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Lincoln Electric Reports First Quarter 2020 Results

Apr 27 2020

First Quarter 2020 Highlights

  • Operating as an “essential business” (1) in substantially all locations to serve customers
  • Implemented best practice hygiene and safety measures to protect employees
  • Net sales declined 7.5%; Organic sales declined 9.5%
  • Operating income margin declined 90 basis points to 11.5%; Adjusted operating income margin declined 40 basis points to 12.6%
  • Q1 EPS decreases 18.8% to $0.91; Adjusted EPS decreases 14.5% to $1.00
  • $140 million returned to shareholders through dividends and share repurchases
  • Solid balance sheet with 1.85 Total debt/EBITDA ratio, $163 million in cash and $314 million in available credit under existing borrowing facilities
(1)  "Essential business" defined as business that continues to operate within a critical infrastructure sector established by the Cybersecurity & Infrastructure Security Agency of the U.S. Department of Homeland Security, as well as other governments worldwide.
 

CLEVELAND, April 27, 2020 (GLOBE NEWSWIRE) -- Lincoln Electric Holdings, Inc. (the “Company”) (Nasdaq: LECO) today reported first quarter 2020 net income of $55.6 million, or diluted earnings per share (EPS) of $0.91, which includes special item after-tax net charges of $5.4 million, or $0.09 EPS.  This compares with prior year period net income of $71.5 million, or $1.12 EPS, which included special item after-tax charges of $3.5 million, or $0.05 EPS.  Excluding these items, first quarter 2020 adjusted net income was $60.9 million, or $1.00 EPS, as compared with $75.0 million, or $1.17 EPS in the prior year period.  The reported and adjusted effective tax rate was 26.8% in the first quarter 2020 as compared with a reported 23.1% tax rate in the prior year period, or 22.9% on an adjusted basis.

First quarter 2020 sales decreased 7.5% to $702.0 million from a 9.5% decrease in organic sales and 1.3% unfavorable foreign exchange, partially offset by a 3.2% benefit from acquisitions.  Operating income for the first quarter 2020 was $81.1 million, or 11.5% of sales.  This compares with operating income of $94.5 million, or 12.4% of sales, in the prior year period.  Excluding special items, adjusted operating income was $88.4 million, or 12.6% of sales, as compared with $98.8 million, or 13.0% of sales, in the prior year period.

“We executed well in an increasingly challenging environment,” said Christopher L. Mapes, Chairman, President and Chief Executive Officer. “Our priority has been to protect employees’ health and safety as we operated as an ‘essential business’ across substantially all of our locations in the quarter.”

“Global demand trends weakened significantly in April, declining in the low 40% range versus the prior year,” stated Mapes. “To mitigate the impact of lower demand, we expanded our cost reduction initiatives and expect these new measures, combined with earlier actions, to now generate $40 to $45 million in realized cost savings in 2020.  While we expect demand to trough in the second quarter, our strong investment-grade balance sheet profile, liquidity, and cash flow generation give me tremendous confidence in our ability to successfully navigate this challenging period and generate long-term value for our shareholders.”

Webcast Information

A conference call to discuss first quarter 2020 financial results will be webcast live today, April 27, 2020, at 10:00 a.m., Eastern Time.  This webcast is accessible at https://ir.lincolnelectric.com.  Listeners should go to the web site prior to the call to register, download and install any necessary audio software.  A replay of the webcast will be available on the Company's web site.

If investors would like to ask questions, please dial (877) 344-3899 (domestic) or (315) 625-3087 (international) and use confirmation code 9746539.  Telephone participants are asked to dial in 10 - 15 minutes prior to the start of the conference call.

Financial results for the first quarter 2020 can also be obtained at https://ir.lincolnelectric.com.

About Lincoln Electric

Lincoln Electric is the world leader in the design, development and manufacture of arc welding products, automated joining, assembly and cutting systems, plasma and oxy-fuel cutting equipment and has a leading global position in brazing and soldering alloys.  Headquartered in Cleveland, Ohio, Lincoln has 59 manufacturing locations in 18 countries and a worldwide network of distributors and sales offices covering more than 160 countries.  For more information about Lincoln Electric and its products and services, visit the Company’s website at https://www.lincolnelectric.com.

