filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
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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 quarters and nine months ended September 30, 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 September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||
| (Millions of dollars, except per share data) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | |||||||||||||||||||||||||||||
| Sales | $ | 7,668 | $ | 6,855 | 12 | % | $ | 22,495 | $ | 19,971 | 13 | % | |||||||||||||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 4,368 | $ | 3,835 | 14 | % | $ | 12,616 | $ | 11,297 | 12 | % | |||||||||||||||||||||||
| As a percent of sales | 57.0 | % | 55.9 | % | 56.1 | % | 56.6 | % | |||||||||||||||||||||||||||
| Selling, general and administrative | $ | 793 | $ | 770 | 3 | % | $ | 2,402 | $ | 2,391 | — | % | |||||||||||||||||||||||
| As a percent of sales | 10.3 | % | 11.2 | % | 10.7 | % | 12.0 | % | |||||||||||||||||||||||||||
| Depreciation and amortization | $ | 1,163 | $ | 1,168 | — | % | $ | 3,500 | $ | 3,434 | 2 | % | |||||||||||||||||||||||
| Cost reduction programs and other charges (b) | $ | 26 | $ | 48 | (46) | % | $ | 222 | $ | 428 | (48) | % | |||||||||||||||||||||||
| Other income (expense) - net | $ | 10 | $ | (29) | 134 | % | $ | (3) | $ | (14) | 79 | % | |||||||||||||||||||||||
| Operating profit | $ | 1,292 | $ | 969 | 33 | % | $ | 3,647 | $ | 2,293 | 59 | % | |||||||||||||||||||||||
| Operating margin | 16.8 | % | 14.1 | % | 16.2 | % | 11.5 | % | |||||||||||||||||||||||||||
| Interest expense - net | $ | 8 | $ | 38 | (79) | % | $ | 46 | $ | 80 | (43) | % | |||||||||||||||||||||||
| Net pension and OPEB cost (benefit), excluding service cost | $ | (45) | $ | (41) | 10 | % | $ | (143) | $ | (131) | 9 | % | |||||||||||||||||||||||
| Effective tax rate | 24.2 | % | 27.3 | % | 24.7 | % | 25.3 | % | |||||||||||||||||||||||||||
| Income from equity investments | $ | 1 | $ | 23 | (96) | % | $ | 81 | $ | 69 | 17 | % | |||||||||||||||||||||||
| Noncontrolling interests from continuing operations | $ | (31) | $ | (31) | — | % | $ | (105) | $ | (91) | 15 | % | |||||||||||||||||||||||
| Income from continuing operations | $ | 978 | $ | 699 | 40 | % | $ | 2,797 | $ | 1,728 | 62 | % | |||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 1.88 | $ | 1.32 | 42 | % | $ | 5.34 | $ | 3.25 | 64 | % | |||||||||||||||||||||||
| Diluted shares outstanding | 520,079 | 530,415 | (2) | % | 523,662 | 531,724 | (2) | % | |||||||||||||||||||||||||||
| Number of employees | 72,159 | 74,648 | (3) | % | 72,159 | 74,648 | (3) | % | |||||||||||||||||||||||||||
| Adjusted Amounts (a) | |||||||||||||||||||||||||||||||||||
| Operating profit | $ | 1,810 | $ | 1,515 | 19 | % | $ | 5,335 | $ | 4,184 | 28 | % | |||||||||||||||||||||||
| Operating margin | 23.6 | % | 22.1 | % | 23.7 | % | 21.0 | % | |||||||||||||||||||||||||||
| Effective tax rate | 23.9 | % | 23.5 | % | 24.1 | % | 23.9 | % | |||||||||||||||||||||||||||
| Income from continuing operations | $ | 1,421 | $ | 1,140 | 25 | % | $ | 4,148 | $ | 3,154 | 32 | % | |||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 2.73 | $ | 2.15 | 27 | % | $ | 7.92 | $ | 5.93 | 34 | % | |||||||||||||||||||||||
| Other Financial Data (a) | |||||||||||||||||||||||||||||||||||
| EBITDA from continuing operations | $ | 2,456 | $ | 2,160 | 14 | % | $ | 7,228 | $ | 5,796 | 25 | % | |||||||||||||||||||||||
| As percent of sales | 32.0 | % | 31.5 | % | 32.1 | % | 29.0 | % | |||||||||||||||||||||||||||
| Adjusted EBITDA from continuing operations | $ | 2,559 | $ | 2,233 | 15 | % | $ | 7,582 | $ | 6,298 | 20 | % | |||||||||||||||||||||||
| As percent of sales | 33.4 | % | 32.6 | % | 33.7 | % | 31.5 | % |
(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" section of this MD&A.
(b) See Note 2 to the condensed consolidated financial statements.
Reported
In the third quarter of 2021, Linde's sales were $7,668 million, 12% above prior year, primarily driven by 3% price attainment and 8% higher volumes. Currency translation increased sales by 2% in the third quarter of 2021 as compared to 2020. Cost pass-through, representing the contractual billing of energy cost variances primarily to onsite customers, increased sales by 3% in the quarter, with minimal impact on operating profit.
Reported operating profit for the third quarter of 2021 of $1,292 million, or 16.8% of sales, was 33% above prior year. The reported year-over-year increase was primarily due to higher price and volumes, partially offset by the deconsolidation of a joint venture with operations in APAC. The reported effective tax rate ("ETR") was 24.2% in the third quarter 2021 versus 27.3% in the third quarter 2020. Diluted earnings per share from continuing operations ("EPS") was $1.88, or 42% above EPS of $1.32 in the third quarter of 2020 primarily due to higher income from continuing operations and lower diluted shares outstanding.
