XNAS:LECO Lincoln Electric Holdings, Inc. Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNAS:LECO Fair Value Estimate
Premium
XNAS:LECO Consider Buying
Premium
XNAS:LECO Consider Selling
Premium
XNAS:LECO Fair Value Uncertainty
Premium
XNAS:LECO Economic Moat
Premium
XNAS:LECO Stewardship
Premium
 

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 June 30, 2012

or

£ 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 £

 

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 £

 

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 £

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

 

Smaller reporting company £

 

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

Yes £  No R

 

The number of shares outstanding of the registrant’s common shares as of June 30, 2012 was 83,527,825.

 

 

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

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

29

Item 4. Controls and Procedures

29

 

 

PART II.  OTHER INFORMATION

29

Item 1. Legal Proceedings

29

Item 1A. Risk Factors

30

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

31

Item 4. Mine Safety Disclosures

31

Item 6. Exhibits

31

 

 

Signature

32

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

744,045

 

$

699,293

 

$

1,471,167

 

$

1,298,472

 

Cost of goods sold

 

519,048

 

503,789

 

1,030,905

 

941,530

 

Gross profit

 

224,997

 

195,504

 

440,262

 

356,942

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

127,714

 

115,546

 

251,329

 

217,165

 

Rationalization and asset impairment charges (gains)

 

1,258

 

(75

)

1,258

 

282

 

Operating income

 

96,025

 

80,033

 

187,675

 

139,495

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

849

 

661

 

1,732

 

1,269

 

Equity earnings in affiliates

 

2,006

 

1,715

 

2,698

 

2,545

 

Other income

 

403

 

712

 

1,269

 

2,007

 

Interest expense

 

(1,126

)

(1,627

)

(2,298

)

(3,285

)

Total other income (expense)

 

2,132

 

1,461

 

3,401

 

2,536

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

98,157

 

81,494

 

191,076

 

142,031

 

Income taxes

 

31,792

 

24,472

 

60,562

 

38,067

 

Net income including noncontrolling interests

 

66,365

 

57,022

 

130,514

 

103,964

 

Noncontrolling interests in subsidiaries’ (loss) earnings

 

46

 

9

 

(48

)

41

 

Net income

 

$

66,319

 

$

57,013

 

$

130,562

 

$

103,923

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.80

 

$

0.69

 

$

1.57

 

$

1.25

 

Diluted earnings per share

 

$

0.79

 

$

0.68

 

$

1.54

 

$

1.23

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.17

 

$

0.155

 

$

0.34

 

$

0.31

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net income including noncontrolling interests

 

$

66,365

 

$

57,022

 

$

130,514

 

$

103,964

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

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

 

(61

)

124

 

(559

)

(104

)

Defined benefit pension plan activity, net of tax

 

4,369

 

3,397

 

9,215

 

6,716

 

Currency translation adjustment

 

(30,533

)

14,289

 

(4,970

)

35,067

 

Other comprehensive (loss) income, net of tax:

 

(26,225

)

17,810

 

3,686

 

41,679

 

Comprehensive income

 

40,140

 

74,832

 

134,200

 

145,643

 

Comprehensive (loss) income attributable to noncontrolling interests

 

(543

)

478

 

(568

)

783

 

Comprehensive income attributable to shareholders

 

$

40,683

 

$

74,354

 

$

134,768

 

$

144,860

 

 

See notes to these consolidated financial statements.

 

4



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

(UNAUDITED)

 

(NOTE 1)

 

ASSETS

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

$

307,963

 

$

361,101

 

Accounts receivable (less allowance for doubtful accounts of $6,702 in 2012; $7,079 in 2011)

 

422,532

 

386,197

 

Inventories:

 

 

 

 

 

Raw materials

 

121,512

 

117,194

 

Work-in-process

 

49,228

 

42,103

 

Finished goods

 

229,822

 

213,941

 

Total inventory

 

400,562

 

373,238

 

 

 

 

 

 

 

Other current assets

 

105,283

 

98,734

 

Total Current Assets

 

1,236,340

 

1,219,270

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

Land

 

42,818

 

42,891

 

Buildings

 

333,301

 

322,626

 

Machinery and equipment

 

