Lincoln Electric(LECO) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited financial statements and management's analysis for the reporting period Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including statements of income, comprehensive income (loss), balance sheets, statements of equity, and cash flows, along with detailed notes explaining significant accounting policies, revenue recognition, earnings per share, acquisitions, segment information, rationalization charges, AOCI, stock repurchases, inventories, leases, warranty costs, debt, retirement plans, other income/expense, income taxes, and derivatives CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) This statement details the company's revenues, expenses, and net income for the three months ended March 31, 2020 and 2019 | Metric | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :-------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net sales | $701,991 | $759,174 | | Cost of goods sold | $464,669 | $500,753 | | Gross profit | $237,322 | $258,421 | | Selling, general & administrative expenses | $149,727 | $160,408 | | Rationalization and asset impairment charges | $6,521 | $3,535 | | Operating income | $81,074 | $94,478 | | Interest expense, net | $5,458 | $5,323 | | Other income (expense) | $309 | $3,763 | | Income before income taxes | $75,925 | $92,918 | | Income taxes | $20,370 | $21,452 | | Net income including non-controlling interests | $55,555 | $71,466 | | Non-controlling interests in subsidiaries' earnings (loss) | $(7) | $(14) | | Net income | $55,562 | $71,480 | | Basic earnings per share | $0.92 | $1.13 | | Diluted earnings per share | $0.91 | $1.12 | | Cash dividends declared per share | $0.49 | $0.47 | - Net sales decreased by 7.5% and net income decreased by 22.3% year-over-year[9][90] CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) This statement presents net income and other comprehensive income components, reflecting the total change in equity from non-owner sources | Metric | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net income including non-controlling interests | $55,555 | $71,466 | | Other comprehensive income (loss), net of tax | $(72,368) | $6,252 | | Comprehensive income (loss) | $(16,813) | $77,718 | | Comprehensive income (loss) attributable to shareholders | $(16,765) | $77,695 | - A significant currency translation adjustment of $(70,608) thousand contributed to the comprehensive loss in Q1 2020, compared to a gain of $5,136 thousand in Q1 2019[12] CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) This statement provides a snapshot of the company's assets, liabilities, and equity at March 31, 2020, and December 31, 2019 | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------------------------- | :------------------------------------ | :------------------------------------ | | Total Current Assets | $1,059,344 | $1,075,581 | | Total Assets | $2,305,900 | $2,371,213 | | Short-term debt | $132,378 | $34,969 | | Total Current Liabilities | $654,822 | $563,135 | | Total Liabilities | $1,637,940 | $1,552,136 | | Total Shareholders' Equity | $667,103 | $818,172 | | Total Equity | $667,960 | $819,077 | - Short-term debt significantly increased from $34,969 thousand at December 31, 2019, to $132,378 thousand at March 31, 2020[15] CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED) This statement outlines changes in shareholders' equity, including net income, dividends, and share repurchases, for the period | Metric | Balance at Dec 31, 2019 (in thousands) | Changes Q1 2020 (in thousands) | Balance at Mar 31, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total Equity | $819,077 | $(151,117) | $667,960 | | Net income | | $55,562 | | | Currency translation adjustment | | $(70,567) | | | Cash dividends declared | | $(29,280) | | | Purchase of shares for treasury | | $(109,762) | | - The company purchased $109,762 thousand worth of shares for treasury during Q1 2020, contributing to the decrease in total equity[18] CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) This statement details cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2020 and 2019 | Metric | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by operating activities | $21,972 | $25,878 | | Net cash used by investing activities | $(5,728) | $(13,949) | | 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 used by financing activities decreased in Q1 2020 compared to Q1 2019, primarily due to higher short-term borrowings offsetting