Adjusted
In the third quarter of 2021, adjusted operating profit of $1,810 million, or 23.6% of sales, was 19% 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 third quarter 2021 versus 23.5% in the 2020 quarter. On an adjusted basis, EPS was $2.73, 27% above the 2020 adjusted EPS of $2.15, 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 September 30, 2021 vs. 2020 | Nine Months Ended September 30, 2021 vs. 2020 | ||||||||||
| % Change | % Change | ||||||||||
| Factors Contributing to Changes - Sales | |||||||||||
| Volume | 8 | % | 8 | % | |||||||
| Price/Mix | 3 | % | 2 | % | |||||||
| Cost pass-through | 3 | % | 2 | % | |||||||
| Currency | 2 | % | 4 | % | |||||||
| Acquisitions/divestitures | (3) | % | (2) | % | |||||||
| Engineering | (1) | % | (1) | % | |||||||
| 12 | % | 13 | % |
Sales
Sales increased $813 million, or 12%, for the third quarter of 2021 and increased $2,524 million, or 13%, for the nine months ended September 30, 2021 versus the respective 2020 periods. Volume growth across all end markets and project start-ups increased sales by 8% in the quarter and year-to-date periods. Higher pricing across all geographic segments contributed 3% to sales in the quarter and 2% in the year-to-date period. Currency translation increased sales by 2% in the quarter and 4% in the year-to-date period, 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 3% in the quarter and 2% in the year-to date period with minimal impact on operating profit. The deconsolidation of a joint venture with operations in APAC decreased sales by 3% in the quarter and 2% in the year-to-date period (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 $533 million, or 14%, for the third quarter of 2021 and increased $1,319 million, or 12% for the nine months ended September 30, 2021, primarily due to higher volumes, cost pass-through and currency impacts, partially offset by productivity initiatives. Cost of sales, exclusive of depreciation and amortization was 57.0% and 56.1% of sales, respectively, for the third quarter and nine months ended September 30, 2021 versus 55.9% and 56.6% of sales for the respective 2020 periods. The increase as a percentage of sales for the third quarter of 2021 was due primarily to higher cost pass-through. The decrease as a percentage of sales for the nine months ended September 30, 2021 was due primarily to productivity initiatives which more than offset the impact of higher cost pass-through.
Selling, general and administrative expenses
Selling, general and administrative expense ("SG&A") increased $23 million, or 3%, for the third quarter of 2021 and increased $11 million, for the nine months ended September 30, 2021. SG&A was 10.3% of third quarter sales and 10.7% sales for the nine months ended September 30, 2021 versus 11.2% and 12.0% for the respective 2020 periods. Currency impacts increased SG&A by approximately $10 million in the quarter and $71 million for the nine months ended September 30, 2021. Excluding currency impacts, underlying SG&A increased in the third quarter of 2021 driven by higher incentive compensation and decreased for the nine months ended September 30, 2021 due to continued productivity initiatives.
Depreciation and amortization
Reported depreciation and amortization expense decreased $5 million for the third quarter of 2021 and increased $66 million, or 2%, for the nine months ended September 30, 2021.
On an adjusted basis depreciation and amortization increased $13 million, or 2%, for the third quarter of 2021 and increased $71 million, or 4% for the year-to-date period, primarily due to currency translation impacts which increased depreciation and amortization by $11 million and $65 million, respectively. Excluding currency impacts, underlying depreciation was relatively flat as the impact of new project start ups largely offset the decrease related to 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 were $26 million and $48 million for the third quarter 2021 and 2020, respectively, primarily related to merger and synergy-related costs (see Note 2 to the condensed consolidated financial statements).
Cost reduction programs and other charges were $222 million and $428 million, respectively, for the nine months ended September 30, 2021 and 2020.
On an adjusted basis, these costs have been excluded in both periods.
Operating profit
On a reported basis, operating profit increased $323 million, or 33%, for the third quarter of 2021 and increased $1,354 million, or 59% for the nine months ended September 30, 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 were $26 million for the third quarter of 2021, versus $48 million for the respective 2020 period. In the year-to-date periods, cost reduction programs and other charges were $222 million and $428 million for the nine months ended September 30, 2021 and 2020, respectively.
On an adjusted basis, which excludes the impacts of purchase accounting and cost reduction programs and other charges, operating profit increased $295 million, or 19% in the 2021 quarter and increased $1,151 million, or 28%, for the nine months ended September 30, 2021. 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 $30 million for the third quarter of 2021 and decreased $34 million for the nine months ended September 30, 2021. On an adjusted basis interest expense decreased $43 million for the third quarter of 2021 and decreased $58 million for the nine months ended September 30, 2021 versus the respective 2020 periods. The decrease in both periods was driven by a lower effective borrowing rate, a gain on the sale of an investment security and the impact of unfavorable foreign currency revaluation on an unhedged intercompany loan in the prior year periods.
Net pension and OPEB cost (benefit), excluding service cost
Reported net pension and OPEB cost (benefit), excluding service cost was a benefit of $45 million and $143 million for the quarter and nine months ended September 30, 2021, respectively, versus a benefit of $41 million and $131 million for the respective 2020 periods. The increase in benefit for both the quarter and year-to-date periods largely relates to a higher expected return on assets and lower interest costs, partially offset by higher amortization of deferred losses. The third quarter of 2021 and 2020 included settlement charges of $4 million and $6 million, respectively (see Note 8 to the condensed consolidated financial statements).
