XNAS:LECO Lincoln Electric Holdings, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number:  0-1402

 

 

LINCOLN ELECTRIC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Ohio

 

34-1860551

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

22801 St. Clair Avenue, Cleveland, Ohio

 

44117

(Address of principal executive offices)

 

(Zip Code)

 

(216) 481-8100

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                                                      Yes R   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes R  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer R

 

Accelerated filer o

Non-accelerated filer   o  (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No R

 

The number of shares outstanding of the registrant’s common shares as of March 31, 2012 was 83,700,239.

 

1



Table of Contents

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

4

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

5

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

6

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

Item 4. Controls and Procedures

24

 

 

PART II. OTHER INFORMATION

24

Item 1. Legal Proceedings

24

Item 1A. Risk Factors

25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 6. Exhibits

25

 

 

Signature

27

 

 

EX-31.1

Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

EX-31.2

Certification of the Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

EX-32.1

Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) and Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

EX-101

Instance Document

 

EX-101

Schema Document

 

EX-101

Calculation Linkbase Document

 

EX-101

Label Linkbase Document

 

EX-101

Presentation Linkbase Document

 

EX-101

Definition Linkbase Document

 

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share amounts)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Net sales

 

$

727,122

 

$

599,179

 

Cost of goods sold

 

511,857

 

437,741

 

Gross profit

 

215,265

 

161,438

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

123,615

 

101,619

 

Rationalization and asset impairment charges

 

 

357

 

Operating income

 

91,650

 

59,462

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

883

 

608

 

Equity earnings in affiliates

 

692

 

830

 

Other income

 

866

 

1,295

 

Interest expense

 

(1,172

)

(1,658

)

Total other income (expense)

 

1,269

 

1,075

 

 

 

 

 

 

 

Income before income taxes

 

92,919

 

60,537

 

Income taxes

 

28,770

 

13,595

 

Net income including noncontrolling interests

 

64,149

 

46,942

 

Noncontrolling interests in subsidiaries’ (loss) earnings

 

(94

)

32

 

Net income

 

$

64,243

 

$

46,910

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.77

 

$

0.56

 

Diluted earnings per share

 

$

0.76

 

$

0.55

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.17

 

$

0.155

 

 

Net income per common share, weighted average number of common shares outstanding and cash dividends declared per common share have been retroactively adjusted to give effect to the two-for-one stock split.  See Note 1 for additional information.

 

See notes to these consolidated financial statements.

 

3



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Net income including noncontrolling interests

 

$

64,149

 

$

46,942

 

Other comprehensive income, net of tax:

 

 

 

 

 

Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax

 

(498

)

(228

)

Defined benefit pension plan activity, net of tax

 

4,846

 

3,319

 

Currency translation adjustment

 

25,563

 

20,778

 

Other comprehensive income, net of tax

 

29,911

 

23,869

 

Comprehensive income

 

94,060

 

70,811

 

Comprehensive (loss) income attributable to noncontrolling interests

 

(25

)

305

 

Comprehensive income attributable to shareholders

 

$

94,085

 

$

70,506

 

 

See notes to these consolidated financial statements.

 

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Table of Contents

 

 

LINCOLN ELECTRIC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

(UNAUDITED)

 

(NOTE 1)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

300,838

 

$

361,101

 

Accounts receivable (less allowance for doubtful accounts
of $6,899 in 2012; $7,079 in 2011)

 

430,448

 

386,197

 

Inventories:

 

 

 

 

 

Raw materials

 

114,381

 

117,194

 

Work-in-process

 

53,596

 

42,103

 

Finished goods

 

233,397

 

213,941

 

Total inventory

 

401,374

 

373,238

 

 

 

 

 

 

 

Other current assets

 

103,342

 

98,734

 

Total Current Assets

 

1,236,002

 

1,219,270

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land

 

44,041

 

42,891

 

Buildings

 

337,713

 

322,626

 

Machinery and equipment

 

741,026

 

724,801

 

 

 

1,122,780

 

1,090,318

 

Less accumulated depreciation

 

635,908

 

619,867

 

Property, Plant and Equipment, Net

 

486,872

 

470,451

 

 

 

 

 

 

 

Non-current assets

 

299,437

 

287,055

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

2,022,311

 

$

1,976,776

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Amounts due banks

 

$

21,451

 

$

19,922

 

Trade accounts payable

 

208,004

 

176,312

 

Other current liabilities

 

223,371

 

193,312

 

Current portion of long-term debt

 

1,096

 

81,496

 

Total Current Liabilities

 

453,922

 

471,042

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

Long-term debt, less current portion

 

2,494

 

1,960

 

Accrued pensions

 

213,902

 

232,175

 

Other long-term liabilities

 

86,364

 

78,357

 

Total Long-Term Liabilities

 

302,760

 

312,492

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Common shares

 

9,858

 

9,858

 

Additional paid-in capital

 

188,139

 

179,104

 

Retained earnings

 

1,534,406

 

1,484,393

 

Accumulated other comprehensive loss

 

(218,039

)

(247,881

)

Treasury shares

 

(265,006

)

(248,528

)

Total Shareholders’ Equity

 

1,249,358

 

1,176,946

 

Noncontrolling interests

 

16,271

 

16,296

 

Total Equity

 

1,265,629

 

1,193,242

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

2,022,311

 

$

1,976,776

 

 

See notes to these consolidated financial statements.

 

5



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

64,243

 

$

46,910

 

Noncontrolling interests in subsidiaries’ (loss) earnings

 

(94

)

32

 

Net income including noncontrolling interests

 

64,149

 

46,942

 

Adjustments to reconcile Net income including noncontrolling interests to Net
cash provided by operating activities:

 

 

 

 

 

Rationalization and asset impairment charges

 

 

227

 

Depreciation and amortization

 

15,579

 

15,206

 

Equity loss (earnings) in affiliates, net

 

443

 

(362

)

Deferred income taxes

 

5,385

 

11,635

 

Stock-based compensation

 

2,230

 

1,468

 

Amortization of terminated interest rate swaps

 

(430

)

(460

)

Amortization of pension actuarial losses and prior service cost

 

7,772

 

5,457

 

Other non-cash items, net

 

402

 

740

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

Increase in accounts receivable

 

(29,752

)

(43,324

)

Increase in inventories

 

(14,462

)

(62,064

)

Increase in other current assets

 

(3,859

)

(2,318

)

Increase in trade accounts payable

 

