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OFFON

LINDE

(LNA)
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LINDE : Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") (form 10-Q)

07/30/2021 | 01:38pm EDT
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."
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Table of Contents

  Consolidated Results
The following table provides summary information for the quarters and six months
ended June 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 June 30,                                            Six Months Ended June 30,
(Millions of dollars, except per share
data)                                       2021                   2020               Variance                 2021                     2020               Variance
Sales                                  $    7,584               $  6,377                     19  %       $     14,827                $ 13,116                     13  %
Cost of sales, exclusive of
depreciation and amortization          $    4,194               $  3,619                     16  %       $      8,248                $  7,462                     11  %
As a percent of sales                        55.3   %               56.8  %                                      55.6   %                56.9  %
Selling, general and administrative    $      822               $    760                      8  %       $      1,609                $  1,621                     (1) %
As a percent of sales                        10.8   %               11.9  %                                      10.9   %                12.4  %
Depreciation and amortization          $    1,171               $  1,124                      4  %       $      2,337                $  2,266                      3  %
Cost reduction programs and other
charges (b)                            $      204               $    249                    (18) %       $        196                $    380           

(48) %


Other income (expense) - net           $      (17)              $      -                    (100%)       $        (13)               $     15                   (187) %
Operating profit                       $    1,142               $    591                     93  %       $      2,355                $  1,324                     78  %
Operating margin                             15.1   %                9.3  %                                      15.9   %                10.1  %
Interest expense - net                 $       18               $     18                      -  %       $         38                $     42                    (10) %
Net pension and OPEB cost (benefit),
excluding service cost                 $      (49)              $    (45)                     9  %       $        (98)               $    (90)                     9  %
Effective tax rate                           28.5   %               26.5  %                                      24.9   %                24.0  %
Income from equity investments         $       37               $     29                     28  %       $         80                $     46                     74  %
Noncontrolling interests from
continuing operations                  $      (36)              $    (25)                    44  %       $        (74)               $    (60)                    23  %
Income from continuing operations      $      840               $    458                     83  %       $      1,819                $  1,029                     77  %
Diluted earnings per share from
continuing operations                  $     1.60               $   0.87                     84  %       $       3.46                $   1.93                     79  %
Diluted shares outstanding                523,723                529,054                     (1) %            525,380                 532,112                     (1) %
Number of employees                        71,736                 76,662                     (6) %             71,736                  76,662                     (6) %
Adjusted Amounts (a)
Operating profit                       $    1,837               $  1,317                     39  %       $      3,525                $  2,669                     32  %
Operating margin                             24.2   %               20.7  %                                      23.8   %                20.3  %
Effective tax rate                           24.6   %               24.3  %                                      24.3   %                24.1  %
Income from continuing operations      $    1,415               $  1,005                     41  %       $      2,727                $  2,014                     35  %
Diluted earnings per share from
continuing operations                  $     2.70               $   1.90                     42  %       $       5.19                $   3.78                     37  %
Other Financial Data (a)
EBITDA from continuing operations      $    2,350               $  1,744                     35  %       $      4,772                $  3,636                     31  %
As percent of sales                          31.0   %               27.3  %                                      32.2   %                27.7  %
Adjusted EBITDA from continuing
operations                             $    2,585               $  2,016                     28  %       $      5,023                $  4,065                     24  %
As percent of sales                          34.1   %               31.6  %                                      33.9   %                31.0  %



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

Reported

In the second quarter of 2021, Linde's sales were $7,584 million, 19% above prior year, primarily driven by 3% price attainment and 15% higher volumes. Currency translation increased sales by 6% in the second quarter of 2021 as compared to 2020.


Reported operating profit for the second quarter of 2021 of $1,142 million, or
15.1% of sales, was 93% 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 28.5% in the
second quarter 2021 versus 26.5% in the second quarter 2020. Diluted earnings
per share from continuing operations ("EPS") was $1.60, or 84% above EPS of
$0.87 in the second quarter of 2020 primarily due to higher income from
continuing operations and lower diluted shares outstanding.


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Adjusted
In the second quarter of 2021, adjusted operating profit of $1,837 million, or
24.2% of sales, was 39% higher as compared to 2020 driven by higher price and
volumes and continued productivity initiatives across all segments. The adjusted
ETR was 24.6% in the second quarter 2021 versus 24.3% in the 2020 quarter. On an
adjusted basis, EPS was $2.70, 42% above the 2020 adjusted EPS of $1.90, 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:
                                                                                                             Six Months Ended June 30,
                                                               Quarter Ended June 30, 2021 vs. 2020                2021 vs. 2020
                                                                             % Change                                 % Change

Factors Contributing to Changes - Sales
Volume                                                                                          15  %                               9  %
Price/Mix                                                                                        3  %                               2  %
Cost pass-through                                                                                2  %                               2  %
Currency                                                                                         6  %                               5  %
Acquisitions/divestitures                                                                       (3) %                              (3) %
Engineering                                                                                     (4) %                              (2) %
                                                                                                19  %                              13  %



