Lincoln Electric Holdings, Inc. — 2017 Form 10-K
Business and reporting period: Global manufacturer of welding, cutting, brazing and soldering products, with operating segments in Americas Welding, International Welding and The Harris Products Group. This filing covers the fiscal year ended December 31, 2017; amounts below are in U.S. dollars and generally rounded to millions.
Financial results and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $2,624.4M | $2,274.6M | +15.4% |
| Gross profit / margin | $880.3M / 33.5% | $789.3M / 34.7% | Margin down 1.2 percentage points |
| Operating income | $377.7M | $288.3M | +31.0% |
| Net income | $247.5M | $198.4M | +24.8% |
| Diluted EPS | $3.71 | $2.91 | +27.5% |
| Operating cash flow | $334.8M | $312.6M | +$22.3M |
| Capital expenditures | $61.7M | $49.9M | +$11.8M |
Management’s non-GAAP adjusted diluted EPS was $3.79, versus $3.29 in 2016; adjusted net income was $252.7M versus $224.5M. These measures exclude specified special items and should be considered alongside GAAP results. Cash and cash equivalents were $326.7M, with $179.1M in marketable securities. Total debt was $706.3M; long-term debt less current portion was $704.1M. The $400M revolving credit facility was undrawn, and the company reported compliance with debt covenants. Debt to total invested capital declined to 43.1% from 49.8%.
Operating cash flow less capital expenditures was approximately $273.2M. Cash dividends paid were $92.5M; declared dividends per share rose to $1.44 from $1.31. The company held $272.4M of cash and equivalents at foreign subsidiaries, potentially subject to taxes if repatriated.
Material changes versus prior periods
- Sales growth reflected acquisitions, higher volume, pricing and foreign exchange: the company attributed 8.0 percentage points of the increase to acquisitions, 4.2 points to volume, 2.4 points to price and 0.8 points to currency.
- Gross margin declined amid the Air Liquide Welding acquisition and higher input costs; the LIFO charge increased to $7.3M from $1.6M.
- July 2017 acquisition of Air Liquide Welding added $182M of sales from August through year-end and contributed 7% of 2017 revenue. The company recorded a $49.7M bargain purchase gain, $15.0M of transaction and integration costs, and $4.6M of acquired-inventory step-up amortization. Its results’ net income impact was described as immaterial.
- Reported earnings also included $8.2M of pension settlement charges, $6.6M of rationalization and impairment charges, and a $28.6M net U.S. Tax Act charge. In 2016, results included a $34.3M loss on deconsolidation of the Venezuelan subsidiary.
- Fourth-quarter 2017 sales were $747.2M versus $563.8M; net income was $24.2M versus $53.4M, and diluted EPS was $0.36 versus $0.81. The fourth quarter included the U.S. Tax Act impact and other special items, including rationalization, pension and acquisition-related items.
By segment, 2017 external sales were $1,609.8M for Americas Welding (+7.7%), $724.0M for International Welding (+42.7%, principally acquisition-related), and $290.6M for Harris Products Group (+6.7%). Adjusted EBIT margins on segment total sales were 17.1%, 5.6% and 12.2%, respectively.
Outlook, risks and contingencies
- Outlook: Management expected a low- to mid-20% effective tax rate beginning in 2018 and forecast 2018 capital expenditures of $60M–$70M. It expected retirement-plan expense to increase approximately $2M–$3M in 2018, excluding 2017 settlement charges, primarily due to a lower expected return on plan assets. No specific revenue or earnings guidance is provided in the filing.
- Demand and costs: Welding and cutting demand is cyclical and tied to industrial activity and capital spending; the business also faces raw-material, energy, labor and foreign-exchange volatility. Higher input costs may pressure profitability if pricing or cost reductions do not offset them.
- Legal matters: The company was a co-defendant in asbestos-related claims involving approximately 3,613 plaintiffs. It intends to defend the claims and cited insurance and cost-sharing; the filing says the aggregate long-term effect is difficult to assess and does not provide a clear quantified loss estimate. Management believed resolution of product-liability and other proceedings would not materially affect consolidated statements.
- Other exposures: Risks include product liability and warranty costs, acquisition integration and realization of synergies, pension-market sensitivity, international political and currency risks, cybersecurity, environmental regulation, and the possibility of further restructuring charges.
- Tax and controls: U.S. Tax Act accounting amounts were provisional and subject to further analysis. Management and the auditor reported effective financial reporting controls, but Air Liquide Welding—14% of year-end assets—was excluded from the 2017 internal-control assessment while integration continued.
Key facts for investors to verify
- How much future growth and profitability comes from acquired businesses versus organic volume and pricing, especially given the lower gross margin.
- The final U.S. Tax Act accounting, cash tax and repatriation consequences, and whether the expected 2018 tax-rate range is realized.
- Air Liquide Welding integration progress, realized synergies, purchase-accounting adjustments and the durability of the bargain purchase gain’s effect on reported earnings.
- Cash conversion, working-capital trends, debt maturities and the use of cash for acquisitions, dividends and share repurchases.
- Developments in asbestos and product-liability claims, pension obligations, and the effectiveness of integrating Air Liquide Welding into company controls.