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LECO > SEC Filings for LECO > Form 10-Q on 25-Apr-2014All Recent SEC Filings

Show all filings for LINCOLN ELECTRIC HOLDINGS INC

Form 10-Q for LINCOLN ELECTRIC HOLDINGS INC


25-Apr-2014

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.
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31,
2013
                                                        Three Months Ended March 31,
                                        2014                        2013                       Change
                                Amount      % of Sales      Amount      % of Sales      Amount          %
Net sales                     $ 685,062        100.0 %    $ 718,573        100.0 %    $ (33,511 )      (4.7 %)
Cost of goods sold              458,726         67.0 %      492,001         68.5 %      (33,275 )      (6.8 %)
Gross profit                    226,336         33.0 %      226,572         31.5 %         (236 )      (0.1 %)
Selling, general &
administrative expenses         145,915         21.3 %      136,891         19.1 %        9,024         6.6 %
Rationalization and asset
impairment (gains) charges          (17 )          -          1,051          0.1 %       (1,068 )    (101.6 %)
Operating income                 80,438         11.7 %       88,630         12.3 %       (8,192 )      (9.2 %)
Interest income                     914          0.1 %        1,026          0.1 %         (112 )     (10.9 %)
Equity earnings in
affiliates                        1,561          0.2 %        1,259          0.2 %          302        24.0 %
Other income                      1,083          0.2 %          714          0.1 %          369        51.7 %
Interest expense                 (1,570 )       (0.2 %)        (950 )       (0.1 %)        (620 )     (65.3 %)
Income before income taxes       82,426         12.0 %       90,679         12.6 %       (8,253 )      (9.1 %)
Income taxes                     26,002          3.8 %       23,836          3.3 %        2,166         9.1 %
Net income including
non-controlling interests        56,424          8.2 %       66,843          9.3 %      (10,419 )     (15.6 %)
Non-controlling interests
in subsidiaries' (loss)
earnings                            (29 )          -             37            -            (66 )    (178.4 %)
Net income                    $  56,453          8.2 %    $  66,806          9.3 %    $ (10,353 )     (15.5 %)

Net Sales: Net sales for the three months ended March 31, 2014 decreased 4.7% from the comparable period in 2013. The sales decrease reflects volume decreases of 5.0%, price increases of 0.4%, increases from acquisitions of 1.1% and unfavorable impacts from foreign exchange of 1.2%. 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.


Table of Contents

Gross Profit: Gross profit decreased 0.1% to $226,336 for the three months ended March 31, 2014 compared with $226,572 in the comparable period in 2013. As a percentage of Net sales, Gross profit increased to 33.0% in the three months ended March 31, 2014 from 31.5% in the comparable period in 2013. The increase was the result of geographic mix and pricing stability in the wake of lower year over year input costs. The prior year period includes incremental costs of $1,579 due to the devaluation of the Venezuelan currency. Foreign currency exchange rates had a $3,076 unfavorable translation impact in the three months ended March 31, 2014.
Selling, General & Administrative ("SG&A") Expenses: SG&A expenses were higher by $9,024, or 6.6%, in the three months ended March 31, 2014 compared with the comparable period in 2013. As a percentage of Net sales, SG&A expenses were 21.3% and 19.1% in the three months ended March 31, 2014 and 2013, respectively. The increase in SG&A expenses was predominantly due to higher foreign exchange transaction losses of $9,674, which includes a charge of $17,665 in the current period relating to a Venezuelan remeasurement loss compared with a charge of $8,081 in the prior year period due to the devaluation of the Venezuelan currency, higher general and administrative spending of $2,835 primarily related to additional employee compensation costs and increased SG&A expenses from acquisitions of $2,045, partially offset by lower bonus expense of $2,505, lower U.S. retirement costs of $1,919 and lower foreign currency translation of $1,662.
Equity Earnings in Affiliates: Equity earnings in affiliates were $1,561 in the three months ended March 31, 2014 compared with earnings of $1,259 in the comparable period in 2013. The increase was due to an increase in earnings in Turkey and Chile.
Interest Expense: Interest expense increased to $1,570 in the three months ended March 31, 2014 from $950 in the comparable period in 2013. The increase was due to the accretion of interest expense from a liability to acquire additional ownership in a majority owned subsidiary.
Income Taxes: The Company recognized $26,002 of tax expense on pre-tax income of $82,426, resulting in an effective income tax rate of 31.5% for the three months ended March 31, 2014 compared with an effective income tax rate of 26.3% for the three months ended March 31, 2013. The effective income tax rate was higher in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 due to the effect on the prior year rate from the reversal of a valuation allowance on deferred tax assets more-likely-than-not to be realized and the 2012 U.S. research and development credit that was recognized in the first quarter 2013.
Net Income: Net income for the three months ended March 31, 2014 was $56,453 compared with Net income of $66,806 in the three months ended March 31, 2013. Diluted earnings per share for the three months ended March 31, 2014 was $0.69 compared with $0.80 in the comparable period in 2013. Foreign currency exchange rate movements had an unfavorable translation effect of $863 on Net income for the three months ended March 31, 2014.

