Lincoln Electric Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Lincoln Electric designs and manufactures welding, cutting, brazing and related products, reported through Americas Welding, International Welding and The Harris Products Group. Dollar figures below are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $590.7 | $777.0 | $1,292.7 | $1,536.2 |
| Gross profit / margin | $189.4 / 32.1% | $269.9 / 34.7% | $426.7 / 33.0% | $528.3 / 34.4% |
| Operating income / margin | $39.8 / 6.7% | $105.2 / 13.5% | $120.8 / 9.3% | $199.7 / 13.0% |
| Net income / margin | $27.0 / 4.6% | $85.5 / 11.0% | $82.6 / 6.4% | $156.9 / 10.2% |
| Diluted EPS | $0.45 | $1.36 | $1.37 | $2.47 |
| Adjusted diluted EPS (non-GAAP) | $0.80 | $1.28 | $1.81 | $2.46 |
- Q2 adjusted EBIT was $66.1 million, down 39.6%, with an 11.2% margin versus 14.1%. Six-month adjusted EBIT was $154.8 million, down 27.0%, with a 12.0% margin versus 13.8%.
- Six-month operating cash flow was $126.0 million, versus $152.0 million in 2019. Capital expenditures were $25.0 million; cash used in investing was $18.8 million and cash used in financing was $155.7 million. Cash declined $56.5 million to $143.1 million.
- At June 30, cash was $143.1 million, current assets $1,007.8 million and current liabilities $568.6 million. Total debt was $765.4 million, comprising $49.6 million short-term and $715.8 million long-term debt. Debt to total invested capital was 53.7%, up from 47.7% at year-end 2019. The $400 million revolving facility had $40 million drawn; the company reported covenant compliance.
- Declared dividends were $0.49 per share in Q2; a further $0.49 per share, totaling $29.1 million, was paid in July.
Material changes versus the prior period
- Q2 sales fell 24.0%; six-month sales fell 15.8%. Management attributed the decline principally to lower volumes amid COVID-19-related demand weakness. For the first half, volume reduced sales by $255.8 million; acquisitions added $39.7 million, while foreign exchange and price reduced sales by $18.2 million and $9.2 million, respectively.
- Q2 gross margin declined 2.6 percentage points. Management cited lower volumes and unfavorable product mix. Net income fell 68.4% in Q2 and 47.4% for the first half, reflecting lower sales and increased rationalization and impairment charges.
- Q2 rationalization and asset impairment charges were $23.2 million, versus $1.3 million; first-half charges were $29.8 million, versus $4.8 million. Q2 also included $3.3 million of pension settlement charges. Adjusted measures exclude specified special items.
- All three segments reported lower Q2 sales. Americas Welding sales declined 30.1%, International Welding 16.6%, and Harris Products Group 8.8%. First-half adjusted EBIT declined in Americas and International Welding, while Harris Products Group adjusted EBIT increased 0.8% to $24.2 million.
- Cash used for share repurchases was $113.0 million in the first half, and dividends paid were $59.8 million. Inventory rose to $417.5 million from $393.7 million; management said it increased inventory to mitigate potential COVID-19 supply-chain disruptions.
Outlook, risks and unusual items
- The company provided no quantified revenue or earnings guidance. It anticipated 2020 capital expenditures of $55–$65 million and said it expected to meet ongoing cash needs with operating cash flow, cash balances and available borrowing sources.
- Management said the duration and severity of COVID-19 impacts and the resulting financial effects could not be reasonably estimated. Further restrictions, customer shutdowns, supply-chain disruption and weaker demand could harm results, cash flows, liquidity and capital investment; covenant compliance or access to alternative financing could also be affected.
- Rationalization plans include workforce reductions and manufacturing-facility consolidation. Management expects these actions to benefit future results and not materially affect liquidity, but additional actions and charges remain possible.
- The company approved termination of its U.S. Retirement Annuity Program effective December 31, 2020. Settlement is expected to take about two years; actuarial gains or losses in accumulated other comprehensive income are expected to be recognized in earnings in the second half of 2021.
- Other items include a 24.7% first-half effective tax rate, up from 20.1%, primarily due to a valuation allowance, smaller stock-compensation tax benefits and prior-year tax-item benefits. The filing reports approximately 2,790 asbestos-related plaintiffs as of June 30; Lincoln Electric is one of many defendants in these cases.
Important facts for investors to verify
- Whether sales volumes and margins recover as customers reopen, and how renewed restrictions affect demand.
- Whether operating cash flow, elevated inventory and working capital convert into sufficient liquidity; monitor debt levels and covenant headroom.
- The total cost, timing and realized savings from restructuring, asset impairments and pension-plan termination.
- Whether the $55–$65 million capital expenditure expectation, dividend and share-repurchase activity remain appropriate under changing conditions.
- Updates on tax audits and unrecognized tax benefits, asbestos litigation, and any material COVID-19-related charges or financing needs.