Non-GAAP Information

Adjusted operating income, Adjusted net income, Adjusted EBIT, Adjusted effective tax rate, Adjusted diluted earnings per share, Organic sales, Cash conversion, Return on invested capital and Earnings before interest, taxes, depreciation and amortization ("EBITDA") are non-GAAP financial measures.  Management uses non-GAAP measures to assess the Company's operating performance by excluding certain disclosed special items that management believes are not representative of the Company's core business.  Management believes that excluding these special items enables them to make better period-over-period comparisons and benchmark the Company's operational performance against other companies in its industry more meaningfully.  Furthermore, management believes that non-GAAP financial measures provide investors with meaningful information that provides a more complete understanding of Company operating results and enables investors to analyze financial and business trends more thoroughly.  Non-GAAP financial measures should not be viewed in isolation, are not a substitute for GAAP measures and have limitations including, but not limited to, their usefulness as comparative measures as other companies may define their non-GAAP measures differently.

Forward-Looking Statements

The Company’s expectations and beliefs concerning the future contained in this news release are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements reflect management’s current expectations and involve a number of risks and uncertainties.  Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “guidance” or words of similar meaning.  Actual results may differ materially from such statements due to a variety of factors that could adversely affect the Company’s operating results.  The factors include, but are not limited to: general economic, financial and market conditions; the effectiveness of operating initiatives; completion of planned divestitures; interest rates; disruptions, uncertainty or volatility in the credit markets that may limit our access to capital; currency exchange rates and devaluations; adverse outcome of pending or potential litigation; actual costs of the Company’s rationalization plans; possible acquisitions, including the Company’s ability to successfully integrate acquisitions; market risks and price fluctuations related to the purchase of commodities and energy; global regulatory complexity; the effects of changes in tax law; tariff rates in the countries where the Company conducts business; and the possible effects of events beyond our control, such as political unrest, acts of terror, natural disasters and pandemics, including the current coronavirus disease ("COVID-19") outbreak, on the Company or its customers, suppliers and the economy in general.  The Company has begun to see the impacts of COVID-19 on its markets and operations including softening demand, supply chain disruptions, and other logistics constraints.  The full extent to which COVID-19 will adversely impact the Company’s business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects. While this matter will negatively impact the Company’s results of operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the full financial impact cannot be reasonably estimated at this time. For additional discussion, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Contact

Amanda Butler
Vice President, Investor Relations & Communications
Tel: 216.383.2534
Email: Amanda_Butler@lincolnelectric.com

 

 

Lincoln Electric Holdings, Inc.
Financial Highlights
(In thousands, except per share amounts)
(Unaudited)

Consolidated Statements of Income

  Three Months Ended March 31,   Fav (Unfav) to
Prior Year
  2020   % of Sales   2019   % of Sales   $   %
Net sales $ 701,991     100.0 %   $ 759,174     100.0 %   $ (57,183 )   (7.5 %)
Cost of goods sold 464,669     66.2 %   500,753     66.0 %   36,084     7.2 %
Gross profit 237,322     33.8 %   258,421     34.0 %   (21,099 )   (8.2 %)
Selling, general & administrative expenses 149,727     21.3 %   160,408     21.1 %   10,681     6.7 %
Rationalization and asset impairment charges 6,521     0.9 %   3,535     0.5 %   (2,986 )   (84.5 %)
Operating income 81,074     11.5 %   94,478     12.4 %   (13,404 )   (14.2 %)
Interest expense, net 5,458     0.8 %   5,323     0.7 %   (135 )   (2.5 %)
Other income (expense) 309         3,763     0.5 %   (3,454 )   (91.8 %)
Income before income taxes 75,925     10.8 %   92,918     12.2 %   (16,993 )   (18.3 %)
Income taxes 20,370     2.9 %   21,452     2.8 %   1,082     5.0 %
Effective tax rate 26.8 %       23.1 %       (3.7 %)    
Net income including non-controlling interests 55,555     7.9 %   71,466     9.4 %   (15,911 )   (22.3 %)
Non-controlling interests in subsidiaries’ loss (7 )       (14 )       7     50.0 %
Net income $ 55,562     7.9 %   $ 71,480     9.4 %   $ (15,918 )   (22.3 %)
                       
