LECO-2013.09.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
|
| | |
Ohio | | 34-1860551 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
22801 St. Clair Avenue, Cleveland, Ohio | | 44117 |
(Address of principal executive offices) | | (Zip Code) |
|
|
(216) 481-8100 |
(Registrant’s telephone number, including area code) |
|
|
Not applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
|
| | |
Large accelerated filer x | | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the registrant’s common shares as of September 30, 2013 was 81,614,694.
TABLE OF CONTENTS
|
| | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
EX-31.1 | Certification of the President and Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. | |
EX-31.2 | Certification of the Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. | |
EX-32.1 | Certification of the President and Chief Executive Officer (Principal Executive Officer) and Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
EX-101 | Instance Document | |
EX-101 | Schema Document | |
EX-101 | Calculation Linkbase Document | |
EX-101 | Label Linkbase Document | |
EX-101 | Presentation Linkbase Document | |
EX-101 | Definition Linkbase Document | |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net sales | $ | 691,875 |
| | $ | 697,552 |
| | $ | 2,137,880 |
| | $ | 2,168,719 |
|
Cost of goods sold | 459,178 |
| | 484,190 |
| | 1,438,273 |
| | 1,515,095 |
|
Gross profit | 232,697 |
| | 213,362 |
| | 699,607 |
| | 653,624 |
|
Selling, general & administrative expenses | 131,217 |
| | 121,602 |
| | 403,323 |
| | 372,931 |
|
Rationalization and asset impairment charges | 6,302 |
| | 3,059 |
| | 8,204 |
| | 4,317 |
|
Operating income | 95,178 |
| | 88,701 |
| | 288,080 |
| | 276,376 |
|
| | | | | | | |
Other income (expense): | |
| | |
| | |
| | |
|
Interest income | 536 |
| | 916 |
| | 2,452 |
| | 2,648 |
|
Equity earnings in affiliates | 1,170 |
| | 1,566 |
| | 3,687 |
| | 4,264 |
|
Other income | 1,514 |
| | 746 |
| | 3,141 |
| | 2,015 |
|
Interest expense | (558 | ) | | (1,040 | ) | | (2,307 | ) | | (3,338 | ) |
Total other income | 2,662 |
| | 2,188 |
| | 6,973 |
| | 5,589 |
|
Income before income taxes | 97,840 |
| | 90,889 |
| | 295,053 |
| | 281,965 |
|
Income taxes | 33,588 |
| | 26,153 |
| | 91,431 |
| | 86,715 |
|
Net income including non-controlling interests | 64,252 |
| | 64,736 |
| | 203,622 |
| | 195,250 |
|
Non-controlling interests in subsidiaries’ loss | (1,792 | ) | | (29 | ) | | (1,834 | ) | | (77 | ) |
Net income | $ | 66,044 |
| | $ | 64,765 |
| | $ | 205,456 |
| | $ | 195,327 |
|
| | | | | | | |
Basic earnings per share | $ | 0.81 |
| | $ | 0.78 |
| | $ | 2.50 |
| | $ | 2.35 |
|
Diluted earnings per share | $ | 0.80 |
| | $ | 0.77 |
| | $ | 2.47 |
| | $ | 2.32 |
|
Cash dividends declared per share | $ | 0.20 |
| | $ | 0.17 |
| | $ | 0.60 |
| | $ | 0.51 |
|
See notes to these consolidated financial statements.
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net income including non-controlling interests | $ | 64,252 |
| | $ | 64,736 |
| | $ | 203,622 |
| | $ | 195,250 |
|
Other comprehensive income (loss), net of tax: | | | |
| | |
| | |
|
Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax of $276 and $(55) in the three and nine months ended September 30, 2013; $147 and $148 in the three and nine months ended September 30, 2012 | (734 | ) | | (5 | ) | | (147 | ) | | (564 | ) |
Defined benefit pension plan activity, net of tax of $2,050 and $8,232 in the three and nine months ended September 30, 2013; $2,755 and $8,593 in the three and nine months ended September 30, 2012 | 4,314 |
| | 4,794 |
| | 14,391 |
| | 14,009 |
|
Currency translation adjustment | 19,891 |
| | 16,928 |
| | (15,209 | ) | | 11,958 |
|
Other comprehensive income (loss): | 23,471 |
| | 21,717 |
| | (965 | ) | | 25,403 |
|
Comprehensive income | 87,723 |
| | 86,453 |
| | 202,657 |
| | 220,653 |
|
Comprehensive (loss) income attributable to non-controlling interests | (1,678 | ) | | 179 |
| | (1,769 | ) | | (389 | ) |
Comprehensive income attributable to shareholders | $ | 89,401 |
| | $ | 86,274 |
| | $ | 204,426 |
| | $ | 221,042 |
|
See notes to these consolidated financial statements.
LINCOLN ELECTRIC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
|
| | | | | | | |
| September 30, 2013 | | December 31, 2012 |
| (UNAUDITED) | | (NOTE 1) |
ASSETS | |
| | |
|
Current Assets | |
| | |
|
Cash and cash equivalents | $ | 330,309 |
| | $ | 286,464 |
|
Accounts receivable (less allowance for doubtful accounts of $8,445 in 2013; $8,654 in 2012) | 375,224 |
| | 360,662 |
|
Inventories: | |
| | |
|
Raw materials | 108,698 |
| | 119,963 |
|
Work-in-process | 45,794 |
| | 41,805 |
|
Finished goods | 215,371 |
| | 203,122 |
|
Total inventory | 369,863 |
| | 364,890 |
|
Other current assets | 107,253 |
| | 120,800 |
|
Total Current Assets | 1,182,649 |
| | 1,132,816 |
|
| | | |
Property, Plant and Equipment | |
| | |
|
Land | 45,539 |
| | 44,510 |
|
Buildings | 367,090 |
| | 343,867 |
|
Machinery and equipment | 720,913 |
| | 732,461 |
|
| 1,133,542 |
| | 1,120,838 |
|
Less accumulated depreciation | 654,869 |
| | 634,602 |
|
Property, Plant and Equipment, Net | 478,673 |
| | 486,236 |
|
Non-current assets | 458,319 |
| | 470,811 |
|
TOTAL ASSETS | $ | 2,119,641 |
| | $ | 2,089,863 |
|
| | | |
LIABILITIES AND EQUITY | |
| | |
|
Current Liabilities | |
| | |
|
Amounts due banks | $ | 14,469 |
| | $ | 18,220 |
|
Trade accounts payable | 177,006 |
| | 209,647 |
|
Other current liabilities | 289,297 |
| | 211,944 |
|
Current portion of long-term debt | 423 |
| | 456 |
|
Total Current Liabilities | 481,195 |
| | 440,267 |
|
| | | |
Long-Term Liabilities | |
| | |
|
Long-term debt, less current portion | 1,251 |
| | 1,599 |
|
Accrued pensions | 127,085 |
| | 216,189 |
|
Other long-term liabilities | 81,291 |
| | 73,487 |
|
Total Long-Term Liabilities | 209,627 |
| | 291,275 |
|
| | | |
Shareholders’ Equity | |
| | |
|
Common shares | 9,858 |
| | 9,858 |
|
Additional paid-in capital | 230,086 |
| | 205,124 |
|
Retained earnings | 1,838,770 |
| | 1,682,668 |
|
Accumulated other comprehensive loss | (236,430 | ) | | (235,400 | ) |
Treasury shares | (427,644 | ) | | (319,877 | ) |
Total Shareholders’ Equity | 1,414,640 |
| | 1,342,373 |
|
Non-controlling interests | 14,179 |
| | 15,948 |
|
Total Equity | 1,428,819 |
| | 1,358,321 |
|
| | | |
TOTAL LIABILITIES AND EQUITY | $ | 2,119,641 |
| | $ | 2,089,863 |
|
See notes to these consolidated financial statements.
