UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
R
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2010
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
(Registrants
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
R
No
£
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
R
No
£
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
R
|
|
Accelerated
filer
£
|
Non-accelerated
filer
£
(Do
not check if a smaller reporting company)
|
|
Smaller
reporting company
£
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
£
No
R
The
number of shares outstanding of the registrants common shares as of September 30,
2010 was 42,261,090.
1
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,
|
|
|
2010
|
|
2009
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2010
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2009
|
Net sales
|
|
$
|
519,338
|
|
|
$
|
441,802
|
|
|
$
|
1,505,880
|
|
|
$
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1,266,836
|
|
Cost of goods sold
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375,267
|
|
|
316,671
|
|
|
1,089,893
|
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|
945,066
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|
Gross profit
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144,071
|
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|
125,131
|
|
|
415,987
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|
321,770
|
|
|
|
|
|
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|
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|
|
|
|
|
|
Selling, general & administrative
expenses
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|
95,612
|
|
|
84,648
|
|
|
284,452
|
|
|
241,791
|
|
Rationalization charges (gains)
|
|
269
|
|
|
7,144
|
|
|
(2,559
|
)
|
|
25,720
|
|
Operating income
|
|
48,190
|
|
|
33,339
|
|
|
134,094
|
|
|
54,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
602
|
|
|
716
|
|
|
1,781
|
|
|
2,780
|
|
Equity earnings (loss) in affiliates
|
|
1,070
|
|
|
(8,692
|
)
|
|
2,684
|
|
|
(6,123
|
)
|
Other income
|
|
628
|
|
|
1,030
|
|
|
1,324
|
|
|
2,341
|
|
Interest expense
|
|
(1,671
|
)
|
|
(2,032
|
)
|
|
(4,751
|
)
|
|
(6,547
|
)
|
Total other income (expense)
|
|
629
|
|
|
(8,978
|
)
|
|
1,038
|
|
|
(7,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income before income taxes
|
|
48,819
|
|
|
24,361
|
|
|
135,132
|
|
|
46,710
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|
Income taxes
|
|
16,191
|
|
|
11,474
|
|
|
44,431
|
|
|
21,855
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|
Net income including noncontrolling interests
|
|
32,628
|
|
|
12,887
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|
90,701
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|
|
24,855
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|
Noncontrolling interests in subsidiaries earnings
|
|
155
|
|
|
130
|
|
|
1,960
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|
|
624
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|
Net income
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|
$
|
32,473
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|
|
$
|
12,757
|
|
|
$
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88,741
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|
$
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24,231
|
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|
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|
|
|
|
|
|
|
|
|
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|
Basic weighted average shares outstanding
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42,134
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42,396
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|
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42,282
|
|
|
42,385
|
|
Effect of dilutive securities - stock options and
awards
|
|
401
|
|
|
246
|
|
|
388
|
|
|
217
|
|
Diluted weighted average shares outstanding
|
|
42,535
|
|
|
42,642
|
|
|
42,670
|
|
|
42,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.77
|
|
|
$
|
0.30
|
|
|
$
|
2.10
|
|
|
$
|
0.57
|
|
Diluted earnings per share
|
|
$
|
0.76
|
|
|
$
|
0.30
|
|
|
$
|
2.08
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.28
|
|
|
$
|
0.27
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|
|
$
|
0.84
|
|
|
$
|
0.81
|
|
See notes to these consolidated financial statements
3
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED
BALANCE SHEETS
(In thousands)
|
|
September 30, 2010
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|
December 31, 2009
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|
(UNAUDITED)
|
|
(NOTE 1)
|
ASSETS
|
|
|
|
|
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|
Current Assets
|
|
|
|
|
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|
Cash and cash equivalents
|
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$
|
382,537
|
|
|
$
|
388,136
|
|
Accounts receivable (less allowance for doubtful
accounts of $7,737 in 2010; $8,174 in 2009)
|
|
319,530
|
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|
273,700
|
|
Inventories:
|
|
|
|
|
|
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Raw materials
|
|
85,969
|
|
|
69,048
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|
Work-in-process
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|
41,290
|
|
|
32,727
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|
Finished goods
|
|
188,196
|
|
|
153,968
|
|
Total inventory
|
|
315,455
|
|
|
255,743
|
|
|
|
|
|
|
|
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Other current assets
|
|
102,589
|
|
|
105,967
|
|
Total Current Assets
|
|
1,120,111
|
|
|
1,023,546
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
|
|
|
|
|
|
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Land
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43,895
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|
|
42,823
|
|
Buildings
|
|
303,269
|
|
|
291,444
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|
Machinery and equipment
|
|
694,837
|
|
|
683,037
|
|
|
|
1,042,001
|
|
|
1,017,304
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|
Less accumulated depreciation
|
|
582,208
|
|
|
557,243
|
|
Property, Plant and Equipment,
Net
|
|
459,793
|
|
|
460,061
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
218,788
|
|
|
221,685
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,798,692
|
|
|
$
|
1,705,292
|
|
|
|
|
|
|
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LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
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Amounts due banks
|
|
$
|
13,653
|
|
|
$
|
34,577
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|
Trade accounts payable
|
|
153,524
|
|
|
100,052
|
|
Other current liabilities
|
|
203,944
|
|
|
162,052
|
|
Current portion of long-term debt
|
|
1,162
|
|
|
1,290
|
|
Total Current Liabilities
|
|
372,283
|
|
|
297,971
|
|
|
|
|
|
|
|
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Long-Term Liabilities
|
|
|
|
|
|
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Long-term debt, less current portion
|
|
85,458
|
|
|
87,850
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|
Accrued pensions
|
|
100,974
|
|
|
139,670
|
|
Other long-term liabilities
|
|
93,346
|
|
|
94,126
|
|
Total Long-Term Liabilities
|
|
279,778
|
|
|
321,646
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
Common shares
|
|
4,929
|
|
|
4,929
|
|
Additional paid-in capital
|
|
165,766
|
|
|
159,440
|
|
Retained earnings
|
|
1,292,106
|
|
|
1,239,004
|
|
Accumulated other comprehensive loss
|
|
(128,316
|
)
|
|
(149,404
|
)
|
Treasury shares
|
|
(203,483
|
)
|
|
(181,623
|
)
|
Total Shareholders Equity
|
|
1,131,002
|
|
|
1,072,346
|
|
Noncontrolling interests
|
|
15,629
|
|
|
13,329
|
|
Total Equity
|
|
1,146,631
|
|
|
1,085,675
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
1,798,692
|
|
|
$
|
1,705,292
|
|
See notes to these consolidated financial statements
4
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
Nine Months Ended September 30,
|
|
|
2010
|
|
2009
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net income
|
|
$
|
88,741
|
|
|
$
|
24,231
|
|
Noncontrolling interests in subsidiaries earnings
|
|
1,960
|
|
|
624
|
|
Net income including noncontrolling interests
|
|
90,701
|
|
|
24,855
|
|
Adjustments to reconcile Net income including
noncontrolling interests to Net cash provided by operating activities:
|
|
|
|
|
|
|
Rationalization gains
|
|
(4,834
|
)
|
|
-
|
|
Depreciation and amortization
|
|
42,422
|
|
|
42,333
|
|
Equity (earnings) loss in affiliates, net
|
|
(704
|
)
|
|
8,954
|
|
Deferred income taxes
|
|
(858
|
)
|
|
1,563
|
|
Stock-based compensation
|
|
6,570
|
|
|
3,546
|
|
Amortization of terminated interest rate swaps
|
|
(1,396
|
)
|
|
(1,271
|
)
|
Amortization of pension actuarial losses and prior
service cost
|
|
15,563
|
|
|
14,092
|
|
Other non-cash items, net
|
|
3,581
|
|
|
1,511
|
|
Changes in operating assets and liabilities, net
of effects from acquisitions:
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
(48,598
|
)
|
|
57,583
|
|
(Increase) decrease in inventories
|
|
(57,211
|
)
|
|
105,876
|
|
(Increase) decrease in other current assets
|
|
(2,880
|
)
|
|
20,099
|
|
Increase (decrease) in trade accounts payable
|
|
54,315
|
|
|
(16,389
|
)
|
Increase (decrease) in other current liabilities
|
|
44,146
|
|
|
(3,191
|
)
|
Decrease in accrued pensions
|
|
(29,241
|
)
|
|
(30,488
|
)
|
Net change in other long-term assets and
liabilities
|
|
(7,862
|
)
|
|
2,240
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
103,714
|
|
|
231,313
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
Capital expenditures
|
|
(43,208
|
)
|
|
(26,285
|
)
|
Additions to equity investment in affiliates
|
|
-
|
|
|
(488
|
)
|
Acquisition of businesses, net of cash acquired
|
|
(1,182
|
)
|
|
(17,558
|
)
|
Proceeds from sale of property, plant and
equipment
|
|
9,746
|
|
|
638
|
|
NET CASH USED BY INVESTING ACTIVITIES
|
|
(34,644
|
)
|
|
(43,693
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
21,014
|
|
|
19,438
|
|
Payments on short-term borrowings
|
|
(19,916
|
)
|
|
(23,965
|
)
|
Amounts due banks, net
|
|
(17,727
|
)
|
|
(2,373
|
)
|
Proceeds from long-term borrowings
|
|
63
|
|
|
330
|
|
Payments on long-term borrowings
|
|
(1,039
|
)
|
|
(30,782
|
)
|
Proceeds from exercise of stock options
|
|
1,319
|
|
|
305
|
|
Tax benefit from exercise of stock options
|
|
469
|
|
|
105
|
|
Purchase of shares for treasury
|
|
(22,960
|
)
|
|
(343
|
)
|
Cash dividends paid to shareholders
|
|
(35,584
|
)
|
|
(34,347
|
)
|
NET CASH USED BY FINANCING ACTIVITIES
|
|
(74,361
|
)
|
|
(71,632
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on Cash and cash
equivalents
|
|
(308
|
)
|
|
5,647
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
(5,599
|
)
|
|
121,635
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
388,136
|
|
|
284,332
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
382,537
|
|
|
$
|
405,967
|
|
See notes to these consolidated financial
statements
5
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., its wholly-owned subsidiaries and majority-owned
consolidated subsidiaries. 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 three and nine month periods ended September 30,
2010 are not necessarily indicative of the results to be expected for the year
ending December 31, 2010.
The accompanying
consolidated balance sheet at December 31, 2009 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 Companys
Annual Report on Form 10-K for the year ended December 31, 2009.
Certain reclassifications
have been made to the prior year financial statements to conform to current
year classifications.
Venezuela Foreign Currency
Effective
January 1, 2010, the financial statements of the Companys Venezuelan operation
have been remeasured into the Companys reporting currency (U.S. dollar). A currency control board exists in Venezuela
that is responsible for foreign exchange procedures, including approval of
requests for exchanges of the Venezuelan currency (the bolivar) for dollars
at the official (government established) exchange rates. An unregulated parallel market that existed
for exchanging bolivars for dollars through securities transactions was shut
down by the Venezuelan government on May 17, 2010 and subsequently
reopened as a regulated market on June 9, 2010. The governmental regulations include
restrictions on trading volume.
The
official exchange rate in Venezuela had been fixed at 2.15 bolivars to 1 dollar
for several years. On January 8,
2010, the Venezuelan government announced the devaluation of its currency
relative to the dollar. The official
exchange rate for imported goods classified as essential changed from 2.15 to
2.60 (the Essential Rate), while the official exchange rate for other
non-essential goods moved to an exchange rate of 4.30 (the Non-Essential Rate). In remeasuring the financial statements the
Non-Essential Rate is used as this is the rate expected to be applicable to
dividend repatriations.
