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LECO > SEC Filings for LECO > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for LINCOLN ELECTRIC HOLDINGS INC

Form 10-Q for LINCOLN ELECTRIC HOLDINGS INC


1-Nov-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 September 30, 2013 Compared with Three Months Ended September
30, 2012
                                                     Three Months Ended September 30,
                                       2013                        2012                       Change
                               Amount      % of Sales      Amount      % of Sales      Amount          %
Net sales                    $ 691,875        100.0 %    $ 697,552        100.0 %    $ (5,677 )       (0.8 %)
Cost of goods sold             459,178         66.4 %      484,190         69.4 %     (25,012 )       (5.2 %)
Gross profit                   232,697         33.6 %      213,362         30.6 %      19,335          9.1 %
Selling, general &
administrative expenses        131,217         19.0 %      121,602         17.4 %       9,615          7.9 %
Rationalization and asset
impairment charges               6,302          0.9 %        3,059          0.4 %       3,243        106.0 %
Operating income                95,178         13.8 %       88,701         12.7 %       6,477          7.3 %
Interest income                    536          0.1 %          916          0.1 %        (380 )      (41.5 %)
Equity earnings in
affiliates                       1,170          0.2 %        1,566          0.2 %        (396 )      (25.3 %)
Other income                     1,514          0.2 %          746          0.1 %         768        102.9 %
Interest expense                  (558 )       (0.1 %)      (1,040 )       (0.1 %)        482         46.3 %
Income before income taxes      97,840         14.1 %       90,889         13.0 %       6,951          7.6 %
Income taxes                    33,588          4.9 %       26,153          3.7 %       7,435         28.4 %
Net income including
non-controlling interests       64,252          9.3 %       64,736          9.3 %        (484 )       (0.7 %)
Non-controlling interests in
subsidiaries' loss              (1,792 )       (0.3 %)         (29 )          -        (1,763 )   (6,079.3 %)
Net income                   $  66,044          9.5 %    $  64,765          9.3 %    $  1,279          2.0 %

Net Sales: Net sales for the third quarter of 2013 decreased 0.8% from the third quarter 2012. The sales decrease reflects volume decreases of 2.5%, price increases of 0.1%, increases from acquisitions of 2.2% and unfavorable impacts from foreign exchange of 0.6%. Sales volumes decreased as a result of soft demand in both domestic and international markets.
Gross Profit: Gross profit increased 9.1% to $232,697 for the third quarter 2013 compared with $213,362 in the third quarter 2012. As a percentage of Net sales, Gross profit increased to 33.6% in the third quarter 2013 from 30.6% in the third 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 charges of $2,521 for inventory write-downs, partially offset by a gain of $1,672 from insurance proceeds associated with a fire at a manufacturing operation. Foreign currency exchange rates had a $1,533 unfavorable translation impact in the third quarter 2013.


Selling, General & Administrative ("SG&A") Expenses: SG&A expenses were higher by $9,615, or 7.9%, in the third quarter 2013 compared with the third quarter of 2012. As a percentage of Net sales, SG&A expenses were 19.0% and 17.4% in the third quarter 2013 and 2012, respectively. The increase in SG&A expenses was predominantly due to higher general and administrative spending of $5,466 primarily related to additional employee compensation costs and increased SG&A expenses from acquisitions of $3,392.
Equity Earnings in Affiliates: Equity earnings in affiliates were $1,170 in the third quarter 2013 compared with earnings of $1,566 in the third quarter of 2012. The decrease was due to decreased earnings in Turkey and Chile. Interest Expense: Interest expense decreased to $558 in the third quarter 2013 from $1,040 in the third quarter of 2012 as a result of lower levels of debt in the current period.
Income Taxes: The Company recognized $33,588 of tax expense on pre-tax income of $97,840, resulting in an effective income tax rate of 34.3% for the three months ended September 30, 2013 compared with an effective income tax rate of 28.8% in the third quarter of 2012. The higher effective income tax rate in the current period reflects a change in the mix of geographic earnings, the impact of losses incurred at certain non-U.S. entities for which no tax benefit was provided and the establishment of deferred tax liabilities for the planned repatriation of foreign earnings.
Net Income: Net income for the third quarter 2013 was $66,044 compared with Net income of $64,765 in the third quarter of 2012. Diluted earnings per share for the third quarter 2013 were $0.80 compared with $0.77 in the third quarter of 2012. Foreign currency exchange rate movements had an unfavorable translation effect of $556 on Net income for the third 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 September 30, 2013:
                                                          Change in Net Sales due to:
                           Net Sales                                                         Foreign        Net Sales
                              2012          Volume        Acquisitions        Price         Exchange          2013
Operating Segments
North America Welding     $  390,327     $     (921 )    $     15,258     $      848      $   (1,399 )    $  404,113
Europe Welding               104,480         (8,613 )               -            265           2,390          98,522
Asia Pacific Welding          76,263         (9,648 )               -           (989 )        (1,792 )        63,834
South America Welding         44,545          1,807                 -          7,867          (2,504 )        51,715
The Harris Products Group     81,937            (20 )               -         (7,606 )          (620 )        73,691
Consolidated              $  697,552     $  (17,395 )    $     15,258     $      385      $   (3,925 )    $  691,875
% Change
North America Welding                          (0.2 %)            3.9 %          0.2 %          (0.4 %)          3.5 %
Europe Welding                                 (8.2 %)              -            0.3 %           2.3 %          (5.7 %)
Asia Pacific Welding                          (12.7 %)              -           (1.3 %)         (2.3 %)        (16.3 %)
South America Welding                           4.1 %               -           17.7 %          (5.6 %)         16.1 %
The Harris Products Group                         -                 -           (9.3 %)         (0.8 %)        (10.1 %)
Consolidated                                   (2.5 %)            2.2 %          0.1 %          (0.6 %)         (0.8 %)