substantial share repurchases and dividend payments[20][110] NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed explanations and disclosures for the financial statements, covering accounting policies, segment information, and other financial notes NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES This note describes the key accounting principles and methods used in preparing the unaudited consolidated financial statements - The company's unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[24] - The COVID-19 pandemic is expected to negatively impact results of operations, cash flows, and financial position, though the full financial impact cannot be reasonably estimated at this time due to uncertainty[26] - Several new accounting pronouncements (ASU 2018-14, 2018-13, 2016-13, 2020-04) were adopted as of January 1, 2020, with ASU 2016-13 on credit losses having no material impact and ASU 2020-04 on LIBOR transition being assessed for future impact[28] NOTE 2 — REVENUE RECOGNITION This note details the company's policies and disaggregation of revenue from contracts with customers by product line | Product Line | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :----------- | :--------------------------------------------- | :--------------------------------------------- | | Consumables | $405,840 | $442,958 | | Equipment | $296,151 | $316,216 | | Net sales | $701,991 | $759,174 | - Consumable sales decreased by 8.4% and Equipment sales decreased by 6.3% year-over-year[29] - Less than 10% of the Company's Net sales are recognized over time, primarily related to automation products with multiple performance obligations[31] NOTE 3 — EARNINGS PER SHARE This note provides the calculation of basic and diluted earnings per share, including the weighted average shares outstanding | Metric | 3 Months Ended March 31, 2020 | 3 Months Ended March 31, 2019 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net income (in thousands) | $55,562 | $71,480 | | Basic weighted average shares outstanding (000's) | 60,184 | 63,160 | | Diluted weighted average shares outstanding (000's) | 60,799 | 63,899 | | Basic earnings per share | $0.92 | $1.13 | | Diluted earnings per share | $0.91 | $1.12 | - Diluted EPS decreased by $0.21, or 18.8%, from $1.12 in Q1 2019 to $0.91 in Q1 2020[33] NOTE 4 — ACQUISITIONS This note describes recent acquisitions and their impact on the company's consolidated financial statements - Acquired Kaynak Tekniği Sanayi ve Ticaret A.Ş. (Askaynak) in July 2019 to advance regional growth in Europe, the Middle East, and Africa[34] - Acquired Baker Industries, Inc. (Baker) in April 2019 to complement the automation portfolio and metal additive manufacturing service business[35] - Pro forma information for these acquisitions was not presented as their impact on consolidated income statements is not material[36] NOTE 5 — SEGMENT INFORMATION This note provides financial data for the company's operating segments, including net sales and Adjusted EBIT - The company operates in three segments: Americas Welding, International Welding, and The Harris Products Group[37] - Segment performance is primarily measured by Adjusted EBIT, which is Operating income plus Other income (expense), adjusted for special items[38] | Segment | Net Sales Q1 2020 (in thousands) | Adjusted EBIT Q1 2020 (in thousands) | Net Sales Q1 2019 (in thousands) | Adjusted EBIT Q1 2019 (in thousands) | | :----------------------- | :------------------------------- | :----------------------------------- | :------------------------------- | :----------------------------------- | | Americas Welding | $418,535 | $70,702 | $457,719 | $81,752 | | International Welding | $197,923 | $6,615 | $218,086 | $13,337 | | The Harris Products Group | $85,533 | $12,492 | $83,369 | $10,519 | | Corporate / Eliminations | $0 | $(1,099) | $0 | $(3,042) | | Consolidated | $701,991 | $88,710 | $759,174 | $102,566 | - Americas Welding and International Welding segments experienced decreases in Adjusted EBIT, while The Harris Products Group saw an increase[39] NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS This note details charges related to rationalization plans and asset impairments, including associated liabilities | Charge Type | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Rationalization and asset impairment net charges | $6,521 | $3,535 | - Rationalization plans initiated in 2020 within Americas Welding and International Welding segments include headcount restructuring and manufacturing