Venezuela Highly Inflationary Economy
An
economy is considered highly inflationary under GAAP if the cumulative
inflation rate for a three-year period meets or exceeds 100 percent. The Venezuelan three-year cumulative
inflation rate exceeded 100 percent during the fourth quarter of
2009. As a result, the financial
statements of the Companys Venezuelan operation are reported under highly
inflationary accounting rules as of January 1, 2010. Under highly inflationary accounting, the
financial statements of the Companys Venezuelan operation have been remeasured
into the Companys reporting currency and exchange gains and losses from the
remeasurement of monetary assets and liabilities are reflected in current
earnings, rather than Accumulated other comprehensive loss on the balance
sheet.
Future
impacts to earnings of applying highly inflationary accounting for Venezuela on
the Companys consolidated financial statements will be dependent upon
movements in the applicable exchange rates between the bolivar and the dollar
and the amount of monetary assets and liabilities included in the Companys
Venezuelan operations balance sheet. At
September 30, 2010, the net bolivar-denominated monetary liability
position was $6,400. Also, foreign
currency transaction gains are generated when liabilities are settled at the
Essential Rate and foreign currency transaction losses are generated when
liabilities are settled at the regulated parallel market rate. In addition, the Company participates in
Venezuelan sovereign debt offerings from time to time as a means of converting
bolivars to dollars. The conversion of
bolivars to dollars through Venezuelan sovereign debt offerings generates
foreign currency transaction losses as the debt is purchased at the
Non-Essential Rate and subsequently sold at a discount. During the third quarter of 2010, the Company
acquired $6,900 of Venezuelan sovereign debt at the Non-Essential Rate, which was
immediately sold at a discount for $5,520.
The sale of the Venezuelan sovereign debt resulted in a loss of $1,380
recognized in Selling, general and administrative expenses.
6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands,
except per share amounts
The devaluation of the
bolivar and the change to the dollar as the functional currency for the nine
months ended September 30, 2010 resulted in a foreign currency transaction
gain of $2,632 in Selling, general & administrative expenses and
higher Cost of goods sold of $5,755 due to the liquidation of inventory
valued at the historical exchange rate.
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS
New Accounting Standards Adopted:
In
January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-06,
Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements.
ASU
2010-06 amends Accounting Standards Codification (ASC) 820-10-50 to require
additional information to be disclosed principally with respect to Level 3 fair
value measurements and transfers to and from Level 1 and Level 2 measurements. In addition, enhanced disclosure is required
concerning inputs and valuation techniques used to determine Level 2 and Level
3 fair value measurements. The new
disclosures and clarifications of existing disclosures, as required by ASU
2010-06, are effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales,
issuances and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. Earlier application is
permitted. ASU 2010-06 was adopted by
the Company on January 1, 2010 and did not have a significant impact on
the Companys financial statements.
In December 2009, the
FASB issued ASU 2009-17,
Consolidations (Topic
810): Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities.
In June 2009,
the FASB issued ASC 810 (formerly Statement of Financial Accounting Standards (SFAS)
167,
Amendments to FASB Interpretation 46(R)
). The objective of ASC 810 is to amend certain
requirements of FASB Interpretation 46(R) (revised December 2003),
Consolidation of Variable Interest Entities,
to
improve financial reporting by enterprises involved with variable interest
entities and to provide more relevant and reliable information to users of
financial statements. ASC 810 was adopted by the Company on
January 1, 2010 and did not have an impact on the Companys financial
statements.
In December 2009, the
FASB issued ASU 2009-16,
Transfers and Servicing
(Topic 860): Accounting for Transfers of Financial Assets.
In June 2009, the FASB issued ASC 860,
Transfers and Servicing,
(formerly SFAS 166,
Accounting for Transfers of Financial Assets, an amendment of FASB
Statement 140
).
The objective of ASC 860 is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial statements about a transfer
of financial assets; the effects of a transfer on its financial position,
financial performance and cash flows; and a transferors continuing involvement
in transferred financial assets. ASC 860
must be applied as of the beginning of each reporting entitys first annual
reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. ASU 2009-16 must be
applied to transfers occurring on or after the effective date. ASU 2009-16 was adopted by the Company on January 1,
2010 and did not have a significant impact on the Companys financial
statements.
New Accounting Standards to be
Adopted:
In October 2009, the
FASB issued ASU 2009-13,
Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements a consensus of the FASB
Emerging Issues Task Force.
This update provides amendments to the criteria in Subtopic ASC
605-25. ASU 2009-13 provides principles
for allocating consideration among multiple-elements and accounting for
separate deliverables under an arrangement.
ASC 605-25, as amended, introduces an estimated selling price method for
valuing the elements of a bundled arrangement if vendor-specific objective
evidence or third-party evidence of selling price is not available and
significantly expands related disclosure requirements. This standard is effective on a prospective
basis for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010.
The Company does not expect adoption of this standard to have a
significant impact on the Companys financial statements.
7
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Dollars in thousands,
except per share amounts
NOTE 3 ACQUISITIONS
On July 29, 2009, the
Company completed the acquisition of 100% of Jinzhou Jin Tai Welding and Metal
Co., Ltd. (Jin Tai), based in Jinzhou, China. This transaction expanded the Companys
customer base and gave the Company control of significant cost-competitive
solid wire manufacturing capacity.
The Company previously held
a 21% direct interest in Jin Tai and a further 27% indirect interest via its
35% ownership in Taiwan-based Kuang Tai Metal Industrial Co., Ltd. (Kuang
Tai). Under the terms of the purchase
agreement, the Company exchanged its 35% interest in Kuang Tai, which had an
estimated fair value of $22,723, paid cash of $35,531 and committed to pay an
additional $4,181 in cash over a three-year period after close. The fair value of the Companys previous
noncontrolling direct interest in Jin Tai was $8,675.
Jin Tai was included in the
Companys consolidated financial statements as of the date of acquisition.
On October 29, 2010,
the Company acquired all of the stock outstanding of Mezhgosmetiz-Mtsensk OAO (MGM),
a privately-held welding wire manufacturer based in the Orel region of Russia,
for approximately $28,000 in cash and assumed debt. This acquisition will provide the Company its
first manufacturing operation in Russia as well as established distribution
channels to serve the growing Russian and Commonwealth of Independent States
welding markets. Annual sales at the date
of acquisition were approximately $30,000.
NOTE 4 SEGMENT INFORMATION
The
Companys 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.
During
the fourth quarter of 2009, the Company realigned its business units into five
operating segments to enhance the utilization of the Companys worldwide
resources and global 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 other three welding segments include
welding operations in Europe, Asia Pacific and South America, respectively. The fifth segment, The Harris Products Group,
includes the Companys global cutting, soldering and brazing businesses as well
as the retail business in the United States.
The segment information of prior periods has been recast to conform to
the current segment presentation.
Segment performance is
measured and resources are allocated based on a number of factors, the primary
profit measure being earnings (loss) 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.
8
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to unaffiliated customers
|
|
$
|
255,636
|
|
|
$
|
85,892
|
|
|
$
|
79,657
|
|
|
$
|
34,065
|
|
|
$
|
64,088
|
|
|
$
|
-
|
|
|
$
|
519,338
|
|
Inter-segment
sales
|
|
28,291
|
|
|
3,242
|
|
|
4,224
|
|
|
662
|
|
|
1,518
|
|
|
(37,937
|
)
|
|
-
|
|
Total
|
|
$
|
283,927
|
|
|
$
|
89,134
|
|
|
$
|
83,881
|
|
|
$
|
34,727
|
|
|
$
|
65,606
|
|
|
$
|
(37,937
|
)
|
|
$
|
519,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT,
as adjusted
|
|
$
|
43,187
|
|
|
$
|
5,664
|
|
|
$
|
(1,488
|
)
|
|
$
|
3,170
|
|
|
$
|
4,119
|
|
|
$
|
(3,680
|
)
|
|
$
|
50,972
|
|
Special
items
|
|
-
|
|
|
(370
|
)
|
|
101
|
|
|
(815
|
)
|
|
-
|
|
|
-
|
|
|
(1,084
|
)
|
EBIT
|
|
$
|
43,187
|
|
|
$
|
5,294
|
|
|
$
|
(1,387
|
)
|
|
$
|
2,355
|
|
|
$
|
4,119
|
|
|
$
|
(3,680
|
)
|
|
$
|
49,888
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,671
|
)
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to unaffiliated customers
|
|
$
|
213,132
|
|
|
$
|
84,365
|
|
|
$
|
62,204
|
|
|
$
|
26,430
|
|
|
$
|
55,671
|
|
|
$
|
-
|
|
|
$
|
441,802
|
|
Inter-segment
sales
|
|
21,393
|
|
|
2,668
|
|
|
1,171
|
|
|
-
|
|
|
1,416
|
|
|
(26,648
|
)
|
|
-
|
|
Total
|
|
$
|
234,525
|
|
|
$
|
87,033
|
|
|
$
|
63,375
|
|
|
$
|
26,430
|
|
|
$
|
57,087
|
|
|
$
|
(26,648
|
)
|
|
$
|
441,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT,
as adjusted
|
|
$
|
34,497
|
|
|
$
|
2,504
|
|
|
$
|
(2,883
|
)
|
|
$
|
4,518
|
|
|
$
|
1,704
|
|
|
$
|
424
|
|
|
$
|
40,764
|
|
Special
items
|
|
-
|
|
|
(6,338
|
)
|
|
(8,606
|
)
|
|
(164
|
)
|
|
21
|
|
|
-
|
|
|
(15,087
|
)
|
EBIT
|
|
$
|
34,497
|
|
|
$
|
(3,834
|
)
|
|
$
|
(11,489
|
)
|
|
$
|
4,354
|
|
|
$
|
1,725
|
|
|
$
|
424
|
|
|
$
|
25,677
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
716
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,032
|
)
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to unaffiliated customers
|
|
$
|
740,780
|
|
|
$
|
255,773
|
|
|
$
|
233,965
|
|
|
$
|
85,009
|
|
|
$
|
190,353
|
|
|
$
|
-
|
|
|
$
|
1,505,880
|
|
Inter-segment
sales
|
|
81,381
|
|
|
9,787
|
|
|
9,310
|
|
|
1,064
|
|
|
4,877
|
|
|
(106,419
|
)
|
|
-
|
|
Total
|
|
$
|
822,161
|
|
|
$
|
265,560
|
|
|
$
|
243,275
|
|
|
$
|
86,073
|
|
|
$
|
195,230
|
|
|
$
|
(106,419
|
)
|
|
$
|
1,505,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT,
as adjusted
|
|
$
|
114,484
|
|
|
$
|
14,721
|
|
|
$
|
1,051
|
|
|
$
|
5,506
|
|
|
$
|
9,378
|
|
|
$
|
(6,474
|
)
|
|
$
|
138,666
|
|
Special
items
|
|
-
|
|
|
(2,079
|
)
|
|
4,222
|
|
|
(3,123
|
)
|
|
416
|
|
|
-
|
|
|
(564
|
)
|
EBIT
|
|
$
|
114,484
|
|
|
$
|
12,642
|
|
|
$
|
5,273
|
|
|
$
|
2,383
|
|
|
$
|
9,794
|
|
|
$
|
(6,474
|
)
|
|
$
|
138,102
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,781
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,751
|
)
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
135,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
913,608
|
|
|
$
|
389,893
|
|
|
$
|
330,163
|
|
|
$
|
96,847
|
|
|
$
|
269,208
|
|
|
$
|
(201,027
|
)
|
|
$
|
1,798,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales to unaffiliated customers
|
|
$
|
639,973
|
|
|
$
|
260,575
|
|
|
$
|
133,144
|
|
|
$
|
69,197
|
|
|
$
|
163,947
|
|
|
$
|
-
|
|
|
$
|
1,266,836
|
|
Inter-segment
sales
|
|
63,736
|
|
|
7,001
|
|
|
2,000
|
|
|
-
|
|
|
6,193
|
|
|
(78,930
|
)
|
|
-
|
|
Total
|
|
$
|
703,709
|
|
|
$
|
267,576
|
|
|
$
|
135,144
|
|
|
$
|
69,197
|
|
|
$
|
170,140
|
|
|
$
|
(78,930
|
)
|
|
$
|
1,266,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT,
as adjusted
|
|
$
|
92,681
|
|
|
$
|
(4,847
|
)
|
|
$
|
(16,079
|
)
|
|
$
|
7,094
|
|
|
$
|
(37
|
)
|
|
$
|
(2,483
|
)
|
|
$
|
76,329
|
|
Special
items
|
|
(10,191
|
)
|
|
(3,325
|
)
|
|
(7,130
|
)
|
|
(528
|
)
|
|
(4,678
|
)
|
|
-
|
|
|
(25,852
|
)
|
EBIT
|
|
$
|
82,490
|
|
|
$
|
(8,172
|
)
|
|
$
|
(23,209
|
)
|
|
$
|
6,566
|
|
|
$
|
(4,715
|
)
|
|
$
|
(2,483
|
)
|
|
$
|
50,477
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,780
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,547
|
)
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
886,657
|
|
|
$
|
392,791
|
|
|
$
|
320,910
|
|
|
$
|
80,036
|
|
|
$
|
254,342
|
|
|
$
|
(182,758
|
)
|
|
$
|
1,751,978
|
|
In the third quarter of
2010, special items include a rationalization charge of $370 for the Europe
Welding segment primarily related to costs associated with the consolidation of
manufacturing operations. The Asia
Pacific Welding segment includes a gain of $101 primarily related to the sale
of assets at rationalized operations.
