LINDE PLC - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
| Commission file number | 001-38730 | ||||
LINDE PLC
(Exact name of registrant as specified in its charter)
Ireland | 98-1448883 | ||||||||||||||||
| (State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| The Priestley Centre | |||||||||||||||||
| 10 Priestley Road, | |||||||||||||||||
| Surrey Research Park, | |||||||||||||||||
| Guildford, | Surrey | GU2 7XY | |||||||||||||||
| United Kingdom | |||||||||||||||||
| (Address of principal executive offices) (Zip Code) | |||||||||||||||||
| +44 | 14 | 83 242200 | |||||||||||||||
| (Registrant's telephone number, including area code) | |||||||||||||||||
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||||||||
| Ordinary shares (€0.001 nominal value per share) | LIN | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At March 31, 2021, 520,208,493 ordinary shares (€0.001 par value) of the Registrant were outstanding.
1
| INDEX | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
| Item 1. | Financial Statements (unaudited) | |||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
2
Forward-looking Statements
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as: anticipate, believe, intend, estimate, expect, continue, should, could, may, plan, project, predict, will, potential, forecast, and similar expressions. They are based on management’s reasonable expectations and assumptions as of the date the statements are made but involve risks and uncertainties. These risks and uncertainties include, without limitation: the performance of stock markets generally; developments in worldwide and national economies and other international events and circumstances, including trade conflicts and tariffs; changes in foreign currencies and in interest rates; the cost and availability of electric power, natural gas and other raw materials; the ability to achieve price increases to offset cost increases; catastrophic events including natural disasters, epidemics, pandemics such as COVID-19, and acts of war and terrorism; the ability to attract, hire, and retain qualified personnel; the impact of changes in financial accounting standards; the impact of changes in pension plan liabilities; the impact of tax, environmental, healthcare and other legislation and government regulation in jurisdictions in which the company operates; the cost and outcomes of investigations, litigation and regulatory proceedings; the impact of potential unusual or non-recurring items; continued timely development and market acceptance of new products and applications; the impact of competitive products and pricing; future financial and operating performance of major customers and industries served; the impact of information technology system failures, network disruptions and breaches in data security; and the effectiveness and speed of integrating new acquisitions into the business. These risks and uncertainties may cause actual future results or circumstances to differ materially from accounting principles generally accepted in the United States of America, International Financial Reporting Standards or adjusted projections, estimates or other forward-looking statements.
Linde plc assumes no obligation to update or provide revisions to any forward-looking statement in response to changing circumstances. The above listed risks and uncertainties are further described in Item 1A. Risk Factors in Linde plc’s Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 1, 2021, which should be reviewed carefully. Please consider Linde plc’s forward-looking statements in light of those risks.
3
LINDE PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
| Quarter Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Sales | $ | 7,243 | $ | 6,739 | |||||||
| Cost of sales, exclusive of depreciation and amortization | 4,054 | 3,843 | |||||||||
| Selling, general and administrative | 787 | 861 | |||||||||
| Depreciation and amortization | 1,166 | 1,142 | |||||||||
| Research and development | 35 | 44 | |||||||||
| Cost reduction programs and other charges | (8) | 131 | |||||||||
| Other income (expense) - net | 4 | 15 | |||||||||
| Operating Profit | 1,213 | 733 | |||||||||
| Interest expense - net | 20 | 24 | |||||||||
| Net pension and OPEB cost (benefit), excluding service cost | (49) | (45) | |||||||||
| Income From Continuing Operations Before Income Taxes and Equity Investments | 1,242 | 754 | |||||||||
| Income taxes on continuing operations | 268 | 165 | |||||||||
| Income From Continuing Operations Before Equity Investments | 974 | 589 | |||||||||
| Income from equity investments | 43 | 17 | |||||||||
| Income From Continuing Operations (Including Noncontrolling Interests) | 1,017 | 606 | |||||||||
| Income from discontinued operations, net of tax | 1 | 2 | |||||||||
| Net Income (Including Noncontrolling Interests) | 1,018 | 608 | |||||||||
| Less: noncontrolling interests from continuing operations | (38) | (35) | |||||||||
| Less: noncontrolling interest from discontinued operations | — | — | |||||||||
| Net Income – Linde plc | $ | 980 | $ | 573 | |||||||
| Net Income – Linde plc | |||||||||||
| Income from continuing operations | $ | 979 | $ | 571 | |||||||
| Income from discontinued operations | $ | 1 | $ | 2 | |||||||
| Per Share Data – Linde plc Shareholders | |||||||||||
| Basic earnings per share from continuing operations | $ | 1.87 | $ | 1.07 | |||||||
| Basic earnings per share from discontinued operations | — | — | |||||||||
| Basic earnings per share | $ | 1.87 | $ | 1.07 | |||||||
| Diluted earnings per share from continuing operations | $ | 1.86 | $ | 1.07 | |||||||
| Diluted earnings per share from discontinued operations | — | — | |||||||||
| Diluted earnings per share | $ | 1.86 | $ | 1.07 | |||||||
| Weighted Average Shares Outstanding (000’s): | |||||||||||
| Basic shares outstanding | 522,459 | 531,215 | |||||||||
| Diluted shares outstanding | 526,927 | 534,956 | |||||||||
The accompanying notes are an integral part of these financial statements.
4
LINDE PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
(UNAUDITED)
| Quarter Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| NET INCOME (INCLUDING NONCONTROLLING INTERESTS) | $ | 1,018 | $ | 608 | |||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | |||||||||||
| Translation adjustments: | |||||||||||
| Foreign currency translation adjustments | (657) | (2,740) | |||||||||
Reclassification to net income (Note 13) | (52) | — | |||||||||
| Income taxes | (6) | 25 | |||||||||
| Translation adjustments | (715) | (2,715) | |||||||||
Funded status - retirement obligations (Note 8): | |||||||||||
| Retirement program remeasurements | 20 | 58 | |||||||||
| Reclassifications to net income | 43 | 22 | |||||||||
| Income taxes | (23) | (15) | |||||||||
| Funded status - retirement obligations | 40 | 65 | |||||||||
Derivative instruments (Note 5): | |||||||||||
| Current unrealized gain (loss) | 21 | (65) | |||||||||
| Reclassifications to net income | (2) | 24 | |||||||||
| Income taxes | (5) | 11 | |||||||||
| Derivative instruments | 14 | (30) | |||||||||
| TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | (661) | (2,680) | |||||||||
| COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS) | 357 | (2,072) | |||||||||
| Less: noncontrolling interests | (32) | 71 | |||||||||
| COMPREHENSIVE INCOME (LOSS) - LINDE PLC | $ | 325 | $ | (2,001) | |||||||
The accompanying notes are an integral part of these financial statements.
5
LINDE PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
| March 31, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 4,096 | $ | 3,754 | |||||||
| Accounts receivable - net | 4,139 | 4,167 | |||||||||
| Contract assets | 137 | 162 | |||||||||
| Inventories | 1,695 | 1,729 | |||||||||
| Prepaid and other current assets | 1,065 | 1,112 | |||||||||
| Total Current Assets | 11,132 | 10,924 | |||||||||
| Property, plant and equipment - net | 26,934 | 28,711 | |||||||||
| Goodwill | 27,472 | 28,201 | |||||||||
| Other intangible assets - net | 14,559 | 16,184 | |||||||||
| Other long-term assets | 4,896 | 4,209 | |||||||||
| Total Assets | $ | 84,993 | $ | 88,229 | |||||||
| Liabilities and equity | |||||||||||
| Accounts payable | $ | 2,945 | $ | 3,095 | |||||||
| Short-term debt | 3,276 | 3,251 | |||||||||
| Current portion of long-term debt | 2,524 | 751 | |||||||||
| Contract liabilities | 1,863 | 1,769 | |||||||||
| Other current liabilities | 4,419 | 4,874 | |||||||||
| Total Current Liabilities | 15,027 | 13,740 | |||||||||
| Long-term debt | 9,950 | 12,152 | |||||||||
| Other long-term liabilities | 12,383 | 12,755 | |||||||||
| Total Liabilities | 37,360 | 38,647 | |||||||||
| Redeemable noncontrolling interests | 13 | 13 | |||||||||
| Linde plc Shareholders’ Equity: | |||||||||||
Ordinary shares,€0.001 par value, authorized 1,750,000,000 shares, 2021 issued: 552,012,862 ordinary shares; 2020 issued: 552,012,862 ordinary shares | 1 | 1 | |||||||||
| Additional paid-in capital | 40,192 | 40,202 | |||||||||
| Retained earnings | 17,563 | 17,178 | |||||||||
Accumulated other comprehensive income (loss) (Note 11) | (5,345) | (4,690) | |||||||||
Less: Treasury shares, at cost (2021 – 31,804,369 shares and 2020 – 28,718,333 shares) | (6,201) | (5,374) | |||||||||
| Total Linde plc Shareholders’ Equity | 46,210 | 47,317 | |||||||||
| Noncontrolling interests | 1,410 | 2,252 | |||||||||
| Total Equity | 47,620 | 49,569 | |||||||||
| Total Liabilities and Equity | $ | 84,993 | $ | 88,229 | |||||||
The accompanying notes are an integral part of these financial statements.
6
LINDE PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
| Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Increase (Decrease) in Cash and Cash Equivalents | |||||||||||
| Operations | |||||||||||
| Net income - Linde plc | $ | 980 | $ | 573 | |||||||
| Less: Income from discontinued operations, net of tax and noncontrolling interests | (1) | (2) | |||||||||
| Add: Noncontrolling interests from continuing operations | 38 | 35 | |||||||||
| Income from continuing operations (including noncontrolling interests) | 1,017 | 606 | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Cost reduction programs and other charges, net of payments | (76) | 40 | |||||||||
| Depreciation and amortization | 1,166 | 1,142 | |||||||||
| Deferred income taxes | (65) | (107) | |||||||||
| Share-based compensation | 29 | 43 | |||||||||
| Working capital: | |||||||||||
| Accounts receivable | (178) | (109) | |||||||||
| Inventory | (60) | (62) | |||||||||
| Prepaid and other current assets | (64) | (92) | |||||||||
| Payables and accruals | 69 | (183) | |||||||||
| Contract assets and liabilities, net | 191 | 176 | |||||||||
| Pension contributions | (12) | (17) | |||||||||
| Long-term assets, liabilities and other | 92 | (90) | |||||||||
| Net cash provided by operating activities | 2,109 | 1,347 | |||||||||
| Investing | |||||||||||
| Capital expenditures | (762) | (803) | |||||||||
| Acquisitions, net of cash acquired | (10) | (41) | |||||||||
| Divestitures and asset sales, net of cash divested | 21 | 231 | |||||||||
| Net cash provided by (used for) investing activities | (751) | (613) | |||||||||
| Financing | |||||||||||
| Short-term debt borrowings (repayments) - net | 704 | 3,149 | |||||||||
| Long-term debt borrowings | 34 | 16 | |||||||||
| Long-term debt repayments | (57) | (53) | |||||||||
| Issuances of ordinary shares | 17 | 13 | |||||||||
| Purchases of ordinary shares | (868) | (1,828) | |||||||||
| Cash dividends - Linde plc shareholders | (553) | (511) | |||||||||
| Noncontrolling interest transactions and other | (247) | (27) | |||||||||
| Net cash provided by (used for) financing activities | (970) | 759 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (46) | (179) | |||||||||
| Change in cash and cash equivalents | 342 | 1,314 | |||||||||
| Cash and cash equivalents, beginning-of-period | 3,754 | 2,700 | |||||||||
| Cash and cash equivalents, end-of-period | $ | 4,096 | $ | 4,014 | |||||||
The accompanying notes are an integral part of these financial statements.
7
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements - Linde plc and Subsidiaries (Unaudited)
8
1. Summary of Significant Accounting Policies
Presentation of Condensed Consolidated Financial Statements - In the opinion of Linde management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented and such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements of Linde plc and subsidiaries in Linde's 2020 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2021.
Accounting Standards Implemented in 2021
•Income Taxes - Simplifying the Accounting for Income Taxes - In December 2019, the FASB issued guidance which simplifies the accounting for income taxes by removing several exceptions in the current standard and adds guidance to reduce complexity in certain areas, such as requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date, evaluating whether a step-up in tax basis of goodwill relates to a business combination or a separate transaction and allocating taxes to members of a consolidated group. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The adoption of this standard did not materially impact the company's consolidated financial statements.