Basic earnings per share $ 0.92         $ 1.13         $ (0.21 )   (18.6 %)
Diluted earnings per share $ 0.91         $ 1.12         $ (0.21 )   (18.8 %)
Weighted average shares (basic) 60,184         63,160              
Weighted average shares (diluted) 60,799         63,899              

 

Lincoln Electric Holdings, Inc.
Financial Highlights
(In thousands)
(Unaudited)

Balance Sheet Highlights

Selected Consolidated Balance Sheet Data March 31, 2020   December 31, 2019
Cash and cash equivalents $ 163,375     $ 199,563  
Total current assets 1,059,344     1,075,581  
Property, plant and equipment, net 503,179     529,344  
Total assets 2,305,900     2,371,213  
Total current liabilities 654,822     563,135  
Short-term debt (1) 132,378     34,969  
Long-term debt, less current portion 715,950     712,302  
Total equity 667,960     819,077  
       
Operating Working Capital March 31, 2020   December 31, 2019
Accounts receivable, net $ 385,673     $ 374,649  
Inventories 398,248     393,748  
Trade accounts payable 248,335     273,002  
Operating working capital $ 535,586     $ 495,395  
       
Average operating working capital to Net sales (2) 19.1 %   16.8 %
       
Invested Capital March 31, 2020   December 31, 2019
Short-term debt (1) $ 132,378     $ 34,969  
Long-term debt, less current portion 715,950     712,302  
Total debt 848,328     747,271  
Total equity 667,960     819,077  
Invested capital $ 1,516,288     $ 1,566,348  
       
Total debt / invested capital 55.9 %   47.7 %

 

(1) Includes current portion of long-term debt.
   
(2) Average operating working capital to Net sales is defined as operating working capital as of period end divided by annualized rolling three months of Net sales.

 

Lincoln Electric Holdings, Inc.
Financial Highlights
(In thousands, except per share amounts)
(Unaudited)
 Non-GAAP Financial Measures

  Three Months Ended March 31,
  2020   2019
Operating income as reported $ 81,074     $ 94,478  
Special items (pre-tax):      
Rationalization and asset impairment charges (2) 6,521     3,535  
Acquisition transaction and integration costs (3)     790  
Amortization of step up in value of acquired inventories (4) 806      
Adjusted operating income (1) $ 88,401     $ 98,803  
As a percent of total sales 12.6 %   13.0 %
       
Net income as reported $ 55,562     $ 71,480  
Special items:      
Rationalization and asset impairment charges (2) 6,521     3,535  
Acquisition transaction and integration costs (3)     790  
Amortization of step up in value of acquired inventories (4) 806      
Tax effect of Special items (5) (1,976 )   (813 )
Adjusted net income (1) 60,913     74,992  
Non-controlling interests in subsidiaries’ loss (7 )   (14 )
Interest expense, net 5,458     5,323  
Income taxes as reported 20,370     21,452  
Tax effect of Special items (5) 1,976     813  
Adjusted EBIT (1) $ 88,710     $ 102,566  
       
Effective tax rate as reported 26.8 %   23.1 %
Net special item tax impact     (0.2 %)
Adjusted effective tax rate (1) 26.8 %   22.9 %
       
Diluted earnings per share as reported $ 0.91     $ 1.12  
Special items per share 0.09     0.05  
Adjusted diluted earnings per share (1) $ 1.00     $ 1.17  
       
Weighted average shares (diluted) 60,799     63,899  

 

(1) Adjusted operating income, Adjusted net income, Adjusted EBIT, Adjusted effective tax rate and Adjusted diluted earnings per share are non-GAAP financial measures.  Refer to Non-GAAP Information section.
   
(2) Primarily related to severance, asset impairments and gains or losses on the disposal of assets.
   
(3) Related to the acquisition of Air Liquide Welding and are included in Selling, general & administrative expenses.
   
(4) Related to an acquisition and are included in Cost of goods sold.
   
(5) Includes the net tax impact of Special items recorded during the respective periods.

The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate.  The applicable tax rates reflect the taxable jurisdiction and nature of each Special item.

