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LECO > SEC Filings for LECO > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for LINCOLN ELECTRIC HOLDINGS INC

Form 10-K for LINCOLN ELECTRIC HOLDINGS INC


21-Feb-2014

Annual Report


ITEM 7. 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 "Selected Financial Data," the Company's consolidated financial statements and other financial information included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. See "Item 1A. Risk Factors" for more information regarding forward-looking statements.
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. The Company is one of only a few worldwide broad-line manufacturers of welding, cutting and brazing 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 CNC plasma and oxy-fuel cutting systems, 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 invests in the research and development of arc welding products in order to continue its market leading product offering. The Company continues to invest in technologies that improve the quality and productivity of welding products. In addition, the Company continues to actively increase its patent application process in order to secure its technology advantage in the United States and other major international jurisdictions. The Company believes its significant investment in research and development and its highly trained technical sales force coupled with its extensive distributor network provide a competitive advantage in the marketplace.
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. The Company's major end-user markets include:
general metal fabrication,

power generation and process industry,

structural steel construction (buildings and bridges),

heavy equipment fabrication (farming, mining and rail),

shipbuilding,

automotive,

pipe mills and pipelines, and

offshore oil and gas exploration and extraction.

The Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Brazil, Canada, China, Colombia, France, Germany, India, Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Russia, Turkey, the United Kingdom and Venezuela. The Company has aligned its business units into five operating segments to enhance the utilization of the Company's worldwide resources and global end user and 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, Africa and the Middle East. 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. See Note 5 to the Company's consolidated financial statements for segment and geographic area information, which is incorporated herein by reference.
The principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys and various chemicals, all of which are normally available for purchase in the open market.


The Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material adverse effect on the Company's earnings. The Company is ISO 9001 certified at nearly all facilities worldwide. In addition, the Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is progressing towards certification at its remaining facilities worldwide. Key Indicators
Key economic measures relevant to the Company include industrial production trends, steel consumption, purchasing manager indices, capacity utilization within durable goods manufacturers and consumer confidence indicators. Key industries which provide a relative indication of demand drivers to the Company include steel, farm machinery and equipment, construction and transportation, fabricated metals, electrical equipment, ship and boat building, defense, truck manufacturing, energy and railroad equipment. Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company's welding products.
Key operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates, all of which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.
Key financial measures utilized by the Company's executive management and operating units in order to evaluate the results of its business and in understanding key variables impacting the current and future results of the Company include: sales; gross profit; selling, general and administrative expenses; operating income; earnings before interest and taxes; earnings before interest, taxes and bonus; net income; adjusted operating income; adjusted net income; adjusted diluted earnings per share; operating cash flows; and capital expenditures, including applicable ratios such as return on invested capital and average operating working capital to sales. These measures are reviewed at monthly, quarterly and annual intervals and compared with historical periods, as well as objectives established by the Board of Directors of the Company. Results of Operations
The following table shows the Company's results of operations:

                                                              Year Ended December 31,
                                         2013                          2012                          2011
                                 Amount       % of Sales       Amount       % of Sales       Amount       % of Sales
Net sales                     $ 2,852,671        100.0 %    $ 2,853,367        100.0 %    $ 2,694,609        100.0 %
Cost of goods sold              1,910,017         67.0 %      1,986,711         69.6 %      1,957,872         72.7 %
Gross profit                      942,654         33.0 %        866,656         30.4 %        736,737         27.3 %
Selling, general &
administrative
  expenses                        527,206         18.5 %        495,221         17.4 %        439,775         16.3 %
Rationalization and asset
impairment
  charges                           8,463          0.3 %          9,354          0.3 %            282            -
Operating income                  406,985         14.3 %        362,081         12.7 %        296,680         11.0 %
Interest income                     3,320          0.1 %          3,988          0.1 %          3,121          0.1 %
Equity earnings in
affiliates                          4,806          0.2 %          5,007          0.2 %          5,385          0.2 %
Other income                        4,194          0.1 %          2,685          0.1 %          2,849          0.1 %
Interest expense                   (2,864 )       (0.1 %)        (4,191 )       (0.1 %)        (6,704 )       (0.2 %)
Income before income taxes        416,441         14.6 %        369,570         13.0 %        301,331         11.2 %
Income taxes                      124,754          4.4 %        112,354          3.9 %         84,318          3.1 %
Net income including
non-controlling
  interests                       291,687         10.2 %        257,216          9.0 %        217,013          8.1 %
Non-controlling interests
in
  subsidiaries' loss               (2,093 )       (0.1 %)          (195 )          -             (173 )          -
Net income                    $   293,780         10.3 %    $   257,411          9.0 %    $   217,186          8.1 %