Segment Results
Net Sales:  The table below summarizes the impacts of volume, acquisitions,
price and foreign currency exchange rates on Net sales for the three months
ended March 31, 2014:
                                                   Change in Net Sales due to:
                    Net Sales                                                         Foreign        Net Sales
                      2013           Volume        Acquisitions        Price         Exchange          2014
Operating
Segments
North America
Welding           $   419,554     $  (23,410 )    $      7,869     $    1,240      $   (3,347 )    $  401,906
Europe Welding        110,491         (5,487 )               -         (1,550 )         1,952         105,406
Asia Pacific
Welding                70,039         (5,386 )               -           (325 )        (3,042 )        61,286
South America
Welding                36,374         (2,026 )               -         12,807          (3,162 )        43,993
The Harris
Products Group         82,115            400                 -         (9,204 )          (840 )        72,471
Consolidated      $   718,573     $  (35,909 )    $      7,869     $    2,968      $   (8,439 )    $  685,062
% Change
North America
Welding                                 (5.6 %)            1.9 %          0.3 %          (0.8 %)         (4.2 %)
Europe Welding                          (5.0 %)              -           (1.4 %)          1.8 %          (4.6 %)
Asia Pacific
Welding                                 (7.7 %)              -           (0.5 %)         (4.3 %)        (12.5 %)
South America
Welding                                 (5.6 %)              -           35.2 %          (8.7 %)         20.9 %
The Harris
Products Group                           0.5 %               -          (11.2 %)         (1.0 %)        (11.7 %)
Consolidated                            (5.0 %)            1.1 %          0.4 %          (1.2 %)         (4.7 %)


Table of Contents

Net sales volumes for the three months ended March 31, 2014 decreased for all operating segments except for The Harris Products Group segment, as a result of soft demand in both domestic and international markets. Net sales volumes in The Harris Products Group segment increased as a result of improved sales volumes on consumables. 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 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 Robolution GmbH ("Robolution") in November 2013 and Burlington Automation Corporation ("Burlington") in November 2013 (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.


Table of Contents

Earnings Before Interest and Income Taxes ("EBIT"), as Adjusted: Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being EBIT, as adjusted. The following table presents EBIT, as adjusted for the three months ended March 31, 2014 by segment compared with the comparable period in 2013:

                                Three Months Ended March 31,
                                  2014                2013         $ Change    % Change
North America Welding:
Net sales                   $     401,906        $     419,554     (17,648 )     (4.2 %)
Inter-segment sales                32,943               28,985       3,958       13.7 %
Total Sales                 $     434,849        $     448,539     (13,690 )     (3.1 %)

EBIT, as adjusted           $      71,364        $      76,660      (5,296 )     (6.9 %)
As a percent of total sales          16.4  %              17.1 %                 (0.7 %)

Europe Welding:
Net sales                   $     105,406        $     110,491      (5,085 )     (4.6 %)
Inter-segment sales                 5,860                4,279       1,581       36.9 %
Total Sales                 $     111,266        $     114,770      (3,504 )     (3.1 %)

EBIT, as adjusted           $       9,292        $      10,701      (1,409 )    (13.2 %)
As a percent of total sales           8.4  %               9.3 %                 (0.9 %)

Asia Pacific Welding:
Net sales                   $      61,286        $      70,039      (8,753 )    (12.5 %)
Inter-segment sales                 4,449                4,384          65        1.5 %
Total Sales                 $      65,735        $      74,423      (8,688 )    (11.7 %)

EBIT, as adjusted           $        (640 )      $       2,293      (2,933 )   (127.9 %)
As a percent of total sales          (1.0 %)               3.1 %                 (4.1 %)

South America Welding:
Net sales                   $      43,993        $      36,374       7,619       20.9 %
Inter-segment sales                    29                   20           9       45.0 %
Total Sales                 $      44,022        $      36,394       7,628       21.0 %

EBIT, as adjusted           $      11,765        $       5,112       6,653      130.1 %
As a percent of total sales          26.7  %              14.0 %                 12.7 %