23,341

 

55,553

 

Increase (decrease) in other current liabilities

 

22,934

 

(2,112

)

Decrease in accrued pensions

 

(18,970

)

(7,404

)

Net change in other long-term assets and liabilities

 

4,402

 

(2,446

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

79,164

 

16,738

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(12,567

)

(15,503

)

Acquisition of businesses, net of cash acquired

 

(21,896

)

(17,881

)

Proceeds from sale of property, plant and equipment

 

210

 

142

 

NET CASH USED BY INVESTING ACTIVITIES

 

(34,253

)

(33,242

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term borrowings

 

1,279

 

2,773

 

Payments on short-term borrowings

 

(319

)

(2,030

)

Amounts due banks, net

 

(2,841

)

(1,168

)

Proceeds from long-term borrowings

 

914

 

 

Payments on long-term borrowings

 

(83,031

)

(894

)

Proceeds from exercise of stock options

 

7,440

 

2,864

 

Tax benefit from exercise of stock options

 

2,983

 

715

 

Purchase of shares for treasury

 

(20,098

)

(905

)

Cash dividends paid to shareholders

 

(14,186

)

(12,987

)

NET CASH USED BY FINANCING ACTIVITIES

 

(107,859

)

(11,632

)

 

 

 

 

 

 

Effect of exchange rate changes on Cash and cash equivalents

 

2,685

 

3,358

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(60,263

)

(24,778

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

361,101

 

366,193

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

300,838

 

$

341,415

 

 

 See notes to these consolidated financial statements.

 

6


 


Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

 

NOTE 1 — BASIS OF PRESENTATION

 

As used in this report, the term “Company,” except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest.  The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements.  However, in the opinion of management, these unaudited consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods.  Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

 

The accompanying Consolidated Balance Sheet at December 31, 2011 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

On April 29, 2011, the Company announced a two-for-one stock split of the Company’s common shares effective in the form of a 100% stock dividend.  The record date for the stock split was May 16, 2011 and the additional shares were distributed on May 31, 2011.  Accordingly, all per share amounts, average shares outstanding, shares outstanding, shares repurchased and equity based compensation presented in this Form 10-Q have been retroactively adjusted to reflect the stock split.  Shareholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the stated value of the additional shares issued in connection with the stock split to Common shares from Additional paid-in capital.

 

Certain reclassifications have been made to the prior year financial statements to conform to current year classifications.

 

Venezuela — Highly Inflationary Economy

 

Venezuela is a highly inflationary economy under GAAP.  As a result, the financial statements of the Company’s Venezuelan operation are reported under highly inflationary accounting rules as of January 1, 2010.  Under highly inflationary accounting, the financial statements of the Company’s Venezuelan operation have been remeasured into the Company’s reporting currency and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings.  In remeasuring the financial statements the official exchange rate for non-essential goods of 4.30 is used as this is the rate expected to be applicable to dividend repatriations.

 

Future impacts to earnings of applying highly inflationary accounting for Venezuela on the Company’s consolidated financial statements will be dependent upon movements in the applicable exchange rates between the bolivar and the U.S. dollar and the amount of monetary assets and liabilities included in the Company’s Venezuelan operation’s balance sheet.  The bolivar-denominated monetary net asset position was $12,015 at March 31, 2012 and $6,826 at December 31, 2011.  The increased exposure was due to the limited opportunities to convert bolivars into U.S. dollars.

 

NOTE 2 — EARNINGS PER SHARE

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Numerator:

 

 

 

 

 

Net income

 

$

64,243

 

$

46,910

 

Denominator:

 

 

 

 

 

Basic weighted average shares outstanding

 

83,452

 

83,791

 

Effect of dilutive securities - Stock options and awards

 

1,156

 

1,087

 

Diluted weighted average shares outstanding

 

84,608

 

84,878

 

Basic earnings per share

 

$

0.77

 

$

0.56

 

Diluted earnings per share

 

$

0.76

 

$

0.55

 

 

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Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

For the three months ended March 31, 2012 and 2011, common shares subject to equity-based awards of 455,081 and 486,210, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

 

NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS

 

New Accounting Standards Adopted:

 

In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment.”  ASU 2011-08 provides an entity the option to first assess qualitative factors to determine whether the existence of events or circumstance leads to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If the entity determines it is not more likely than not that the fair value is less than the carrying amount, then performing the two-step impairment test is unnecessary.  However, if the entity concludes otherwise, it is required to perform the first step of the two-step impairment test.  The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  ASU 2011-08 was adopted by the Company on January 1, 2012 and will not have a significant impact on the Company’s financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.”  This update provides amendments to Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income.  ASU 2011-05 provides an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income.  Further, ASU 2011-05 requires the presentation on the face of the financial statements items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.  The amendment to present reclassification adjustments was deferred when the FASB issued ASU 2011-12.  ASU 2011-05 should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company adopted ASU 2011-05, excluding deferred portions, on January 1, 2012.  Refer to the Consolidated Statements of Comprehensive Income herein.

 

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS’s.”  ASU 2011-04 amends ASC Topic 820, resulting in common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRS”).  Consequently, the amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  These amendments are to be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  ASU 2011-04 was adopted by the Company on January 1, 2012 and did not have a significant impact on the Company’s financial statements.

 

New Accounting Standards to be Adopted:

 

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.”  ASU 2011-11 requires an entity to disclose information about financial instruments and derivative instruments that are subject to offsetting, master netting or other similar arrangements, to illustrate the effect or potential effect of those arrangements on the Company’s financial position.  The amendments are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods.  The amendments should be applied retrospectively for all prior periods presented.  The Company is currently evaluating the impact of the adoption of ASU 2011-11 on the Company’s financial statements.

 

NOTE 4 — ACQUISITIONS

 

On March 6, 2012, the Company completed the acquisition of Weartech International, Inc. (“Weartech”) for approximately $30,286 in cash and assumed debt.  The preliminary fair value of net assets acquired was $20,246, resulting in goodwill of $10,040.  These values are preliminary and subject to final closing balance sheet and working capital adjustments.  Weartech, based in Anaheim, California, is a producer of cobalt-based hard facing and wear-resistant welding consumables.  The acquisition added to the Company’s consumables portfolio.  Annual sales for 2011 were approximately $40,000.

