- Annual Report (10-K)
February 28 2011 - 2:04PM
Edgar (US Regulatory)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2010
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Commission file number 0-1402
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LINCOLN ELECTRIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Ohio
(State or other jurisdiction of
incorporation or organization)
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34-1860551
(I.R.S. Employer Identification No.)
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22801 St. Clair Avenue, Cleveland, Ohio
(Address of principal executive offices)
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44117
(Zip Code)
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(216) 481-8100
(Registrant's
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Shares, without par value
(Title of each class)
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The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
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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
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K
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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 "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
(Do not check if a smaller
reporting company)
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Smaller reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
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No
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The aggregate market value of the common shares held by non-affiliates as of June 30, 2010 was $2,016,760,202 (affiliates, for this purpose, have been deemed
to be Directors and Executive Officers of the Company and certain significant shareholders).
The
number of shares outstanding of the registrant's common shares as of December 31, 2010 was 42,120,800.
DOCUMENTS INCORPORATED BY REFERENCE
Part III
of this Annual Report on Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement to be filed on or about
March 18, 2011 with respect to the registrant's 2011 Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS
General
As used in this report, the term "Company," except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc. and its
wholly-owned and majority-owned subsidiaries for which it has a controlling interest. The Lincoln Electric Company began operations in 1895 and was incorporated under the laws
of the State of Ohio in 1906. During 1998, The Lincoln Electric Company reorganized into a holding company structure, and Lincoln Electric Holdings, Inc. became the publicly-held
parent of Lincoln Electric subsidiaries worldwide, including The Lincoln Electric Company.
The
Company is one of only a few worldwide broad-line manufacturers of welding and cutting products. Welding products include arc welding power sources, wire feeding systems, robotic
welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company's product offering also includes 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
arc welding power sources and wire feeding systems manufactured by the Company range in technology from basic units used for light manufacturing and maintenance to highly sophisticated robotic
applications for high production welding and fabrication. Three primary types of arc welding electrodes are produced: (1) coated manual or stick electrodes, (2) solid electrodes produced
in coil, reel or drum forms for continuous feeding in mechanized welding, and (3) cored electrodes produced in coil form for continuous feeding in mechanized welding.
The
Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, China, Colombia, France, Germany,
India, Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Russia, Turkey, United Kingdom and Venezuela. Nearly all of the above facilities are ISO 9001 certified.
The
Company has aligned its business units into five operating segments to enhance the utilization of the Company's 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
Company's global cutting, soldering and brazing businesses as well as the retail business in the United States. See Note 3 to the Company's consolidated financial statements for segment and
geographic area information, which is incorporated herein by reference.
Customers
The Company's products are sold in both domestic and international markets. In North America, products are sold principally through industrial
distributors, retailers and also directly to users of welding products. Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell
products from the Company's various manufacturing sites to distributors and product users.
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The
Company's major end-user markets include:
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general metal fabrication,
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power generation and process industry,
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structural steel construction (buildings and bridges),
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heavy equipment fabrication (farming, mining and rail),
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shipbuilding,
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automotive,
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pipe mills and pipelines, and
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offshore oil and gas exploration and extraction.
The
Company is not dependent on a single customer or a few customers. The loss of any one customer would not have a material adverse effect on its business. The Company's operating results are
sensitive to changes in general economic conditions. The arc welding and cutting industry is generally a mature industry in developed markets such as North America and Western Europe and is very
cyclical in nature. Overall demand for arc welding and cutting products is largely determined by economic cycles and the level of capital spending in manufacturing and other industrial sectors. The
Company experiences some variability in reported period-to-period results as demand for the Company's products are mildly seasonal with generally higher demand in the second
and third quarters.
Competition
Conditions in the arc welding and cutting industry are highly competitive. The Company believes it is the world's largest manufacturer of consumables
and equipment with relatively few major broad-line competitors worldwide, but numerous smaller competitors in specific geographic markets. The Company continues to pursue strategies to
heighten its competitiveness in domestic and international markets, which includes positioning low cost manufacturing facilities in most geographical markets. Competition in the arc welding and
cutting industry is on the basis of brand preference, product quality, price, performance, warranty, delivery, service and technical support. The Company believes its performance against these factors
has contributed to the Company's position as the leader in the industry.
Most
of the Company's products may be classified as standard commercial articles and are manufactured for stock. The Company believes it has a competitive advantage in the marketplace because of its
highly trained technical sales force and the support of its welding research and development staff to assist consumers in optimizing their welding applications. This allows the Company to introduce
its products to new users and to establish and maintain close relationships with its consumers. This close relationship between the technical sales force and the direct consumers, together with its
supportive relationship with its distributors, who are particularly interested in handling the broad range of the Company's products, is an important element of the Company's market success and a
valuable asset of the Company.
