Lincoln Electric Holdings, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Unless noted, financial amounts below are in U.S. dollars in millions; the filing reports most amounts in thousands. The company manufactures welding, cutting and brazing equipment and consumables, with operations across five segments in 2015.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $2,535.8 | $2,813.3 | -9.9% |
| Gross profit / gross margin | $841.1 / 33.2% | $949.3 / 33.7% | Margin down 0.5 percentage points |
| Operating income / operating margin | $181.7 / 7.2% | $373.7 / 13.3% | Down substantially, including unusual charges |
| Net income | $127.5 | $254.7 | -49.9% |
| Diluted EPS | $1.70 | $3.18 | -46.5% |
| Operating cash flow | $310.9 | $401.7 | -$90.8 |
| Capital expenditures | $50.5 | $73.0 | -$22.5 |
| Cash and cash equivalents | $304.2 | $278.4 | +$25.8 |
| Total debt | $354.6 | $70.7 | +$284.0 |
Operating cash flow less capital expenditures was approximately $260.4 million in 2015. Year-end current assets were $936.0 million and current liabilities $370.1 million (an approximate 2.5 current ratio). The company had no borrowings under its $400 million revolving credit facility at year-end. Net debt was approximately $50.4 million.
Sales fell primarily because of lower volume (down 8.0%) and unfavorable foreign exchange (down 8.1%), partly offset by price increases (up 4.0%) and acquisitions (up 2.2%). Management cited softer industrial demand, weakness in oil and gas and U.S. export markets, and a stronger U.S. dollar. Adjusted diluted EPS, a non-GAAP measure excluding special items, was $3.48 versus $3.82 in 2014.
Material changes and unusual items
- 2015 results included $142.7 million of non-cash pension settlement charges, primarily associated with a group annuity contract. The transaction transferred specified retiree benefit obligations to the insurer and was funded from plan assets.
- Rationalization and asset impairment charges totaled $20.0 million, including $13.7 million primarily for severance and related costs, plus goodwill and other asset impairments.
- Venezuelan currency remeasurement losses were $27.2 million. Adoption of the SIMADI exchange rate also led to $22.9 million of inventory charges in cost of goods sold. Venezuela generated $84.7 million of sales and a reported net loss of $24.0 million.
- Foreign exchange movements had an unfavorable $11.4 million translation effect on net income. Gross profit also reflected higher warranty costs and Venezuelan inventory charges; a LIFO credit partially offset these pressures.
- The company issued $350 million of senior unsecured notes in 2015, with maturities from 2025 to 2045 and a weighted average effective rate of 3.5%. Year-end debt-to-total-invested-capital was 27.6%, versus 5.2% in 2014.
- Cash returned to shareholders included $87.0 million of dividends and $399.5 million of share repurchases. The annual dividend declared per share rose to $1.19 from $0.98.
Segments, outlook and management commentary
Adjusted EBIT declined in North America Welding ($306.7 million, down 8.6%), Europe Welding ($31.3 million, down 35.9%), and South America Welding ($5.6 million, down 65.1%). Asia Pacific Welding improved to $7.4 million from $1.3 million, while Harris Products Group was $27.9 million, down 2.4%. Segment adjusted EBIT excludes items that management classifies as special; reported GAAP operating income includes them.
The filing provides no consolidated earnings or revenue guidance. Management anticipated 2016 capital expenditures of $65–$75 million, approximately $400 million of share repurchases, and a voluntary $20 million U.S. pension contribution. It expected defined-benefit pension expense, excluding settlements, to decrease by approximately $1–$3 million. The company said operating cash flow, cash balances, credit facilities and capital markets should fund ongoing needs; a significant acquisition could require additional financing. In the first quarter of 2016, after the reporting period, the company reorganized its segments into Americas Welding, International Welding and Harris Products Group.
Risks and contingencies
- Industrial demand is cyclical and sensitive to manufacturing capital spending. Raw-material and energy costs, competition, and foreign currency movements may affect margins and results.
- Venezuela presents elevated currency, price-control, cash repatriation and operating risks. The company continued to consolidate its subsidiary at year-end but disclosed that future deconsolidation could become necessary. Its stated total investment there was approximately $35 million.
- The company was a co-defendant in asbestos-related claims involving approximately 8,415 plaintiffs at year-end. It intends to contest the cases and cited insurance and cost-sharing arrangements; it said the aggregate long-term impact is difficult to assess and that a range of possible losses often cannot be estimated.
- Other disclosed risks include product liability and warranty claims, pension-market exposure, environmental compliance, cyber and information-technology risks, tax audits, and acquisition integration and contingent-payment obligations. Management stated that existing environmental compliance had not materially harmed earnings.
Important facts for investors to verify
- How much of the earnings decline reflects recurring operating weakness versus the pension settlement, Venezuelan charges and other special items; review both GAAP results and the company’s non-GAAP reconciliations.
- Whether volume, foreign-exchange and demand pressures persist, particularly in Europe, Asia Pacific and South America, and whether segment margins recover.
- The cash, earnings and operational consequences of Venezuela’s currency restrictions, SIMADI-rate assumptions and potential deconsolidation.
- The sustainability of substantial share repurchases and dividends relative to operating cash flow, debt service and planned capital spending.
- Developments in asbestos litigation, pension funding and investment returns, and acquisition-related contingent consideration.