Lincoln Electric Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed October 27, 2020. Lincoln Electric designs and manufactures welding, cutting, brazing and soldering products. Its operating segments are Americas Welding, International Welding and The Harris Products Group. Financial statements are unaudited.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $668.9m | $730.8m | $1,961.6m | $2,267.0m |
| Gross profit / margin | $215.4m / 32.2% | $238.4m / 32.6% | $642.1m / 32.7% | $766.7m / 33.8% |
| Operating income / margin | $77.8m / 11.6% | $88.5m / 12.1% | $198.6m / 10.1% | $288.2m / 12.7% |
| Net income | $58.5m | $72.5m | $141.0m | $229.4m |
| Diluted EPS | $0.97 | $1.17 | $2.34 | $3.64 |
| Adjusted diluted EPS | $1.10 | $1.09 | $2.91 | $3.55 |
| Adjusted EBIT | $88.3m | $93.7m | $243.1m | $305.8m |
- Q3 sales fell 8.5% year over year, primarily from lower volume; nine-month sales fell 13.5%. For the nine-month period, volume reduced sales by $325.3m, partly offset by $39.7m from acquisitions.
- Q3 gross margin declined 0.4 percentage points and operating margin declined 0.5 points. Nine-month gross and operating margins declined 1.1 and 2.6 points, respectively.
- Q3 adjusted EBIT margin improved to 13.2% from 12.8%, despite lower sales; nine-month adjusted EBIT margin declined to 12.4% from 13.5%.
- Q3 net income decreased 19.3%; reported diluted EPS decreased 17.1%. Nine-month net income fell 38.5% and diluted EPS fell 35.7%.
Segments and material changes
- Q3: Americas Welding sales were $371.5m, down 16.2%, and adjusted EBIT was $59.1m, down 20.2%. International Welding sales were $196.9m, down 4.1%, while adjusted EBIT increased 31.9% to $13.4m. Harris Products Group sales rose 22.6% to $100.4m and adjusted EBIT rose 59.3% to $17.6m, supported by higher retail volumes.
- Nine months: Americas Welding sales declined 18.5% and adjusted EBIT declined 26.7%; International Welding sales declined 10.0% and adjusted EBIT declined 23.2%. Harris sales increased 5.1% and adjusted EBIT increased 19.3%.
- SG&A expense declined with lower employee costs and discretionary spending. Rationalization and asset impairment charges rose to $36.0m for nine months from $6.3m a year earlier. The company also recorded $6.5m of pension settlement charges for nine months.
- Q3 2019 included a $7.6m gain on change in control related to the Askaynak acquisition, contributing to the year-over-year decline in other income. Nine-month 2020 results also included a higher effective tax rate, 22.9% versus 20.4%, partly due to a valuation allowance and lower stock-compensation tax benefits.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $215.6m, down from $280.7m, primarily due to lower earnings. Capital expenditures were $37.1m versus $53.6m; management anticipated full-year 2020 capital expenditures of $50m–$60m.
- Cash and equivalents were $152.5m at September 30, down $47.1m from year-end 2019. Cash used in investing was $30.2m, compared with $178.8m in 2019, when acquisitions used $136.7m. Cash used in financing was $227.3m, including $113.2m for share repurchases and $88.9m of dividends.
- Total debt was approximately $716.8m: $1.1m short-term and $715.7m long-term. Total debt to total invested capital increased to 50.2% from 47.7% at December 31, 2019. The $400m revolving credit facility had no borrowings; other credit lines totaled $50m, with $1.0m outstanding. The company reported compliance with debt covenants.
- Current assets were $1,026.2m and current liabilities $533.2m. The company held $130.3m of cash at international subsidiaries. Management said existing cash, operating cash flow and available financing were expected to meet foreseeable needs, while noting pandemic-related uncertainty.
- The company declared dividends of $0.49 per share per quarter. It repurchased 1.4m shares during the first nine months at an average $80.22 per share; 11.5m shares remained authorized for repurchase.
Outlook, risks and unusual items
- Management said demand troughed in April 2020 and negative impacts eased through Q3, but the duration and severity of COVID-19 effects and the shape of the economic recovery remained uncertain. No specific earnings or revenue guidance was provided.
- Most customers had reopened and increased operating levels, but renewed outbreaks, restrictions or customer closures could further affect demand, operations, cash flows and financial position. The ultimate financial impact could not be reasonably estimated.
- Rationalization plans include headcount restructuring and manufacturing-facility consolidation. The company expects these actions to benefit future results, does not expect a material liquidity impact, and noted further actions could bring additional charges.
- The Lincoln Electric Company Retirement Annuity Program is scheduled for termination effective December 31, 2020. Settlement is expected through lump sums and a group annuity purchase; actuarial gains or losses are expected to be recognized in earnings upon settlement, anticipated in the second half of 2021.
- Other disclosed exposures include commodity and currency movements, tax audits and $20.5m of unrecognized tax benefits. At September 30, the company was a co-defendant in asbestos-related cases involving approximately 2,774 plaintiffs; claims generally sought unspecified compensatory and punitive damages.
Important facts for investors to verify
- Whether the improvement in demand after the April trough continued, particularly in Americas and International Welding, and how COVID-19 restrictions affected subsequent quarters.
- Whether cost actions and improved Q3 adjusted EBIT margin can offset lower volumes without continued elevated rationalization or impairment charges.
- Operating cash generation, inventory levels and working-capital efficiency; inventory days were 111.6 versus 99.9 at year-end 2019, which the company attributed partly to supply-chain protection measures.
- Debt covenant headroom and liquidity under a prolonged downturn, alongside the elevated debt-to-invested-capital ratio and ongoing capital returns.
- The costs and timing of the pension plan termination, potential future settlement charges, and developments in asbestos claims and tax audits.