731,228

 

724,801

 

 

 

1,107,347

 

1,090,318

 

Less accumulated depreciation

 

630,869

 

619,867

 

Property, Plant and Equipment, Net

 

476,478

 

470,451

 

 

 

 

 

 

 

Non-current assets

 

309,170

 

287,055

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

2,021,988

 

$

1,976,776

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Amounts due banks

 

$

19,538

 

$

19,922

 

Trade accounts payable

 

202,413

 

176,312

 

Other current liabilities

 

236,274

 

193,312

 

Current portion of long-term debt

 

1,195

 

81,496

 

Total Current Liabilities

 

459,420

 

471,042

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

Long-term debt, less current portion

 

2,396

 

1,960

 

Accrued pensions

 

195,479

 

232,175

 

Other long-term liabilities

 

83,685

 

78,357

 

Total Long-Term Liabilities

 

281,560

 

312,492

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Common shares

 

9,858

 

9,858

 

Additional paid-in capital

 

195,094

 

179,104

 

Retained earnings

 

1,586,527

 

1,484,393

 

Accumulated other comprehensive loss

 

(243,675

)

(247,881

)

Treasury shares

 

(282,524

)

(248,528

)

Total Shareholders’ Equity

 

1,265,280

 

1,176,946

 

Noncontrolling interests

 

15,728

 

16,296

 

Total Equity

 

1,281,008

 

1,193,242

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

2,021,988

 

$

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)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

130,562

 

$

103,923

 

Noncontrolling interests in subsidiaries’ (loss) earnings

 

(48

)

41

 

Net income including noncontrolling interests

 

130,514

 

103,964

 

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

 

 

 

 

 

Asset impairment charges

 

 

23

 

Depreciation and amortization

 

31,785

 

31,349

 

Equity earnings in affiliates, net

 

(711

)

(558

)

Deferred income taxes

 

17,472

 

10,215

 

Stock-based compensation

 

4,465

 

2,937

 

Amortization of terminated interest rate swaps

 

(430

)

(926

)

Amortization of pension actuarial losses and prior service cost

 

15,498

 

10,917

 

Other non-cash items, net

 

(1,331

)

1,289

 

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

 

 

 

 

 

Increase in accounts receivable

 

(21,549

)

(75,723

)

Increase in inventories

 

(20,702

)

(111,727

)

(Increase) decrease in other current assets

 

(10,250

)

1,226

 

Increase in trade accounts payable

 

16,383

 

66,037

 

Increase in other current liabilities

 

32,734

 

26,159

 

Decrease in accrued pensions

 

(36,857

)

(16,544

)

Net change in other long-term assets and liabilities

 

3,865

 

(3,062

)

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

160,886

 

45,576

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(26,247

)

(29,370

)

Acquisition of businesses, net of cash acquired

 

(49,335

)

(17,881

)

Proceeds from sale of property, plant and equipment

 

338

 

849

 

Other investing activities

 

(1,541

)

 

NET CASH USED BY INVESTING ACTIVITIES

 

(76,785

)

(46,402

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from short-term borrowings

 

2,069

 

6,666

 

Payments on short-term borrowings

 

(1,700

)

(5,825

)

Amounts due banks, net

 

(2,428

)

(1,084

)

Proceeds from long-term borrowings

 

914

 

 

Payments on long-term borrowings

 

(84,224

)

(1,243

)

Proceeds from exercise of stock options

 

12,212

 

6,199

 

Tax benefit from exercise of stock options

 

5,454

 

2,027

 

Purchase of shares for treasury

 

(40,138

)

(13,309

)

Cash dividends paid to shareholders

 

(28,363

)

(26,005

)

NET CASH USED BY FINANCING ACTIVITIES

 

(136,204

)

(32,574

)

 

 

 

 

 

 

Effect of exchange rate changes on Cash and cash equivalents

 

(1,035

)

5,122

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(53,138

)

(28,278

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

361,101

 

366,193

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

307,963

 

$

337,915

 

 

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 six months ended June 30, 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.