Raw Materials
The principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys and
various chemicals, all of which are normally available for purchase in the open market.
Patents and Trademarks
The Company holds many valuable patents, primarily in arc welding, and has increased the application process as research and development has
progressed in both the United States and major international
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jurisdictions.
The Company believes its trademarks are an important asset and aggressively pursues brand management.
Environmental Regulations
The Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material
adverse effect on the Company's earnings. The Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is working to gain certification at its
remaining facilities worldwide. In addition, the Company is ISO 9001 certified at nearly all facilities worldwide.
International Operations
The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States. As a
result, the Company is subject to business risks inherent to non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency
fluctuations.
Research and Development
Research activities, which the Company believes provide a competitive advantage, relate to the development of new products and the improvement of
existing products. Research activities are Company-sponsored. Refer to Note 1 to the consolidated financial statements with respect to total costs of research and development, which
is incorporated herein by reference.
Employees
The number of persons employed by the Company worldwide at December 31, 2010 was 9,472. See Item 10 of Part III for information
regarding the Company's executive officers, which is incorporated herein by reference.
Website Access
The Company's website, www.lincolnelectric.com, is used as a channel for routine distribution of important information, including news releases and
financial information. The Company posts its filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including annual, quarterly, and current
reports on Forms 10-K, 10-Q, and 8-K; proxy statements; and any amendments to those reports or statements. The Company also posts its Code of Corporate
Conduct and Ethics on its website. All such postings and filings are available on the Company's website free of charge. In addition, this website allows investors and other interested persons to sign
up to automatically receive e-mail alerts when news releases and financial information is posted on the website. The SEC also maintains a website, www.sec.gov, that contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K
is not incorporated by reference into this Annual Report unless expressly noted.
ITEM 1A. RISK FACTORS
From
time to time, information we provide, statements by our employees or information included in our filings with the SEC may contain forward-looking statements that are not historical
facts. Those statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, and our future
performance, operating results, financial position and
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liquidity,
are subject to a variety of factors that could materially affect results, including those risks described below. Any forward-looking statements made in this report or otherwise
speak only as of the date of the statement, and, except as required by law, we undertake no obligation to update those statements. Comparisons of results for current and any prior periods are not
intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
In
the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have a material impact on our business, financial condition, operating
results and cash flows.
Our
Enterprise Risk Management ("ERM") process seeks to identify and address significant risks. Our ERM process is a company-wide initiative that is designed with the intent of
prioritizing risks and assigning appropriate consideration for such risks. We use the integrated risk framework of the Committee of Sponsoring Organizations to assess, manage and monitor risks.
Management
has identified and prioritized critical risks based on the severity and likelihood of each risk and assigned an executive to address each major identified risk area and lead action plans to
monitor and mitigate risks, where possible. Our Board of Directors provides oversight of the ERM process and systematically reviews identified critical risks. The Audit Committee also reviews major
financial risk exposures and the steps management has taken to monitor and control them.
Our
goal is to proactively manage risks in a structured approach and in conjunction with strategic planning, with the intent to preserve and enhance shareholder value. However, these and other risks
and uncertainties could cause our results to vary materially from recent results or from our anticipated future results.
The
risk factors and uncertainties described below together with information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K should be
carefully considered. Additional risks and uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect our business.
General economic and market conditions may adversely affect the Company's financial condition, results of operations and access to capital markets.
The Company's operating results are sensitive to changes in general economic conditions. Recessionary economic cycles, higher interest rates,
inflation, trade barriers in the world markets and changes in tax laws or other economic factors affecting the countries and industries in which we do business could adversely affect demand for the
Company's products, thereby impacting our results of operations, financial condition and access to capital markets.
Availability of and volatility in energy costs or raw material prices may adversely affect our performance.
In the normal course of business, we are exposed to market risks related to the availability of and price fluctuations in the purchase of energy and
commodities used in the manufacture of our products (primarily steel, brass, copper, silver, aluminum alloys, electronic components, electricity and natural gas). The availability and prices for raw
materials are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute materials,
currency exchange rates, our competitors' production costs, anticipated or perceived shortages and other factors. The price of steel used to manufacture our products has experienced periods of
significant price volatility and has been subject to periodic
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shortages
due to global economic factors. We have also experienced substantial volatility in prices for other raw materials, including metals, chemicals and energy costs.