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands) |
| | | | | | | |
| Nine Months Ended September 30, |
| 2013 | | 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
|
Net income | $ | 205,456 |
| | $ | 195,327 |
|
Non-controlling interests in subsidiaries’ loss | (1,834 | ) | | (77 | ) |
Net income including non-controlling interests | 203,622 |
| | 195,250 |
|
Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities: | |
| | |
|
Rationalization and asset impairment charges | 5,049 |
| | 357 |
|
Depreciation and amortization | 51,881 |
| | 48,220 |
|
Equity earnings in affiliates, net | (1,313 | ) | | (1,449 | ) |
Deferred income taxes | 21,023 |
| | (288 | ) |
Stock-based compensation | 7,511 |
| | 6,711 |
|
Pension expense | 22,261 |
| | 26,590 |
|
Pension contributions and payments | (84,417 | ) | | (57,814 | ) |
Other, net | 1,223 |
| | (512 | ) |
Changes in operating assets and liabilities, net of effects from acquisitions: | |
| | |
|
(Increase) decrease in accounts receivable | (17,982 | ) | | 13,750 |
|
Increase in inventories | (9,889 | ) | | (6,832 | ) |
Decrease (increase) in other current assets | 10,860 |
| | (12,180 | ) |
Decrease in trade accounts payable | (32,703 | ) | | (1,182 | ) |
Increase in other current liabilities | 64,767 |
| | 85,593 |
|
Net change in other long-term assets and liabilities | 198 |
| | (52,873 | ) |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 242,091 |
| | 243,341 |
|
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
|
Capital expenditures | (59,691 | ) | | (39,307 | ) |
Acquisition of businesses, net of cash acquired | (4,936 | ) | | (52,851 | ) |
Proceeds from sale of property, plant and equipment | 796 |
| | 538 |
|
Other investing activities | (4,217 | ) | | (1,541 | ) |
NET CASH USED BY INVESTING ACTIVITIES | (68,048 | ) | | (93,161 | ) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | |
|
Proceeds from short-term borrowings | 788 |
| | 2,291 |
|
Payments on short-term borrowings | (1,732 | ) | | (3,813 | ) |
Amounts due banks, net | (1,110 | ) | | (1,858 | ) |
Proceeds from long-term borrowings | — |
| | 914 |
|
Payments on long-term borrowings | (297 | ) | | (85,535 | ) |
Proceeds from exercise of stock options | 16,077 |
| | 12,695 |
|
Excess tax benefits from stock-based compensation | 6,973 |
| | 5,594 |
|
Purchase of shares for treasury | (113,641 | ) | | (60,155 | ) |
Cash dividends paid to shareholders | (32,987 | ) | | (42,510 | ) |
Other financing activities | (2,809 | ) | | — |
|
NET CASH USED BY FINANCING ACTIVITIES | (128,738 | ) | | (172,377 | ) |
| | | |
Effect of exchange rate changes on Cash and cash equivalents | (1,460 | ) | | 1,771 |
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 43,845 |
| | (20,426 | ) |
| | | |
Cash and cash equivalents at beginning of period | 286,464 |
| | 361,101 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 330,309 |
| | $ | 340,675 |
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts
NOTE 1 — BASIS OF PRESENTATION
As used in this report, the term “Company,” except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. However, in the opinion of management, these unaudited consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods. Operating results for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.
The accompanying Consolidated Balance Sheet at December 31, 2012 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications.
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 non-essential rate moved from 4.3 to 6.3 bolivars to the U.S. dollar. 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 $4,117 due to the liquidation of inventory valued at the historical exchange rate.
Future impacts to earnings of applying highly inflationary accounting for Venezuela on the Company’s consolidated financial statements will be dependent upon movements in the applicable exchange rates between the bolivar and the U.S. dollar and the amount of monetary assets and liabilities included in the Company’s Venezuelan operation’s balance sheet. The bolivar-denominated monetary net asset position was $19,104 at September 30, 2013 and $31,545 at December 31, 2012.
NOTE 2 — EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Numerator: | |
| | |
| | |
| | |
|
Net income | $ | 66,044 |
| | $ | 64,765 |
| | $ | 205,456 |
| | $ | 195,327 |
|
Denominator: | |
| | |
| | |
| | |
|
Basic weighted average shares outstanding | 81,644 |
| | 82,918 |
| | 82,260 |
| | 83,233 |
|
Effect of dilutive securities - Stock options and awards | 1,063 |
| | 998 |
| | 1,054 |
| | 1,093 |
|
Diluted weighted average shares outstanding | 82,707 |
| | 83,916 |
| | 83,314 |
| | 84,326 |
|
Basic earnings per share | $ | 0.81 |
| | $ | 0.78 |
| | $ | 2.50 |
| | $ | 2.35 |
|
Diluted earnings per share | $ | 0.80 |
| | $ | 0.77 |
| | $ | 2.47 |
| | $ | 2.32 |
|
For the three months ended September 30, 2013 and 2012, common shares subject to equity-based awards of 44,026 and 461,093, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended September 30, 2013 and 2012, common shares subject to equity-based awards of 420,584 and 46,678, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS
New Accounting Standards to be Adopted:
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11, "Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 requires an entity to present an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with limited exceptions. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption and retrospective application is permitted. The Company is currently evaluating the impact of the adoption of ASU 2013-11, but does not expect it will have a significant impact on the Company's financial statements.