Effective tax rate
The reported effective tax rate ("ETR") for the quarter and nine months ended September 30, 2021 was 24.2% and 24.7%, respectively, versus 27.3% and 25.3% for the respective 2020 periods. The 2020 quarter and year-to-date periods include a deferred income tax charge related to the revaluation of net deferred tax liabilities for a tax rate increase in the United Kingdom. The 2021 year-to-date period includes net tax charges of $38 million primarily related to $81 million of a deferred income tax charge related to the revaluation of net deferred tax liabilities for a tax rate increase in United Kingdom, partially offset by a tax settlement benefit of $33 million (see Note 2 to the condensed consolidated financial statements).
On an adjusted basis, the ETR for the quarter and nine months ended September 30, 2021 was 23.9% and 24.1%, respectively, versus 23.5% and 23.9% for the respective 2020 periods. The increase in both periods is primarily due to lower tax benefits from share option exercises.
Income from equity investments
Reported income from equity investments for the third quarter of 2021 and nine months ended September 30, 2021 was $1 million and $81 million, respectively, versus $23 million and $69 million for the respective 2020 periods. On an adjusted basis, income from equity investments for the third quarter and nine months ended September 30, 2021 was $55 million and $173 million, respectively, versus $37 million and $111 million, in the prior year respective periods.
On a reported basis, income from equity investments decreased in the third quarter of 2021 due to a $35 million impairment charge related to a joint venture in the APAC segment (see Note 2 to the condensed consolidated financial statements), which more than offset the increase due to the deconsolidation of a joint venture with operations in APAC which is reflected in equity income effective January 1, 2021. Income from equity investments increased for the nine months ended September 30, 2021 as the increase related to the deconsolidation more than offset the impairment charge.
The increase in adjusted income from equity investments for the quarter and year-to-date periods 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). The quarter and year-to-date 2020 periods also include the impact of unfavorable foreign currency revaluation on an unhedged loan of an investment in EMEA.
Noncontrolling interests from continuing operations
At September 30, 2021, noncontrolling interests from continuing operations consisted primarily of non-controlling shareholders' investments in APAC (primarily China) and surface technologies.
Reported noncontrolling interests from continuing operations was flat for the third quarter of 2021 and increased $14 million for the nine months ended September 30, 2021 versus the respective 2020 periods primarily driven by higher income from continuing operations, partially offset 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.
Adjusted noncontrolling interests from continuing operations decreased $10 million for the third quarter of 2021 and decreased $18 million for the nine months ended September 30, 2021 versus the respective 2020 periods 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, which more than offset the increase from higher income from continuing operations.
Income from continuing operations
Reported income from continuing operations increased $279 million, or 40%, for the third quarter of 2021 and increased $1,069 million, or 62%, for the nine months ended September 30, 2021 versus the respective 2020 periods, primarily due to higher overall operating profit.
On an adjusted basis, which excludes the impacts of purchase accounting and other non-GAAP adjustments, income from continuing operations increased $281 million, or 25%, for the quarter and increased $994 million, or 32% for the nine months ended September 30, 2021 versus the respective 2020 periods. The increase in the quarter and year-to-date periods was driven by higher overall adjusted operating profit.
Diluted earnings per share from continuing operations
Reported diluted earnings per share from continuing operations increased $0.56, or 42%, for the third quarter of 2021 and increased $2.09, or 64% for the nine months ended September 30, 2021 versus the comparable 2020 periods.
On an adjusted basis, diluted EPS for the third quarter of 2021 increased $0.58, or 27%, and increased $1.99, or 34% for the nine months ended September 30, 2021 versus the respective 2020 periods, primarily due to higher income from continuing operations and lower diluted shares outstanding.
Employees
The number of employees at September 30, 2021 was 72,159, a decrease of 2,489 employees from September 30, 2020 primarily driven by cost reduction actions and divestitures.
Other Financial Data
EBITDA was $2,456 million for the third quarter of 2021 as compared to $2,160 million in the respective 2020 period. EBITDA increased to $7,228 million for the nine months ended September 30, 2021 from $5,796 million in the respective 2020 period. Adjusted EBITDA from continuing operations increased to $2,559 million for the third quarter 2021 from $2,233 million in the respective 2020 period. Adjusted EBITDA from continuing operations increased to $7,582 million from $6,298 million for the nine months ended September 30, 2021 as compared to the respective 2020 period primarily due to higher income from continuing operations versus the prior period.
See the "Non-GAAP Measures and Reconciliations" for adjusted amounts sections below for definitions and reconciliations of these adjusted non-GAAP measures to reported GAAP amounts.
Other Comprehensive Income (Loss)
Other comprehensive losses for the third quarter of 2021 and the nine months ended September 30, 2021 were $723 million and $938 million, respectively, resulted primarily from currency translation adjustments of $819 million during the quarter and $1,124 million during the year-to-date period. 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.