Increases
in the cost of raw materials and components may adversely affect our profitability if we are unable to pass along to our customers these cost increases in the form of price increases or
otherwise reduce our cost of goods sold. Although most of the raw materials and components used in our
products are commercially available from a number of sources and in adequate supply, any disruption in the availability of such raw materials and components, our inability to timely or otherwise
obtain substitutes for such items, or any deterioration in our relationships with or the financial viability of our suppliers could adversely affect our business.
We are a co-defendant in litigation alleging manganese induced illness and litigation alleging asbestos induced illness. Liabilities relating to such litigation
could reduce our profitability and impair our financial condition.
At December 31, 2010, we were a co-defendant in cases alleging manganese induced illness involving claims by approximately 1,975
plaintiffs and a co-defendant in cases alleging asbestos induced illness involving claims by approximately 16,865 plaintiffs. In each instance, we are one of a large number of defendants.
In the manganese cases, 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. In the asbestos cases, the claimants allege that exposure to asbestos contained in welding consumables caused the plaintiffs to develop adverse pulmonary diseases, including mesothelioma
and other lung cancers.
Since
January 1, 1995, we have been a co-defendant in manganese cases that have been resolved as follows: 14,859 of those claims were dismissed, 23 were tried to defense verdicts in
favor of us and five were tried to plaintiff verdicts (three of which were reversed on appeal and one of which has post-trial motions pending). In addition, 13 claims were resolved by
agreement for immaterial amounts and one claim was decided in favor of the Company following a summary judgment motion. Since January 1, 1995, we have been a co-defendant in
asbestos cases that have been resolved as follows: 38,968 of those claims were dismissed, 17 were tried to defense verdicts, seven were tried to plaintiff verdicts (two of which are being appealed),
one was resolved by agreement for an immaterial amount and 573 were decided in favor of the Company following summary judgment motions.
Defense
costs remain significant. The long-term impact of the manganese and asbestos loss contingencies, in each case in the aggregate, on operating results, operating cash flows and
access to capital markets is difficult to assess, particularly since claims are in many different stages of development and we benefit significantly from cost-sharing with
co-defendants and insurance carriers. While we intend to contest these lawsuits vigorously, and believe we have applicable insurance relating to these claims, there are several risks and
uncertainties that may affect our liability for personal claims relating to exposure to manganese and asbestos, including the future impact of changing cost sharing arrangements or a change in our
overall trial experience.
Manganese
is an essential element of steel and cannot be eliminated from welding consumables. Asbestos use in welding consumables in the U.S. ceased in 1981.
We may incur material losses and costs as a result of product liability claims that may be brought against us.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture, sale and application of our products and
the products of third-party suppliers that we utilize or resell. Our products are used in a variety of applications, including infrastructure projects such as oil and gas
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pipelines
and platforms, buildings, bridges and power generation facilities, the manufacture of transportation and heavy equipment and machinery, and various other construction projects. We face risk
of exposure to product liability claims in the event that accidents or failures on these projects result, or are alleged to result, in bodily injury or property damage. Further, our products are
designed for use in specific applications, and if a product is used inappropriately, personal injury or property damage may result.
The
occurrence of defects in or failures of our products, or the misuse of our products in specific applications, could cause termination of customer contracts, increased costs and losses to us, our
customers and other end users. We cannot be assured that we will not experience any material product liability losses in the future or that we will not incur significant costs to defend those claims.
Further, we cannot be assured that our product liability insurance coverage will be adequate for any liabilities that we may ultimately incur or that product liability insurance will continue to be
available on terms acceptable to us.
The cyclicality and maturity of the arc welding and cutting industry in developed markets may adversely affect our performance.
The arc welding and cutting industry is generally a mature industry in developed markets such as North America and Western Europe and is very
cyclical in nature. Overall demand for arc welding and cutting products is largely determined by the level of capital spending in manufacturing and other industrial sectors, and the welding industry
has historically experienced contraction during periods of slowing industrial activity. If economic, business and industry conditions deteriorate, capital spending in those sectors may be
substantially decreased, which could reduce demand for our products, our revenues and our results of operations.
We may not be able to complete our acquisition strategy or successfully integrate acquired businesses.
Part of our business strategy is to pursue targeted business acquisition opportunities, including foreign investment opportunities. For example, we
have completed and continue to pursue acquisitions in emerging markets including, but not limited to Brazil, Russia, India and China in order to strategically position resources to increase our
presence in growing markets. We cannot be certain that we will be successful in pursuing potential acquisition candidates or that the consequences of any acquisition would be beneficial to us. Future
acquisitions may expose us to unexpected liabilities and involve the expenditure of significant funds and management time. Further, we may not be able to successfully integrate any acquired business
with our existing businesses or recognize the expected benefits from any completed acquisition.