Accounting Standards to be Implemented
•Reference Rate Reform - In March 2020, the FASB issued guidance related to reference rate reform which provides practical expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions that the reference London Interbank Offered Rate (“LIBOR”) and other interbank offered rates. This update is applicable to our contracts and hedging relationships that reference LIBOR and other interbank offered rates. The amendments may be applied to impacted contracts and hedges prospectively through December 31, 2022. We are currently evaluating the impact of this guidance on our consolidated financial statements.
Reclassifications – Certain prior periods' amounts have been reclassified to conform to the current year’s presentation.
2. Cost Reduction Programs and Other Charges
2021 Charges
Cost reduction programs and other charges were a benefit of $8 million for the three months ended March 31, 2021 (benefit of $28 million, after tax). The following table summarizes the activities related to the company's cost reduction charges for the three months ended March 31, 2021:
| Quarter Ended March 31, 2021 | |||||||||||||||||||||||||||||
| (millions of dollars) | Severance costs | Other cost reduction charges | Total cost reduction program related charges | Merger-related and other charges | Total | ||||||||||||||||||||||||
| Americas | $ | 3 | $ | 2 | $ | 5 | $ | — | $ | 5 | |||||||||||||||||||
| EMEA | 13 | 7 | 20 | — | 20 | ||||||||||||||||||||||||
| APAC | 2 | 2 | 4 | (53) | (49) | ||||||||||||||||||||||||
| Engineering | 7 | — | 7 | — | 7 | ||||||||||||||||||||||||
| Other | 1 | 7 | 8 | 1 | 9 | ||||||||||||||||||||||||
| Total | $ | 26 | $ | 18 | $ | 44 | $ | (52) | $ | (8) | |||||||||||||||||||
9
Cost Reduction Programs
Total cost reduction program related charges were $44 million for the three months ended March 31, 2021 ($34 million, after tax).
Severance costs
Severance costs were $26 million for the three months ended March 31, 2021. As of March 31, 2021, the majority of the actions have been taken, with the remaining actions anticipated to be completed by the end of the fiscal year.
Other cost reduction charges
Other cost reduction charges of $18 million for the three months ended March 31, 2021 are primarily charges related to the execution of the company's synergistic actions including location consolidations and business rationalization projects, process harmonization, and associated non-recurring costs.
Merger-related Costs and Other Charges
Merger-related costs and other charges were a benefit of $52 million (benefit of $62 million, after tax) for the three months ended March 31, 2021, primarily due to a $52 million gain triggered by a joint venture deconsolidation in the APAC segment (see Note 13), and other tax adjustments.
Cash Requirements
The total cash requirements of the cost reduction program and other charges during the three months ended March 31, 2021 are estimated to be approximately $24 million and are expected to be paid through 2022. Total cost reduction programs and other charges, net of payments in the condensed consolidated statements of cash flows for the three months ended March 31, 2021 also reflects the impact of cash payments of liabilities, including merger-related tax liabilities, accrued as of December 31, 2020.
The following table summarizes the activities related to the company's cost reduction related charges for the three months ended March 31, 2021:
| (millions of dollars) | Severance costs | Other cost reduction charges | Total cost reduction program related charges | Merger-related and other charges | Total | ||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 283 | $ | 22 | $ | 305 | $ | 64 | $ | 369 | |||||||||||||||||||
| 2021 Cost Reduction Programs and Other Charges | 26 | 18 | 44 | (52) | (8) | ||||||||||||||||||||||||
| Less: Cash payments | (54) | (1) | (55) | (4) | (59) | ||||||||||||||||||||||||
| Less: Non-cash charges / benefits | — | (13) | (13) | 52 | 39 | ||||||||||||||||||||||||
| Foreign currency translation and other | (4) | — | (4) | (3) | (7) | ||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | 251 | $ | 26 | $ | 277 | $ | 57 | $ | 334 | |||||||||||||||||||
2020 Charges
Cost reduction programs and other charges were $131 million for the three months ended March 31, 2020 ($95 million, after tax). Total cost reduction program related charges were $78 million ($56 million, after tax), which consisted primarily of severance charges of $58 million, largely in the EMEA and Engineering segments. Merger-related and other charges were $53 million ($39 million, after tax).
Classification in the condensed consolidated financial statements
The costs are shown within operating profit in a separate line item on the consolidated statements of income. On the condensed consolidated statements of cash flows, the impact of these costs, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 10 Segments, Linde excluded these costs from its management definition of segment operating profit; a reconciliation of segment operating profit to consolidated operating profit is shown within the segment operating profit table.
10
3. Supplemental Information
Receivables
Linde applies loss rates that are lifetime expected credit losses at initial recognition of the receivables. These expected loss rates are based on an analysis of the actual historical default rates for each business, taking regional circumstances into account. If necessary, these historical default rates are adjusted to reflect the impact of current changes in the macroeconomic environment using forward-looking information. The loss rates are also evaluated based on the expectations of the responsible management team regarding the collectability of the receivables. Gross trade receivables aged less than one year were $4,125 million and $4,169 million at March 31, 2021 and December 31, 2020 respectively and gross receivables aged greater than one year were $338 million and $358 million at March 31, 2021 and December 31, 2020 respectively. Other receivables were $122 million and $111 million at March 31, 2021 and December 31, 2020, respectively. Receivables aged greater than one year are generally fully reserved unless specific circumstances warrant exceptions, such as those backed by federal governments.
Accounts receivable net of reserves were $4,139 million at March 31, 2021 and $4,167 million at December 31, 2020. Allowances for expected credit losses were $446 million at March 31, 2021 and $471 million at December 31, 2020. Provisions for expected credit losses were $39 million and $46 million for the three months ended March 31, 2021 and 2020, respectively. The allowance activity in the three months ended March 31, 2021 related to write-offs of uncollectible amounts, net of recoveries and currency movements is not material.
Inventories
The following is a summary of Linde's consolidated inventories:
| (Millions of dollars) | March 31, 2021 | December 31, 2020 | |||||||||
| Inventories | |||||||||||
| Raw materials and supplies | $ | 364 | $ | 411 | |||||||
| Work in process | 347 | 337 | |||||||||
| Finished goods | 984 | 981 | |||||||||
| Total inventories | $ | 1,695 | $ | 1,729 | |||||||
11
4. Debt
The following is a summary of Linde's outstanding debt at March 31, 2021 and December 31, 2020:
| (Millions of dollars) | March 31, 2021 | December 31, 2020 | |||||||||
| SHORT-TERM | |||||||||||
| Commercial paper | $ | 1,979 | $ | 2,527 | |||||||
| Other borrowings (primarily non U.S.) | 1,297 | 724 | |||||||||
| Total short-term debt | 3,276 | 3,251 | |||||||||
| LONG-TERM (a) | |||||||||||
| (U.S. dollar denominated unless otherwise noted) | |||||||||||
3.875% Euro denominated notes due 2021 (b) | 709 | 748 | |||||||||
0.250% Euro denominated notes due 2022 (b) | 1,178 | 1,226 | |||||||||
2.45% Notes due 2022 | 600 | 599 | |||||||||
2.20% Notes due 2022 | 499 | 499 | |||||||||
2.70% Notes due 2023 | 499 | 499 | |||||||||
2.00% Euro denominated notes due 2023 (b) | 795 | 832 | |||||||||
5.875% GBP denominated notes due 2023 (b) | 455 | 460 | |||||||||
1.20% Euro denominated notes due 2024 | 644 | 671 | |||||||||
1.875% Euro denominated notes due 2024 (b) | 372 | 389 | |||||||||
2.65% Notes due 2025 | 399 | 398 | |||||||||
1.625% Euro denominated notes due 2025 | 583 | 607 | |||||||||
3.20% Notes due 2026 | 725 | 725 | |||||||||
3.434% Notes due 2026 | 196 | 196 | |||||||||
1.652% Euro denominated notes due 2027 | 96 | 100 | |||||||||
0.250% Euro denominated notes due 2027 | 877 | 914 | |||||||||
1.00% Euro denominated notes due 2028 (b) | 918 | 966 | |||||||||
1.10% Notes due 2030 | 696 | 696 | |||||||||
1.90% Euro denominated notes due 2030 | 122 | 127 | |||||||||
0.550% Euro denominated notes due 2032 | 873 | 909 | |||||||||
3.55% Notes due 2042 | 664 | 664 | |||||||||
2.00% Notes due 2050 | 296 | 296 | |||||||||
| Non U.S. borrowings | 268 | 372 | |||||||||
| Other | 10 | 10 | |||||||||
| 12,474 | 12,903 | ||||||||||
| Less: current portion of long-term debt | (2,524) | (751) | |||||||||
| Total long-term debt | 9,950 | 12,152 | |||||||||
| Total debt | $ | 15,750 | $ | 16,154 | |||||||
(a)Amounts are net of unamortized discounts, premiums and/or debt issuance costs as applicable.
(b)March 31, 2021 and December 31, 2020 included a cumulative $62 million and $79 million adjustment to carrying value, respectively, related to hedge accounting of interest rate swaps. Refer to Note 5 for additional information.
The company maintains a $5 billion unsecured revolving credit agreement with a syndicate of banking institutions that expires March 26, 2024. There are no financial maintenance covenants contained within the credit agreement. No borrowings were outstanding under the credit agreement as of March 31, 2021.
12
5. Financial Instruments
In its normal operations, Linde is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy and commodity costs. The objective of financial risk management at Linde is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Linde routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Linde only uses commonly traded and non-leveraged instruments.
There are three types of derivatives that the company enters into: (i) those relating to fair-value exposures, (ii) those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Linde designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, cross-currency contracts are generally not designated as hedges for accounting purposes. Certain currency contracts related to forecasted transactions are designated as hedges for accounting purposes. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective through the use of a qualitative assessment, then hedge accounting will be discontinued prospectively.
Counterparties to Linde's derivatives are major banking institutions with credit ratings of investment grade or better. The company has Credit Support Annexes ("CSAs") in place with its principal counterparties to minimize potential default risk and to mitigate counterparty risk. Under the CSAs, the fair values of derivatives for the purpose of interest rate and currency management are collateralized with cash on a regular basis. As of March 31, 2021, the impact of such collateral posting arrangements on the fair value of derivatives was insignificant. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.
The following table is a summary of the notional amount and fair value of derivatives outstanding at March 31, 2021 and December 31, 2020 for consolidated subsidiaries:
| Fair Value | |||||||||||||||||||||||||||||||||||
| Notional Amounts | Assets (a) | Liabilities (a) | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
| Derivatives Not Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Currency contracts: | |||||||||||||||||||||||||||||||||||
| Balance sheet items | $ | 6,002 | $ | 6,470 | $ | 26 | $ | 72 | $ | 32 | $ | 48 | |||||||||||||||||||||||
| Forecasted transactions | 705 | 823 | 6 | 16 | 9 | 12 | |||||||||||||||||||||||||||||
| Cross-currency swaps | 194 | 260 | 23 | 24 | 6 | 7 | |||||||||||||||||||||||||||||
| Commodity contracts | N/A | N/A | 2 | 1 | N/A | N/A | |||||||||||||||||||||||||||||
| Total | $ | 6,901 | $ | 7,553 | $ | 57 | $ | 113 | $ | 47 | $ | 67 | |||||||||||||||||||||||
| Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||||||||||||||
| Currency contracts: | |||||||||||||||||||||||||||||||||||
| Forecasted transactions | 309 | 355 | 5 | 20 | 6 | 14 | |||||||||||||||||||||||||||||
| Commodity contracts | N/A | N/A | 29 | 3 | N/A | N/A | |||||||||||||||||||||||||||||
| Interest rate swaps | 1,859 | 1,923 | 50 | 64 | — | — | |||||||||||||||||||||||||||||
| Total Hedges | $ | 2,168 | $ | 2,278 | $ | 84 | $ | 87 | $ | 6 | $ | 14 | |||||||||||||||||||||||
| Total Derivatives | $ | 9,069 | $ | 9,831 | $ | 141 | $ | 200 | $ | 53 | $ | 81 | |||||||||||||||||||||||
(a)March 31, 2021 and December 31, 2020 included current assets of $67 million and $110 million which are recorded in prepaid and other current assets; long-term assets of $74 million and $90 million which are recorded in other long-term assets; current liabilities of $42 million and $70 million which are recorded in other current liabilities; and long-term liabilities of $11 million and $11 million which are recorded in other long-term liabilities.
