Linde plc — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020, compared with the same period in 2019. Linde supplies industrial gases and related products, as well as engineering equipment and services. Industrial gases represented approximately 83% of sales. The quarter included the initial effects of COVID-19, notably lower APAC volumes, and significant foreign-currency translation impacts.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Sales | $6.739 billion | $6.944 billion; down 3% |
| GAAP operating profit / margin | $733 million / 10.9% | $609 million / 8.8% |
| Adjusted operating profit / margin | $1.352 billion / 20.1% | $1.222 billion / 17.7% |
| Income from continuing operations attributable to Linde | $571 million | $435 million |
| Diluted EPS from continuing operations | $1.07 GAAP; $1.89 adjusted | $0.79 GAAP; $1.69 adjusted |
| Operating cash flow | $1.347 billion | $1.068 billion |
| Capital expenditures | $803 million | $843 million |
| Cash and cash equivalents | $4.014 billion | $2.700 billion at Dec. 31, 2019 |
| Total debt / net debt | $16.875 billion / $12.861 billion | $13.956 billion / $11.256 billion at Dec. 31, 2019 |
Adjusted measures are non-GAAP and exclude specified items, including merger purchase-accounting effects and cost-reduction and other charges; they are not substitutes for GAAP results. Cost-reduction and other charges were $131 million in Q1 2020 versus $89 million in Q1 2019. Short-term debt rose to $4.848 billion from $1.732 billion at year-end, primarily alongside increased commercial-paper borrowings. Linde had no borrowings under its $5 billion unsecured revolving credit facility, which has no financial maintenance covenants.
Operating cash flow increased 26% year over year. Investing activities used $613 million, including $803 million of capital expenditures and $231 million of divestiture and asset-sale proceeds. Financing activities provided $759 million, including a net $3.112 billion increase in debt; share repurchases were $1.828 billion and dividends paid were $511 million. Foreign-currency translation drove a $2.715 billion negative translation adjustment and contributed to a $2.680 billion total other comprehensive loss.
Material changes versus the prior period
- Sales fell 3%, reflecting a 1% volume decline and 3% unfavorable currency impact, partly offset by 2% higher price/mix. Cost pass-through reduced sales by 1% with minimal operating-profit impact.
- APAC sales fell 6%, principally due to COVID-19 effects in China, a prior-year equipment sale, and currency movements. Americas sales declined 1%; EMEA declined 3%; Engineering declined 4%.
- Adjusted operating profit rose 11%, with higher pricing, cost-reduction actions and productivity more than offsetting currency impacts and cost inflation. Adjusted diluted EPS rose 12%, also benefiting from lower diluted share count.
- GAAP operating profit increased 20%, but included $488 million of Linde AG purchase-accounting impacts and $131 million of cost-reduction and other charges. Q1 2019 included $531 million of purchase-accounting impacts and $89 million of charges.
- Reported continuing-operations income also benefited from a $45 million net pension and OPEB benefit, compared with a $15 million cost in Q1 2019; the prior-year quarter included a $51 million pension settlement charge.
Outlook, commentary, risks and contingencies
- Linde cited an approximately $9.4 billion sale-of-gas and sale-of-equipment project backlog as a foundation for growth over the next several years. Approximately $4 billion was sale-of-gas backlog, mainly in APAC and the Americas. The filing does not provide a specific earnings or sales forecast in the supplied text.
- COVID-19 could materially adversely affect results. The company cited potential impacts to operations, employees, customers, suppliers, supply chains, transportation, contract performance, demand, costs, economies and financial markets. The duration and ultimate financial impact were uncertain.
- Cost-reduction actions incurred $78 million of program-related charges and $53 million of merger-related and other charges in Q1. The severance actions covered approximately 600 positions, about 450 of which had terminated; most actions were expected to be completed by 2021.
- Management stated it believed cash, operating flexibility and funding sources were sufficient for business needs and did not anticipate limitations on access to debt markets or other external funding. This outlook is subject to the stated risks and uncertainties.
- Brazil tax claims had estimated exposure of approximately $200 million, including interest and penalties; Linde had recorded no liability and was defending the matters. Certain Brazilian antitrust fines had been overturned on appeal, with further proceedings pending; the company considered cash outflows extremely unlikely and recorded no reserve. Former Linde AG shareholders’ appraisal claims in Germany also remained unresolved, with timing not estimable.
- Management reported disclosure controls and procedures were effective at quarter-end and no material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How subsequent COVID-19 developments affected volumes, pricing, supply continuity and the project backlog, particularly in China and other affected markets.
- Whether the higher short-term borrowing level and increased net debt were temporary, and how debt maturities and refinancing needs were managed.
- The sustainability of adjusted margin and EPS improvements, including the effects of purchase-accounting exclusions, cost actions, pricing and currency movements.
- Progress and cash requirements for restructuring, merger-related charges, share repurchases and dividends.
- Developments in the Brazilian tax and antitrust matters and German appraisal proceedings, including any change to reserves or estimated exposure.