Depending
on the nature, size and timing of future acquisitions, we may be required to raise additional financing, which may not be available to us on acceptable terms. Our current operational cash
flow is sufficient to fund our current acquisition plans, but a significant acquisition could require access to the capital markets.
If we cannot continue to develop, manufacture and market products that meet customer demands, our revenues and gross margins may suffer.
Our continued success depends, in part, on our ability to continue to meet our customers' needs for welding and cutting products through the
introduction of innovative new products and the enhancement of existing product design and performance characteristics. We must remain committed to product research and development and customer
service in order to remain competitive. We cannot be assured that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to our operating
results, or that we will be able to continue our product
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development
efforts at a pace to sustain future growth. Further, we may lose customers to our competitors if they demonstrate product design, development or manufacturing capabilities superior to
ours.
The competitive pressures we face could harm our revenue, gross margins and prospects.
We operate in a highly competitive global environment and compete in each of our businesses with other broad-line manufacturers and
numerous smaller competitors specializing in particular products. We compete primarily on the basis of brand, product quality, price, performance, warranty, delivery, service and technical support. We
have recently initiated, and may in the future initiate significant rationalization activities to align our business to current market conditions. Such rationalization activities could fail to deliver
the desired competitive cost structure and could result in disruptions in customer service. If our products, services, support and cost structure do not enable us to compete successfully based on any
of the criteria listed above, our operations, results and prospects could suffer.
Further,
in the past decade, the arc welding industry in the United States and other developed countries has been subject to increased levels of foreign competition as low cost imports have become
more readily available. Our competitive position could also be harmed if new or emerging competitors become more active in the arc welding business. For example, while steel manufacturers
traditionally have not been significant competitors in the domestic arc welding industry, some foreign integrated steel producers manufacture selected consumable arc welding products. Our sales and
results of operations, as well as our plans to expand in some foreign countries, could be harmed by this practice.
We conduct our sales and distribution operations on a worldwide basis and maintain manufacturing facilities in a number of foreign countries, which subjects us to risks
associated with doing business outside the United States.
Our long-term strategy is to continue to increase our market share in growing international markets, particularly Asia (with emphasis in
China and India), Latin America, Eastern Europe, Russia and other developing markets.
The
share of sales and profits we derive from our international operations and exports from the United States is significant and growing. This trend increases our exposure to the performance of many
developing economies in addition to the developed economies outside of the United States.
There
are a number of risks in doing business internationally, which may impede our ability to achieve our strategic objectives relating to our foreign operations. Many developing countries have a
significant degree of political and economic uncertainty and social turmoil that may impede our ability to implement and achieve our international growth objectives. Conducting business
internationally subjects us to corporate governance and management challenges in consideration of the numerous U.S. and foreign laws and regulations, including regulations relating to
import-export control, technology transfer restrictions, repatriation of earnings and funds, exchange controls,
anti-boycott provisions and anti-bribery laws (such as the Foreign Corrupt Practices Act and the Organization for Economic Cooperation and Development Convention). Failure by
the Company or its sales representatives, agents or distributors to comply with these laws and regulations could result in administrative, civil or criminal liabilities, all or any of which could
negatively impact our business and reputation. Our foreign operations also subject us to the risks of international terrorism and hostilities.
Our operations depend on maintaining a skilled workforce, and any interruption in our workforce could negatively impact our results of operations and financial condition.
Our success depends in part on the efforts and abilities of our management team and key employees. Their skills, experience and industry knowledge
significantly benefit our operations and performance.
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Our
future success will also depend on our ability to identify, attract, and retain highly qualified managerial, technical (including research and development), sales and marketing, and customer
service personnel. Competition for these individuals is intense, and we may not succeed in identifying, attracting, or retaining qualified personnel. With our strategy to expand internationally into
developing markets, we may incur additional risks as some developing economies lack a sufficiently trained labor pool.
Any
interruption of our workforce, including interruptions due to unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could impact our results of
operations and financial condition.
Our revenues and results of operations may suffer if we cannot continue to enforce the intellectual property rights on which our business depends or if third parties assert
that we violate their intellectual property rights.
