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LECO > SEC Filings for LECO > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for LINCOLN ELECTRIC HOLDINGS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for LINCOLN ELECTRIC HOLDINGS INC


31-Jul-2013

Quarterly Report


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, 2013 Compared with Three Months Ended June 30, 2012
                                                       Three Months Ended June 30,
                                       2013                        2012                       Change
                               Amount      % of Sales      Amount      % of Sales      Amount          %
Net sales                    $ 727,432        100.0 %    $ 744,045        100.0 %    $ (16,613 )      (2.2 %)
Cost of goods sold             487,094         67.0 %      519,048         69.8 %      (31,954 )      (6.2 %)
Gross profit                   240,338         33.0 %      224,997         30.2 %       15,341         6.8 %
Selling, general &
administrative expenses        135,215         18.6 %      127,714         17.2 %        7,501         5.9 %
Rationalization and asset
impairment charges                 851          0.1 %        1,258          0.2 %         (407 )     (32.4 %)
Operating income               104,272         14.3 %       96,025         12.9 %        8,247         8.6 %
Interest income                    890          0.1 %          849          0.1 %           41         4.8 %
Equity earnings in
affiliates                       1,258          0.2 %        2,006          0.3 %         (748 )     (37.3 %)
Other income                       913          0.1 %          403          0.1 %          510       126.6 %
Interest expense                  (799 )       (0.1 %)      (1,126 )       (0.2 %)         327        29.0 %
Income before income taxes     106,534         14.6 %       98,157         13.2 %        8,377         8.5 %
Income taxes                    34,007          4.7 %       31,792          4.3 %        2,215         7.0 %
Net income including
non-controlling interests       72,527         10.0 %       66,365          8.9 %        6,162         9.3 %
Non-controlling interests in
subsidiaries' (loss)
earnings                           (79 )          -             46            -           (125 )    (271.7 %)
Net income                   $  72,606         10.0 %    $  66,319          8.9 %    $   6,287         9.5 %

Net Sales: Net sales for the second quarter of 2013 decreased 2.2% from the second quarter 2012. The sales decrease reflects volume decreases of 4.9%, price increases of 0.1%, increases from acquisitions of 3.1% and unfavorable impacts from foreign exchange of 0.5%. Sales volumes decreased as a result of softening demand in both the domestic and international markets.
Gross Profit: Gross profit increased 6.8% to $240,338 for the second quarter 2013 compared with $224,997 in the second quarter 2012. As a percentage of Net sales, Gross profit increased to 33.0% in the second quarter 2013 from 30.2% in the second quarter 2012. The increase was the result of geographic mix and pricing stability in the wake of lower year over year input costs. The current period includes incremental costs of $2,538 due to the devaluation of the Venezuelan currency. The prior year period includes charges of $1,039 due to a change in Venezuelan labor law, which provides for increased employee severance obligations. Foreign currency exchange rates had a $976 unfavorable translation impact in the second quarter 2013.


Selling, General & Administrative ("SG&A") Expenses: SG&A expenses were higher by $7,501, or 5.9%, in the second quarter 2013 compared with the second quarter of 2012. As a percentage of Net sales, SG&A expenses were 18.6% and 17.2% in the second quarter 2013 and 2012, respectively. The increase in SG&A expenses was predominantly due to increased SG&A expenses from acquisitions of $5,091 and higher general and administrative spending of $4,391 primarily related to additional employee compensation costs.
Equity Earnings in Affiliates: Equity earnings in affiliates were $1,258 in the second quarter 2013 compared with earnings of $2,006 in the second quarter of 2012. The decrease was primarily due to decreased earnings in Turkey. Interest Expense: Interest expense decreased to $799 in the second quarter 2013 from $1,126 in the second quarter of 2012 as a result of lower levels of debt in the current period.
Income Taxes: The Company recognized $34,007 of tax expense on pre-tax income of $106,534, resulting in an effective income tax rate of 31.9% for the three months ended June 30, 2013 compared with an effective income tax rate of 32.4% in the second quarter of 2012.
Net Income: Net income for the second quarter 2013 was $72,606 compared with Net income of $66,319 in the second quarter of 2012. Diluted earnings per share for the second quarter 2013 were $0.87 compared with $0.79 in the second quarter of 2012. Foreign currency exchange rate movements had an unfavorable translation effect of $200 on Net income for the second quarter of 2013.

