LINCOLN ELECTRIC HOLDINGS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with the Company's unaudited consolidated financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q. General The Company is the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products. Welding products include arc welding power sources, computer numerical control and plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes, welding accessories and specialty welding consumables and fabrication. The Company's product offering also includes oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. In addition, the Company has a leading global position in the brazing and soldering alloys market. The Company's products are sold in both domestic and international markets.
In
theAmericas , products are sold principally through industrial distributors, retailers and directly to users of welding products. Outside of theAmericas , the Company has an international sales organization comprised of Company employees and agentswho sell products from the Company's various manufacturing sites to distributors and product users. The Company's business units are aligned into three operating segments. The operating segments consist of Americas Welding,International Welding andThe Harris Products Group . The Americas Welding segment includes welding operations inNorth and South America . The International Welding segment includes welding operations inEurope ,Africa ,Asia andAustralia .The Harris Products Group includes the Company's global oxy-fuel cutting, soldering and brazing businesses as well as its retail business inthe United States . COVID-19 Assessment InMarch 2020 , theWorld Health Organization categorized the current coronavirus disease ("COVID-19") as a pandemic, and the President ofthe United States declared the COVID-19 outbreak a national emergency. COVID-19 continues to spread throughoutthe United States and other countries across the world, and the ultimate duration and severity on the Company's business remains unknown. The outbreak has resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of COVID-19. During the COVID-19 pandemic, substantially all of the Company's global businesses have continued to operate within a critical infrastructure sector (as established by theCybersecurity & Infrastructure Security Agency of theU.S. Department of Homeland Security , as well as other governments worldwide) and as a result, the Company has been able to meet the demand of its customers in the various markets it serves. For the three months endedJune 30, 2020 , the Company experienced weakened global demand trends resulting in a decrease in Net sales and Net income primarily related to COVID-19. The Company has taken actions to protect the health and well-being of employees, while maintaining its workforce to serve customer requirements. These actions did not and are not expected to have a material negative impact on the Company's profitability. New and changing government actions to address the COVID-19 pandemic continue to occur on a regular basis. As a result, the countries in which the Company's products are manufactured and distributed are in varying stages of restrictions. Certain jurisdictions have had to re-establish restrictions due to a resurgence in COVID-19 cases. Additionally, although many of the Company's customers have begun to re-open or increase operating levels, such customers may be forced to close or limit operations as any new COVID-19 outbreaks occur. Even as government restrictions are lifted and economies gradually reopen, the shape of the economic recovery is uncertain and may continue to negatively impact the Company's results of operations, cash flows and financial position in subsequent quarters. Given this current level of economic and operational uncertainty over the impacts of COVID-19, the ultimate financial impact cannot be reasonably estimated at this time. The Company's consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by management as ofJune 30, 2020 . Events and changes in circumstances arising afterJune 30, 2020 , including those resulting from the continued impacts of COVID-19, will be reflected in management's estimates for future periods. DuringMarch 2020 , the Coronavirus Aid, Relief and Economic Security Act, the Families First Coronavirus Response Act and several other state and local legislative acts were signed and enacted into law. The Company continues to evaluate the impact of the new laws on its business, and does not expect a material impact to its consolidated financial statements. 24 --------------------------------------------------------------------------------
For further discussion of this matter, refer "Item 1A. Risk Factors" in Part II of this report.