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 September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||
| SALES | ||||||||||||||||||||
| Americas | $ | 3,091 | $ | 2,641 | 17 | % | $ | 8,951 | $ | 7,735 | 16 | % | ||||||||
| EMEA | 1,911 | 1,622 | 18 | % | 5,585 | 4,703 | 19 | % | ||||||||||||
| APAC | 1,564 | 1,484 | 5 | % | 4,544 | 4,115 | 10 | % | ||||||||||||
| Engineering | 601 | 678 | (11) | % | 1,921 | 2,096 | (8) | % | ||||||||||||
| Other | 501 | 430 | 17 | % | 1,494 | 1,322 | 13 | % | ||||||||||||
| Total sales | $ | 7,668 | $ | 6,855 | 12 | % | $ | 22,495 | $ | 19,971 | 13 | % | ||||||||
| SEGMENT OPERATING PROFIT | ||||||||||||||||||||
| Americas | $ | 859 | $ | 742 | 16 | % | $ | 2,525 | $ | 2,025 | 25 | % | ||||||||
| EMEA | 476 | 370 | 29 | % | 1,414 | 1,028 | 38 | % | ||||||||||||
| APAC | 382 | 337 | 13 | % | 1,122 | 912 | 23 | % | ||||||||||||
| Engineering | 106 | 106 | — | % | 323 | 335 | (4) | % | ||||||||||||
| Other | (13) | (40) | 68 | % | (49) | (116) | 58 | % | ||||||||||||
| Segment operating profit | $ | 1,810 | $ | 1,515 | 19 | % | $ | 5,335 | $ | 4,184 | 28 | % | ||||||||
| Reconciliation to reported operating profit: | ||||||||||||||||||||
| Cost reduction programs and other charges (Note 2) | (26) | (48) | (222) | (428) | ||||||||||||||||
| Purchase accounting impacts - Linde AG | (492) | (498) | (1,466) | (1,463) | ||||||||||||||||
| Total operating profit | $ | 1,292 | $ | 969 | $ | 3,647 | $ | 2,293 |
Americas
| Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||||||||
| Sales | $ | 3,091 | $ | 2,641 | 17 | % | $ | 8,951 | $ | 7,735 | 16 | % | ||||||||||||||
| Operating profit | $ | 859 | $ | 742 | 16 | % | $ | 2,525 | $ | 2,025 | 25 | % | ||||||||||||||
| As a percent of sales | 27.8 | % | 28.1 | % | 28.2 | % | 26.2 | % |
| Quarter Ended September 30, 2021 vs. 2020 | Nine Months Ended September 30, 2021 vs. 2020 | ||||||||||
| % Change | % Change | ||||||||||
| Factors Contributing to Changes - Sales | |||||||||||
| Volume | 9 | % | 10 | % | |||||||
| Price/Mix | 3 | % | 3 | % | |||||||
| Cost pass-through | 4 | % | 3 | % | |||||||
| Currency | 1 | % | — | % | |||||||
| Acquisitions/divestitures | — | % | — | % | |||||||
| 17 | % | 16 | % |
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 $450 million, or 17%, for the third quarter and increased $1,216 million, or 16%, for the nine months ended September 30, 2021 versus the respective 2020 periods. Higher pricing contributed 3% to sales in the quarter and year-to-date period. Higher volumes increased sales by 9% for the third quarter and increased 10% for the nine months ended September 30, 2021, led by higher demand across all end markets and project start-ups. Currency translation increased sales by 1% in the quarter and was flat for the year-to-date period primarily driven by the strengthening of the Canadian dollar and Mexican peso against the U.S. Dollar. Cost pass-through increased sales by 4% for the third quarter and 3% for the year-to-date period with minimal impact on operating profit.
Operating profit
Operating profit in the Americas segment increased $117 million, or 16%, in the third quarter and increased $500 million, or 25%, for the nine months ended September 30, 2021 versus the respective 2020 periods. For the quarter and year-to-date periods, operating profit increased due primarily to higher pricing and volumes and continued productivity initiatives.
EMEA
| Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 1,911 | $ | 1,622 | 18 | % | $ | 5,585 | $ | 4,703 | 19 | % | ||||||||
| Operating profit | $ | 476 | $ | 370 | 29 | % | $ | 1,414 | $ | 1,028 | 38 | % | ||||||||
| As a percent of sales | 24.9 | % | 22.8 | % | 25.3 | % | 21.9 | % |
| Quarter Ended September 30, 2021 vs. 2020 | Nine Months Ended September 30, 2021 vs. 2020 | ||||||||||
| % Change | % Change | ||||||||||
| Factors Contributing to Changes - Sales | |||||||||||
| Volume | 5 | % | 6 | % | |||||||
| Price/Mix | 4 | % | 3 | % | |||||||
| Cost pass-through | 7 | % | 4 | % | |||||||
| Currency | 2 | % | 7 | % | |||||||
| Acquisitions/divestitures | — | % | (1) | % | |||||||
| 18 | % | 19 | % |
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 $289 million, or 18%, in the third quarter and increased by $882 million, or 19%, for the nine months ended September 30, 2021 as compared to the respective 2020 periods. Volumes increased 5% in the quarter and 6% in the year-to-date period driven by increased demand across all end markets. Currency translation increased sales by 2% in
the quarter and 7% in the year-to-date period due to the strengthening of the Euro, British pound and Swedish krona against the U.S. Dollar. Higher price increased sales by 4% in the quarter and 3% in the year-to-date period. Sales decreased 1% in the year-to-date period related to the divestiture of a non-core business in Scandinavia. Cost pass-through contributed 7% to sales in the quarter and increased sales by 4% in the year-to-date periods with minimal impact on operating profit.
Operating profit
Operating profit for the EMEA segment increased by $106 million, or 29%, in the third quarter and increased $386 million, or 38%, for the nine months ended September 30, 2021 as compared to the respective 2020 periods, driven largely by higher price and volumes and continued productivity initiatives.
