Lincoln Electric Holdings, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless stated otherwise. Lincoln Electric designs and manufactures arc welding and cutting products, and brazing and soldering alloys. Dollar amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Net sales | $599.2 | $471.0 | Up 27.2% |
| Gross profit / margin | $161.4 / 26.9% | $123.3 / 26.2% | Profit up 30.9%; margin up 0.7 percentage points |
| Operating income / margin | $59.5 / 9.9% | $34.8 / 7.4% | Up 71.1% |
| Net income | $46.9 | $23.7 | Up 97.7%; includes a $4.8 tax-audit settlement benefit in 2011 |
| Diluted EPS | $1.11 | $0.55 | Adjusted diluted EPS was $1.00 vs. $0.58 |
| Operating cash flow | $16.7 | $15.6 | Up $1.1 |
| Capital expenditures | $15.5 | $9.8 | Management expects about $60.0 for full-year 2011 |
| Cash and cash equivalents | $341.4 at March 31 | $366.2 at December 31, 2010 | Quarterly decrease of $24.8 |
| Total debt | $97.2 at March 31 | $97.7 at December 31, 2010 | Debt to total invested capital declined to 7.4% from 7.8% |
Operating cash flow was more than offset by investing outflows of $33.2 million, including $17.9 million for acquisitions and $15.5 million of capital expenditures, and financing outflows of $11.6 million. Cash decreased by $24.8 million. Inventory and receivables rose as sales expanded; management reported net operating working capital to sales of 22.1%, versus 20.7% at year-end 2010. The current ratio, calculated from reported balances, was approximately 2.4 at March 31, 2011.
The $80.0 million Series C note is due in March 2012. The company reported $145.9 million available under its $150.0 million credit line and compliance with debt covenants. Cash dividends declared were $0.31 per share, compared with $0.28 in Q1 2010.
Material changes and management commentary
- Sales growth reflected higher volume across every segment, price increases, acquisitions and favorable foreign exchange. Consolidated sales gains included volume of $78.6 million, price of $30.4 million, currency of $10.7 million and acquisitions of $8.5 million.
- Management attributed higher volumes to improving industrial economies and modest market-share gains. Pricing reflected increases implemented in response to raw-material costs; Harris pricing also reflected pass-through of higher silver and copper costs.
- SG&A increased $13.8 million, but declined to 17.0% of sales from 18.6%. Higher bonuses, selling, administrative and R&D costs, currency translation and foreign-exchange transaction losses were partly offset by lower legal expenses.
- Reported net income benefited from a $4.8 million tax-audit settlement adjustment. The effective tax rate was 22.5%, versus 31.6% in Q1 2010. Excluding disclosed special items, adjusted net income was $42.3 million versus $24.8 million.
- Segment sales increased year over year in all businesses: North America 21.4%, Europe 34.9%, Asia Pacific 21.7%, South America 49.8% and Harris Products Group 37.1%. Segment profitability varied; Asia Pacific Welding reported adjusted EBIT of $0.1 million.
Acquisitions, outlook, risks and unusual items
- Acquired Russian welding-consumables manufacturer Severstal on March 11 for approximately $16.6 million in cash and assumed debt; preliminary goodwill was $8.4 million. Acquired Arc Products in January for $3.3 million in cash plus contingent consideration initially fair-valued at $3.8 million. Acquisition pro forma results were not presented because the income-statement impact was not material.
- Management said ongoing cash needs should be met through operating cash flow, existing cash and, if needed, credit facilities. No specific revenue or earnings guidance was provided; expected 2011 capital expenditures were approximately $60 million.
- Rationalization charges were $0.4 million in Q1 2011. Management expected no further material costs from these actions in 2011; the related $1.3 million liability was expected to be substantially paid by year-end.
- Venezuela is accounted for as a highly inflationary economy, with foreign-exchange movements potentially affecting earnings. The company reported a $2.0 million net bolivar-denominated monetary liability at quarter-end.
- Risks cited include economic and market conditions, commodity and energy prices, currency and interest rates, litigation, regulatory complexity, acquisitions and disruptions from political unrest, labor disputes or natural disasters. The filing reports asbestos claims involving approximately 16,841 plaintiffs and manganese-related claims involving approximately 1,195 plaintiffs; management believed resolution would not materially affect the consolidated financial statements.
- On April 29, 2011, the company announced a two-for-one stock split, payable as a stock dividend on May 31 to holders of record May 16. Reported share and per-share amounts were not split-adjusted.
Important facts for investors to verify
- How much of the strong reported earnings increase reflects underlying operations versus the $4.8 million tax-audit benefit and other adjustments; compare GAAP EPS of $1.11 with adjusted EPS of $1.00.
- Whether working-capital growth, particularly inventory and receivables, converts into cash as demand and production levels evolve.
- The repayment or refinancing plan for the $80 million note due March 2012, and continued availability of the credit facility.
- Acquisition integration, performance and contingent consideration exposure, including the five-year sales-based Arc Products payment.
- Developments in commodity costs, foreign exchange and Venezuelan currency conditions, as well as asbestos, manganese and other litigation.