 

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

 

Translation of Foreign Currencies

 

The translation of assets and liabilities originally denominated in foreign currencies into U.S. dollars is for consolidation purposes, and does not necessarily indicate that the Company could realize or settle the reported value of those assets and liabilities in U.S. dollars.  Additionally, such a translation does not necessarily indicate that the Company could return or distribute the reported U.S. dollar value of the net equity of its foreign operations to its shareholders.

 

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 $13,407 at June 30, 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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

66,319

 

$

57,013

 

$

130,562

 

$

103,923

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

83,328

 

83,037

 

83,390

 

83,414

 

Effect of dilutive securities - Stock options and awards

 

1,120

 

1,068

 

1,137

 

1,079

 

Diluted weighted average shares outstanding

 

84,448

 

84,105

 

84,527

 

84,493

 

Basic earnings per share

 

$

0.80

 

$

0.69

 

$

1.57

 

$

1.25

 

Diluted earnings per share

 

$

0.79

 

$

0.68

 

$

1.54

 

$

1.23

 

 

For the three months ended June 30, 2012 and 2011, common shares subject to equity-based awards of 45,188 and 486,310, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.  For the six months ended June 30, 2012 and 2011, common shares subject to equity-based awards of 43,211 and 486,260, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

 

7



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

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 May 17, 2012, the Company completed the acquisition of Wayne Trail Technologies, Inc. (“Wayne Trail”) for approximately $30,516 in cash, net of acquired cash, and assumed debt.  The preliminary fair value of net assets acquired was $16,072, resulting in goodwill of $14,444.  These values are preliminary and subject to final opening balance sheet adjustments.  Wayne Trail, based in Ft. Loramie, Ohio, is a manufacturer of automated systems and tooling, serving a wide range of applications in the metal processing market.  The acquisition added to the Company’s welding and automated solutions portfolio.  Annual sales for Wayne Trail at the date of acquisition were approximately $50,000.

 

On March 6, 2012, the Company completed the acquisition of Weartech International, Inc. (“Weartech”) for approximately $29,995 in cash and assumed debt.  The preliminary fair value of net assets acquired was $19,804, resulting in goodwill of $10,191.  These values are preliminary and subject to final opening balance sheet adjustments.  Weartech, based in Anaheim,

 

8



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

California, is a producer of cobalt-based hard facing and wear-resistant welding consumables.  The acquisition added to the Company’s consumables portfolio.  Sales for Weartech during 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 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 June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

416,223

 

$

114,437

 

$

85,433

 

$

37,169

 

$

90,783

 

$

 

$

744,045

 

Inter-segment sales

 

39,658

 

4,466

 

5,076

 

11

 

2,353

 

(51,564

)

 

Total

 

$

455,881

 

$

118,903

 

$

90,509

 

$

37,180

 

$

93,136

 

$

(51,564

)

$

744,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

76,556

 

$

10,991

 

$

4,014

 

$

2,980

 

$

9,041

 

$

(2,509

)

$

101,073

 

Special items charge (gain)

 

77

 

592

 

589

 

1,381

 

 

 

2,639

 

EBIT

 

$

76,479

 

$

10,399

 

$

3,425

 

$

1,599

 

$

9,041

 

$

(2,509

)

$

98,434

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

849

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,126

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

98,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

321,656

 

$

139,248

 

$

102,721

 

$

37,769

 

$

97,899

 

$

 

$

699,293

 

Inter-segment sales

 

37,222

 

6,302

 

3,397

 

120

 

2,017

 

(49,058

)

 

Total

 

$

358,878

 

$

145,550

 

$

106,118

 

$

37,889

 

$

99,916

 

$

(49,058

)

$

699,293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

58,120

 

$

11,073

 

$

1,256

 

$

3,527

 

$

9,197

 

$

(788

)

$

82,385

 

Special items charge (gain)

 

 

34

 

(109

)

 

 

 

(75

)

EBIT

 

$

58,120

 

$

11,039

 

$

1,365

 

$

3,527

 

$

9,197

 

$

(788

)

$

82,460

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

661

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,627

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

81,494

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

797,552

 

$

240,240

 

$

177,996

 

$

77,007

 

$

178,372

 

$

 

$

1,471,167

 

Inter-segment sales

 

73,200

 

8,917

 

8,893

 

11

 