The Harris Products Group:
Net sales                   $      72,471        $      82,115      (9,644 )    (11.7 %)
Inter-segment sales                 2,118                2,224        (106 )     (4.8 %)
Total Sales                 $      74,589        $      84,339      (9,750 )    (11.6 %)

EBIT, as adjusted           $       6,058        $       7,151      (1,093 )    (15.3 %)
As a percent of total sales           8.1  %               8.5 %                 (0.4 %)

EBIT, as adjusted as a percent of total sales decreased for the North America Welding segment in the three months ended March 31, 2014 as compared with the same period of the prior year primarily due to volume decreases of 5.6%. The decrease in the Europe Welding segment is primarily due to volume decreases of 5.0% and higher SG&A expenses. The Asia Pacific Welding segment decrease is due to lower profitability in China due to weaker demand and higher SG&A expenses. The South America Welding segment increase is a result of 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.


Table of Contents

In the three months ended March 31, 2014, special items include net gains of $47 and $9 in the North America Welding and Asia Pacific Welding segments, respectively, and a net charge of $39 in the Europe Welding segment primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. The South America Welding segment special items represent a charge of $17,665, relating to a Venezuelan remeasurement loss. In the three months ended March 31, 2013, special items include net charges of $860 and $197 in the North America Welding and Asia Pacific Welding segments, respectively, and a net gain of $6 in the Europe Welding segment 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 $9,660, relating to the devaluation of the Venezuelan currency.

Non-GAAP Financial Measures
The Company reviews Adjusted operating income, Adjusted net income and Adjusted diluted earnings per share, all non-GAAP financial measures, in assessing and evaluating the Company's underlying operating performance. These non-GAAP financial measures exclude the impact of special items on the Company's reported financial results. Non-GAAP financial measures should be read in conjunction with the generally accepted accounting principles in the United States ("GAAP") financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures.
The following table presents a reconciliation of Operating income as reported to Adjusted operating income:

                                                            Three Months Ended March 31,
                                                              2014                 2013
Operating income as reported                           $        80,438       $        88,630
Special items (pre-tax):
Rationalization and asset impairment (gains) charges               (17 )               1,051
Venezuela foreign exchange losses                               17,665                 9,660
Adjusted operating income                              $        98,086       $        99,341

Special items included in Operating income during the three month period ended March 31, 2014 include net rationalization and asset impairment gains of $17 related to employee severance and other costs associated with the consolidation of manufacturing operations and a charge of $17,665 relating to a Venezuelan remeasurement loss.
Special items included in Operating income during the three month period ended March 31, 2013 include net rationalization and asset impairment charges of $1,051, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations and charges of $9,660 related to the devaluation of the Venezuelan currency.
The following table presents reconciliations of Net income and Diluted earnings per share as reported to Adjusted net income and Adjusted diluted earnings per share:

                                                            Three Months Ended March 31,
                                                              2014                 2013
Net income as reported                                 $        56,453       $       66,806
Special items (after-tax):
Rationalization and asset impairment (gains) charges                (7 )                673
Venezuela foreign exchange losses                               17,665                9,660
Adjusted net income                                    $        74,111       $       77,139

Diluted earnings per share as reported                 $          0.69       $         0.80
Special items                                                     0.22                 0.12
Adjusted diluted earnings per share                    $          0.91       $         0.92

Special items included in Net income during the three month period ended March 31, 2014 include net rationalization and asset impairment gains of $7 related to employee severance and other costs associated with the consolidation of manufacturing operations and a charge of $17,665 relating to a Venezuelan remeasurement loss.


Table of Contents

Special items included in Net income during the three month period ended March 31, 2013 include net rationalization and asset impairment charges of $673, primarily related to employee severance and other costs associated with the consolidation of manufacturing operations and charges of $9,660 related to the devaluation of the Venezuelan currency.

Liquidity and Capital Resources
The Company's cash flow from operations can be cyclical. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets. In assessing liquidity, the Company reviews working capital measurements to define areas for improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances and, if necessary, borrowings under its existing credit facilities.
The Company continues to expand globally and periodically looks at transactions that would involve significant investments. The Company can fund its global expansion plans with operational cash flow, but a significant acquisition may require access to capital markets, in particular, the long-term debt market, as well as the syndicated bank loan market. The Company's financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the United States, and then lends funds to the specific subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made.
The following table reflects changes in key cash flow measures:

                                                         Three Months Ended March 31,
                                                       2014          2013         Change
Cash provided (used) by operating activities        $  13,631     $ (20,148 )   $ 33,779
Cash used by investing activities                     (13,759 )     (15,582 )      1,823
Capital expenditures                                  (14,506 )     (15,138 )        632
Acquisition of businesses, net of cash acquired          (892 )        (549 )       (343 )
Proceeds from sale of property, plant and equipment     1,066           105          961
Other investing activities                                573             -          573
Cash used by financing activities                     (75,422 )        (625 )    (74,797 )
Payments on short-term borrowings, net                 (6,621 )      (1,345 )     (5,276 )
Payments on long-term borrowings, net                  (1,435 )        (147 )     (1,288 )
Proceeds from exercise of stock options                 2,956         9,658       (6,702 )
Excess tax benefits from stock-based compensation       1,652         3,989       (2,337 )
Purchase of shares for treasury                       (51,021 )     (12,780 )    (38,241 )
Cash dividends paid to shareholders                   (18,623 )           -      (18,623 )
Transactions with non-controlling interests            (2,330 )           -       (2,330 )
Decrease in Cash and cash equivalents                 (94,438 )     (38,009 )

Cash and cash equivalents decreased 31.5% or $94,438 during the three months ended March 31, 2014 to $205,387 from $299,825 as of December 31, 2013. This decrease was predominantly due to capital expenditures of $14,506, payments on short-term borrowings of $6,621, purchase of treasury stock of $51,021 and cash dividends paid to shareholders of $18,623. The decrease in Cash and cash equivalents during the three months ended March 31, 2014 compares to a decrease of 13.3% or $38,009 to $248,455 during the three months ended March 31, 2013. Cash provided by operating activities increased by $33,779 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The increase was predominantly due to a decrease in pension contributions and payments of $33,240. Net operating working capital is defined as the sum of Accounts receivable and Total inventory less Trade accounts payable. Net operating working capital to sales, defined as net operating working capital divided by annualized rolling three months of Net sales, increased to 20.8% at March 31, 2014 compared with 17.6% at December 31, 2013 and 20.3% at March 31, 2013. Days sales in inventory increased to 99.3 days at March 31, 2014 from 93.2 days at December 31, 2013 and 94.6 days at March 31, 2013. Accounts receivable days increased to 56.1 days at March 31, 2014 from 50.3 days at December 31, 2013 and decreased from 56.4 at March 31, 2013. Average days in accounts payable decreased to 44.1 days at March 31, 2014 from 45.5 days at December 31, 2013 and remained consistent with 44.1 days at March 31, 2013.


Table of Contents

Cash used by investing activities decreased by $1,823 for the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The decrease is predominantly due to a decrease in capital expenditures of $632 and an increase in proceeds from property, plant and equipment of $961. The Company currently anticipates capital expenditures of $60,000 to $80,000 in 2014. Anticipated capital expenditures reflect investments for capital maintenance and to improve operational effectiveness. Management critically evaluates all proposed capital expenditures and requires each project to increase efficiency, reduce costs, promote business growth, or improve the overall safety and environmental conditions of the Company's facilities.
Cash used by financing activities increased by $74,797 to $75,422 in the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The increase was predominantly due to higher net payments of short-term borrowings of $5,276, higher cash dividends paid to shareholders of $18,623 and higher purchases of common shares for treasury of $38,241.
The Company's debt levels decreased from $19,087 at December 31, 2013 to $9,981 at March 31, 2014. Debt to total invested capital decreased to 0.7% at March 31, 2014 from 1.2% at December 31, 2013.
In April 2014, the Company paid a cash dividend of $0.23 per share, or $18,497 to shareholders of record on March 31, 2014. Canada - Notice of Reassessment
As discussed in Note 16 to the consolidated financial statements, in July 2012, the Company received a Notice of Reassessment from the CRA for 2004 to 2011, which would disallow the deductibility of inter-company dividends. These adjustments would increase Canadian federal and provincial tax due by $56,623 plus approximately $15,422 of interest, net of tax. 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 the CRA. The Company has elected to deposit the entire amount of the dispute in order to suspend the continuing accrual of a 5% interest charge. Additionally, deposited amounts will earn interest of approximately 1% due upon a favorable outcome. A deposit was made in 2012 and is recorded as a non-current asset as of March 31, 2014. Although the Company believes it will prevail on the merits of the tax position, the ultimate outcome of the assessment remains uncertain. 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. On February 8, 2013, the Venezuelan government announced the devaluation of its currency relative to the U.S. dollar. Effective February 13, 2013 the official rate moved from 4.3 to 6.3 bolivars to the U.S. dollar. During the three months ended March 31, 2013, the devaluation of the bolivar resulted in a foreign currency transaction loss of $8,081 in Selling, general & administrative expenses and higher Cost of goods sold of $1,579 due to the liquidation of inventory valued at the historical exchange rate.
In January 2014, the Venezuela government announced the formation of the . . .

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