Lincoln Electric Holdings, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Lincoln Electric designs and manufactures welding, cutting, brazing and soldering products. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $550.7 | $657.9 | -16.3% |
| Gross profit / margin | $189.1 / 34.3% | $220.4 / 33.5% | Profit -14.2%; margin +0.8 pp |
| Operating income / margin | $75.3 / 13.7% | $90.5 / 13.8% | -16.8% |
| Net income | $53.6 | $68.4 | -21.5% |
| Diluted EPS | $0.76 | $0.89 | -14.6% |
| Operating cash flow | $24.4 | $52.8 | -$28.4 |
| Capital expenditures | $8.9 | $12.5 | -$3.6 |
Sales fell primarily because of weaker volume and unfavorable currency translation. The company reported volume down 14.2%, foreign exchange impact of -15.0%, acquisitions adding 1.6%, and pricing adding 11.4%, with the pricing increase driven largely by Venezuela’s highly inflationary environment. Excluding Venezuela, price and foreign exchange had unfavorable impacts of 1.0% and 2.2%, respectively. Softer demand, weakness in oil and gas markets, and weaker U.S. exports weighed on sales.
SG&A declined 12.4% to $113.8 million, but rose as a share of sales to 20.7% from 19.7%. Management attributed the expense reduction chiefly to lower bonus expense, lower foreign-exchange transaction losses and lower salaries and wages. Interest expense increased to $3.8 million from $1.8 million, primarily due to higher borrowings. The effective tax rate was 26.7%, versus 26.3%.
Segments and balance sheet
| Segment | Sales | Adjusted EBIT | Adjusted EBIT margin on total segment sales |
|---|---|---|---|
| Americas Welding | $359.0 million (-20.0%) | $61.4 million (-18.5%) | 16.0% (flat) |
| International Welding | $124.3 million (-10.7%) | $6.2 million (-43.0%) | 4.8% (7.6% prior year) |
| The Harris Products Group | $67.4 million (-3.4%) | $7.7 million (+2.1%) | 11.1% (10.5% prior year) |
At March 31, 2016, cash was $221.0 million, down $83.2 million from year-end 2015. Current assets were $902.3 million and current liabilities $401.5 million. Total debt was $375.0 million, up from $354.6 million at year-end; debt to total invested capital increased to 29.6% from 27.6%. Debt included $24.8 million short-term and $350.1 million long-term. The company had no borrowings under its $400 million revolving credit agreement and reported compliance with debt covenants. Its $350 million senior unsecured note placement carries a weighted average effective interest rate of 3.5% and maturities from 2025 to 2045.
Operating cash flow was lower year over year, in part because Q1 2015 included a $25.0 million Canadian tax-deposit refund. Q1 2016 financing cash use was $104.8 million, including $102.5 million of treasury-share purchases and $22.6 million of dividends paid. Cash and cash equivalents included $216.5 million held by international subsidiaries, potentially subject to tax if repatriated.
Outlook, developments and risks
- Management anticipated 2016 capital expenditures of $65 million to $75 million and share repurchases of approximately $400 million. In April, the board authorized repurchases of up to an additional 10 million shares; 2.8 million remained under the prior program at quarter-end.
- The company declared a quarterly dividend of $0.32 per share, up from $0.29 in Q1 2015. A $0.32-per-share dividend was paid in April 2016.
- The company realigned reporting into Americas Welding, International Welding and The Harris Products Group; prior-period segment results were revised to match. No rationalization charges were recorded in Q1 2016. International Welding restructuring liabilities of $7.2 million remained, substantially expected to be paid during 2016.
- Venezuela remains a significant uncertainty: the exchange system changed to two tiers, with the DICOM rate at 272.9 bolivars per U.S. dollar at quarter-end. Management warned of possible further earnings effects, restrictions on currency conversion and repatriation, operational constraints, or eventual deconsolidation. Venezuela contributed $5.0 million of Q1 sales and $0.1 million of net income; the company’s total investment there was approximately $35 million.
- Other risks cited include weak economic and end-market conditions, currency movements, commodity and energy prices, credit-market access, acquisitions, rationalization costs, and litigation. The company was a co-defendant in asbestos-related cases involving approximately 7,274 plaintiffs; management stated it did not expect the proceedings to materially affect consolidated financial statements. No material change in market-risk exposure was reported.
Most important facts for investors to verify
- Whether weak demand and foreign-exchange pressure persist, particularly in Americas and International Welding, and whether margins stabilize.
- Whether operating cash flow supports planned $400 million share repurchases, capital expenditures and dividends without materially increasing borrowing.
- Venezuela’s exchange-rate accessibility, currency exposure, ability to remit funds and continued basis for consolidation.
- Progress and cash costs of International Welding rationalization plans, and any material developments in asbestos litigation or tax audits.
- Management reported disclosure controls were effective at March 31, 2016, with no material quarter-end change in internal control over financial reporting.