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 June 30, 2013:
                                                         Change in Net Sales due to:
                           Net Sales                                                       Foreign        Net Sales
                              2012          Volume        Acquisitions       Price        Exchange          2013
Operating Segments
North America Welding     $  416,223     $  (20,571 )          22,954     $  1,354      $     (891 )    $  419,069
Europe Welding               114,437         (5,624 )               -          789            (941 )       108,661
Asia Pacific Welding          85,433        (15,177 )               -       (1,063 )            46          69,239
South America Welding         37,169          3,060                 -        6,005          (1,731 )        44,503
The Harris Products Group     90,783          1,997                 -       (6,356 )          (464 )        85,960
Consolidated              $  744,045     $  (36,315 )    $     22,954     $    729      $   (3,981 )    $  727,432
% Change
North America Welding                          (4.9 %)            5.5 %        0.3 %          (0.2 %)          0.7 %
Europe Welding                                 (4.9 %)              -          0.7 %          (0.8 %)         (5.0 %)
Asia Pacific Welding                          (17.8 %)              -         (1.2 %)          0.1 %         (19.0 %)
South America Welding                           8.2 %               -         16.2 %          (4.7 %)         19.7 %
The Harris Products Group                       2.2 %               -         (7.0 %)         (0.5 %)         (5.3 %)
Consolidated                                   (4.9 %)            3.1 %        0.1 %          (0.5 %)         (2.2 %)

Net sales volumes for the second quarter of 2013 decreased for all operating segments except for the South America Welding and The Harris Products Group segments, as a result of softening demand in both the domestic and international markets. Net sales volumes in the South America Welding segment increased as a result of increased demand in Brazil. Net sales volumes in The Harris Products Group segment increased as a result of increased demand in the domestic brazing market along with cutting and gas regulation equipment. Product pricing in the North America Welding and Europe Welding segments increased slightly due to the realization of price increases. Product pricing decreased for the Asia Pacific Welding segment due to lower raw material costs and competitive pricing conditions. Product pricing in the South America Welding segment reflects a higher inflationary environment, particularly in Venezuela, and pricing increases in Brazil. Product pricing decreased for The Harris Products Group segment because of significant decreases in the costs of silver and copper as compared to the prior year period. The increase in Net sales from acquisitions was due to the acquisitions of Tennessee Rand, Inc. ("Tenn Rand") in December 2012, the Kaliburn, Burny and Cleveland Motion Control businesses (collectively, "Kaliburn") in November 2012 and Wayne Trail Technologies, Inc. ("Wayne Trail") in May 2012 (see the "Acquisitions" section below for additional information regarding the acquisitions). 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.


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 June 30, 2013 by segment compared with the comparable period in 2012:

                                Three Months Ended June 30,
                                  2013               2012         $ Change    % Change
North America Welding:
Net sales                   $     419,069       $     416,223       2,846        0.7 %
Inter-segment sales                35,529              39,658      (4,129 )    (10.4 %)
Total Sales                 $     454,598       $     455,881      (1,283 )     (0.3 %)

EBIT, as adjusted           $      82,777       $      76,556       6,221        8.1 %
As a percent of total sales          18.2 %              16.8 %                  1.4 %
Europe Welding:
Net sales                   $     108,661       $     114,437      (5,776 )     (5.0 %)
Inter-segment sales                 4,330               4,466        (136 )     (3.0 %)
Total Sales                 $     112,991       $     118,903      (5,912 )     (5.0 %)

EBIT, as adjusted           $       9,532       $      10,991      (1,459 )    (13.3 %)
As a percent of total sales           8.4 %               9.2 %                 (0.8 %)
Asia Pacific Welding:
Net sales                   $      69,239       $      85,433     (16,194 )    (19.0 %)
Inter-segment sales                 4,374               5,076        (702 )    (13.8 %)
Total Sales                 $      73,613       $      90,509     (16,896 )    (18.7 %)

