Linde 10-Q 2022-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2022

or

For the transition period from to

LINDE PLC

(Exact name of registrant as specified in its charter)

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:

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.

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, 2022, 503,281,693 ordinary shares (€0.001 par value) of the Registrant were outstanding.

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,

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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, 2022 and 2021. 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:

(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 first quarter of 2022, Linde's sales were $8,211 million, 13% above prior year, primarily driven by 6% price attainment and 3% higher volumes. Cost pass-through, representing the contractual billing of energy cost variances primarily to onsite customers, increased sales by 6% in the quarter, with minimal impact on operating profit. Currency translation decreased sales by 3% in the first quarter of 2022 as compared to 2021.

Reported operating profit for the first quarter of 2022 of $1,480 million, or 18% of sales, was 22% above prior year. The reported year-over-year increase was primarily due to higher price, the benefit of cost reduction programs and productivity initiatives and lower depreciation and amortization driven by merger related intangible assets. The reported effective tax rate ("ETR") was 24.0% in the first quarter 2022 versus 21.6% in the first quarter 2021. Diluted earnings per share from continuing operations ("EPS") was $2.30, or 24% above EPS of $1.86 in the first quarter of 2021 primarily due to higher income from continuing operations and lower diluted shares outstanding.

Adjusted

In the first quarter of 2022, adjusted operating profit of $1,905 million, or 23.2% of sales, was 13% higher as compared to 2021 driven by higher price and the benefit of cost reduction programs and productivity initiatives. The adjusted ETR was 24.3% in the first quarter 2022 versus 23.9% in the 2021 quarter. On an adjusted basis, EPS was $2.93, 18% above the 2021 adjusted EPS of $2.49, 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:

Sales

Sales increased $968 million, or 13%, for the first quarter of 2022 versus the respective 2021 period. Volume growth across most end markets increased sales by 3% in the quarter. Higher pricing across all geographic segments contributed 6% to sales in the quarter. Currency translation decreased sales by 3% in the quarter largely in EMEA and APAC, driven by the weakening of the Euro, Australian dollar, Korean won and British pound against the U.S. dollar. Cost pass-through increased sales by 6% in the quarter with minimal impact on operating profit.

Cost of sales, exclusive of depreciation and amortization

Cost of sales, exclusive of depreciation and amortization increased $744 million, or 18%, for the first quarter of 2022, primarily due to higher volumes and cost pass-through, partially offset by productivity initiatives and currency impacts. Cost of sales, exclusive of depreciation and amortization was 58.4% of sales, for the first quarter of 2022 versus 56.0% of sales for the respective 2021 period. The increase as a percentage of sales for the first quarter of 2022 was due primarily to higher cost pass-through.

Selling, general and administrative expenses

Selling, general and administrative expense ("SG&A") increased $15 million, or 2%, for the first quarter of 2022. SG&A was 9.8% of first quarter sales versus 10.9% for the respective 2021 period. Currency impacts decreased SG&A by approximately $18 million in the quarter. Excluding currency impacts, underlying SG&A increased in the first quarter of 2022 driven primarily by higher incentive compensation.

Depreciation and amortization

Reported depreciation and amortization expense decreased $54 million for the first quarter of 2022. The decrease is related primarily to intangible assets acquired in the merger.

On an adjusted basis, depreciation and amortization increased $6 million, or 1%, for the first quarter of 2022, primarily due to new project start ups which were partially offset by currency translation impacts which decreased depreciation and amortization by $16 million.

Operating profit

On a reported basis, operating profit increased $267 million, or 22%, for the first quarter of 2022. The increase was primarily due to higher pricing, the benefit of cost reduction programs and productivity initiatives and lower depreciation and amortization driven by merger related intangible assets which more than offset inflation during the quarter.

On an adjusted basis, which excludes the impacts of purchase accounting and cost reduction programs and other charges, operating profit increased $217 million, or 13% in the 2022 quarter. Operating profit growth was driven by higher pricing and the benefit of cost reduction programs and productivity initiatives which more than offset inflation during the period. A discussion of operating profit by segment is included in the segment discussion that follows.

Interest expense - net

Reported interest expense - net decreased $11 million for the first quarter of 2022. On an adjusted basis, interest expense decreased $19 million for the first quarter of 2022 versus the respective 2021 period driven by a lower effective borrowing rate.

