Linde plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Linde supplies industrial gases and related services and operates an engineering business. The Praxair–Linde AG merger closed October 31, 2018; therefore, Q1 2019 reflects the combined company, while Q1 2018 reflects Praxair only. Reported year-over-year comparisons are not like-for-like. Management provides supplemental pro forma comparisons, which are illustrative, non-GAAP in part, and exclude potential synergies.
Financial results and position
| Metric | Q1 2019 | Comparable / prior-period context |
|---|---|---|
| Sales | $6.944 billion reported | $2.983 billion in Q1 2018, up 133% mainly due to the merger. Pro forma sales were $6.914 billion versus $6.941 billion, essentially flat. |
| Operating profit | $609 million; 8.8% reported margin | $653 million; 21.9% in Q1 2018. Q1 2019 included $531 million of Linde AG purchase-accounting impacts and $89 million of transaction and other charges. Adjusted pro forma operating profit was $1.222 billion, up 1%, with a 17.7% margin. |
| Net income and EPS | Linde plc net income: $517 million, including $82 million attributable to discontinued operations. Continuing-operations diluted EPS: $0.79; total diluted EPS: $0.94. | Q1 2018 net income was $462 million, all from continuing operations; diluted EPS was $1.59. Continuing-operations income attributable to Linde was $435 million versus $462 million. Adjusted pro forma continuing-operations diluted EPS was $1.69 versus $1.51, up 12%. |
| Cash flow | Operating cash flow $1.068 billion; investing cash flow $2.460 billion; financing cash outflow $2.211 billion. | Operating cash flow was $688 million in Q1 2018. Investing inflow was driven primarily by $3.444 billion net proceeds from the Linde AG Americas divestiture. |
| Debt and liquidity | Total debt $14.146 billion; cash $5.791 billion; net debt $8.355 billion. | At December 31, 2018: debt $15.296 billion, cash $4.466 billion, net debt $10.830 billion. A new $5.0 billion revolving facility was undrawn at quarter-end. |
| Other notable items | Capital expenditures $843 million; quarterly dividend $0.875 per share; $725 million of share purchases in financing cash flows. | Q1 2018 capital expenditures were $325 million and dividends were $237 million. |
Q1 2019 pro forma sales were flat as volume and pricing gains were offset by unfavorable currency translation. Adjusted pro forma EBITDA was $1.972 billion, or 28.5% of sales, versus $1.916 billion, or 27.6%, in Q1 2018. These adjusted measures exclude specified purchase-accounting and other items and are not substitutes for GAAP results.
Material changes and significant events
- The merger materially expanded the reported business and share count, making reported sales, margins and per-share comparisons with Q1 2018 difficult to interpret. Management’s pro forma comparison is the more relevant operating trend reference, subject to its stated assumptions.
- Purchase-accounting charges included approximately $521 million of additional depreciation and amortization; segment reporting separately reconciles $531 million of purchase-accounting impacts. The filing reports $89 million of transaction and other charges, including merger costs and synergy-related severance actions.
- The U.S. hold-separate restrictions ended March 1, 2019 following required divestitures, and Linde adopted Americas, EMEA, APAC and Engineering reporting segments.
- After quarter-end, Linde AG completed a minority-share squeeze-out on April 8 for $3.2 billion. Linde completed the sale of selected Linde Korea assets on April 30 for $1.2 billion, subject to customary adjustments.
- Reported cash increased during the quarter, while the company also repaid debt, repurchased shares and paid dividends. Divestiture proceeds were a major source of investing cash inflow.
Outlook, risks and contingencies
- No specific earnings or EPS guidance is stated in the filing; management directs investors to quarterly earnings releases and investor teleconferences for updates.
- At March 31, the backlog of large projects under construction was $3.5 billion, mainly in APAC (48%) and the Americas (42%). The backlog represents estimated capital cost, not guaranteed future revenue.
- Long-term on-site supply contracts have estimated minimum-purchase consideration of approximately $45 billion; about half is expected to be earned in the next five years. Actual amounts may vary with contract changes, customer demand, price escalators, foreign exchange and energy-cost pass-throughs.
- Management identifies risks including merger integration and realization of synergies, regulatory requirements and divestitures, economic and trade conditions, currency and interest-rate movements, energy and raw-material costs, competition, litigation and regulation, and cybersecurity and operational disruptions.
- Brazilian tax claims were estimated at approximately $205 million, including interest and penalties; no liability was recorded. The company is contesting the claims. Brazilian antitrust fine proceedings also remain unresolved; management states that cash outflows are extremely unlikely and has recorded no reserve.
- Management does not expect ordinary-course legal matters in aggregate to materially affect consolidated financial position or liquidity, but says outcomes could significantly affect results in a given period. The purchase-price allocation remains preliminary, with further measurement-period adjustments possible.
Important facts for investors to verify
- Use the pro forma and adjusted pro forma reconciliations to assess underlying trends; distinguish them from reported GAAP results and note that pro forma results exclude possible synergies.
- Track delivery and returns on the $3.5 billion project backlog, especially in APAC and the Americas, and monitor the effect of currency, pricing and cost inflation.
- Confirm the final financial effects of the post-quarter $3.2 billion squeeze-out and $1.2 billion Korea divestiture, including any customary sale-price adjustments.
- Monitor debt, cash use, capital spending, dividends and share repurchases after the substantial divestiture proceeds and buyback activity.
- Follow the resolution of Brazilian tax and antitrust matters and any changes to the preliminary merger purchase-price allocation.