APAC
| Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 1,564 | $ | 1,484 | 5 | % | $ | 4,544 | $ | 4,115 | 10 | % | ||||||||
| Operating profit | $ | 382 | $ | 337 | 13 | % | $ | 1,122 | $ | 912 | 23 | % | ||||||||
| As a percent of sales | 24.4 | % | 22.7 | % | 24.7 | % | 22.2 | % |
| Quarter Ended September 30, 2021 vs. 2020 | Nine Months Ended September 30, 2021 vs. 2020 | |||||||
| % Change | % Change | |||||||
| Factors Contributing to Changes - Sales | ||||||||
| Volume/Equipment | 10 | % | 13 | % | ||||
| Price/Mix | 1 | % | 1 | % | ||||
| Cost pass-through | 2 | % | 2 | % | ||||
| Currency | 3 | % | 6 | % | ||||
| Acquisitions/divestitures | (11) | % | (12) | % | ||||
| 5 | % | 10 | % |
The APAC segment includes Linde's industrial gases operations in approximately 20 Asian and South Pacific countries and regions including China, Australia, India, South Korea and Thailand.
Sales
Sales for the APAC segment increased $80 million, or 5%, for the third quarter and increased $429 million, or 10% for the nine months ended September 30, 2021 versus the respective 2020 periods. Volumes increased 10% in the quarter and 13% in the year-to-date period driven by increased demand across all end markets, led by the cyclical end markets, and electronics and project start-ups. Higher price contributed 1% to sales in both the quarter and year-to-date periods. Currency translation increased sales by 3% in quarter and increased sales by 6% in the year-to-date periods driven primarily by the strengthening of the Chinese yuan, Australian dollar and Korean won against the U.S. Dollar. Sales decreased $161 million, or 11%, in the third quarter of 2021 and decreased $457 million, or 12%, for the nine months ended September 30, 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 $45 million, or 13%, in the third quarter and increased $210 million, or 23%, for the nine months ended September 30, 2021 versus the respective 2020 periods. Higher volumes and price, and continued productivity initiatives in both periods were partially offset by a $29 million and $85 million reduction due to the deconsolidation of the joint venture in the third quarter and year-to-date periods, respectively.
Engineering
| Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 601 | $ | 678 | (11) | % | $ | 1,921 | $ | 2,096 | (8) | % | ||||||||
| Operating profit | $ | 106 | $ | 106 | — | % | $ | 323 | $ | 335 | (4) | % | ||||||||
| As a percent of sales | 17.6 | % | 15.6 | % | 16.8 | % | 16.0 | % |
| Quarter Ended September 30, 2021 vs. 2020 | Nine Months Ended September 30, 2021 vs. 2020 | ||||||||||
| % Change | % Change | ||||||||||
| Factors Contributing to Changes - Sales | |||||||||||
| Volume | (12) | % | (14) | % | |||||||
| Currency | 1 | % | 6 | % | |||||||
| (11) | % | (8) | % |
Sales
Engineering segment sales decreased $77 million, or 11%, in the third quarter 2021 and decreased $175 million, or 8%, for the nine months ended September 30, 2021 as compared to the respective 2020 periods driven primarily by project timing, partially offset by currency impacts which increased sales by 1% in the quarter and 6% in the year-to-date period.
Operating profit
Engineering segment operating profit was flat in the third quarter 2021 and decreased $12 million, or 4%, for the nine months ended September 30, 2021 as compared to the respective 2020 periods driven primarily by sales and project timing.
Other
| Quarter Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||
| (Millions of dollars) | 2021 | 2020 | Variance | 2021 | 2020 | Variance | ||||||||||||||
| Sales | $ | 501 | $ | 430 | 17 | % | $ | 1,494 | $ | 1,322 | 13 | % | ||||||||
| Operating profit (loss) | $ | (13) | $ | (40) | 68 | % | $ | (49) | $ | (116) | 58 | % | ||||||||
| As a percent of sales | (2.6) | % | (9.3) | % | (3.3) | % | (8.8) | % |
| Quarter Ended September 30, 2021 vs. 2020 | Nine Months Ended September 30, 2021 vs. 2020 | ||||||||||
| % Change | % Change | ||||||||||
| Factors Contributing to Changes - Sales | |||||||||||
| Volume/price | 15 | % | 9 | % | |||||||
| Cost pass-through | — | % | — | % | |||||||
| Currency | 2 | % | 4 | % | |||||||
| Acquisitions/divestitures | — | % | — | % | |||||||
| 17 | % | 13 | % | ||||||||
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 $71 million, or 17%, for the third quarter 2021 and increased $172 million, or 13%, for the nine months ended September 30, 2021 versus the respective 2020 periods. Currency translation increased sales by 2% in the quarter and 4% for the year-to-date period. Higher volumes and price increased sales by 15% in the quarter and 9% in the year-to-date period across all businesses.
Operating profit
Operating profit in Other increased $27 million, or 68% in the third quarter 2021 and increased $67 million, or 58%, for the nine months ended September 30, 2021 versus the respective 2020 periods, due primarily to volume growth, higher price and continued productivity initiatives.