We rely upon patent, trademark, copyright and trade secret laws in the United States and similar laws in foreign countries, as well as agreements
with our employees, customers, suppliers and other third parties, to establish and maintain our intellectual property rights. However, any of our intellectual property rights could be challenged,
invalidated or circumvented, or our intellectual property rights may not be sufficient to provide a competitive advantage. Further, the laws and their application in certain foreign countries do not
protect our proprietary rights to the same extent as U.S. laws. Accordingly, in certain countries, we may be unable to protect our proprietary rights
against unauthorized third-party copying or use, which could impact our competitive position.
Further,
third parties may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that those claims are without merit, defending those claims and
contesting the validity of patents can be time-consuming and costly. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly
settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from manufacturing, marketing or selling certain of our products.
The Company's defined benefit pension plans are subject to financial market risks that could adversely affect our results of operations and cash flows.
The performance of the financial markets and interest rates impact our funding obligations under our defined benefit pension plans. Significant
changes in market interest rates, decreases in the fair value of plan assets and investment losses on plan assets may increase our funding obligations and adversely impact our results of operations
and cash flows.
A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating income.
Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in other
currencies. Our profitability is affected by movements of the U.S. dollar against other foreign currencies in which we generate revenues and incur expenses. Significant long-term
fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitability and financial
condition.
Changes in tax rates or exposure to additional income tax liabilities could affect profitability.
Our business is subject to income taxes in the United States and various foreign jurisdictions. Domestic and international tax liabilities are
subject to the allocation of income among various tax jurisdictions.
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Our
effective tax rate could be adversely affected by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets or
changes in tax laws.
The
amount of income taxes paid is subject to ongoing audits by United States federal, state and local tax authorities and by foreign tax authorities. If these audits result in assessments different
from amounts reserved, future financial results may include unfavorable adjustments which could have a material adverse effect on our results of operations.
We are subject to risks relating to our information technology systems.
The conduct and management of our business relies extensively on information technology systems. If these systems are damaged or cease to function
properly and we suffer any interruption in our ability to manage and operate the business, our results of operations and financial condition could be adversely affected.
Our global operations are subject to increasingly complex environmental regulatory requirements.
We are subject to increasingly complex environmental regulations affecting international manufacturers, including those related to air and water
emissions, waste management and climate change.
There
is a growing political and scientific belief that emissions of greenhouse gases ("GHG") alter the composition of the global atmosphere in ways that are affecting the global climate. Various
stakeholders, including legislators and regulators, shareholders and non-governmental
organizations, as well as companies in many business sectors, are considering ways to reduce GHG emissions. These concerns may lead to international, national, regional or local legislative or
regulatory responses in the near future. Such regulation could result in new or additional regulatory or product standard requirements for the Company's global businesses. We are unable, at this time,
to predict the significance of these requirements as the impact of any future GHG legislative, regulatory or product standards is dependent on the timing and design of the mandates or standards.
Furthermore,
the potential physical impacts of theorized climate change on the Company's customers, and therefore on the Company's operations, are speculative and highly uncertain, and would be
particular to the circumstances developing in various geographical regions. These may include changes in weather patterns (including drought and rainfall levels), water availability, storm patterns
and intensities, and temperature levels. These potential physical effects may adversely impact the cost, production, sales and financial performance of the Company's operations which we are unable, at
this time, to predict.
It
is our policy to apply strict standards for environmental protection to all of our operations inside and outside the United States, even when we are not subject to local government regulations. We
may incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, liabilities resulting from third-party property damage or personal injury claims, or our
products could be enjoined from entering certain jurisdictions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental
laws.
We
also face increasing complexity in our products design and procurement operations as we adjust to new and future requirements relating to the design, production and labeling of our products that
are sold worldwide in multiple jurisdictions. The ultimate costs under environmental laws and the timing of these costs are difficult to predict, and liability under some environmental laws relating
to contaminated locations can be imposed retroactively and on a joint and several basis.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The
Company's corporate headquarters and principal United States manufacturing facilities are located in the Cleveland, Ohio area. Total Cleveland area property consists of 233 acres, of which present
manufacturing facilities comprise an area of approximately 2,940,000 square feet.
The
Company has 40 manufacturing facilities, including operations and joint ventures in 19 countries, the locations (grouped by operating segment) of which are as follows:
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North America Welding:
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United States
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Cleveland, Ohio; San Diego & Oceanside, California.
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Canada
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Toronto; Mississauga.
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Mexico
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Mexico City; Torreon.
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Europe Welding:
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France
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Grand-Quevilly.
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Germany
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Essen.
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Italy
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Genoa; Corsalone.
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Netherlands
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Nijmegen.