 

On July 29, 2011, the Company acquired substantially all of the assets of Techalloy Company, Inc. and certain assets of its parent company, Central Wire Industries Ltd. (collectively, “Techalloy”), for approximately $36,900 in cash and assumed

 

8



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

debt.  The fair value of net assets acquired was $32,814, resulting in goodwill of $4,086.  Techalloy, based in Baltimore, Maryland, is a manufacturer of nickel alloy and stainless steel welding consumables.  The acquisition added to the Company’s consumables portfolio.  Annual sales for Techalloy at the date of acquisition were approximately $70,000.

 

On July 29, 2011, the Company acquired substantially all of the assets of Applied Robotics, Inc. (d/b/a Torchmate) (“Torchmate”) for approximately $8,280 in cash.  The fair value of net assets acquired was $2,361, resulting in goodwill of $5,919.  Torchmate, based in Reno, Nevada, provides a wide selection of computer numeric controlled plasma cutter and oxy-fuel cutting systems.  The acquisition added to the Company’s plasma and oxy-fuel cutting product offering.  Annual sales for Torchmate at the date of acquisition were approximately $13,000.

 

On March 11, 2011, the Company completed the acquisition of OOO Severstal-metiz: welding consumables (“Severstal”) for approximately $16,861 in cash and assumed debt.  The fair value of net assets acquired was $8,049, resulting in goodwill of $8,812.  Severstal is a leading manufacturer of welding consumables in Russia and was a subsidiary of OAO Severstal, one of the world’s leading vertically integrated steel and mining companies.  This acquisition expanded the Company’s capacity and distribution channels in Russia and the Commonwealth of Independent States.  Sales for Severstal during 2010 were approximately $40,000.

 

On January 31, 2011, the Company acquired substantially all of the assets of SSCO Manufacturing, Inc. (d/b/a Arc Products) (“Arc Products”) for approximately $3,280 in cash and a contingent consideration liability fair valued at $3,806.  The contingent consideration is based upon estimated sales for the five-year period ending December 31, 2015 and will be paid in 2016 based on actual sales during the five-year period.  The fair value of net assets acquired was $3,613, resulting in goodwill of $3,473.  Arc Products is a manufacturer of orbital welding systems and welding automation components based in Southern California.  Orbital welding systems are designed to automatically weld pipe and tube in difficult to access locations and for mission-critical applications requiring high weld integrity and sophisticated quality monitoring capabilities.  The acquisition will complement the Company’s ability to serve global customers in the nuclear, power generation and process industries worldwide.  Sales for Arc Products during 2010 were not significant.

 

Pro forma information related to these acquisitions has not been presented because the impact on the Company’s Consolidated Statements of Income is not material.  Acquired companies are included in the Company’s consolidated financial statements as of the date of acquisition.

 

NOTE 5 — SEGMENT INFORMATION

 

The Company’s primary business is the design and manufacture of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products.  The Company also has a leading global position in the brazing and soldering alloys market.  The Company has aligned its business units into five operating segments to enhance the utilization of the Company’s worldwide resources and global sourcing initiatives.  The operating segments consist of North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group.  The North America Welding segment includes welding operations in the United States, Canada and Mexico.  The Europe Welding segment includes welding operations in Europe, Russia and Africa.  The other two welding segments include welding operations in Asia Pacific and South America, respectively.  The fifth segment, The Harris Products Group, includes the Company’s global cutting, soldering and brazing businesses as well as the retail business in the United States.

 

Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being earnings before interest and income taxes (“EBIT”), as adjusted.  Segment 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.

 

9



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

Financial information for the reportable segments follows:

 

 

 

North
America
Welding

 

Europe
Welding

 

Asia
Pacific
Welding

 

South
America
Welding

 

The Harris
Products
Group

 

Corporate /
Eliminations

 

Consolidated

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

381,329

 

$

125,803

 

$

92,563

 

$

39,838

 

$

87,589

 

$

 

$

727,122

 

Inter-segment sales

 

33,542

 

4,451

 

3,817

 

 

2,383

 

(44,193

)

 

Total

 

$

414,871

 

$

130,254

 

$

96,380

 

$

39,838

 

$

89,972

 

$

(44,193

)

$

727,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

69,519

 

$

12,811

 

$

2,573

 

$

2,905

 

$

7,153

 

$

(1,753

)

$

93,208

 

Special items charge (gain)

 

 

 

 

 

 

 

 

EBIT

 

$

69,519

 

$

12,811

 

$

2,573

 

$

2,905

 

$

7,153

 

$

(1,753

)

$

93,208

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

883

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,172

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

92,919

 

Total assets

 

$

840,427

 

$

477,295

 

$

388,511

 

$

117,621

 

$

208,296

 

$

(9,839

)

$

2,022,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

280,757

 

$

114,208

 

$

87,560

 

$

34,073

 

$

82,581

 

$

 

$

599,179

 

Inter-segment sales

 

35,127

 

3,835

 

3,213

 

 

2,233

 

(44,408

)

 

Total

 

$

315,884

 

$

118,043

 

$

90,773

 

$

34,073

 

$

84,814

 

$

(44,408

)

$

599,179

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

46,636

 

$

5,912

 

$

126

 

$

2,048

 

$

6,543

 

$

679

 

$

61,944

 

Special items charge (gain)

 

 

358

 

(1

)

 

 

 

357

 

EBIT

 

$

46,636

 

$

5,554

 

$

127

 

$

2,048

 

$

6,543

 

$

679

 

$

61,587

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

608

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,658

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

60,537

 

Total assets

 

$

630,986

 

$

485,370

 

$

355,236

 

$

103,952

 

$

220,042

 

$

117,984

 

$

1,913,570

 

 

In the first quarter of 2011, special items include net charges of $357 for rationalization actions in the Europe Welding and Asia Pacific Welding segments, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations.

 

NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS

 

During 2009, the Company initiated rationalization actions including the consolidation of certain manufacturing operations in the Europe Welding, Asia Pacific Welding and The Harris Products Group segments.  At March 31, 2012, a liability relating to these actions of $178 was recognized in “Other current liabilities.”  The Company does not expect any further material costs associated with these actions in 2012 as they were substantially completed in 2010 and are expected to be substantially paid by the end of 2012.  During April 2012, the Company initiated a process to rationalize its Severstal manufacturing facility in Russia and consolidate production to another facility in Russia.  This action, expected to begin in the second quarter of 2012, will result in charges in the range of $1,500 to $3,000 over the next year and will impact approximately 225 employees.  The Company continues to evaluate its cost structure, which may result in additional rationalization actions and charges in future periods.