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 | September 30, | December 31, | |||||||||||||||||||||||||||
| Currency | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Euro | 20 | % | 0.84 | 0.89 | 0.86 | 0.82 | |||||||||||||||||||||||
| Chinese yuan | 9 | % | 6.47 | 6.99 | 6.44 | 6.53 | |||||||||||||||||||||||
| British pound | 7 | % | 0.72 | 0.79 | 0.74 | 0.73 | |||||||||||||||||||||||
| Australian dollar | 4 | % | 1.32 | 1.48 | 1.38 | 1.30 | |||||||||||||||||||||||
| Brazilian real | 4 | % | 5.33 | 5.02 | 5.44 | 5.20 | |||||||||||||||||||||||
| Canadian dollar | 3 | % | 1.25 | 1.35 | 1.27 | 1.27 | |||||||||||||||||||||||
| Korean won | 3 | % | 1,131 | 1,200 | 1,184 | 1,087 | |||||||||||||||||||||||
| Mexican peso | 2 | % | 20.13 | 21.64 | 20.64 | 19.91 | |||||||||||||||||||||||
| Indian rupee | 2 | % | 73.57 | 74.18 | 74.24 | 73.07 | |||||||||||||||||||||||
| South African rand | 2 | % | 14.56 | 16.65 | 15.07 | 14.69 | |||||||||||||||||||||||
| Swedish krona | 1 | % | 8.48 | 9.39 | 8.76 | 8.23 | |||||||||||||||||||||||
| Thailand bhat | 1 | % | 31.48 | 31.52 | 33.83 | 29.96 |
Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion that follows:
| (Millions of dollars) | Nine months ended September 30, | ||||||||||
| 2021 | 2020 | ||||||||||
| NET CASH PROVIDED BY (USED FOR): | |||||||||||
| OPERATING ACTIVITIES | |||||||||||
| Net income (including noncontrolling interests) | $ | 2,902 | $ | 1,819 | |||||||
| Non-cash charges (credits): | |||||||||||
| Add: Depreciation and amortization | 3,500 | 3,434 | |||||||||
| Add: Deferred income taxes | (184) | (299) | |||||||||
| Add: Share-based compensation | 95 | 104 | |||||||||
| Add: Cost reduction programs and other charges, net of payments (a) | 83 | 240 | |||||||||
| Net income adjusted for non-cash charges | 6,396 | 5,298 | |||||||||
| Less: Working capital | 20 | (99) | |||||||||
| Less: Pension contributions | (32) | (76) | |||||||||
| Other | 108 | (128) | |||||||||
| Net cash provided by operating activities | $ | 6,492 | $ | 4,995 | |||||||
| INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (2,247) | (2,373) | |||||||||
| Acquisitions, net of cash acquired | (31) | (41) | |||||||||
| Divestitures and asset sales | 147 | 435 | |||||||||
| Net cash provided by (used for) investing activities | $ | (2,131) | $ | (1,979) | |||||||
| FINANCING ACTIVITIES | |||||||||||
| Debt increase (decrease) - net | 1,808 | 3,335 | |||||||||
| Issuances (purchases) of common stock - net | (3,212) | (1,989) | |||||||||
| Cash dividends - Linde plc shareholders | (1,648) | (1,523) | |||||||||
| Noncontrolling interest transactions and other | (319) | (201) | |||||||||
| Net cash provided by (used for) financing activities | $ | (3,371) | $ | (378) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | $ | (44) | $ | (139) | |||||||
| Cash and cash equivalents, end-of-period | $ | 4,700 | $ | 5,199 |
(a) See Note 2 to the condensed consolidated financial statements.
Cash Flow from Operations
Cash provided by operations of $6,492 million for the nine months ended September 30, 2021 increased $1,497 million, or 30%, versus 2020. The increase was driven by higher net income adjusted for non-cash charges and lower working capital requirements, including an increase in contract liabilities due to engineering customer advanced payments, which more than offset higher cash taxes. Cost reduction programs and other charges were $222 million and $428 million, respectively, for the nine months ended September 30, 2021 and 2020. Related cash outflows were $139 million and $188 million for the same respective periods.
Linde estimates that total 2021 required contributions to its pension plans will be in the range of $40 million to $50 million, of which $32 million has been made through September 30, 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.
Investing
Net cash used for investing of $2,131 million for the nine months ended September 30, 2021 increased $152 million versus 2020, primarily driven by the proceeds from divestitures in 2020, partially offset by lower capital expenditures and acquisitions.
Capital expenditures for the nine months ended September 30, 2021 were $2,247 million, $126 million lower than the prior year.
At September 30, 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 nine months ended September 30, 2021 were $31 million and related primarily to acquisitions in the Americas and EMEA. Acquisitions for the nine months ended September 30, 2020 were $41 million and related to acquisitions in the Americas and APAC.
Divestitures and asset sales for the nine months ended September 30, 2021 and 2020 were $147 million and $435 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 $3,371 million for the nine months ended September 30, 2021 as compared to cash used for financing activities of $378 million for the nine months ended September 30, 2020. Cash provided by debt was $1,808 million versus $3,335 million in 2020. Net purchases of ordinary shares were $3,212 million in 2021 versus $1,989 million in 2020. Cash dividends of $1,648 million increased $125 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 $319 million for the nine months ended September 30, 2021 versus cash used of $201 million for the respective 2020 period primarily due to the settlement of the buyout of minority interests in the Republic of South Africa in January of 2021.
In June 2021, Linde repaid €600 million of 3.875% note that became due. In September 2021, Linde issued €700 million of 0.000% notes due 2026, €500 million of 0.375% notes due 2033, and €700 million of 1.000% notes due 2051 (see Note 4 to the condensed consolidated financial statements).
