Linde plc — Q2 2023 Form 10-Q Summary
Business context and reporting period
Linde plc is a global industrial gases and engineering company. This unaudited quarterly report covers the quarter and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. On March 1, 2023, a shareholder-approved intercompany reorganization created a new Linde plc holding company; shareholders received one new share for each previously held share.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $8.204 billion | $8.457 billion | $16.397 billion | $16.668 billion |
| Operating profit, reported | $2.011 billion | $589 million | $3.944 billion | $2.069 billion |
| Operating margin, reported | 24.5% | 7.0% | 24.1% | 12.4% |
| Operating profit, adjusted | $2.286 billion | $1.988 billion | $4.492 billion | $3.893 billion |
| Adjusted operating margin | 27.9% | 23.5% | 27.4% | 23.4% |
| Net income attributable to Linde | $1.575 billion | $372 million | $3.091 billion | $1.546 billion |
| Diluted EPS, reported | $3.19 | $0.74 | $6.25 | $3.04 |
| Diluted EPS, adjusted | $3.57 | $3.10 | $6.98 | $6.03 |
Adjusted measures are non-GAAP and exclude specified items, principally Linde AG purchase-accounting impacts and other charges. Adjusted operating profit rose 15% in both periods; adjusted diluted EPS rose 15% in Q2 and 16% year to date. Management attributed adjusted growth mainly to pricing and productivity, partly offset by inflation and currency effects. Price/mix increased sales 7% in both periods, while volumes declined 1%; lower energy cost pass-through, divestitures net of acquisitions, engineering sales, and currency also weighed on reported sales.
Q2 reported operating profit growth was heavily affected by the 2022 Russia-related charges. Other charges were $22 million in Q2 2023 and $993 million in Q2 2022; for the six-month periods they were $40 million and $989 million, respectively. Reported 2023 results also include Linde AG purchase-accounting impacts of $253 million in Q2 and $508 million year to date, which are excluded from adjusted results.
Cash from operations was $4.058 billion in the first half, versus $4.133 billion in 2022. Capital expenditures were $1.688 billion, compared with $1.475 billion; operating cash flow less capital expenditures was approximately $2.370 billion. Investing cash outflow was $2.498 billion, including $834 million for acquisitions, primarily nexAir. Financing cash outflow was $3.656 billion, including $1.767 billion of share repurchases and $1.246 billion of dividends. Cash fell by $2.079 billion to $3.357 billion.
At June 30, 2023, total debt was $17.490 billion, cash was $3.357 billion, and reported net debt was $14.133 billion (adjusted net debt: $14.123 billion). Current assets were $11.411 billion and current liabilities were $14.552 billion. Linde had undrawn revolving credit facilities of $5 billion and $1.5 billion, with no borrowings outstanding under them and no financial maintenance covenants. Management said it believed cash, operating flexibility, and funding sources were sufficient for business needs.
Material changes and management commentary
- Segment operating profit increased in Q2 across Americas (18%), EMEA (18%), APAC (11%), and Engineering (2%). Americas, EMEA, and APAC benefited chiefly from pricing and productivity. EMEA and Americas also faced volume weakness; APAC volumes increased.
- Engineering sales fell 23% in Q2 and 25% year to date, mainly due to project timing; reported segment profit was slightly higher. Other-segment sales declined following the 2022 sale of the GIST business.
- Higher interest rates on short-term debt drove higher net interest expense: $52 million in Q2 versus $5 million, and $89 million year to date versus $14 million.
- Linde completed its $859 million all-cash acquisition of the remaining 77% of nexAir in January. The acquisition contributed $101 million of Q2 sales and $204 million of first-half sales.
- In June, Linde issued euro-denominated notes totaling €1.9 billion across maturities in 2025, 2029, and 2034. The company also continued share repurchases; $3.6 billion remained authorized under its $10 billion program at June 30, 2023.
Outlook, risks, and contingencies
The 10-Q provides no numeric earnings or sales guidance; Linde says quarterly guidance and updates are provided through earnings releases and investor teleconferences. Management cited pricing, productivity, inflation, volumes, currency, and project timing as key performance drivers. The filing identifies risks including economic and geopolitical developments, energy and raw-material costs, foreign exchange and interest rates, competition, customer and industry performance, regulation, litigation, cyber or IT disruption, and integration of acquisitions. Management stated there were no material changes to the risk factors in the 2022 Form 10-K.
Russia-related engineering contracts and claims remain a notable uncertainty. Approximately $1.7 billion of contract liabilities related to sanctioned Russian engineering projects were recorded at June 30; the company said satisfying residual obligations may adversely affect cash flows, though it did not expect the obligations to adversely affect earnings. A Russian customer claim and parallel arbitration proceedings remain unresolved, and the timing of resolution is uncertain. Other contingencies include Brazilian tax matters, including approximately $120 million of estimated state VAT claims for which no liability was recorded, and antitrust litigation in Brazil for which management considers cash outflow extremely unlikely. The filing says aggregate litigation losses are not expected to materially harm consolidated financial position or liquidity, but outcomes could significantly affect results in a given period.
Other unusual items include a $124 million tax benefit from resolution of a U.S. income tax audit and an $85 million accrual for a potential international tax settlement, both recorded in Q1 2023. The company also recorded $22 million of Q2 other charges, primarily Engineering severance; first-half charges additionally included intercompany reorganization expenses.
Important facts for investors to verify
- How much of reported earnings growth reflects underlying operating improvement versus prior-year Russia charges and ongoing Linde AG purchase-accounting adjustments.
- Whether pricing and productivity continue to offset inflation, currency headwinds, and weaker volumes in certain end markets.
- Cash-flow conversion and working-capital trends, including lower engineering customer advances and the potential cash consequences of the Russian contract liabilities.
- Debt, interest expense, and liquidity trends as short-term borrowing costs and refinancing needs evolve.
- Potential outcomes and financial effects of the Russia proceedings, Brazilian tax disputes, and other contingencies, for which timing or ultimate exposure may be uncertain.