Lincoln Electric Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed October 30, 2019. The company designs and manufactures welding, cutting, automation, brazing and soldering products, reported in Americas Welding, International Welding and The Harris Products Group. Financial amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $730.8 | $737.1 | $2,267.0 | $2,284.8 |
| Gross profit / margin | $238.4 / 32.6% | $251.6 / 34.1% | $766.7 / 33.8% | $778.2 / 34.1% |
| Operating income / margin | $88.5 / 12.1% | $100.8 / 13.7% | $288.2 / 12.7% | $280.6 / 12.3% |
| Net income | $72.5 | $70.5 | $229.4 | $200.2 |
| Diluted EPS | $1.17 | $1.07 | $3.64 | $3.03 |
| Adjusted diluted EPS (non-GAAP) | $1.09 | $1.21 | $3.55 | $3.53 |
For the first nine months, operating cash flow was $280.7 million, capital expenditures were $53.6 million, and cash used in investing and financing was $178.8 million and $302.5 million, respectively. Cash ended the period at $156.6 million, down from $358.8 million at year-end 2018. Total debt was approximately $727.2 million, comprising $13.3 million short-term and $713.9 million long-term debt; management reported debt to total invested capital of 47.2%, versus 44.2% at year-end. The $400 million revolving credit facility had no borrowings, and the company reported compliance with debt covenants.
Changes versus the prior comparable period
- Q3 sales declined 0.9%; lower volume and unfavorable foreign exchange outweighed acquisition contributions. For the nine-month period, sales declined 0.8%, with volume down 4.3% and currency effects down 2.1%, partly offset by acquisitions and pricing.
- Gross margin contracted 1.5 percentage points in Q3 and 0.3 points year to date. Management cited product mix, lower volumes and acquisitions; favorable LIFO effects partly offset these pressures.
- Q3 operating income fell 12.1%, while nine-month operating income rose 2.7%, helped by substantially lower rationalization charges year over year.
- Reported net income and EPS increased in both periods, but Q3 adjusted EPS declined to $1.09 from $1.21, and nine-month adjusted EPS was $3.55 versus $3.53. Lower tax rates and special items materially influenced reported comparisons.
- Segment results were mixed: Q3 Americas Welding sales fell 2.3% and adjusted EBIT fell 17.0%; International Welding sales fell 2.0% and adjusted EBIT fell 5.0%; Harris Products Group sales rose 11.5% and adjusted EBIT rose 27.2%. Year-to-date International Welding sales declined 9.2%, while Harris sales rose 8.6%.
Outlook, commentary and notable items
- Management anticipated 2019 capital expenditures of $65 million to $75 million, primarily for maintenance and operational-effectiveness investments. The filing provides no specific full-year revenue or earnings guidance.
- Management said operating cash flow, existing cash, credit facilities and potential capital-market borrowing should meet foreseeable cash needs; significant acquisitions could require additional financing. It noted softer demand in European and Asian markets and a current economic environment affecting demand.
- Acquisitions included Baker Industries in April and a controlling stake in Turkey-based Askaynak in July. The Askaynak transaction generated a $7.6 million change-in-control gain in 2019; acquired-inventory step-up amortization also affected results. These items help explain why GAAP and adjusted earnings trends differ.
- Q3 foreign-currency translation reduced other comprehensive income by $24.0 million. The company continued rationalization actions in International Welding; it said further actions could produce charges in future periods.
- Cash returned to shareholders included $221.9 million of share repurchases and $89.2 million of dividends during the first nine months. The quarterly dividend declared was $0.47 per share; 3.6 million shares remained authorized for repurchase at period-end.
- Risk factors include economic and market conditions, currency movements, acquisitions and integration, commodities and energy prices, tariffs, tax-law changes, litigation and political or other disruptions. The company was a co-defendant in asbestos cases involving approximately 3,283 plaintiffs; claim amounts were generally unspecified. Management reported disclosure controls were effective and no material change in market-risk exposure since year-end.
Important facts for investors to verify
- Whether weaker volumes and gross-margin pressure persist, especially in Americas and International Welding, and whether Harris Products Group strength continues.
- How much reported earnings growth reflects sustainable operations versus lower taxes, the Askaynak gain and other special items; compare GAAP results with the company’s non-GAAP reconciliations.
- Cash conversion and working-capital trends: inventory rose to $411.1 million from $361.8 million at year-end, and average operating working capital was 19.2% of sales versus 16.5% at year-end.
- Acquisition integration, financing needs and leverage, including the effect of continued buybacks and dividends on cash and debt levels.
- Developments in asbestos litigation, tax audits and unrecognized tax benefits, rationalization charges, and the company’s stated economic, currency and geopolitical risks.