Lincoln Electric Holdings, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Lincoln Electric designs and manufactures welding, cutting, brazing and soldering products. Its segments are Americas Welding, International Welding and The Harris Products Group. Amounts below are in millions of U.S. dollars unless noted.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $757.7 | $580.9 | +30.4% |
| Gross profit / margin | $256.6 / 33.9% | $202.7 / 34.9% | Margin down 1.0 percentage point |
| Operating income / margin | $85.2 / 11.2% | $79.4 / 13.7% | Income +7.3% |
| Net income | $60.8 | $55.8 | +8.9% |
| Diluted EPS | $0.92 | $0.84 | +9.5% |
| Operating cash flow | $43.8 | $76.2 | Down $32.5 |
Adjusted operating income, excluding specified special items, was $97.3 million versus $83.0 million; adjusted diluted EPS was $1.10 versus $0.88. These are non-GAAP measures and supplement, not replace, reported results. The reported effective tax rate was 27.8%, compared with 28.3%.
Revenue and segment performance
Sales growth reflected acquisition contribution of $106.6 million, higher volume of $30.2 million, pricing of $24.2 million and favorable foreign exchange of $15.8 million. Air Liquide Welding, acquired in 2017, contributed $107 million of Q1 2018 sales.
| Segment | Sales | Adjusted EBIT | Notable comparison |
|---|---|---|---|
| Americas Welding | $434.8 million, +13.4% | $77.4 million, +12.7% | Demand and pricing improved; margin was 16.8% versus 16.9%. |
| International Welding | $247.3 million, +91.9% | $15.0 million, +55.9% | Acquisition drove most sales growth; adjusted EBIT margin fell to 5.9% from 7.2%. |
| The Harris Products Group | $75.6 million, +10.1% | $9.2 million, +9.0% | Adjusted EBIT margin was 11.9%, unchanged. |
Cash, debt and liquidity
- Cash and cash equivalents were $369.1 million at March 31, 2018, up from $326.7 million at year-end. Marketable securities were $136.7 million; combined cash and marketable securities were $505.8 million.
- Total debt was approximately $702.9 million, including $2.0 million short-term debt. The company had no borrowings under its $400 million revolving credit facility and reported compliance with debt covenants. The facility matures June 30, 2022.
- Current assets were $1,445.8 million and current liabilities $550.2 million. Total debt to invested capital was 41.7%, down from 43.1% at December 31, 2017.
- Operating cash flow declined, primarily due to working-capital movements, including increases in receivables and inventory. Capital expenditures were $14.7 million. Investing cash flow was positive $34.1 million, primarily reflecting marketable-security proceeds; financing cash outflow was $38.5 million, including $14.7 million of share repurchases and $25.7 million of dividends paid.
- Average operating working capital to sales increased to 18.1% from 15.9% at year-end; inventory days were 96.8 versus 88.9 at year-end.
Material changes, outlook and risks
- Gross margin was pressured by the Air Liquide Welding acquisition and rising input costs. SG&A rose due to acquisitions, compensation and foreign exchange, partly offset by lower acquisition-related costs.
- The company recorded $10.2 million of rationalization and asset impairment charges, primarily for severance, in International Welding. It expected a further $3.5–$4.0 million of charges to complete those plans. Management said the actions are intended to improve future results and are not expected to materially affect liquidity.
- Management anticipated 2018 capital expenditures of $60–$70 million. The filing provides no specific full-year sales or earnings guidance. Management said operating cash flow, existing cash, credit facilities and capital markets should meet foreseeable cash needs.
- U.S. tax reform reduced the corporate tax rate, but Q1 tax expense included a $2.5 million adjustment related to tax on unremitted foreign earnings and estimated effects of GILTI, partly offset by FDII. Tax accounting remained under review; the company also continued evaluating BEAT and the interest-expense limitation.
- Reported risks include economic and market conditions, input and energy prices, currency movements, integration of Air Liquide Welding, rationalization costs, tax-law changes, access to credit, litigation and political or other disruptive events. The company reported approximately 3,526 asbestos-related plaintiffs and stated that it believed resolution of claims would not materially affect its consolidated financial statements; for many claims, a loss range could not be estimated.
- Revenue standard Topic 606 was adopted January 1, 2018 using the modified retrospective method, with no material adoption impact. Management reported disclosure controls were effective at March 31, 2018.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects the Air Liquide Welding acquisition versus organic volume, pricing and currency, and whether the acquired business’s margins improve.
- Whether rising input costs and working-capital growth continue to pressure margins and operating cash flow.
- The actual final cost and expected benefits of International Welding rationalization plans, including the forecast additional $3.5–$4.0 million in charges.
- Final tax-reform accounting, including the $2.5 million adjustment and the company’s treatment of GILTI, BEAT and interest-expense limitations.
- Progress against the $60–$70 million capital expenditure outlook, debt and liquidity position, and integration of Air Liquide Welding.