Lincoln Electric Holdings, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; fourth-quarter figures are included where relevant. Amounts below are in U.S. dollars, rounded to millions, except per-share data and percentages.
Business context
Lincoln Electric manufactures welding, cutting, brazing and soldering equipment and consumables, automation systems and related products. It reports three segments: Americas Welding, International Welding and The Harris Products Group. Demand is tied to industrial activity and capital spending; management notes that demand is cyclical and generally seasonally stronger in the second and third quarters.
Key financial results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $3,003.3 | $3,028.7 | (0.8%) |
| Gross profit / margin | $1,007.6 / 33.5% | $1,028.5 / 34.0% | Margin down 0.5 percentage points |
| Operating income / margin | $370.9 / 12.4% | $375.5 / 12.4% | Income down 1.2% |
| Net income / margin | $293.1 / 9.8% | $287.1 / 9.5% | Income up 2.1% |
| Diluted EPS | $4.68 | $4.37 | Up $0.31 |
| Adjusted diluted EPS (non-GAAP) | $4.70 | $4.82 | Down $0.12 |
| Cash provided by operations | $403.2 | $329.2 | Up $74.0 |
| Capital expenditures | $69.6 | $71.2 | Down $1.6 |
Full-year sales reflected lower volume (down $140.9 million) and unfavorable foreign exchange (down $51.4 million), partly offset by acquisitions ($129.2 million) and pricing ($37.7 million). Gross margin weakened on product mix, lower volumes and acquisitions; a favorable LIFO credit compared with a prior-year LIFO charge partly offset these pressures. Reported net income benefited from lower rationalization charges, a $7.6 million Askaynak change-in-control gain and a lower effective tax rate. Adjusted EBIT fell 5.2% to $400.8 million, and its margin declined to 13.3% from 14.0%.
Segments: Americas Welding sales rose 0.5% to $1,815.7 million, but adjusted EBIT fell 7.3% to $315.7 million. International Welding sales decreased 7.1% to $854.4 million and adjusted EBIT decreased 7.4% to $50.3 million, with softer European and Asian demand and unfavorable currency effects. Harris Products Group sales increased 10.2% to $333.2 million and adjusted EBIT increased 25.0% to $45.7 million, supported by consumables volume.
Fourth quarter: Net sales were $736.3 million versus $743.8 million in Q4 2018; net income was $63.7 million versus $86.8 million; diluted EPS was $1.03 versus $1.35. Quarterly results included special items, so reported quarterly comparisons should be read with the filing’s itemized disclosures.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $199.6 million at year-end, down from $358.8 million. Current assets were $1,075.6 million and current liabilities $563.1 million (current ratio approximately 1.9).
- Total debt was $747.3 million, including $712.3 million of long-term debt and about $34.9 million of short-term borrowings; net debt was approximately $547.7 million. The weighted-average effective interest rate on the senior notes was 3.3%, with a 14-year average remaining term. The company reported covenant compliance.
- Operating cash flow less capital expenditures was approximately $333.6 million. Cash used for acquisitions was $134.7 million; treasury-share purchases were $292.7 million and dividends paid were $117.9 million.
- Dividends declared per share rose to $1.90 from $1.64. The company repurchased 3.4 million shares during 2019 for approximately $288.1 million. A new authorization for up to 10 million additional shares was approved in February 2020.
- Management expects 2020 capital expenditures of $65 million to $75 million and anticipates retirement-plan expense to decrease by approximately $1 million to $2 million. The filing provides no clear numeric 2020 sales or earnings guidance.
Changes, unusual items and risks
- 2019 acquisitions included Baker Industries and a controlling stake in Askaynak. Acquisitions contributed to sales and added goodwill and intangible assets; acquired inventory step-up amortization and integration costs affected results. Goodwill was $337.1 million at year-end, up from $281.3 million.
- Rationalization and asset impairment charges were $15.2 million in 2019 versus $25.3 million in 2018, mainly for severance, impairments and asset disposals. The company says it may undertake additional rationalization actions.
- Reported 2019 results also included $4.9 million of tax benefits relating to a tax settlement and deductions associated with an investment in a subsidiary, a $3.6 million after-tax gain on property disposals, and the $7.6 million Askaynak gain. Adjusted measures exclude specified special items and are not GAAP measures.
- Operating cash flow improved primarily because of working-capital movements and cash tax payments and receipts. Cash declined as acquisitions, repurchases and dividends exceeded operating cash generation plus investing inflows.
- Principal risks include economic and industrial downturns, input-cost and supply volatility, foreign exchange and international-market exposure, acquisition integration, competition, pension assumptions, environmental and product liability claims, cybersecurity and the transition from LIBOR.
- The company was a co-defendant in asbestos-related cases involving approximately 3,233 plaintiffs at year-end. It intends to contest claims and believes insurance and defenses apply; it says aggregate resolution is not expected to materially affect the financial statements, while noting that potential losses are difficult to estimate.
- Management and the auditor reported effective internal control over financial reporting. The assessment excluded Baker and Askaynak, which together represented 8.8% of consolidated assets and 2.2% of 2019 revenue; integration into company systems and controls was expected during 2020. The auditor issued an unqualified opinion and identified acquired-intangible valuation and uncertain tax positions as critical audit matters.
Important facts for investors to verify
- Whether softer volumes, especially in International Welding, persist and how segment margins respond.
- Whether acquisition integration delivers expected growth and returns, including the assumptions supporting acquired intangible and goodwill valuations.
- Whether working-capital-driven cash-flow improvement is sustainable, given the decline in cash and substantial spending on repurchases, dividends and acquisitions.
- Debt maturities, borrowing capacity, covenant headroom and implications of the LIBOR transition.
- Developments in asbestos, product-liability and tax matters, as well as the company’s completion of acquired-business control integration.