 

Lincoln Electric Holdings, Inc.
Financial Highlights
(In thousands, except per share amounts)
(Unaudited)

Non-GAAP Financial Measures

  Twelve Months Ended March 31,
Return on Invested Capital 2020   2019
Net income as reported $ 277,191     $ 297,722  
Rationalization and asset impairment charges 18,174     18,645  
Acquisition transaction and integration costs 1,014     3,381  
Pension settlement charges     5,928  
Amortization of step up in value of acquired inventories 3,814      
Gains on asset disposals (3,554 )    
Gain on change in control (7,601 )    
Tax effect of Special items (2) (8,549 )   (7,328 )
Adjusted net income (1) $ 280,489     $ 318,348  
Plus: Interest expense, net of tax of $6,484 and $6,211 in 2020 and 2019, respectively 19,489     18,666  
Less: Interest income, net of tax of $605 and $1,605 in 2020 and 2019, respectively 1,818     4,825  
Adjusted net income before tax-effected interest $ 298,160     $ 332,189  
       
Invested Capital March 31, 2020   March 31, 2019
Short-term debt $ 132,378     $ 110  
Long-term debt, less current portion 715,950     705,725  
Total debt 848,328     705,835  
Total equity 667,960     864,665  
Invested capital $ 1,516,288     $ 1,570,500  
       
Return on invested capital (1) 19.7 %   21.2 %
       
  Twelve Months Ended March 31,
Total Debt / EBITDA 2020   2019
Net income as reported $ 277,191     $ 297,722  
Income taxes 74,328     79,741  
Interest expense, net 23,550     18,447  
Depreciation and amortization 83,614     73,113  
EBITDA (1) $ 458,683     $ 469,023  
       
  March 31, 2020   March 31, 2019
Total debt $ 848,328     $ 705,835  
       
Total debt / EBITDA 1.85     1.50  

 

(1) Adjusted net income, Return on invested capital and EBITDA are non-GAAP financial measures.  Refer to Non-GAAP Information section.
   
(2) Includes the net tax impact of Special items recorded during the respective periods, including tax benefits of $4,852 for the settlement of a tax item as well as tax deductions associated with an investment in a subsidiary in the twelve months ended March 31, 2020.

The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate.  The applicable tax rates reflect the taxable jurisdiction and nature of each Special item.

 

Lincoln Electric Holdings, Inc.
Financial Highlights
(In thousands, except per share amounts)
(Unaudited)

Condensed Consolidated Statements of Cash Flows

  Three Months Ended March 31,
  2020   2019
OPERATING ACTIVITIES:      
Net income $ 55,562     $ 71,480  
Non-controlling interests in subsidiaries’ loss (7 )   (14 )
Net income including non-controlling interests 55,555     71,466  
Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities:      
Rationalization and asset impairment net (gains) charges (236 )   1,424  
Depreciation and amortization 21,028     18,901  
Equity earnings in affiliates, net (162 )   (448 )
Other non-cash items, net (4,182 )   4,394  
Changes in operating assets and liabilities, net of effects from acquisitions:      
Increase in accounts receivable (25,698 )   (26,900 )
Increase in inventories (17,401 )   (14,638 )
Decrease in trade accounts payable (16,676 )   (15,107 )
Net change in other current assets and liabilities 11,693     (14,648 )
Net change in other long-term assets and liabilities (1,949 )   1,434  
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,972     25,878  
       
INVESTING ACTIVITIES:      
Capital expenditures (11,828 )   (16,251 )
Proceeds from sale of property, plant and equipment 6,100     302  
Other investing activities     2,000  
NET CASH USED BY INVESTING ACTIVITIES (5,728 )   (13,949 )
       
FINANCING ACTIVITIES:      
Net change in borrowings 97,777     (3 )
Proceeds from exercise of stock options 1,047     637  
Purchase of shares for treasury (109,762 )   (75,584 )
Cash dividends paid to shareholders (30,675 )   (30,560 )
NET CASH USED BY FINANCING ACTIVITIES (41,613 )   (105,510 )
       
Effect of exchange rate changes on Cash and cash equivalents (10,819 )   1,866  
DECREASE IN CASH AND CASH EQUIVALENTS (36,188 )   (91,715 )
Cash and cash equivalents at beginning of period 199,563     358,849  
Cash and cash equivalents at end of period $ 163,375     $ 267,134  
       