The South America Welding segment includes a
9
LINCOLN ELECTRIC
HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars
in thousands, except per share amounts
charge of $815 for the
impact to the Companys operations in Venezuela of the change in functional
currency to the dollar and devaluation of the Venezuelan currency.
In the third quarter of
2009, special items include rationalization charges of $6,338 and $164 for the
Europe Welding and South America Welding segments, respectively. The Asia Pacific Welding segment includes a
charge of $7,943 on the acquisition of Jin Tai included in Equity earnings
(loss) in affiliates and $663 in rationalization charges. The Harris Products Group segment includes a
rationalization gain of $21.
Rationalization charges in all segments were primarily related to
employee severance.
For the nine months ended September 30,
2010, special items include a rationalization charge of $2,079 for the Europe
Welding segment primarily related to costs associated with the consolidation of
manufacturing operations. The Asia
Pacific Welding segment includes a gain of $4,555 related to the sale of assets
at rationalized operations and charges of $333 for costs associated with the
consolidation of manufacturing operations.
The South America Welding segment includes a net charge of $3,123 for
the impact to the Companys operations in Venezuela of the change in functional
currency to the dollar and devaluation of the Venezuelan currency. The Harris Products Group segment includes a
gain of $416 on the sale of a property of a rationalized operation.
For the nine months ended September 30,
2009, special items include rationalization charges of $10,191, $528 and $4,678
for the North America Welding, South America Welding and The Harris Products
Group segments, respectively. The Europe
Welding segment includes a gain of $5,667 on the sale of a property included in
Equity earnings (loss) in affiliates and $8,992 in rationalization charges. The Asia Pacific Welding segment includes a
gain of $2,144 on the settlement of a pension obligation, a charge of $7,943 on
the acquisition of Jin Tai and related disposal of the Companys 35% interest
in Kuang Tai included in Equity earnings (loss) in affiliates and $1,331 in
rationalization charges. Rationalization
charges in all segments were primarily related to employee severance.
NOTE 5 RATIONALIZATION
The
Company recognized rationalization gains of $2,559 during the nine months ended
September 30, 2010 relating primarily to the sale of assets at rationalized
operations.
During
the third quarter of 2009, the Company initiated various rationalization
actions including the consolidation of certain manufacturing operations in the
Europe Welding and Asia Pacific Welding segments. These actions impacted 81 employees in the
Europe Welding segment, 193 employees in the Asia Pacific Welding segment and
nine employees in the South America Welding segment and resulted in the
recognition of rationalization charges of $8,333, primarily related to
severance costs, and related asset impairment charges of $1,768 in 2009.
The
Company recognized a net gain of $2,143 for the nine months ended September 30,
2010 related to these activities. This
amount includes a gain of $4,555 on the sale of property and other assets at
rationalized operations in the Asia Pacific Welding segment. The Company also recognized charges
associated with the continuation of the consolidation of certain manufacturing
operations of $1,652 and $333 in the Europe Welding and Asia Pacific Welding
segments, respectively, and asset impairment charges of $427 in the Europe
Welding segment. At September 30,
2010, a liability relating to these actions of $497 was recognized in Other
current liabilities. The Company
expects to recognize an additional $500 in costs associated with these actions
which are expected to be substantially completed and paid by the end of 2010.
During
the third quarter of 2009, the Company initiated various rationalization
activities including the closure of a manufacturing operation in The Harris
Products Group segment for which rationalization charges of $6,684 were
recognized for the year ended December 31, 2009. The Company recognized a gain of $416 on the
sale of a property of a rationalized operation in The Harris Products Group
segment in the nine months ended September 30, 2010. At September 30, 2010, a liability
related to these actions of $1,070 was recognized in Other current
liabilities. The liability primarily
relates to employee severance benefits expected to be substantially paid within
the next 12 months.
10
LINCOLN ELECTRIC
HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars
in thousands, except per share amounts
The
following table summarizes the activity related to the rationalization
liabilities by segment:
|
|
Europe
Welding
|
|
Asia Pacific
Welding
|
|
The Harris
Products
Group
|
|
Consolidated
|
Balance at December 31, 2009
|
|
$
|
3,081
|
|
|
$
|
831
|
|
|
$
|
2,445
|
|
|
$
|
6,357
|
|
Payments and other adjustments
|
|
(4,284
|
)
|
|
(1,116
|
)
|
|
(1,375
|
)
|
|
(6,775
|
)
|
Charged to expense
|
|
1,652
|
|
|
333
|
|
|
-
|
|
|
1,985
|
|
Balance at September 30, 2010
|
|
$
|
449
|
|
|
$
|
48
|
|
|
$
|
1,070
|
|
|
$
|
1,567
|
|
NOTE 6 STOCK-BASED
COMPENSATION
The Company issued 48,806
and 14,650 shares of common stock from treasury upon exercise of employee stock
options during the nine months ended September 30, 2010 and 2009,
respectively. The Company granted 800
and 2,520 stock options and 4,972 and 1,065 restricted shares during the nine
months ended September 30, 2010 and 2009, respectively. The restricted shares granted during the nine
months ended September 30, 2010 and 2009 were issued from treasury.
For
the three months ended September 30, 2010 and 2009, common shares subject
to equity-based awards of 695,401 and 657,810, 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, 2010 and 2009, common shares subject to
equity-based awards of 695,086 and 662,890, respectively, were excluded from
the computation of diluted earnings per share because the effect of their
exercise would be anti-dilutive.
NOTE 7
COMMON SHARE REPURCHASE PROGRAM
The
Company has a share repurchase program for up to 15 million shares of the
Companys common stock. At managements
discretion, the Company repurchases its common stock 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, 2010, the Company purchased a total of 187,575
and 430,131 shares at an average cost per share of $53.50 and $53.38,
respectively. As of September 30,
2010, there remained 3,354,479 shares available for repurchase under the stock
repurchase program. The treasury shares
have not been retired.
NOTE 8
COMPREHENSIVE INCOME
The
components of comprehensive income are as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Net income including noncontrolling interests
|
|
$
|
32,628
|
|
|
$
|
12,887
|
|
|
$
|
90,701
|
|
|
$
|
24,855
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivatives designated
and qualifying as cash flow hedges, net of tax
|
|
(1,015
|
)
|
|
413
|
|
|
(185
|
)
|
|
672
|
|
Defined benefit pension plan activity, net of tax
|
|
3,193
|
|
|
3,812
|
|
|
15,061
|
|
|
14,085
|
|
Currency translation adjustment
|
|
40,445
|
|
|
20,841
|
|
|
6,552
|
|
|
43,731
|
|
Total comprehensive income
|
|
75,251
|
|
|
37,953
|
|
|
112,129
|
|
|
83,343
|
|
Total comprehensive income (loss) attributable to
noncontrolling interests
|
|
612
|
|
|
(125
|
)
|
|
2,300
|
|
|
1,287
|
|
Total comprehensive income attributable to
shareholders
|
|
$
|
74,639
|
|
|
$
|
38,078
|
|
|
$
|
109,829
|
|
|
$
|
82,056
|
|
For
the three months ended September 30, 2010 and 2009, Unrealized (loss) gain
on derivatives is shown above net of tax of ($93) and $865, respectively. For the nine months ended September 30,
2010 and 2009, Unrealized (loss) gain on derivatives is shown net of tax of
$285 and $1,092, respectively.
11
LINCOLN ELECTRIC
HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars
in thousands, except per share amounts
For
the three months ended September 30, 2010 and 2009, Defined benefit
pension plan activity is shown above net of tax of $1,785 and $2,333,
respectively. For the nine months ended September 30,
2010 and 2009, Defined benefit pension plan activity is shown net of tax of
$9,230 and $7,253, respectively.
NOTE 9 - EQUITY
Changes
in equity for the nine months ended September 30, 2010 are as follows:
|
|
Shareholders
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at December 31, 2009
|
|
$
|
1,072,346
|
|
|
$
|
13,329
|
|
|
$
|
1,085,675
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
88,741
|
|
|
1,960
|
|
|
90,701
|
|
Other comprehensive income
|
|
21,088
|
|
|
340
|
|
|
21,428
|
|
Total comprehensive income
|
|
109,829
|
|
|
2,300
|
|
|
112,129
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared - $0.84 per share
|
|
(35,639
|
)
|
|
-
|
|
|
(35,639
|
)
|
Issuance of shares under benefit plans
|
|
7,426
|
|
|
-
|
|
|
7,426
|
|
Purchase of shares for treasury
|
|
(22,960
|
)
|
|
-
|
|
|
(22,960
|
)
|
Balance at September 30, 2010
|
|
$
|
1,131,002
|
|
|
$
|
15,629
|
|
|
$
|
1,146,631
|
|
Changes
in equity for the nine months ended September 30, 2009 are as follows:
|
|
Shareholders
Equity
|
|
Noncontrolling
Interests
|
|
Total Equity
|
Balance at December 31, 2008
|
|
$
|
995,216
|
|
|
$
|
14,757
|
|
|
$
|
1,009,973
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
24,231
|
|
|
624
|
|
|
24,855
|
|
Other comprehensive income
|
|
57,825
|
|
|
663
|
|
|
58,488
|
|
Total comprehensive income
|
|
82,056
|
|
|
1,287
|
|
|
83,343
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared - $0.81 per share
|
|
(34,443
|
)
|
|
-
|
|
|
(34,443
|
)
|
Issuance of shares under benefit plans
|
|
3,998
|
|
|
-
|
|
|
3,998
|
|
Purchase of shares for treasury
|
|
(343
|
)
|
|
-
|
|
|
(343
|
)
|
Acquisition of noncontrolling interests
|
|
55
|
|
|
(2,796
|
)
|
|
(2,741
|
)
|
Balance at September 30, 2009
|
|
$
|
1,046,539
|
|
|
$
|
13,248
|
|
|
$
|
1,059,787
|
|
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 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, by necessity, are based on estimates of expected year-end
inventory levels and costs and are subject to final year-end LIFO inventory
calculations. The excess of current cost
over LIFO cost was $69,193 and $62,447 at September 30, 2010 and December 31,
2009, respectively.
