Lincoln Electric Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions unless otherwise noted.
Business context and financial performance
Lincoln Electric designs and manufactures welding and cutting products and sells brazing and soldering alloys globally. Its reportable businesses are North America, Europe, Asia Pacific and South America Welding, and The Harris Products Group.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $664.7m | $728.5m | $1,322.6m | $1,413.6m |
| Gross profit / margin | $225.8m / 34.0% | $250.3m / 34.4% | $446.2m / 33.7% | $476.6m / 33.7% |
| Operating income / margin | $96.8m / 14.6% | $112.3m / 15.4% | $187.3m / 14.2% | $192.7m / 13.6% |
| Net income | $70.9m | $77.3m | $139.3m | $133.8m |
| Diluted EPS | $0.94 | $0.96 | $1.82 | $1.65 |
| Operating cash flow | Not separately stated | Not separately stated | $130.1m | $118.6m |
Material changes and segment results
- Q2 sales fell 8.8% year over year: volume was down 6.5% and foreign exchange reduced sales 5.9%, partly offset by 2.0% from acquisitions and 1.6% from pricing. For the first half, sales declined 6.4%, reflecting a 3.7% volume decrease and 6.9% adverse currency impact, partly offset by acquisitions and price increases.
- Management attributed weaker volumes to softer economic conditions and accelerating weakness in oil and gas and U.S. export markets. The stronger U.S. dollar reduced sales across all segments.
- Q2 net income declined 8.3%, while first-half net income rose 4.1%. First-half diluted EPS increased to $1.82 from $1.65; however, adjusted diluted EPS, a non-GAAP measure excluding special items, declined to $1.83 from $1.92. Lower taxes and fewer weighted-average shares supported reported EPS.
- First-half gross margin was unchanged year over year. Q2 gross margin eased 0.4 percentage points; the company cited lower volume and unfavorable currency translation, partly offset by a LIFO credit. The 2014 comparison included a $3.9m insurance-settlement gain.
- First-half adjusted segment EBIT declined in North America, Europe and South America; Asia Pacific and Harris improved. South America’s adjusted EBIT fell 73.0%, with lower Venezuelan margins and unfavorable currency effects among the cited drivers. Asia Pacific benefited from lower material costs and operational efficiencies; Harris benefited from mix and equipment volumes.
Liquidity, debt and capital allocation
- At June 30, cash was $312.7m, current assets $1,089.2m and current liabilities $470.6m. Total debt was $214.2m, up from $70.7m at year-end 2014; reported cash exceeded total debt by approximately $98.6m.
- First-half operating cash flow was $130.1m; investing cash outflow was $25.8m, including $29.2m of capital expenditures. Financing cash outflow was $61.3m, including $158.5m of share repurchases and $44.2m of dividends paid. Cash increased $34.4m during the period.
- The company had a $400m revolving credit facility, with $40m drawn at June 30, and reported compliance with debt covenants. It issued $350m of senior unsecured notes in April; $150m was received and recorded by June 30, with the remaining $200m expected in August. The notes have 10-to-30-year maturities and a weighted-average effective rate of 3.5%.
- Management anticipated 2015 capital expenditures of $65m–$70m and approximately $400m of share repurchases. The company repurchased 2.3m shares in the first half; 9.0m shares remained authorized. The declared quarterly dividend was $0.29 per share, up from $0.23 a year earlier.
Outlook, risks and unusual items
- The filing provides no quantified sales, earnings or margin guidance. Management said operating cash flow, cash balances, existing credit facilities and capital-market access were expected to meet ongoing funding needs; significant acquisitions could require additional capital.
- Venezuela remains a significant uncertainty. The company used a SICAD exchange rate of 12.8 bolivars per U.S. dollar at June 30, while the SIMADI rate was 197.3. Management estimated that conversion at SIMADI could produce approximately $19m of additional cost of goods sold and $4m of SG&A charges, based on then-current balances. Government currency restrictions could affect payments and operations; the company continued consolidating its Venezuelan subsidiary.
- Venezuelan operations generated $46.2m of first-half sales and $3.2m of net income. Requests awaiting government approval included $7.9m for dividends and $7.9m for other payments, outstanding for more than a year.
- First-half rationalization charges were $1.2m, primarily severance in Europe Welding; the company expected up to $0.4m in additional charges. It also classified $22.8m of assets and $5.9m of liabilities in Asia Pacific as held for sale.
- Other notable items included $25.0m of Canadian tax-deposit refunds and $1.6m of related interest received in Q1; a $1.8m gain from liquidation of a foreign subsidiary; and increased interest expense partly tied to an adjustment to expected consideration for acquiring additional ownership in a subsidiary.
- The company cited economic conditions, foreign exchange and devaluation, commodity and energy prices, credit-market access, litigation, regulatory complexity and political events among forward-looking risks. It reported approximately 9,333 plaintiffs in asbestos-related cases at June 30 and stated that it did not expect the proceedings, individually or collectively, to materially affect its consolidated financial statements.
Important facts for investors to verify
- Whether demand weakness, particularly in oil and gas and U.S. exports, persists and how it affects segment volumes and margins.
- How exchange rates and currency controls affect Venezuelan earnings, cash access, payments and the company’s ability to maintain operations.
- The timing and receipt of the remaining $200m note proceeds, total debt trends, and continued compliance with credit covenants.
- Execution of planned 2015 capital spending and share repurchases, alongside cash generation and dividend commitments.
- Progress and ultimate proceeds from the Asia Pacific divestiture, and final costs of the Europe rationalization plan.
- Whether reported earnings comparisons remain supported by lower tax rates and share-count reductions; compare GAAP results with the company’s adjusted, non-GAAP measures.