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Poland
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Bielawa; Swietochlowice; Dzierzoniow.
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Portugal
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Lisbon.
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Russia
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Mtsensk.
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Turkey
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Istanbul.
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United Kingdom
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Sheffield; Chertsey.
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Asia Pacific Welding:
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Australia
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Sydney.
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China
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Shanghai; Jinzhou; Nanjing; Zhengzhou; Luan County.
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India
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Chennai.
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Indonesia
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Cikarang.
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South America Welding:
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Brazil
|
|
Sao Paulo.
|
|
|
Colombia
|
|
Bogota.
|
|
|
Venezuela
|
|
Maracay.
|
|
The Harris Products Group:
|
|
|
|
|
United States
|
|
Mason, Ohio; Gainesville, Georgia; Santa Fe Springs, California.
|
|
|
Brazil
|
|
Guarulhos.
|
|
|
Mexico
|
|
Tijuana.
|
|
|
Poland
|
|
Dzierzoniow.
|
All
properties relating to the Company's Cleveland, Ohio headquarters and manufacturing facilities are owned by the Company. Most of the Company's foreign subsidiaries own
manufacturing facilities in the country where they are located. The Company believes that its existing properties are in good condition and are suitable for the conduct of its business. At
December 31, 2010, $1.4 million of indebtedness under capital leases was secured by property with a book value of $4.5 million.
In
addition, the Company maintains operating leases for many of its distribution centers and sales offices throughout the world. See Note 13 to the Company's consolidated financial statements
for information regarding the Company's lease commitments.
10
ITEM 3. 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
December 31, 2010, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 16,865 plaintiffs, which is a net increase of 23
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: 38,968 of those claims were dismissed, 17
were tried to defense verdicts, seven were tried to plaintiff verdicts (two of which are being appealed), one was resolved by agreement for an immaterial amount and 573 were decided in favor of the
Company following summary judgment motions.
At
December 31, 2010, the Company was a co-defendant in cases alleging manganese induced illness involving claims by approximately 1,975 plaintiffs, which is a net decrease of 200
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 December 31, 2010, cases involving 929 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: 14,859 of
those claims were dismissed, 23 were tried to defense verdicts in favor of the Company and five were tried to plaintiff verdicts (three of which were reversed on appeal and one of which has
post-trial motions pending). In addition, 13 claims were resolved by agreement for immaterial amounts and one claim was decided in favor of the Company following a summary judgment motion.
Finally, on December 9, 2010, the Mississippi Supreme Court reversed a plaintiff's verdict in another manganese case (which is included in the above totals).
On
December 13, 2006, the Company filed a complaint in U.S. District Court (Northern District of Ohio) against Illinois Tool Works, Inc. seeking a declaratory judgment that eight patents
owned by the defendant relating to certain inverter power sources have not and are not being infringed and that the subject patents are invalid. Illinois Tool Works filed a motion to dismiss this
action, which the Court denied on June 21, 2007. On September 7, 2007, the Court stayed the litigation, referencing pending reexaminations before the U.S. Patent and Trademark Office. On
June 17, 2008, the Company filed a motion to amend its pleadings in the foregoing matter to include several additional counts, including specific allegations of fraud on the U.S. Patent and
Trademark Office with respect to portable professional welding machines and resulting monopoly power in that market.
ITEM 4. (REMOVED AND RESERVED)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The
Company's common shares are traded on The NASDAQ Global Select Market under the symbol "LECO." The number of record holders of common shares at December 31, 2010 was 1,694.
11
The
total amount of dividends paid in 2010 was $47.4 million. During 2010, dividends were paid quarterly on January 15, April 15, July 15 and October 15.
Quarterly
high and low stock prices and dividends declared for the last two years were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
|
Stock Price
|
|
|
|
Stock Price
|
|
|
|
|
|
Dividends
Declared
|
|
Dividends
Declared
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First quarter
|
|
$
|
58.41
|
|
$
|
46.10
|
|
$
|
0.28
|
|
$
|
56.22
|
|
$
|
26.32
|
|
$
|
0.27
|
|
Second quarter
|
|
|
62.86
|
|
|
50.02
|
|
|
0.28
|
|
|
45.96
|
|
|
30.88
|
|
|
0.27
|
|
Third quarter
|
|
|
58.63
|
|
|
48.27
|
|
|
0.28
|
|
|
52.81
|
|
|
32.97
|
|
|
0.27
|
|
Fourth quarter
|
|
|
67.18
|
|
|
56.09
|
|
|
0.31
|
|
|
56.71
|
|
|
42.90
|
|
|
0.28
|
|
Issuer
purchases of equity securities for the fourth quarter 2010 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares Repurchased
|
|
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)
|
|
October 1-31, 2010
|
|
|
|
|
$
|
|
|
|
|
|
|
3,354,479
|
|
November 1-30, 2010
|
|
|
208,186
|
|
|
61.13
|
|
|
208,186
|
|
|
3,146,293
|
|
December 1-31, 2010
|
|
|
64,800
|
|
|
61.67
|
|
|
64,800
|
|
|
3,081,493
|
|
-
(1)
-
The
Company's Board of Directors authorized share repurchase programs for up to 15 million shares of the Company's common stock. Total shares
purchased through the share repurchase programs were 11,918,507 shares at a cost of $314.2 million for a weighted average cost of $26.36 per share through December 31, 2010.