Net pension and OPEB cost (benefit), excluding service cost

Reported net pension and OPEB cost (benefit), excluding service cost was a benefit of $64 million for the quarter versus a benefit of $49 million for the respective 2021 period. The increase in benefit primarily relates to lower amortization of deferred losses, partially offset by higher interest cost reflective of the higher discount rate environment year-over-year.

Effective tax rate

The reported effective tax rate ("ETR") for the quarter was 24.0%, versus 21.6% for the respective 2021 period. The increase is primarily driven by lower tax impact from share based compensation in 2022 and a non-taxable gain related to the deconsolidation of a joint venture with operations in APAC in the first quarter of 2021.

On an adjusted basis, the ETR for the quarter was 24.3%, versus 23.9% for the respective 2021 period. The increase is primarily due to lower tax benefits from share option exercises.

Income from equity investments

Reported income from equity investments for the first quarter of 2022 was $44 million, versus $43 million for the respective 2021 period. On an adjusted basis, income from equity investments for the first quarter was $64 million, versus $62 million in the prior year respective period.

Noncontrolling interests from continuing operations

At March 31, 2022, noncontrolling interests from continuing operations consisted primarily of non-controlling shareholders' investments in APAC (primarily China).

Reported noncontrolling interests from continuing operations decreased $2 million for the first quarter of 2022, versus the respective 2021 period.

Income from continuing operations

Reported income from continuing operations increased $195 million, or 20%, for the first quarter of 2022, versus the respective 2021 period, 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 $188 million, or 14%, for the quarter versus the respective 2021 period. The increase was driven by higher overall adjusted operating profit.

Diluted earnings per share from continuing operations

Reported diluted earnings per share from continuing operations increased $0.44, or 24%, for the first quarter of 2022, versus the comparable 2021 period. On an adjusted basis, diluted EPS for the first quarter of 2022 increased $0.44, or 18%,versus the respective 2021 period. The increase on both bases was primarily due to higher income from continuing operations and lower diluted shares outstanding.

Employees

The number of employees at March 31, 2022 was 72,507, an increase of 808 employees from March 31, 2021, driven primarily by the Americas.

Other Financial Data

EBITDA was $2,636 million for the first quarter of 2022 as compared to $2,422 million in the respective 2021 period. Adjusted EBITDA from continuing operations increased to $2,663 million for the first quarter 2022 from $2,438 million in the respective 2021 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 losses for the first quarter of 2022 were $98 million, resulting primarily from currency translation adjustments of $48 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.

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 Consolidated Statements of Income.

Americas

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 $401 million, or 14%, for the first quarter versus the respective 2021 period. Higher pricing contributed 5% to sales in the quarter. Higher volumes increased sales by 5% for the first quarter, driven by higher demand across most end markets, led by chemicals and energy and manufacturing. Cost pass-through increased sales by 4% for the first quarter with minimal impact on operating profit. The impact of currency translation in the quarter was not significant.

Operating profit

Operating profit in the Americas segment increased $109 million, or 14%, in the first quarter versus the respective 2021 period, driven primarily by higher pricing and continued productivity initiatives which more than offset inflation during the quarter.

EMEA

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 $349 million, or 19%, in the first quarter as compared to the respective 2021 period. Cost pass-through contributed 14% to sales in the quarter, with minimal impact on operating profit, while higher price attainment increased sales by 11% in the quarter. Volumes were relatively flat in the quarter. Currency translation decreased sales by 6% in the quarter due largely to the weakening of the Euro and British pound against the U.S. Dollar.

Operating Profit

Operating profit for the EMEA segment increased by $52 million, or 12%, in the first quarter as compared to the respective 2021 period, driven largely by higher pricing and continued productivity initiatives which more than offset inflation during the quarter.

APAC

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 $166 million, or 12%, for the first quarter versus the respective 2021 period. Volumes increased 6% in the quarter driven by increased demand across most end markets, led by electronics and chemicals and energy, and project start-ups. Higher price and cost pass-through both contributed 4% to sales in the quarter. The impact of cost pass-through on operating profit was minimal. Currency translation decreased sales by 2% in quarter driven primarily by the weakening of the Australian dollar and Korean won against the U.S. Dollar.

Operating profit

Operating profit in the APAC segment increased $48 million, or 14%, in the first quarter versus the respective 2021 period driven by higher volumes and pricing and continued productivity initiatives which more than offset the impact of inflation during the quarter.

Engineering

Sales

Engineering segment sales increased $54 million, or 8%, in the first quarter 2022 as compared to the respective 2021 period driven primarily by project timing, partially offset by currency impacts which decreased sales by 5% in the quarter.