2013 Compared with 2012
Net Sales: Net sales for 2013 remained flat with 2012. The sales change reflects volume decreases of 2.7%, price increases of 0.1%, increases from acquisitions of 3.2% and unfavorable impacts from foreign exchange of 0.6%. Sales volumes decreased as a result of soft demand in both domestic and international markets. Product pricing increased from prior year levels reflecting the highly inflationary environment in Venezuela offset by pricing declines in The Harris Products Group segment due to significant decreases in the costs of silver and copper. Net sales for 2013 include $109,139 in sales from the Company's Venezuelan operations.
Gross Profit: Gross profit increased 8.8% to $942,654 during 2013 compared with $866,656 in 2012. As a percentage of Net sales, Gross profit increased to 33.0% in 2013 compared with 30.4% 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. In the prior year period, the Company recorded charges of $2,334 related to the initial accounting for recent acquisitions and 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 $5,622 unfavorable translation impact in 2013. Selling, General & Administrative ("SG&A") Expenses: SG&A expenses increased 6.5% to $527,206 during 2013 compared with $495,221 in 2012. The increase was primarily due to incremental SG&A expenses from acquisitions of $18,620, general and administrative spending primarily related to additional employee compensation costs of $17,160 and higher foreign exchange transaction losses of $3,280, which include a charge of $8,081 due to the devaluation of the Venezuelan currency, partially offset by foreign currency translation of $3,264, lower bonus expense of $3,112 and lower U.S. retirement costs of $1,415. Rationalization and Asset Impairment Charges: In 2013, the Company recorded $8,463 in charges primarily related to asset impairments and rationalization actions. See "Rationalization and Asset Impairments" for additional information. Equity Earnings in Affiliates: Equity earnings in affiliates were $4,806 in 2013 compared with earnings of $5,007 in 2012. The decrease was due to decreased earnings in Chile of $161 and Turkey of $40.
Interest Expense: Interest expense decreased to $2,864 in 2013 from $4,191 in 2012, primarily as a result of lower levels of debt in the current period. Income Taxes: The Company recorded $124,754 of tax expense on pre-tax income of $416,441, resulting in an effective tax rate of 30.0% for 2013. 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 carry-forwards for which valuation allowances had been previously provided. The effective income tax rate of 30.4% for 2012 was lower than the Company's statutory rate primarily due to income earned in lower tax rate jurisdictions and the utilization of foreign tax loss carry-forwards for which valuation allowances had been previously provided.
Net Income: Net income for 2013 was $293,780 compared with $257,411 in the prior year. Diluted earnings per share for 2013 were $3.54 compared with diluted earnings of $3.06 per share in 2012. Net income for 2013 included $25,614, or $0.31 per diluted share, from the Company's Venezuelan operations. Foreign currency exchange rate movements had an unfavorable translation effect of $1,572 and $2,879 on Net income for 2013 and 2012, respectively.


Segment Results
Net Sales: The table below summarizes the impacts of volume, acquisitions, price
and foreign currency exchange rates on Net sales for the twelve months ended
December 31, 2013:
                                                               Change in Net Sales due to:
                              Net Sales                                                                            Net Sales
                                2012           Volume       Acquisitions        Price        Foreign Exchange         2013
Operating Segments
North America Welding       $ 1,580,818     $ (22,962 )    $     91,442     $    7,785      $        (4,314 )    $ 1,652,769
Europe Welding                  452,227       (18,518 )               -         (5,696 )              1,535          429,548
Asia Pacific Welding            324,482       (48,964 )               -         (4,947 )             (4,289 )        266,282
South America Welding           161,483        13,269                 -         29,730               (8,587 )        195,895
The Harris Products Group       334,357         1,276                 -        (24,748 )             (2,708 )        308,177
Consolidated                $ 2,853,367     $ (75,899 )    $     91,442     $    2,124      $       (18,363 )    $ 2,852,671
% Change
North America Welding                            (1.5 %)            5.8 %          0.5 %               (0.3 %)           4.6 %
Europe Welding                                   (4.1 %)              -           (1.3 %)               0.3 %           (5.0 %)
Asia Pacific Welding                            (15.1 %)              -           (1.5 %)              (1.3 %)         (17.9 %)
South America Welding                             8.2 %               -           18.4 %               (5.3 %)          21.3 %
The Harris Products Group                         0.4 %               -           (7.4 %)              (0.8 %)          (7.8 %)
Consolidated                                     (2.7 %)            3.2 %          0.1 %               (0.6 %)             -