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 $4.7 billion of cash as of September 30, 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 September 30, 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.
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 September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Adjusted Operating Profit and Operating Margin | |||||||||||||||||
| Reported operating profit | $ | 1,292 | $ | 969 | $ | 3,647 | $ | 2,293 | |||||||||
| Add: Cost reduction programs and other charges | 26 | 48 | 222 | 428 | |||||||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 492 | 498 | 1,466 | 1,463 | |||||||||||||
| Total adjustments | 518 | 546 | 1,688 | 1,891 | |||||||||||||
| Adjusted operating profit | $ | 1,810 | $ | 1,515 | $ | 5,335 | $ | 4,184 | |||||||||
| Reported percentage change | 33 | % | 59 | % | |||||||||||||
| Adjusted percentage change | 19 | % | 28 | % | |||||||||||||
| Reported sales | $ | 7,668 | $ | 6,855 | $ | 22,495 | $ | 19,971 | |||||||||
| Reported operating margin | 16.8 | % | 14.1 | % | 16.2 | % | 11.5 | % | |||||||||
| Adjusted operating margin | 23.6 | % | 22.1 | % | 23.7 | % | 21.0 | % | |||||||||
| Adjusted Depreciation and amortization | |||||||||||||||||
| Reported depreciation and amortization | $ | 1,163 | $ | 1,168 | $ | 3,500 | $ | 3,434 | |||||||||
| Less: Purchase accounting impacts - Linde AG (c) | (469) | (487) | (1,426) | (1,431) | |||||||||||||
| Adjusted depreciation and amortization | $ | 694 | $ | 681 | $ | 2,074 | $ | 2,003 | |||||||||
| Adjusted Other Income (Expense) - net | |||||||||||||||||
| Reported Other Income (Expense) - net | $ | 10 | $ | (29) | $ | (3) | $ | (14) | |||||||||
| Less: Purchase accounting impacts - Linde AG (c) | (23) | (11) | (40) | (32) | |||||||||||||
| Adjusted Other Income (Expense) - net | $ | 33 | $ | (18) | $ | 37 | $ | 18 | |||||||||
| Adjusted Net Pension and OPEB Cost (Benefit), Excluding Service Cost | |||||||||||||||||
| Reported net pension and OPEB cost (benefit), excluding service cost | $ | (45) | $ | (41) | $ | (143) | $ | (131) | |||||||||
| Add: Pension settlement charges | (4) | (6) | (4) | (6) | |||||||||||||
| Adjusted Net Pension and OPEB cost (benefit), excluding service costs | $ | (49) | $ | (47) | $ | (147) | $ | (137) | |||||||||
| Adjusted Interest Expense - Net | |||||||||||||||||
| Reported interest expense - net | $ | 8 | $ | 38 | $ | 46 | $ | 80 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 10 | 23 | 43 | 67 | |||||||||||||
| Adjusted interest expense - net | $ | 18 | $ | 61 | $ | 89 | $ | 147 | |||||||||
| Adjusted Income Taxes (a) | |||||||||||||||||
| Reported income taxes | $ | 321 | $ | 265 | $ | 923 | $ | 594 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 115 | 75 | 349 | 292 | |||||||||||||
| Add: Pension settlement charges | 1 | 1 | 1 | 1 | |||||||||||||
| Add: Cost reduction programs and other charges | 3 | 12 | 29 | 110 | |||||||||||||
| Total adjustments | 119 | 88 | 379 | 403 | |||||||||||||
| Adjusted income taxes | $ | 440 | $ | 353 | $ | 1,302 | $ | 997 | |||||||||
| Adjusted Effective Tax Rate (a) | |||||||||||||||||
| Reported income before income taxes and equity investments | $ | 1,329 | $ | 972 | $ | 3,744 | $ | 2,344 | |||||||||
| Add: Pension settlement charge | 4 | 6 | 4 | 6 | |||||||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 482 | 475 | 1,423 | 1,396 | |||||||||||||
| Add: Cost reduction programs and other charges | 26 | 48 | 222 | 428 | |||||||||||||
| Total adjustments | 512 | 529 | 1,649 | 1,830 | |||||||||||||
| Adjusted income before income taxes and equity investments | $ | 1,841 | $ | 1,501 | $ | 5,393 | $ | 4,174 | |||||||||
| Reported Income taxes | $ | 321 | $ | 265 | $ | 923 | $ | 594 | |||||||||
| Reported effective tax rate | 24.2 | % | 27.3 | % | 24.7 | % | 25.3 | % | |||||||||
| Adjusted income taxes | $ | 440 | $ | 353 | $ | 1,302 | $ | 997 | |||||||||
| Adjusted effective tax rate | 23.9 | % | 23.5 | % | 24.1 | % | 23.9 | % | |||||||||
| Income from Equity Investments | |||||||||||||||||
| Reported income from equity investments | $ | 1 | $ | 23 | $ | 81 | $ | 69 | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 19 | 14 | $ | 57 | $ | 42 | |||||||||||
| Add: Cost reduction programs and other charges (e) | 35 | — | 35 | — | |||||||||||||
| Adjusted income from equity investments | $ | 55 | $ | 37 | $ | 173 | $ | 111 | |||||||||
| Adjusted Noncontrolling Interests from Continuing Operations | |||||||||||||||||
| Reported noncontrolling interests from continuing operations | $ | (31) | $ | (31) | $ | (105) | $ | (91) | |||||||||