NOTE 11 ACCRUED EMPLOYEE
COMPENSATION AND BENEFITS
Other current liabilities
at September 30, 2010 and 2009 include accruals for year-end bonuses and
related payroll taxes of $56,872 and $33,499, respectively, related to the
Companys employees worldwide. The
payment of bonuses is discretionary and is subject to approval by the Board of
Directors. A majority of annual bonuses
are paid in December resulting in an
12
LINCOLN ELECTRIC
HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars
in thousands, except per share amounts
increasing bonus accrual
during the Companys fiscal year. The
increase in the accrual from September 30, 2009 to September 30, 2010
is due to the increase in profitability of the Company.
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 and manganese induced
illnesses. The claimants in the asbestos
and manganese 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 Companys accrual for
contingent liabilities, primarily for product liability claims, was $5,453 as
of September 30, 2010 and $15,333 as of December 31, 2009. 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 $2,194 as of September 30, 2010 and $11,235
as of December 31, 2009. The asset
is included in Other current assets.
The decrease in the accrual for contingent liabilities and related
recoveries from insurance carriers is primarily due to the change in the
Companys assessment of the probability of loss for two product liability
claims during the third quarter of 2010.
Damages previously awarded against the Company were vacated on appeal
for one of the claims while a plaintiff verdict was reversed on appeal for the
other claim. The reversal of accruals for
the aforementioned claims resulted in the recognition of a net credit of $2,144
in Cost of goods sold.
Based on the Companys
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 Companys 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 (exclusive of defense costs), will not have a material effect on
the Companys 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 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,
2010 and 2009 are as follows:
|
|
Nine Months Ended September 30,
|
|
|
2010
|
|
2009
|
Balance at beginning of period
|
|
$
|
16,768
|
|
|
$
|
13,736
|
|
Charged to expense
|
|
7,809
|
|
|
8,835
|
|
Deductions
|
|
(8,375
|
)
|
|
(7,647
|
)
|
Foreign currency translation
|
|
(205
|
)
|
|
405
|
|
Balance at end of period
|
|
$
|
15,997
|
|
|
$
|
15,329
|
|
Warranty expense was 0.5%
and 0.7% of sales for the nine months ended September 30, 2010 and 2009,
respectively.
NOTE 14
DEBT
As of September 30,
2010, the Company was in compliance with its debt covenants.
The Companys $80,000 Series C Note (the Note) is due in March 2012.
The
Company historically utilized interest rate swaps to manage interest rate
risks. The Company terminated its
remaining interest rate swaps in 2009 and had no interest rate swaps
outstanding as of September 30, 2010.
The termination of interest rate swaps in 2009 resulted in a realized gain
of $5,079. This gain was deferred and is
being amortized over the remaining life of the Note. The amortization of this gain reduced Interest
expense by $1,243 and $1,010 in the nine months ended September 30, 2010
and 2009, respectively, and is expected to reduce annual interest expense by
$1,661 during 2010. At
13
LINCOLN ELECTRIC
HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars
in thousands, except per share amounts
September 30,
2010, $2,407 remained to be amortized and is recognized in Long-term debt,
less current portion. The weighted
average effective interest rate on the Note, net of the impact of swaps, was
4.0% for the nine months ended September 30, 2010.
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,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Service cost
|
|
$
|
3,847
|
|
|
$
|
3,245
|
|
|
$
|
11,530
|
|
|
$
|
9,564
|
|
Interest cost
|
|
10,810
|
|
|
10,753
|
|
|
32,331
|
|
|
32,235
|
|
Expected return on plan assets
|
|
(12,620
|
)
|
|
(10,972
|
)
|
|
(37,758
|
)
|
|
(32,802
|
)
|
Amortization of prior service cost
|
|
(12
|
)
|
|
(5
|
)
|
|
(34
|
)
|
|
(18
|
)
|
Amortization of net loss
|
|
5,201
|
|
|
6,269
|
|
|
15,597
|
|
|
18,815
|
|
Settlement gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,329
|
)
|
Defined benefit plans
|
|
7,226
|
|
|
9,290
|
|
|
21,666
|
|
|
25,465
|
|
Multi-employer plans
|
|
235
|
|
|
397
|
|
|
764
|
|
|
1,011
|
|
Defined contribution plans
|
|
1,865
|
|
|
1,525
|
|
|
5,554
|
|
|
3,923
|
|
Total pension cost
|
|
$
|
9,326
|
|
|
$
|
11,212
|
|
|
$
|
27,984
|
|
|
$
|
30,399
|
|
The
Company voluntarily contributed $31,500 to its defined benefit plans in the
United States during the nine months ended September 30, 2010 and expects
to contribute a total of $41,500 to its defined benefit plans in the United
States during 2010. The Company
reinstated a Company match effective January 1, 2010 on eligible employee
contributions to a defined contribution plan covering certain U.S.-based
employees.
The
expected return on plan assets increased in 2010 due to a higher balance in
plan assets at December 31, 2009 than at December 31, 2008. The amortization of net loss decreased due to
a lower unrecognized loss at December 31, 2009 than at December 31,
2008.
NOTE 16 INCOME TAXES
The Company recognized
$44,431 of tax expense on pre-tax income of $135,132, resulting in an effective
income tax rate of 32.9% for the nine months ended September 30,
2010. The effective income tax rate is
lower than the Companys statutory rate primarily because of income earned in
lower tax rate jurisdictions and the utilization of foreign tax loss
carryforwards for which valuation allowances had been previously recognized.
The effective income tax
rate of 46.8% for the nine months ended September 30, 2009 was primarily
due to losses at certain non-U.S. entities for which no tax benefit was
provided. The rate also included a
benefit for the utilization of foreign tax credits.
The anticipated effective
income tax rate for 2010 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,
2010, the Company had $42,212 of unrecognized tax benefits. If recognized, approximately $26,699 would be
recognized as a component of income tax expense.
The Company files income tax
returns in the United States 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 2005. The Company anticipates no significant
changes to its total unrecognized tax benefits through the end of the third
quarter of 2011. The Company is
currently subject to an Internal Revenue Service audit for the 2005 through
2008 tax years and an Indonesian tax audit for 2003 through 2007. The Company does not expect the results of
these examinations to have a material effect on the Companys consolidated
financial statements.
14
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars
in thousands, except per share amounts
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 Companys 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
Companys Consolidated Statements of Cash Flows. Hedge ineffectiveness was immaterial in the
nine months ended September 30, 2010 and 2009.
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, 2010.
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 $30,902 and $3,570 at September 30, 2010 and December 31,
2009, respectively. The effective portions of the fair value gains or
losses on these cash flow hedges are recognized in Accumulated other
comprehensive income (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.
Fair
Value Hedges
The
Company had no fair value hedges outstanding at September 30, 2010 or December 31,
2009.
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 $237,905 and $102,410 at September 30,
2010 and December 31, 2009, respectively. The fair value gains or
losses from these contracts were recognized in Selling, general and
administrative expenses, offsetting the losses or gains on the exposures being
hedged.
The
Company had short-term silver forward contracts with a notional amount of
390,000 troy ounces at September 30, 2010.
Realized and unrealized gains and losses on these contracts were
recognized in earnings.
15
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands,
except per share amounts
Fair
values of derivative instruments in the Companys Consolidated Balance Sheets
follow:
|
|
September 30, 2010
|
|
December 31, 2009
|
Derivatives by hedge designation
|
|
Other
Current
Assets
|
|
Other
Current
Liabilities
|
|
Other
Current
Assets
|
|
Other
Current
Liabilities
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
324
|
|
|
$
|
1,171
|
|
|
$
|
63
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
1,138
|
|
|
2,480
|
|
|
133
|
|
|
1,017
|
|
Commodity contracts
|
|
-
|
|
|
818
|
|
|
611
|
|
|
186
|
|
Total derivatives
|
|
$
|
1,462
|
|
|
$
|
4,469
|
|
|
$
|
807
|
|
|
$
|
1,215
|
|
The
effects of designated fair value hedges and undesignated derivative instruments
on the Companys Consolidated Statements of Income consisted of the following:
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Derivatives by hedge designation
|
|
Classification of gains (losses)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedges:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Selling, general & administrative
expenses
|
|
(5,366
|
)
|
(2,210
|
)
|
(1,518
|
)
|
(5,980
|
)
|
Commodity contracts
|
|
Cost of goods sold
|
|
(1,156
|
)
|
607
|
|
(1,592
|
)
|
3,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of designated
cash flow hedges on AOCI and the Companys Consolidated Statements of Income
consisted of the following:
Total gain (loss) recognized
in AOCI, net of tax
|
|
September 30, 2010
|
|
December 31, 2009
|
|
Foreign exchange contracts
|
|
$
|
(829
|
)
|
|
$
|
(5
|
)
|
Commodity contracts
|
|
-
|
|
|
(639
|
)
|
|
|
|
|
|
|
|
|
|
The Company expects a loss
of $829 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.
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Derivative type
|
|
Gain (loss) reclassified from AOCI to:
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Foreign exchange contracts
|
|
Sales
|
|
$
|
44
|
|
$
|
2
|
|
$
|
60
|
|
$
|
(151
|
)
|
|
|
Cost
of goods sold
|
|
(23
|
)
|
(922
|
)
|
(111
|
)
|
2,222
|
|
Commodity contracts
|
|
Cost
of goods sold
|
|
(96
|
)
|
(680
|
)
|
(1,029
|
)
|
(5,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
LINCOLN ELECTRIC
HOLDINGS, INC.
NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands,
except per share amounts
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 measured at fair value on a
recurring basis:
Description
|
|
Balance as of
September 30, 2010
|
|
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
|
|
$
|
1,462
|
|
$
|
-
|
|
$
|
1,462
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
3,651
|
|
$
|
-
|
|
$
|
3,651
|
|
$
|
-
|
|
Commodity contracts
|
|
818
|
|
-
|
|
818
|
|
-
|
|
Total liabilities
|
|
$
|
4,469
|
|
$
|
-
|
|
$
|
4,469
|
|
$
|
-
|
|
The Companys derivative
contracts are valued at fair value using the market approach. The Company measures the fair value of
foreign exchange 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 quarter ended September 30,
2010, there were no transfers between Levels 1, 2 or 3.