Net sales volumes for 2013 decreased for all operating segments except for the South America Welding and The Harris Products Group segments, 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 improved demand in the South American markets. Net sales volumes in The Harris Products Group segment increased as a result of improved sales volumes on equipment. 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. 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 Robolution GmbH ("Robolution") in November 2013, Burlington Automation Corporation ("Burlington") in November 2013, Tennessee Rand, Inc. ("Tenn Rand") in December 2012, Kaliburn, Burny and Cleveland Motion Control businesses (collectively, "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, except for the Europe 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 2013 by segment compared with 2012:

                                   Twelve Months Ended
                                      December 31,
                                  2013            2012        $ Change    % Change
North America Welding:
Net sales                     $ 1,652,769     $ 1,580,818      71,951        4.6 %
Inter-segment sales               127,254         131,062      (3,808 )     (2.9 %)
Total Sales                   $ 1,780,023     $ 1,711,880      68,143        4.0 %

EBIT, as adjusted             $   318,507     $   293,070      25,437        8.7 %
As a percent of total sales          17.9 %          17.1 %                  0.8 %

Europe Welding:
Net sales                     $   429,548     $   452,227     (22,679 )     (5.0 %)
Inter-segment sales                19,911          16,048       3,863       24.1 %
Total Sales                   $   449,459     $   468,275     (18,816 )     (4.0 %)

EBIT, as adjusted             $    36,247     $    37,299      (1,052 )     (2.8 %)
As a percent of total sales           8.1 %           8.0 %                  0.1 %

Asia Pacific Welding:
Net sales                     $   266,282     $   324,482     (58,200 )    (17.9 %)
Inter-segment sales                14,906          14,829          77        0.5 %
Total Sales                   $   281,188     $   339,311     (58,123 )    (17.1 %)

EBIT, as adjusted             $     1,815     $     7,247      (5,432 )    (75.0 %)
As a percent of total sales           0.6 %           2.1 %                 (1.5 %)

South America Welding:
Net sales                     $   195,895     $   161,483      34,412       21.3 %
Inter-segment sales                   233              38         195      513.2 %
Total Sales                   $   196,128     $   161,521      34,607       21.4 %

EBIT, as adjusted             $    57,306     $    18,301      39,005      213.1 %
As a percent of total sales          29.2 %          11.3 %                 17.9 %

The Harris Products Group:
Net sales                     $   308,177     $   334,357     (26,180 )     (7.8 %)
Inter-segment sales                 9,605           8,549       1,056       12.4 %
Total Sales                   $   317,782     $   342,906     (25,124 )     (7.3 %)

EBIT, as adjusted             $    27,826     $    29,477      (1,651 )     (5.6 %)
As a percent of total sales           8.8 %           8.6 %                  0.2 %

EBIT, as adjusted as a percent of total sales increased for all segments, except for the Asia Pacific Welding segment, in 2013 as compared with 2012. The North America Welding segment increase is primarily due to improved pricing management and lower material costs. The increase at the Europe Welding segment is primarily due to cost control on volume decreases of 4.1%. The Asia Pacific Welding segment decrease is due to lower profitability in China and Australia due to weaker demand. The South America Welding segment increase is a result of improved pricing management and manufacturing costs in Brazil and Colombia, and pricing increases as a result of the highly inflationary economy in Venezuela. The Harris Products Group segment growth is primarily a result of improved product mix on equipment sales volume.


