Lincoln Electric Holdings, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Lincoln Electric designs and manufactures welding and cutting products and equipment, and brazing and soldering alloys. Financial statement amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $715.8 | $691.9 | $2,129.4 | $2,137.9 |
| Gross profit / margin | $241.6 / 33.8% | $232.7 / 33.6% | $718.2 / 33.7% | $699.6 / 32.7% |
| Operating income / margin | $76.1 / 10.6% | $95.2 / 13.8% | $268.8 / 12.6% | $288.1 / 13.5% |
| Net income | $45.7 | $66.0 | $179.5 | $205.5 |
| Diluted EPS | $0.57 | $0.80 | $2.22 | $2.47 |
| Cash dividends declared per share | $0.23 | $0.20 | $0.69 | $0.60 |
Cash flow and balance sheet: Nine-month operating cash flow was $268.1 million, versus $242.1 million; investing cash use was $38.5 million, versus $68.0 million; and financing cash use was $226.7 million, versus $128.7 million. Cash was $279.5 million at September 30, down from $299.8 million at year-end 2013. Current assets were $1,209.8 million and current liabilities $571.7 million. Total debt was $88.5 million, including $75.0 million drawn on the credit facility; debt to total invested capital was 6.0%, versus 1.2% at year-end. The company reported compliance with credit covenants and a $400 million, five-year credit facility.
Capital allocation was substantial: nine-month treasury share purchases were $249.4 million and dividends paid were $55.4 million. Management anticipated approximately $300 million in share repurchases and $70–$80 million in 2014 capital expenditures.
Material changes and operating drivers
- Q3 sales increased 3.5%, reflecting volume growth of 1.9%, acquisitions of 1.4% and pricing of 2.5%, partly offset by a 2.3% foreign-exchange impact. Nine-month sales decreased 0.4%, with lower volume and foreign exchange offset partly by pricing and acquisitions.
- Q3 gross margin improved to 33.8%, attributed to geographic mix and operational improvements. However, operating income fell 20.0% and net income fell 30.8%, principally reflecting higher rationalization and impairment charges.
- Q3 rationalization and impairment charges were $29.1 million, including $32.4 million of non-cash long-lived-asset impairments in Asia Pacific, partly offset by asset-sale gains. Nine-month charges were $29.9 million, versus $8.2 million.
- Reported diluted EPS declined to $0.57 from $0.80 in Q3 and to $2.22 from $2.47 for nine months. Management’s non-GAAP adjusted diluted EPS was $0.94 versus $0.86 in Q3 and $2.86 versus $2.69 for nine months; these measures exclude specified special items.
- Segment results were mixed. North America and Europe improved, with Q3 adjusted EBIT of $84.5 million and $15.2 million, respectively. Asia Pacific sales declined and South America was sharply weaker: Q3 sales fell 36.5% in South America, where adjusted EBIT was a $0.6 million loss, amid Venezuelan raw-material supply disruptions and currency-related costs.
Outlook, commentary and risks
- The filing provides no quantified revenue or earnings guidance. Management stated that ongoing cash needs are expected to be met by operating cash flow, existing cash and, if needed, credit facilities; significant acquisitions could require additional capital-market or bank financing.
- Venezuela remains a material uncertainty. The company used the SICAD I exchange rate of 12 bolivars per U.S. dollar at September 30 and recorded a $17.7 million first-quarter remeasurement loss, alongside related inventory costs. Management described uncertainty over exchange mechanisms, government currency access, price controls and production continuity. A hypothetical move to the SICAD II rate cited in the filing would cause estimated additional charges of approximately $13 million to cost of goods sold and $7 million to SG&A, based on then-current exposures.
- In October 2014, after quarter-end, the company acquired substantially all assets of Easom Automation Systems, which had annual sales of approximately $30 million. It also acquired the remaining interest in its Harris Soldas Especiais joint venture. Asia Pacific assets identified for divestiture were classified as held for sale; completion and potential retained liabilities are risks.
- The company expected to receive a $80.0 million Canadian tax-deposit refund plus 1% annual interest in Q1 2015 following a judgment wholly in its favor. The refund was still being processed at the filing date.
- Other disclosed risks include economic and market conditions, foreign exchange, commodity and energy prices, acquisitions and divestitures, litigation, and rationalization costs. The company faced asbestos-related claims involving approximately 14,758 plaintiffs; management said resolution of claims and proceedings was not expected to materially affect consolidated financial statements. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Asia Pacific’s planned divestiture proceeds and timing align with the carrying values and whether any related liabilities are retained.
- Developments in Venezuela’s exchange-rate regime, government approvals for currency remittances, raw-material availability and resulting earnings exposure.
- Whether reported operating cash flow remains strong after the effect of lower pension contributions, and how planned buybacks and dividends affect cash and debt.
- Completion and financial terms of the Easom acquisition and the Harris Soldas Especiais ownership purchase.
- Receipt and timing of the Canadian tax refund, and subsequent developments in tax audits, litigation and other contingencies.