Results of Operations
The following table shows the Company's results of operations:
Three Months
Ended
Favorable (Unfavorable)
2020 2019 2020 vs. 2019
Amount % of Sales Amount % of Sales $ %
Net sales $ 590,727 $ 777,008 $ (186,281 ) (24.0 %)
Cost of goods sold 401,349 507,127 105,778 20.9 %
Gross profit 189,378 32.1 % 269,881 34.7 % (80,503 ) (29.8 %)
Selling, general &
administrative expenses 126,376 21.4 % 163,388 21.0 % 37,012 22.7 %
Rationalization and asset
impairment charges 23,238 3.9 % 1,307 0.2 % (21,931 ) (1,678.0 %)
Operating income 39,764 6.7 % 105,186 13.5 % (65,422 ) (62.2 %)
Interest expense, net 5,881 5,898 17 0.3 %
Other income (expense) (203 ) 4,196 (4,399 ) (104.8 %)
Income before income taxes 33,680 5.7 % 103,484
13.3 % (69,804 ) (67.5 %)
Income taxes 6,667 18,040 11,373 63.0 %
Effective tax rate 19.8 % 17.4 % (2.4 )%
Net income including
non-controlling interests 27,013 85,444 (58,431 ) (68.4 %)
Non-controlling interests in
subsidiaries' loss 17 (8 ) 25 312.5 %
Net income $ 26,996 4.6 % $ 85,452 11.0 % $ (58,456 ) (68.4 %)
Diluted earnings per share $ 0.45 $ 1.36 $ (0.91 ) (66.9 %)
Six Months Ended June 30,
Favorable (Unfavorable)
2020 2019 2020 vs. 2019
Amount % of Sales Amount % of Sales $ %
Net sales $ 1,292,718 $ 1,536,182 $ (243,464 ) (15.8 %)
Cost of goods sold 866,018 1,007,880 141,862 14.1 %
Gross profit 426,700 33.0 % 528,302 34.4 % (101,602 ) (19.2 %)
Selling, general &
administrative expenses 276,103 21.4 % 323,796 21.1 % 47,693 14.7 %
Rationalization and asset
impairment charges 29,759 2.3 % 4,842 0.3 % (24,917 ) (514.6 %)
Operating income 120,838 9.3 % 199,664 13.0 % (78,826 ) (39.5 %)
Interest expense, net 11,339 11,221 (118 ) (1.1 %)
Other income (expense) 106 7,959 (7,853 ) (98.7 %)
Income before income taxes 109,605 8.5 % 196,402
12.8 % (86,797 ) (44.2 %)
Income taxes 27,037 39,492 12,455 31.5 %
Effective tax rate 24.7 % 20.1 % (4.6 %)
Net income including
non-controlling interests 82,568 156,910 (74,342 ) (47.4 %)
Non-controlling interests in
subsidiaries' loss 10 (22 ) 32 145.5 %
Net income $ 82,558 6.4 % $ 156,932 10.2 % $ (74,374 ) (47.4 %)
Diluted earnings per share $ 1.37 $ 2.47 $ (1.10 ) (44.5 %)
--------------------------------------------------------------------------------
Table of Contents
Net Sales : The following table summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales on a consolidated basis: Three Months Ended June 30, Change in Net Sales due to: Net Sales Net Sales 2019 Volume Acquisitions Price Foreign Exchange 2020Lincoln Electric Holdings, Inc.$ 777,008 $ (190,378 ) $ 15,219 $ (2,407 ) $ (8,715 ) $ 590,727 % Change Lincoln Electric Holdings, Inc. (24.5 %) 2.0 % (0.3 %) (1.1 %) (24.0 %) Six Months Ended June 30, Change in Net Sales due to: Net Sales Net Sales 2019 Volume Acquisitions Price Foreign Exchange 2020 Lincoln Electric Holdings, Inc.$ 1,536,182 $ (255,777 ) $ 39,711 $ (9,167 ) $ (18,231 ) $ 1,292,718 % Change Lincoln Electric Holdings, Inc. (16.7 %) 2.6 % (0.6 %) (1.2 %) (15.8 %) Net sales decreased in the three and six months endedJune 30, 2020 as a result of lower organic sales driven by the impact of COVID-19 on global demand and unfavorable foreign exchange, partially offset by acquisitions. The increase in Net sales from acquisitions in the three months endedJune 30, 2020 was driven by the acquisition of Askaynak within International Welding. The increase in Net sales from acquisitions in the six months endedJune 30, 2020 was driven by the acquisitions of Baker within Americas Welding and Askaynak within International Welding. Refer to Note 4 to the consolidated financial statements for details. Gross Profit: Gross profit for the three and six months endedJune 30, 2020 decreased, as a percent of sales, compared to the prior year primarily due to lower volumes and product mix, including the impact of COVID-19 on global demand. Selling, General & Administrative ("SG&A") Expenses: SG&A