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, 2010 and December 31, 2009. The fair value of long-term debt at September 30,
2010 and December 31, 2009, including the current portion, was
approximately $89,963 and $91,365, respectively, which was determined using
available market information and methodologies requiring judgment. The carrying value of this debt at such dates
was $86,620 and $89,140, 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.
17
ITEM 2.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts
)
This
Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read together with the Companys unaudited consolidated
financial statements and other financial information included elsewhere in this
Quarterly Report on Form 10-Q.
General
The
Company is the worlds 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 Companys welding product offering also
includes regulators and torches used in oxy-fuel welding and cutting. In addition, the Company has a leading global
position in the brazing and soldering alloys market.
The
Companys 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 Companys various
manufacturing sites to distributors and product users.
Results
of Operations
Three
Months Ended September 30, 2010 Compared with Three Months Ended September 30,
2009
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of Sales
|
|
Amount
|
|
% of Sales
|
|
Amount
|
|
%
|
|
Net sales
|
|
$
|
519,338
|
|
100.0%
|
|
$
|
441,802
|
|
100.0%
|
|
$
|
77,536
|
|
17.5%
|
|
Cost of goods sold
|
|
375,267
|
|
72.3%
|
|
316,671
|
|
71.7%
|
|
58,596
|
|
18.5%
|
|
Gross profit
|
|
144,071
|
|
27.7%
|
|
125,131
|
|
28.3%
|
|
18,940
|
|
15.1%
|
|
Selling, general & administrative
expenses
|
|
95,612
|
|
18.4%
|
|
84,648
|
|
19.2%
|
|
10,964
|
|
13.0%
|
|
Rationalization charges
|
|
269
|
|
0.1%
|
|
7,144
|
|
1.6%
|
|
(6,875
|
)
|
(96.2%
|
)
|
Operating income
|
|
48,190
|
|
9.3%
|
|
33,339
|
|
7.5%
|
|
14,851
|
|
44.5%
|
|
Interest income
|
|
602
|
|
0.1%
|
|
716
|
|
0.2%
|
|
(114
|
)
|
(15.9%
|
)
|
Equity earnings (loss) in affiliates
|
|
1,070
|
|
0.2%
|
|
(8,692
|
)
|
(2.0%
|
)
|
9,762
|
|
(112.3%
|
)
|
Other income
|
|
628
|
|
0.1%
|
|
1,030
|
|
0.2%
|
|
(402
|
)
|
(39.0%
|
)
|
Interest expense
|
|
(1,671
|
)
|
(0.3%
|
)
|
(2,032
|
)
|
(0.5%
|
)
|
361
|
|
17.8%
|
|
Income before income taxes
|
|
48,819
|
|
9.4%
|
|
24,361
|
|
5.5%
|
|
24,458
|
|
100.4%
|
|
Income taxes
|
|
16,191
|
|
3.1%
|
|
11,474
|
|
2.6%
|
|
4,717
|
|
41.1%
|
|
Net income including noncontrolling interests
|
|
32,628
|
|
6.3%
|
|
12,887
|
|
2.9%
|
|
19,741
|
|
153.2%
|
|
Noncontrolling interests in subsidiaries earnings
|
|
155
|
|
-
|
|
130
|
|
-
|
|
25
|
|
19.2%
|
|
Net income
|
|
$
|
32,473
|
|
6.3%
|
|
$
|
12,757
|
|
2.9%
|
|
$
|
19,716
|
|
154.6%
|
|
18
Net Sales:
The table below summarizes
the impacts of volume, acquisitions, price and foreign currency exchange rates
on Net sales for the three months ended September 30, 2010:
|
|
|
|
Change in Net Sales due to:
|
|
|
|
|
Net Sales
2009
|
|
Volume
|
|
Acquisitions
|
|
Price
|
|
Foreign
Exchange
|
|
Net Sales
2010
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America Welding
|
|
$
|
213,132
|
|
|
$
|
37,360
|
|
|
$
|
-
|
|
|
$
|
3,351
|
|
|
$
|
1,793
|
|
|
$
|
255,636
|
|
Europe
Welding
|
|
84,365
|
|
|
9,515
|
|
|
-
|
|
|
28
|
|
|
(8,016
|
)
|
|
85,892
|
|
Asia
Pacific Welding
|
|
62,204
|
|
|
5,022
|
|
|
12,338
|
|
|
(1,598
|
)
|
|
1,691
|
|
|
79,657
|
|
South
America Welding
|
|
26,430
|
|
|
11,996
|
|
|
-
|
|
|
5,539
|
|
|
(9,900
|
)
|
|
34,065
|
|
The
Harris Products Group
|
|
55,671
|
|
|
3,180
|
|
|
-
|
|
|
5,384
|
|
|
(147
|
)
|
|
64,088
|
|
Consolidated
|
|
$
|
441,802
|
|
|
$
|
67,073
|
|
|
$
|
12,338
|
|
|
$
|
12,704
|
|
|
$
|
(14,579
|
)
|
|
$
|
519,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America Welding
|
|
|
|
|
17.5%
|
|
|
-
|
|
|
1.6%
|
|
|
0.8%
|
|
|
19.9%
|
|
Europe
Welding
|
|
|
|
|
11.3%
|
|
|
-
|
|
|
-
|
|
|
(9.5%
|
)
|
|
1.8%
|
|
Asia
Pacific Welding
|
|
|
|
|
8.1%
|
|
|
19.8%
|
|
|
(2.6%
|
)
|
|
2.7%
|
|
|
28.1%
|
|
South
America Welding
|
|
|
|
|
45.4%
|
|
|
-
|
|
|
21.0%
|
|
|
(37.5%
|
)
|
|
28.9%
|
|
The
Harris Products Group
|
|
|
|
|
5.7%
|
|
|
-
|
|
|
9.7%
|
|
|
(0.3%
|
)
|
|
15.1%
|
|
Consolidated
|
|
|
|
|
15.2%
|
|
|
2.8%
|
|
|
2.9%
|
|
|
(3.3%
|
)
|
|
17.5%
|
|
Net
sales volumes for the third quarter of 2010 increased for all operating
segments as a result of higher demand levels associated with the improved
global economy. Increased sales volumes
in the South America Welding segment also reflect market share expansion. Product pricing increased in the North
America Welding segment from prior year levels due to the realization of price
increases implemented in the U.S. market in the second quarter of 2010 in
response to increases in raw materials costs.
Product pricing increased in the South America Welding segment primarily
due to high inflation in Venezuela.
Product pricing increased in The Harris Products Group segment due to
the pass-through effect of higher commodity costs, particularly silver and
copper, over the prior year period.
Product pricing decreased from prior year levels due to changes in
pricing required to remain competitive in the Asia Pacific Welding
segment. The increase in Net sales from
acquisitions is due to the acquisition of Jinzhou Jin Tai Welding and Metal Co., Ltd.
(Jin Tai) in July 2009 (see the Acquisitions section below for
additional information regarding the acquisition of Jin Tai).
With respect to changes in
Net sales due to foreign exchange, the North America Welding segment increased
primarily due to a stronger Canadian dollar during the period. The Europe Welding segment decreased
primarily due to a weaker euro and pound sterling during the period. The Asia Pacific Welding segment increased
primarily due to a stronger Australian dollar and Chinese renminbi during the
period. The South America Welding segment
decreased primarily due to the devaluation of the Venezuelan bolivar fuerte (bolivar)
offset by a stronger Brazilian real during the period. The Harris Products Group segment decreased
primarily due to a weaker euro and weaker Polish zloty offset by a stronger
Brazilian real during the period.
Gross
Profit:
Gross profit increased 15.1% to
$144,071 for the third quarter of 2010 compared with $125,131 in the third
quarter of 2009. As a percentage of Net
sales, Gross profit decreased to 27.7% in the third quarter of 2010 from 28.3%
in the third quarter of 2009. The
decrease was primarily a result of an increase in the LIFO reserve of $1,419
compared with a decrease of $7,650 in the prior year and lower selling prices
and higher input costs in China partially offset by higher sales volumes, cost
reduction initiatives and lower product liability costs of $2,823. The reduction in product liability costs
includes a net credit of $2,144 due to the reversal of accruals for two claims
against the Company. See Note 12 Contingencies
for additional information regarding the Companys accruals for contingent
liabilities. In addition, the South
America Welding segment experienced higher inventory costs of $815 resulting
from the change in Venezuelas functional currency to the dollar and the
devaluation of the bolivar. Foreign
currency exchange rates had a $743 unfavorable translation impact in the third
quarter of 2010.
Selling,
General & Administrative (SG&A) Expenses:
SG&A expenses were
higher than prior year by $10,964, or 13.0%, in the third quarter of 2010 compared
with the third quarter of 2009. As a
percentage of Net sales, SG&A expenses were 18.4% in 2010 and 19.2% in
2009. The increase in expenses was
primarily due to higher bonus expense of $4,001, increased selling,
administrative and research and development expense of $3,888 and higher
foreign currency transaction losses of $3,265, partially offset by a decrease
in U.S. retirement costs of $607 and a favorable impact of foreign currency
translation of $638.
19
Rationalization
Charges:
In the third quarter of
2010, the Company recognized $269 ($265 after-tax) in charges primarily related
to rationalization actions initiated in 2009.
A charge of $487 ($461 after-tax) was recognized on the continuation of activities
to consolidate certain manufacturing operations in the Europe Welding and Asia
Pacific Welding segments offset by a gain on the disposal of assets of $218
($196 after-tax) recognized in the Asia Pacific Welding segment.
Interest Income:
Interest income decreased to
$602 in the third quarter of 2010 from $716 in the third quarter of 2009. The decrease was due to lower interest rates
on Cash and cash equivalents in 2010 when compared with 2009.
Equity
Earnings (Loss) in Affiliates:
Equity earnings in affiliates was $1,070 in
the third quarter of 2010 compared with a loss of $8,692 in the third quarter
of 2009. Equity loss in the third
quarter of 2009 included a loss of $7,943 associated with the acquisition of
Jin Tai and related disposal of the Companys 35% interest in Taiwan-based
Kuang Tai Metal Industrial Co., Ltd. (Kuang Tai).
Interest
Expense:
Interest expense decreased
to $1,671 in the third quarter of 2010 from $2,032 in the third quarter of 2009
primarily as a result of the translation impact of the Venezuelan currency
which resulted in lower interest expense from the Companys Venezuelan
operation.
Income
Taxes:
The Company recognized $16,191
of tax expense on pre-tax income of $48,819, resulting in an effective income
tax rate of 33.2% for the three months ended September 30, 2010. The effective income tax rate is lower than
the Companys statutory rate primarily because of income earned in lower tax
rate jurisdictions and the utilization of foreign tax loss carryforwards for which
valuation allowances had been previously recognized offset by losses with no
tax benefit at certain non-U.S. entities.
The effective income tax
rate of 47.1% for the three months ended September 30, 2009 was primarily
due to losses at certain non-U.S. entities for which no tax benefit was
provided and a benefit for the utilization of foreign tax credits.
Net
Income:
Net income for the third
quarter of 2010 was $32,473 compared with Net income of $12,757 in the third
quarter of 2009. Diluted earnings per
share for the third quarter of 2010 was $0.76 compared with $0.30 in the third
quarter of 2009. Foreign currency
exchange rate movements had a favorable translation effect of $1,269 on Net
income for the third quarter of 2010.