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Balance Sheet Items
Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. Certain forward currency contracts are entered into to protect underlying monetary assets and liabilities denominated in foreign currencies from foreign exchange risk and are not designated as hedging instruments. For balance sheet items that are not designated as hedging instruments, the fair value adjustments on these contracts are offset by the fair value adjustments recorded on the underlying monetary assets and liabilities.
Forecasted Transactions
Foreign currency contracts related to forecasted transactions consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on (1) forecasted purchases of capital-related equipment and services, (2) forecasted sales, or (3) other forecasted cash flows denominated in currencies other than the functional currency of the related operating units. For forecasted transactions that are designated as cash flow hedges, fair value adjustments are recorded to accumulated other comprehensive income ("AOCI") with deferred amounts reclassified to earnings over the same time period as the income statement impact of the associated forecasted transaction. For forecasted transactions that do not qualify for cash flow hedging relationships, fair value adjustments are recorded directly to earnings.
Cross-Currency Swaps
Cross-currency interest rate swaps are entered into to limit the foreign currency risk of future principal and interest cash flows associated with intercompany loans, and to a more limited extent bonds, denominated in non-functional currencies. The fair value adjustments on the cross-currency swaps are recorded to earnings, where they are offset by fair value adjustments on the underlying intercompany loan or bond.
Commodity Contracts
Commodity contracts are entered into to manage the exposure to fluctuations in commodity prices, which arise in the normal course of business from its procurement transactions. To reduce the extent of this risk, Linde enters into a limited number of electricity, natural gas, and propane gas derivatives. For forecasted transactions that are designated as cash flow hedges, fair value adjustments are recorded to accumulated other comprehensive income ("AOCI") with deferred amounts reclassified to earnings over the same time period as the income statement impact of the associated purchase.
Net Investment Hedge
As of March 31, 2021, Linde has €2.3 billion ($2.7 billion) intercompany Euro-denominated credit facility loans and intercompany loans which are designated as hedges of the net investment positions in foreign operations. Since hedge inception, the deferred loss recorded within the cumulative translation adjustment component of AOCI in the condensed consolidated balance sheets and the consolidated statements of comprehensive income is $137 million (deferred gain of $75 million recorded during the three months ended March 31, 2021).
As of March 31, 2021, exchange rate movements relating to previously designated hedges that remain in AOCI is a gain of $73 million. These movements will remain in AOCI, until appropriate, such as upon sale or liquidation of the related foreign operations at which time amounts will be reclassified to the consolidated statement of income.
Interest Rate Swaps
Linde uses interest rate swaps to hedge the exposure to changes in the fair value of financial assets and financial liabilities as a result of interest rate changes. These interest rate swaps effectively convert fixed-rate interest exposures to variable rates; fair value adjustments are recognized in earnings along with an equally offsetting charge/benefit to earnings for the changes in the fair value of the underlying financial asset or financial liability. The notional value of outstanding interest rate swaps of Linde with maturity dates from 2021 through 2028 was $1,859 million at March 31, 2021 and $1,923 million at December 31, 2020 (see Note 4 for further information).
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Terminated Treasury Rate Locks
The unrecognized aggregated losses related to terminated treasury rate lock contracts on the underlying $500 million 2.20% fixed-rate notes that mature in 2022 at March 31, 2021 and December 31, 2020 were immaterial in both periods. The unrecognized gains / (losses) for the treasury rate locks are shown in AOCI and are being recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements.
Derivatives' Impact on Consolidated Statements of Income
The following table summarizes the impact of the company’s derivatives on the consolidated statements of income:
| Amount of Pre-Tax Gain (Loss) Recognized in Earnings * | |||||||||||
| Quarter Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| Derivatives Not Designated as Hedging Instruments | |||||||||||
| Currency contracts: | |||||||||||
| Balance sheet items | |||||||||||
| Debt-related | $ | 19 | $ | (5) | |||||||
| Other balance sheet items | 4 | (41) | |||||||||
| Total | $ | 23 | $ | (46) | |||||||
* The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. Accordingly, the gains (losses) for the derivatives and the underlying hedged assets and liabilities related to debt items are recorded in the consolidated statements of income as interest expense-net. Other balance sheet items and anticipated net income gains (losses) are generally recorded in the consolidated statements of income as other income (expenses)-net.
The amounts of gain or loss recognized in AOCI and reclassified to the consolidated statement of income was immaterial for the three months ended March 31, 2021. Net losses expected to be reclassified to earnings during the next twelve months are also not material.
6. Fair Value Disclosures
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring basis:
| Fair Value Measurements Using | |||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||
| (Millions of dollars) | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Derivative assets | $ | — | $ | — | $ | 141 | $ | 200 | $ | — | $ | — | |||||||||||||||||||||||
| Investments and securities* | 20 | 21 | — | — | 45 | 47 | |||||||||||||||||||||||||||||
Total | $ | 20 | $ | 21 | $ | 141 | $ | 200 | 45 | $ | 47 | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||
| Derivative liabilities | $ | — | $ | — | $ | 53 | $ | 81 | $ | — | $ | — | |||||||||||||||||||||||
* Investments and securities are recorded in prepaid and other current assets and other long-term assets in the company's condensed consolidated balance sheets.
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Level 1 investments and securities are marketable securities traded on an exchange. Level 2 investments are based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. Level 3 investments and securities consist of a venture fund within the Americas. For the valuation, Linde uses the net asset value received as part of the fund's quarterly reporting, which for the most part is not based on quoted prices in active markets. In order to reflect current market conditions, Linde proportionally adjusts these by observable market data (stock exchange prices) or current transaction prices.
The below summarizes the changes in level 3 investments and securities for the three months ended March 31, 2021. Gains (losses) recognized in earnings are recorded to interest expense - net in the company's consolidated statements of income.
The level 3 investments and securities as of December 31, 2020 was $47 million. During the quarter period the balance decreased $2 million related to foreign currency movements. The balance as of March 31, 2021 was $45 million.
The fair value of cash and cash equivalents, short-term debt, accounts receivable-net, and accounts payable approximate carrying value because of the short-term maturities of these instruments.
The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues. Long-term debt is categorized within either Level 1 or Level 2 of the fair value hierarchy depending on the trading volume of the issues and whether or not they are actively quoted in the market as opposed to traded through over-the-counter transactions. At March 31, 2021, the estimated fair value of Linde’s long-term debt portfolio was $12,746 million versus a carrying value of $12,474 million. At December 31, 2020, the estimated fair value of Linde’s long-term debt portfolio was $13,611 million versus a carrying value of $12,903 million. Differences between the carrying value and the fair value are attributable to fluctuations in interest rates subsequent to when the debt was issued and relative to stated coupon rates.
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7. Earnings Per Share – Linde plc Shareholders
Basic and diluted earnings per share is computed by dividing Income from continuing operations, Income from discontinued operations and Net income – Linde plc for the period by the weighted average number of either basic or diluted shares outstanding, as follows:
| Quarter Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Numerator (Millions of dollars) | |||||||||||
| Income from continuing operations | $ | 979 | $ | 571 | |||||||
| Income from discontinued operations | 1 | 2 | |||||||||
| Net Income – Linde plc | $ | 980 | $ | 573 | |||||||
| Denominator (Thousands of shares) | |||||||||||
| Weighted average shares outstanding | 522,103 | 530,952 | |||||||||
| Shares earned and issuable under compensation plans | 356 | 263 | |||||||||
| Weighted average shares used in basic earnings per share | 522,459 | 531,215 | |||||||||
| Effect of dilutive securities | |||||||||||
| Stock options and awards | 4,468 | 3,741 | |||||||||
Weighted average shares used in diluted earnings per share | 526,927 | 534,956 | |||||||||
| Basic earnings per share from continuing operations | $ | 1.87 | $ | 1.07 | |||||||
| Basic earnings per share from discontinued operations | — | — | |||||||||
| Basic Earnings Per Share | $ | 1.87 | $ | 1.07 | |||||||
| Diluted earnings per share from continuing operations | $ | 1.86 | $ | 1.07 | |||||||
| Diluted earnings per share from discontinued operations | — | — | |||||||||
| Diluted Earnings Per Share | $ | 1.86 | $ | 1.07 | |||||||
There were no antidilutive shares for any period presented.
8. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarters ended March 31, 2021 and 2020 are shown below:
| Quarter Ended March 31, | |||||||||||||||||||||||
| Pensions | OPEB | ||||||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Amount recognized in Operating Profit | |||||||||||||||||||||||
| Service cost | $ | 40 | $ | 37 | $ | — | $ | 1 | |||||||||||||||
| Amount recognized in Net pension and OPEB cost (benefit), excluding service cost | |||||||||||||||||||||||
| Interest cost | 38 | 52 | 1 | 1 | |||||||||||||||||||
| Expected return on plan assets | (131) | (120) | — | — | |||||||||||||||||||
| Net amortization and deferral | 44 | 23 | (1) | (1) | |||||||||||||||||||
| (49) | (45) | — | — | ||||||||||||||||||||
| Net periodic benefit cost (benefit) | $ | (9) | $ | (8) | $ | — | $ | 1 | |||||||||||||||
Linde estimates that 2021 required contributions to its pension plans will be in the range of $70 million to $80 million, of which $12 million have been made through March 31, 2021.
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9. Commitments and Contingencies
Contingent Liabilities
Linde is subject to various lawsuits and government investigations that arise from time to time in the ordinary course of business. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others. Linde has strong defenses in these cases and intends to defend itself vigorously. It is possible that the company may incur losses in connection with some of these actions in excess of accrued liabilities. Management does not anticipate that in the aggregate such losses would have a material adverse effect on the company’s consolidated financial position or liquidity; however, it is possible that the final outcomes could have a significant impact on the company’s reported results of operations in any given period (see Note 17 to the consolidated financial statements of Linde's 2020 Annual Report on Form 10-K).
Significant matters are:
•During 2009, the Brazilian government published Law 11941/2009 instituting a new voluntary amnesty program (“Refis Program”) which allowed Brazilian companies to settle certain federal tax disputes at reduced amounts. During 2009, the company decided that it was economically beneficial to settle many of its outstanding federal tax disputes and such disputes were enrolled in the Refis Program, subject to final calculation and review by the Brazilian federal government. The company recorded estimated liabilities based on the terms of the Refis Program. Since 2009, Linde has been unable to reach final agreement on the calculations and initiated litigation against the government in an attempt to resolve certain items. Open issues relate to the following matters: (i) application of cash deposits and net operating loss carryforwards to satisfy obligations and (ii) the amount of tax reductions available under the Refis Program. It is difficult to estimate the timing of resolution of legal matters in Brazil.
•At March 31, 2021 the most significant non-income and income tax claims in Brazil, after enrollment in the Refis Program, relate to state VAT tax matters and a federal income tax matter where the taxing authorities are challenging the tax rate that should be applied to income generated by a subsidiary company. The total estimated exposure relating to such claims, including interest and penalties, as appropriate, is approximately $190 million. Linde has not recorded any liabilities related to such claims based on management judgments, after considering judgments and opinions of outside counsel. Because litigation in Brazil historically takes many years to resolve, it is very difficult to estimate the timing of resolution of these matters; however, it is possible that certain of these matters may be resolved within the near term. The company is vigorously defending against the proceedings.
•On September 1, 2010, CADE (Brazilian Administrative Council for Economic Defense) announced alleged anticompetitive activity on the part of five industrial gas companies in Brazil and imposed fines. Originally, CADE imposed a civil fine of R$2.2 billion Brazilian reais ($386 million) on White Martins, the Brazil-based subsidiary of Praxair, Inc. The fine was reduced to R$1.7 billion Brazilian reais ($298 million) due to a calculation error made by CADE. The fine against White Martins was overturned by the Ninth Federal Court of Brasilia. CADE appealed this decision, and the Federal Court of Appeals rejected CADE's appeal and confirmed the decision of the Ninth Federal Court of Brasilia. CADE has filed an appeal with the Superior Court of Justice and a decision is pending.
