Lincoln Electric Holdings, Inc. 2015 Earnings Conference Call October 30, 2015 Christopher L. Mapes Chairman, President & Chief Executive Officer Vincent K. Petrella Executive Vice President & Chief Financial Officer
Safe Harbor and Regulation G Disclosures Forward-Looking Statements: Statements made during this presentation which are not historical facts may be considered forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied. 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. For further information concerning issues that could materially affect financial performance related to forward-looking statements, please refer to Lincoln Electric s quarterly earnings releases and periodic filings with the Securities and Exchange Commission, which can be found on www.sec.gov or on www.lincolnelectric.com. Non-GAAP Measures: Our management uses non-gaap financial measures in assessing and evaluating the Company s performance, which exclude items we consider unusual or special items. We believe the use of such financial measures and information may be useful to investors. Non-GAAP financial measures should be read in conjunction with the GAAP financial measures, as non-gaap measures are a supplement to, and not a replacement for, GAAP financial measures. Please refer to the attached schedule for a reconciliation of non-gaap financial measures to the related GAAP financial measures. 2
2015 Highlights Focused on margin performance in a challenging quarter Reported sales declined 9.9%; organic sales down 6.9% on lower volumes Reported results unfavorably impacted by $181 million of pre-tax special charges or $127 million after-tax impact, or $(1.71) to EPS Margins resilient: 15.1% Adjusted operating income margin (+40 bps vs. PY) Adjusted EPS of $0.89 Net Operating Working Capital to Net Sales at 17.5% Solid cash flow generation: $105 million cash flow from operations, >100% FCF conversion, and returned $161 million to shareholders (shares & dividends) ROIC at 12.0%, or 21.4% excluding special charges 3
End Markets Weakened in the Quarter Volumes declined 10.2% on weakening demand trends Automation up double digit percent while consumables and equipment declined on: Weak oil and gas, heavy fabrication and U.S. export demand Broad weakening in domestic North American general fabrication demand Weak South American macro s and ongoing strategic repositioning in China Challenging year-over-year comparisons in North America, Europe and Harris (Volumes increased +5.7%, +12.5% and +7.4%, respectively in -2014) End Sectors slowing: Growth (rates decelerating): Transportation, Structural (non-residential construction), and Pipe Mills Weakening demand trends: General Industrial Fabrication, Energy (includes pipeline, offshore, power generation/chemical processing) and Heavy Fabrication (includes construction, mining and agricultural equipment) 4
Staying Focused on Growth & Cost Reductions Investing in Growth Areas: Automation, Aluminum and Education M&A strategy: Wolf Robotics (automation) and SWP (alloys) New product development in high-growth areas Expanding our presence in targeted customer accounts Implementing Our Cost Reduction Plan to Align the Business with Market Conditions: New actions taken in : Continuing workforce reductions including a voluntary separation incentive program in the U.S. Temporary suspension of the 401K match Maintaining cost saving actions initiated in Q2: Aligned productive hours with demand, reduced discretionary spending, cap-ex and associated project expenses Now expecting $20 to $25 million in annualized temporary benefits and $10 to $12 million in annualized structural cost savings starting in Q4 5
Income Statement 2015 % of % of YoY % $ in Millions 2015 Sales 2014 Sales Change Fav/(Unfav) Sales Mix Net Sales 2 $ 645.2 $ 715.8 (9.9%) Volume (10.2%) Gross Profit 198.9 30.8% 241.6 33.8% (17.7%) Price 3.3% SG&A 128.3 19.9% 136.4 19.1% 6.0% Acquisitions 3.0% Operating Income (loss) 2 (84.0) - 76.1 10.6% (210.4%) FX (5.9%) Operating Income, as Adjusted 1,2 97.1 15.1% 105.2 14.7% (7.7%) Total (9.9%) Interest Expense (5.8) (0.9%) (1.2) (0.2%) (394.3%) Income Taxes 28.0 (4.3%) 33.0 4.6% 185.1% Effective Tax Rate 31.7% 42.4% (1070 bps) Net Income (loss) 2 $ (60.5) - $ 45.7 6.4% (232.3%) Net Income, as Adjusted 1,2 $ 66.2 10.3% $ 74.9 10.5% (11.6%) Diluted EPS (loss) 2 $ (0.82) $ 0.57 (243.9%) Diluted EPS, as Adjusted 1,2 $ 0.89 $ 0.94 (5.3%) 6 1 Please refer to the appendix for reconciliation of non-gaap measures 2-2015 results include $181.1 million of pre-tax special charges, or $127 million after-tax. Pre-tax charges include a $136.3 million non-cash charge for a pension annuity contract, a $26.5 million non-cash charge for a Venezuelan currency remeasurement loss ($22.2M in COGS and $4.3M in SG&A), and $18.3 million of rationalization and asset impairment charges.