expenses decreased for the three and six months endedJune 30, 2020 as compared toJune 30, 2019 due to lower employee costs and discretionary spending, partially offset by higher expense from acquisitions. Rationalization and Asset Impairment Charges: The Company recorded net charges of$23,238 ,$18,494 after-tax, and$29,759 ,$23,039 after-tax, in the three and six months endedJune 30, 2020 , respectively, primarily related to severance charges, non-cash asset impairments of long-lived assets and gains or losses on the disposal of assets. The Company recorded net charges of$1,307 ,$937 after-tax, and$4,842 ,$3,751 after-tax, in the three and six months endedJune 30, 2019 , respectively, primarily related to severance, asset impairments and gains or losses on the disposal of assets. Income Taxes: The increase in the effective tax rate for the three and six months endedJune 30, 2020 as compared toJune 30, 2019 was primarily due to recording the tax expense associated with a valuation allowance in 2020, smaller tax benefits related to the vesting of stock-based compensation in 2020 and income tax benefits for the settlement of tax items recorded in 2019. Net Income: The decrease in Net income for the three and six months endedJune 30, 2020 as compared toJune 30, 2019 was primarily due to lower sales volumes, including the impact of COVID-19 on global demand, and higher Rationalization and asset impairment charges. 26
--------------------------------------------------------------------------------
Table of Contents
Segment Results
Three months
ended June 30, Change in Net Sales due to:
Net Sales Foreign Net Sales
2019 Volume (1) Acquisitions (2) Price (3) Exchange 2020
Operating
Segments
Americas Welding $ 476,607 $ (139,035 ) $ - $ (1,405 ) $ (2,938 ) $ 333,229
International
Welding 212,306 (44,452 ) 15,219 (1,280 ) (4,626 ) 177,167
The Harris
Products Group 88,095 (6,891 ) - 278 (1,151 ) 80,331
% Change
Americas Welding (29.2 %) - (0.3 %) (0.6 %) (30.1 %)
International
Welding (20.9 %) 7.2 % (0.6 %) (2.2 %) (16.6 %)
The Harris
Products Group (7.8 %) - 0.3 % (1.3 %) (8.8 %)
Six Months Ended
June 30, Change in Net Sales due to:
Net Sales
Foreign Net Sales
2019 Volume (1) Acquisitions (2) Price (3) Exchange 2020
Operating
Segments
Americas Welding $ 934,326 $ (176,727 ) $ 6,190 $ (6,797 ) $ (5,228 ) $ 751,764
International
Welding 430,392 (74,959 ) 33,521 (2,971 ) (10,893 ) 375,090
The Harris
Products Group 171,464 (4,091 ) - 601 (2,110 ) 165,864
% Change
Americas Welding (18.9 %) 0.7 % (0.7 %) (0.6 %) (19.5 %)
International
Welding (17.4 %) 7.8 % (0.7 %) (2.5 %) (12.8 %)
The Harris
Products Group (2.4 %) - 0.4 % (1.2 %) (3.3 %)
(1) Decrease for three and six months ended June 30, 2020 for all segments due
to softer demand associated with the current economic environment and the
impacts of COVID-19 on global demand. The Harris Products Group volume declines
were partially offset by higher retail volumes.
(2) Increase for the three months ended June 30, 2020 due to the acquisition of
Askaynak within International Welding. Increase for the six months ended June
30, 2020 due to the acquisition of Baker within Americas Welding and Askaynak
within International Welding. Refer to Note 4 to the consolidated financial
statements for details.
(3) Decrease for Americas Welding reflects lower tariff-related surcharges in
2020 compared to 2019.
27--------------------------------------------------------------------------------
Table of Contents
Adjusted Earnings Before Interest and Income Taxes: Segment performance is measured and resources are allocated based on a number of factors, the primary measure being the Adjusted EBIT profit measure. EBIT is defined as Operating income plus Other income (expense). EBIT is adjusted for special items as determined by management such as the impact of rationalization activities, certain asset impairment charges and gains or losses on disposals of assets.
