Lincoln Electric Holdings, Inc. — Q2 2013 Form 10-Q
Business and period: Lincoln Electric designs and manufactures arc welding and cutting products, and brazing and soldering alloys. This unaudited filing covers the three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
- Second quarter: Sales were $727.4, down 2.2%; net income was $72.6, up 9.5%; diluted EPS was $0.87 versus $0.79. Gross margin improved to 33.0% from 30.2%, and operating margin to 14.3% from 12.9%.
- First six months: Sales were $1,446.0, down 1.7%; net income was $139.4, up 6.8%; diluted EPS was $1.67 versus $1.54. Gross margin increased to 32.3% from 29.9%, and operating margin to 13.3% from 12.8%.
- Cash flow: Operating cash flow was $87.1 for the first half, compared with $160.9 a year earlier. Capital expenditures were $31.0. Cash declined by $30.1 to $256.4.
- Balance sheet and debt: At June 30, cash was $256.4 and total debt was $16.2, down from $20.3 at year-end 2012. The company had no borrowings under its $300 million revolving credit facility and was in compliance with its covenants. Debt to total invested capital was 1.1%.
- Returns to shareholders: Dividends declared were $0.20 per share for Q2. The company repurchased $69.7 of shares in the first half; the board authorized an additional repurchase program of up to 15 million shares in July.
Changes versus the prior period
- Sales declined primarily because of lower volumes: down 4.9% in Q2 and 5.4% for the first half. Acquisitions partly offset the declines; foreign exchange also reduced sales.
- Higher gross margins reflected geographic mix, stable pricing and lower year-over-year input costs. SG&A increased 5.9% in Q2 and 8.3% in the first half, including acquisition costs and higher employee compensation; first-half costs also included higher foreign-exchange transaction losses.
- Q2 adjusted segment EBIT rose in North America and South America but fell in Europe, Asia Pacific and Harris Products Group. Asia Pacific was notably weak, with Q2 sales down 19.0% and adjusted EBIT down 83.7%. For the first half, adjusted EBIT also declined in Europe, Asia Pacific and Harris.
- First-half operating cash flow was lower mainly because of working-capital needs and a $75.0 voluntary contribution to U.S. defined-benefit pension plans, $39.0 more than in the prior-year period.
Outlook, risks and unusual items
- Management gave no specific earnings or sales guidance. It anticipates 2013 capital expenditures of approximately $60 million and expects to fund ongoing needs primarily through operating cash flow, cash balances and, if needed, available credit. Significant acquisitions could require additional financing.
- Venezuela’s February 2013 currency devaluation produced an $8.1 foreign-exchange transaction loss in SG&A and $4.1 of higher cost of goods sold from inventory liquidation. The filing also identifies $12.2 of first-half Venezuela devaluation charges as a special item for its non-GAAP reconciliations. Further losses could result from additional devaluation or government price and exchange controls.
- Rationalization and asset-impairment charges were $1.9 for the first half, primarily employee severance and related costs. The company said further rationalization actions could generate future charges.
- A Canadian tax reassessment disputes intercompany dividend deductions and would increase Canadian tax by $58.6 plus approximately $16.2 interest. The company deposited $84.1, contests the reassessment, and recorded no tax accrual for the disputed positions. An adverse outcome could materially affect results when resolved.
- The company reported approximately 15,033 plaintiffs in asbestos-related cases and other ordinary-course claims. It believes the claims will not materially affect its consolidated financial statements, based on its assessment and historical experience.
- Other stated risks include economic and market conditions, currency and interest-rate movements, commodity and energy prices, litigation, acquisition activity, and political or other disruptive events. Management said disclosure controls were effective and no material changes in internal control occurred during the quarter.
Important facts for investors to verify
- Whether soft demand—especially in Asia Pacific—and segment profitability improve in subsequent periods.
- How further Venezuelan exchange-rate changes or controls may affect earnings, inventory and cash conversion.
- The outcome and timing of the Canadian tax dispute, including the status of the $84.1 deposit and potential financial-statement effects.
- Whether operating cash flow recovers after the pension contribution and working-capital outflows, and whether planned capital spending remains near $60 million.
- Actual repurchases, dividends, and any additional financing or acquisition commitments.