 

The following table summarizes the activity related to the rationalization liabilities by segment:

 

 

 

Europe
Welding

 

The Harris
Products
Group

 

Consolidated

 

Balance at December 31, 2011

 

$

173

 

$

82

 

$

255

 

Payments and other adjustments

 

5

 

(82

)

(77

)

Balance at March 31, 2012

 

$

178

 

$

 

$

178

 

 

10



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

NOTE 7 — COMMON SHARE REPURCHASE PROGRAM

 

The Company has a share repurchase program for up to 30 million of the Company’s common shares.  At management’s discretion, the Company repurchases its common shares from time to time in the open market, depending on market conditions, stock price and other factors.  During the three month period ended March 31, 2012, the Company purchased an aggregate of 432,384 common shares in the open market under this program.  As of March 31, 2012, there remained 4,689,373 common shares available for repurchase under this program.  The repurchased common shares remain in treasury and have not been retired.

 

NOTE 8 — COMPREHENSIVE INCOME

 

The tax effects allocated to each component of other comprehensive income are as follows:

 

 

 

Three Months Ended March 31, 2012

 

 

 

Gross of
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net of Tax
Amount

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges

 

$

(573

)

$

75

 

$

(498

)

Defined benefit pension plan activity

 

7,690

 

(2,844

)

4,846

 

Currency translation adjustment

 

25,563

 

 

25,563

 

Total other comprehensive income

 

$

32,680

 

$

(2,769

)

$

29,911

 

 

 

 

Three Months Ended March 31, 2011

 

 

 

Gross of
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net of Tax
Amount

 

Other comprehensive income:

 

 

 

 

 

 

 

Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges

 

$

(214

)

$

(14

)

$

(228

)

Defined benefit pension plan activity

 

5,729

 

(2,410

)

3,319

 

Currency translation adjustment

 

20,778

 

 

20,778

 

Total other comprehensive income

 

$

26,293

 

$

(2,424

)

$

23,869

 

 

NOTE 9 — EQUITY

 

Changes in equity for the three months ended March 31, 2012 are as follows:

 

 

 

Shareholders’
Equity

 

Noncontrolling
Interests

 

Total Equity

 

Balance at December 31, 2011

 

$

1,176,946

 

$

16,296

 

$

1,193,242

 

Comprehensive income:

 

 

 

 

 

 

 

Net income (loss)

 

64,243

 

(94

)

64,149

 

Other comprehensive income

 

29,842

 

69

 

29,911

 

Total comprehensive income

 

94,085

 

(25

)

94,060

 

 

 

 

 

 

 

 

 

Cash dividends declared - $0.17 per share

 

(14,229

)

 

(14,229

)

Issuance of shares under benefit plans

 

12,654

 

 

12,654

 

Purchase of shares for treasury

 

(20,098

)

 

(20,098

)

Balance at March 31, 2012

 

$

1,249,358

 

$

16,271

 

$

1,265,629

 

 

11



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

Changes in equity for the three months ended March 31, 2011 are as follows:

 

 

 

Shareholders’
Equity

 

Noncontrolling
Interests

 

Total Equity

 

Balance at December 31, 2010

 

$

1,133,497

 

$

15,981

 

$

1,149,478

 

Comprehensive income:

 

 

 

 

 

 

 

Net income (loss)

 

46,910

 

32

 

46,942

 

Other comprehensive income

 

23,596

 

273

 

23,869

 

Total comprehensive income

 

70,506

 

305

 

70,811

 

 

 

 

 

 

 

 

 

Cash dividends declared - $0.155 per share

 

(13,075

)

 

(13,075

)

Issuance of shares under benefit plans

 

5,682

 

 

5,682

 

Purchase of shares for treasury

 

(905

)

 

(905

)

Balance at March 31, 2011

 

$

1,195,705

 

$

16,286

 

$

1,211,991

 

 

NOTE 10 — INVENTORY VALUATION

 

Inventories are valued at the lower of cost or market.  Fixed manufacturing overhead costs are allocated to inventory based on normal production capacity and abnormal manufacturing costs are recognized as period costs.  For most domestic inventories, cost is determined principally by the last-in, first-out (“LIFO”) method, and for non-U.S. inventories, cost is determined by the first-in, first-out (“FIFO”) method.  The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time.  Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs.  Actual year-end costs and inventory levels may differ from interim LIFO inventory valuations.  The excess of current cost over LIFO cost was $79,550 and $78,292 at March 31, 2012 and December 31, 2011, respectively.

 

NOTE 11 — ACCRUED EMPLOYEE BONUS

 

“Other current liabilities” at March 31, 2012 and 2011 include accruals for year-end bonuses and related payroll taxes of $37,865 and $26,665, respectively, related to the Company’s employees worldwide.  The payment of bonuses is discretionary and subject to approval by the Board of Directors.  A majority of annual bonuses are paid in December, resulting in an increasing bonus accrual during the Company’s fiscal year.  The increase in the accrual from March 31, 2011 to March 31, 2012 is due to the increase in profitability of the Company.

 

NOTE 12 — CONTINGENCIES

 

The Company, like other manufacturers, is subject from time to time to a variety of civil and administrative proceedings arising in the ordinary course of business.  Such claims and litigation include, without limitation, product liability claims and health, safety and environmental claims, some of which relate to cases alleging asbestos and manganese induced illnesses.  The claimants in the asbestos and manganese cases seek compensatory and punitive damages, in most cases for unspecified amounts.  The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously.

 

The Company’s accrual for contingent liabilities, primarily for product liability claims, was $11,457 as of March 31, 2012 and $11,312 as of December 31, 2011.  The accrual is included in “Other current liabilities.”  The Company also recognized an asset for recoveries from insurance carriers related to the insured claims outstanding of $4,516 as of both March 31, 2012 and December 31, 2011.  The asset is included in “Other current assets.”  The March 31, 2012 accrual includes a liability for the agreement entered into in January 2012 with the Company’s co-defendants and plaintiffs’ counsel that provides for the dismissal with prejudice of substantially all of the pending manganese claims.

 

Based on the Company’s historical experience in litigating product liability claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, as well as the Company’s current assessment of the underlying merits of the claims and applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material effect on the Company’s consolidated financial statements.