Projects being executed for Russia that are currently or expected to be sanctioned and thus being wound down represent approximately $350 million of the Engineering segment sales during the first quarter of 2022.

Operating profit

Engineering segment operating profit increased, $34 million, or 31%, in the first quarter 2022 as compared to the respective 2021 period driven primarily by project timing.

Other

Other consists of corporate costs and a few smaller businesses including: Surface Technologies, GIST and global helium wholesale; which individually do not meet the quantitative thresholds for separate presentation.

Sales

Sales for Other decreased $2 million for the first quarter 2022 versus the respective 2021 period. Currency translation decreased sales by 2% in the quarter. Underlying sales increased 1% in the quarter driven by higher pricing partially offset by lower global helium volumes.

Operating profit

Operating profit in Other decreased $26 million, or 144% in the first quarter 2022 versus the respective 2021 period, due primarily to lower volumes and higher sourcing costs in the global helium business.

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):

Liquidity, Capital Resources and Other Financial Data

The following selected cash flow information provides a basis for the discussion that follows:

(a) See Note 2 to the condensed consolidated financial statements.

Cash Flow from Operations

Cash provided by operations of $2,000 million for the three months ended March 31, 2022 decreased $109 million, or 5%, versus 2021. The decrease was driven primarily by higher working capital requirements, which more than offset higher net income adjusted for non-cash charges. Cost reduction programs and other charges were benefits of $4 million and $8 million, respectively, for the three months ended March 31, 2022 and 2021. Related cash outflows were $30 million and $68 million for the same respective periods.

Linde estimates that total 2022 required contributions to its pension plans will be in the range of $40 million to $50 million, of which $13 million has been made through March 31, 2022.

Investing

Net cash used for investing of $665 million for the three months ended March 31, 2022 decreased $86 million versus 2021, primarily driven by lower capital expenditures, partially offset by higher acquisition spend net of cash acquired.

Capital expenditures for the three months ended March 31, 2022 were $649 million, $113 million lower than the prior year.

At March 31, 2022, 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, 2022 and 2021 were $43 million and 10 million, respectively, and related primarily to acquisitions in EMEA. Divestitures and asset sales for the three months ended March 31, 2022 and 2021 were $27 million and $21 million, respectively.

Financing

Cash provided by financing activities was $244 million for the three months ended March 31, 2022 as compared to cash used for financing activities of $970 million for the three months ended March 31, 2021. Cash provided by debt was $2,546 million versus $681 million in 2021 driven by higher commercial paper borrowings and debt issuances in 2022. In January 2022, Linde repaid €1.0 billion of 0.250% notes that became due. In March 2022, Linde issued €500 million of 1.000% notes due 2027, €750 million of 1.375% notes due 2031, and €800 million of 1.625% notes due 2035.

Net purchases of ordinary shares were $1,709 million in 2022 versus $851 million in 2021. On February 28, 2022, the company’s Board of Directors approved the additional repurchase of $10.0 billion of its ordinary shares. For additional information related to the share repurchase programs, see Part II Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Cash dividends of $592 million increased $39 million from 2021 driven primarily by a 10% increase in quarterly dividends per share from $1.06 per share to $1.17 per share, partially offset by lower shares outstanding. Cash used for Noncontrolling interest transactions and other was $1 million for the three months ended March 31, 2022 versus cash used of $247 million for the respective 2021 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 $4.5 billion of cash as of March 31, 2022, 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, 2022. 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.

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.

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.

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 and/or Linde GmbH. 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. 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.

Refer to Item 7A. to Part II of Linde's 2021 Annual Report on Form 10-K for discussion.

(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.

PART II - OTHER INFORMATION

Linde plc and Subsidiaries

See Note 9 to the condensed consolidated financial statements for a description of current legal proceedings.

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, 2021.

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, 2022 is provided below:

(1) 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, expires on July 31, 2023, and was fully utilized as of February 28, 2022.

(2) On February 28, 2022, the company's board of directors approved the repurchase of $10.0 billion of its ordinary shares ("2022 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 2022 program has a maximum repurchase amount of 15% of outstanding shares, began on March 1, 2022 and expires on July 31, 2024.

As of March 31, 2022, the company repurchased $495 million and $1.3 billion of its ordinary shares pursuant to the 2021 and 2022 programs, respectively. As of March 31, 2022, $8.7 billion of share repurchases remain authorized under the 2022 program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

None.

*Indicates a management contract or compensatory plan or arrangement.

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.