In March 2013, the FASB issued ASU No. 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP by emphasizing that the accounting for the release of the cumulative translation adjustment into net income for sales or transfers of a controlling financial interest within a foreign entity is the same irrespective of whether the sale or transfer is of a subsidiary or a group of assets that is a nonprofit activity or business. When a reporting entity ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company is currently evaluating the impact of the adoption of ASU 2013-05 on the Company's financial statements.
NOTE 4 — ACQUISITIONS
On December 31, 2012, the Company completed the acquisition of the privately-held automated systems and tooling manufacturer, Tennessee Rand, Inc. ("Tenn Rand"). Tenn Rand, based in Chattanooga, Tennessee, is a leader in the design and manufacture of tooling and robotic systems for welding applications. The acquisition added tool design, system building and machining capabilities that will enable the Company to further expand its welding automation business. Annual sales for Tenn Rand in 2012 were approximately $35,000.
On November 13, 2012, the Company completed the acquisition of the Kaliburn, Burny and Cleveland Motion Control businesses (collectively, "Kaliburn") from ITT Corporation. Kaliburn, headquartered in Ladson, South Carolina, is a designer and manufacturer of shape cutting solutions, producer of shape cutting control systems and manufacturer of web tension transducers and engineered machine systems. The acquisitions added to the Company's cutting business portfolio. Annual sales for Kaliburn at the date of acquisition were approximately $36,000.
On May 17, 2012, the Company completed the acquisition of Wayne Trail Technologies, Inc. (“Wayne Trail”). Wayne Trail, based in Ft. Loramie, Ohio, is a manufacturer of automated systems and tooling, serving a wide range of applications in the metal processing market. The acquisition added to the Company’s welding and automated solutions portfolio. Annual sales for Wayne Trail at the date of acquisition were approximately $50,000.
On March 6, 2012, the Company completed the acquisition of Weartech International, Inc. (“Weartech”). Weartech, based in Anaheim, California, is a producer of cobalt-based hard facing and wear-resistant welding consumables. The acquisition added to the Company’s consumables portfolio. Sales for Weartech during 2011 were approximately $40,000.
The Company acquired Tenn Rand, Kaliburn, Wayne Trail and Weartech for approximately $143,456 in cash, net of cash acquired and assumed debt. The fair value of net assets acquired was $71,727, resulting in goodwill of $71,729. The purchase price allocations for some of the acquisitions are preliminary and subject to final opening balance sheet adjustments.
Pro forma information related to these acquisitions has not been presented because the impact on the Company’s Consolidated Statements of Income is not material. Acquired companies are included in the Company’s consolidated financial statements as of the date of acquisition.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
NOTE 5 — SEGMENT INFORMATION
The Company’s primary business is the design and manufacture of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products. The Company also has a leading global position in the brazing and soldering alloys market. The Company has aligned its business units into five operating segments to enhance the utilization of the Company’s worldwide resources and global 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.
Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being earnings before interest and income taxes (“EBIT”), as adjusted. Segment EBIT is adjusted for special items as determined by management such as the impact of rationalization activities, certain asset impairment charges and gains or losses on disposals of assets.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
Financial information for the reportable segments follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America Welding | | Europe Welding | | Asia Pacific Welding | | South America Welding | | The Harris Products Group | | Corporate / Eliminations | | Consolidated |
Three Months Ended September 30, 2013 | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | $ | 404,113 |
| | $ | 98,522 |
| | $ | 63,834 |
| | $ | 51,715 |
| | $ | 73,691 |
| | $ | — |
| | $ | 691,875 |
|
Inter-segment sales | 35,355 |
| | 5,256 |
| | 3,821 |
| | 151 |
| | 2,311 |
| | (46,894 | ) | | — |
|
Total | $ | 439,468 |
| | $ | 103,778 |
| | $ | 67,655 |
| | $ | 51,866 |
| | $ | 76,002 |
| | $ | (46,894 | ) | | $ | 691,875 |
|
| | | | | | | | | | | | | |
EBIT, as adjusted | $ | 75,225 |
| | $ | 7,881 |
| | $ | (979 | ) | | $ | 15,942 |
| | $ | 6,917 |
| | $ | (822 | ) | | $ | 104,164 |
|
Special items charge | (17 | ) | | 1,595 |
| | 4,724 |
| | — |
| | — |
| | — |
| | 6,302 |
|
EBIT | $ | 75,242 |
| | $ | 6,286 |
| | $ | (5,703 | ) | | $ | 15,942 |
| | $ | 6,917 |
| | $ | (822 | ) | | $ | 97,862 |
|
Interest income | |
| | |
| | |
| | |
| | |
| | |
| | 536 |
|
Interest expense | |
| | |
| | |
| | |
| | |
| | |
| | (558 | ) |
Income before income taxes | |
| | |
| | |
| | |
| | |
| | |
| | $ | 97,840 |
|
| | | | | | | | | | | | | |
Three Months Ended September 30, 2012 | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | $ | 390,327 |
| | $ | 104,480 |
| | $ | 76,263 |
| | $ | 44,545 |
| | $ | 81,937 |
| | $ | — |
| | $ | 697,552 |
|
Inter-segment sales | 28,186 |
| | 3,261 |
| | 2,748 |
| | 27 |
| | 1,869 |
| | (36,091 | ) | | — |
|
Total | $ | 418,513 |
| | $ | 107,741 |
| | $ | 79,011 |
| | $ | 44,572 |
| | $ | 83,806 |
| | $ | (36,091 | ) | | $ | 697,552 |
|
| | | | | | | | | | | | | |
EBIT, as adjusted | $ | 70,797 |
| | $ | 8,515 |
| | $ | 2,054 |
| | $ | 7,587 |
| | $ | 7,739 |
| | $ | (2,620 | ) | | $ | 94,072 |
|
Special items charge | 477 |
| | 1,874 |
| | 708 |
| | — |
| | — |
| | — |