 

NOTE 13 — PRODUCT WARRANTY COSTS

 

The Company accrues for product warranty claims based on historical experience and the expected material and labor costs to provide warranty service.  Warranty services are generally provided for periods up to three years from the date of sale.  The accrual for product warranty claims is included in “Other current liabilities.”

 

12



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

The changes in the carrying amount of product warranty accruals for the three months ended March 31, 2012 and 2011 are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Balance at beginning of period

 

$

15,781

 

$

16,879

 

Accruals for warranties

 

2,761

 

2,557

 

Settlements

 

(3,164

)

(2,588

)

Foreign currency translation

 

190

 

247

 

Balance at end of period

 

$

15,568

 

$

17,095

 

 

NOTE 14 DEBT

 

The Company’s $80,000 Series C Note (the “Note”) was repaid on March 12, 2012 at maturity.  The Company has a line of credit totaling $150,000 through the Amended and Restated Credit Agreement (the “Credit Agreement”), which was entered into on November 18, 2009.  As of March 31, 2012, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Credit Agreement, but had letters of credit outstanding totaling $60, which reduced the availability under the Credit Agreement to $149,940.  The Credit Agreement has a three-year term and is scheduled to expire in November 2012 which may be increased, subject to certain conditions, by an additional amount up to $75,000 at any time not later than 180 days prior to the last day of the term.  The Company expects to replace the Credit Agreement prior to its expiration in November 2012, although there can be no assurances that the Company can replace the Credit Agreement or that satisfactory terms will be reached.

 

The Company historically utilized interest rate swaps to manage interest rate risks.  The Company terminated its remaining interest rate swaps in 2009 and had no interest rate swaps outstanding as of March 31, 2012.  The termination of interest rate swaps in 2009 resulted in a realized gain of $5,079.  This gain was deferred and amortized over the remaining life of the Note.  The amortization of this gain reduced “Interest expense” by $328 and $410 in the three months ended March 31, 2012 and 2011, respectively.  At March 31, 2012, the deferred gain was fully amortized.  The weighted average effective interest rate on the Note, net of the impact of swaps, was 4.1% for the three months ended March 31, 2012.

 

NOTE 15 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS

 

The components of total pension cost were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Service cost

 

$

4,879

 

$

4,335

 

Interest cost

 

10,238

 

10,957

 

Expected return on plan assets

 

(14,388

)

(14,355

)

Amortization of prior service cost

 

(22

)

(15

)

Amortization of net loss

 

7,794

 

5,472

 

Defined benefit plans

 

8,501

 

6,394

 

Multi-employer plans

 

242

 

235

 

Defined contribution plans

 

2,244

 

2,053

 

Total pension cost

 

$

10,987

 

$

8,682

 

 

The Company voluntarily contributed $18,000 to its defined benefit plans in the United States during the three months ended March 31, 2012 and expects to contribute up to $60,000 to its defined benefit plans in the United States during 2012.  The amortization of net loss increased in the first quarter of 2012 due to greater actuarial losses during 2011, attributable to a lower discount rate and lower actual return on plan assets compared with the expected return on assets.

 

NOTE 16 — INCOME TAXES

 

The Company recognized $28,770 of tax expense on pre-tax income of $92,919, resulting in an effective income tax rate of 31.0% for the three months ended March 31, 2012.  The effective income tax rate is lower than the Company’s statutory rate primarily due to income earned in lower tax rate jurisdictions and the utilization of foreign tax loss carryforwards for which valuation allowances had been previously provided.

 

13



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

The effective income tax rate of 22.5% for the three months ended March 31, 2011 was lower than the Company’s statutory rate primarily due to income earned in lower tax rate jurisdictions, the utilization of foreign tax loss carryforwards for which valuation allowances had been previously provided and a tax benefit of $4,844 for tax audit settlements.

 

The anticipated effective income tax rate for 2012 depends on the amount of earnings in various tax jurisdictions and the level of related tax deductions achieved during the year.

 

As of March 31, 2012, the Company had $29,530 of unrecognized tax benefits.  If recognized, approximately $17,210 would be reflected as a component of income tax expense.

 

The Company files income tax returns in the U.S. and various state, local and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2007.  The Company is currently subject to various U.S. state audits, a Russian tax audit for 2008 – 2010, a Canadian tax audit for 2003 – 2007 and an Indonesian tax audit for 2003 – 2007.  The Company does not expect the results of these examinations to have a material effect on the Company’s consolidated financial statements.

 

Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations.  Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits.  It is reasonably possible there could be a reduction of $8,198 in prior years’ unrecognized tax benefits by the end of the first quarter 2013.

 

NOTE 17 — DERIVATIVES

 

The Company uses derivatives to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business.  Derivative contracts to hedge currency and commodity exposures are generally written on a short-term basis but may cover exposures for up to two years while interest rate contracts may cover longer periods consistent with the terms of the underlying debt.  The Company does not enter into derivatives for trading or speculative purposes.

 

All derivatives are recognized at fair value on the Company’s Consolidated Balance Sheets.  The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.  The Company formally documents the relationship of the hedge with the hedged item as well as the risk-management strategy for all designated hedges.  Both at inception and on an ongoing basis, the hedging instrument is assessed as to its effectiveness, when applicable.  If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.  The cash flows from settled derivative contracts are recognized in operating activities in the Company’s Consolidated Statements of Cash Flows.  Hedge ineffectiveness was immaterial in the three months ended March 31, 2012 and 2011.

 

The Company is subject to the credit risk of the counterparties to derivative instruments.  Counterparties include a number of major banks and financial institutions.  The Company manages individual counterparty exposure by monitoring the credit rating of the counterparty and the size of financial commitments and exposures between the Company and the counterparty.  None of the concentrations of risk with any individual counterparty was considered significant at March 31, 2012.  The Company does not expect any counterparties to fail to meet their obligations.

 

Cash Flow Hedges

 

Certain foreign currency forward contracts were qualified and designated as cash flow hedges.  The dollar equivalent gross notional amount of these short-term contracts was $66,718 and $65,721 at March 31, 2012 and December 31, 2011, respectively.  The effective portions of the fair value gains or losses on these cash flow hedges are recognized in “Accumulated other comprehensive income” (“AOCI”) and subsequently reclassified to “Cost of goods sold” or “Sales” for hedges of purchases and sales, respectively, as the underlying hedged transactions affect earnings.