Nine
Months Ended September 30, 2010 Compared with Nine Months Ended September 30,
2009
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
Amount
|
|
% of Sales
|
|
Amount
|
|
% of Sales
|
|
Amount
|
|
%
|
|
Net sales
|
|
$
|
1,505,880
|
|
100.0%
|
|
$
|
1,266,836
|
|
100.0%
|
|
$
|
239,044
|
|
18.9%
|
|
Cost of goods sold
|
|
1,089,893
|
|
72.4%
|
|
945,066
|
|
74.6%
|
|
144,827
|
|
15.3%
|
|
Gross profit
|
|
415,987
|
|
27.6%
|
|
321,770
|
|
25.4%
|
|
94,217
|
|
29.3%
|
|
Selling, general & administrative
expenses
|
|
284,452
|
|
18.9%
|
|
241,791
|
|
19.1%
|
|
42,661
|
|
17.6%
|
|
Rationalization (gains) charges
|
|
(2,559
|
)
|
(0.2%
|
)
|
25,720
|
|
2.0%
|
|
(28,279
|
)
|
(109.9%
|
)
|
Operating income
|
|
134,094
|
|
8.9%
|
|
54,259
|
|
4.3%
|
|
79,835
|
|
147.1%
|
|
Interest income
|
|
1,781
|
|
0.1%
|
|
2,780
|
|
0.2%
|
|
(999
|
)
|
(35.9%
|
)
|
Equity earnings (loss) in affiliates
|
|
2,684
|
|
0.2%
|
|
(6,123
|
)
|
(0.5%
|
)
|
8,807
|
|
(143.8%
|
)
|
Other income
|
|
1,324
|
|
0.1%
|
|
2,341
|
|
0.2%
|
|
(1,017
|
)
|
(43.4%
|
)
|
Interest expense
|
|
(4,751
|
)
|
(0.3%
|
)
|
(6,547
|
)
|
(0.5%
|
)
|
1,796
|
|
27.4%
|
|
Income before income taxes
|
|
135,132
|
|
9.0%
|
|
46,710
|
|
3.7%
|
|
88,422
|
|
189.3%
|
|
Income taxes
|
|
44,431
|
|
3.0%
|
|
21,855
|
|
1.7%
|
|
22,576
|
|
103.3%
|
|
Net income including noncontrolling interests
|
|
90,701
|
|
6.0%
|
|
24,855
|
|
2.0%
|
|
65,846
|
|
264.9%
|
|
Noncontrolling interests in subsidiaries earnings
|
|
1,960
|
|
0.1%
|
|
624
|
|
-
|
|
1,336
|
|
214.1%
|
|
Net income
|
|
$
|
88,741
|
|
5.9%
|
|
$
|
24,231
|
|
1.9%
|
|
$
|
64,510
|
|
266.2%
|
|
20
Net Sales:
The table below summarizes
the impacts of volume, acquisitions, price and foreign currency exchange rates
on Net sales for the nine months ended September 30, 2010:
|
|
|
|
Change in Net Sales due to:
|
|
|
|
|
Net Sales
2009
|
|
Volume
|
|
Acquisitions
|
|
Price
|
|
Foreign
Exchange
|
|
Net Sales
2010
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America Welding
|
|
$
|
639,973
|
|
|
$
|
100,131
|
|
|
$
|
-
|
|
|
$
|
(9,460
|
)
|
|
$
|
10,136
|
|
|
$
|
740,780
|
|
Europe
Welding
|
|
260,575
|
|
|
11,610
|
|
|
-
|
|
|
(10,697
|
)
|
|
(5,715
|
)
|
|
255,773
|
|
Asia
Pacific Welding
|
|
133,144
|
|
|
11,236
|
|
|
86,235
|
|
|
(5,973
|
)
|
|
9,323
|
|
|
233,965
|
|
South
America Welding
|
|
69,197
|
|
|
24,552
|
|
|
-
|
|
|
11,719
|
|
|
(20,459
|
)
|
|
85,009
|
|
The
Harris Products Group
|
|
163,947
|
|
|
10,978
|
|
|
-
|
|
|
12,445
|
|
|
2,983
|
|
|
190,353
|
|
Consolidated
|
|
$
|
1,266,836
|
|
|
$
|
158,507
|
|
|
$
|
86,235
|
|
|
$
|
(1,966
|
)
|
|
$
|
(3,732
|
)
|
|
$
|
1,505,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America Welding
|
|
|
|
|
15.6%
|
|
|
-
|
|
|
(1.5%
|
)
|
|
1.6%
|
|
|
15.8%
|
|
Europe
Welding
|
|
|
|
|
4.5%
|
|
|
-
|
|
|
(4.1%
|
)
|
|
(2.2%
|
)
|
|
(1.8%
|
)
|
Asia
Pacific Welding
|
|
|
|
|
8.4%
|
|
|
64.8%
|
|
|
(4.5%
|
)
|
|
7.0%
|
|
|
75.7%
|
|
South
America Welding
|
|
|
|
|
35.5%
|
|
|
-
|
|
|
16.9%
|
|
|
(29.6%
|
)
|
|
22.9%
|
|
The
Harris Products Group
|
|
|
|
|
6.7%
|
|
|
-
|
|
|
7.6%
|
|
|
1.8%
|
|
|
16.1%
|
|
Consolidated
|
|
|
|
|
12.5%
|
|
|
6.8%
|
|
|
(0.2%
|
)
|
|
(0.3%
|
)
|
|
18.9%
|
|
Net
sales volumes for the nine months ended September 30, 2010 increased for all
operating segments as a result of higher demand levels associated with the
improved global economy. Increased sales
volumes in the South America Welding segment also reflect market share expansion. Product pricing increased in the South
America Welding segment primarily due to high inflation in Venezuela. Product pricing increased in The Harris
Products Group segment due to the pass-through effect of higher commodity
costs, particularly silver and copper, over the prior year period. Product pricing decreased from prior year
levels due to changes in pricing required to remain competitive as a result of
lower materials costs in the North America Welding, Europe Welding and Asia
Pacific Welding segments. The increase
in Net sales from acquisitions is due to the acquisition of Jin Tai in July
2009 (see the Acquisitions section below for additional information regarding
the acquisition of Jin Tai).
With respect to changes in
Net sales due to foreign exchange, the North America Welding segment increased
primarily due to a stronger Canadian dollar and Mexican peso during the
period. The Europe Welding segment
decreased primarily due to a weaker euro offset by a stronger Polish zloty
during the period. The Asia Pacific
Welding segment increased primarily due to a stronger Australian dollar and
Indonesian rupiah during the period. The
South America Welding segment decreased primarily due to the devaluation of the
Venezuelan bolivar offset by a stronger Brazilian real and Colombian peso
during the period. The Harris Products
Group segment increased primarily due to a stronger Brazilian real during the
period.
Gross
Profit:
Gross profit increased 29.3% to
$415,987 for the nine months ended September 30, 2010 compared with $321,770 in
the comparable prior year period. As a
percentage of Net sales, Gross profit increased to 27.6% in the nine months
ended September 30, 2010 from 25.4% in the comparable prior year period. The increase was primarily a result of higher
sales and production volumes, cost reduction initiatives and lower product
liability costs of $2,120 partially offset by an increase to the LIFO reserve
of $6,746 compared with a decrease of $13,595 in the comparable period. The reduction in product liability costs
includes a net credit of $2,144 due to the reversal of accruals for two claims
against the Company. See Note 12
Contingencies for additional information regarding the Companys accruals for
contingent liabilities. In addition, the
South American Welding segment experienced higher inventory costs of $5,755
resulting from the change in Venezuelas functional currency to the dollar and
the devaluation of the bolivar. The
Europe Welding segments margin in the prior year was negatively impacted by
higher cost inventories. Foreign
currency exchange rates had a $4,385 favorable translation impact in the nine
months ended September 30, 2010.
Selling,
General & Administrative (SG&A) Expenses:
SG&A expenses increased
by $42,661, or 17.6%, in the nine months ended September 30, 2010 compared with
the nine months ended September 30, 2009.
As a percentage of Net sales, SG&A expenses were 18.9% in 2010 and
19.1% in 2009. The increase in expenses
was primarily due to higher bonus expense of $22,921, higher legal expenses of
$8,356, incremental SG&A from acquisitions of $4,088, higher selling,
administrative and research and development expenses of $3,824 and the
unfavorable translation impact of foreign currency exchange rates of $3,740
partially offset by a gain of $2,632 due to the change in functional currency
for the Companys operation in Venezuela and the devaluation of the
bolivar. Also, the prior year period
included a gain of $2,144 on the settlement of a pension obligation.
21
Rationalization
(Gains) Charges:
In the nine months ended
September 30, 2010, the Company recognized $2,559 ($2,896 after-tax) in gains
primarily related to the sale of assets at rationalized operations. Gains on the sale of assets of $4,555 ($4,596
after-tax) and $416 ($416 after-tax) were recognized in the Asia Pacific
Welding and The Harris Products Group segments, respectively. Also, charges of $2,412 ($2,116 after-tax)
were recognized on the continuation of activities initiated in 2009 to
consolidate certain manufacturing operations in the Europe Welding and Asia
Pacific Welding segments.
Interest Income:
Interest income decreased to
$1,781 in the nine months ended September 30, 2010 from $2,780 in the
comparable period of 2009. The decrease
was due to lower interest rates on Cash and cash equivalents in 2010 when
compared with 2009.
Equity
Earnings (Loss) in Affiliates:
Equity earnings
in affiliates were $2,684 in the nine months ended September 30, 2010 compared
with loss of $6,123 in the comparable period of 2009. Equity loss in the prior year period included
a gain of $5,667 on the sale of a property at the Companys joint venture in
Turkey and a loss of $7,943 associated with the acquisition of Jin Tai and
related disposal of the Companys 35% interest in Kuang Tai.
Interest
Expense:
Interest
expense decreased to $4,751 in the nine months ended September 30, 2010 from
$6,547 in the comparable period of 2009 primarily as a result of the
translation impact of the devaluation of the Venezuelan currency that resulted
in lower interest expense from the Companys Venezuelan operation and a
decrease in average debt levels.
Income
Taxes:
The Company recognized $44,431
of tax expense on pre-tax income of $135,132, resulting in an effective income
tax rate of 32.9% for the nine months ended September 30, 2010. Tax expense includes a net impact of $437
related to the change in the functional currency for the Companys operation in
Venezuela and the devaluation of the bolivar.
The effective income tax rate is lower than the Companys statutory rate
primarily because of income earned in lower tax rate jurisdictions and the
utilization of foreign tax loss carryforwards for which valuation allowances
had been previously recognized.
The effective income tax
rate of 46.8% for the nine months ended September 30, 2009 was primarily due to
losses at certain non-U.S. entities for which no tax benefit was provided. The rate also included a benefit for the
utilization of foreign tax credits.
Net
Income:
Net income for the nine
months ended September 30, 2010 was $88,741 compared with $24,231 in the nine
months ended September 30, 2009. Diluted
earnings per share for the nine months ended September 30, 2010 was $2.08
compared with diluted earnings per share of $0.57 in the nine months ended
September 30, 2009. Foreign currency
exchange rate movements had a favorable translation effect of $471 on Net
income for the nine months ended September 30, 2010.
