Lincoln Electric Holdings, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. The company designs and manufactures welding, cutting, brazing and soldering products. Financial amounts below are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $697.6 | $701.6 | $2,168.7 | $2,000.1 |
| Gross profit / margin | $213.4 / 30.6% | $185.5 / 26.4% | $653.6 / 30.1% | $542.4 / 27.1% |
| Operating income / margin | $88.7 / 12.7% | $74.8 / 10.7% | $276.4 / 12.7% | $214.3 / 10.7% |
| Net income | $64.8 | $55.5 | $195.3 | $159.5 |
| Diluted EPS | $0.77 | $0.66 | $2.32 | $1.88 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $243.3 | $130.4 |
Q3 sales decreased 0.6%, while net income increased 16.6%. For the nine-month period, sales rose 8.4%, operating income 29.0%, and net income 22.5%. The filing attributes nine-month sales growth to volume (+3.8%), acquisitions (+5.3%) and pricing (+1.9%), partly offset by foreign exchange (-2.6%).
At September 30, cash and cash equivalents were $340.7, current assets $1,239.6 and current liabilities $492.7. Total debt was $21.2, down from $103.4 at year-end 2011; debt to total invested capital fell to 1.6% from 8.0%. The company had no borrowings under its $300 million, five-year credit facility and reported compliance with its covenants. Nine-month capital expenditures were $39.3; cash dividends paid were $42.5 and treasury-share purchases were $60.2.
Material changes and management commentary
- Q3 sales were broadly flat as U.S. growth and acquisitions were offset by weaker international demand and unfavorable currency translation. Management reported volume down 2.2%, acquisitions up 3.8%, price up 0.8% and foreign exchange down 3.0%.
- Higher gross margin reflected pricing and favorable regional mix, partly offset by lower margins at recent acquisitions. SG&A rose 9.9% in Q3, mainly due to bonus and employee compensation costs and acquisition expenses.
- North America was the principal growth contributor. In Q3, North America Welding sales increased 13.1%; Europe Welding and Asia Pacific Welding sales fell 18.6% and 22.0%, respectively. Adjusted segment EBIT margins improved across all segments.
- Operating cash flow improved by $113.0 million year over year, which management attributed mainly to higher earnings and lower working-capital requirements. Cash nevertheless declined $20.4 million, reflecting debt repayment, acquisitions, share repurchases and a Canadian tax-related deposit.
Outlook, unusual items and risks
- Outlook: No specific revenue or earnings guidance is provided. Management expected 2012 capital expenditures of $50–$55 million and stated that ongoing cash needs should be met by operating cash flow, existing cash and, if needed, credit facilities.
- Rationalization: The company recorded $4.3 million of nine-month rationalization and impairment charges, primarily for manufacturing consolidations. Additional charges were expected for the Italy, Australia, Oceanside-Reno and Russia plans; estimated ranges vary by plan.
- Canadian tax dispute: The CRA reassessment for 2004–2011 would increase Canadian taxes by $60.1 million plus approximately $16.6 million of interest. The company disputes the assessment, has made a deposit and expects to pay the balance in Q4 2012. No accrual was recorded for the disputed tax positions; an unfavorable outcome could materially affect results in the quarter of judgment.
- Venezuela: Highly inflationary accounting, exchange restrictions and potential devaluation create earnings exposure. The bolivar-denominated monetary net asset position was $21.9 million, versus $6.8 million at year-end 2011. The filing illustrates that a devaluation to 6.4 per U.S. dollar could produce additional charges of approximately $4.5 million to cost of goods sold and $7.2 million to SG&A, based on then-current balances.
- Pensions: The company made $53.3 million of voluntary U.S. defined-benefit contributions through September and expected to contribute up to $60 million in 2012. It expected $38.4 million of lump-sum pension payments in Q4, funded from plan assets.
- Other risks: The filing cites economic and international demand conditions, foreign exchange and interest rates, raw-material and energy prices, litigation, rationalization costs, acquisitions and political or other disruptive events. It reports no material change in market-risk exposure since year-end 2011.
Important facts for investors to verify
- Progress and final liability, cash requirements and potential financial-statement impact of the CRA reassessment and related deposits.
- Whether international demand and foreign-exchange headwinds continue, and whether improved margins persist as input prices and product pricing change.
- Final costs and expected savings from rationalization plans, along with integration and margins of recent acquisitions.
- Actual 2012 capital spending, pension contributions and lump-sum payments, and ongoing working-capital and cash-flow trends.
- Any changes in Venezuelan currency controls, exchange rates or the company’s ability to convert and repatriate funds.