Cash dividends paid per share $ 0.49     $ 0.47  

 

Lincoln Electric Holdings, Inc.
Segment Highlights (1)
(In thousands)
(Unaudited)

  Americas Welding   International Welding   The Harris
Products Group
  Corporate /
Eliminations
  Consolidated
Three months ended March 31, 2020                
Net sales $ 418,535     $ 197,923     $ 85,533     $     $ 701,991  
Inter-segment sales 24,783     4,483     1,725     (30,991 )    
Total $ 443,318     $ 202,406     $ 87,258     $ (30,991 )   $ 701,991  
                   
Net income                 $ 55,562  
As a percent of total sales                 7.9 %
                   
EBIT (1) $ 69,512     $ 478     $ 12,492     $ (1,099 )   $ 81,383  
As a percent of total sales 15.7 %   0.2 %   14.3 %       11.6 %
Special items charges (gains) (3) 1,190     6,137             7,327  
Adjusted EBIT (2) $ 70,702     $ 6,615     $ 12,492     $ (1,099 )   $ 88,710  
As a percent of total sales 15.9 %   3.3 %   14.3 %       12.6 %
                   
Three months ended March 31, 2019                
Net sales $ 457,719     $ 218,086     $ 83,369     $     $ 759,174  
Inter-segment sales 29,388     4,209     1,867     (35,464 )    
Total $ 487,107     $ 222,295     $ 85,236     $ (35,464 )   $ 759,174  
                   
Net income                 $ 71,480  
As a percent of total sales                 9.4 %
                   
EBIT (1) $ 80,416     $ 11,138     $ 10,519     $ (3,832 )   $ 98,241  
As a percent of total sales 16.5 %   5.0 %   12.3 %       12.9 %
Special items charges (gains) (4) 1,336     2,199         790     4,325  
Adjusted EBIT (2) $ 81,752     $ 13,337     $ 10,519     $ (3,042 )   $ 102,566  
As a percent of total sales 16.8 %   6.0 %   12.3 %       13.5 %

 

(1) EBIT is defined as Operating income plus Other income (expense).
   
(2) The primary profit measure used by management to assess segment performance is Adjusted EBIT.  EBIT for each operating segment is adjusted for special items to derive Adjusted EBIT.
   
(3) Special items in 2020 reflect Rationalization and asset impairment charges of $1,190 and $5,331 in Americas Welding and International Welding, respectively, and amortization of step up in value of acquired inventories of $806 in International Welding related to an acquisition.
   
(4) Special items in 2019 reflect Rationalization and asset impairment charges of $1,336 in Americas Welding and $2,199 in International Welding and acquisition transaction and integration costs of $790 in Corporate/Eliminations related to the acquisition of Air Liquide Welding.

 

Lincoln Electric Holdings, Inc.
Change in Net Sales by Segment
(In thousands)
(Unaudited)

 
Three Months Ended March 31st Change in Net Sales by Segment
             
        Change in Net Sales due to:    
    Net Sales
2019
  Volume   Acquisitions   Price   Foreign
Exchange
  Net Sales
2020
Operating Segments                        
Americas Welding   $ 457,719     $ (37,692 )   $ 6,190     $ (5,392 )   $ (2,290 )   $ 418,535  
International Welding   218,086     (30,507 )   18,302     (1,691 )   (6,267 )   197,923  
The Harris Products Group   83,369     2,800         323     (959 )   85,533  
Consolidated   $ 759,174     $ (65,399 )   $ 24,492     $ (6,760 )   $ (9,516 )   $ 701,991  
                         
% Change                        
Americas Welding       (8.2 %)   1.4 %   (1.2 %)   (0.5 %)   (8.6 %)
International Welding       (14.0 %)   8.4 %   (0.8 %)   (2.9 %)   (9.2 %)
The Harris Products Group       3.4 %       0.4 %   (1.2 %)   2.6 %
Consolidated       (8.6 %)   3.2 %   (0.9 %)   (1.3 %)   (7.5 %)
                         

 

lincoln logo.jpg

 

Source: Lincoln Electric Holdings, Inc.