12
The
following line graph compares the yearly percentage change in the cumulative total shareholder return on the Company's common stock against the cumulative total return of the S&P Composite 500
Stock Index ("S&P 500") and the S&P 400 MidCap Index ("S&P 400") for the five-year calendar period commencing January 1, 2006 and ending December 31,
2010. This graph assumes that $100 was invested on December 31, 2005 in each of the Conpany's common stock, the S&P 500 and the S&P 400. A peer-group index for the
welding industry, in general, was not readily available because the industry is comprised of a large number of privately held competitors and competitors that are relatively small entities of large
publicly traded companies.
13
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Net sales
|
|
$
|
2,070,172
|
|
$
|
1,729,285
|
|
$
|
2,479,131
|
|
$
|
2,280,784
|
|
$
|
1,971,915
|
|
Net income
|
|
|
130,244
|
|
|
48,576
|
|
|
212,286
|
|
|
202,736
|
|
|
175,008
|
|
Basic earnings per share
|
|
|
3.09
|
|
|
1.15
|
|
|
4.98
|
|
|
4.73
|
|
|
4.11
|
|
Diluted earnings per share
|
|
|
3.06
|
|
|
1.14
|
|
|
4.93
|
|
|
4.67
|
|
|
4.07
|
|
Cash dividends declared per share
|
|
|
1.15
|
|
|
1.09
|
|
|
1.02
|
|
|
0.91
|
|
|
0.79
|
|
Total assets
|
|
|
1,783,788
|
|
|
1,705,292
|
|
|
1,718,805
|
|
|
1,645,296
|
|
|
1,394,579
|
|
Long-term debt
|
|
|
84,627
|
|
|
87,850
|
|
|
91,537
|
|
|
117,329
|
|
|
113,965
|
|
Results
for 2010 include net rationalization gains of $384 ($894 after-tax). The Company's rationalization activities to align its business to current market conditions resulted in net
gains of $3,684 ($3,725 after-tax) related to the sale of property and asset disposals, impairment charges of $883 ($801 after-tax) and $2,417 ($2,030 after-tax) in
rationalization charges. Results also include a net charge of $3,123 ($3,560 after-tax) related to the change of functional currency and devaluation of the Venezuelan currency, income of
$5,092 was recognized due to an adjustment in tax liabilities for a change in applicable tax regulations in the Asia Pacific Welding segment, a gain of $108 after-tax in noncontrolling
interests related to the impairment of assets for a majority-owned consolidated subsidiary and a charge of $1,890 after-tax in noncontrolling interests related to gains on the disposal of
assets in a majority-owned consolidated subsidiary.
Results
for 2009 include net rationalization and asset impairment charges of $29,897 ($23,789 after-tax). The Company's rationalization activities to align the business to current market
conditions resulted in charges of $26,957 ($21,529 after-tax) and impairment charges of $2,940 ($2,260 after-tax) for certain indefinite-lived intangible assets. Results also
include a loss of $7,943 ($7,943 after-tax) associated with the acquisition of a business in China and the related disposal of an interest in Taiwan, a pension settlement gain of $2,144
($2,144 after-tax), a charge of $601 after-tax in noncontrolling interests associated with the pension settlement gain for a majority-owned consolidated subsidiary, and a gain
on the sale of a property by the Company's joint venture in Turkey of $5,667 ($5,667 after-tax).
Results
for 2008 include a charge of $2,447 ($1,698 after-tax) relating to the Company's rationalization programs that began in the fourth quarter 2008 designed to align the business to
current market conditions. Results for 2008 also include $16,924 ($16,615 after-tax) in asset impairment charges including $13,194 of goodwill and $2,388 of long-lived assets
related
to two businesses in China (with no tax benefit) as well as an impairment charge of $1,342 ($1,033 after-tax) for intangible assets in North America and Europe.