Similarly, on September 1, 2010, CADE imposed a civil fine of R$237 million Brazilian reais ($42 million) on Linde Gases Ltda., the former Brazil-based subsidiary of Linde AG, which was divested to MG Industries GmbH on March 1, 2019 and with respect to which Linde provided a contractual indemnity. The fine was reduced to R$188 million Brazilian reais ($33 million) due to a calculation error made by CADE. The fine against Linde Gases Ltda. was overturned by the Seventh Federal Court in Brasilia. CADE appealed this decision, and the Federal Court of Appeals rejected CADE's appeal and confirmed the decision of the Seventh Federal Court of Brasilia. CADE filed an appeal with the Superior Court of Justice, and a final decision is pending.
Linde has strong defenses and is confident that it will prevail on appeal and have the fines overturned. Linde strongly believes that the allegations of anticompetitive activity against our current and former Brazilian subsidiaries are not supported by valid and sufficient evidence. Linde believes that this decision will not stand up to judicial review and deems the possibility of cash outflows to be extremely unlikely. As a result, no reserves have been recorded as management does not believe that a loss from this case is probable.
•On and after April 23, 2019 former shareholders of Linde AG filed appraisal proceedings at the District Court (Landgericht) Munich I (Germany), seeking an increase of the cash consideration paid in connection with the previously completed cash merger squeeze-out of all of Linde AG’s minority shareholders for €189.46 per share. Any such increase would apply to all 14,763,113 Linde AG shares that were outstanding on April 8, 2019, when the cash merger squeeze-out was completed. The period for plaintiffs to file claims expired on July 9, 2019. The company believes the consideration paid was fair and that the claims lack merit, and no reserve has been established. We cannot estimate the timing of resolution.
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10. Segments
For a description of Linde plc's operating segments, refer to Note 18 to the consolidated financial statements on Linde plc's 2020 Annual Report on Form 10-K.
The table below presents sales and operating profit information about reportable segments and Other for the quarters ended March 31, 2021 and 2020.
| Quarter Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
SALES(a) | |||||||||||
| Americas | $ | 2,840 | $ | 2,677 | |||||||
| EMEA | 1,799 | 1,633 | |||||||||
| APAC | 1,436 | 1,336 | |||||||||
| Engineering | 674 | 608 | |||||||||
| Other | 494 | 485 | |||||||||
| Total sales | $ | 7,243 | $ | 6,739 | |||||||
| Quarter Ended March 31, | |||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| SEGMENT OPERATING PROFIT | |||||||||||
| Americas | $ | 795 | $ | 661 | |||||||
| EMEA | 451 | 355 | |||||||||
| APAC | 351 | 281 | |||||||||
| Engineering | 109 | 91 | |||||||||
| Other | (18) | (36) | |||||||||
| Segment operating profit | 1,688 | 1,352 | |||||||||
Cost reduction programs and other charges (Note 2) | 8 | (131) | |||||||||
| Purchase accounting impacts - Linde AG | (483) | (488) | |||||||||
| Total operating profit | $ | 1,213 | $ | 733 | |||||||
(a)Sales reflect external sales only. Intersegment sales, primarily from Engineering to the industrial gases segments, were not material.
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11. Equity
Equity
A summary of the changes in total equity for the quarters ended March 31, 2021 and 2020 is provided below:
| Quarter Ended March 31, | |||||||||||||||||||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| Activity | Linde plc Shareholders’ Equity | Noncontrolling Interests | Total Equity | Linde plc Shareholders’ Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 47,317 | $ | 2,252 | $ | 49,569 | $ | 49,074 | $ | 2,448 | $ | 51,522 | |||||||||||||||||||||||
| Net income (a) | 980 | 38 | 1,018 | 573 | 35 | 608 | |||||||||||||||||||||||||||||
| Other comprehensive income (loss) | (655) | (6) | (661) | (2,574) | (106) | (2,680) | |||||||||||||||||||||||||||||
| Noncontrolling interests: | |||||||||||||||||||||||||||||||||||
| Additions (reductions) (b) | — | (853) | (853) | — | 2 | 2 | |||||||||||||||||||||||||||||
| Dividends and other capital changes | — | (21) | (21) | — | (4) | (4) | |||||||||||||||||||||||||||||
Dividends to Linde plc ordinary share holders ($1.060 per share in 2021 and $0.963 per share in 2020) | (553) | — | (553) | (511) | — | (511) | |||||||||||||||||||||||||||||
| Issuances of ordinary shares: | |||||||||||||||||||||||||||||||||||
| For employee savings and incentive plans | (2) | — | (2) | (18) | — | (18) | |||||||||||||||||||||||||||||
| Purchases of ordinary shares | (906) | — | (906) | (1,811) | — | (1,811) | |||||||||||||||||||||||||||||
| Share-based compensation | 29 | — | 29 | 43 | — | 43 | |||||||||||||||||||||||||||||
| Balance, end of period | $ | 46,210 | $ | 1,410 | $ | 47,620 | $ | 44,776 | $ | 2,375 | $ | 47,151 | |||||||||||||||||||||||
(a) Net income for noncontrolling interests excludes net income related to redeemable noncontrolling interests which is not significant for both the three months ended March 31, 2021 and 2020which is not part of total equity.
(b) Additions (reductions) for noncontrolling interests as of the three months period ended March 31, 2021, includes the impact from the deconsolidation of a joint venture with operations in APAC (see Note 13).
The components of AOCI are as follows:
| March 31, | December 31, | ||||||||||
| (Millions of dollars) | 2021 | 2020 | |||||||||
| Cumulative translation adjustment - net of taxes: | |||||||||||
| Americas | $ | (3,938) | $ | (3,788) | |||||||
| EMEA | 620 | 1,020 | |||||||||
| APAC | 327 | 616 | |||||||||
| Engineering | 164 | 354 | |||||||||
| Other | (700) | (1,020) | |||||||||
| (3,527) | (2,818) | ||||||||||
| Derivatives - net of taxes | 18 | 4 | |||||||||
Pension / OPEB (net of $537 million and $560 million tax benefit in March 31, 2021 and December 31, 2020, respectively) | (1,836) | (1,876) | |||||||||
| $ | (5,345) | $ | (4,690) | ||||||||
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12. Revenue Recognition
Revenue is accounted for in accordance with ASC 606. Revenue is recognized as control of goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled to receive in exchange for the goods or services.
Contracts with Customers
Linde serves a diverse group of industries including healthcare, petroleum refining, energy, manufacturing, food, beverage carbonation, fiber-optics, steel making, aerospace, chemicals and water treatment.
Industrial Gases
Within each of the company’s geographic segments for industrial gases, there are three basic distribution methods: (i) on-site or tonnage; (ii) merchant or bulk liquid; and (iii) packaged or cylinder gases. The distribution method used by Linde to supply a customer is determined by many factors, including the customer’s volume requirements and location. The distribution method generally determines the contract terms with the customer and, accordingly, the revenue recognition accounting practices. Linde's primary products in its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). These products are generally sold through one of the three distribution methods.
Following is a description of each of the three industrial gases distribution methods and the respective revenue recognition policies:
On-site. Customers that require the largest volumes of product and that have a relatively constant demand pattern are supplied by cryogenic and process gas on-site plants. Linde constructs plants on or adjacent to these customers’ sites and supplies the product directly to customers by pipeline. Where there are large concentrations of customers, a single pipeline may be connected to several plants and customers. On-site product supply contracts generally are total requirement contracts with terms typically ranging from 10-20 years and contain minimum purchase requirements and price escalation provisions. Many of the cryogenic on-site plants also produce liquid products for the merchant market. Therefore, plants are typically not dedicated to a single customer. Additionally, Linde is responsible for the design, construction, operations and maintenance of the plants and our customers typically have no involvement in these activities. Advanced air separation processes also allow on-site delivery to customers with smaller volume requirements.
The company’s performance obligations related to on-site customers are satisfied over time as customers receive and obtain control of the product. Linde has elected to apply the practical expedient for measuring progress towards the completion of a performance obligation and recognizes revenue as the company has the right to invoice each customer, which generally corresponds with product delivery. Accordingly, revenue is recognized when product is delivered to the customer and the company has the right to invoice the customer in accordance with the contract terms. Consideration in these contracts is generally based on pricing which fluctuates with various price indices. Variable components of consideration exist within on-site contracts but are considered constrained.
Merchant. Merchant deliveries generally are made from Linde's plants by tanker trucks to storage containers at the customer's site. Due to the relatively high distribution cost, merchant oxygen and nitrogen generally have a relatively small distribution radius from the plants at which they are produced. Merchant argon, hydrogen and helium can be shipped much longer distances. The customer agreements used in the merchant business are usually -to seven-year supply agreements based on the requirements of the customer. These contracts generally do not contain minimum purchase requirements or volume commitments.
The company’s performance obligations related to merchant customers are generally satisfied at a point in time as the customers receive and obtain control of the product. Revenue is recognized when product is delivered to the customer and the company has the right to invoice the customer in accordance with the contract terms. Any variable components of consideration within merchant contracts are constrained however this consideration is not significant.
Packaged Gases. Customers requiring small volumes are supplied products in containers called cylinders, under medium to high pressure. Linde distributes merchant gases from its production plants to company-owned cylinder filling plants where cylinders are then filled for distribution to customers. Cylinders may be delivered to the customer’s site or picked up by the customer at a packaging facility or retail store. Linde invoices the customer for the industrial gases and the use of the cylinder container(s). The company also sells hardgoods and welding equipment purchased from independent manufacturers. Packaged gases are generally sold under to three-year supply contracts and purchase orders and do not contain minimum purchase requirements or volume commitments.
The company’s performance obligations related to packaged gases are satisfied at a point in time. Accordingly, revenue is
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recognized when product is delivered to the customer or when the customer picks up product from a packaged gas facility or retail store, and the company has the right to payment from the customer in accordance with the contract terms. Any variable consideration is constrained and will be recognized when the uncertainty related to the consideration is resolved.
Linde Engineering
The company designs and manufactures equipment for air separation and other industrial gas applications manufactured specifically for end customers. Sale of equipment contracts are generally comprised of a single performance obligation. Revenue from sale of equipment is generally recognized over time as Linde has an enforceable right to payment for performance completed to date and performance does not create an asset with alternative use. For contracts recognized over time, revenue is recognized primarily using a cost incurred input method. Costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer. Contract modifications are typically accounted for as part of the existing contract and are recognized as a cumulative adjustment for the inception-to-date effect of such change.
Contract Assets and Liabilities
Contract assets and liabilities result from differences in timing of revenue recognition and customer invoicing. Contract assets primarily relate to sale of equipment contracts for which revenue is recognized over time. The balance represents unbilled revenue which occurs when revenue recognized under the measure of progress exceeds amounts invoiced to customers. Customer invoices may be based on the passage of time, the achievement of certain contractual milestones or a combination of both criteria. Contract liabilities include advance payments or right to consideration prior to performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied under contract terms. Linde has contract assets of $137 million and $162 million at March 31, 2021 and December 31, 2020, respectively. Total contract liabilities are $2,511 million at March 31, 2021 (current of $1,863 million and $648 million within other long-term liabilities in the condensed consolidated balance sheets). Total contract liabilities were $2,301 million at December 31, 2020 (current contract liabilities of $1,769 million and $532 million in other long-term liabilities in the condensed consolidated balance sheets). Revenue recognized for the three months ended March 31, 2021 that was included in the contract liability at December 31, 2020 was $446 million. Contract assets and liabilities primarily relate to the Linde Engineering business.
Payment Terms and Other
Linde generally receives payment after performance obligations are satisfied, and customer prepayments are not typical for the industrial gases business. Payment terms vary based on the country where sales originate and local customary payment practices. Linde does not offer extended financing outside of customary payment terms. Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue producing transactions are presented on a net basis and are not included in sales within the consolidated statement of income. Additionally, sales returns and allowances are not a normal practice in the industry and are not significant.
Disaggregated Revenue Information
As described above and in Note 18 to Linde's 2020 Form 10-K, the company manages its industrial gases business on a geographic basis, while the Engineering and Other businesses are generally managed on a global basis. Furthermore, the company believes that reporting sales by distribution method by reportable geographic segment best illustrates the nature, timing, type of customer, and contract terms for its revenues, including terms and pricing.