4,736

 

(95,757

)

 

Total

 

$

870,752

 

$

249,157

 

$

186,889

 

$

77,018

 

$

183,108

 

$

(95,757

)

$

1,471,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

146,075

 

$

23,802

 

$

6,587

 

$

5,885

 

$

16,194

 

$

(4,262

)

$

194,281

 

Special items charge (gain)

 

77

 

592

 

589

 

1,381

 

 

 

2,639

 

EBIT

 

$

145,998

 

$

23,210

 

$

5,998

 

$

4,504

 

$

16,194

 

$

(4,262

)

$

191,642

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

1,732

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,298

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

191,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

897,248

 

$

453,089

 

$

365,494

 

$

124,093

 

$

200,676

 

$

(18,612

)

$

2,021,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

602,413

 

$

253,456

 

$

190,281

 

$

71,842

 

$

180,480

 

$

 

$

1,298,472

 

Inter-segment sales

 

72,349

 

10,137

 

6,610

 

120

 

4,250

 

(93,466

)

 

Total

 

$

674,762

 

$

263,593

 

$

196,891

 

$

71,962

 

$

184,730

 

$

(93,466

)

$

1,298,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT, as adjusted

 

$

104,756

 

$

16,985

 

$

1,382

 

$

5,575

 

$

15,740

 

$

(109

)

$

144,329

 

Special items charge (gain)

 

 

392

 

(110

)

 

 

 

282

 

EBIT

 

$

104,756

 

$

16,593

 

$

1,492

 

$

5,575

 

$

15,740

 

$

(109

)

$

144,047

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

1,269

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,285

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

142,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

678,044

 

$

505,590

 

$

369,181

 

$

119,387

 

$

235,068

 

$

93,796

 

$

2,001,066

 

 

In the second quarter of 2012, special items include charges of $77, $592 and $589 for rationalization actions in the North America Welding, Europe Welding and Asia Pacific Welding segments, respectively, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations.  The South America Welding segment special item represents a charge of $1,381, relating to a change in Venezuelan labor law, which provides for increased employee severance obligations.

 

In the second quarter of 2011, special items include net charges of $34 and $94 for rationalization actions in the Europe Welding and Asia Pacific Welding segments, respectively, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations.  The Asia Pacific Welding segment special items also include a gain of $203 on the sale of assets at a rationalized operation.

 

10



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

In the six months ended June 30, 2012, special items include charges of $77, $592 and $589 for rationalization actions in the North America Welding, Europe Welding and Asia Pacific Welding segments, respectively, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations.  The South America Welding segment special item represents a charge of $1,381, relating to a change in Venezuelan labor law, which provides for increased employee severance obligations.

 

In the six months ended June 30, 2011, special items include net charges of $188 and $93 for rationalization actions in the Europe Welding and Asia Pacific Welding segments, respectively, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations.  The Europe Welding and Asia Pacific Welding segments special items also include a loss of $204 and a gain of $203, respectively, on the sale of assets at rationalized operations.

 

NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS

 

The Company recorded rationalization charges of $1,258 for the six months ended June 30, 2012 resulting from rationalization plans initiated in 2012.  A description of each plan and the related costs follows:

 

Australia Plan:

 

During June 2012, the Company initiated a plan to rationalize its Australian manufacturing operations.  This action is expected to impact 50 employees within the Asia Pacific Welding segment.  During the six months ending June 30, 2012, the Company recorded charges of $589 related to these activities.  Charges represent employee severance and other related costs.  At June 30, 2012, a liability relating to these actions of $594 was recognized in Other current liabilities, which will be substantially paid over the next 12 months.  The Company expects additional charges in the range of $800 to $1,750 to be recorded related to the completion of these activities.

 

Oceanside-Reno Plan:

 

During May 2012, the Company initiated a plan to consolidate its Oceanside, California operations and its Reno, Nevada operations to another facility in Reno, Nevada.  This action is expected to impact 22 employees within the North America Welding segment.  During the six months ending June 30, 2012, the Company recorded charges of $77 related to these activities.  Charges represent employee severance and other related costs.  At June 30, 2012, a liability relating to these actions of $77 was recognized in Other current liabilities, which will be substantially paid over the next 12 months.  The Company expects additional charges in the range of $1,000 to $1,400 to be recorded related to the completion of these activities.