 

Derivatives Not Designated as Hedging Instruments

 

The Company has certain foreign exchange forward contracts that are not designated as hedges.  These derivatives are held as economic hedges of certain balance sheet exposures.  The dollar equivalent gross notional amount of these contracts was $184,009 and $161,026 at March 31, 2012 and December 31, 2011, respectively.  The fair value gains or losses from these contracts are recognized in “Selling, general and administrative expenses,” offsetting the losses or gains on the exposures being hedged.

 

14



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

The Company has short-term silver forward contracts with notional amounts of 375,000 troy ounces at March 31, 2012.  The notional amount of short-term silver contracts was 340,000 troy ounces at December 31, 2011.  Realized and unrealized gains and losses on these contracts are recognized in earnings.

 

Fair values of derivative instruments in the Company’s Consolidated Balance Sheets follow:

 

 

 

March 31, 2012

 

December 31, 2011

 

 Derivatives by hedge designation 

 

Other 
 Current 
Assets

 

Other 
 Current 
Liabilities

 

Other 
 Current 
Assets

 

Other 
 Current 
Liabilities

 

Designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

579

 

$

413

 

$

801

 

$

531

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

406

 

347

 

726

 

1,026

 

Commodity contracts

 

472

 

39

 

1,559

 

 

Total derivatives

 

$

1,457

 

$

799

 

$

3,086

 

$

1,557

 

 

The effects of designated fair value hedges and undesignated derivative instruments on the Company’s Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 consisted of the following:

 

 

 

 

 

Three Months Ended
March 31,

 

Derivatives by hedge designation

 

Classification of gains (losses)

 

2012

 

2011

 

Not designated as hedges:

 

 

 

 

 

 

 

Foreign exchange contracts

 

Selling, general & administrative expenses

 

$

281

 

$

(3,538

)

Commodity contracts

 

Cost of goods sold

 

(1,753

)

(2,877

)

Commodity contracts

 

Other income

 

 

(12

)

 

The effects of designated cash flow hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:

 

Total gain (loss) recognized in AOCI, net of tax

 

March 31, 2012

 

December 31, 2011

 

Foreign exchange contracts

 

$

414

 

$

912

 

 

 

 

 

 

Three Months Ended
March 31,

 

Derivative type

 

Gain (loss) reclassified from AOCI to:

 

2012

 

2011

 

Foreign exchange contracts

 

Sales

 

$

231

 

$

51

 

 

 

Cost of goods sold

 

222

 

(573

)

 

The Company expects a gain of $414 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized.

 

NOTE 18 — FAIR VALUE

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The following hierarchy is used to classify the inputs used to measure fair value:

 

Level 1                      Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2                      Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.

 

Level 3                      Unobservable inputs for the asset or liability.

 

15



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

The following table provides a summary of assets and liabilities as of March 31, 2012 measured at fair value on a recurring basis:

 

Description

 

Balance as of
March 31, 2012

 

Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

985

 

$

 

$

985

 

$

 

Commodity contracts

 

472

 

 

472

 

 

Total assets

 

$

1,457

 

$

 

$

1,457

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

760

 

$

 

$

760

 

$

 

Commodity contracts

 

39

 

 

39

 

 

Contingent consideration

 

4,255

 

 

 

4,255

 

Deferred compensation

 

16,361

 

 

16,361

 

 

Total liabilities

 

$

21,415

 

$

 

$

17,160

 

$

4,255

 

 

The following table provides a summary of assets and liabilities as of December 31, 2011 measured at fair value on a recurring basis:

 

Description

 

Balance as of
December 31, 2011

 

Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

1,527

 

$

 

$

1,527

 

$

 

Commodity contracts

 

1,559

 

 

1,559

 

 

Total assets

 

$

3,086

 

$

 

$

3,086

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

1,557

 

$

 

$

1,557

 

$

 

Contingent consideration

 

4,297

 

 

 

4,297

 

Deferred compensation

 

14,936

 

 

14,936

 

 

Total liabilities

 

$

20,790

 

$

 

$

16,493

 

$

4,297

 

 

The Company’s derivative contracts are valued at fair value using the market approach.  The Company measures the fair value of foreign exchange contracts using Level 2 inputs based on observable spot and forward rates in active markets.  The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions.  During the quarter ended March 31, 2012, there were no transfers between Levels 1, 2 or 3.

 

In connection with an acquisition, the Company recorded a contingent consideration fair valued at $4,255 as of March 31, 2012, which reflects a $42 decrease in the liability from December 31, 2011.  The contingent consideration is based upon estimated sales for the five-year period ending December 31, 2015 and will be paid in 2016 based on actual sales during the five-year period.  The fair value of the contingent consideration is a Level 3 valuation and fair valued using a probability weighted discounted cash flow analysis.  The discounted cash flow utilized weighted average inputs, including a risk based discount rate of 12.3%, determined using discount rates of 3.5% reflective of the Company’s cost of debt and 14.1% as a risk adjusted cost of capital and a compounded annual revenue growth rate of 28.6%, determined using various scenarios with growth rates ranging from 11.1% to 50.0%.

 

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Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

The deferred compensation liability is the Company’s obligation under its executive deferred compensation plan.  The Company measures the fair value of the liability using the market values of the participants’ underlying investment fund elections.

 

The fair value of “Cash and cash equivalents,” “Accounts receivable,” “Amounts due banks” and “Trade accounts payable” approximated book value due to the short-term nature of these instruments at both March 31, 2012 and December 31, 2011.  The fair value of long-term debt at March 31, 2012 and December 31, 2011, including the current portion, was approximately $3,462 and $84,110, respectively, which was determined using available market information and methodologies requiring judgment.  The carrying value of this debt at such dates was $3,590 and $83,456, respectively.  Since considerable judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount that could be realized in a current market exchange.

 

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Table of Contents

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts)

 

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, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes.  The Company’s product offering also includes regulators and torches used in oxy-fuel welding and cutting.  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 North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products.  Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company’s various manufacturing sites to distributors and product users.

 

On April 29, 2011, the Company announced a two-for-one stock split of the Company’s common shares effective in the form of a 100% stock dividend.  The record date for the stock split was May 16, 2011 and the additional shares were distributed on May 31, 2011.  Accordingly, all per share amounts, average shares outstanding, shares outstanding, shares repurchased and equity based compensation presented in this Form 10-Q have been retroactively adjusted to reflect the stock split.  Shareholders’ equity has been retroactively adjusted to give effect to the stock split for all periods presented by reclassifying the stated value of the additional shares issued in connection with the stock split to Common shares from Additional paid-in capital.