| | 3,059 |
|
EBIT | $ | 70,320 |
| | $ | 6,641 |
| | $ | 1,346 |
| | $ | 7,587 |
| | $ | 7,739 |
| | $ | (2,620 | ) | | $ | 91,013 |
|
Interest income | |
| | |
| | |
| | |
| | |
| | |
| | 916 |
|
Interest expense | |
| | |
| | |
| | |
| | |
| | |
| | (1,040 | ) |
Income before income taxes | |
| | |
| | |
| | |
| | |
| | |
| | $ | 90,889 |
|
| | | | | | | | | | | | | |
Nine Months Ended September 30, 2013 | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | $ | 1,242,736 |
| | $ | 317,674 |
| | $ | 203,112 |
| | $ | 132,592 |
| | $ | 241,766 |
| | $ | — |
| | $ | 2,137,880 |
|
Inter-segment sales | 99,869 |
| | 13,865 |
| | 12,579 |
| | 222 |
| | 7,209 |
| | (133,744 | ) | | — |
|
Total | $ | 1,342,605 |
| | $ | 331,539 |
| | $ | 215,691 |
| | $ | 132,814 |
| | $ | 248,975 |
| | $ | (133,744 | ) | | $ | 2,137,880 |
|
| | | | | | | | | | | | | |
EBIT, as adjusted | $ | 234,662 |
| | $ | 28,114 |
| | $ | 1,967 |
| | $ | 32,119 |
| | $ | 21,411 |
| | $ | (2,963 | ) | | $ | 315,310 |
|
Special items charge | 1,109 |
| | 1,664 |
| | 5,431 |
| | 12,198 |
| | — |
| | — |
| | 20,402 |
|
EBIT | $ | 233,553 |
| | $ | 26,450 |
| | $ | (3,464 | ) | | $ | 19,921 |
| | $ | 21,411 |
| | $ | (2,963 | ) | | $ | 294,908 |
|
Interest income | |
| | |
| | |
| | |
| | |
| | |
| | 2,452 |
|
Interest expense | |
| | |
| | |
| | |
| | |
| | | | (2,307 | ) |
Income before income taxes | |
| | |
| | |
| | |
| | |
| | |
| | $ | 295,053 |
|
| | | | | | | | | | | | | |
Total assets | $ | 979,043 |
| | $ | 415,387 |
| | $ | 329,117 |
| | $ | 145,672 |
| | $ | 186,474 |
| | $ | 63,948 |
| | $ | 2,119,641 |
|
| | | | | | | | | | | | | |
Nine months ended September 30, 2012 | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | $ | 1,187,879 |
| | $ | 344,720 |
| | $ | 254,259 |
| | $ | 121,552 |
| | $ | 260,309 |
| | $ | — |
| | $ | 2,168,719 |
|
Inter-segment sales | 101,386 |
| | 12,178 |
| | 11,641 |
| | 38 |
| | 6,605 |
| | (131,848 | ) | | — |
|
Total | $ | 1,289,265 |
| | $ | 356,898 |
| | $ | 265,900 |
| | $ | 121,590 |
| | $ | 266,914 |
| | $ | (131,848 | ) | | $ | 2,168,719 |
|
| | | | | | | | | | | | | |
EBIT, as adjusted | $ | 216,872 |
| | $ | 32,317 |
| | $ | 8,641 |
| | $ | 13,472 |
| | $ | 23,933 |
| | $ | (6,882 | ) | | $ | 288,353 |
|
Special items charge | 554 |
| | 2,466 |
| | 1,297 |
| | 1,381 |
| | — |
| | — |
| | 5,698 |
|
EBIT | $ | 216,318 |
| | $ | 29,851 |
| | $ | 7,344 |
| | $ | 12,091 |
| | $ | 23,933 |
| | $ | (6,882 | ) | | $ | 282,655 |
|
Interest income | |
| | |
| | |
| | |
| | |
| | |
| | 2,648 |
|
Interest expense | |
| | |
| | |
| | |
| | |
| | |
| | (3,338 | ) |
Income before income taxes | |
| | |
| | |
| | |
| | |
| | |
| | $ | 281,965 |
|
| | | | | | | | | | | | | |
Total assets | $ | 909,827 |
| | $ | 460,586 |
| | $ | 358,626 |
| | $ | 128,658 |
| | $ | 203,536 |
| | $ | 30,289 |
| | $ | 2,091,522 |
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
In the third quarter 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 third quarter 2012, special items include charges of $477, $1,914 and $311 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 Asia Pacific Welding segment special items also include a charge of $397 related to asset impairments.
In the nine months ended September 30, 2013, special items include net charges of $1,109, $1,664 and $756 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 Asia Pacific Welding segment special items also include charges of $4,675 related to impairment of long-lived assets. The South America Welding segment special items represent charges of $12,198 related to the devaluation of the Venezuelan currency.
In the nine months ended September 30, 2012, special items include charges of $554, $2,506 and $900 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 Asia Pacific Welding segment special items also include a charge of $397 related to asset impairments. The South America Welding segment special item represents a charge of $1,381 related to a change in Venezuelan labor law, which provides for increased employee severance obligations.
NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS
The Company recorded net rationalization charges of $8,204 for the nine months ended September 30, 2013. The charges include $3,479 primarily related to employee severance and $4,881 in asset impairment charges, partially offset by gains of $156 related to sale of assets. A description of each restructuring plan and the related costs follows:
North America Welding Plans:
During 2012, the Company initiated various rationalization plans within the North America Welding segment. Plans for the segment include consolidating its Oceanside, California operations and its Reno, Nevada operations to another facility in Reno, Nevada and consolidating its Baltimore, Maryland manufacturing operations into its current manufacturing operations in Cleveland, Ohio. These actions impacted 72 employees within the North America Welding segment. During the nine months ended September 30, 2013, the Company recorded charges of $1,109, which represent employee severance and other related costs. At September 30, 2013, a liability relating to these actions of $614 was recognized in Other current liabilities, which will be substantially paid in 2013. Additional charges related to the completion of this plan are expected to be immaterial.
Europe Welding Plans:
The Company initiated a rationalization plan within the Europe Welding segment to consolidate certain consumable manufacturing operations. These actions are expected to impact 56 employees within the Europe Welding segment. During the nine months ended September 30, 2013, the Company recorded charges of $1,518 related to these activities which represents employee severance and other related costs. At September 30, 2013, a liability relating to these actions of $1,518 was recognized in Other current liabilities. The Company expects to incur additional charges in the range of $600 to $1,500 related to the completion of this plan.