EBIT, as adjusted           $         653       $       4,014      (3,361 )    (83.7 %)
As a percent of total sales           0.9 %               4.4 %                 (3.5 %)
South America Welding:
Net sales                   $      44,503       $      37,169       7,334       19.7 %
Inter-segment sales                    51                  11          40      363.6 %
Total Sales                 $      44,554       $      37,180       7,374       19.8 %

EBIT, as adjusted           $      11,065       $       2,980       8,085      271.3 %
As a percent of total sales          24.8 %               8.0 %                 16.8 %
The Harris Products Group:
Net sales                   $      85,960       $      90,783      (4,823 )     (5.3 %)
Inter-segment sales                 2,674               2,353         321       13.6 %
Total Sales                 $      88,634       $      93,136      (4,502 )     (4.8 %)

EBIT, as adjusted           $       7,343       $       9,041      (1,698 )    (18.8 %)
As a percent of total sales           8.3 %               9.7 %                 (1.4 %)

EBIT, as adjusted as a percent of total sales increased for the North America Welding segment in the three months ended June 30, 2013 as compared with the same period of the prior year primarily due to improved pricing and lower material costs. The decrease in the Europe Welding segment is primarily due to volume decreases of 4.9% and increased SG&A expenses. The Asia Pacific Welding segment decrease is due to volume decreases of 17.8% and lower profitability in China. The South America Welding segment increase is a result of improving results in Brazil and pricing increases as a result of the highly inflationary economy in Venezuela. The Harris Products Group segment decrease is primarily a result of lower commodity prices leading to lower margins, and higher SG&A expenses.


In the three months ended June 30, 2013, special items include net charges of $266, $75 and $510 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 items represent charges of $2,538, relating to the devaluation of the Venezuelan currency.
In the three 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.

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

                                                           Six Months Ended June 30,
                                         2013                          2012                        Change
                                 Amount       % of Sales       Amount       % of Sales      Amount          %
Net sales                     $ 1,446,005        100.0 %    $ 1,471,167        100.0 %    $ (25,162 )      (1.7 %)
Cost of goods sold                979,095         67.7 %      1,030,905         70.1 %      (51,810 )      (5.0 %)
Gross profit                      466,910         32.3 %        440,262         29.9 %       26,648         6.1 %
Selling, general &
administrative expenses           272,106         18.8 %        251,329         17.1 %       20,777         8.3 %
Rationalization and asset
impairment charges                  1,902          0.1 %          1,258          0.1 %          644        51.2 %
Operating income                  192,902         13.3 %        187,675         12.8 %        5,227         2.8 %
Interest income                     1,916          0.1 %          1,732          0.1 %          184        10.6 %
Equity earnings in
affiliates                          2,517          0.2 %          2,698          0.2 %         (181 )      (6.7 %)
Other income                        1,627          0.1 %          1,269          0.1 %          358        28.2 %
Interest expense                   (1,749 )       (0.1 %)        (2,298 )       (0.2 %)         549        23.9 %
Income before income taxes        197,213         13.6 %        191,076         13.0 %        6,137         3.2 %
Income taxes                       57,843          4.0 %         60,562          4.1 %       (2,719 )      (4.5 %)
Net income including
non-controlling interests         139,370          9.6 %        130,514          8.9 %        8,856         6.8 %
Non-controlling interests
in subsidiaries' loss                 (42 )          -              (48 )          -              6        12.5 %
Net income                    $   139,412          9.6 %    $   130,562          8.9 %    $   8,850         6.8 %

