Lincoln Electric Holdings, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial amounts below are in millions of dollars unless stated otherwise. Lincoln Electric designs and manufactures welding, cutting, brazing and soldering products, reported across five operating segments.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $744.0 | $699.3 | $1,471.2 | $1,298.5 |
| Gross profit / margin | $225.0 / 30.2% | $195.5 / 28.0% | $440.3 / 29.9% | $356.9 / 27.5% |
| Operating income / margin | $96.0 / 12.9% | $80.0 / 11.4% | $187.7 / 12.8% | $139.5 / 10.7% |
| Net income | $66.3 | $57.0 | $130.6 | $103.9 |
| Diluted EPS | $0.79 | $0.68 | $1.54 | $1.23 |
| Cash provided by operations | Not stated for quarter | Not stated for quarter | $160.9 | $45.6 |
- Q2 sales rose 6.4%; management attributed the change to volume growth of 2.1%, acquisitions of 6.3% and pricing of 1.6%, partly offset by a 3.6% unfavorable foreign-exchange effect. Six-month sales increased 13.3%, including 7.0% volume, 6.2% acquisitions and 2.6% pricing, offset by 2.4% unfavorable currency.
- For the six months, adjusted diluted EPS was $1.57 versus $1.18 a year earlier. This non-GAAP measure excludes specified special items; reported diluted EPS was $1.54 versus $1.23.
- At June 30, cash and equivalents were $308.0, total debt was $23.1, and shareholders’ equity was $1,265.3. Debt to total invested capital was 1.8%, down from 8.0% at year-end 2011. The company repaid an $80.0 million note at maturity in March.
- Current assets were $1,236.3 and current liabilities $459.4. Cash decreased $53.1 during the six months, mainly due to debt repayment, acquisitions and share repurchases.
- Six-month investing cash outflow was $76.8, including $49.3 for acquisitions and $26.2 for capital expenditures. Financing cash outflow was $136.2, including $84.2 of long-term debt payments, $40.1 of treasury-share purchases and $28.4 of dividends paid.
Changes, segments and management commentary
- Profitability improved year over year: Q2 gross margin increased 2.2 percentage points and operating margin increased 1.5 points. Management cited pricing, operating leverage and, for the six-month period, favorable regional mix; lower margins at recent acquisitions and rising material costs were offsets.
- North America was the principal growth driver. Q2 segment sales increased 29.4%, including acquisition contributions; Europe and Asia Pacific sales fell 17.8% and 16.8%, respectively, amid softer international demand. For the six months, North America sales rose 32.4%, while Europe and Asia Pacific declined 5.2% and 6.5%.
- Currency movements reduced Q2 sales by $25.5 million and six-month sales by $31.6 million. Management estimated unfavorable translation effects on net income of $1.3 million for Q2 and $1.8 million for the six months.
- Two 2012 acquisitions were completed: Weartech, a producer of wear-resistant welding consumables, and Wayne Trail Technologies, a manufacturer of automated systems and tooling. Their preliminary purchase accounting recorded goodwill of $10.2 million and $14.4 million, respectively.
- Q2 special items included $1.3 million of rationalization charges and a $1.4 million charge related to Venezuelan labor-law changes. Management expects further rationalization charges of $0.8–$1.75 million for Australia, $1.0–$1.4 million for the Oceanside-Reno consolidation, and $1.0–$2.5 million for Russia.
Outlook, risks and unusual items
- Management forecast 2012 capital expenditures of $60–$70 million. The filing provides no specific full-year sales or earnings guidance and cautions that first-half results are not necessarily indicative of full-year results.
- In July 2012, the company entered a new five-year $300 million revolving credit agreement, expandable by up to $100 million subject to conditions. It replaced the prior $150 million facility, which was due to expire in November 2012. The company reported compliance with its covenants at June 30.
- A Canadian tax reassessment received in July would claim $56.5 million of additional tax plus approximately $14.3 million of interest through June 30, 2012. The company disputes the assessment, recorded no accrual for it, and expects to deposit at least half of the assessed tax and interest during 2012. An adverse resolution could materially affect the financial statements in the quarter decided.
- A U.S. defined-benefit pension lump-sum option could trigger settlement accounting if payments exceed approximately $52 million. Maximum potential payments are estimated at about $100 million; management estimates a pre-tax loss of up to $38 million in Q4 2012, depending on elections and actuarial factors. The company had contributed $36 million to U.S. defined-benefit plans in the first half and expected to contribute up to $60 million during 2012.
- Venezuela is accounted for as a highly inflationary economy. Its bolivar-denominated monetary net asset exposure rose to $13.4 million from $6.8 million at year-end, partly because of limited currency-conversion opportunities; future earnings effects depend on exchange rates and monetary balances.
- Product-liability matters include approximately 15,140 asbestos plaintiffs. The company reported that conditions for dismissal of substantially all pending manganese claims had been satisfied and dismissals were being entered. Management believes ordinary-course claims will not materially affect consolidated financial statements, but the Canadian tax dispute remains uncertain.
- Other stated risks include economic and international demand conditions, foreign exchange and commodity prices, litigation, rationalization costs, regulatory changes and Argentina’s import controls. Disclosure controls were assessed as effective at June 30, 2012.
Important facts for investors to verify
- Whether the Canadian reassessment results in a required cash deposit, tax expense or material adverse judgment, and the timing and amount of the deposit.
- Actual pension lump-sum elections, payments and any Q4 settlement-accounting loss versus the stated maximum estimate.
- Progress and final costs of the Australia, Russia and Oceanside-Reno rationalization plans.
- Whether international demand, foreign-exchange movements and raw-material costs continue to offset North American growth and pricing.
- Final purchase accounting and subsequent operating contribution from Weartech and Wayne Trail, and the company’s execution of its $60–$70 million capital-spending plan.