The following table presents Adjusted EBIT by segment:
Favorable (Unfavorable)
Three months ended June 30, 2020 vs. 2019
2020 2019 $ %
Americas Welding:
Net sales $ 333,229 $ 476,607 $ (143,378 ) (30.1 %)
Inter-segment sales 27,493 34,811 (7,318 ) (21.0 %)
Total Sales $ 360,722 $ 511,418 (150,696 ) (29.5 %)
Adjusted EBIT (3) $ 46,702 $ 84,851 (38,149 ) (45.0 %)
As a percent of total sales (1) 12.9 % 16.6 % (3.7 %)
International Welding:
Net sales $ 177,167 $ 212,306 (35,139 ) (16.6 %)
Inter-segment sales 4,286 4,188 98 2.3 %
Total Sales $ 181,453 $ 216,494 (35,041 ) (16.2 %)
Adjusted EBIT (4) $ 9,682 $ 15,178 (5,496 ) (36.2 %)
As a percent of total sales (1) 5.3 % 7.0 % (1.7 %)
The Harris Products Group :
Net sales $ 80,331 $ 88,095 (7,764 ) (8.8 %)
Inter-segment sales 1,753 2,113 (360 ) (17.0 %)
Total Sales $ 82,084 $ 90,208 (8,124 ) (9.0 %)
Adjusted EBIT $ 11,713 $ 13,488 (1,775 ) (13.2 %)
As a percent of total sales (2) 14.3 % 15.0 % (0.7 %)
Corporate / Eliminations:
Inter-segment sales $ (33,532 ) $ (41,112 ) (7,580 ) (18.4 %)
Adjusted EBIT (5) (1,964 ) (3,969 ) (2,005 ) (50.5 %)
Consolidated:
Net sales $ 590,727 $ 777,008 (186,281 ) (24.0 %)
Net income $ 26,996 $ 85,452 (58,456 ) (68.4 %)
As a percent of total sales 4.6 % 11.0 % (6.4 %)
Adjusted EBIT (6) $ 66,133 $ 109,548 (43,415 ) (39.6 %)
As a percent of sales 11.2 % 14.1 % (2.9 %)
(1) Decrease for the three months ended
2019 primarily driven by lower Net sales volumes driven by the COVID-19
impact on global demand.
(2) Decrease for the three months ended
2019 driven by lower Net sales volumes driven by the COVID-19 impact on
global demand, partially offset by retail volume increases.
(3) The three months ended
asset impairment charges of
severance charges and non-cash asset impairments of long-lived assets as
discussed in Note 6 to the consolidated financial statements. The three
months ended
of step up in value of acquired inventories of $1,399 related to the Baker
acquisition.
28--------------------------------------------------------------------------------
Table of Contents
(4) The three months ended
asset impairment charges of
severance, asset impairments and gains or losses on the disposal of assets
as discussed in Note 6 to the consolidated financial statements. The three
months ended
(5) The three months ended
integration costs of
acquisition.
(6) See non-GAAP Financial Measures for a reconciliation of Net income as
reported and Adjusted EBIT.
The following table presents Adjusted EBIT by segment:
Favorable (Unfavorable)
Six Months Ended June 30, 2020 vs. 2019
2020 2019 $ %
Americas Welding:
Net sales $ 751,764 $ 934,326 $ (182,562 ) (19.5 %)
Inter-segment sales 52,276 64,199 (11,923 ) (18.6 %)
Total Sales $ 804,040 $ 998,525 (194,485 ) (19.5 %)
Adjusted EBIT (3) $ 117,404 $ 166,603 (49,199 ) (29.5 %)
As a percent of total sales (1) 14.6 % 16.7 % (2.1 %)
International Welding:
Net sales $ 375,090 $ 430,392 (55,302 ) (12.8 %)
Inter-segment sales 8,769 8,397 372 4.4 %
Total Sales $ 383,859 $ 438,789 (54,930 ) (12.5 %)
Adjusted EBIT (4) $ 16,297 $ 28,515 (12,218 ) (42.8 %)
As a percent of total sales (1) 4.2 % 6.5 % (2.3 %)
The Harris Products Group :
Net sales $ 165,864 $ 171,464 (5,600 ) (3.3 %)
Inter-segment sales 3,478 3,980 (502 ) (12.6 %)
Total Sales $ 169,342 $ 175,444 (6,102 ) (3.5 %)
Adjusted EBIT $ 24,205 $ 24,007 198 0.8 %
As a percent of total sales (2) 14.3 % 13.7 % 0.6 %
Corporate / Eliminations:
Inter-segment sales $ (64,523 ) $ (76,576 ) (12,053 ) (15.7 %)
Adjusted EBIT (5) (3,063 ) (7,011 ) (3,948 ) (56.3 %)
Consolidated:
Net sales $ 1,292,718 $ 1,536,182 (243,464 ) (15.8 %)
Net income $ 82,558 $ 156,932 (74,374 ) (47.4 %)
As a percent of total sales 6.4 % 10.2 % (3.8 %)
Adjusted EBIT (6) $ 154,843 $ 212,114 (57,271 ) (27.0 %)
As a percent of sales 12.0 % 13.8 % (1.8 %)
(1) Decrease for the six months ended
2019 primarily driven lower Net sales volumes from softer demand in
current economic environment, including the impact of COVID-19 on global
demand.