Net Sales: Net sales for the six months ended June 30, 2013 decreased 1.7% from the comparable period in 2012. The sales decrease reflects volume decreases of 5.4%, price increases of 0.1%, increases from acquisitions of 4.3% and unfavorable impacts from foreign exchange of 0.7%. Sales volumes decreased as a result of softening demand in both domestic and international markets. Gross Profit: Gross profit increased 6.1% to $466,910 for the six months ended June 30, 2013 compared with $440,262 in the comparable period in 2012. As a percentage of Net sales, Gross profit increased to 32.3% in the six months ended June 30, 2013 from 29.9% in the comparable period in 2012. The increase was the result of geographic mix and pricing stability in the wake of lower year over year input costs. The current period includes incremental costs of $4,117 due to the devaluation of the Venezuelan currency. The prior year period includes charges of $1,039 due to a change in Venezuelan labor law, which provides for increased employee severance obligations. Foreign currency exchange rates had a $2,446 unfavorable translation impact in the six months ended June 30, 2013. Selling, General & Administrative ("SG&A") Expenses: SG&A expenses were higher by $20,777, or 8.3%, in the six months ended June 30, 2013 compared with the comparable period in 2012. As a percentage of Net sales, SG&A expenses were 18.8% and 17.1% in the six months ended June 30, 2013 and 2012, respectively. The increase in SG&A expenses was predominantly due to increased SG&A expenses from acquisitions of $12,388, higher foreign exchange transaction losses of $7,028, which includes a charge of $8,081 due to the devaluation of the Venezuelan currency, and higher general and administrative spending of $7,767 primarily related to additional employee compensation costs, partially offset by lower bonus expense of $3,510.
Equity Earnings in Affiliates: Equity earnings in affiliates were $2,517 in the six months ended June 30, 2013 compared with earnings of $2,698 in the comparable period in 2012. The decrease was due to a decrease in earnings in Turkey and Chile.


Table of Contents

Interest Expense: Interest expense decreased to $1,749 in the six months ended June 30, 2013 from $2,298 in the comparable period in 2012 as a result of lower levels of debt in the six months ended June 30, 2013.
Income Taxes: The Company recognized $57,843 of tax expense on pre-tax income of $197,213, resulting in an effective income tax rate of 29.3% for the six months ended June 30, 2013. The effective income tax rate is lower than the Company's effective income tax rate of 31.7% for the six months ended June 30, 2012 due to the reversal of a valuation allowance on deferred tax assets more-likely-than-not to be realized and the effect of the renewed U.S. research and development credit.
Net Income: Net income for the six months ended June 30, 2013 was $139,412 compared with Net income of $130,562 in the six months ended June 30, 2012. Diluted earnings per share for the six months ended June 30, 2013 was $1.67 compared with $1.54 in the comparable period in 2012. Foreign currency exchange rate movements had an unfavorable translation effect of $488 on Net income for the six months ended June 30, 2013.

Segment Results
Net Sales:  The table below summarizes the impacts of volume, acquisitions,
price and foreign currency exchange rates on Net sales for the six months ended
June 30, 2013:
                                                   Change in Net Sales due to:
                    Net Sales                                                         Foreign        Net Sales
                      2012           Volume        Acquisitions        Price         Exchange           2013
Operating
Segments
North America
Welding           $   797,552     $  (27,921 )    $     63,214     $    6,630      $     (852 )    $   838,623
Europe Welding        240,240        (14,631 )               -         (3,187 )        (3,270 )        219,152
Asia Pacific
Welding               177,996        (35,322 )               -         (2,984 )          (412 )        139,278
South America
Welding                77,007           (261 )               -          7,997          (3,866 )         80,877
The Harris
Products Group        178,372         (1,810 )               -         (6,815 )        (1,672 )        168,075
Consolidated      $ 1,471,167     $  (79,945 )    $     63,214     $    1,641      $  (10,072 )    $ 1,446,005
% Change
North America
Welding                                 (3.5 %)            7.9 %          0.8 %          (0.1 %)           5.1 %
Europe Welding                          (6.1 %)              -           (1.3 %)         (1.4 %)          (8.8 %)
Asia Pacific
Welding                                (19.8 %)              -           (1.7 %)         (0.2 %)         (21.8 %)
South America
Welding                                 (0.3 %)              -           10.4 %          (5.0 %)           5.0 %
The Harris
Products Group                          (1.0 %)              -           (3.8 %)         (0.9 %)          (5.8 %)
Consolidated                            (5.4 %)            4.3 %          0.1 %          (0.7 %)          (1.7 %)