Special Charges $181.1 Million of Pre-tax Special Charges Taken in Comprised of: $136.3M (non-cash) Pension Settlement Charges The pension annuity contract purchase reduces U.S. pension plan obligations by $433M, or by 49%, and lowers volatility and risk $26.5M (non-cash) Venezuelan Currency Remeasurement Loss Using the SIMADI rate starting September 30, 2015 as it approximates the rate we expect to transact business in Venezuela. Charge comprised of: $22.2M in COGs; $4.6M in SG&A $18.3M ($6.1M is non-cash) Rationalization and Asset Impairment Charges Reflects rationalization programs in North America and Asia Pacific to reduce headcount and asset write-downs $127 Million After-tax, or $(1.71) EPS Impact 7
Welding Segment North America ($ in Millions) 2015 2014 % YoY Change Sales Mix 2 Net Sales $ 408.4 $ 439.6 (7.1%) Volume (10.2%) Price 0.9% Adjusted EBIT 1 $ 79.7 $ 84.5 (5.6%) Acq/Div 4.5% FX (2.3%) Adj EBIT Margin 1 18.3% 18.0% +30 bps Total (7.1%) Volume weakness reflects slowing end market conditions and challenging YoY comparisons. Margin performance primarily reflects benefits of cost reductions. 8 1 Please refer to the appendix for reconciliation of non-gaap measures 2 Figures may not sum due to rounding
Welding Segment Europe ($ in Millions) 2015 2014 % YoY Change Sales Mix 2 Net Sales $ 80.6 $ 107.5 (25.0%) Volume (9.6%) Price (0.8%) Adjusted EBIT 1 $ 8.3 $ 15.2 (45.2%) Acq/Div - FX (14.7%) Adj EBIT Margin 1 9.8% 13.6% (380) bps Total (25.0%) Lower volumes and margin performance reflect weaker oil and gas demand and challenging YoY comparisons. 9 1 Please refer to the appendix for reconciliation of non-gaap measures 2 Figures may not sum due to rounding
Welding Segment Asia Pacific ($ in Millions) 2015 2014 % YoY Change Sales Mix 2 Net Sales $ 45.5 $ 57.4 (20.7%) Volume (16.7%) Price (1.0%) Adjusted EBIT 1 $ 2.0 $ (0.3) - Acq/Div 3.1% FX (6.2%) Adj EBIT Margin 1 4.2% (0.5%) + 470 bps Total (20.7%) Lower volumes due to weak end markets. Margin expansion reflects improved mix and strategic repositioning. 10 1 Please refer to the appendix for reconciliation of non-gaap measures 2 Figures may not sum due to rounding
Welding Segment South America ($ in Millions) 2015 2014 % YoY Change Sales Mix 2 Net Sales 3 $ 47.7 $ 32.8 45.2% Volume (6.3%) Price 79.5% Adjusted EBIT 1,3 $ 1.8 $ (0.6) - Acq/Div - FX (28.1%) Adj EBIT Margin 1 3.9% (1.8%) +570 bps Total 45.2% Volumes lower on weaker macro conditions in key markets. Pricing and margin results primarily reflect conditions in Venezuela. 11 1 Please refer to the appendix for reconciliation of non-gaap measures 2 Figures may not sum due to rounding 3-2015 results include $34.7 million in Net Sales and $0.2 million in Adjusted net income from our Venezuelan operation, which operates in a highly inflationary environment. This compares with -2014 results which include $12.8 million in Net Sales and $(1.2) million loss in Adjusted net income. Additionally, the Company incurred a $26.5 million charge in -2015 ($22.2M in COGS and $4.3M in SG&A) related to the remeasurement to the SIMADI exchange rate at 9/30/2015.