(2) Increase for the six months ended June 30, 2020 as compared to June 30,
2019 driven by retail volume increases.
(3) The six months ended June 30, 2020 and 2019 exclude Rationalization and
asset impairment charges of
severance charges and non-cash asset impairments of long-lived assets as
discussed in Note 6 to the consolidated financial statements. The six
months ended June 30, 2020 also exclude pension settlement charges of
of step up in value of acquired inventories of $1,399 related to the Baker
acquisition.
29--------------------------------------------------------------------------------
Table of Contents
(4) The six months endedJune 30, 2020 and 2019 exclude Rationalization and asset impairment charges of$5,896 and$3,126 , respectively, related to
severance, asset impairments and gains or losses on the disposal of assets
as discussed in Note 6 to the consolidated financial statements. The six
months ended June 30, 2020 also excludes the amortization of step up in
value of acquired inventories of $806 related to an acquisition and the
six months ended June 30, 2019 exclude gains on disposal of assets of
$3,554 .
(5) The six months ended June 30, 2019 exclude acquisition transaction and
integration costs of $1,804 related to the Air Liquide Welding
acquisition.
(6) See non-GAAP Financial Measures for a reconciliation of Net income as
reported and Adjusted EBIT.
Non-GAAP Financial Measures
The Company reviews Adjusted operating income, Adjusted net income, Adjusted
EBIT, Adjusted effective tax rate, Adjusted diluted earnings per share, Return
on invested capital, Cash conversion, Organic sales, Earnings before interest,
taxes, depreciation and amortization, all non-GAAP financial measures, in
assessing and evaluating the Company's underlying operating performance. These
non-GAAP financial measures exclude the impact of special items on the Company's
reported financial results. Non-GAAP financial measures should be read in
conjunction with the generally accepted accounting principles in the United
States ("GAAP") financial measures, as non-GAAP measures are a supplement to,
and not a replacement for, GAAP financial measures.
30--------------------------------------------------------------------------------
Table of Contents
The following table presents the reconciliations of Operating income as reported
to Adjusted operating income, Net income as reported to Adjusted net income and
Adjusted EBIT, Effective tax rate as reported to Adjusted effective tax rate and
Diluted earnings per share as reported to Adjusted diluted earnings per share:
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
Operating income as reported $ 39,764 $ 105,186 $ 120,838 $ 199,664
Special items (pre-tax):
Rationalization and asset impairment
charges (1) 23,238 1,307 29,759 4,842
Acquisition transaction and
integration costs (2) - 1,014 - 1,804Amortization of step up in value of
acquired inventories (3) - 1,399 806 1,399 Gains on asset disposals (4) - (3,045 ) - (3,045 ) Adjusted operating income$ 63,002 $ 105,861
Net income as reported$ 26,996 $ 85,452 $ 82,558 $ 156,932 Special items: Rationalization and asset impairment charges (1) 23,238 1,307 29,759 4,842 Acquisition transaction and integration costs (2) - 1,014 - 1,804 Pension settlement charges (5) 3,334 - 3,334 -
Amortization of step up in value of
acquired inventories (3) - 1,399 806 1,399 Gains on asset disposals (4) - (3,554 ) - (3,554 ) Tax effect of Special items (6) (5,576 ) (4,751 ) (7,552 ) (5,564 ) Adjusted net income 47,992 80,867 108,905 155,859 Non-controlling interests in subsidiaries' income (loss) 17 (8 ) 10 (22 ) Interest expense, net 5,881 5,898 11,339 11,221 Income taxes as reported 6,667 18,040 27,037 39,492 Tax effect of Special items (6) 5,576 4,751 7,552 5,564 Adjusted EBIT$ 66,133 $ 109,548 $ 154,843 $ 212,114 Effective tax rate as reported 19.8 % 17.4 % 24.7 % 20.1 % Net special item tax impact 0.5 % 4.6 % (0.6 %) 2.3 % Adjusted effective tax rate 20.3 % 22.0 % 24.1 % 22.4 % Diluted earnings per share as reported$ 0.45 $ 1.36$ 1.37 $ 2.47 Special items per share 0.35 (0.08 ) 0.44 (0.01 )