During 2012, the Company initiated various rationalization plans within the Europe Welding segment. Plans for the segment include the consolidation of manufacturing facilities in Russia, relocation of its Italian machine manufacturing operations to current facilities in Poland and headcount restructuring at various other manufacturing operations within the segment to better align the cost structure and capacity requirements with current economic needs and conditions. These actions impacted 285 employees within the Europe Welding segment. During the nine months ended September 30, 2013, the Company recorded net charges of $146 related to these activities. The amount represents employee severance and other related costs partially offset by a gain on sale of assets. At September 30, 2013, a liability relating to these actions of $1,315 was recognized in Other current liabilities, which will be substantially paid in 2013. Additional charges related to the completion of this plan are expected to be immaterial.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
Asia Pacific Welding Plans:
During 2012, the Company initiated various rationalization plans within the Asia Pacific Welding segment. Plans for the segment include the rationalization of its Australian manufacturing operations and headcount restructuring at various other manufacturing operations within the segment to better align the cost structure and capacity requirements with current economic needs and conditions. These actions impacted 268 employees within the Asia Pacific Welding segment. During the nine months ended September 30, 2013, the Company recorded net charges of $756, which represent employee severance and other related costs of $704 and asset impairment charges of $206, partially offset by gains of $154 from the sale of assets. At September 30, 2013, a liability relating to these actions of $461 was recognized in Other current liabilities, which will be substantially paid in 2013. Additional charges related to the completion of this plan are expected to be immaterial.
The Company continues evaluating its cost structure and additional rationalization actions may result in charges in future periods.
In the third quarter 2013, the Company recorded long-lived asset impairment charges of $4,675 in Rationalization and asset impairment charges. The charge is the result of the Company removing capacity to align itself with current market conditions and improve operating efficiency.
The following tables summarize the activity related to the rationalization liabilities by segment for the nine months ended September 30, 2013:
|
| | | | | | | | | | | | | | | |
| North America Welding | | Europe Welding | | Asia Pacific Welding | | Consolidated |
Balance, December 31, 2012 | $ | — |
| | $ | 2,013 |
| | $ | 1,044 |
| | $ | 3,057 |
|
Payments and other adjustments | (495 | ) | | (846 | ) | | (1,287 | ) | | (2,628 | ) |
Charged to expense | 1,109 |
| | 1,666 |
| | 704 |
| | 3,479 |
|
Balance, September 30, 2013 | $ | 614 |
| | $ | 2,833 |
| | $ | 461 |
| | $ | 3,908 |
|
NOTE 7 — COMMON SHARE REPURCHASE PROGRAM
As of September 30, 2013, the Company had a share repurchase program for up to 45 million of the Company’s common shares. At management’s discretion, the Company repurchases its common shares from time to time in the open market, depending on market conditions, stock price and other factors. During the three and nine month periods ended September 30, 2013, the Company purchased an aggregate of 710,726 and 1,923,142 common shares, respectively, in the open market under this program. As of September 30, 2013, there remained 16,419,231 common shares available for repurchase under this program. The repurchased common shares remain in treasury and have not been retired.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
NOTE 8 — ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME ("AOCI")
The following tables set forth the total changes in AOCI by component, net of taxes, for the three months ended September 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2013 |
| | Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges | | Defined benefit pension plan activity | | Currency translation adjustment | | Total |
Balance at June 30, 2013 | | $ | 667 |
| | $ | (251,767 | ) | | $ | (8,687 | ) | | $ | (259,787 | ) |
Other comprehensive (loss) income before reclassification | | (1,203 | ) | | — |
| | 19,808 |
| 3 |
| 18,605 |
|
Amounts reclassified from AOCI | | 469 |
| 1 |
| 4,314 |
| 2 |
| (31 | ) | 3 |
| 4,752 |
|
Net current-period other comprehensive (loss) income | | (734 | ) | | 4,314 |
| | 19,777 |
| | 23,357 |
|
Balance at September 30, 2013 | | $ | (67 | ) | | $ | (247,453 | ) | | $ | 11,090 |
| | $ | (236,430 | ) |
| | | | | | | | |
| | Three Months Ended September 30, 2012 |
| | Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges | | Defined benefit pension plan activity | | Currency translation adjustment | | Total |
Balance at June 30, 2012 | | $ | 353 |
| | $ | (246,154 | ) | | $ | 2,126 |
| | $ | (243,675 | ) |
Other comprehensive (loss) income before reclassification | | (167 | ) | | — |
| | 16,775 |
| 3 |
| 16,608 |
|
Amounts reclassified from AOCI | | 162 |
| 1 |
| 4,794 |
| 2 |
| (55 | ) | 3 |
| 4,901 |
|
Net current-period other comprehensive (loss) income | | (5 | ) | | 4,794 |
| | 16,720 |
| | 21,509 |
|
Balance at September 30, 2012 | | $ | 348 |
| | $ | (241,360 | ) | | $ | 18,846 |
| | $ | (222,166 | ) |
| | | | | | | | |
_______________________________________________________________________________
| |
1 | During the 2013 period, this AOCI reclassification is a component of Net sales of $165 (net of tax of $29) and Cost of goods sold of $304 (net of tax of $145); during the 2012 period, the reclassification is a component of Net sales of $127 (net of tax of $13) and Cost of goods sold of $35 (net of tax of $59). (See Note 17 - Derivatives for additional details.) |
| |
2 | This AOCI component is included in the computation of net periodic pension costs (net of tax of $2,050 and $2,755 during the three months ended September 30, 2013 and 2012, respectively). (See Note 15 - Retirement and Postretirement Benefit Plans for additional details.) |
| |
3 | The Other comprehensive income before reclassifications excludes $114 and $207 attributable to Non-controlling interests in the three months ended September 30, 2013 and 2012, respectively. The reclassified AOCI component is included in the computation of Non-controlling interests. (See Note 9 - Equity for additional details.) |
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
The following tables set forth the total changes in AOCI by component, net of taxes for the nine months ended September 30, 2013 and 2012:
|
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2013 |
| | Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges | | Defined benefit pension plan activity | | Currency translation adjustment | | Total |
Balance at December 31, 2012 | | $ | 80 |
| | $ | (261,844 | ) | | $ | 26,364 |
| | $ | (235,400 | ) |
Other comprehensive (loss) income before reclassification | | (1,067 | ) | | — |
| | (15,408 | ) | 6 |
| (16,475 | ) |
Amounts reclassified from AOCI | | 920 |
| 4 |
| 14,391 |
| 5 |
| 134 |
| 6 |
| 15,445 |
|
Net current-period other comprehensive (loss) income | | (147 | ) | | 14,391 |
| | (15,274 | ) | | (1,030 | ) |