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 Companys underlying operating performance. These non-GAAP financial measures exclude the
impact of special items on the Companys reported financial results. Non-GAAP financial measures should be read in
conjunction with the GAAP financial measures, as non-GAAP measures are merely 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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Operating
income as reported
|
|
$
|
48,190
|
|
|
$
|
33,339
|
|
|
$
|
134,094
|
|
|
$
|
54,259
|
|
Special
items (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rationalization
charges (gains)
|
|
269
|
|
|
7,144
|
|
|
(2,559
|
)
|
|
25,720
|
|
Venezuela
- functional currency change and devaluation
|
|
815
|
|
|
-
|
|
|
3,123
|
|
|
-
|
|
Pension
settlement gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,144
|
)
|
Adjusted
operating income
|
|
$
|
49,274
|
|
|
$
|
40,483
|
|
|
$
|
134,658
|
|
|
$
|
77,835
|
|
22
Special items included in
Operating income during the third quarter of 2010 include rationalization
charges of $269 primarily related to costs associated with the consolidation of
manufacturing operations initiated in 2009 offset by gains on the disposal of
assets at rationalized operations and a charge of $815 in Cost of goods sold
related to the change in functional currency for the Companys operation in
Venezuela to the dollar and the devaluation of the Venezuelan currency. Special items included in Operating income
during the nine months ended September 30, 2010 include a rationalization gain
of $2,559 primarily related to the disposal of assets at rationalized
operations offset by costs associated with the consolidation of manufacturing
operations initiated in 2009 and a net charge of $3,123 related to the change
in the functional currency for the Companys operation in Venezuela to the
dollar and the devaluation of the Venezuelan currency. The net charge of $3,123 includes an
incremental inventory cost of $5,755 included in Cost of goods sold and a
foreign currency transaction gain of $2,632 included in SG&A expenses.
Special items included in
Operating income during 2009 include rationalization charges of $7,144 and
$25,720 for the three and nine months ended September 30, 2009, respectively,
primarily related to employee severance.
Special items also include a gain of $2,144 during the nine months ended
September 30, 2009 for the settlement of a pension obligation.
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Net
income as reported
|
|
$
|
32,473
|
|
|
$
|
12,757
|
|
|
$
|
88,741
|
|
|
$
|
24,231
|
|
Special
items (after-tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Rationalization
charges (gains)
|
|
265
|
|
|
6,340
|
|
|
(2,896
|
)
|
|
20,407
|
|
Venezuela
- functional currency change and devaluation
|
|
815
|
|
|
-
|
|
|
3,560
|
|
|
-
|
|
Pension
settlement gain
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,144
|
)
|
Gain
on sale of property of equity investment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5,667
|
)
|
Loss
on disposal of equity investment
|
|
-
|
|
|
7,943
|
|
|
-
|
|
|
7,943
|
|
Noncontrolling
interests
|
|
44
|
|
|
-
|
|
|
1,890
|
|
|
601
|
|
Adjusted
net income
|
|
$
|
33,597
|
|
|
$
|
27,040
|
|
|
$
|
91,295
|
|
|
$
|
45,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share as reported
|
|
$
|
0.76
|
|
|
$
|
0.30
|
|
|
$
|
2.08
|
|
|
$
|
0.57
|
|
Special
items
|
|
0.03
|
|
|
0.33
|
|
|
0.06
|
|
|
0.50
|
|
Adjusted
diluted earnings per share
|
|
$
|
0.79
|
|
|
$
|
0.63
|
|
|
$
|
2.14
|
|
|
$
|
1.07
|
|
Special items included in
Net income during 2010 include rationalization charges of $265 and gains of
$2,896 for the three and nine months ended September 30, 2010, respectively,
primarily related to costs associated with the consolidation of manufacturing
operations initiated in 2009 offset by gains on the disposal of assets at
rationalized operations. Special items
for 2010 also include net charges of $815 and $3,560 for the three and nine
months ended September 30, 2010, respectively, related to the change in the
functional currency for the Companys operation in Venezuela to the dollar and
the devaluation of the Venezuelan currency.
In addition, special items include charges of $44 and $1,890 in
Noncontrolling interests for the three and nine months ended September 30, 2010,
respectively, associated with gains recognized on the disposal of assets for a
majority-owned consolidated subsidiary.
Special items included in
Net income during the three and nine months ended September 30, 2009 include
rationalization charges of $6,340 and $20,407, respectively, primarily related
to employee severance. Special items
also include gains of $2,144 and $5,667 during the nine months ended September
30, 2009 for the settlement of a pension obligation and the sale of a property
of an equity investment, respectively.
The three and nine months ended September 30, 2009 include a loss of
$7,943 associated with the acquisition of Jin Tai and related disposal of Kuang
Tai. In addition, special items include
a charge of $601 in Noncontrolling interests for the nine months ended
September 30, 2009 associated with a pension settlement gain for a majority-owned
consolidated subsidiary.
Liquidity and Capital
Resources
The Companys 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
23
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 following table reflects
changes in key cash flow measures:
|
|
Nine Months Ended September 30,
|
|
|
2010
|
|
2009
|
|
Change
|
Cash provided by operating activities
|
|
$
|
103,714
|
|
|
$
|
231,313
|
|
|
$
|
(127,599
|
)
|
Cash used by investing activities
|
|
(34,644
|
)
|
|
(43,693
|
)
|
|
9,049
|
|
Capital expenditures
|
|
(43,208
|
)
|
|
(26,285
|
)
|
|
(16,923
|
)
|
Acquisition of businesses, net of cash acquired
|
|
(1,182
|
)
|
|
(17,558
|
)
|
|
16,376
|
|
Proceeds from sale of property, plant and
equipment
|
|
9,746
|
|
|
638
|
|
|
9,108
|
|
Cash used by financing activities
|
|
(74,361
|
)
|
|
(71,632
|
)
|
|
(2,729
|
)
|
Payments on short-term borrowings, net
|
|
(16,629
|
)
|
|
(6,900
|
)
|
|
(9,729
|
)
|
Payments on long-term borrowings, net
|
|
(976
|
)
|
|
(30,452
|
)
|
|
29,476
|
|
Purchase of shares for treasury
|
|
(22,960
|
)
|
|
(343
|
)
|
|
(22,617
|
)
|
Cash dividends paid to shareholders
|
|
(35,584
|
)
|
|
(34,347
|
)
|
|
(1,237
|
)
|
(Decrease) increase in Cash and cash equivalents
|
|
(5,599
|
)
|
|
121,635
|
|
|
|
|
Cash
and cash equivalents decreased 1.4% or $5,599 during the nine months ended
September 30, 2010 to $382,537 from $388,136 as of December 31, 2009. This compares to an increase of 42.8% or
$121,635 to $405,967 during the nine months ended September 30, 2009.
Cash
provided by operating activities decreased by $127,599 for the nine months
ended September 30, 2010 compared with the nine months ended September 30,
2009. The decrease was primarily related
to an increase in net operating working capital, defined as the sum of Accounts
receivable and Total inventory less Trade accounts payable, of $51,494 in the
nine months ended September 30, 2010 compared with a decrease in net operating
working capital of $147,070 in the nine months ended September 30, 2009. This decrease was partially offset by higher
earnings in 2010. Net operating working
capital to sales, defined as net operating working capital divided by
annualized rolling three months of Net sales, was 23.2% at both September 30,
2010 and December 31, 2009, compared with 24.8% at September 30, 2009. Days sales in inventory increased to 107.7
days at September 30, 2010 from 100.8 days at December 31, 2009 and decreased
from 117.2 days at September 30, 2009.
Accounts receivable days increased to 59.3 days at September 30, 2010
from 56.9 days at December 31, 2009 and decreased from 60.0 days at September
30, 2009. Average days in accounts
payable increased to 41.2 days at September 30, 2010 from 30.0 days at December
31, 2009 and 36.0 days at September 30, 2009.
Cash used by investing
activities for the nine months ended September 30, 2010 compared with the nine
months ended September 30, 2009 decreased by $9,049. This reflects an increase in capital
expenditures of $16,923 to $43,208 from $26,285 in the nine months ended
September 30, 2009, a decrease in cash used in the acquisition of businesses of
$16,376 and an increase in the proceeds from the sale of property, plant and
equipment of $9,108 primarily due to the sale of assets at rationalized
operations. The Company anticipates capital
expenditures in 2010 in the range of $50,000 to $55,000. Anticipated capital expenditures reflect
investments to improve operational effectiveness and the Companys continuing
international expansion. Management
critically evaluates all proposed capital expenditures and requires each
project to increase efficiency, reduce costs, promote business growth, or to
improve the overall safety and environmental conditions of the Companys
facilities.
Cash used by financing
activities increased by $2,729 to $74,361 in the nine months ended September
30, 2010 compared with the comparable period of 2009. The increase was primarily due to higher
purchases of common shares for treasury of $22,617 and increased payments of
short-term borrowings of $9,729 compared with the prior year comparable period,
offset by the repayment of the Companys $30,000 Series B Senior Unsecured Note
on maturity in 2009.
The Companys debt levels
decreased from $123,717 at December 31, 2009 to $100,273 at September 30, 2010
primarily due to net reductions in short-term borrowings at certain foreign
subsidiaries and the translation impact on the local-currency denominated debt
in Venezuela. Debt to total invested
capital decreased to 8.0% at September 30, 2010 from 10.2% at December 31,
2009.
In October 2010, the Company
paid a cash dividend of $0.28 per share, or $11,780, to shareholders of record
on September 30, 2010.
24
Venezuela
Foreign Currency
Effective
January 1, 2010, the financial statements of the Companys Venezuelan operation
have been remeasured into the Companys reporting currency (U.S. dollar). A currency control board exists in Venezuela
that is responsible for foreign exchange procedures, including approval of
requests for exchanges of the Venezuelan currency (the bolivar) for dollars
at the official (government established) exchange rates. An unregulated parallel market that existed
for exchanging bolivars for dollars through securities transactions was shut
down by the Venezuelan government on May 17, 2010 and subsequently reopened as
a regulated market on June 9, 2010. The
governmental regulations include restrictions on trading volume.
The
official exchange rate in Venezuela had been fixed at 2.15 bolivars to 1 dollar
for several years. On January 8,
2010, the Venezuelan government announced the devaluation of its currency
relative to the dollar. The official
exchange rate for imported goods classified as essential changed from 2.15 to
2.60 (the Essential Rate), while the official exchange rate for other
non-essential goods moved to an exchange rate of 4.30 (the Non-Essential Rate). In remeasuring the financial statements the
Non-Essential Rate is used as this is the rate expected to be applicable to
dividend repatriations.
Venezuela Highly Inflationary Economy
An
economy is considered highly inflationary under GAAP if the cumulative
inflation rate for a three-year period meets or exceeds 100 percent. The Venezuelan three-year cumulative
inflation rate exceeded 100 percent during the fourth quarter of
2009. As a result, the financial
statements of the Companys Venezuelan operation are reported under highly
inflationary accounting rules as of January 1, 2010. Under highly inflationary accounting, the
financial statements of the Companys Venezuelan operation have been remeasured
into the Companys reporting currency and exchange gains and losses from the
remeasurement of monetary assets and liabilities are reflected in current
earnings, rather than Accumulated other comprehensive loss on the balance
sheet.
Future
impacts to earnings of applying highly inflationary accounting for Venezuela on
the Companys consolidated financial statements will be dependent upon
movements in the applicable exchange rates between the bolivar and the dollar
and the amount of monetary assets and liabilities included in the Companys
Venezuelan operations balance sheet. At
September 30, 2010, the net bolivar-denominated monetary liability position was
$6,400. Also, foreign currency
transaction gains are generated when liabilities are settled at the Essential
Rate and foreign currency transaction losses are generated when liabilities are
settled at the regulated parallel market rate.
