Lincoln Electric Holdings, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Lincoln Electric designs and manufactures welding, cutting, automation, brazing and soldering products. Amounts below are in millions of U.S. dollars, except per-share data and percentages.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $759.2 | $757.7 | +0.2% |
| Gross profit / margin | $258.4 / 34.0% | $256.6 / 33.9% | Margin +0.1 pp |
| Operating income / margin | $94.5 / 12.4% | $85.2 / 11.2% | +10.9% |
| Net income | $71.5 | $60.8 | +17.5% |
| Diluted EPS | $1.12 | $0.92 | +21.7% |
| Cash from operations | $25.9 | $43.8 | Down $17.9 |
Revenue was nearly flat as price increases (+4.5%) and acquisitions (+2.4%) were largely offset by lower volume (-3.6%) and unfavorable foreign exchange (-3.2%). Management attributed improved gross margin to pricing and segment mix. Net income benefited from higher sales, a lower effective tax rate (23.1% versus 27.8%) and lower rationalization charges.
Adjusted EBIT, a non-GAAP measure, was $102.6 million, up 1.1%; adjusted diluted EPS was $1.17 versus $1.10. The filing reconciles these measures to GAAP and excludes specified special items.
Segments and material changes
- Americas Welding: Sales of $457.7 million, up 5.3%; adjusted EBIT of $81.8 million, up 5.6%, with margin flat at 16.8%. Pricing and acquisitions partly offset lower volume.
- International Welding: Sales of $218.1 million, down 11.8%; adjusted EBIT of $13.3 million, down 10.9%. Softer European demand, integration activity and unfavorable currency weighed on sales; adjusted margin was 6.0%, versus 5.9%.
- The Harris Products Group: Sales of $83.4 million, up 10.3%; adjusted EBIT of $10.5 million, up 14.0%. Higher consumables volume, acquisitions and mix supported results.
Q1 2019 rationalization and asset impairment charges were $3.5 million, versus $10.2 million in Q1 2018. The company continued International Welding restructuring, including workforce reductions and manufacturing consolidation. Adjusted EBIT excludes these charges and acquisition transaction/integration costs.
Cash flow, debt and liquidity
- Cash and cash equivalents were $267.1 million at March 31, down $91.7 million from year-end 2018; $193.1 million was held by international subsidiaries.
- Operating cash flow was $25.9 million. Management attributed the year-over-year decline primarily to the timing of tax payments. Investing cash outflow was $13.9 million, including $16.3 million of capital expenditures.
- Financing cash outflow was $105.5 million, including $75.6 million of share repurchases and $30.6 million of dividends paid. The company repurchased approximately 0.8 million shares at an average $84.34; 5.3 million shares remained authorized for repurchase.
- Total debt was approximately $705.8 million; total debt to total invested capital rose to 44.9% from 44.2% at December 31, 2018. The company had no borrowings under its $400 million revolving credit facility or $700 million aggregate uncommitted shelf facilities and reported compliance with debt covenants.
- Working capital indicators included average operating working capital equal to 18.0% of sales, versus 16.5% at year-end 2018. Days sales in inventory rose to 96.2 from 95.1 at year-end; receivable days increased to 54.3 from 52.7.
Outlook, risks and unusual items
The company expected 2019 capital expenditures of $65–$75 million. Management stated it expected to meet ongoing cash needs for the foreseeable future using operating cash flow, cash balances and available financing. No full-year revenue or earnings guidance is provided in the filing.
Key risks identified include economic and market conditions, softer demand, foreign exchange and currency devaluation, input and energy prices, tariffs, interest rates and capital-market access, tax-law changes, litigation, rationalization costs, and the ability to complete and integrate acquisitions. The filing reports no material change in market-risk exposure since year-end 2018.
After quarter-end, the company acquired Baker Industries in April 2019, a provider of custom tooling, parts and fixtures serving mainly automotive and aerospace markets. It also paid a $0.47-per-share dividend in April. Adoption of the new lease standard on January 1, 2019 recorded $53.6 million of operating lease liabilities and, according to the company, did not materially affect earnings, cash flows or debt covenants.
Contingencies include asbestos-related cases involving approximately 3,288 plaintiffs; the filing does not provide a clear estimate of potential loss. Unrecognized tax benefits totaled $27.9 million, and management said up to $1.8 million could reasonably be reduced by the end of Q1 2020. Management reported disclosure controls were effective at March 31, 2019.
Important facts for investors to verify
- Whether the weak volume trend—especially in International Welding—and foreign-exchange headwinds persist, and whether pricing can continue to offset cost pressures.
- Whether operating cash flow improves from Q1 and working capital remains controlled, given cash fell substantially due in large part to buybacks and dividends.
- How the International Welding restructuring, acquisition integration and Baker Industries purchase affect future costs, growth and margins.
- The sustainability of earnings growth: Q1 GAAP improvement benefited from a lower tax rate and lower restructuring charges; adjusted measures exclude special items.
- Any developments in asbestos litigation, tax audits and unrecognized tax benefits, for which the filing gives no clear quantified estimate of total potential exposure.