Balance at September 30, 2013 | | $ | (67 | ) | | $ | (247,453 | ) | | $ | 11,090 |
| | $ | (236,430 | ) |
| | | | | | | | |
| | Nine months ended September 30, 2012 |
| | Unrealized (loss) gain on derivatives designated and qualifying as cash flow hedges | | Defined benefit pension plan activity | | Currency translation adjustment | | Total |
Balance at December 31, 2011 | | $ | 912 |
| | $ | (255,369 | ) | | $ | 6,576 |
| | $ | (247,881 | ) |
Other comprehensive (loss) income before reclassification | | (1,243 | ) | | — |
| | 12,000 |
| 6 |
| 10,757 |
|
Amounts reclassified from AOCI | | 679 |
| 4 |
| 14,009 |
| 5 |
| 270 |
| 6 |
| 14,958 |
|
Net current-period other comprehensive (loss) income | | (564 | ) | | 14,009 |
| | 12,270 |
| | 25,715 |
|
Balance at September 30, 2012 | | $ | 348 |
| | $ | (241,360 | ) | | $ | 18,846 |
| | $ | (222,166 | ) |
| | | | | | | | |
| |
4 | During the 2013 period, this AOCI reclassification is a component of Net sales of $467 (net of tax of $78) and Cost of goods sold of $453 (net of tax of $136); during the 2012 period, the reclassification is a component of Net sales of $591 (net of tax of $104) and Cost of goods sold of $88 (net of tax of $164). (See Note 17 - Derivatives for additional details.) |
| |
5 | This AOCI component is included in the computation of net periodic pension costs (net of tax of $8,232 and $8,593 during the nine months ended September 30, 2013 and 2012, respectively). (See Note 15 - Retirement and Postretirement Benefit Plans for additional details.) |
| |
6 | The Other comprehensive income before reclassifications excludes $65 and $312 attributable to Non-controlling interests in the nine months ended September 30, 2013 and 2012, respectively. The reclassified AOCI component is included in the computation of Non-controlling interests. (See Note 9 - Equity for additional details.) |
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
NOTE 9 — EQUITY
Changes in equity for the nine months ended September 30, 2013 are as follows:
|
| | | | | | | | | | | |
| Shareholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance, December 31, 2012 | $ | 1,342,373 |
| | $ | 15,948 |
| | $ | 1,358,321 |
|
Comprehensive income (loss): | |
| | |
| | |
|
Net income (loss) | 205,456 |
| | (1,834 | ) | | 203,622 |
|
Other comprehensive income (loss) | (1,030 | ) | | 65 |
| | (965 | ) |
Total comprehensive income (loss) | 204,426 |
| | (1,769 | ) | | 202,657 |
|
| | | | | |
Cash dividends declared - $0.60 per share | (49,353 | ) | | — |
| | (49,353 | ) |
Issuance of shares under benefit plans | 30,835 |
| | — |
| | 30,835 |
|
Purchase of shares for treasury | (113,641 | ) | | — |
| | (113,641 | ) |
Balance, September 30, 2013 | $ | 1,414,640 |
| | $ | 14,179 |
| | $ | 1,428,819 |
|
Changes in equity for the nine months ended September 30, 2012 are as follows:
|
| | | | | | | | | | | |
| Shareholders’ Equity | | Non-controlling Interests | | Total Equity |
Balance, December 31, 2011 | $ | 1,176,946 |
| | $ | 16,296 |
| | $ | 1,193,242 |
|
Comprehensive income (loss): | |
| | |
| | |
|
Net income (loss) | 195,327 |
| | (77 | ) | | 195,250 |
|
Other comprehensive income (loss) | 25,715 |
| | (312 | ) | | 25,403 |
|
Total comprehensive income (loss) | 221,042 |
| | (389 | ) | | 220,653 |
|
| | | | | |
Cash dividends declared - $0.51 per share | (42,551 | ) | | — |
| | (42,551 | ) |
Issuance of shares under benefit plans | 25,002 |
| | — |
| | 25,002 |
|
Purchase of shares for treasury | (60,155 | ) | | — |
| | (60,155 | ) |
Balance, September 30, 2012 | $ | 1,320,284 |
| | $ | 15,907 |
| | $ | 1,336,191 |
|
NOTE 10 — INVENTORY VALUATION
Inventories are valued at the lower of cost or market. Fixed manufacturing overhead costs are allocated to inventory based on normal production capacity and abnormal manufacturing costs are recognized as period costs. For most domestic inventories, cost is determined principally by the last-in, first-out (“LIFO”) method, and for non-U.S. inventories, cost is determined by the first-in, first-out (“FIFO”) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Actual year-end costs and inventory levels may differ from interim LIFO inventory valuations. The excess of current cost over LIFO cost was $74,599 and $72,173 at September 30, 2013 and December 31, 2012, respectively.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
NOTE 11 — ACCRUED EMPLOYEE BONUS
“Other current liabilities” at September 30, 2013 and 2012 include accruals for year-end bonuses and related payroll taxes of $107,049 and $105,685, respectively, related to the Company’s employees worldwide. The payment of bonuses is discretionary and subject to approval by the Board of Directors. A majority of annual bonuses are paid in December, resulting in an increasing bonus accrual during the Company’s fiscal year.
NOTE 12 — CONTINGENCIES
The Company, like other manufacturers, is subject from time to time to a variety of civil and administrative proceedings arising in the ordinary course of business. Such claims and litigation include, without limitation, product liability claims and health, safety and environmental claims, some of which relate to cases alleging asbestos induced illnesses. The claimants in the asbestos cases seek compensatory and punitive damages, in most cases for unspecified amounts. The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously.
The Company’s accrual for contingent liabilities was $3,930 as of September 30, 2013 and $5,636 as of December 31, 2012. The accrual is included in Other current liabilities. The Company also recognized an asset for recoveries from insurance carriers related to the insured claims outstanding of $545 as of September 30, 2013 and $1,311 as of December 31, 2012. The asset is included in Other current assets.
The Company accrues its best estimate of the probable costs, after a review of the facts with management and counsel and taking into account past experience. If an unfavorable outcome is determined to be reasonably possible but not probable, or if the amount of loss cannot be reasonably estimated, disclosure is provided for material claims or litigation. Many of the current cases are in differing procedural stages and information on the circumstances of each claimant, which forms the basis for judgments as to the validity or ultimate disposition of such actions, varies greatly. Therefore, in many situations a range of possible losses cannot be made. Reserves are adjusted as facts and circumstances change and related management assessments of the underlying merits and the likelihood of outcomes change. Moreover, reserves only cover identified and/or asserted claims. Future claims could, therefore, give rise to increases to such reserves.
Based on the Company's historical experience in litigating product liability claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, as well as the Company's current assessment of the underlying merits of the claims and applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material effect on the Company's consolidated financial statements.
NOTE 13 — PRODUCT WARRANTY COSTS
The Company accrues for product warranty claims based on historical experience and the expected material and labor costs to provide warranty service. Warranty services are generally provided for periods up to three years from the date of sale. The accrual for product warranty claims is included in “Other current liabilities.”