facility consolidation[41] - Total rationalization liabilities at March 31, 2020, were $13,638 thousand, with $854 thousand for Americas Welding and $12,784 thousand for International Welding[43] NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI") This note presents the components of accumulated other comprehensive income (loss) and changes during the period | AOCI Component | Balance at Dec 31, 2019 (in thousands) | Net current-period OCI (loss) Q1 2020 (in thousands) | Balance at Mar 31, 2020 (in thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Unrealized gain (loss) on derivatives | $1,626 | $(2,369) | $(743) | | Defined benefit pension plan activity | $(70,546) | $609 | $(69,937) | | Currency translation adjustment | $(206,930) | $(70,567) | $(277,497) | | Total AOCI | $(275,850) | $(72,327) | $(348,177) | - Currency translation adjustments contributed a significant loss of $(70,567) thousand to AOCI in Q1 2020[44] NOTE 8 — COMMON STOCK REPURCHASE PROGRAM This note provides details on the company's common stock repurchase activities and remaining authorization - The company repurchased 1.3 million shares at an average cost of $80.57 per share during Q1 2020[45] - As of March 31, 2020, 1.5 million common shares remained available for repurchase under the existing program[45] - A new share repurchase program authorizing up to an additional 10 million shares was approved on February 12, 2020[46] NOTE 9 — INVENTORIES This note provides a breakdown of inventory components and the valuation methods used | Component | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :-------------- | :-------------------------------- | :-------------------------------- | | Raw materials | $110,641 | $116,716 | | Work-in-process | $63,077 | $63,744 | | Finished goods | $224,530 | $213,288 | | Total | $398,248 | $393,748 | - Approximately 37% of total inventories at March 31, 2020, were valued using the LIFO method[47] NOTE 10 — LEASES This note details the company's lease assets, liabilities, and related expenses and cash flows | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------------- | :-------------------------------- | :-------------------------------- | | Right-of-use assets | $48,893 | $51,533 | | Total lease liabilities | $50,840 | $52,648 | - Total lease expense was $5,219 thousand for Q1 2020, and cash paid for lease liabilities was $4,097 thousand[51] - As of March 31, 2020, the weighted average remaining lease term is 6.3 years and the weighted average discount rate is 3.6%[52] NOTE 11 — PRODUCT WARRANTY COSTS This note outlines changes in the company's product warranty accruals, including additions and settlements | Metric | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Balance at beginning of year | $20,650 | $19,778 | | Accruals for warranties | $4,117 | $2,847 | | Settlements | $(3,591) | $(2,663) | | Foreign currency translation and other adjustments | $(318) | $(19) | | Balance at March 31 | $20,858 | $19,943 | - Warranty accruals increased by $1,270 thousand in Q1 2020 compared to Q1 2019[53] NOTE 12 — DEBT This note provides information on the company's various debt instruments, including credit agreements, senior notes, and their fair values - The company has a $400,000 thousand Revolving Credit Agreement with $115,000 thousand outstanding as of March 31, 2020[54] - Senior Unsecured Notes totaling $700,000 thousand (from 2015 and 2016 issuances) have maturity dates ranging from 2025 to 2045, with a weighted average effective interest rate of 3.3%[55] - The company has uncommitted master note facilities (Shelf Agreements) allowing borrowings up to $700,000 thousand, with no outstanding borrowings as of March 31, 2020[56] - The fair value of long-term debt was approximately $710,599 thousand at March 31, 2020, compared to a carrying value of $716,062 thousand[57] NOTE 13 — RETIREMENT AND POSTRETIREMENT BENEFIT PLANS This note details the costs associated with the company's U.S. and non-U.S. pension plans and a planned termination | Component | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :-------------------------- | :--------------------------------------------- | :--------------------------------------------- | | U.S. pension plans | $4,207 | $4,764 | | Non-U.S. pension plans | $1,986 | $1,887 | | Total pension cost | $6,193 | $6,651 | - The company approved an amendment to terminate the Lincoln Electric Company Retirement Annuity Program plan effective December 31, 2020, with settlement expected in the second half of 