The following tables show sales by distribution method at the consolidated level and for each reportable segment and Other for the three months ended March 31, 2021 and March 31, 2020.
| (Millions of dollars) | Quarter Ended March 31, 2021 | |||||||||||||||||||||||||
| Sales | Americas | EMEA | APAC | Engineering | Other | Total | % | |||||||||||||||||||
| Merchant | $ | 771 | $ | 531 | $ | 484 | $ | — | $ | 53 | $ | 1,839 | 25 | % | ||||||||||||
| On-Site | 689 | 392 | 553 | — | — | 1,634 | 23 | % | ||||||||||||||||||
| Packaged Gas | 1,332 | 861 | 361 | — | 6 | 2,560 | 35 | % | ||||||||||||||||||
| Other | 48 | 15 | 38 | 674 | 435 | 1,210 | 17 | % | ||||||||||||||||||
| Total | $ | 2,840 | $ | 1,799 | $ | 1,436 | $ | 674 | $ | 494 | $ | 7,243 | 100 | % | ||||||||||||
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| (Millions of dollars) | Quarter Ended March 31, 2020 | |||||||||||||||||||||||||
| Sales | Americas | EMEA | APAC | Engineering | Other | Total | % | |||||||||||||||||||
| Merchant | $ | 726 | $ | 470 | $ | 459 | $ | — | $ | 47 | $ | 1,702 | 25 | % | ||||||||||||
| On-Site | 650 | 343 | 492 | — | — | 1,485 | 22 | % | ||||||||||||||||||
| Packaged Gas | 1,275 | 811 | 360 | — | 5 | 2,451 | 36 | % | ||||||||||||||||||
| Other | 26 | 9 | 25 | 608 | 433 | 1,101 | 17 | % | ||||||||||||||||||
| Total | $ | 2,677 | $ | 1,633 | $ | 1,336 | $ | 608 | $ | 485 | $ | 6,739 | 100 | % | ||||||||||||
Remaining Performance Obligations
As described above, Linde's contracts with on-site customers are under long-term supply arrangements which generally require the customer to purchase their requirements from Linde and also have minimum purchase requirements. The company estimates the consideration related to minimum purchase requirements is approximately $45 billion. This amount excludes all sales above minimum purchase requirements, which can be significant depending on customer needs. In the future, actual amounts will be different due to impacts from several factors, many of which are beyond the company’s control including, but not limited to, timing of newly signed, terminated and renewed contracts, inflationary price escalations, currency exchange rates, and pass-through costs related to natural gas and electricity. The actual duration of long-term supply contracts ranges up to twenty years. The company estimates that approximately half of the revenue related to minimum purchase requirements will be earned in the next five years and the remaining thereafter.
13. Divestitures
Effective January 1, 2021, Linde deconsolidated a joint venture with operations in APAC, due to the expiration of certain contractual rights that the parties mutually agreed not to renew. From the effective date, the joint venture is reflected as an equity investment on Linde's consolidated balance sheet with the corresponding results reflected in income from equity investments on the consolidated statement of income.
The fair value of the joint venture at January 1, 2021 was determined using a discounted cash flow model and approximated the carrying amount of its net assets. The net carrying value of $852 million was mainly comprised of assets of approximately $1.9 billion (primarily Other intangibles and Property plant and equipment - net), net of liabilities of approximately $1.0 billion. Upon deconsolidation an equity investment was recorded representing Linde's share of the joint venture's net assets. The deconsolidation resulted in a gain of $52 million recorded within cost reduction programs and other charges (see Note 2) related to the release of the CTA balance recorded within AOCI. The company did not receive any consideration, cash or otherwise, as part of the deconsolidation.
The joint venture contributed sales of approximately $600 million in 2020. Future earnings per share will not be affected as the ownership percent remains the same.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Non-GAAP Measures
Throughout MD&A, the company provides adjusted operating results from continuing operations exclusive of certain items such as cost reduction programs and other charges, net gains on sale of businesses, purchase accounting impacts of the Linde AG merger and pension settlement charges. Adjusted amounts are non-GAAP measures which are intended to supplement investors’ understanding of the company’s financial information by providing measures which investors, financial analysts and management find useful in evaluating the company’s operating performance. Items which the company does not believe to be indicative of on-going business performance are excluded from these calculations so that investors can better evaluate and analyze historical and future business trends on a consistent basis. In addition, operating results from continuing operations, excluding these items, is important to management's development of annual and long-term employee incentive compensation plans. Definitions of these non-GAAP measures may not be comparable to similar definitions used by other companies and are not a substitute for similar GAAP measures.
The non-GAAP measures and reconciliations are separately included in a later section in the MD&A titled "Non-GAAP Measures and Reconciliations."
Consolidated Results
The following table provides summary information for the three months ended March 31, 2021 and 2020. The reported amounts are GAAP amounts from the Consolidated Statements of Income. The adjusted amounts are intended to supplement investors' understanding of the company's financial information and are not a substitute for GAAP measures:
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars, except per share data) | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 7,243 | $ | 6,739 | 7 | % | |||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 4,054 | $ | 3,843 | 5 | % | |||||||||||
| As a percent of sales | 56.0 | % | 57.0 | % | |||||||||||||
| Selling, general and administrative | $ | 787 | $ | 861 | (9) | % | |||||||||||
| As a percent of sales | 10.9 | % | 12.8 | % | |||||||||||||
| Depreciation and amortization | $ | 1,166 | $ | 1,142 | 2 | % | |||||||||||
| Cost reduction programs and other charges (b) | $ | (8) | $ | 131 | (106) | % | |||||||||||
| Other income (expense) - net | $ | 4 | $ | 15 | (73) | % | |||||||||||
| Operating profit | $ | 1,213 | $ | 733 | 65 | % | |||||||||||
| Operating margin | 16.7 | % | 10.9 | % | |||||||||||||
| Interest expense - net | $ | 20 | $ | 24 | (17) | % | |||||||||||
| Net pension and OPEB cost (benefit), excluding service cost | $ | (49) | $ | (45) | 9 | % | |||||||||||
| Effective tax rate | 21.6 | % | 21.9 | % | |||||||||||||
| Income from equity investments | $ | 43 | $ | 17 | 153 | % | |||||||||||
| Noncontrolling interests from continuing operations | $ | (38) | $ | (35) | 9 | % | |||||||||||
| Income from continuing operations | $ | 979 | $ | 571 | 71 | % | |||||||||||
| Diluted earnings per share from continuing operations | $ | 1.86 | $ | 1.07 | 74 | % | |||||||||||
| Diluted shares outstanding | 526,927 | 534,956 | (2) | % | |||||||||||||
| Number of employees | 71,699 | 79,008 | (9) | % | |||||||||||||
| Adjusted Amounts (a) | |||||||||||||||||
| Operating profit | $ | 1,688 | $ | 1,352 | 25 | % | |||||||||||
| Operating margin | 23.3 | % | 20.1 | % | |||||||||||||
| Effective tax rate | 23.9 | % | 23.9 | % | |||||||||||||
| Income from continuing operations | $ | 1,312 | $ | 1,009 | 30 | % | |||||||||||
| Diluted earnings per share from continuing operations | $ | 2.49 | $ | 1.89 | 32 | % | |||||||||||
| Other Financial Data (a) | |||||||||||||||||
| EBITDA from continuing operations | $ | 2,422 | $ | 1,892 | 28 | % | |||||||||||
| As percent of sales | 33.4 | % | 28.1 | % | |||||||||||||
| Adjusted EBITDA from continuing operations | $ | 2,438 | $ | 2,049 | 19 | % | |||||||||||
| As percent of sales | 33.7 | % | 30.4 | % | |||||||||||||
(a) Adjusted Amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Measures and Reconciliations" sections of this MD&A.
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(b) See Note 2 to the condensed consolidated financial statements.
Reported
In the first quarter of 2021, Linde's sales were $7,243 million, 7% above prior year, primarily driven by 2% price attainment and 3% higher volumes. Currency translation increased sales by 4% in the first quarter of 2021 as compared to 2020.
Reported operating profit for the first quarter of 2021 of $1,213 million, or 16.7% of sales, was 65% above prior year. The reported year-over-year increase was primarily due to higher price and volumes and lower cost reduction programs and other charges. The reported effective tax rate ("ETR") was 21.6% in the first quarter 2021 versus 21.9% in the first quarter 2020. Diluted earnings per share from continuing operations ("EPS") was $1.86, or 74% above EPS of $1.07 in the first quarter of 2020 primarily due to higher income from continuing operations and lower diluted shares outstanding.
Adjusted
In the first quarter of 2021, adjusted operating profit of $1,688 million, or 23.3% of sales, was 25% higher as compared to 2020 driven by higher price and volumes and continued productivity initiatives across all segments. The adjusted ETR was 23.9% in the first quarter 2021, flat versus the 2020 quarter. On an adjusted basis, EPS was $2.49, 32% above the 2020 adjusted EPS of $1.89, driven by higher adjusted income from continuing operations and lower diluted shares outstanding.
Outlook
Linde provides quarterly updates on operating results, material trends that may affect financial performance, and financial guidance via quarterly earnings releases and investor teleconferences. These updates are available on the company’s website, www.linde.com, but are not incorporated herein.
Results of operations
The changes in consolidated sales compared to the prior year are attributable to the following:
| Quarter Ended March 31, 2021 vs. 2020 | |||||
| % Change | |||||
| Factors Contributing to Changes - Sales | |||||
| Volume | 3 | % | |||
| Price/Mix | 2 | % | |||
| Cost pass-through | 1 | % | |||
| Currency | 4 | % | |||
| Acquisitions/divestitures | (3) | % | |||
| Engineering | — | % | |||
| 7 | % | ||||
Sales
Sales increased $504 million, or 7%, for the first quarter of 2021 versus the respective 2020 period. Volume increased sales by 3% in the quarter primarily driven by healthcare, electronics and a recovery in the cyclical end markets of manufacturing, metals, chemicals and refining. Higher pricing across all geographic segments contributed 2% to sales in the quarter. Currency translation increased sales by 4% in the quarter, largely in EMEA and APAC, driven by the strengthening of the Euro, Australian dollar, Chinese yuan and British pound against the U.S. dollar. Cost pass-through increased sales by 1% in the quarter with minimal impact on operating profit. The deconsolidation of a joint venture with operations in APAC decreased sales by 3% (see Note 13 to the condensed consolidated financial statements).
Cost of sales, exclusive of depreciation and amortization
Cost of sales, exclusive of depreciation and amortization increased $211 million, or 5%, for the first quarter of 2021 primarily due to higher volumes and currency impacts, partially offset by productivity initiatives. Cost of sales, exclusive of depreciation and amortization was 56.0% of sales for the first quarter of 2021 versus 57.0% of sales for the respective 2020 period. The decrease as a percentage of sales in the quarter was due primarily to cost reduction and productivity initiatives.
25
Selling, general and administrative expenses
Selling, general and administrative expense ("SG&A") decreased $74 million, or 9%, for the first quarter of 2021. SG&A was 10.9% of first quarter sales versus 12.8% for the respective 2020 period. Currency impacts increased SG&A by approximately $25 million in the quarter. Excluding currency impacts, underlying SG&A decreased driven by lower incentive compensation and continued cost reduction and productivity initiatives.
Depreciation and amortization
Reported depreciation and amortization expense increased $24 million, or 2%, for the first quarter of 2021 primarily due to currency translation impacts.
On an adjusted basis depreciation and amortization increased $22 million, or 3%, for the first quarter of 2021, primarily due to currency translation impacts which increased depreciation and amortization by $20 million. Excluding currency impacts, underlying depreciation was relatively flat as the impact of new project start ups was largely offset by the deconsolidation of a joint venture with operations in APAC (see Note 13 to the condensed consolidated financial statements).
Cost reduction programs and other charges
Cost reduction programs and other charges was a benefit of $8 million and a charge of $131 million for the first quarter 2021 and 2020, respectively, primarily related to merger and synergy-related costs (see Note 2 to the condensed consolidated financial statements).
On an adjusted basis, these costs have been excluded in both periods.
Operating profit
On a reported basis, operating profit increased $480 million, or 65%, for 2021. The increase was primarily due to higher volumes and price, partially offset by the deconsolidation of a joint venture with operations in APAC. Cost reduction programs and other charges was a benefit of $8 million for the first quarter, versus a charge of $131 million for the respective 2020 period.
On an adjusted basis, which excludes the impacts of purchase accounting and cost reduction programs and other charges, operating profit increased $336 million, or 25% in the 2021 quarter. Operating profit growth was driven by higher volume and price and the benefit of cost reduction programs and productivity initiatives, partially offset by the deconsolidation of a joint venture with operations in APAC. A discussion of operating profit by segment is included in the segment discussion that follows.
