Lincoln Electric Holdings, Inc. — Q2 2010 Form 10-Q
Reporting period and business context: Unaudited results for the three and six months ended June 30, 2010, compared with the same 2009 periods. Lincoln Electric designs and manufactures welding and cutting products and brazing and soldering alloys, reporting across five operating segments.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $515.6 million | $413.3 million | $986.5 million | $825.0 million |
| Gross profit / margin | $148.6 million / 28.8% | $106.4 million / 25.7% | $271.9 million / 27.6% | $196.6 million / 23.8% |
| Operating income / margin | $51.1 million / 9.9% | $20.0 million / 4.8% | $85.9 million / 8.7% | $20.9 million / 2.5% |
| Net income attributable to shareholders | $32.5 million | $15.1 million | $56.3 million | $11.5 million |
| Diluted EPS | $0.76 | $0.35 | $1.32 | $0.27 |
| Operating cash flow | Not presented by quarter | $47.7 million | $134.2 million |
Sales rose 24.8% in Q2 and 19.6% in the first half. Management attributed the growth chiefly to higher volume amid improved global demand; the first-half comparison also benefited from the Jin Tai acquisition. For the first half, reported adjusted diluted EPS, a company-defined non-GAAP measure, was $1.35 versus $0.43.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $373.9 million; current assets were $1.076 billion and current liabilities $349.5 million.
- Total debt, including amounts due banks, was $110.3 million, down from $123.7 million at December 31, 2009. Debt to total invested capital was 9.2%, versus 10.2% at year-end. The company reported compliance with debt covenants; its $80 million Series C Note is due March 2012.
- Six-month investing cash use was $15.7 million, including $23.5 million of capital expenditures. Financing cash use was $40.1 million, including $23.8 million of dividends and $12.9 million of share repurchases. Cash declined $14.2 million during the period.
- The declared dividend was $0.56 per share for the first half. A $0.28-per-share dividend was paid in July. At June 30, 3.54 million shares remained authorized for repurchase.
Material changes and management commentary
- Q2 volume increased in all operating segments. Segment sales were particularly boosted by Jin Tai in Asia Pacific; currency translation reduced consolidated Q2 sales by $4.9 million. First-half pricing was lower in North America, Europe and Asia Pacific, partly offset by pricing increases in South America and Harris Products Group.
- Higher volume and cost-reduction initiatives lifted gross margin. Offsets included LIFO reserve increases of $2.4 million in Q2 and $5.3 million in the first half, and Venezuelan inventory costs of $2.3 million and $4.9 million, respectively.
- SG&A rose 27.2% in Q2, mainly from higher bonuses, legal costs, operating expenses, currency translation and acquisition costs. First-half SG&A increased 20.2%.
- Operating cash flow fell $86.5 million year over year in the first half, principally because working capital absorbed cash, compared with a working-capital release in 2009. Net operating working capital was 22.0% of sales, down from 23.2% at year-end 2009.
Outlook, unusual items and risks
- No full-year earnings or sales guidance is provided. Management expected to fund ongoing needs with operating cash flow, existing cash and, if needed, credit facilities. Planned 2010 capital expenditures were $40–$50 million; U.S. defined-benefit pension contributions were expected to total $31.5 million for 2010, of which $19.5 million had been contributed by June 30.
- Rationalization actions generated a net gain in the first half, largely from asset sales. The company expected about $1.0 million of additional costs for certain consolidation actions, substantially completed and paid by year-end 2010.
- Venezuela’s currency devaluation and highly inflationary accounting created earnings and cost volatility. For the first half, the company recorded a $2.6 million currency transaction gain in SG&A and $4.9 million of additional cost of goods sold from inventory remeasurement. Future effects depend on exchange rates and local monetary balances.
- At June 30, the company faced asbestos-related claims involving about 16,790 plaintiffs and manganese-related claims involving about 2,233 plaintiffs. A Philadelphia jury awarded $825,000 in compensatory damages in one asbestos case; the company said it planned to appeal after final judgment. Management said it believed the broader claims would not materially adversely affect the financial statements, excluding defense costs.
- Other stated risks include economic conditions, execution of operating initiatives, currency and interest rates, litigation, commodity and energy prices, and international regulatory and geopolitical conditions. Management reported no material change in market-risk exposure since December 31, 2009.
Important facts for investors to verify
- Whether the recovery in demand and volume is sustained, and how much future growth depends on Jin Tai and currency movements.
- How much reported profit growth reflects underlying operations versus rationalization gains, prior-year one-time items and Venezuelan currency effects.
- Whether working-capital investment continues to weigh on operating cash flow as sales and production increase.
- The outcome and potential financial exposure of the asbestos verdict and other product-liability claims, including defense costs and insurance recoveries.
- Venezuela-related exchange-rate developments, repatriation restrictions and inflationary-accounting effects.
- Progress on planned capital spending, pension contributions, rationalization costs and the March 2012 debt maturity.