Adjusted diluted earnings per share
(1) Charges primarily related to severance, impairments of long-lived assets and gains or losses on the disposal of assets as discussed in Note 6 to the consolidated financial statements. (2) Costs related to the Air Liquide Welding acquisition and are included in Selling, general & administrative expenses. (3) Costs related to an acquisition and are included in Cost of goods sold. (4) Gains primarily included in Cost of goods sold. (5) Related to lump sum pension payments and are included in Other income (expense). (6) 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 three and six months endedJune 30, 2019 . 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. 31
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources The Company's cash flow from operations can be cyclical. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets.
In
assessing liquidity, the Company reviews working capital measurements to define areas for improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances, borrowings under its existing credit facilities and raising debt in capital markets. As the impact of the COVID-19 pandemic on the economy and the Company's operations evolves, it will continue to assess liquidity needs. A continued worldwide disruption could materially affect the Company's future access to its sources of liquidity, particularly cash flows from operations, financial condition, capitalization and capital investments. In the event of a sustained market deterioration, the Company may need additional liquidity, which would require it to evaluate available alternatives and take appropriate actions. The Company continues to expand globally and periodically looks at transactions that would involve significant investments. The Company can fund its global expansion plans with operational cash flow, but a significant acquisition may require access to capital markets, in particular, the long-term debt market, as well as the syndicated bank loan market. The Company's financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usuallythe United States , and then lends funds to the specific subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made. The following table reflects changes in key cash flow measures: Six Months Ended
2020 2019 $ Change
Cash provided by operating activities (1) $ 126,013 $ 151,985 $ (25,972 )
Cash used by investing activities (2) (18,793 ) (133,644 ) 114,851
Capital expenditures (25,011 ) (36,513 )
11,502
Acquisition of businesses, net of cash acquired - (107,843 )
107,843
Cash used by financing activities (3) (155,692 ) (190,078 )
34,386
Proceeds from short-term borrowings, net 15,106 29,982 (14,876 ) Purchase of shares for treasury (112,975 ) (160,914 )
47,939
Cash dividends paid to shareholders (59,814 ) (60,101 )
287
Decrease in Cash and cash equivalents (4) (56,508 ) (168,988 )
(1) Cash provided by operating activities decreased for the six months endedJune 30, 2020 , compared with the six months endedJune 30, 2019 primarily due to lower company earnings. (2) Cash used by investing activities decreased for the six months endedJune 30, 2020 , compared with the six months endedJune 30, 2019 predominantly due to cash used in the acquisition of businesses in 2019. The Company currently anticipates capital expenditures of$55,000 to$65,000 in 2020. Anticipated capital expenditures include investments for capital maintenance to improve operational effectiveness. Management critically evaluates all proposed capital expenditures and expects each project to increase efficiency, reduce costs, promote business growth or improve the overall safety and environmental conditions of the Company's facilities. (3) Cash used by financing activities decreased in the six months endedJune 30, 2020 , compared with the six months endedJune 30, 2019 due lower purchases of shares for treasury in 2020. (4) Cash and cash equivalents decreased 28.3%, or$56,508 , to$143,055 during the six months endedJune 30, 2020 , from$199,563 as ofDecember 31, 2019 . This decrease was predominantly due to cash used in the