| Add: Purchase accounting impacts - Linde AG (c) | (4) | (14) | (11) | (43) | |||||||||||||
| Adjusted noncontrolling interests from continuing operations | $ | (35) | $ | (45) | $ | (116) | $ | (134) | |||||||||
| Adjusted Income from Continuing Operations (b) | |||||||||||||||||
| Reported income from continuing operations | $ | 978 | $ | 699 | $ | 2,797 | $ | 1,728 | |||||||||
| Add: Pension settlement charge | 3 | 5 | 3 | 5 | |||||||||||||
| Add: Cost reduction programs and other charges | 58 | 36 | 228 | 318 | |||||||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 382 | 400 | 1,120 | 1,103 | |||||||||||||
| Total adjustments | 443 | 441 | 1,351 | 1,426 | |||||||||||||
| Adjusted income from continuing operations | $ | 1,421 | $ | 1,140 | $ | 4,148 | $ | 3,154 | |||||||||
| Adjusted Diluted EPS from Continuing Operations (b) | |||||||||||||||||
| Reported diluted EPS from continuing operations | $ | 1.88 | $ | 1.32 | $ | 5.34 | $ | 3.25 | |||||||||
| Add: Pension settlement charge | 0.01 | 0.01 | 0.01 | 0.01 | |||||||||||||
| Add: Cost reduction programs and other charges | 0.11 | 0.07 | 0.44 | 0.60 | |||||||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 0.73 | 0.75 | 2.13 | 2.07 | |||||||||||||
| Total adjustments | 0.85 | 0.83 | 2.58 | 2.68 | |||||||||||||
| Adjusted diluted EPS from continuing operations | $ | 2.73 | $ | 2.15 | $ | 7.92 | $ | 5.93 | |||||||||
| Reported percentage change | 42 | % | 64 | % | |||||||||||||
| Adjusted percentage change | 27 | % | 34 | % | |||||||||||||
| Adjusted EBITDA and % of Sales | |||||||||||||||||
| Income from continuing operations | $ | 978 | $ | 699 | $ | 2,797 | $ | 1,728 | |||||||||
| Add: Noncontrolling interests related to continuing operations | 31 | 31 | 105 | 91 | |||||||||||||
| Add: Net pension and OPEB cost (benefit), excluding service cost | (45) | (41) | (143) | (131) | |||||||||||||
| Add: Interest expense | 8 | 38 | 46 | 80 | |||||||||||||
| Add: Income taxes | 321 | 265 | 923 | 594 | |||||||||||||
| Add: Depreciation and amortization | 1,163 | 1,168 | 3,500 | 3,434 | |||||||||||||
| EBITDA from continuing operations | $ | 2,456 | $ | 2,160 | $ | 7,228 | $ | 5,796 | |||||||||
| Add: Cost reduction programs and other charges | 61 | 48 | 257 | 428 | |||||||||||||
| Add: Purchase accounting impacts - Linde AG (c) | 42 | 25 | 97 | 74 | |||||||||||||
| Total adjustments | 103 | 73 | 354 | 502 | |||||||||||||
| Adjusted EBITDA from continuing operations | $ | 2,559 | $ | 2,233 | $ | 7,582 | $ | 6,298 | |||||||||
| Reported sales | $ | 7,668 | $ | 6,855 | $ | 22,495 | $ | 19,971 | |||||||||
| % of sales | |||||||||||||||||
| EBITDA from continuing operations | 32.0 | % | 31.5 | % | 32.1 | % | 29.0 | % | |||||||||
| Adjusted EBITDA from continuing operations | 33.4 | % | 32.6 | % | 33.7 | % | 31.5 | % |
| (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 purchase 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. | |||||||||||||||||||||||||||||||||||||||||
| (e) Impairment charge related to a joint venture in the APAC segment. |
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.
| September 30, 2021 | December 31, 2020 | ||||||||||
| (Millions of dollars) | |||||||||||
| Debt | $ | 16,727 | $ | 16,154 | |||||||
| Less: cash and cash equivalents | (4,700) | (3,754) | |||||||||
| Net debt | 12,027 | 12,400 | |||||||||
| Less: purchase accounting impacts - Linde AG | (72) | (121) | |||||||||
| Adjusted net debt | $ | 11,955 | $ | 12,279 |
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.
| (Millions of dollars) | |||||||||||
| Statement of Income Data | Nine Months Ended September 30, 2021 | Twelve Months Ended December 31, 2020 | |||||||||
| Sales | $ | 5,433 | $ | 6,876 | |||||||
| Operating profit | 661 | 786 | |||||||||
| Net income | 358 | 690 | |||||||||
| Transactions with non-guarantor subsidiaries | 1,267 | 2,222 | |||||||||
| Balance Sheet Data (at period end) | |||||||||||
| Current assets (a) | $ | 6,061 | $ | 4,174 | |||||||
| Long-term assets (b) | 16,100 | 17,978 | |||||||||
| Current liabilities (c) | 10,343 | 8,337 | |||||||||
| Long-term liabilities (d) | 41,348 | 39,208 | |||||||||
| (a) From current assets above, amount due from non-guarantor subsidiaries | $ | 3,287 | $ | 1,984 | |||||||
| (b) From long-term assets above, amount due from non-guarantor subsidiaries | 3,219 | 4,565 | |||||||||
| (c) From current liabilities above, amount due to non-guarantor subsidiaries | 1,276 | 1,054 | |||||||||
| (d) From long-term liabilities above, amount due to non-guarantor subsidiaries | 25,810 | 23,394 |
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