Lincoln Electric Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Amounts below are in U.S. dollars; financial statement figures are shown in millions unless noted. Lincoln Electric designs and manufactures welding and cutting products, and brazing and soldering alloys, through five operating segments.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $657.9m | $685.1m | -4.0% |
| Gross profit / margin | $220.4m / 33.5% | $226.3m / 33.0% | Profit -2.6%; margin +0.5 pts |
| Operating income / margin | $90.5m / 13.8% | $80.4m / 11.7% | +12.5% |
| Net income | $68.4m | $56.5m | +21.1% |
| Diluted EPS | $0.89 | $0.69 | +$0.20 |
| Operating cash flow | $52.8m | $13.6m | +$39.2m |
| Capital expenditures | $12.5m | $14.5m | -$2.1m |
Sales fell mainly because foreign exchange reduced sales by 7.9%; volume declined 0.8%, while price and acquisitions added 2.9% and 1.8%, respectively. The stronger U.S. dollar adversely affected every segment. Gross margin improved on geographic mix and operational improvements. Lower SG&A—down $16.0m—supported operating income; the prior-year quarter included a $17.7m Venezuelan remeasurement loss. The 2015 effective tax rate was 26.3%, versus 31.5%, aided by U.S. tax credits and interest on a tax refund.
Segments and balance sheet
North America sales rose 2.8%, while Europe fell 16.1%, Asia Pacific fell 19.6%, South America fell 14.9%, and Harris Products Group fell 3.7%. Adjusted segment EBIT was broadly stronger in Asia Pacific and Harris, approximately flat in North America, and lower in Europe and South America. South America’s adjusted EBIT declined 73.2%, reflecting lower volume and margins associated with Venezuela’s Fair Pricing Law.
At March 31, cash was $289.0m and total debt was $171.9m, versus $278.4m and $70.7m at year-end. Total current assets were $1,095.0m and current liabilities $608.4m. Total assets were $1,921.5m; total equity was $1,180.0m. Cash flow from operations included a $25.0m Canadian tax-deposit refund and $1.6m interest, so the increase over the prior-year quarter was not solely from recurring operations. Financing included $102.9m of treasury-share purchases and $22.3m of dividends paid. The declared quarterly dividend rose to $0.29 per share from $0.23.
Outlook, risks, and unusual items
- Management anticipated 2015 capital expenditures of $65m–$75m and share repurchases of approximately $400m. The filing gives no specific revenue or earnings guidance; management said it expects to meet ongoing cash needs through operating cash flow, cash balances, credit facilities, and capital markets.
- After quarter-end, on April 1, the company issued $350m of senior unsecured notes, with $150m received in April and $200m due in August. The notes have 10–30-year maturities and a 3.5% weighted-average effective interest rate; proceeds are for general corporate purposes. At March 31, $130m was drawn on a $400m credit facility, and the company reported compliance with its covenants.
- Venezuela remains a material uncertainty: the company used the SICAD I rate of 12.0 bolivars per U.S. dollar at quarter-end despite a newly announced market-based system. A conversion at the SIMADI rate of 193.0 could, based on then-current balances, produce estimated additional charges of about $22m to cost of goods sold and $1.2m to SG&A. Currency restrictions also may hinder remittances, payments, and normal production. Venezuela contributed $22.9m in sales and $1.8m in net income in the quarter.
- Other notable items include $56.6m of currency translation loss in other comprehensive income; a $1.8m gain associated with liquidation of a foreign subsidiary and related non-controlling interest; and $20m of voluntary U.S. defined-benefit pension contributions. Assets held for sale in Asia Pacific included $29.3m of assets and $8.5m of liabilities.
- The company disclosed approximately 12,278 asbestos-related plaintiffs, generally alongside numerous co-defendants, and stated it believes resolution of claims will not materially affect consolidated financial statements. It also cited foreign exchange and devaluation, economic conditions, litigation, commodity costs, credit-market access, and execution of planned divestitures among forward-looking risks.
Most important facts for investors to verify
- Whether sales and segment performance improve as foreign-exchange headwinds and weaker Asia Pacific and South America demand evolve.
- How much of stronger operating cash flow reflects recurring operations versus the Canadian tax refund, and how working capital develops.
- Venezuela’s exchange-rate treatment, government approvals for outstanding currency requests, and potential devaluation charges.
- Execution and funding of planned $400m share repurchases, the $65m–$75m capital program, and the post-quarter $350m note issuance.
- Progress and final proceeds from the Asia Pacific assets held for sale, and developments in asbestos and tax-related exposures.