Interest expense - net
Reported interest expense - net decreased $4 million for the first quarter of 2021. On an adjusted basis interest expense decreased $8 million for the first quarter versus the respective 2020 period.
On both a reported and adjusted basis, the decrease was driven primarily by the impact of unfavorable foreign currency revaluation on an unhedged intercompany loan in the prior year period.
Net pension and OPEB cost (benefit), excluding service cost
Reported net pension and OPEB cost (benefit), excluding service cost was a benefit of $49 million for the 2021 quarter, versus a benefit of $45 million for the respective 2020 period. The increase in benefit of $4 million largely relates to a higher expected return on assets and lower interest costs driven by the low discount rate environment offset by higher amortization of deferred losses.
Effective tax rate
The reported effective tax rate ("ETR") for the 2021 quarter was 21.6%, versus 21.9% for the respective 2020 period.
On an adjusted basis, the ETR for the first quarter 2021 was 23.9%, flat with the respective 2020 period.
Income from equity investments
Reported income from equity investments for the first quarter 2021 was $43 million, versus $17 million for the respective 2020 period. On an adjusted basis, income from equity investments for the first quarter of 2021 was $62 million, versus $31 million, in the prior respective period. The increase in both the reported and adjusted income from equity investments was driven by the deconsolidation of a joint venture with operations in APAC which is reflected in equity income effective January 1, 2021 (see Note 13 to the condensed consolidated financial statements), and the impact of unfavorable foreign currency revaluation on an unhedged loan of an investment in EMEA in the prior year period.
Noncontrolling interests from continuing operations
At March 31, 2021, noncontrolling interests from continuing operations consisted primarily of non-controlling shareholders' investments in APAC (primarily China) and surface technologies.
26
Reported noncontrolling interests from continuing operations increased $3 million for the first quarter of 2021 versus the respective 2020 period. Adjusted noncontrolling interests from continuing operations decreased $7 million for the first quarter of 2021 versus the respective 2020 period, primarily driven by the deconsolidation of a joint venture with operations in APAC (see Note 13 to the condensed consolidated financial statements) and the buyout of minority shareholders in the Republic of South Africa.
Income from continuing operations
Reported income from continuing operations increased $408 million, or 71%, for the first quarter of 2021 primarily due to higher operating profit versus the respective 2020 period.
On an adjusted basis, which excludes the impacts of purchase accounting and other non-GAAP adjustments, income from continuing operations increased $303 million, or 30%, for 2021 versus the respective 2020 period. The increase in the quarter was driven by higher overall adjusted operating profit.
Diluted earnings per share from continuing operations
Reported diluted EPS from continuing operations increased $0.79, or 74%, for 2021 versus the comparable 2020 period. On an adjusted basis, diluted EPS of $2.49 for the first quarter increased $0.60, or 32% versus the respective 2020 period. The increase in both reported and adjusted diluted EPS is driven by higher income from continuing operations and lower diluted shares outstanding.
Employees
The number of employees at March 31, 2021 was 71,699, a decrease of 7,309 employees from March 31, 2020 primarily driven by cost reduction actions and divestitures.
Other Financial Data
EBITDA from continuing operations was $2,422 million for the first quarter 2021 as compared to $1,892 million in the respective 2020 period. Adjusted EBITDA from continuing operations increased to $2,438 million for the first quarter 2021 from $2,049 million in the respective 2020 period.
See the "Non-GAAP Measures and Reconciliations" section for definitions and reconciliations of these adjusted non-GAAP measures to reported GAAP amounts.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) for the first quarter 2021 was a loss of $661 million and resulted primarily from currency translation adjustments of $715 million during the quarter. The translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements to U.S. dollars, and are largely driven by the movement of the U.S. dollar against major currencies including the Euro, British pound and the Chinese yuan. See the "Currency" section of the MD&A for exchange rates used for translation purposes and Note 11 to the condensed consolidated financial statements for a summary of the currency translation adjustment component of accumulated other comprehensive income by segment.
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Segment Discussion
The following summary of sales and operating profit by segment provides a basis for the discussion that follows. Linde plc evaluates the performance of its reportable segments based on operating profit, excluding items not indicative of ongoing business trends. The reported amounts are GAAP amounts from the Condensed Consolidated Statements of Income.
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | ||||||||||||||
| SALES | |||||||||||||||||
| Americas | $ | 2,840 | $ | 2,677 | 6 | % | |||||||||||
| EMEA | 1,799 | 1,633 | 10 | % | |||||||||||||
| APAC | 1,436 | 1,336 | 7 | % | |||||||||||||
| Engineering | 674 | 608 | 11 | % | |||||||||||||
| Other | 494 | 485 | 2 | % | |||||||||||||
| Total sales | $ | 7,243 | $ | 6,739 | 7 | % | |||||||||||
| SEGMENT OPERATING PROFIT | |||||||||||||||||
| Americas | $ | 795 | $ | 661 | 20 | % | |||||||||||
| EMEA | 451 | 355 | 27 | % | |||||||||||||
| APAC | 351 | 281 | 25 | % | |||||||||||||
| Engineering | 109 | 91 | 20 | % | |||||||||||||
| Other | (18) | (36) | 50 | % | |||||||||||||
| Segment operating profit | $ | 1,688 | $ | 1,352 | 25 | % | |||||||||||
| Reconciliation to reported operating profit: | |||||||||||||||||
Cost reduction programs and other charges (Note 2) | 8 | (131) | |||||||||||||||
| Purchase accounting impacts - Linde AG | (483) | (488) | |||||||||||||||
| Total operating profit | $ | 1,213 | $ | 733 | |||||||||||||
Americas
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 2,840 | $ | 2,677 | 6 | % | |||||||||||
| Operating profit | $ | 795 | $ | 661 | 20 | % | |||||||||||
| As a percent of sales | 28.0 | % | 24.7 | % | |||||||||||||
| Quarter Ended March 31, 2021 vs. 2020 | |||||
| % Change | |||||
| Sales | |||||
| Factors Contributing to Changes - Sales | |||||
| Volume | 4 | % | |||
| Price/Mix | 3 | % | |||
| Cost pass-through | 1 | % | |||
| Currency | (2) | % | |||
| Acquisitions/divestitures | — | % | |||
| 6 | % | ||||
28
The Americas segment includes Linde's industrial gases operations in approximately 20 countries including the United States, Canada, Mexico and Brazil.
Sales
Sales for the Americas segment increased $163 million, or 6%, for the first quarter of 2021 versus the respective 2020 period. Higher pricing contributed 3% to sales in the quarter. Higher volumes increased sales by 4% led by higher demand from the healthcare and chemical and refining end markets. Currency translation decreased sales by 2% in the quarter primarily driven by the weakening of the Brazilian real and Mexican peso against the U.S. Dollar. Cost pass-through contributed 1% to sales in the quarter with minimal impact on operating profit.
Operating profit
Operating profit in the Americas segment increased $134 million, or 20%, in 2021 versus the respective 2020 period. Operating profit increased due primarily to higher pricing and higher volumes, which were partially offset by unfavorable impacts of currency translation.
EMEA
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 1,799 | $ | 1,633 | 10 | % | |||||||||||
| Operating profit | $ | 451 | $ | 355 | 27 | % | |||||||||||
| As a percent of sales | 25.1 | % | 21.7 | % | |||||||||||||
| Quarter Ended March 31, 2021 vs. 2020 | |||||
| % Change | |||||
| Sales | |||||
| Factors Contributing to Changes - Sales | |||||
| Volume | 1 | % | |||
| Price/Mix | 3 | % | |||
| Cost pass-through | 1 | % | |||
| Currency | 7 | % | |||
| Acquisitions/divestitures | (2) | % | |||
| 10 | % | ||||
The EMEA segment includes Linde's industrial gases operations in approximately 45 European, Middle Eastern and African countries including Germany, France, Sweden, the Republic of South Africa, and the United Kingdom.
Sales
EMEA segment sales increased by $166 million, or 10%, for the first quarter 2021 as compared to the respective 2020 period. Volumes increased 1% in the quarter driven by increased demand from the healthcare end market. Higher price increased sales by 3% in the quarter. Currency translation increased sales by 7% in the quarter due to the strengthening of the Euro, British pound and Swedish krona against the U.S. Dollar. Sales decreased 2% in the quarter related to the 2020 divestiture of a non-core business in Scandinavia. Cost pass-through contributed 1% to sales in the quarter with minimal impact on operating profit.
Operating profit
Operating profit for the EMEA segment increased by $96 million, or 27%, in the first quarter 2021 as compared to the respective 2020 period, driven largely by higher price, continued cost reduction and productivity initiatives and favorable currency translation.
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APAC
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 1,436 | $ | 1,336 | 7 | % | |||||||||||
| Operating profit | $ | 351 | $ | 281 | 25 | % | |||||||||||
| As a percent of sales | 24.4 | % | 21.0 | % | |||||||||||||
| Quarter Ended March 31, 2021 vs. 2020 | |||||
| % Change | |||||
| Sales | |||||
| Factors Contributing to Changes - Sales | |||||
| Volume/Equipment | 10 | % | |||
| Price/Mix | 1 | % | |||
| Cost pass-through | 1 | % | |||
| Currency | 6 | % | |||
| Acquisitions/divestitures | (11) | % | |||
| 7 | % | ||||
The APAC segment includes Linde's industrial gases operations in approximately 20 Asian and South Pacific countries and regions including China, Australia, India and South Korea.
Sales
Sales for the APAC segment increased $100 million, or 7%, for the first quarter 2021 versus the respective 2020 period. Volumes increased 10% in the quarter primarily in the cyclical end markets and project start-ups. Higher price contributed 1% to sales. Currency translation increased sales by 6% in quarter driven primarily by the strengthening of the Chinese yuan and Australian dollar against the U.S. Dollar in the period. Sales decreased $143 million, or 11%, in the first quarter of 2021 due to the deconsolidation of a joint venture with operations in Taiwan (see Note 13 to the condensed consolidated financial statements).
Operating profit
Operating profit in the APAC segment increased $70 million, or 25%, in the first quarter 2021 versus the respective 2020 period driven by higher volumes, continued cost reduction and productivity initiatives and favorable currency translation, partially offset by a $28 million reduction due to the deconsolidation of a joint venture.
Engineering
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 674 | $ | 608 | 11 | % | |||||||||||
| Operating profit | $ | 109 | $ | 91 | 20 | % | |||||||||||
| As a percent of sales | 16.2 | % | 15.0 | % | |||||||||||||
30
| Quarter Ended March 31, 2021 vs. 2020 | |||||
| % Change | |||||
| Sales | |||||
| Factors Contributing to Changes - Sales | |||||
| Volume | 4 | % | |||
| Currency | 7 | % | |||
| 11 | % | ||||
Sales
Engineering segment sales increased $66 million, or 11%, in the first quarter 2021 as compared to the respective 2020 period driven primarily by favorable currency impacts of 7%. Volumes increased sales by 4% driven by project timing.
Operating profit
Engineering segment operating profit increased $18 million, or 20%, in the first quarter 2021 as compared to the respective 2020 period driven by productivity initiatives and favorable currency impacts.
Other
| Quarter Ended March 31, | |||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 494 | $ | 485 | 2 | % | |||||||||||
| Operating profit (loss) | $ | (18) | $ | (36) | 50 | % | |||||||||||
| As a percent of sales | (3.6) | % | (7.4) | % | |||||||||||||
| Quarter Ended March 31, 2021 vs. 2020 | |||||
| % Change | |||||
| Sales | |||||
| Factors Contributing to Changes - Sales | |||||
| Volume/price | (4) | % | |||
| Cost pass-through | 1 | % | |||
| Currency | 5 | % | |||
| Acquisitions/divestitures | — | % | |||
| 2 | % | ||||
Other consists of corporate costs and a few smaller businesses including: Surface Technologies, GIST, global helium wholesale, and Electronic Materials; which individually do not meet the quantitative thresholds for separate presentation.
Sales
Sales for Other increased $9 million, or 2%, for the first quarter 2021 versus the respective 2020 period. Currency translation increased sales by 5% in the period. Lower volumes decreased sales by 4% largely due to Surface Technologies. Cost pass-through increased sales by 1%.