In 2013, EBIT, as adjusted, for the North America Welding, Europe Welding and Asia Pacific Welding segments excluded special item charges of $1,052, $2,045 and $922, respectively, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. The Asia Pacific Welding segment EBIT, as adjusted, also excluded charges of $4,444 related to impairment of long-lived assets and a charge of $705 related to a loss on the sale of land. The South America Welding segment EBIT, as adjusted, excluded special item charges of $12,198, related to the devaluation of the Venezuelan currency.
In 2012, EBIT, as adjusted, for the North America Welding, Europe Welding and Asia Pacific Welding segments excluded special item charges of $827, $3,534 and $4,993, respectively, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. The South America Welding segment EBIT, as adjusted, excluded a special item charge of $1,381, related to a change in Venezuelan labor law, which provides for increased employee severance obligations.
2012 Compared with 2011
Net Sales: Net sales for 2012 increased 5.9% from 2011. The sales increase reflects volume increases of 1.3%, price increases of 1.7%, increases from acquisitions of 4.9% and unfavorable impacts from foreign exchange of 2.0%. Sales volumes increased because of growth in the domestic markets offset by lower demand in the international markets. Product pricing increased from prior year levels due to the realization of price increases implemented in response to increases in raw material costs.
Gross Profit: Gross profit increased 17.6% to $866,656 during 2012 compared with $736,737 in 2011. As a percentage of Net sales, Gross profit increased to 30.4% in 2012 compared with 27.3% in 2011. The increase was the result of pricing increases and operating leverage partially offset by lower margins from the acquisitions of Kaliburn, Wayne Trail, Weartech, Techalloy Company, Inc. and certain assets of its parent company, Central Wire Industries Ltd. (collectively, "Techalloy") and OOO Severstal-metiz: welding consumables ("Severstal"). In 2012, the Company recorded charges of $2,334 related to the initial accounting for recent acquisitions and 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 $13,166 unfavorable translation impact in 2012.
Selling, General & Administrative ("SG&A") Expenses: SG&A expenses increased 12.6% to $495,221 during 2012 compared with $439,775 in 2011. The increase was primarily due to higher bonus expense of $20,439, incremental SG&A expenses from acquisitions of $15,403, higher general and administrative spending primarily related to additional employee compensation costs of $12,692, higher U.S. retirement costs of $3,986 and higher legal expenses of $2,142 partially offset by foreign currency translation of $8,821.
Rationalization and Asset Impairment Charges: In 2012, the Company recorded $9,354 in charges primarily related to rationalization actions initiated in 2012. See "Rationalization and Asset Impairments" for additional information. Equity Earnings in Affiliates: Equity earnings in affiliates were $5,007 in 2012 compared with earnings of $5,385 in 2011. The decrease was due to a decrease in earnings of $542 in Chile being partially offset by an increase in earnings of $164 in Turkey.
Interest Expense: Interest expense decreased to $4,191 in 2012 from $6,704 in 2011, primarily as a result of lower levels of debt in the current period. Income Taxes: The Company recorded $112,354 of tax expense on pre-tax income of $369,570, resulting in an effective tax rate of 30.4% for 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 carry-forwards for which valuation allowances had been previously provided. The effective income tax rate of 28.0% for 2011 was lower than the Company's statutory rate primarily due to income earned in lower tax rate jurisdictions, the utilization of foreign tax loss carry-forwards for which valuation allowances had been previously provided and a tax benefit of $4,844 for tax audit settlements.
Net Income: Net income for 2012 was $257,411 compared with $217,186 in the prior year. Diluted earnings per share for 2012 were $3.06 compared with diluted earnings of $2.56 per share in 2011. Foreign currency exchange rate movements had an unfavorable translation effect of $2,879 and a favorable translation effect of $2,948 on Net income for 2012 and 2011, respectively.


Segment Results
Net Sales: The table below summarizes the impacts of volume, acquisitions, price
and foreign currency exchange rates on Net sales for the twelve months ended
December 31, 2012:
                                                            Change in Net Sales due to:
                              Net Sales                                                       Foreign        Net Sales
                                2011           Volume       Acquisitions        Price         Exchange          2012
Operating Segments
North America Welding       $ 1,309,499     $ 112,898      $     124,830     $  37,124      $  (3,533 )    $ 1,580,818
Europe Welding                  508,692       (36,199 )            8,322         4,874        (33,462 )        452,227
Asia Pacific Welding            376,276       (54,289 )                -         1,646            849          324,482
South America Welding           156,684        (1,284 )                -        15,584         (9,501 )        161,483
The Harris Products Group       343,458        13,683                  -       (13,427 )       (9,357 )        334,357
Consolidated                $ 2,694,609     $  34,809      $     133,152     $  45,801      $ (55,004 )    $ 2,853,367
% Change
North America Welding                             8.6 %              9.5 %         2.8 %         (0.3 %)          20.7 %
Europe Welding                                   (7.1 %)             1.6 %         1.0 %         (6.6 %)         (11.1 %)
Asia Pacific Welding                            (14.4 %)               -           0.4 %          0.2 %          (13.8 %)
South America Welding                            (0.8 %)               -           9.9 %         (6.1 %)           3.1 %
The Harris Products Group                         4.0 %                -          (3.9 %)        (2.7 %)          (2.6 %)
Consolidated                                      1.3 %              4.9 %         1.7 %         (2.0 %)           5.9 %

Net sales volumes for 2012 increased for the North America Welding and The Harris Products Group segments because of growth within the domestic markets. Volume decreases for the Europe Welding, Asia Pacific Welding and South America Welding segments are the result of softening demand in these international markets. Product pricing increased for all operating segments from prior year levels, except for The Harris Products Group segment, due to the realization of price increases implemented in response to increases in raw material costs. Product pricing in the South America Welding segment reflects a higher . . .

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