Lincoln Electric Holdings, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Lincoln Electric designs and manufactures welding, cutting, oxy-fuel, brazing and related products. Figures below are in millions of U.S. dollars unless noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $702.0 | $759.2 | Down 7.5% |
| Gross profit / margin | $237.3 / 33.8% | $258.4 / 34.0% | Margin down 0.2 percentage points |
| Operating income / margin | $81.1 / 11.5% | $94.5 / 12.4% | Down 14.2% |
| Net income | $55.6 | $71.5 | Down 22.3% |
| Diluted EPS | $0.91 | $1.12 | Down 18.8% |
| Adjusted EBIT / margin | $88.7 / 12.6% | $102.6 / 13.5% | Down 13.5% |
| Operating cash flow | $22.0 | $25.9 | Down $3.9 |
| Capital expenditures | $11.8 | $16.3 | Down $4.4 |
Sales fell primarily on lower volume (down $65.4 million) and unfavorable foreign exchange (down $9.5 million), partly offset by acquisitions (up $24.5 million). Consumables sales were $405.8 million and equipment sales $296.2 million. Lower volume and product mix reduced gross margin. The effective tax rate rose to 26.8% from 23.1%, reflecting a valuation allowance, lower stock-compensation tax benefits and prior-year tax-item settlement benefits.
Segments and material changes
- Americas Welding: Sales of $418.5 million, down 8.6%; Adjusted EBIT of $70.7 million, down 13.5%, with margin of 15.9% versus 16.8%.
- International Welding: Sales of $197.9 million, down 9.2%; Adjusted EBIT of $6.6 million, down 50.4%, with margin of 3.3% versus 6.0%.
- The Harris Products Group: Sales of $85.5 million, up 2.6%; Adjusted EBIT of $12.5 million, up 18.8%, with margin of 14.3% versus 12.3%.
Net income declined mainly because of lower sales volumes. Rationalization and asset-impairment charges were $6.5 million, compared with $3.5 million a year earlier; Q1 2020 also included $0.8 million of acquired-inventory step-up amortization. Adjusted diluted EPS was $1.00 versus $1.17.
Cash, debt and liquidity
- Cash and equivalents were $163.4 million at March 31, down $36.2 million from year-end; $151.9 million was held by international subsidiaries.
- Total debt was $848.3 million, comprising $132.4 million short-term debt and $716.0 million long-term debt including current portion. Debt-to-total-invested-capital increased to 55.9% from 47.7% at December 31, 2019.
- The company had $115 million outstanding under its $400 million revolving credit agreement and reported compliance with debt covenants. It had no borrowings under its $700 million uncommitted shelf facilities.
- Operating cash flow was lower due mainly to reduced earnings and unfavorable working-capital changes. Inventory increased to $398.2 million from $393.7 million; average operating working capital was 19.1% of sales versus 16.8% at year-end.
- Financing cash use included $109.8 million of share repurchases and $30.7 million of dividends paid. The company declared a $0.49-per-share dividend; it paid $29.1 million in April.
Outlook, risks and unusual items
- Management said COVID-19 had begun to weaken demand and disrupt supply chains and logistics. Global demand trends weakened significantly in April, declining in the low-40% range year over year. The company expected adverse effects on results, cash flow and financial position, but said the full impact could not be reasonably estimated. Most global businesses continued operating as critical infrastructure.
- Management anticipated 2020 capital expenditures of $55 million to $65 million. No earnings or sales guidance was provided in the filing.
- Management said it expected to meet cash requirements for the foreseeable future using operating cash flow, cash balances, credit facilities and capital-market borrowing, while warning that prolonged disruption could impair liquidity, covenant compliance or access to financing.
- Q1 included a $22.1 million loss on undesignated foreign-exchange contracts in SG&A, compared with a $5.4 million gain in Q1 2019. Currency translation reduced other comprehensive income by $70.6 million.
- New rationalization plans included restructuring and facility consolidation; related liabilities totaled $13.6 million. The company said the actions were intended to improve future results and that further charges could occur.
- The company approved termination of its U.S. Retirement Annuity Program effective December 31, 2020; settlement gains or charges were expected in the second half of 2021. It also reported approximately 3,124 asbestos-related plaintiffs as of March 31; claims were unspecified and the company was one of many defendants.
- The board authorized a new repurchase program for up to 10 million shares in February 2020. The company repurchased approximately 1.3 million shares in Q1 at an average $80.57 per share.
Important facts for investors to verify
- Whether April’s steep demand decline continued, and the resulting effects on sales, margins and operating cash flow.
- Cash generation, working-capital trends and available borrowing capacity as debt and leverage increased.
- Compliance with credit covenants and the availability and terms of alternative financing if conditions deteriorate.
- International Welding’s recovery and the sustainability of Harris Products Group’s improved results.
- Future restructuring charges, pension settlement effects, foreign-exchange exposure and any material developments in asbestos litigation.