Net sales volumes for the third quarter of 2013 decreased for all operating segments except for the South America Welding segment, as a result of soft demand in both 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 remained flat. Product pricing in the North America Welding and Europe Welding segments increased slightly due to the realization of price increases and improved pricing management. 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 highly 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 and the Kaliburn, Burny and Cleveland Motion Control businesses (collectively, "Kaliburn") in November 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 Europe Welding segment, decreased due to a stronger U.S. dollar. The Europe Welding segment increased primarily due to a stronger euro.


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

                                    Three Months Ended September 30,
                                        2013                  2012          $ Change     % Change
North America Welding:
Net sales                       $       404,113         $       390,327      13,786         3.5 %
Inter-segment sales                      35,355                  28,186       7,169        25.4 %
Total Sales                     $       439,468         $       418,513      20,955         5.0 %

EBIT, as adjusted               $        75,225         $        70,797       4,428         6.3 %
As a percent of total sales                17.1  %                 16.9 %                   0.2 %
Europe Welding:
Net sales                       $        98,522         $       104,480      (5,958 )      (5.7 %)
Inter-segment sales                       5,256                   3,261       1,995        61.2 %
Total Sales                     $       103,778         $       107,741      (3,963 )      (3.7 %)

EBIT, as adjusted               $         7,881         $         8,515        (634 )      (7.4 %)
As a percent of total sales                 7.6  %                  7.9 %                  (0.3 %)
Asia Pacific Welding:
Net sales                       $        63,834         $        76,263     (12,429 )     (16.3 %)
Inter-segment sales                       3,821                   2,748       1,073        39.0 %
Total Sales                     $        67,655         $        79,011     (11,356 )     (14.4 %)

EBIT, as adjusted               $          (979 )       $         2,054      (3,033 )    (147.7 %)
As a percent of total sales                (1.4 %)                  2.6 %                  (4.0 %)
South America Welding:
Net sales                       $        51,715         $        44,545       7,170        16.1 %
Inter-segment sales                         151                      27         124       459.3 %
Total Sales                     $        51,866         $        44,572       7,294        16.4 %

EBIT, as adjusted               $        15,942         $         7,587       8,355       110.1 %
As a percent of total sales                30.7  %                 17.0 %                  13.7 %
The Harris Products Group:
Net sales                       $        73,691         $        81,937      (8,246 )     (10.1 %)
Inter-segment sales                       2,311                   1,869         442        23.6 %
Total Sales                     $        76,002         $        83,806      (7,804 )      (9.3 %)

EBIT, as adjusted               $         6,917         $         7,739        (822 )     (10.6 %)
As a percent of total sales                 9.1  %                  9.2 %                  (0.1 %)

EBIT, as adjusted as a percent of total sales increased for the North America Welding segment in the three months ended September 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 8.2% and increased SG&A expenses. 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.


