Lincoln Electric Holdings, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Unless noted otherwise, dollar amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
Lincoln Electric manufactures welding, cutting and brazing products, serving industrial and infrastructure markets worldwide. Its five operating segments are North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group. The company reported approximately 10,000 employees and operations or joint ventures in 19 countries.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $2,813.3 million | $2,852.7 million |
| Gross profit / gross margin | $949.3 million / 33.7% | $942.7 million / 33.0% |
| Operating income / operating margin | $373.7 million / 13.3% | $407.0 million / 14.3% |
| Net income / net margin | $254.7 million / 9.1% | $293.8 million / 10.3% |
| Diluted EPS | $3.18 | $3.54 |
| Adjusted diluted EPS | $3.82 | $3.77 |
| Cash from operating activities | $401.7 million | $338.9 million |
| Capital expenditures | $73.0 million | $76.0 million |
FY 2014 sales fell 1.4%; volume declined 2.0%, partly offset by price increases of 1.8% and acquisitions adding 1.5%, while foreign exchange reduced sales 2.6%. Gross margin improved on geographic mix and operating improvements, but higher SG&A, rationalization and impairment charges, and Venezuelan currency losses weighed on operating and net income. Adjusted net income was $305.9 million in 2014 versus $313.2 million in 2013; adjusted measures exclude special items.
Fourth-quarter 2014 sales were $684.0 million versus $714.8 million a year earlier; net income was $75.2 million versus $88.3 million, and diluted EPS was $0.96 versus $1.07. Fourth-quarter gross profit was $231.1 million. The quarter included $0.2 million of net rationalization and impairment charges.
Operating cash flow rose $62.8 million year over year, helped by a $50.3 million Canadian tax-deposit refund and lower pension contributions and payments. Cash and equivalents were $278.4 million at year-end, down from $299.8 million. Total debt was $70.7 million, up from $19.1 million; the company had a $400 million revolving credit facility, with $50 million outstanding under it, and reported compliance with its covenants. Current assets were $1,098.7 million and current liabilities $492.4 million.
Material changes and segment trends
- North America Welding sales increased 2.9% to $1,700.9 million; adjusted EBIT rose 5.3% to $335.5 million.
- Europe Welding sales decreased 0.9% to $425.8 million, while adjusted EBIT increased 34.7% to $48.8 million, reflecting higher volume, lower manufacturing costs and improved mix.
- Asia Pacific Welding sales fell 8.4% to $243.8 million; adjusted EBIT decreased to $1.3 million. The company recorded $32.7 million of long-lived asset impairment charges in the segment.
- South America Welding sales declined 24.1% to $148.6 million and adjusted EBIT fell 72.2% to $16.0 million, primarily due to Venezuelan raw-material shortages, production disruption and foreign-exchange losses.
- Harris Products Group sales decreased 4.5% to $294.2 million, partly reflecting lower silver and copper prices; adjusted EBIT increased 2.6% to $28.6 million.
Acquisitions included Easom Automation Systems in October 2014, adding automation capabilities. Share repurchases totaled $307.2 million for 4.4 million shares; cash dividends paid were $73.3 million. The annual dividend declared per share rose to $0.98 from $0.83.
Outlook, risks and unusual items
- The company did not provide specific revenue or earnings guidance in the supplied filing text. It expected 2015 capital expenditures of $65–$75 million, approximately $400 million of share repurchases, and a voluntary U.S. pension contribution of $21 million. Management expected 2015 defined-benefit pension expense to increase by approximately $10–$12 million.
- Venezuela was a significant uncertainty: 2014 Venezuelan sales were $71.8 million, and operations recorded a net loss of $8.2 million. Currency controls, restricted access to foreign currency, price controls and possible further devaluation could affect production, cash repatriation and earnings. The company estimated that remeasurement at the newly announced SIMADI rate could produce about $22 million of additional cost of goods sold, based on year-end inventory, and about $1 million of SG&A gains based on its monetary net liability position.
- 2014 included $30.1 million of net rationalization and asset impairment charges, mainly non-cash asset impairments partly offset by asset-sale gains, and $21.1 million of Venezuelan remeasurement losses. Reported diluted EPS was $3.18 compared with adjusted diluted EPS of $3.82.
- Demand is cyclical and tied to industrial activity and capital spending. Other cited risks include foreign-exchange and raw-material volatility, international political and regulatory risks, customer losses, product liability, pensions and cybersecurity.
- The company was a co-defendant in asbestos-related claims involving approximately 14,634 plaintiffs at year-end. It said it intended to contest the claims and, based on its assessment and insurance, did not expect their resolution to materially affect consolidated financial statements; the ultimate exposure remains difficult to assess.
- Goodwill fair value exceeded carrying value by at least 10% at the 2014 test date, but future results could differ if revenue growth, margins or discount-rate assumptions change. The company identified assets for divestiture and classified them as held for sale.
Important facts for investors to verify
- Whether the sales and earnings weakness in South America and Asia Pacific persists, and how much reported performance is affected by currencies versus underlying demand.
- The effect of Venezuelan exchange mechanisms and controls on future earnings, inventory valuation, cash access and the ability to maintain normal production.
- Whether operating cash flow remains strong after excluding the Canadian tax refund and considering future pension funding, capital spending, dividends and planned repurchases.
- The nature, timing and proceeds of the planned divestiture, and whether further impairment or rationalization charges arise.
- Debt utilization, covenant headroom and the valuation assumptions underlying contingent consideration and the obligation to acquire an additional subsidiary interest.