 

Russia Plan:

 

During April 2012, the Company initiated a plan to rationalize and consolidate manufacturing facilities in Russia.  This action is expected to impact 225 employees within the Europe Welding segment.  During the six months ending June 30, 2012, the Company recorded charges of $592 related to these activities.  Charges represent employee severance and other related costs.  At June 30, 2012, a liability relating to these actions of $508 was recognized in Other current liabilities, which will be substantially paid over the next 12 months.  The Company expects additional charges in the range of $1,000 to $2,500 to be recorded related to the completion of these activities.

 

2009 Plans:

 

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 June 30, 2012, a liability relating to these actions of $170 was recognized in Other current liabilities.  The Company does not expect any further 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.

 

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:

 

 

 

North
America
Welding

 

Europe
Welding

 

Asia Pacific
Welding

 

The Harris
Products
Group

 

Consolidated

 

Balance at December 31, 2011

 

$

 

$

173

 

$

 

$

82

 

$

255

 

Payments and other adjustments

 

 

(87

)

5

 

(82

)

(164

)

Charged to expense

 

77

 

592

 

589

 

 

1,258

 

Balance at June 30, 2012

 

$

77

 

$

678

 

$

594

 

$

 

$

1,349

 

 

11



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 and six month periods ended June 30, 2012, the Company purchased an aggregate of 428,300 and 860,684 common shares, respectively, in the open market under this program.  As of June 30, 2012, there remained 4,261,073 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 June 30, 2012

 

Three Months Ended June 30, 2011

 

 

 

Gross of
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net of Tax
Amount

 

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

 

$

13

 

$

(74

)

$

(61

)

$

140

 

$

(16

)

$

124

 

Defined benefit pension plan activity

 

7,363

 

(2,994

)

4,369

 

5,419

 

(2,022

)

3,397

 

Currency translation adjustment

 

(30,533

)

 

(30,533

)

14,289

 

 

14,289

 

Total other comprehensive (loss) income

 

$

(23,157

)

$

(3,068

)

$

(26,225

)

$

19,848

 

$

(2,038

)

$

17,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2012

 

Six Months Ended June 30, 2011

 

 

 

Gross of
Tax
Amount

 

Tax
(Expense)
Benefit

 

Net of Tax
Amount

 

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

 

$

(560

)

$

1

 

$

(559

)

$

(74

)

$

(30

)

$

(104

)

Defined benefit pension plan activity

 

15,053

 

(5,838

)

9,215

 

11,148

 

(4,432

)

6,716

 

Currency translation adjustment

 

(4,970

)

 

(4,970

)

35,067

 

 

35,067

 

Total other comprehensive income

 

$

9,523

 

$

(5,837

)

$

3,686

 

$

46,141

 

$

(4,462

)

$

41,679

 

 

NOTE 9 - EQUITY

 

Changes in equity for the six months ended June 30, 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)

 

130,562

 

(48

)

130,514

 

Other comprehensive income (loss)

 

4,206

 

(520

)

3,686

 

Total comprehensive income (loss)

 

134,768

 

(568

)

134,200

 

 

 

 

 

 

 

 

 

Cash dividends declared - $0.34 per share

 

(28,429

)

 

(28,429

)

Issuance of shares under benefit plans

 

22,133

 

 

22,133

 

Purchase of shares for treasury

 

(40,138

)

 

(40,138

)

Balance at June 30, 2012

 

$

1,265,280

 

$

15,728

 

$

1,281,008

 

 

12



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 six months ended June 30, 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

 

103,923

 

41

 

103,964

 

Other comprehensive income

 

40,937

 

742

 

41,679

 

Total comprehensive income

 

144,860

 

783

 

145,643

 

 

 

 

 

 

 

 

 

Cash dividends declared - $0.31 per share

 

(26,126

)

 

(26,126

)

Issuance of shares under benefit plans

 

12,373

 

 

12,373

 

Purchase of shares for treasury

 

(13,309

)

 

(13,309

)

Balance at June 30, 2011

 

$

1,251,295

 

$

16,764

 

$

1,268,059

 

 

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 $78,146 and $78,292 at June 30, 2012 and December 31, 2011, respectively.