In the three months ended September 30, 2013, special items include net charges of $1,595 and $49 for rationalization actions in the Europe Welding and Asia Pacific Welding segments, respectively, and a net gain of $17 in the North America Welding segment primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. The Asia Pacific Welding segment special items also include charges of $4,675 related to impairment of long-lived assets.
In the three months ended September 30, 2012 , special items include net charges of $477, $1,874 and $708 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.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended

September 30, 2012
                                                         Nine Months Ended September 30,
                                         2013                          2012                        Change
                                 Amount       % of Sales       Amount       % of Sales      Amount           %
Net sales                     $ 2,137,880        100.0 %    $ 2,168,719        100.0 %    $ (30,839 )       (1.4 %)
Cost of goods sold              1,438,273         67.3 %      1,515,095         69.9 %      (76,822 )       (5.1 %)
Gross profit                      699,607         32.7 %        653,624         30.1 %       45,983          7.0 %
Selling, general &
administrative expenses           403,323         18.9 %        372,931         17.2 %       30,392          8.1 %
Rationalization and asset
impairment charges                  8,204          0.4 %          4,317          0.2 %        3,887         90.0 %
Operating income                  288,080         13.5 %        276,376         12.7 %       11,704          4.2 %
Interest income                     2,452          0.1 %          2,648          0.1 %         (196 )       (7.4 %)
Equity earnings in
affiliates                          3,687          0.2 %          4,264          0.2 %         (577 )      (13.5 %)
Other income                        3,141          0.1 %          2,015          0.1 %        1,126         55.9 %
Interest expense                   (2,307 )       (0.1 %)        (3,338 )       (0.2 %)       1,031         30.9 %
Income before income taxes        295,053         13.8 %        281,965         13.0 %       13,088          4.6 %
Income taxes                       91,431          4.3 %         86,715          4.0 %        4,716          5.4 %
Net income including
non-controlling interests         203,622          9.5 %        195,250          9.0 %        8,372          4.3 %
Non-controlling interests
in subsidiaries' loss              (1,834 )       (0.1 %)           (77 )          -         (1,757 )   (2,281.8 %)
Net income                    $   205,456          9.6 %    $   195,327          9.0 %    $  10,129          5.2 %

Net Sales: Net sales for the nine months ended September 30, 2013 decreased 1.4% from the comparable period in 2012. The sales decrease reflects volume decreases of 4.5%, price increases of 0.1%, increases from acquisitions of 3.6% and unfavorable impacts from foreign exchange of 0.6%. Sales volumes decreased as a result of soft demand in both domestic and international markets. Gross Profit: Gross profit increased 7.0% to $699,607 for the nine months ended September 30, 2013 compared with $653,624 in the comparable period in 2012. As a percentage of Net sales, Gross profit increased to 32.7% in the nine months ended September 30, 2013 from 30.1% 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 and charges of $2,521 for inventory write-downs, partially offset by a gain of $1,672 from insurance proceeds associated with a fire at a manufacturing operation. 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 $3,979 unfavorable translation impact in the nine months ended September 30, 2013.
Selling, General & Administrative ("SG&A") Expenses: SG&A expenses were higher by $30,392, or 8.1%, in the nine months ended September 30, 2013 compared with the comparable period in 2012. As a percentage of Net sales, SG&A expenses were 18.9% and 17.2% in the nine months ended September 30, 2013 and 2012, respectively. The increase in SG&A expenses was predominantly due to increased SG&A expenses from acquisitions of $15,780, higher general and administrative spending of $13,233 primarily related to additional employee compensation costs and higher foreign exchange transaction losses of $6,791, which include a charge of $8,081 due to the devaluation of the Venezuelan currency, partially offset by lower bonus expense of $2,952 and lower foreign currency translation of $2,310.


