Lincoln Electric Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise stated. Dollar amounts are in millions except per-share data. Lincoln Electric designs and manufactures welding, cutting, brazing and soldering products.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $757.0 | $702.0 | +7.8% |
| Gross profit / margin | $253.8 / 33.5% | $237.3 / 33.8% | +6.9%; margin down 0.3 percentage points |
| Operating income / margin | $103.9 / 13.7% | $81.1 / 11.5% | +28.2% |
| Net income | $74.2 | $55.6 | +33.5% |
| Diluted EPS | $1.23 | $0.91 | +35.2% |
| Adjusted diluted EPS (non-GAAP) | $1.37 | $1.00 | +37% |
| Adjusted EBIT (non-GAAP) | $112.7 | $88.7 | +27.0% |
| Operating cash flow | $45.3 | $22.0 | +$23.3 |
| Capital expenditures | $9.9 | $11.8 | Down $1.9 |
Sales comprised $434.2 million of consumables and $322.8 million of equipment. Management attributed sales growth to stronger demand, higher volume, pricing actions to offset higher input costs, and favorable foreign exchange. Gross margin was slightly lower, primarily due to higher LIFO charges ($3.9 million versus $0.2 million). Lower discretionary spending reduced SG&A.
Segments and material changes
- Americas Welding: Sales rose 1.6% to $425.2 million; adjusted EBIT increased 8.4% to $76.6 million. Lower volume was attributed to softer demand, partly offset by pricing and cost actions.
- International Welding: Sales increased 12.7% to $223.1 million; adjusted EBIT rose to $18.8 million from $6.6 million, reflecting higher demand and cost reductions.
- The Harris Products Group: Sales increased 27.1% to $108.7 million and adjusted EBIT rose 49.7% to $18.7 million, supported by retail and brazing volumes and pricing.
- Consolidated net income and EPS benefited from higher sales volume and operating leverage. The effective tax rate declined to 23.7% from 26.8%, primarily due to income in lower-tax jurisdictions and a prior-year valuation allowance.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $242.1 million at March 31, down from $257.3 million at year-end; $175.5 million was held by international subsidiaries.
- Total debt was approximately $718.9 million, comprising $3.6 million short-term and $715.3 million long-term debt. Cash exceeded short-term debt; the filing reports no borrowing under the main $400 million revolving credit facility at quarter-end. The company was in compliance with debt covenants.
- Operating cash flow was $45.3 million; cash used for investing was $2.9 million and cash used for financing was $55.4 million. Financing included $28.5 million for treasury-share purchases and $31.0 million in dividends paid.
- The company declared a quarterly dividend of $0.51 per share, up from $0.49 a year earlier. It repurchased approximately 0.2 million shares during the quarter.
- Management expects 2021 capital expenditures of $65 million to $75 million and said it expects to fund ongoing cash needs through operations, existing cash, credit facilities and debt markets as needed.
- After quarter-end, on April 23, the company replaced its revolving credit agreement with a $500 million, five-year facility maturing April 23, 2026, expandable by up to $150 million subject to conditions. This is a financing capacity change, not a reported quarter-end borrowing.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided in the filing. Management cautioned that Q1 results are not necessarily indicative of full-year results.
- COVID-19 continues to create uncertainty for global economic conditions and the assumptions used in accounting estimates. Management also identifies demand, commodity and energy costs, foreign exchange, interest rates, supply-chain disruption, tariffs, regulation, acquisitions, litigation and geopolitical events as risks.
- Rationalization and asset impairment charges were $4.2 million, mainly related to severance and asset actions. The company said restructuring is expected to benefit future results, but further actions and charges may occur; $13.2 million of rationalization liabilities remained at March 31.
- Pension settlement charges were $4.9 million, primarily from lump-sum payments. Termination of a U.S. retirement plan is expected to be substantially complete by year-end 2021; further settlement gains or charges may be recognized in the second half.
- In April, the company acquired Zeman Bauelemente, an Austrian designer and manufacturer of robotic assembly and arc-welding systems. Purchase price and financial contribution are not stated in the supplied filing text.
- At March 31, the company was a co-defendant in asbestos-related illness cases involving approximately 2,775 plaintiffs. Claims seek compensatory and punitive damages, generally unspecified; the filing does not provide a clear estimate of potential exposure.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether higher demand and pricing persist, especially given softer Americas Welding volume and the margin impact of input-cost inflation and LIFO charges.
- Whether segment profit growth, particularly International Welding’s improvement, is sustainable after adjusting for special items.
- Working-capital and cash conversion trends: receivables and inventory increased, while inventory levels were maintained partly to reduce supply-chain disruption risk.
- The amount and timing of pension settlement impacts, further rationalization costs, and the eventual cost and contribution of the Zeman acquisition.
- Debt covenant headroom and terms of the new credit facility, alongside the company’s capacity to fund dividends, repurchases, capital spending and any acquisitions.
- Developments in asbestos litigation, tax audits and COVID-19-related economic and operational risks.