 

NOTE 11 — ACCRUED EMPLOYEE BONUS

 

“Other current liabilities” at June 30, 2012 and 2011 include accruals for year-end bonuses and related payroll taxes of $73,331 and $58,019, 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 June 30, 2011 to June 30, 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 $5,168 as of June 30, 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 June 30, 2012 and December 31, 2011.  The asset is included in “Other current assets.”  The decrease in the accrual for contingent liabilities is primarily due to a payment made in conjunction with the agreement entered into in January 2012 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.

 

13



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

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.”

 

The changes in the carrying amount of product warranty accruals for the six months ended June 30, 2012 and 2011 are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Balance at beginning of period

 

$

15,781

 

$

16,879

 

Accruals for warranties

 

5,487

 

4,978

 

Settlements

 

(5,833

)

(5,259

)

Foreign currency translation

 

(49

)

394

 

Balance at end of period

 

$

15,386

 

$

16,992

 

 

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 June 30, 2012, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Credit Agreement.  The Credit Agreement has a three-year term and is scheduled to expire in November 2012.

 

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 June 30, 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 $824 in the six months ended June 30, 2012 and 2011, respectively.  At June 30, 2012, the deferred gain was fully amortized.

 

In July 2012, the Company entered into a new credit agreement (the “2012 Agreement”) for a $300,000 revolving credit facility to be used for general corporate purposes.  The 2012 Agreement amended and restated the Credit Agreement.  The 2012 Agreement has a five-year term 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 LIBOR or the prime rate, plus a spread based on the Company’s leverage ratio, at the Company’s election.  The 2012 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.

 

NOTE 15 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS

 

The components of total pension cost were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

5,970

 

$

4,326

 

$

10,849

 

$

8,661

 

Interest cost

 

10,491

 

10,983

 

20,729

 

21,940

 

Expected return on plan assets

 

(14,983

)

(14,383

)

(29,371

)

(28,738

)

Amortization of prior service cost

 

(23

)

(16

)

(45

)

(31

)

Amortization of net loss

 

7,749

 

5,476

 

15,543

 

10,948

 

Defined benefit plans

 

9,204

 

6,386

 

17,705

 

12,780

 

Multi-employer plans

 

225

 

241

 

467

 

476

 

Defined contribution plans

 

2,353

 

2,137

 

4,597

 

4,190

 

Total pension cost

 

$

11,782

 

$

8,764

 

$

22,769

 

$

17,446

 

 

The Company voluntarily contributed $36,000 to its defined benefit plans in the United States during the six months ended June 30, 2012 and expects to contribute up to $60,000 to its defined benefit plans in the United States during 2012.  The

 

14



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

amortization of net loss increased in the second 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 $60,562 of tax expense on pre-tax income of $191,076, resulting in an effective income tax rate of 31.7% for the six months ended June 30, 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 26.8% for the six months ended June 30, 2011 was lower than the Company’s statutory rate primarily due to income earned in lower tax rate jurisdictions 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 June 30, 2012, the Company had $28,100 of unrecognized tax benefits.  If recognized, approximately $16,876 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 Canadian tax audit for 2003 — 2010 and an Indonesian tax audit for 2003 — 2007.  Except as discussed below, 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 $7,904 in prior years’ unrecognized tax benefits by the end of the second quarter 2013.

 

In July 2012, the Company received a Notice of Reassessment from the Canada Revenue Agency (the “CRA”) for 2004 to 2010, which would disallow the deductibility of intercompany dividends.  These adjustments would increase Canadian federal and provincial tax due by $56,459 plus approximately $14,292 of interest, net of tax, through June 30, 2012.  The Company disagrees with the position taken by the CRA and believes it is without merit.  The Company will vigorously contest the assessment through the Tax Court of Canada.  A trial date has not yet been scheduled.