Table of Contents

Equity Earnings in Affiliates: Equity earnings in affiliates were $3,687 in the nine months ended September 30, 2013 compared with earnings of $4,264 in the comparable period in 2012. The decrease was due to a decrease in earnings in Turkey and Chile.
Interest Expense: Interest expense decreased to $2,307 in the nine months ended September 30, 2013 from $3,338 in the comparable period in 2012 as a result of lower levels of debt in the nine months ended September 30, 2013.
Income Taxes: The Company recognized $91,431 of tax expense on pre-tax income of $295,053, resulting in an effective income tax rate of 31.0% for the nine months ended September 30, 2013 compared with an effective income tax rate of 30.8% for the nine months ended September 30, 2012.
Net Income: Net income for the nine months ended September 30, 2013 was $205,456 compared with Net income of $195,327 in the nine months ended September 30, 2012. Diluted earnings per share for the nine months ended September 30, 2013 was $2.47 compared with $2.32 in the comparable period in 2012. Foreign currency exchange rate movements had an unfavorable translation effect of $1,044 on Net income for the nine months ended September 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 nine months ended
September 30, 2013:
                                                    Change in Net Sales due to:
                    Net Sales                                                          Foreign        Net Sales
                      2012           Volume        Acquisitions        Price          Exchange           2013
Operating
Segments
North America
Welding           $ 1,187,879     $  (28,842 )    $     78,472     $     7,478      $   (2,251 )    $ 1,242,736
Europe Welding        344,720        (23,244 )               -          (2,922 )          (880 )        317,674
Asia Pacific
Welding               254,259        (44,970 )               -          (3,973 )        (2,204 )        203,112
South America
Welding               121,552          1,546                 -          15,864          (6,370 )        132,592
The Harris
Products Group        260,309         (1,830 )               -         (14,421 )        (2,292 )        241,766
Consolidated      $ 2,168,719     $  (97,340 )    $     78,472     $     2,026      $  (13,997 )    $ 2,137,880
% Change
North America
Welding                                 (2.4 %)            6.6 %           0.6 %          (0.2 %)           4.6 %
Europe Welding                          (6.7 %)              -            (0.8 %)         (0.3 %)          (7.8 %)
Asia Pacific
Welding                                (17.7 %)              -            (1.6 %)         (0.9 %)         (20.1 %)
South America
Welding                                  1.3 %               -            13.1 %          (5.2 %)           9.1 %
The Harris
Products Group                          (0.7 %)              -            (5.5 %)         (0.9 %)          (7.1 %)
Consolidated                            (4.5 %)            3.6 %           0.1 %          (0.6 %)          (1.4 %)

Net sales volumes for the nine months ended September 30, 2013 decreased for all operating segments except for the South America Welding segment, as result of soft demand in both domestic and international markets. Net sales volumes in the South America Welding segment increased as a result of increased demand in Brazil. Product pricing in the North America Welding segment increased slightly due to the realization of price increases and improved pricing management. 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 highly 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 Technologies, Inc. ("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 nine months ended September 30, 2013 by segment compared with the comparable period in 2012:

                               Nine Months Ended September 30,
                                   2013                 2012        $ Change    % Change
North America Welding:
Net sales                   $      1,242,736       $  1,187,879      54,857        4.6 %
Inter-segment sales                   99,869            101,386      (1,517 )     (1.5 %)
Total Sales                 $      1,342,605       $  1,289,265      53,340        4.1 %

EBIT, as adjusted           $        234,662       $    216,872      17,790        8.2 %
As a percent of total sales             17.5 %             16.8 %                  0.7 %

Europe Welding:
Net sales                   $        317,674       $    344,720     (27,046 )     (7.8 %)
Inter-segment sales                   13,865             12,178       1,687       13.9 %
Total Sales                 $        331,539       $    356,898     (25,359 )     (7.1 %)

EBIT, as adjusted           $         28,114       $     32,317      (4,203 )    (13.0 %)
As a percent of total sales              8.5 %              9.1 %                 (0.6 %)

Asia Pacific Welding:
Net sales                   $        203,112       $    254,259     (51,147 )    (20.1 %)
Inter-segment sales                   12,579             11,641         938        8.1 %
Total Sales                 $        215,691       $    265,900     (50,209 )    (18.9 %)

EBIT, as adjusted           $          1,967       $      8,641      (6,674 )    (77.2 %)
As a percent of total sales              0.9 %              3.2 %                 (2.3 %)

South America Welding:
Net sales                   $        132,592       $    121,552      11,040        9.1 %
Inter-segment sales                      222                 38         184      484.2 %
Total Sales                 $        132,814       $    121,590      11,224        9.2 %

EBIT, as adjusted           $         32,119       $     13,472      18,647      138.4 %
As a percent of total sales             24.2 %             11.1 %                 13.1 %

The Harris Products Group:
Net sales                   $        241,766       $    260,309     (18,543 )     (7.1 %)
Inter-segment sales                    7,209              6,605         604        9.1 %
Total Sales                 $        248,975       $    266,914     (17,939 )     (6.7 %)

EBIT, as adjusted           $         21,411       $     23,933      (2,522 )    (10.5 %)
As a percent of total sales              8.6 %              9.0 %                 (0.4 %)

EBIT, as adjusted as a percent of total sales increased for the North America Welding segment in the nine months ended September 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 6.7%. 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.


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