Lincoln Electric Holdings, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company designs and manufactures arc welding and cutting products, consumables, equipment, and brazing and soldering products. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $790.1 | $626.9 | $1,547.7 | $1,207.8 |
| Gross profit / margin | $270.1 / 34.2% | $216.3 / 34.5% | $526.7 / 34.0% | $419.0 / 34.7% |
| Operating income / margin | $94.6 / 12.0% | $85.6 / 13.7% | $179.8 / 11.6% | $165.0 / 13.7% |
| Net income | $68.9 | $61.4 | $129.7 | $117.2 |
| Diluted EPS | $1.04 | $0.92 | $1.96 | $1.76 |
| Adjusted diluted EPS, non-GAAP | $1.22 | $0.97 | $2.32 | $1.85 |
- Q2 sales increased 26.0%; management attributed the increase to acquisitions (16.0 percentage points), volume (4.4), pricing (4.9), and foreign exchange (0.7). For the first half, sales rose 28.2%, including 17.1 percentage points from acquisitions.
- Q2 net income grew 12.2%, slower than sales, and net margin declined to 8.7% from 9.8%. Adjusted EBIT was $111.4 million, up 19.1%, with a 14.1% margin versus 14.9%.
- Gross margin declined year over year, which management attributed to the Air Liquide Welding acquisition and higher input costs. LIFO charges were $5.3 million in Q2 and $6.2 million in the first half, versus $2.0 million and $3.7 million, respectively, in 2017.
Segments and material changes
- Americas Welding: Q2 sales increased 14.2% to $462.5 million; adjusted EBIT rose 18.3% to $88.2 million. Management cited improved demand and pricing.
- International Welding: Q2 sales increased 72.0% to $243.4 million, primarily reflecting Air Liquide Welding, acquired in July 2017. Organic volume declined 4.5%, which the company attributed to repositioning its European channel strategy. Adjusted EBIT was $16.3 million, including a $11.5 million rationalization and impairment charge excluded from the adjusted measure.
- Harris Products Group: Q2 sales rose 4.9% to $84.2 million and adjusted EBIT increased 3.8% to $10.2 million.
- Air Liquide Welding contributed $207 million of sales in the first half of 2018. The acquisition also generated $2.7 million in first-half transaction and integration costs.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $123.6 million, down from $151.7 million. Capital expenditures were $31.4 million; operating cash flow less capital expenditures was approximately $92.2 million, versus $123.6 million in the prior-year period.
- Investing activities provided $15.5 million, largely reflecting net proceeds from marketable securities. Financing activities used $98.7 million, including $50.2 million for treasury-share purchases and $51.3 million in dividends paid.
- At June 30, cash and cash equivalents were $357.1 million and marketable securities were $139.1 million. Total debt was approximately $702.1 million; cash plus marketable securities therefore exceeded neither debt nor represented net cash. Total debt to invested capital was 42.7%, down from 43.1% at year-end 2017.
- Current assets were $1.412 billion and current liabilities $539.8 million. The company had a $400 million revolving credit facility, no outstanding borrowings under it, and reported compliance with its debt covenants. Senior unsecured notes have stated interest rates of 2.75%–4.02% and maturities from 2025 through 2045.
- Management expects 2018 capital expenditures of $60–$70 million and said ongoing cash requirements should be met through operating cash flow, existing cash, credit facilities, and potential capital-market access. No revenue or earnings guidance was provided.
Outlook, risks and unusual items
- Rationalization and asset impairment charges were $11.5 million in Q2 and $21.7 million in the first half, mainly for severance and asset impairment in International Welding. The company expects approximately $5 million of additional charges to complete the International Welding plans; it expects the actions to benefit future results and not materially affect liquidity.
- The effective tax rate was 27.0% in Q2 and 27.3% for the first half. The U.S. Tax Act reduced the federal corporate rate, but the company continued to refine its tax accounting, including estimates related to GILTI and other provisions. It recorded a $2.5 million first-quarter adjustment for tax on unremitted foreign earnings.
- Management identified risks including economic and market conditions, input and energy costs, foreign exchange, interest rates and credit-market access, tariffs and regulatory complexity, tax-law changes, litigation, rationalization costs, and successful integration of Air Liquide Welding.
- The company was a co-defendant in asbestos-related claims involving approximately 3,507 plaintiffs at June 30. Claim amounts are generally unspecified; management said it believes it has meritorious defenses and does not expect resolution to materially affect the consolidated financial statements.
- The company expects the new lease accounting standard, effective in 2019, to result in right-of-use assets and corresponding liabilities for substantially all operating leases; the impact had not yet been determined. Revenue-standard adoption in 2018 had no material reported impact.
Key facts for investors to verify
- How much of sales and earnings growth is sustainable excluding the Air Liquide Welding acquisition, and whether International Welding volume stabilizes.
- Whether pricing continues to offset inflation in materials and other input costs, and whether gross and adjusted operating margins recover.
- Actual restructuring costs and savings versus the expected additional $5 million of charges.
- Cash conversion and working-capital trends, including receivables and inventory, alongside planned capital spending and share repurchases.
- Final tax accounting under the U.S. Tax Act, including GILTI, BEAT, and the potential effect of tax audits and unrecognized tax benefits.
- Progress on asbestos claims, acquisition integration, and recognition of lease liabilities under the new accounting standard.