 

Results of Operations

 

Three Months Ended March 31, 2012 Compared with Three Months Ended March 31, 2011

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Change

 

 

 

Amount

 

% of Sales

 

Amount

 

% of Sales

 

Amount

 

%

 

Net sales

 

$

727,122

 

100.0%

 

$

599,179

 

100.0%

 

$

127,943

 

21.4%

 

Cost of goods sold

 

511,857

 

70.4%

 

437,741

 

73.1%

 

74,116

 

16.9%

 

Gross profit

 

215,265

 

29.6%

 

161,438

 

26.9%

 

53,827

 

33.3%

 

Selling, general & administrative expenses

 

123,615

 

17.0%

 

101,619

 

17.0%

 

21,996

 

21.6%

 

Rationalization and asset impairment charges

 

 

 

357

 

0.1%

 

(357

)

(100.0%

)

Operating income

 

91,650

 

12.6%

 

59,462

 

9.9%

 

32,188

 

54.1%

 

Interest income

 

883

 

0.1%

 

608

 

0.1%

 

275

 

45.2%

 

Equity earnings in affiliates

 

692

 

0.1%

 

830

 

0.1%

 

(138

)

(16.6%

)

Other income

 

866

 

0.1%

 

1,295

 

0.2%

 

(429

)

(33.1%

)

Interest expense

 

(1,172

)

(0.2%

)

(1,658

)

(0.3%

)

486

 

29.3%

 

Income before income taxes

 

92,919

 

12.8%

 

60,537

 

10.1%

 

32,382

 

53.5%

 

Income taxes

 

28,770

 

4.0%

 

13,595

 

2.3%

 

15,175

 

111.6%

 

Net income including noncontrolling interests

 

64,149

 

8.8%

 

46,942

 

7.8%

 

17,207

 

36.7%

 

Noncontrolling interests in subsidiaries’ (loss) earnings

 

(94

)

 

32

 

 

(126

)

(393.8%

)

Net income

 

$

64,243

 

8.8%

 

$

46,910

 

7.8%

 

$

17,333

 

36.9%

 

 

Net Sales:  Net sales for the first quarter of 2012 increased 21.4% from the first quarter 2011.  The sales increase reflects volume increases of 12.8%, price increases of 3.7%, increases from acquisitions of 5.9% and unfavorable impacts from foreign exchange of 1.0%.  Sales volumes increased because of improved demand levels reflective of expanding industrial economies and modest market gains.  Product pricing increased from prior year levels due to the realization of price increases implemented in response to increases in raw material costs.

 

Gross Profit:  Gross profit increased 33.3% to $215,265 for the first quarter 2012 compared with $161,438 in the first quarter 2011.  As a percentage of Net sales, Gross profit increased to 29.6% in the first quarter 2012 from 26.9% in the first quarter 2011.  The increase in this percentage was the result of increased product pricing and operating leverage partially offset by rising material costs and lower margins from recent acquisitions.  Foreign currency exchange rates had a $1,797 unfavorable translation impact in the first quarter 2012.

 

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Table of Contents

 

Selling, General & Administrative (“SG&A”) Expenses:  SG&A expenses were higher by $21,996, or 21.6%, in the first quarter 2012 compared with the first quarter of 2011.  As a percentage of Net sales, SG&A expenses were 17.0% in the first quarter 2012 and 2011.  The increase in SG&A expenses was predominantly due to higher bonus expense of $10,934, increased selling, administrative and research and development expense of $7,015, increased selling, general and administrative expenses from acquisitions of $2,487 and increased legal expenses of $1,557 partially offset by foreign currency translations of $1,020.

 

Interest Income:  Interest income increased to $883 in the first quarter 2012 from $608 in the first quarter of 2011.  The increase was largely due to a higher average cash balance in the current quarter earning a more favorable rate of interest.

 

Equity Earnings in Affiliates:  Equity earnings in affiliates were $692 in the first quarter 2012 compared with earnings of $830 in the first quarter of 2011.  The decrease was due to decreases in earnings of $24 in Turkey and $113 in Chile.

 

Interest Expense:  Interest expense decreased to $1,172 in the first quarter 2012 from $1,658 in the first quarter of 2011 as a result of lower levels of debt in the current period.

 

Income Taxes:  The Company recognized $28,770 of tax expense on pre-tax income of $92,919, resulting in an effective income tax rate of 31.0% for the three months ended March 31, 2012.  The effective income tax rate is lower than the Company’s statutory rate primarily due to income earned in lower tax rate jurisdictions and the utilization of foreign tax loss carryforwards for which valuation allowances had been previously provided.

 

The effective income tax rate of 22.5% for the three months ended March 31, 2011 was lower than the Company’s statutory rate primarily due to income earned in lower tax rate jurisdictions, the utilization of foreign tax loss carryforwards for which valuation allowances had been previously provided and a $4,844 favorable adjustment for tax audit settlements.

 

Net Income:  Net income for the first quarter 2012 was $64,243 compared with Net income of $46,910 in the first quarter of 2011.  Diluted earnings per share for the first quarter 2012 was $0.76 compared with $0.55 in the first quarter of 2011.  Foreign currency exchange rate movements had an unfavorable translation effect of $460 on Net income for the first quarter of 2012.

 

Segment Results

 

Net Sales:  The table below summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the three months ended March 31, 2012:

 

 

 

 

 

 Change in Net Sales due to:

 

 

 

 

 

Net Sales
2011

 

Volume

 

Acquisitions

 

Price

 

Foreign
Exchange

 

Net Sales
2012

 

Operating Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Welding

 

$

280,757

 

$

63,279

 

$

27,318

 

$

10,840

 

$

(865

)

$

381,329

 

Europe Welding

 

114,208

 

3,800

 

8,322

 

5,362

 

(5,889

)

125,803

 

Asia Pacific Welding

 

87,560

 

382

 

 

1,891

 

2,730

 

92,563

 

South America Welding

 

34,073

 

3,593

 

 

3,058

 

(886

)

39,838

 

The Harris Products Group

 

82,581

 

5,378

 

 

770

 

(1,140

)

87,589

 

Consolidated

 

$

599,179

 

$

76,432

 

$

35,640

 

$

21,921

 

$

(6,050

)

$

727,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

North America Welding

 

 

 

22.5%

 

9.7%

 

3.9%

 

(0.3%

)

35.8%

 

Europe Welding

 

 

 

3.3%

 

7.3%

 

