Lincoln Electric Holdings, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This filing reports annual results; it does not provide a clear standalone fourth-quarter financial summary. Lincoln Electric manufactures welding, cutting, automation, brazing and soldering products, with operations in three segments: Americas Welding, International Welding and The Harris Products Group.
Key financial results
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $2,655.4 million | $3,003.3 million | Down 11.6% |
| Gross profit / margin | $871.3 million / 32.8% | $1,007.6 million / 33.5% | Margin down 0.7 percentage points |
| Operating income / margin | $282.1 million / 10.6% | $370.9 million / 12.4% | Down 24.0% |
| Net income / net margin | $206.1 million / 7.8% | $293.1 million / 9.8% | Down 29.7% |
| Diluted EPS | $3.42 | $4.68 | Down 26.9% |
| Operating cash flow | $351.4 million | $403.2 million | Down $51.8 million |
| Capital expenditures | $59.2 million | $69.6 million | Down $10.4 million |
Free cash flow, defined by the company as operating cash flow less capital expenditures, was approximately $292.2 million in 2020. Adjusted diluted EPS, a non-GAAP measure, was $4.15 versus $4.70; adjusted EBIT was $340.4 million versus $400.8 million.
Segments
- Americas Welding: Sales fell 16.8% to $1,509.9 million; adjusted EBIT declined 22.2% to $245.7 million.
- International Welding: Sales fell 7.9% to $786.8 million; adjusted EBIT declined 10.5% to $45.0 million.
- The Harris Products Group: Sales increased 7.7% to $358.7 million; adjusted EBIT increased 20.7% to $55.2 million, supported by retail volumes and pricing.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $257.3 million at year-end, up from $199.6 million. Total debt was $718.2 million, compared with $747.3 million; cash less total debt implies net debt of approximately $460.9 million.
- Working capital was affected by precautionary inventory positioning during COVID-19: inventory days rose to 104.7 from 99.9, and average operating working capital as a percentage of sales increased to 18.0% from 16.8%.
- The company had no borrowings under its $400 million revolving credit facility and was in compliance with debt covenants. It also reported $2.6 million outstanding under other credit lines. Senior notes had a 3.3% weighted-average effective interest rate and 13.4-year weighted-average remaining term.
- Cash dividends paid were $118.1 million; declared dividends were $1.98 per share versus $1.90 in 2019. A January 2021 dividend of $0.51 per share represented a 4.1% increase in the payout rate.
- The company repurchased 1.4 million shares for $113.5 million in 2020. At year-end, 11.5 million shares remained authorized for repurchase.
Material changes, outlook and risks
- Sales declined primarily because of lower organic volumes, including COVID-19-related demand impacts, and unfavorable foreign exchange; acquisitions partly offset the decline. Consolidated volume reduced sales by $381.2 million, while acquisitions added $39.7 million.
- Lower sales volumes reduced gross profit and operating income. SG&A declined with lower employee costs and discretionary spending, but rationalization and asset impairment charges rose to $45.5 million from $15.2 million.
- Special items included $17.3 million of non-cash intangible-asset impairment charges and pension settlement charges. Management reported that the pandemic’s ultimate financial impact remained uncertain, although substantially all global businesses continued operating as essential businesses.
- The company did not provide broad earnings or sales guidance. It anticipated 2021 capital expenditures of $65 million to $75 million and expected retirement-plan expense to increase by approximately $2.5 million to $3.5 million, excluding settlement charges.
- The Retirement Annuity Program was scheduled for termination, with settlement expected to be substantially complete by the end of 2021. The company disclosed $106.4 million of unrecognized losses related to the plan that could be reclassified to earnings upon settlement.
- Principal risks include renewed COVID-19 disruption, cyclical industrial demand, international and currency exposure, commodity and component costs, cybersecurity, workforce availability, pension-market sensitivity, and execution of acquisitions or restructuring. Asbestos litigation involved approximately 2,769 plaintiffs at year-end; the company intends to contest claims and stated that resolution was not expected to have a material effect, while noting that outcomes are difficult to assess.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified uncertain tax positions as a critical audit matter.
Important facts for investors to verify
- Whether order trends and industrial demand recovered after year-end, and how much of the 2020 volume decline was temporary versus cyclical.
- Whether the 2021 pension-plan termination produced material settlement charges or required significant cash funding.
- Progress in restoring Americas and International Welding profitability and sustaining Harris Products Group growth.
- Cash conversion and working-capital needs, particularly inventory levels, alongside planned capital spending, dividends and buybacks.
- Updates to COVID-19, asbestos, tax, commodity-price and foreign-exchange exposures, including any changes in estimates or contingencies.