Net sales volumes for the six months ended June 30, 2013 decreased for all operating segments as result of softening demand in both domestic and international markets. Product pricing in the North America Welding segment increased slightly due to the realization of price increases. Product pricing in the Europe Welding segment decreased due to declining raw material costs. Product pricing decreased for the Asia Pacific Welding segment due to lower raw material costs and competitive pricing conditions. Product pricing in the South America Welding segment reflects a higher inflationary environment, particularly in Venezuela, and pricing increases in Brazil. Product pricing decreased for The Harris Products Group segment because of significant decreases in the costs of silver and copper as compared to the prior year period. The increase in Net sales from acquisitions was due to the acquisitions of Tenn Rand in December 2012, Kaliburn in November 2012, Wayne Trail in May 2012 and Weartech International, Inc. ("Weartech") in March 2012 (see the "Acquisitions" section below for additional information regarding the acquisitions). With respect to changes in Net sales due to foreign exchange, all segments decreased due to a stronger U.S. dollar.


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 six months ended June 30, 2013 by segment compared with the comparable period in 2012:

                               Six Months Ended June 30,
                                  2013             2012       $ Change    % Change
North America Welding:
Net sales                   $     838,623       $ 797,552      41,071        5.1 %
Inter-segment sales                64,514          73,200      (8,686 )    (11.9 %)
Total Sales                 $     903,137       $ 870,752      32,385        3.7 %

EBIT, as adjusted           $     159,437       $ 146,075      13,362        9.1 %
As a percent of total sales          17.7 %          16.8 %                  0.9 %

Europe Welding:
Net sales                   $     219,152       $ 240,240     (21,088 )     (8.8 %)
Inter-segment sales                 8,609           8,917        (308 )     (3.5 %)
Total Sales                 $     227,761       $ 249,157     (21,396 )     (8.6 %)

EBIT, as adjusted           $      20,233       $  23,802      (3,569 )    (15.0 %)
As a percent of total sales           8.9 %           9.6 %                 (0.7 %)

Asia Pacific Welding:
Net sales                   $     139,278       $ 177,996     (38,718 )    (21.8 %)
Inter-segment sales                 8,758           8,893        (135 )     (1.5 %)
Total Sales                 $     148,036       $ 186,889     (38,853 )    (20.8 %)

EBIT, as adjusted           $       2,946       $   6,587      (3,641 )    (55.3 %)
As a percent of total sales           2.0 %           3.5 %                 (1.5 %)

South America Welding:
Net sales                   $      80,877       $  77,007       3,870        5.0 %
Inter-segment sales                    71              11          60      545.5 %
Total Sales                 $      80,948       $  77,018       3,930        5.1 %

EBIT, as adjusted           $      16,177       $   5,885      10,292      174.9 %
As a percent of total sales          20.0 %           7.6 %                 12.4 %

The Harris Products Group:
Net sales                   $     168,075       $ 178,372     (10,297 )     (5.8 %)
Inter-segment sales                 4,898           4,736         162        3.4 %
Total Sales                 $     172,973       $ 183,108     (10,135 )     (5.5 %)

EBIT, as adjusted           $      14,494       $  16,194      (1,700 )    (10.5 %)
As a percent of total sales           8.4 %           8.8 %                 (0.4 %)

EBIT, as adjusted as a percent of total sales increased for the North America Welding segment in the six months ended June 30, 2013 as compared with the same period of the prior year primarily due to improved pricing and lower material costs. The decrease in the Europe Welding segment is primarily due to volume decreases of 6.1%. The Asia Pacific Welding segment decrease is due to lower profitability in Australia and China due to weaker demand. The South America Welding segment increase is a result of improving results in Brazil and pricing increases as a result of the highly inflationary economy in Venezuela. The Harris Products Group segment decrease is primarily a result of lower commodity prices leading to lower margins, and higher SG&A expenses.


Table of Contents

In the six months ended June 30, 2013, special items include net charges of $1,126, $69 and $707 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 items represent charges of $12,198, relating to the devaluation of the Venezuelan currency.
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, . . .

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