purchases of common shares for treasury and cash dividends paid to shareholders, partially offset by proceeds from short-term borrowings and cash provided by operating activities. The decrease in Cash and cash equivalents during the six months endedJune 30, 2020 compares to a decrease of 47.1% during the six months endedJune 30, 2019 . The decrease in 2019 was predominantly due to cash used in the acquisition of businesses, purchases of common shares for treasury and cash dividends paid to shareholders, partially offset by cash provided by operating activities. AtJune 30, 2020 ,$139,302 of Cash and cash equivalents was held by international subsidiaries. The Company's total debt levels increased compared toDecember 31, 2019 predominately due to additional short-term borrowings. Total debt to total invested capital increased to 53.7% atJune 30, 2020 from 47.7% atDecember 31, 2019 . InJuly 2020 , the Company paid a cash dividend of$0.49 per share, or$29,090 , to shareholders of record as ofJune 30, 2020 . 32
--------------------------------------------------------------------------------
Table of Contents
Working Capital Ratios
June 30, 2020 December 31, 2019 June 30, 2019
Average operating working capital to Net
sales (1) (2) 22.4 % 16.8 % 18.4 %
Days sales in Inventories (2) 131.4 99.9 98.4
Days sales in Accounts receivable 56.8 51.4 53.6
Average days in Trade accounts payable 58.1 56.0 50.6
(1) Average operating working capital to net sales is defined as the sum of
Accounts receivable and Inventories less Trade accounts payable as of period end
divided by annualized rolling three months of Net sales.
(2) In order to minimize potential supply chain disruptions in serving customers
due to the COVID-19 crisis, the Company increased inventories resulting in
higher Days sales in Inventories and higher Average operating working capital to
Net sales.
Return on Invested Capital
The Company reviews return on invested capital ("ROIC") in assessing and
evaluating the Company's underlying operating performance. ROIC is a non-GAAP
financial measure that the Company believes is a meaningful metric to investors
in evaluating the Company's financial performance and may be different than the
method used by other companies to calculate ROIC. ROIC is defined as rolling 12
months of Adjusted net income excluding tax-effected interest income and expense
divided by invested capital. Invested capital is defined as total debt, which
includes Short-term debt and Long-term debt, less current portions, plus Total
equity.
The following table presents ROIC:
Twelve Months Ended June 30,
2020 2019
Net income $ 218,735 $ 314,310
Rationalization and asset impairment charges 40,105 8,410
Acquisition transaction and integration costs -
3,607
Pension settlement charges 3,334
5,928
Amortization of step up in value of acquired inventories 2,415 1,399 Gains on disposal of assets - (3,554 ) Gain on change in control (7,601 ) - Tax effect of Special items (1) (9,374 ) (11,295 ) Adjusted net income$ 247,614 $ 318,805 Plus: Interest expense, net of tax of$6,439 and$6,178 in 2020 and 2019, respectively 19,348
18,569
Less: Interest income, net of tax of
1,691 3,912
Adjusted net income before tax effected interest$ 265,271 $ 333,462 Invested Capital June 30, 2020 June 30, 2019 Short-term debt$ 49,597 $ 30,110 Long-term debt, less current portion 715,817 710,458 Total debt 765,414 740,568 Total equity 660,111 846,058 Invested capital$ 1,425,525 $ 1,586,626 Return on invested capital 18.6 % 21.0 % (1) Includes the net tax impact of Special items recorded during the
respective periods, including tax benefits of
a tax item as well as tax deductions associated with an investment in a
subsidiary in the twelve months ended June 30, 2019 .
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.
33
--------------------------------------------------------------------------------
New Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a discussion of new
accounting pronouncements.
Acquisitions
Refer to Note 4 to the consolidated financial statements for a discussion of the
Company's recent acquisitions.