The changes in the carrying amount of product warranty accruals for the nine months ended September 30, 2013 and 2012 are as follows:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2013 | | 2012 |
Balance at beginning of period | $ | 15,304 |
| | $ | 15,781 |
|
Accruals for warranties | 8,430 |
| | 7,847 |
|
Settlements | (9,193 | ) | | (8,283 | ) |
Foreign currency translation | (88 | ) | | 52 |
|
Balance at end of period | $ | 14,453 |
| | $ | 15,397 |
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
NOTE 14 — DEBT
The Company has a line of credit totaling $300,000 through the Amended and Restated Credit Agreement (the “Credit Agreement”), which was entered into on July 26, 2012. The Credit Agreement contains customary affirmative, negative and financial covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets, transactions with affiliates and a fixed charges coverage ratio and total leverage ratio. As of September 30, 2013, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Credit Agreement. The Credit Agreement has a five-year term and may be increased, subject to certain conditions, by an additional amount up to $100,000. The interest rate on borrowings is based on either LIBOR or the prime rate, plus a spread based on the Company’s leverage ratio, at the Company’s election.
NOTE 15 — RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The components of total pension cost were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Service cost | $ | 6,144 |
| | $ | 5,426 |
| | $ | 17,563 |
| | $ | 16,275 |
|
Interest cost | 8,954 |
| | 10,368 |
| | 27,852 |
| | 31,097 |
|
Expected return on plan assets | (14,667 | ) | | (14,688 | ) | | (45,931 | ) | | (44,059 | ) |
Amortization of prior service cost | (153 | ) | | (23 | ) | | (459 | ) | | (68 | ) |
Amortization of net loss | 7,045 |
| | 7,773 |
| | 23,262 |
| | 23,316 |
|
Defined benefit plans | 7,323 |
| | 8,856 |
| | 22,287 |
| | 26,561 |
|
Multi-employer plans | 237 |
| | 223 |
| | 702 |
| | 690 |
|
Defined contribution plans | 2,599 |
| | 2,435 |
| | 7,791 |
| | 7,032 |
|
Total pension cost | $ | 10,159 |
| | $ | 11,514 |
| | $ | 30,780 |
| | $ | 34,283 |
|
The Company voluntarily contributed $75,216 to its defined benefit plans in the United States during the nine months ended September 30, 2013.
NOTE 16 — 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. The effective income tax rate is lower than the Company’s statutory rate primarily due to income earned in lower tax rate jurisdictions, reversal of valuation allowance on deferred tax assets more-likely-than-not to be realized, U.S. tax credits and deductions and the utilization of foreign tax loss carry-forwards for which valuation allowances had been previously provided partially offset by the establishment of deferred tax liabilities for the planned repatriation of foreign earnings.
The effective income tax rate of 30.8% for the nine months ended September 30, 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.
The anticipated effective income tax rate for 2013 depends on the amount of earnings in various tax jurisdictions and the level of related tax deductions achieved during the year.
As of September 30, 2013, the Company had $24,084 of unrecognized tax benefits. If recognized, approximately $14,130 would be reflected as a component of income tax expense.
The Company files income tax returns in the U.S. and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2009. The Company is currently subject to an IRS audit for 2010-2011, various U.S. state audits, a Canadian tax audit for 2003-2010, an Indian tax audit for 2012 and an Indonesian tax audit for 2003-2007. Except as discussed below, the Company does not expect the results of these examinations to have a material effect on the Company’s consolidated financial statements.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations. Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits. It is reasonably possible there could be a reduction of $3,619 in prior years’ unrecognized tax benefits by the end of the third quarter 2014.
In July 2012, the Company received a Notice of Reassessment from the Canada Revenue Agency (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 $60,711 plus approximately $16,536 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 and is recorded as a non-current asset valued at $86,827 as of September 30, 2013. Any Canadian tax ultimately due will be creditable in the parent company’s U.S. federal tax return. The Company expects to be able to utilize the full amount of foreign tax credits generated in the statutorily allowed carry-back and carry-forward periods. Accordingly, should the Company not prevail in this dispute, the income statement charge will approximate the deficiency interest, net of tax.
The Company believes it will prevail on the merits of the tax position. In accordance with prescribed recognition and measurement thresholds, no income tax accrual has been made for any uncertain tax positions related to the CRA reassessment. An unfavorable resolution of this matter could have a material effect on the Company’s financial statements in the quarter in which a judgment is reached.
NOTE 17 — DERIVATIVES
The Company uses derivatives to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business. Derivative contracts to hedge currency and commodity exposures are generally written on a short-term basis but may cover exposures for up to two years while interest rate contracts may cover longer periods consistent with the terms of the underlying debt. The Company does not enter into derivatives for trading or speculative purposes.
All derivatives are recognized at fair value on the Company’s Consolidated Balance Sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. The Company formally documents the relationship of the hedge with the hedged item as well as the risk-management strategy for all designated hedges. Both at inception and on an ongoing basis, the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued. The cash flows from settled derivative contracts are recognized in operating activities in the Company’s Consolidated Statements of Cash Flows. Hedge ineffectiveness was immaterial in the nine months ended September 30, 2013 and 2012.
The Company is subject to the credit risk of the counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. The Company manages individual counterparty exposure by monitoring the credit rating of the counterparty and the size of financial commitments and exposures between the Company and the counterparty. None of the concentrations of risk with any individual counterparty was considered significant at September 30, 2013. The Company does not expect any counterparties to fail to meet their obligations.
Cash Flow Hedges
Certain foreign currency forward contracts were qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of these short-term contracts was $45,359 and $39,597 at September 30, 2013 and December 31, 2012, respectively. The effective portions of the fair value gains or losses on these cash flow hedges are recognized in AOCI and subsequently reclassified to Cost of goods sold or Sales for hedges of purchases and sales, respectively, as the underlying hedged transactions affect earnings.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
Net Investment Hedges
The Company has a foreign currency forward contract that qualifies and is designated as a net investment hedge. The dollar equivalent gross notional amount of this short-term contract was $7,444 at September 30, 2013. The effective portion of the fair value gain or loss on this net investment hedge is recognized in AOCI and subsequently reclassified to Selling, general and administrative expenses, as the underlying hedged investment is liquidated.
Derivatives Not Designated as Hedging Instruments
The Company has certain foreign exchange forward contracts that are not designated as hedges. These derivatives are held as economic hedges of certain balance sheet exposures. The dollar equivalent gross notional amount of these contracts was $245,101 and $189,259 at September 30, 2013 and December 31, 2012, respectively. The fair value gains or losses from these contracts are recognized in Selling, general and administrative expenses, offsetting the losses or gains on the exposures being hedged.