Operating profit
Operating profit in Other increased $18 million, or 50% in the first quarter 2021 versus the respective 2020 period, due primarily to continued cost reduction and productivity initiatives.
31
Currency
The results of Linde's non-U.S. operations are translated to the company’s reporting currency, the U.S. dollar, from the functional currencies. For most operations, Linde uses the local currency as its functional currency. There is inherent variability and unpredictability in the relationship of these functional currencies to the U.S. dollar and such currency movements may materially impact Linde's results of operations in any given period.
To help understand the reported results, the following is a summary of the significant currencies underlying Linde's consolidated results and the exchange rates used to translate the financial statements (rates of exchange expressed in units of local currency per U.S. dollar):
| Percentage of YTD 2021 Consolidated Sales | Exchange Rate for Income Statement | Exchange Rate for Balance Sheet | |||||||||||||||||||||||||||
| Year-To-Date Average | March 31, | December 31, | |||||||||||||||||||||||||||
| Currency | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Euro | 21 | % | 0.83 | 0.91 | 0.85 | 0.82 | |||||||||||||||||||||||
| Chinese yuan | 8 | % | 6.48 | 6.98 | 6.55 | 6.53 | |||||||||||||||||||||||
| British pound | 6 | % | 0.73 | 0.78 | 0.73 | 0.73 | |||||||||||||||||||||||
| Australian dollar | 4 | % | 1.29 | 1.52 | 1.32 | 1.30 | |||||||||||||||||||||||
| Brazilian real | 4 | % | 5.46 | 4.43 | 5.70 | 5.20 | |||||||||||||||||||||||
| Canadian dollar | 3 | % | 1.27 | 1.34 | 1.26 | 1.27 | |||||||||||||||||||||||
| Korean won | 2 | % | 1,114 | 1,193 | 1,132 | 1,087 | |||||||||||||||||||||||
| Mexican peso | 2 | % | 20.34 | 19.84 | 20.43 | 19.91 | |||||||||||||||||||||||
| Indian rupee | 2 | % | 72.90 | 72.38 | 73.11 | 73.07 | |||||||||||||||||||||||
| South African rand | 1 | % | 14.96 | 15.32 | 14.78 | 14.69 | |||||||||||||||||||||||
| Swedish krona | 1 | % | 8.39 | 9.67 | 8.73 | 8.23 | |||||||||||||||||||||||
| Thailand bhat | 1 | % | 30.28 | 31.27 | 31.24 | 29.96 | |||||||||||||||||||||||
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Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion that follows:
| (Millions of dollars) | Three months ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| NET CASH PROVIDED BY (USED FOR): | |||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income (including noncontrolling interests) | $ | 1,017 | $ | 606 | |||||||
| Non-cash charges (credits): | |||||||||||
| Add: Depreciation and amortization | 1,166 | 1,142 | |||||||||
| Add: Deferred income taxes | (65) | (107) | |||||||||
| Add: Share-based compensation | 29 | 43 | |||||||||
| Add: Cost reduction programs and other charges, net of payments (a) | (76) | 40 | |||||||||
| Net income adjusted for non-cash charges | 2,071 | 1,724 | |||||||||
| Less: Working capital | (42) | (270) | |||||||||
| Less: Pension contributions | (12) | (17) | |||||||||
| Other | 92 | (90) | |||||||||
| Net cash provided by operating activities | $ | 2,109 | $ | 1,347 | |||||||
| INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (762) | (803) | |||||||||
| Acquisitions, net of cash acquired | (10) | (41) | |||||||||
| Divestitures and asset sales | 21 | 231 | |||||||||
| Net cash provided by (used for) investing activities | $ | (751) | $ | (613) | |||||||
| FINANCING ACTIVITIES | |||||||||||
| Debt increase (decrease) - net | 681 | 3,112 | |||||||||
| Issuances (purchases) of common stock - net | (851) | (1,815) | |||||||||
| Cash dividends - Linde plc shareholders | (553) | (511) | |||||||||
| Noncontrolling interest transactions and other | (247) | (27) | |||||||||
| Net cash provided by (used for) financing activities | $ | (970) | $ | 759 | |||||||
| Effect of exchange rate changes on cash and cash equivalents | $ | (46) | $ | (179) | |||||||
| Cash and cash equivalents, end-of-period | $ | 4,096 | $ | 4,014 | |||||||
(a) See Note 2 to the condensed consolidated financial statements.
Cash Flow from Operations
Cash provided by operations of $2,109 million for the three months ended March 31, 2021 increased $762 million, or 57%, versus 2020. The increase was driven by higher net income adjusted for non-cash charges, lower working capital requirements, lower merger and synergy related cash outflows and favorable changes in other long-term assets and liabilities. Cost reduction programs and other charges was a benefit of $8 million and a charge of $131 million for the quarters ended March 31, 2021 and 2020, respectively. Related cash outflows were $68 million and $91 million for the same respective periods.
Linde estimates that total 2021 required contributions to its pension plans will be in the range of $70 million to $80 million, of which $12 million has been made through March 31, 2021. At a minimum, Linde contributes to its pension plans to comply with local regulatory requirements (e.g., ERISA in the United States). Discretionary contributions in excess of the local minimum requirements are made based on many factors, including long-term projections of the plans' funded status, the economic environment, potential risk of overfunding, pension insurance costs and alternative uses of the cash. Changes to these factors can impact the amount and timing of discretionary contributions from year to year.
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Investing
Net cash used for investing of $751 million for the three months ended March 31, 2021 increased $138 million versus 2020, primarily driven by the proceeds from divestitures in 2020, partially offset by lower capital expenditures and acquisitions.
Capital expenditures for the three months ended March 31, 2021 were $762 million, $41 million lower than the prior year.
At March 31, 2021, Linde's sale of gas backlog of large projects under construction was approximately $3.5 billion. This represents the total estimated capital cost of large plants under construction.
Acquisitions for the three months ended March 31, 2021 were $10 million and related primarily to acquisitions in EMEA. Acquisitions for the three months ended March 31, 2020 were $41 million and related to acquisitions in the Americas.
Divestitures and asset sales for the three months ended March 31, 2021 and 2020 were $21 million and $231 million, respectively. The 2020 period includes net proceeds from merger-related divestitures of $98 million from the sale of selected assets of Linde China and proceeds of approximately $130 million related to the divestiture of a non-core business in Scandinavia.
Financing
Cash used for financing activities was $970 million for the three months ended March 31, 2021 as compared to cash provided by financing activities of $759 million for the three months ended March 31, 2020. Cash provided by debt was $681 million versus cash provided by debt of $3,112 million in 2020 primarily due to lower short-term debt borrowings net of repayments. Net purchases of ordinary shares were $851 million in 2021 versus $1,815 million in 2020. Cash dividends of $553 million increased $42 million from 2020 driven primarily by a 10% increase in quarterly dividends per share from 96.3 cents per share to 106 cents per share. Cash used for Noncontrolling interest transactions and other was $247 million for the three months ended March 31, 2021 versus cash used of $27 million for the respective 2020 period due to the settlement of the buyout of minority interests in the Republic of South Africa in January of 2021.
The company continues to believe it has sufficient operating flexibility, cash, and funding sources to meet its business needs around the world. The company had $4.1 billion of cash as of March 31, 2021, and has a $5 billion unsecured and undrawn revolving credit agreement with no associated financial covenants. No borrowings were outstanding under the credit agreement as of March 31, 2021. The company does not anticipate any limitations on its ability to access the debt capital markets and/or other external funding sources and remains committed to its strong ratings from Moody’s and Standard & Poor’s.
On January 25, 2021, the company's board of directors approved the repurchase of $5.0 billion of its ordinary shares ("2021 program") which could take place from time to time on the open market (and could include the use of 10b5-1 trading plans), subject to market and business conditions. The 2021 program has a maximum repurchase amount of 15% of outstanding shares, began on February 1, 2021 and expires on July 31, 2023.
Legal Proceedings
See Note 9 to the condensed consolidated financial statements.
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NON-GAAP MEASURES AND RECONCILIATIONS
(Millions of dollars, except per share data)
(UNAUDITED)
The following non-GAAP measures are intended to supplement investors’ understanding of the company’s financial information by providing measures which investors, financial analysts and management use to help evaluate the company’s operating performance and liquidity. Items which the company does not believe to be indicative of on-going business trends are excluded from these calculations so that investors can better evaluate and analyze historical and future business trends on a consistent basis. Definitions of these non-GAAP measures may not be comparable to similar definitions used by other companies and are not a substitute for similar GAAP measures.
| Quarter Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Adjusted Operating Profit and Operating Margin | |||||||||||
| Reported operating profit | $ | 1,213 | $ | 733 | |||||||
| Add: Cost reduction programs and other charges | (8) | 131 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 483 | 488 | |||||||||
| Total adjustments | 475 | 619 | |||||||||
| Adjusted operating profit | $ | 1,688 | $ | 1,352 | |||||||
| Reported percentage change | 65 | % | 20 | % | |||||||
| Adjusted percentage change | 25 | % | 11 | % | |||||||
| Reported sales | $ | 7,243 | $ | 6,739 | |||||||
| Reported operating margin | 16.7 | % | 10.9 | % | |||||||
| Adjusted operating margin | 23.3 | % | 20.1 | % | |||||||
| Adjusted Depreciation and amortization | |||||||||||
| Reported depreciation and amortization | $ | 1,166 | $ | 1,142 | |||||||
| Less: Purchase accounting impacts - Linde AG (c) | (478) | (476) | |||||||||
| Adjusted depreciation and amortization | $ | 688 | $ | 666 | |||||||
| Adjusted Other Income (Expense) - net | |||||||||||
| Reported Other Income (Expense) - net | $ | 4 | $ | 15 | |||||||
| Less: Purchase accounting impacts - Linde AG (c) | (5) | (12) | |||||||||
| Adjusted Other Income (Expense) - net | $ | 9 | $ | 27 | |||||||
| Adjusted Net Pension and OPEB Cost (Benefit), Excluding Service Cost | |||||||||||
| Reported net pension and OPEB cost (benefit), excluding service cost | $ | (49) | $ | (45) | |||||||
| Add: Pension settlement charges | — | — | |||||||||
| Adjusted Net Pension and OPEB cost (benefit), excluding service costs | $ | (49) | $ | (45) | |||||||
| Adjusted Interest Expense - Net | |||||||||||
| Reported interest expense - net | $ | 20 | $ | 24 | |||||||
| Add: Purchase accounting impacts - Linde AG (c) | 18 | 22 | |||||||||
| Adjusted interest expense - net | $ | 38 | $ | 46 | |||||||
35
| Adjusted Income Taxes (a) | |||||||||||
| Reported income taxes | $ | 268 | $ | 165 | |||||||
| Add: Purchase accounting impacts - Linde AG (c) | 118 | 122 | |||||||||
| Add: Cost reduction programs and other charges | 20 | 36 | |||||||||
| Total adjustments | 138 | 158 | |||||||||
| Adjusted income taxes | $ | 406 | $ | 323 | |||||||
| Adjusted Effective Tax Rate (a) | |||||||||||
| Reported income before income taxes and equity investments | $ | 1,242 | $ | 754 | |||||||
| Add: Purchase accounting impacts - Linde AG (c) | 465 | 466 | |||||||||
| Add: Cost reduction programs and other charges | (8) | 131 | |||||||||
| Total adjustments | 457 | 597 | |||||||||
| Adjusted income before income taxes and equity investments | $ | 1,699 | $ | 1,351 | |||||||
| Reported Income taxes | $ | 268 | $ | 165 | |||||||
| Reported effective tax rate | 21.6 | % | 21.9 | % | |||||||
| Adjusted income taxes | $ | 406 | $ | 323 | |||||||
| Adjusted effective tax rate | 23.9 | % | 23.9 | % | |||||||
| Income from Equity Investments | |||||||||||
| Reported income from equity investments | $ | 43 | $ | 17 | |||||||
| Add: Purchase accounting impacts - Linde AG (c) | 19 | 14 | |||||||||
| Adjusted income from equity investments | $ | 62 | $ | 31 | |||||||
| Adjusted Noncontrolling Interests from Continuing Operations | |||||||||||
| Reported noncontrolling interests from continuing operations | $ | (38) | $ | (35) | |||||||
| Add: Purchase accounting impacts - Linde AG (c) | (5) | (15) | |||||||||
| Adjusted noncontrolling interests from continuing operations | $ | (43) | $ | (50) | |||||||
| Adjusted Income from Continuing Operations (b) | |||||||||||
| Reported income from continuing operations | $ | 979 | $ | 571 | |||||||
| Add: Cost reduction programs and other charges | (28) | 95 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 361 | 343 | |||||||||