2021[59] NOTE 14 — OTHER INCOME (EXPENSE) This note provides a breakdown of other income and expense components, including equity earnings and pension-related items | Component | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Equity earnings in affiliates | $162 | $1,006 | | Other components of net periodic pension (cost) income | $1,199 | $766 | | Other income (expense) | $(1,052) | $1,991 | | Total Other income (expense) | $309 | $3,763 | - Total Other income (expense) decreased by $3,454 thousand, or 91.8%, in Q1 2020 compared to Q1 2019[60][90] NOTE 15 — INCOME TAXES This note details income tax expense, pretax income, effective tax rates, and unrecognized tax benefits | Metric | 3 Months Ended March 31, 2020 (in thousands) | 3 Months Ended March 31, 2019 (in thousands) | | :-------------------- | :--------------------------------------------- | :--------------------------------------------- | | Income tax expense | $20,370 | $21,452 | | Pretax income | $75,925 | $92,918 | | Effective income tax rate | 26.8% | 23.1% | - The effective tax rate increased by 3.7 percentage points in Q1 2020, primarily due to a valuation allowance and reduced tax benefits from stock-based compensation[61][62] - As of March 31, 2020, the company had $20,256 thousand in unrecognized tax benefits, with a potential reduction of $2,769 thousand by Q1 2021[63][65] NOTE 16 — DERIVATIVES This note describes the company's use of derivative instruments to manage exposures to currency, interest rate, and commodity price risks - The company uses derivatives to manage exposures to currency exchange rates, interest rates, and commodity prices[66] - Cash flow hedges include foreign currency forward contracts ($76,358 thousand notional at March 31, 2020) and an interest rate forward starting swap ($50,000 thousand notional) to hedge future debt issuance[68][69] - Net investment hedges consist of cross currency swap agreements with a notional amount of $50,000 thousand[71] - Undesignated foreign exchange forward contracts, held as economic hedges, had a gross notional amount of $363,772 thousand at March 31, 2020[72] NOTE 17 - FAIR VALUE This note provides fair value measurements for financial instruments, categorized by input levels | Description | Balance as of March 31, 2020 (in thousands) | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) (in thousands) | Significant Other Observable Inputs (Level 2) (in thousands) | Significant Unobservable Inputs (Level 3) (in thousands) | | :------------------------ | :------------------------------------------ | :----------------------------------------------------------------------------------------- | :----------------------------------------------------------- | :------------------------------------------------------- | | Assets: | | | | | | Foreign exchange contracts | $10,468 | $0 | $10,468 | $0 | | Cross currency swap agreements | $1,398 | $0 | $1,398 | $0 | | Total assets | $11,866 | $0 | $11,866 | $0 | | Liabilities: | | | | | | Foreign exchange contracts | $6,310 | $0 | $6,310 | $0 | | Forward starting swap agreement | $352 | $0 | $352 | $0 | | Deferred compensation | $27,717 | $0 | $27,717 | $0 | | Total liabilities | $34,379 | $0 | $34,379 | $0 | - Derivative contracts are valued using Level 2 inputs based on observable spot and forward rates[75] - The deferred compensation liability is measured using market values of participants' underlying investment fund elections[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for Q1 2020, highlighting the negative impact of COVID-19 on sales, gross profit, and net income. It discusses segment-specific results, liquidity, capital resources, and non-GAAP financial measures like Adjusted EBIT and ROIC, noting a decrease in ROIC and an increase in debt-to-invested capital - The company is the world's largest designer and manufacturer of arc welding and cutting products, with three operating segments: Americas Welding, International Welding, and The Harris Products Group[81][83] - COVID-19 has led to softening demand, supply chain disruptions, and logistics constraints, with global demand trends weakening significantly in April, declining in the low 40% range versus the prior year[85] | Metric | 2020 (in thousands) | 2019 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :-------------------- | :-------------------- | :--------- | :--------- | | Net sales | $701,991 | $759,174 | $(57,183) | (7.5%) | | Gross profit | $237,322 | $258,421 | $(21,099) | (8.2%) | | Operating income | $81,074 | $94,478 | $(13,404) | (14.2%) | | Net income | $55,562 | $71,480 | $(15,918) | (22.3%) | | Diluted earnings per share | $0.91 | $1.12 | $(0.21) | (18.8%) | - Net sales decreased primarily due to lower organic sales and unfavorable foreign exchange, partially offset by acquisitions[91] - Cash provided by operating activities decreased by $3,906 thousand, primarily due to lower company earnings and unfavorable changes in working capital[110] - Total debt to total invested capital increased to 55.9% at March 31, 2020, from 47.7% at December 31, 2019, predominantly due to additional short-term borrowings[111] - Return on Invested Capital (ROIC) decreased to 19.7% for the twelve months ended March 31, 2020, from 21.2% in the prior year period[114] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the company's exposure to market risk since December 31, 2019 - No material changes in market risk exposure since December 31, 2019[124] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of March 31, 2020[125] - No material changes in internal control over financial reporting during Q1 2020[126] PART II. OTHER INFORMATION This section covers other important information, including legal proceedings, risk factors, equity sales, and corporate governance updates Item 1. Legal Proceedings This section discloses ongoing legal proceedings, primarily asbestos-related claims, where the company is a co-defendant. The number of asbestos claims decreased by 109 to approximately 3,124 as of March 31, 2020 - The company is a co-defendant in approximately 3,124 asbestos-induced illness cases as of March 31, 2020, a net decrease of 109 claims[129] Item 1A. Risk Factors This section highlights the COVID-19 pandemic as a new material risk factor, detailing its potential adverse effects on operations, financial condition, liquidity, and capital investments due to demand softening, supply chain disruptions, and government measures - The COVID-19 pandemic is a new material adverse risk factor, with unknown duration and severity, potentially impacting operations, financial condition, liquidity, and capital investments[131] - Potential impacts include temporary closures, decreased employee availability, border closures, and disruptions to channel partners, leading to supply chain issues and decreased customer demand[132] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on issuer purchases of common shares during Q1 2020, totaling 1,357,526 shares at an average price of $80.85 per share, and notes the approval of a new 10 million share repurchase program | Period | Total Number of Shares Repurchased | Average Price Paid Per Share | | :-------------------- | :--------------------------------- | :--------------------------- | | January 1 - 31, 2020 | 241,080 | $95.73 | | February 1 - 29, 2020 | 335,024 | $90.55 | | March 1 - 31, 2020 | 781,422 | $72.11 | | Total | 1,357,526 | $80.85 | - A new share repurchase program for up to an additional 10 million shares was authorized on February 12, 2020[141] Item 4. Mine Safety Disclosures This item states that mine safety disclosures are not applicable to the company - Not applicable[135] Item 5: Other Information This section reports on the appointment of Gabriel Bruno as the new Chief Financial Officer and Treasurer, including his compensatory arrangements, and summarizes the results of the 2020 Annual Meeting of Shareholders, including director elections and advisory votes on executive compensation - Gabriel Bruno succeeded Vincent K. Petrella as Chief Financial Officer and Treasurer on April 22, 2020[136] - Gabriel Bruno received an award of 4,027 restricted stock units (approx. $300,000) and an increased target bonus of $360,000 annually[137] - Shareholders elected eleven directors, ratified Ernst & Young LLP as the independent auditor, and approved executive compensation on an advisory basis at the 2020 Annual Meeting[139][140][142] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications, XBRL documents, and the cover page interactive data file - Includes certifications (31.1, 31.2, 32.1) and various XBRL documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF, 104)[144] Signatures This section contains the formal declaration that the report has been duly signed on behalf of Lincoln Electric Holdings, Inc. by Gabriel Bruno, Executive Vice President, Chief Financial Officer and Treasurer, on April 27, 2020 - The report was signed by Gabriel Bruno, Executive Vice President, Chief Financial Officer and Treasurer, on April 27, 2020[148]