In addition, the Company participates in Venezuelan sovereign debt offerings
from time to time as a means of converting bolivars to dollars. The conversion of bolivars to dollars through
Venezuelan sovereign debt offerings generates foreign currency transaction
losses as the debt is purchased at the Non-Essential Rate and subsequently sold
at a discount. During the third quarter
of 2010, the Company acquired $6,900 of Venezuelan sovereign debt at the
Non-Essential Rate, which was immediately sold at a discount for $5,520. The sale of the Venezuelan sovereign debt
resulted in a loss of $1,380 recognized in Selling, general and administrative
expenses.
The devaluation of the
bolivar and the change to the dollar as the functional currency for the nine
months ended September 30, 2010 resulted in a foreign currency transaction gain
of $2,632 in Selling, general & administrative expenses and higher Cost
of goods sold of $5,755 due to the liquidation of inventory valued at the
historical exchange rate.
New
Accounting Pronouncements
Refer
to Note 2 to the consolidated financial statements for a discussion of
accounting standards recently adopted or required to be adopted in the future.
Acquisitions
On July 29, 2009, the
Company completed the acquisition of 100% of Jin Tai, based in Jinzhou,
China. This transaction expanded the
Companys customer base and gave the Company control of significant
cost-competitive solid wire manufacturing capacity.
The Company previously held
a 21% direct interest in Jin Tai and a further 27% indirect interest via its
35% ownership in Kuang Tai. Under the
terms of the purchase agreement, the Company exchanged its 35% interest in
Kuang Tai, which had an estimated fair value of $22,723, paid cash of $35,531
and committed to pay an additional $4,181 in cash over a three-year period
after close. The fair value of the
Companys previous noncontrolling direct interest in Jin Tai was $8,675.
Jin Tai was included in the
Companys consolidated financial statements as of the date of acquisition.
25
On October 29, 2010,
the Company acquired all of the stock outstanding of Mezhgosmetiz-Mtsensk OAO (MGM),
a privately-held welding wire manufacturer based in the Orel region of Russia,
for approximately $28,000 in cash and assumed debt. This acquisition will provide the Company its
first manufacturing operation in Russia as well as established distribution
channels to serve the growing Russian and Commonwealth of Independent States
welding markets. Annual sales at the
date of acquisition were approximately $30,000.
Rationalization
The
Company recognized rationalization gains of $2,559 during the nine months ended
September 30, 2010 relating primarily to the sale of assets at
rationalized operations.
During
the third quarter of 2009, the Company initiated various rationalization
actions including the consolidation of certain manufacturing operations in the
Europe Welding and Asia Pacific Welding segments. These actions impacted 81 employees in the
Europe Welding segment, 193 employees in the Asia Pacific Welding segment and
nine employees in the South America Welding segment and resulted in the
recognition of rationalization charges of $8,333, primarily related to
severance costs, and related asset impairment charges of $1,768 in 2009.
The
Company recognized a net gain of $2,143 for the nine months ended September 30,
2010 related to these activities. This
amount includes a gain of $4,555 on the sale of property and other assets at
rationalized operations in the Asia Pacific Welding segment. The Company also recognized charges
associated with the continuation of the consolidation of certain manufacturing
operations of $1,652 and $333 in the Europe Welding and Asia Pacific Welding
segments, respectively, and asset impairment charges of $427 in the Europe
Welding segment. At September 30,
2010, a liability relating to these actions of $497 was recognized in Other
current liabilities. The Company
expects to recognize an additional $500 in costs associated with these actions
which are expected to be substantially completed and paid by the end of 2010.
During
the third quarter of 2009, the Company initiated various rationalization
activities including the closure of a manufacturing operation in The Harris
Products Group segment for which rationalization charges of $6,684 were
recognized for the year ended December 31, 2009. The Company recognized a gain of $416 on the
sale of a property of a rationalized operation in The Harris Products Group
segment in the nine months ended September 30, 2010. At September 30, 2010, a liability
related to these actions of $1,070 was recognized in Other current
liabilities. The liability primarily
relates to employee severance benefits expected to be substantially paid within
the next 12 months.
Debt
As of September 30,
2010, the Company was in compliance with its debt covenants.
The Companys $80,000 Series C Note (the Note) is due in March 2012.
The
Company historically utilized interest rate swaps to manage interest rate
risks. The Company terminated its remaining
interest rate swaps in 2009 and had no interest rate swaps outstanding as of September 30,
2010. The termination of interest rate
swaps in 2009 resulted in a realized gain of $5,079. This gain was deferred and is being amortized
over the remaining life of the Note. The
amortization of this gain reduced Interest expense by $1,243 and $1,010 in
the nine months ended September 30, 2010 and 2009, respectively, and is
expected to reduce annual interest expense by $1,661 during 2010. At September 30, 2010, $2,407 remained
to be amortized and is recognized in Long-term debt, less current portion. The weighted average effective interest rate
on the Note, net of the impact of swaps, was 4.0% for the nine months ended September 30,
2010.
Forward-looking
Statements
The
Companys expectations and beliefs concerning the future contained in this
report are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.
These statements reflect managements current expectations and involve a
number of risks and uncertainties.
Actual results may differ materially from such statements due to a
variety of factors that could adversely affect the Companys operating
results. The factors include, but are
not limited to: general economic and market conditions; the effectiveness of
operating initiatives; currency exchange and interest rates; adverse outcome of
pending or potential litigation; possible acquisitions; market risks and price
fluctuations related to the purchase of commodities and energy; global
regulatory complexity; and the possible effects of international terrorism and
hostilities on the Company or its customers, suppliers and the economy in
general. For additional discussion, see Item
1A. Risk Factors in the Companys Annual Report on Form 10-K.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material
changes in the Companys exposure to market risk since December 31,
2009. See Item 7A. Quantitative and Qualitative Disclosures
About Market Risk in the Companys Annual Report on Form 10-K for the
year ended December 31, 2009.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
The Company carried out an
evaluation under the supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Companys
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that the Companys disclosure controls and procedures were effective.
Changes in Internal Control Over
Financial Reporting
There have been no changes
in the Companys internal control over financial reporting during the period
covered by this Form 10-Q that materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The Company is subject, from
time to time, to a variety of civil and administrative proceedings arising out
of its normal operations, including, without limitation, product liability
claims and health, safety and environmental claims. Among such proceedings are the cases
described below.
At
September 30, 2010, the Company was a co-defendant in cases alleging
asbestos induced illness involving claims by approximately 16,842 plaintiffs,
which is a net increase of 52 claims from those previously reported. In each instance, the Company is one of a
large number of defendants. The asbestos
claimants seek compensatory and punitive damages, in most cases for unspecified
sums. Since January 1, 1995, the
Company has been a co-defendant in other similar cases that have been resolved
as follows: 38,952 of those claims were dismissed, 17 were tried to defense
verdicts, seven were tried to plaintiff verdicts (two of which are being or
will be appealed), one was resolved by agreement for an immaterial amount and
570 were decided in favor of the Company following summary judgment motions.
At September 30, 2010,
the Company was a co-defendant in cases alleging manganese induced illness
involving claims by approximately 2,175 plaintiffs, which is a net decrease of
58 claims from those previously reported.
In each instance, the Company is one of a large number of defendants. The claimants in cases alleging manganese
induced illness seek compensatory and punitive damages, in most cases for
unspecified sums. The claimants allege
that exposure to manganese contained in welding consumables caused the
plaintiffs to develop adverse neurological conditions, including a condition
known as manganism. At September 30,
2010, cases involving 1,079 claimants were filed in or transferred to federal
court where the Judicial Panel on Multidistrict Litigation has consolidated
these cases for pretrial proceedings in the Northern District of Ohio. Since January 1, 1995, the Company has
been a co-defendant in similar cases that have been resolved as follows: 14,660
of those claims were dismissed, 23 were tried to defense verdicts in favor of
the Company (one of which is being appealed) and five were tried to plaintiff
verdicts (two of which were reversed on appeal and two of which are being or
will be appealed). In addition, 13
claims were resolved by agreement for immaterial amounts and one was decided in
favor of the Company following a summary judgment motion. On August 26, 2010, the United States
Court of Appeals for the Fifth Circuit vacated the compensatory and punitive
damages awards (and related attorney fees) in one such case, the Companys
share of which was $2,200,000. On September 8,
2010, the United States Court of Appeals for the Sixth Circuit reversed a
plaintiffs verdict in another such case, remanding it for a new trial,
vacating a compensatory damages award against the Company of $10,250,000. On October 21, 2010, a jury returned a
defense verdict in one such case against the Company in the United States
District Court for the Northern District of Ohio.
27
ITEM 1A. RISK FACTORS
In addition to the other
information set forth in this report, the reader should carefully consider the
factors discussed in Item 1A. Risk Factors in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009, which could materially affect the
Companys business, financial condition or future results.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer
purchases of its common stock during the third quarter of 2010 were as follows:
Period
|
|
Total Number of
Shares Repurchased
(1)
|
|
Average Price
Paid Per Share
|
|
Total Number of
Shares Repurchased as
Part of Publicly
Announced Plans or
Programs
|
|
Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs
(1)
|
|
July 1 - 31, 2010
|
|
-
|
|
$
|
-
|
|
-
|
|
3,542,054
|
|
August 1 - 31, 2010
|
|
187,575
|
|
53.50
|
|
187,575
|
|
3,354,479
|
|
September 1 - 30, 2010
|
|
-
|
|
-
|
|
-
|
|
3,354,479
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
In October 2003, the Companys Board of Directors authorized share
repurchase programs for up to 15 million shares of the Companys common
stock. Total shares purchased through
the share repurchase programs were 11,645,521 shares at a cost of $297,492,000
for a weighted average cost of $25.55 per share through September 30,
2010.
ITEM
6. EXHIBITS
(a) Exhibits
10.1
|
Form of Restricted
Shares Agreement for Non-Employee Directors
|
|
|
10.2
|
Form of Restricted
Shares Agreement for Executive Officers
|
|
|
10.3
|
Form of Stock Option
Agreement for Non-Employee Directors
|
|
|
10.4
|
Form of Stock Option
Agreement for Executive Officers
|
|
|
31.1
|
Certification of the
Chairman, President and Chief Executive Officer (Principal Executive Officer)
pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
|
|
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.
|
|
|
32.1
|
Certification of the
Chairman, 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.
|
101.INS
|
XBRL
Instance Document
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
101.DEF
|
XBRL Taxonomy Extension
Definition Linkbase Document
|
In accordance with Rule 406T
of Regulation S-T, the XBRL related information in Exhibit 101 to this
Quarterly Report on Form 10-Q shall not be deemed to be filed for
purposes of Section 18 of the Exchange Act, or otherwise subject to the
liability of that section, and shall not be part of any registration statement
or other document filed under the Securities Act or the Exchange Act, except as
shall be expressly set forth by specific reference in such filing.
28
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
LINCOLN
ELECTRIC HOLDINGS, INC.
|
|
|
|
|
|
/s/
Vincent K. Petrella
|
|
|
|
Vincent
K. Petrella
|
|
|
|
Senior
Vice President, Chief Financial
|
|
|
|
Officer
and Treasurer
|
|
|
|
(principal
financial and accounting officer)
|
|
|
|
November 5,
2010
|
|
29
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