Sales
Sales increased $1,207 million, or 19%, for the second quarter of 2021 and
increased $1,711 million, or 13% for the six months ended June 30, 2021 versus
the respective 2020 periods. Volume growth across all end markets and project
start-ups increased sales by 15% in the quarter and 9% year-to-date. 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 6% in
the quarter and 5% 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 2% in both
periods with minimal impact on operating profit. The deconsolidation of a joint
venture with operations in APAC decreased sales by 3% in the quarter and
year-to-date periods (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 $575
million, or 16%, for the second quarter of 2021 and increased $786 million, or
11% for the six months ended June 30, 2021 primarily due to higher volumes and
currency impacts, partially offset by productivity initiatives. Cost of sales,
exclusive of depreciation and amortization was 55.3% and 55.6% of sales,
respectively, for the second quarter and six months ended June 30, 2021 versus
56.8% and 56.9% of sales for the respective 2020 periods. The decrease as a
percentage of sales in the quarter and for the six months ended June 30, 2021
was due primarily to productivity initiatives.
Selling, general and administrative expenses
Selling, general and administrative expense ("SG&A") increased $62 million, or
8%, for the second quarter of 2021 and decreased $12 million, or 1%, for the six
months ended June 30, 2021. SG&A was 10.8% of second quarter sales and 10.9%
sales for the six months ended June 30, 2021 versus 11.9% and 12.4% for the
respective 2020 periods. Currency impacts increased SG&A by approximately $36
million in the quarter and increased SG&A by approximately $61 million for the
six months ended June 30, 2021. Excluding currency impacts, underlying SG&A
increased in the second quarter of 2021 driven by higher incentive compensation
and decreased for the six months ended June 30, 2021 due to continued
productivity initiatives.
Depreciation and amortization
Reported depreciation and amortization expense increased $47 million, or 4%, for
the second quarter of 2021 and increased $71 million, or 3%, for the six months
ended June 30, 2021 primarily due to currency translation impacts.
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On an adjusted basis depreciation and amortization increased $36 million, or 5%,
for the second quarter of 2021 and increased $58 million, or 4% for the
year-to-date period, primarily due to currency translation impacts which
increased depreciation and amortization by $34 million and $54 million,
respectively. 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 were $204 million and $249 million for
the second 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 $196 million and $380 million,
respectively, for the six months ended June 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 $551 million, or 93%, for the
second quarter of 2021 and increased $1,031 million, or 78% for the six months
ended June 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 $204 million for the second
quarter of 2021, versus $249 million for the respective 2020 period. In the
year-to-date periods cost reduction programs and other charges were $196 million
and $380 million, respectively, for the six months ended June 30, 2021 and 2020.

On an adjusted basis, which excludes the impacts of purchase accounting and cost
reduction programs and other charges, operating profit increased $520 million,
or 39% in the 2021 quarter and increased $856 million, or 32%, for the six
months ended June 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 was flat for the second quarter of 2021 and
decreased $4 million for the six months ended June 30, 2021. On an adjusted
basis interest expense decreased $7 million for the second quarter of 2021 and
decreased $15 million for the six months ended June 30, 2021 versus the
respective 2020 periods. The decrease in both periods was driven by a lower
effective borrowing rate. The year-to-date period decrease was also driven by
the impact of favorable foreign currency revaluation on an unhedged intercompany
loan.
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 and $98 million for the quarter and six months ended June
30, 2021, respectively, versus a benefit of $45 million and $90 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.
Effective tax rate
The reported effective tax rate ("ETR") for the quarter and six months ended
June 30, 2021 was 28.5% and 24.9%, respectively, versus 26.5% and 24.0% for the
respective 2020 periods. The 2021 periods include net tax charges of $38 million
primarily related to $81 million of expense due to a tax rate increase in the
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 six months ended June 30, 2021
was 24.6% and 24.3%, respectively, versus 24.3% and 24.1% for the respective
2020 periods.
Income from equity investments
Reported income from equity investments for the second quarter of 2021 and six
months ended June 30, 2021 was $37 million and $80 million, respectively, versus
$29 million and $46 million for the respective 2020 periods. On an adjusted
basis, income from equity investments for the second quarter and six months
ended June 30, 2021 was $56 million and $118 million, respectively, versus $43
million and $74 million, in the prior respective periods. The increase in both
the reported and 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
year-to-date 2020 period also includes the impact of unfavorable foreign
currency revaluation on an unhedged loan of an investment in EMEA.

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Noncontrolling interests from continuing operations
At June 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 increased $11
million for the second quarter of 2021 and increased $14 million for the six
months ended June 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 $1
million for the second quarter of 2021 and decreased $8 million for the six
months ended June 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 $382 million, or 83%, for
the second quarter of 2021 primarily due to higher operating profit and
increased $790 million, or 77%, for the six months ended June 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 $410
million, or 41%, for the quarter and increased $713 million, or 35% for the six
months ended June 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 $0.73,
or 84%, for the second quarter of 2021 and increased $1.53, or 79% for the six
months ended June 30, 2021 versus the comparable 2020 periods.
On an adjusted basis, diluted EPS for the second quarter of 2021 increased
$0.80, or 42%, and increased $1.41, or 37% for the six months ended June 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 June 30, 2021 was 71,736, a decrease of 4,926
employees from June 30, 2020 primarily driven by cost reduction actions and
divestitures.
Other Financial Data
EBITDA was $2,350 million for the second quarter of 2021 as compared to $1,744
million in the respective 2020 period. EBITDA increased to $4,772 million for
the six months ended June 30, 2021 from $3,636 million in the respective 2020
period. Adjusted EBITDA from continuing operations increased to $2,585 million
for the second quarter 2021 from $2,016 million in the respective 2020 period.
Adjusted EBITDA from continuing operations increased to $5,023 million from
$4,065 million for the six months ended June 30, 2021 as compared to the
respective 2020 period primarily due to higher income from continuing operations
plus depreciation and amortization 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 income for the second quarter of 2021 and loss for the six
months ended June 30, 2021 of $446 million and $215 million, respectively,
resulted primarily from positive currency translation adjustments of $410
million during the quarter and negative currency translation adjustments of $305
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.
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