Lincoln Electric Holdings, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Dollar amounts below are in millions unless stated otherwise. Lincoln Electric designs and manufactures welding, cutting, automation, brazing and soldering products, reported through Americas Welding, International Welding and The Harris Products Group.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $826.5 | $590.7 | $1,583.5 | $1,292.7 |
| Gross profit / margin | $274.0 / 33.2% | $189.4 / 32.1% | $527.8 / 33.3% | $426.7 / 33.0% |
| Operating income / margin | $121.8 / 14.7% | $39.8 / 6.7% | $225.8 / 14.3% | $120.8 / 9.3% |
| Net income | $96.1 | $27.0 | $170.3 | $82.6 |
| Diluted EPS | $1.60 | $0.45 | $2.83 | $1.37 |
| Operating cash flow | Not separately presented for the quarter | $145.2 | $126.0 |
- Q2 sales increased 39.9%; first-half sales increased 22.5%. Management attributed growth to recovering demand and higher volumes, price increases to offset input costs, favorable currency translation, and the Zeman Bauelemente acquisition. For the first half, reported sales growth comprised volume 13.4%, price 6.6%, foreign exchange 2.3% and acquisitions 0.3%.
- First-half gross margin edged up to 33.3% from 33.0%; higher volumes and operating leverage were partly offset by LIFO charges of $13.3 million, versus $0.1 million in the 2020 period. Q2 LIFO charges were $9.5 million, versus a small benefit in Q2 2020.
- First-half SG&A rose to $297.2 million from $276.1 million, primarily on higher employee costs. Rationalization and impairment charges fell to $4.8 million from $29.8 million for the first half, contributing to higher reported operating income.
- First-half effective tax rate was 20.7%, versus 24.7%, reflecting favorable discrete tax adjustments and a prior-year valuation allowance. Q2 rates were 18.3% and 19.8%, respectively.
- First-half segment sales and Adjusted EBIT: Americas Welding $882.7 million and $160.8 million; International Welding $475.4 million and $48.8 million; Harris Products Group $225.3 million and $36.9 million. Adjusted EBIT is a non-GAAP measure; consolidated first-half Adjusted EBIT was $241.1 million versus $154.8 million.
Cash, liquidity and debt
- Cash and equivalents were $190.9 million at June 30, down from $257.3 million at December 31, 2020; $142.5 million was held by international subsidiaries. First-half operating cash flow of $145.2 million was offset by investing outflows of $102.4 million and financing outflows of $109.0 million, resulting in a $66.4 million cash decrease.
- Investing cash use included $83.7 million for business acquisitions and $27.8 million in capital expenditures. Financing included $53.7 million of share repurchases and $61.4 million of dividends paid.
- Short-term debt was $10.4 million and long-term debt, less current portion, was $718.1 million. The $500 million revolving credit facility, maturing April 2026, had no borrowings; other credit lines totaled $94.2 million, with $9.8 million outstanding. The company reported compliance with debt covenants. Cash less reported debt was approximately $537.7 million.
- Current assets were $1,237.9 million and current liabilities $696.0 million. Inventories increased to $477.7 million from $381.3 million at year-end; management said it raised inventories to mitigate potential pandemic-related supply disruptions.
Outlook, commentary and notable items
- Management anticipated 2021 capital expenditures of $65 million to $75 million. The filing provides no specific full-year revenue or earnings guidance.
- Management said operating cash flow, existing cash, credit facilities and access to debt markets should meet ongoing cash requirements for the foreseeable future. It noted significant acquisitions could require capital-market financing.
- The April 2021 acquisition of Zeman Bauelemente expanded international automation capabilities in structural steel and infrastructure. The filing reports $83.7 million of acquisition cash outflow; pro forma results were not presented because the impact was not material.
- The company expected termination of its U.S. Retirement Annuity Program to be substantially complete by year-end 2021. Pension settlement could cause actuarial gains or losses in accumulated other comprehensive income to be recorded in earnings in the second half; the amount is not clearly stated.
- Key risks include COVID-19 and economic uncertainty, supply-chain disruption and input-cost/commodity volatility, currency movements, interest rates and credit-market access, litigation, acquisitions and integration, regulation, and rationalization costs. The filing reported approximately 2,751 asbestos-related plaintiff claims at June 30, with the company one of many defendants in each case; damages sought were generally unspecified.
- Management reported no material change in market-risk exposure since year-end and concluded disclosure controls were effective at June 30, 2021.
Important facts for investors to verify
- Whether recovering demand, volume and pricing persist, and how input-cost inflation and LIFO charges affect gross margins.
- Whether elevated inventories convert into sales and cash without increased obsolescence or further working-capital pressure.
- The final purchase-price allocation and integration performance of Zeman Bauelemente.
- The timing and earnings impact of the planned pension-plan termination and settlement charges.
- Cash generation, capital spending, dividends and repurchases relative to debt and liquidity needs; the filing does not provide specific earnings guidance.
- Developments in COVID-19 conditions, supply-chain risks, and asbestos-related and other litigation.