Debt
Revolving Credit Agreement
The Company has a line of credit totaling $400,000 through the Amended and
Restated Credit Agreement (the "Credit Agreement"). The Credit Agreement has a
term of 5 years with a maturity date of June 30, 2022 and may be increased,
subject to certain conditions, by an additional amount up to $100,000 . The
interest rate on borrowings is based on either the London Inter-Bank Offered
Rate ("LIBOR") or the prime rate, plus a spread based on the Company's leverage
ratio, at the Company's election. The Credit Agreement contains customary
affirmative, negative and financial covenants for credit facilities of this
type, including limitations on the Company and its subsidiaries with respect to
liens, investments, distributions, mergers and acquisitions, dispositions of
assets, transactions with affiliates and a fixed charges coverage ratio and
total leverage ratio. As of June 30, 2020 , the Company was in compliance with
all of its covenants and had outstanding borrowings of $40,000 under the Credit
Agreement.
Senior Unsecured Notes
On April 1, 2015 and October 20, 2016 , the Company entered into separate Note
Purchase Agreements pursuant to which it issued senior unsecured notes (the
"Notes") through a private placement. The 2015 Notes and 2016 Notes each have an
aggregate principal amount of $350,000 , comprised of four different series
ranging from $50,000 to $100,000 , with maturity dates ranging from August 20,
2025 through April 1, 2045 , and interest rates ranging from 2.75% and 4.02%.
Interest on the Notes is paid semi-annually. The Company's total weighted
average effective interest rate and remaining weighted average tenure of the
Notes is 3.3% and 13.9 years, respectively. The proceeds of the Notes were used
for general corporate purposes. The Notes contain certain affirmative and
negative covenants. As of June 30, 2020 , the Company was in compliance with all
of its debt covenants relating to the Notes.
Shelf Agreements
On November 27, 2018 , the Company entered into seven uncommitted master note
facilities (the "Shelf Agreements") that allow borrowings up to $700,000 in the
aggregate. The Shelf Agreements have a term of 5 years and the average life of
borrowings cannot exceed 15 years. The Company is required to comply with
covenants similar to those contained in the Notes. As of June 30, 2020 , the
Company was in compliance with all of its covenants and had no outstanding
borrowings under the Shelf Agreements.
As discussed above, the Company's debt agreements require that it maintain
certain financial and other covenants. Although the Company currently expects
continued compliance with debt covenants for the next twelve months and believes
it has adequate liquidity, events resulting from the effects of COVID-19 may
negatively impact the Company's ability to comply with these covenants or
require the Company to pursue alternative financing. The Company has no
assurance that any such alternative financing, if required, could be obtained at
acceptable terms or at all.
Pensions
In March 2020 , the Company approved an amendment to terminate the Lincoln
Electric Company Retirement Annuity Program plan effective as of December 31,
2020 . The Company provided notice to participants of the intent to terminate the
plan and applied for a determination letter. Pension obligations will be
distributed through a combination of lump sum payments to eligible plan
participants and through the purchase of a group annuity contract. Upon
settlement of the pension obligations, the Company will reclassify unrecognized
actuarial gains or losses, currently recorded in AOCI, to the Company's
Consolidated Statements of Income as settlement gains or charges in the second
half of 2021. The Company anticipates the termination process will take
approximately two years to complete.
34--------------------------------------------------------------------------------
Table of Contents
Forward-looking Statements The Company's expectations and beliefs concerning the future contained in this report 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 COVID-19 outbreak, on the Company or its customers, suppliers and the economy in general. The Company has experienced the negative impacts of COVID-19 on its markets and operations; however, the ultimate duration and severity on the Company's business remains unknown. New and changing government actions to address the COVID-19 pandemic continue to occur on a regular basis. As a result, the countries in which the Company's products are manufactured and distributed are in varying stages of restrictions. Certain jurisdictions have had to re-establish restrictions due to a resurgence in COVID-19 cases. Additionally, although many of the Company's customers have begun to re-open or increase operating levels, such customers may be forced to close or limit operations as any new COVID-19 outbreaks occur. Even as government restrictions are lifted and economies gradually reopen, the shape of the economic recovery is uncertain and may continue to negatively impact the Company's results of operations, cash flows and financial position in subsequent quarters. Given this current level of economic and operational uncertainty over the impacts of COVID-19, the ultimate financial impact cannot be reasonably estimated at this time. For additional discussion, see "Item 1A. Risk Factors" presented herein, as well as in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 and on Form 10-Q for the quarter endedMarch 31, 2020 .
© Edgar Online, source
