Linde plc — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2020, compared with the same 2019 periods. Linde supplies industrial gases and related products, with Engineering and other businesses. Management identified COVID-19-related economic slowdown as a principal influence on demand.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $6.377bn | $7.204bn | $13.116bn | $14.148bn |
| GAAP operating profit | $591m | $669m | $1.324bn | $1.278bn |
| GAAP operating margin | 9.3% | 9.3% | 10.1% | 9.0% |
| GAAP net income attributable to Linde | $458m | $522m | $1.031bn | $1.039bn |
| Diluted EPS from continuing operations | $0.87 | $0.94 | $1.93 | $1.73 |
| Adjusted operating profit (non-GAAP) | $1.317bn | $1.319bn | $2.669bn | $2.541bn |
| Adjusted operating margin (non-GAAP) | 20.7% | 18.4% | 20.3% | 18.0% |
| Adjusted diluted EPS from continuing operations (non-GAAP) | $1.90 | $1.83 | $3.78 | $3.52 |
- Q2 sales fell 11% as reported; excluding currency translation, sales declined 7%. Six-month reported sales fell 7%. Volume reduced sales by 7% in Q2 and 5% year to date; pricing/mix added 2% in both periods.
- Operating cash flow was $3.111bn for the first six months, versus $2.073bn a year earlier. Capital expenditures were $1.586bn, compared with $1.708bn.
- Cash and cash equivalents were $4.941bn at June 30, 2020. Total debt was $17.480bn, up from $13.956bn at year-end 2019; net debt was $12.539bn versus $11.256bn. The company had no drawings on its $5bn revolving credit facility, which matures in 2024 and has no financial maintenance covenants.
- Current assets were $12.073bn and current liabilities $15.095bn. Total assets were $85.856bn and total liabilities $37.919bn.
Material changes versus prior comparable periods
- Q2 GAAP operating profit declined 12%, while adjusted operating profit was essentially flat. Adjusted EPS rose 4%, supported by higher adjusted continuing-operations income and fewer diluted shares.
- For the first six months, GAAP operating profit rose 4%, adjusted operating profit rose 5%, and adjusted EPS rose 7%. Reported continuing-operations diluted EPS increased 12%.
- Sales fell across the Americas, EMEA, and APAC in Q2, each down 13%; Engineering sales increased 8%. Engineering operating profit increased 39%, while operating profit in the three geographic segments declined.
- Cost-reduction and other charges rose to $249m in Q2 and $380m for the first six months, versus $141m and $230m, respectively, in 2019. These charges included severance, synergy actions, merger-related costs, and other items.
- Foreign-currency translation reduced six-month comprehensive income, with other comprehensive loss of $1.895bn, primarily from a $1.971bn translation adjustment. Q2 other comprehensive income was $785m.
Outlook, management commentary, risks and unusual items
- The filing provides no specific earnings or sales guidance. Management cited a sale-of-gas and sale-of-equipment project backlog of approximately $8.6bn as a growth foundation for coming years; approximately $3.6bn was sale-of-gas projects. Timing and realization depend on project execution and other factors.
- Management said the ultimate operational impact of COVID-19 remained uncertain and would depend on the duration of the disruption, public-health measures, demand, and government actions. The company emphasized employee safety and continuity of customer supply.
- Management estimated approximately $296m of cash requirements for cost-reduction and other charges, expected to be paid through 2022. The remaining actions were expected to be completed by the end of 2021.
- Potential Brazilian tax claims were estimated at approximately $190m, including interest and penalties; Linde recorded no liability and is contesting the claims. The filing also discusses Brazilian antitrust fines and former Linde AG shareholder appraisal proceedings; no reserve was recorded for these matters, and management described the antitrust cash outflow as extremely unlikely.
- Other risks include foreign-exchange, interest-rate and commodity-price movements; litigation and regulatory outcomes; and the broader risk factors described in prior filings. Management reported no material change in risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Compare reported results with the company’s non-GAAP adjusted measures; adjustments include $965m of Linde AG purchase-accounting impacts for the first six months and $380m of cost-reduction and other charges.
- Monitor COVID-19 effects on demand, volumes, customer industries, and the timing of the $8.6bn project backlog.
- Track debt, short-term borrowings, liquidity, and cash needs, including planned cost-reduction payments, capital spending, dividends, and share repurchases.
- Review developments in the approximately $190m Brazilian tax claims and other disclosed legal proceedings.
- Assess currency movements and translation effects, which materially affected reported sales and shareholders’ accumulated other comprehensive income.