Lincoln Electric Holdings, Inc. — FY 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a standalone quarterly filing. Lincoln Electric manufactures welding, cutting and brazing products, with Americas Welding, International Welding and The Harris Products Group as its operating segments. Fourth-quarter figures are included below where relevant.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $3,028.7 million | $2,624.4 million | +15.4% |
| Gross profit / margin | $1,028.5 million / 34.0% | $875.1 million / 33.3% | Margin +0.7 pts |
| Operating income / margin | $375.5 million / 12.4% | $376.9 million / 14.4% | -0.4% income |
| Net income | $287.1 million | $247.5 million | +16.0% |
| Diluted EPS | $4.37 | $3.71 | +17.8% |
| Operating cash flow | $329.2 million | $334.8 million | Down $5.7 million |
| Capital expenditures | $71.2 million | $61.7 million | Up $9.6 million |
Sales growth reflected acquisitions ($239.2 million, chiefly Air Liquide Welding), pricing ($146.2 million), volume ($27.8 million) and unfavorable foreign exchange ($9.0 million). Reported net income benefited from greater sales and a lower effective tax rate, while operating income was nearly flat year over year. Adjusted diluted EPS, a non-GAAP measure, was $4.82 versus $3.79; adjusted EBIT was $422.7 million versus $370.3 million.
By segment, sales were $1,806.5 million for Americas Welding (+12.2%), $919.8 million for International Welding (+27.0%) and $302.4 million for Harris (+4.0%). International Welding’s reported growth included acquisition contribution; organic volume fell 9.2%, which management attributed to channel repositioning in Europe and restructuring. Adjusted EBIT margins on segment total sales were 17.7%, 5.8% and 11.8%, respectively.
For Q4 2018, net sales were $743.8 million versus $747.2 million a year earlier; net income was $86.8 million versus $24.2 million. The prior-year quarter included significant tax and acquisition-related special items, so the earnings comparison is not directly indicative of underlying growth.
Cash, liquidity and capital
- Cash and cash equivalents were $358.8 million at year-end, up from $326.7 million. Operating cash flow less capital expenditures was approximately $257.9 million, versus $273.2 million in 2017.
- Total debt was $702.7 million, including $702.5 million of long-term debt; cash less total debt implies net debt of approximately $343.8 million. The $400 million revolving facility and $700 million aggregate uncommitted shelf facilities had no borrowings outstanding. The company reported compliance with debt covenants.
- Long-term debt had a 3.3% weighted-average effective interest rate and 15-year weighted-average remaining term. The company paid $102.1 million in dividends and repurchased $201.7 million of shares in 2018. Dividends declared per share rose to $1.64 from $1.44.
- Average operating working capital as a percentage of sales increased to 16.5% from 15.9%; inventory days increased to 95.1 from 88.9.
Material changes, outlook and risks
- Gross margin improved with price management and segment mix, despite a higher LIFO charge ($11.0 million versus $7.3 million). SG&A rose 16.0%, reflecting acquisitions, compensation and professional fees.
- 2018 special items included $25.3 million of rationalization and asset impairment charges, $6.7 million of pension settlement charges and $4.5 million of Air Liquide Welding transaction and integration costs. In 2017, results included a $49.7 million bargain purchase gain, which makes year-over-year operating comparisons less straightforward.
- The effective tax rate declined to 22.2% from 32.4%, principally reflecting the U.S. Tax Act’s 21% federal corporate rate; the company completed its accounting for the Act in 2018. The transition tax is payable over eight years.
- 2018 acquisitions included Worthington Industries’ soldering business, Coldwater Machine, Pro Systems and Inovatech Engineering. Management expects rationalization actions to benefit future results, but cautions that further restructuring charges may occur and savings may not be fully realized.
- Management anticipated 2019 capital expenditures of $70 million to $80 million and said ongoing cash needs should be met primarily through operations, cash balances and available financing. The filing provides no specific 2019 revenue or earnings guidance.
- Key risks include cyclical industrial demand, steel and other raw-material cost volatility and tariffs, currency and international-market exposure, acquisition integration, pension-market sensitivity, product liability and asbestos litigation, cybersecurity, and environmental regulation. At year-end, the company was a co-defendant in asbestos cases involving approximately 3,336 plaintiffs; it stated that loss ranges often cannot be estimated and that it intends to contest claims.
The company adopted the new revenue-recognition standard in 2018 with no material financial-statement impact. Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of continued sales and earnings growth is organic versus acquisition-driven, particularly in International Welding.
- Whether pricing continues to offset raw-material, tariff and labor-cost pressures, and whether working-capital intensity improves.
- Execution and integration results for the 2018 acquisitions, and whether restructuring delivers the anticipated savings without further material charges.
- Cash conversion, capital spending, share repurchases, dividend growth and debt levels relative to future acquisition plans.
- Potential changes in asbestos, product-liability, pension and tax exposures; the filing does not provide a clear quantified range for possible asbestos losses.