4.7%

 

(5.2%

)

10.2%

 

Asia Pacific Welding

 

 

 

0.4%

 

 

2.2%

 

3.1%

 

5.7%

 

South America Welding

 

 

 

10.5%

 

 

9.0%

 

(2.6%

)

16.9%

 

The Harris Products Group

 

 

 

6.5%

 

 

0.9%

 

(1.4%

)

6.1%

 

Consolidated

 

 

 

12.8%

 

5.9%

 

3.7%

 

(1.0%

)

21.4%

 

 

Net Sales:  Net sales volumes for the first quarter of 2012 increased for all operating segments because of improved demand levels reflective of expanding industrial economies.  Product pricing increased for all operating segments from prior year levels due to the realization of price increases implemented in response to increases in raw material costs.  Product pricing in the South America Welding segment reflects a higher inflationary environment, particularly in Venezuela.  Product pricing increased in The Harris Products Group segment primarily as a result of the pass-through effect of higher commodity costs, particularly silver and copper, over the prior year period.  With respect to changes in Net sales due to foreign exchange, all segments, except for the Asia Pacific Welding segment, decreased due to a stronger U.S. dollar.  The Asia Pacific Welding segment increased largely due to a stronger Chinese renminbi and Australian dollar, partially offset by a weaker Indian rupee.

 

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Table of Contents

 

Earnings Before Interest and Income Taxes (“EBIT”), as Adjusted:  Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being EBIT, as adjusted.  The following table presents EBIT, as adjusted for the three months ended March 31, 2012 by segment compared with the comparable period in 2011:

 

 

 

Three Months Ended
March 31,

 

 

 

 

 

 

 

2012

 

2011

 

$ Change

 

% Change

 

North America Welding:

 

 

 

 

 

 

 

 

 

Net sales

 

$

381,329

 

$

280,757

 

100,572

 

35.8%

 

Inter-segment sales

 

33,542

 

35,127

 

(1,585

)

(4.5%

)

Total Sales

 

$

414,871

 

$

315,884

 

98,987

 

31.3%

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

69,519

 

$

46,636

 

22,883

 

49.1%

 

As a percent of total sales

 

16.8%

 

14.8%

 

 

 

2.0%

 

 

 

 

 

 

 

 

 

 

 

Europe Welding:

 

 

 

 

 

 

 

 

 

Net sales

 

$

125,803

 

$

114,208

 

11,595

 

10.2%

 

Inter-segment sales

 

4,451

 

3,835

 

616

 

16.1%

 

Total Sales

 

$

130,254

 

$

118,043

 

12,211

 

10.3%

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

12,811

 

$

5,912

 

6,899

 

116.7%

 

As a percent of total sales

 

9.8%

 

5.0%

 

 

 

4.8%

 

 

 

 

 

 

 

 

 

 

 

Asia Pacific Welding:

 

 

 

 

 

 

 

 

 

Net sales

 

$

92,563

 

$

87,560

 

5,003

 

5.7%

 

Inter-segment sales

 

3,817

 

3,213

 

604

 

18.8%

 

Total Sales

 

$

96,380

 

$

90,773

 

5,607

 

6.2%

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

2,573

 

$

126

 

2,447

 

1942.1%

 

As a percent of total sales

 

2.7%

 

0.1%

 

 

 

2.6%

 

 

 

 

 

 

 

 

 

 

 

South America Welding:

 

 

 

 

 

 

 

 

 

Net sales

 

$

39,838

 

$

34,073

 

5,765

 

16.9%

 

Inter-segment sales

 

 

 

 

 

Total Sales

 

$

39,838

 

$

34,073

 

5,765

 

16.9%

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

2,905

 

$

2,048

 

857

 

41.8%

 

As a percent of total sales

 

7.3%

 

6.0%

 

 

 

1.3%

 

 

 

 

 

 

 

 

 

 

 

The Harris Products Group:

 

 

 

 

 

 

 

 

 

Net sales

 

$

87,589

 

$

82,581

 

5,008

 

6.1%

 

Inter-segment sales

 

2,383

 

2,233

 

150

 

6.7%

 

Total Sales

 

$

89,972

 

$

84,814

 

5,158

 

6.1%

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

7,153

 

$

6,543

 

610

 

9.3%

 

As a percent of total sales

 

8.0%

 

7.7%

 

 

 

0.3%

 

 

EBIT, as adjusted, and as a percent of total sales increased for all segments in the three months ended March 31, 2012 as compared with the prior year.  The North America Welding segment growth is primarily due to improved leverage on 22.5% increase in volumes.  The increase at the Europe Welding segment is primarily due to improved leverage on price increases of 4.7%.  The Asia Pacific Welding segment increase represents improved profitability from prior rationalization actions.  The South America Welding segment increase is a result of improved leverage on volume increases of 10.5% and price increases of 9.0%.  The Harris Products Group segment growth is primarily a result of operating leverage on 6.5% increase in volumes.

 

In the three months ended March 31, 2011, EBIT for the Europe Welding segment was adjusted for special items charges of $358.  Special items in the period consists of $23 in asset impairment charges, $204 in losses on the disposal of fixed assets at rationalized operations and rationalization charges of $131, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations resulting from actions initiated in 2009.  EBIT for the Asia

 

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Table of Contents

 

Pacific Welding segment was adjusted for a rationalization gain of $1, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations resulting from actions initiated in 2009.

 

Non-GAAP Financial Measures

 

The Company reviews Adjusted operating income, Adjusted net income and Adjusted diluted earnings per share, 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 GAAP financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures.

 

The following table presents a reconciliation of Operating income as reported to Adjusted operating income:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Operating income as reported

 

$

91,650

 

$

59,462

 

Special items (pre-tax):

 

 

 

 

 

Rationalization and asset impairment charges

 

 

357

 

Adjusted operating income

 

$

91,650

 

$

59,819

 

 

Special items included in Operating income during the first quarter 2011 include net rationalization and asset impairment charges of $357, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations in the Europe Welding and Asia Pacific Welding segments resulting from actions initiated in 2009.

 

The following table presents reconciliations of Net income and Diluted earnings per share as reported to Adjusted net income and Adjusted diluted earnings per share:

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Net income as reported

 

$

64,243

 

$

46,910

 

Special items (after-tax):

 

 

 

 

 

Rationalization and asset impairment charges

 

 

281

 

Adjustment for tax audit settlements

 

 

(4,844