The Harris Products Group ($ in Millions) 2015 2014 % YoY Change Sales Mix 2 Net Sales $ 62.9 $ 78.4 (19.7%) Volume (8.4%) Price (6.9%) Adjusted EBIT 1 $ 6.4 $ 8.9 (28.2%) Acq/Div - FX (4.4%) Adj EBIT Margin 1 9.8% 11.1% (130) bps Total (19.7%) Volumes declined on weakening end market conditions and challenging YoY comparisons. Lower price reflects declining raw material prices. Margins impacted by volume declines. 12 1 Please refer to the appendix for reconciliation of non-gaap measures 2 Figures may not sum due to rounding
Cash Flow from Operations Metrics Cash Flow from Operations ($ in millions) Average Operating Working Capital Ratio $300 $250 $200 $268 (12%) $235 $150 $100 $50 $149 $105 (29%) 17.1% 17.5% $- -2014-2015 YTD thru 9/30/14 YTD thru 9/30/15 1 Dec 31 2014 Sept 30 2015 cash flow from operations remain solid with 143% free cash flow 2 to net income conversion. 13 1 Cash flow from operations increased $25 million in Q1-2015 from the receipt of a Canadian tax refund. For the first nine months of 2015, the Company contributed $52.1 million to pension plans, as compared with $34.6 million in the prior year period. 2 Free cash flow defined as cash flow from operations less capital expenditures.
Capital Allocation ($ in millions) Capital Allocation 2015 Results (vs. Prior Year) Acquisitions Cap Ex Share Repurchases Dividends $360 $1 $55 $438 $34 $40 Dividends: +19% to $22M. Share Repurchases: +7% to $139M $206 $164 $34 $16 $11 $249 $298 Capital Expenditures: (29%) to $11M Net Cash Balance: +$11M at 9/30/15 $130 $139 $18 $22 $55 $66-2014 -2015 YTD thru 9/30/14 YTD thru 9/30/15 Return on Invested Capital: 12.0%, or 21.4% excluding special items Returned approximately 150% cash flow from operations to shareholders (shares & dividends) in -2015 14
15 Amanda Butler Director, Investor Relations Amanda_Butler@lincolnelectric.com 216.383.2534
Non-GAAP Financial Measures Non-GAAP Financial Measures: Reconciliation of Operating Income, Net Income and Earnings to Non-GAAP Adjusted Operating Income, Adjusted Net Income and Adjusted Earnings (In thousands, except per share amounts) (Unaudited) 16 (1) The three and nine months ended September 30, 2015 and 2014 include net charges primarily related to severance and other related costs and long-lived asset impairments. The three and nine months ended September 30, 2015 also include a goodwill asset impairment charge. Rationalization charges in 2014 are partially offset by gains related to the sale of assets at rationalized operations. (2) The three and nine months ended September 30, 2015 and nine months ended September 2014 represent the impacts of Venezuelan remeasurement losses related to the adoption of new foreign exchange mechanisms. (3) The three and nine months ended September 30, 2015 include pension settlement charges primarily related to the purchase of a group annuity contract. (4) Adjusted diluted earnings per share for the three months ended September 30, 2015 include the dilutive effect of common share equivalents. Reported diluted loss per share excludes the effect of common stock equivalents because their inclusion would be anti-dilutive. (5) Adjusted operating income, Adjusted net income and Adjusted diluted earnings per share are non-gaap financial measures that management believes are important to investors to evaluate and compare the Company s financial performance from period to period. Management uses this information in assessing and evaluating the Company s underlying operating performance. Non-GAAP financial measures should be read in conjunction with the GAAP financial measures, as non-gaap measures are a supplement to, and not a replacement for, GAAP financial measures.
Non-GAAP Financial Measures Non-GAAP Financial Measures: EBIT and Adjusted EBIT Three Months Ended September 30, 2015 (In thousands) (Unaudited) 17 (1) EBIT is defined as Operating income plus Equity earnings in affiliates and Other income. (2) Special items in the three and nine months ended September 30, 2015 represent rationalization charges related to employee severance and other related costs, charges related to pension settlements, charges related to the impairment of long-lived assets and goodwill and charges relating to a Venezuelan remeasurement loss related to the adoption of a new foreign exchange mechanism. (3) Special items in the three and nine months ended September 30, 2014 include non-cash asset impairment charges partially offset by net rationalization gains including a gain on the sale of real estate. Special items in the nine months ended September 30, 2014 also include the impact of the Venezuelan remeasurement losses related to the adoption of a new foreign exchange mechanism in the first quarter. (4) The primary profit measure used by management to assess segment performance is EBIT, as adjusted. EBIT for each operating segment is adjusted for special items to derive EBIT, as adjusted.