Linde plc — 2018 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2018. Linde is a global industrial gases, engineering and surface technologies company. Praxair and Linde AG completed their all-stock combination on October 31, 2018. Because Praxair was the accounting acquirer, 2018 includes Praxair for the full year but Linde AG only from the merger date; prior-year comparisons are primarily Praxair and are therefore not like-for-like.
Financial performance and condition
- Sales were $14.900 billion, up 30% reported. The merger contributed 24 percentage points, net of divestitures; underlying sales grew 6%, reflecting 4% volume growth and 2% higher price/mix.
- Reported operating profit was $5.247 billion, including a $3.294 billion gain on business sales, $309 million of transaction and other charges, and $714 million of merger purchase-accounting impacts. Adjusted operating profit, a non-GAAP measure, was $2.976 billion, up 19%; adjusted operating margin was 20.0% versus 21.8%.
- Continuing-operations income was $4.273 billion and diluted EPS was $12.79. Adjusted continuing income was $2.121 billion and adjusted diluted EPS was $6.35, up 26% and 9%, respectively. Reported results were materially affected by the divestiture gain and merger-related items.
- Gross margin was 39.0%, down from 43.5%; the merger inventory fair-value step-up contributed a $368 million charge. Excluding that charge, gross margin was 41.5%. Adjusted EBITDA was $4.516 billion, with a 30.3% margin, versus $3.727 billion and 32.6% in 2017.
- Operating cash flow was $3.654 billion, or 25% of sales; capital expenditures were $1.883 billion. Cash and cash equivalents were $4.466 billion at year-end. Total debt was $15.296 billion and net debt was $10.830 billion.
- The company reported $93.386 billion in assets, including $26.874 billion of goodwill, much of it arising from the merger. It reported $57.080 billion in total equity. Undrawn facilities included $2.5 billion and €2.5 billion; the company said it had adequate liquidity and was in compliance with debt covenants.
Material changes versus prior periods
- Reported sales rose from $11.437 billion in 2017, primarily because Linde AG was consolidated from October 31, 2018. Adjusted operating profit growth also reflected the merger, higher volumes and pricing.
- Reported operating profit and EPS rose sharply, but the comparison is distorted by the $3.294 billion divestiture gain and merger accounting. Adjusted diluted EPS increased 9%, a more representative measure of underlying year-over-year performance, though the periods remain structurally different.
- Cash increased from $617 million to $4.466 billion, reflecting merger cash and divestiture proceeds, partly offset by capital spending, dividends, share repurchases and debt repayments. Net debt increased $2.447 billion year over year, including debt acquired in the merger.
- Regional results varied: Asia operating profit increased 28%; South America operating profit declined 10%, with currency weakness a significant factor. Praxair’s European business was sold in December 2018.
Outlook, commentary, risks and unusual items
- The filing cites a $3.5 billion backlog of large projects under construction at December 31, 2018, primarily serving energy, chemicals and electronics customers. The excerpt does not provide a clear numerical 2019 earnings or revenue guidance figure.
- On March 1, 2019, Linde completed the required sale of most of Linde AG’s Americas industrial gases business for $2.97 billion, plus $531 million of proceeds from additional plant sales. The FTC hold-separate restrictions were lifted that day, enabling integration activities. Certain Asia divestitures were still expected in 2019.
- Management identifies integration and synergy execution, regulatory requirements, economic and customer cyclicality, energy and feedstock costs, foreign exchange, financing costs, cyber and operational disruptions, litigation, tax changes and pension assumptions as risks. Energy cost recovery depends in part on contract pass-through provisions.
- Purchase-price allocation remained preliminary at year-end, with further adjustments expected during 2019. Goodwill and other intangible asset values, fair values, useful lives and related amortization are significant estimates; the company reported no goodwill impairment in 2018.
- Brazilian tax claims were estimated at approximately $205 million, with no liability recorded. A separate Brazilian antitrust fine against Praxair’s subsidiary had been overturned by a lower court but remained under appeal; management recorded no reserve, stating it did not believe a loss was probable. The filing says aggregate contingencies were not expected to materially affect financial position or liquidity, but outcomes could affect results in a period.
- Required pension contributions for 2019 were estimated at $95 million to $160 million. The international pension deficit increased substantially following consolidation of Linde AG. Management’s internal-control assessment and auditor’s control audit excluded Linde AG, representing 26.4% of consolidated assets and 19.3% of sales.
- The board approved a $6.0 billion share repurchase program in January 2019, following the $1.0 billion 2018 program. The filing also reports a $368 million inventory step-up expense, $309 million in transaction and other charges, and the $3.294 billion divestiture gain.
Important facts for investors to verify
- Assess underlying performance using adjusted results and account for the partial-year Linde AG consolidation, divestitures, purchase accounting and the unusually large sale gain.
- Track integration progress, synergy delivery, remaining divestitures and the effect of the new 2019 operating structure.
- Review debt maturities, cash deployment, repurchases and pension funding needs against operating cash flow and capital commitments.
- Monitor final purchase accounting, goodwill and intangible-asset assumptions, and future amortization and impairment risks.
- Follow the Brazilian tax and antitrust matters, other contingencies, and the integration of Linde AG controls and reporting.