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." 28 --------------------------------------------------------------------------------
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Consolidated Results The following table provides summary information for the quarters and nine months endedSeptember 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. 29 --------------------------------------------------------------------------------
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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: Nine Months Ended September 30, Quarter Ended September 30, 2021 vs. 2020 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 endedSeptember 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 theU.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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 . SG&A was 10.3% of third quarter sales and 10.7% sales for the nine months endedSeptember 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 endedSeptember 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 endedSeptember 30, 2021 due to continued productivity initiatives.
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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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 theUnited 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 inUnited 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 endedSeptember 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.
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Income from equity investments Reported income from equity investments for the third quarter of 2021 and nine months endedSeptember 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 endedSeptember 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 effectiveJanuary 1, 2021 . Income from equity investments increased for the nine months endedSeptember 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 effectiveJanuary 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 AtSeptember 30, 2021 , noncontrolling interests from continuing operations consisted primarily of non-controlling shareholders' investments in APAC (primarilyChina ) 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 endedSeptember 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 theRepublic 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 endedSeptember 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 theRepublic 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 atSeptember 30, 2021 was 72,159, a decrease of 2,489 employees fromSeptember 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 endedSeptember 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 endedSeptember 30, 2021 as compared to the respective 2020 period primarily due to higher income from continuing operations versus the prior period. 32 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 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 toU.S. dollars, and are largely driven by the movement of theU.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.
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