| Total adjustments | 333 | 438 | |||||||||
| Adjusted income from continuing operations | $ | 1,312 | $ | 1,009 | |||||||
| Adjusted Diluted EPS from Continuing Operations (b) | |||||||||||
| Reported diluted EPS from continuing operations | $ | 1.86 | $ | 1.07 | |||||||
| Add: Cost reduction programs and other charges | (0.05) | 0.18 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 0.68 | 0.64 | |||||||||
| Total adjustments | 0.63 | 0.82 | |||||||||
| Adjusted diluted EPS from continuing operations | $ | 2.49 | $ | 1.89 | |||||||
| Reported percentage change | 74 | % | 35 | % | |||||||
| Adjusted percentage change | 32 | % | 12 | % | |||||||
36
| Adjusted EBITDA and % of Sales | |||||||||||
| Income from continuing operations | $ | 979 | $ | 571 | |||||||
| Add: Noncontrolling interests related to continuing operations | 38 | 35 | |||||||||
| Add: Net pension and OPEB cost (benefit), excluding service cost | (49) | (45) | |||||||||
| Add: Interest expense | 20 | 24 | |||||||||
| Add: Income taxes | 268 | 165 | |||||||||
| Add: Depreciation and amortization | 1,166 | 1,142 | |||||||||
| EBITDA from continuing operations | $ | 2,422 | $ | 1,892 | |||||||
| Add: Cost reduction programs and other charges | (8) | 131 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 24 | 26 | |||||||||
| Total adjustments | 16 | 157 | |||||||||
| Adjusted EBITDA from continuing operations | $ | 2,438 | $ | 2,049 | |||||||
| Reported sales | $ | 7,243 | $ | 6,739 | |||||||
| % of sales | |||||||||||
| EBITDA from continuing operations | 33.4 | % | 28.1 | % | |||||||
| Adjusted EBITDA from continuing operations | 33.7 | % | 30.4 | % | |||||||
| (a) The income tax expense (benefit) on the non-GAAP pre-tax adjustments was determined using the applicable tax rates for the jurisdictions that were utilized in calculating the GAAP income tax expense (benefit) and included both current and deferred income tax amounts. | |||||||||||||||||||||||||||||||||||||||||
| (b) Net of income taxes which are shown separately in “Adjusted Income Taxes and Adjusted Effective Tax Rate”. | |||||||||||||||||||||||||||||||||||||||||
(c) The company believes that its non-GAAP measures excluding Purchase accounting impacts - Linde AG are useful to investors because: (i) the business combination was a merger of equals in an all-stock merger transaction, with no cash consideration, (ii) the company is managed on a geographic basis and the results of certain geographies are more heavily impacted by purchase accounting than others, causing results that are not comparable at the reportable segment level, therefore, the impacts of purchasing accounting adjustments to each segment vary and are not comparable within the company and when compared to other companies in similar regions, (iii) business management is evaluated and variable compensation is determined based on results excluding purchase accounting impacts, and; (iv) it is important to investors and analysts to understand the purchase accounting impacts to the financial statements. A summary of each of the adjustments made for Purchase accounting impacts - Linde AG are as follows: Adjusted Operating Profit and Margin: The purchase accounting adjustments for the periods presented relate primarily to depreciation and amortization related to the fair value step up of fixed assets and intangible assets (primarily customer related) acquired in the merger and the allocation of fair value step-up for ongoing Linde AG asset disposals (reflected in Other Income/(Expense)). Adjusted Interest Expense - Net: Relates to the amortization of the fair value of debt acquired in the merger. Adjusted Income Taxes and Effective Tax Rate: Relates to the current and deferred income tax impact on the adjustments discussed above. The income tax expense (benefit) on the non-GAAP pre-tax adjustments was determined using the applicable tax rates for the jurisdictions that were utilized in calculating the GAAP income tax expense (benefit) and included both current and deferred income tax amounts. Adjusted Income from Equity Investments: Represents the amortization of increased fair value on equity investments related to depreciable and amortizable assets. Adjusted Noncontrolling Interests from Continuing Operations: Represents the noncontrolling interests’ ownership portion of the adjustments described above determined on an entity by entity basis. | |||||||||||||||||||||||||||||||||||||||||
Net Debt and Adjusted Net Debt
Net debt is a financial liquidity measure used by investors, financial analysts and management to evaluate the ability of a company to repay its debt. Purchase accounting impacts have been excluded as they are non-cash and do not have an impact on liquidity.
| March 31, 2021 | December 31, 2020 | ||||||||||
| (Millions of dollars) | |||||||||||
| Debt | $ | 15,750 | $ | 16,154 | |||||||
| Less: cash and cash equivalents | (4,096) | (3,754) | |||||||||
| Net debt | 11,654 | 12,400 | |||||||||
| Less: purchase accounting impacts - Linde AG | (98) | (121) | |||||||||
| Adjusted net debt | $ | 11,556 | $ | 12,279 | |||||||
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Supplemental Guarantee Information
On June 6, 2020, the company filed a Form S-3 Registration Statement with the SEC ("the Registration Statement").
Linde plc may offer debt securities, preferred shares, depositary shares and ordinary shares under the Registration Statement, and debt securities exchangeable for or convertible into preferred shares, ordinary shares or other debt securities. Debt securities of Linde plc may be guaranteed by Linde, Inc (previously Praxair) and/or Linde GmbH (previously Linde AG). Linde plc may provide guarantees of debt securities offered by its wholly owned subsidiaries Linde, Inc. or Linde Finance under the Registration Statement.
Linde, Inc. (previously Praxair, Inc.) is a wholly owned subsidiary of Linde plc. Linde, Inc. may offer debt securities under the Registration Statement. Debt securities of Linde, Inc. will be guaranteed by Linde plc, and such guarantees by Linde plc may be guaranteed by Linde GmbH. Linde, Inc. may also provide (i) guarantees of debt securities offered by Linde plc under the Registration Statement and (ii) guarantees of the guarantees provided by Linde plc of debt securities of Linde Finance offered under the Registration Statement.
Linde Finance B.V. is a wholly owned subsidiary of Linde plc. Linde Finance may offer debt securities under the Registration Statement. Linde plc will guarantee debt securities of Linde Finance offered under the Registration Statement. Linde GmbH and Linde, Inc. may guarantee Linde plc’s obligations under its downstream guarantee.
Linde GmbH is a wholly owned subsidiary of Linde plc. Linde GmbH may provide (i) guarantees of debt securities offered by Linde plc under the Registration Statement and (ii) upstream guarantees of downstream guarantees provided by Linde plc of debt securities of Linde, Inc. or Linde Finance offered under the Registration Statement.
In September 2019, Linde plc provided downstream guarantees of all of the pre-business combination Linde, Inc. and Linde Finance notes, and Linde GmbH and Linde, Inc., respectively, provided upstream guarantees of Linde plc’s downstream guarantees.
For further information about the guarantees of the debt securities registered under the Registration Statement (including the ranking of such guarantees, limitations on enforceability of such guarantees and the circumstances under which such guarantees may be released), see “Description of Debt Securities – Guarantees” and “Description of Debt Securities – Ranking” in the Registration Statement, which subsections are incorporated herein by reference.
The following tables present summarized financial information for Linde plc, Linde, Inc., Linde GmbH and Linde Finance on a combined basis, after eliminating intercompany transactions and balances between them and excluding investments in and equity in earnings from non-guarantor subsidiaries.
38
| (Millions of dollars) | |||||||||||
| Statement of Income Data | Three Months Ended March 31, 2021 | Twelve Months Ended December 31, 2020 | |||||||||
| Sales | $ | 1,720 | $ | 6,772 | |||||||
| Operating profit | 179 | 760 | |||||||||
| Net income | 87 | 660 | |||||||||
| Transactions with non-guarantor subsidiaries | 424 | 2,082 | |||||||||
| Balance Sheet Data (at period end) | |||||||||||
| Current assets (a) | $ | 3,227 | $ | 3,117 | |||||||
| Long-term assets (b) | 17,420 | 17,892 | |||||||||
| Current liabilities (c) | 10,595 | 8,265 | |||||||||
| Long-term liabilities (d) | 36,727 | 38,188 | |||||||||
(a) From current assets above, amount due from non-guarantor subsidiaries | $ | 949 | $ | 937 | |||||||
| (b) From long-term assets above, amount due from non-guarantor subsidiaries | 4,336 | 4,553 | |||||||||
| (c) From current liabilities above, amount due to non-guarantor subsidiaries | 1,078 | 1,053 | |||||||||
| (d) From long-term liabilities above, amount due to non-guarantor subsidiaries | 22,834 | 22,419 | |||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Refer to Item 7A. to Part II of Linde's 2020 Annual Report on Form 10-K for discussion.
Item 4. Controls and Procedures
(a)Based on an evaluation of the effectiveness of Linde's disclosure controls and procedures, which was made under the supervision and with the participation of management, including Linde's principal executive officer and principal financial officer, the principal executive officer and principal financial officer have each concluded that, as of the end of the quarterly period covered by this report, such disclosure controls and procedures are effective in ensuring that information required to be disclosed by Linde in reports that it files under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and accumulated and communicated to management including Linde's principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
(b)There were no changes in Linde's internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, Linde's internal control over financial reporting.
39
PART II - OTHER INFORMATION
Linde plc and Subsidiaries
Item 1. Legal Proceedings
See Note 9 to the condensed consolidated financial statements for a description of current legal proceedings.
Item 1A. Risk Factors
Through the quarterly period covered by this report, there have been no material changes to the risk factors disclosed in Item 1A to Part I of Linde's Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities- Certain information regarding purchases made by or on behalf of the company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of its ordinary shares during the quarter ended March 31, 2021 is provided below:
| Period | Total Number of Shares Purchased (Thousands) | Average Price Paid Per Share | Total Numbers of Shares Purchased as Part of Publicly Announced Program (1,2) (Thousands) | Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (2) (Millions) | |||||||||||||||||||
| January 2021 | 537 | $ | 257.37 | 537 | $ | 1,138 | |||||||||||||||||
| February 2021 | 1,240 | $ | 251.63 | 1,240 | $ | 4,688 | |||||||||||||||||
| March 2021 | 1,719 | $ | 265.40 | 1,719 | $ | 4,232 | |||||||||||||||||
| First Quarter 2021 | 3,496 | $ | 259.28 | 3,496 | $ | 4,232 | |||||||||||||||||
(1) On January 22, 2019 the company’s board of directors approved the repurchase of $6.0 billion of its ordinary shares ("2019 program") which could take place from time to time on the open market (which could include the use of 10b5-1 trading plans), subject to market and business conditions. The 2019 program had a maximum repurchase amount of 15% of outstanding shares and expired on February 1, 2021.
(2) On January 25, 2021 the company's board of directors approved the repurchase of $5.0 billion of its ordinary shares ("2021 program") which could take place from time to time on the open market (and could include the use of 10b5-1 trading plans), subject to market and business conditions.The 2021 program has a maximum repurchase amount of 15% of outstanding shares, began on February 1, 2021 and expires on July 31, 2023.
As of March 31, 2021, the company repurchased $768 million and $4.9 billion of its ordinary shares pursuant to the 2021 and 2019 programs, respectively. Under the 2021 program, $4.2 billion shares remain authorized. The 2019 program expired on February 1, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
| (a) | Exhibits | ||||||||||
| 10.01 | |||||||||||
| 31.01 | |||||||||||
| 31.02 | |||||||||||
| 32.01 | |||||||||||
| 32.02 | |||||||||||
| 101.INS | XBRL Instance Document: The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema | ||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | ||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | ||||||||||
*Indicates a management contract or compensatory plan or arrangement.
41
SIGNATURE
Linde plc and Subsidiaries
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Linde plc | |||||||||||
| (Registrant) | |||||||||||
Date: May 6, 2021 | By: /s/ Kelcey E. Hoyt | ||||||||||
| Kelcey E. Hoyt | |||||||||||
| Chief Accounting Officer | |||||||||||
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