The Company had short-term silver and copper forward contracts with notional amounts of 310,000 troy ounces and 375,000 pounds, respectively, at September 30, 2013. The notional amount of short-term silver and copper forward contracts was 275,000 troy ounces and 375,000 pounds, respectively, at December 31, 2012. Realized and unrealized gains and losses on these contracts are recognized in Costs of goods sold.
Fair values of derivative instruments in the Company’s Consolidated Balance Sheets follow:
|
| | | | | | | | | | | | | | | | |
| | September 30, 2013 | | December 31, 2012 |
Derivatives by hedge designation | | Other Current Assets | | Other Current Liabilities | | Other Current Assets | | Other Current Liabilities |
Designated as hedging instruments: | | |
| | |
| | |
| | |
|
Foreign exchange contracts | | $ | 411 |
| | $ | 435 |
| | $ | 352 |
| | $ | 325 |
|
Net investment contracts | | — |
| | 2 |
| | — |
| | — |
|
Not designated as hedging instruments: | | |
| | |
| | |
| | |
|
Foreign exchange contracts | | 959 |
| | 1,282 |
| | 510 |
| | 902 |
|
Commodity contracts | | 289 |
| | 57 |
| | 731 |
| | — |
|
Total derivatives | | $ | 1,659 |
| | $ | 1,776 |
| | $ | 1,593 |
| | $ | 1,227 |
|
The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income for the three and nine month periods ended September 30, 2013 and 2012 consisted of the following:
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Derivatives by hedge designation | | Classification of gain (loss) | | 2013 | | 2012 | | 2013 | | 2012 |
Not designated as hedges: | | | | |
| | |
| | | | |
Foreign exchange contracts | | Selling, general & administrative expenses | | $ | 3,186 |
| | $ | 1,547 |
| | $ | 194 |
| | $ | 2,308 |
|
Commodity contracts | | Cost of goods sold | | (556 | ) | | (2,410 | ) | | 2,841 |
| | (2,504 | ) |
The effects of designated hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:
|
| | | | | | | | |
Total gain (loss) recognized in AOCI, net of tax | | September 30, 2013 | | December 31, 2012 |
Foreign exchange contracts | | $ | (79 | ) | | $ | 80 |
|
Net investment contracts | | 12 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Derivative type | | Gain (loss) reclassified from AOCI to: | | 2013 | | 2012 | | 2013 | | 2012 |
Foreign exchange contracts | | Sales | | $ | 165 |
| | $ | 127 |
| | $ | 467 |
| | $ | 591 |
|
| | Cost of goods sold | | 304 |
| | 35 |
| | 453 |
| | 88 |
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
The Company expects a loss of $67 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized.
NOTE 18 - FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The following hierarchy is used to classify the inputs used to measure fair value:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3 Unobservable inputs for the asset or liability.
The following table provides a summary of assets and liabilities as of September 30, 2013, measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | |
Description | | Balance as of September 30, 2013 | | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | |
| | |
| | |
| | |
|
Foreign exchange contracts | | $ | 1,370 |
| | $ | — |
| | $ | 1,370 |
| | $ | — |
|
Commodity contracts | | 289 |
| | — |
| | 289 |
| | — |
|
Total assets | | $ | 1,659 |
| | $ | — |
| | $ | 1,659 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Foreign exchange contracts | | $ | 1,717 |
| | $ | — |
| | $ | 1,717 |
| | $ | — |
|
Commodity contracts | | 57 |
| | — |
| | 57 |
| | — |
|
Net investment contracts | | 2 |
| | — |
| | 2 |
| | — |
|
Contingent consideration | | 5,250 |
| | — |
| | — |
| | 5,250 |
|
Deferred compensation | | 19,278 |
| | — |
| | 19,278 |
| | — |
|
Total liabilities | | $ | 26,304 |
| | $ | — |
| | $ | 21,054 |
| | $ | 5,250 |
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts
The following table provides a summary of assets and liabilities as of December 31, 2012, measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | |
Description | | Balance as of December 31, 2012 | | Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | |
| | |
| | |
| | |
|
Foreign exchange contracts | | $ | 862 |
| | $ | — |
| | $ | 862 |
| | $ | — |
|
Commodity contracts | | 731 |
| | — |
| | 731 |
| | — |
|
Total assets | | $ | 1,593 |
| | $ | — |
| | $ | 1,593 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Foreign exchange contracts | | $ | 1,227 |
| | $ | — |
| | $ | 1,227 |
| | $ | — |
|
Contingent consideration | | 4,894 |
| | — |
| | — |
| | 4,894 |
|
Deferred compensation | | 16,882 |
| | — |
| | 16,882 |
| | — |
|
Total liabilities | | $ | 23,003 |
| | $ | — |
| | $ | 18,109 |
| | $ | 4,894 |
|
The Company’s derivative contracts are valued at fair value using the market approach. The Company measures the fair value of foreign exchange contracts and net investment contracts using Level 2 inputs based on observable spot and forward rates in active markets. The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions. During the nine months ended September 30, 2013, there were no transfers between Levels 1, 2 or 3.
In connection with an acquisition, the Company recorded a contingent consideration fair valued at $5,250 as of September 30, 2013, which reflects a $356 increase in the liability from December 31, 2012. The contingent consideration is based upon estimated sales for the five-year period ending December 31, 2015 and will be paid in 2016 based on actual sales during the five-year period. The fair value of the contingent consideration is a Level 3 valuation and fair valued using a probability weighted discounted cash flow analysis. The discounted cash flow utilized weighted average inputs, including a risk-based discount rate of 9.7% and a compounded annual revenue growth rate of 30.5%. The discount rate was determined using discount rates of 3.5% reflective of the Company’s cost of debt and 14.1% as a risk adjusted cost of capital and the compounded annual revenue growth rate was determined using various scenarios with growth ranging from remaining relatively flat to growth rates of up to 65.6%.
The deferred compensation liability is the Company’s obligation under its executive deferred compensation plan. The Company measures the fair value of the liability using the market values of the participants’ underlying investment fund elections.
The fair value of “Cash and cash equivalents,” “Accounts receivable,” “Amounts due banks” and “Trade accounts payable” approximated book value due to the short-term nature of these instruments at both September 30, 2013 and December 31, 2012. The fair value of long-term debt at September 30, 2013 and December 31, 2012, including the current portion, was approximately $1,503 and $1,919, respectively, which was determined using available market information and methodologies requiring judgment. The carrying value of this debt at such dates was $1,674 and $2,055, respectively. Since considerable judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount that could be realized in a current market exchange.
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 |
| |