 

In connection with the litigation process, the Company is required to deposit no less than one-half of the tax and interest assessed by CRA.  This payment, expected to be made in 2012, will affect the Company’s cash flows in the quarter the payment is made.  Any Canadian tax ultimately due will be creditable in the parent company’s U.S. federal tax return.  The Company expects to be able to utilize the full amount of foreign tax credits generated in the statutorily allowed carryback and carryforward period.  Accordingly, should the Company not prevail in this dispute, the income statement charge will approximate the deficiency interest, net of tax.

 

The Company believes it will prevail on the merits of the tax position.  In accordance with prescribed recognition and measurement thresholds, no income tax accrual has been made for any uncertain tax positions related to the CRA reassessment.  An unfavorable resolution of this matter could have a material effect on the Company’s financial statements in the quarter in which a judgment is reached.

 

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

 

15



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

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 six months ended June 30, 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 June 30, 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 $58,189 and $65,721 at June 30, 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 $163,270 and $161,026 at June 30, 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.

 

The Company has short-term silver and copper forward contracts with notional amounts of 285,000 troy ounces and 375,000 pounds, respectively, at June 30, 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:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Other

 

Other

 

Other

 

Other

 

 

 

Current

 

Current

 

Current

 

Current

 

Derivatives by hedge designation 

 

Assets

 

Liabilities

 

Assets

 

Liabilities

 

Designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

618

 

$

441

 

$

801

 

$

531

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

2,029

 

1,061

 

726

 

1,026

 

Commodity contracts

 

222

 

56

 

1,559

 

 

Total derivatives

 

$

2,869

 

$

1,558

 

$

3,086

 

$

1,557

 

 

The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income for the three and six months ended June 30, 2012 and 2011 consisted of the following:

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

Derivatives by hedge designation

 

Classification of gains (losses)

 

2012

 

2011

 

2012

 

2011

 

Not designated as hedges:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

Selling, general & administrative expenses

 

$

480

 

$

(2,350

)

$

761

 

$

(5,888

)

Commodity contracts

 

Cost of goods sold

 

1,659

 

1,240

 

(94

)

(1,637

)

Commodity contracts

 

Other income

 

 

 

 

(12

)

 

16



Table of Contents

 

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

 

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

 

June 30, 2012

 

December 31, 2011

 

Foreign exchange contracts

 

$

353

 

$

912

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30,

 

June 30,

 

Derivative type

 

Gain (loss) reclassified from AOCI to:

 

2012

 

2011

 

2012

 

2011

 

Foreign exchange contracts

 

Sales

 

$

233

 

$

59

 

$

464

 

$

110

 

 

 

Cost of goods sold

 

(169

)

(630

)

53

 

(1,203

)

 

The Company expects a gain of $353 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.

 

The following table provides a summary of assets and liabilities as of June 30, 2012 measured at fair value on a recurring basis:

 

Description

 

Balance as of
June 30, 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

 

$

2,647

 

$

 

$

2,647

 

$

 

Commodity contracts

 

222

 

 

222

 

 

Total assets

 

$

2,869

 

$

 

$

2,869

 

$

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

$

1,502

 

$

 

$

1,502

 

$

 

Commodity contracts

 

56

 

 

56

 

 

Contingent consideration

 

4,436

 

 

 

4,436

 

Deferred compensation

 

16,361

 

 

16,361

 

 

Total liabilities

 

$

22,355

 

$

 

$

17,919

 

$

4,436

 

 

17



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 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 six months ended June 30, 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 $4,436 as of June 30, 2012, which reflects a $139 increase 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 10.2%, 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 33.4%, determined using various scenarios with growth rates ranging from 14.6% to 56.9%.

 

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 June 30, 2012 and December 31, 2011.  The fair value of long-term debt at June 30, 2012 and December 31, 2011, including the current portion, was approximately $3,528 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 $3,591 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.

 

18



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 computer numeric controlled plasma and 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 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.

 

Results of Operations

 

Three Months Ended June 30, 2012 Compared with Three Months Ended June 30, 2011

 

 

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

Change

 

 

 

Amount

 

% of Sales

 

 

Amount

 

% of Sales

 

 

Amount

 

%

 

 

Net sales

 

$

744,045

 

100.0

%

 

$

699,293

 

100.0

%

 

$

44,752

 

6.4

%

 

Cost of goods sold

 

519,048

 

69.8

%