Results
for 2007 include a net gain of $188 ($107 after-tax) relating to the Company's rationalization programs.
Results
for 2006 include a charge of $3,478 ($3,478 after-tax) relating to the Company's rationalization programs and a gain of $9,006 ($7,204 after-tax) on the sale of a
facility in Ireland.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with "Selected Financial Data,"
the Company's consolidated financial statements and other financial information included elsewhere in this Annual Report on Form 10-K. This Annual Report on
Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. See
"Item 1A. Risk Factors" for more information regarding forward-looking statements.
General
The Company is the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a broad line of arc welding
equipment, consumable welding products and other welding and cutting products.
The
Company is one of only a few worldwide broad-line manufacturers of welding and cutting products. Welding products include arc welding power sources, wire feeding systems, robotic
welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company's product offering also includes 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
Company invests in the research and development of arc welding products in order to continue its market leading product offering. The Company continues to invest in technologies that improve the
quality and productivity of welding products. In addition, the Company continues to actively increase its patent application process in order to secure its technology advantage in the United States
and other major international jurisdictions. The Company believes its significant investment in research and development and its highly trained technical sales force coupled with its extensive
distributor network provide a competitive advantage in the marketplace.
The
Company's products are sold in both domestic and international markets. In North America, products are sold principally through industrial distributors, retailers and also directly to users of
welding products. Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing
sites to distributors and product users.
The
Company's major end-user markets include:
-
-
general metal fabrication,
-
-
power generation and process industry,
-
-
structural steel construction (buildings and bridges),
-
-
heavy equipment fabrication (farming, mining and rail),
-
-
shipbuilding,
-
-
automotive,
-
-
pipe mills and pipelines, and
-
-
offshore oil and gas exploration and extraction.
The
Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, China, Colombia, France, Germany, India,
Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Russia,Turkey, United Kingdom and Venezuela.
15
The
Company has aligned its business units into five operating segments to enhance the utilization of the Company's 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
Company's global cutting, soldering and brazing businesses as well as the retail business in the United States. See Note 3 to the Company's consolidated financial statements for segment and
geographic area information.
The
principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys and various chemicals, all of which are normally
available for purchase in the open market.
The
Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material adverse effect on the Company's earnings. The Company
is ISO 9001 certified at nearly all facilities worldwide. In addition, the Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is
working to gain certification at its remaining facilities worldwide.
Key Indicators
Key economic measures relevant to the Company include industrial production trends, steel consumption, purchasing manager indices, capacity
utilization within durable goods manufacturers and consumer confidence indicators. Key industries which provide a relative indication of demand drivers to the Company include steel, farm machinery and
equipment, construction and transportation, fabricated metals, electrical equipment, ship and boat building, defense, truck manufacturing, energy and railroad equipment. Although these measures
provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels
in the markets which ultimately use the Company's welding products.
Key
operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates, all of which provide key indicators of business trends. These
measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.
Key
financial measures utilized by the Company's executive management and operating units in order to evaluate the results of its business and in understanding key variables impacting the current and
future results of the Company include: sales; gross profit; selling, general and administrative expenses; operating income; earnings before interest and taxes; earnings before interest, taxes and
bonus; net income; adjusted operating income; adjusted net income; adjusted diluted earnings per share; operating cash flows; and capital expenditures, including applicable ratios such as return on
invested capital and average operating working capital to sales. These measures are reviewed at monthly, quarterly and annual intervals and compared with historical periods, as well as objectives
established by the Board of Directors of the Company.
16
Results of Operations
The following table shows the Company's results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
Amount
|
|
% of Sales
|
|
Amount
|
|
% of Sales
|
|
Amount
|
|
% of Sales
|
|
Net sales
|
|
$
|
2,070,172
|
|
|
100.0%
|
|
$
|
1,729,285
|
|
|
100.0%
|
|
$
|
2,479,131
|
|
|
100.0%
|
|
Cost of goods sold
|
|
|
1,506,353
|
|
|
72.8%
|
|
|
1,273,017
|
|
|
73.6%
|
|
|
1,758,980
|
|
|
71.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
563,819
|
|
|
27.2%
|
|
|
456,268
|
|
|
26.4%
|
|
|
720,151
|
|
|
29.0%
|
|
Selling, general & administrative expenses
|
|
|
377,773
|
|
|
18.2%
|
|
|
333,138
|
|
|
19.3%
|
|
|
405,120
|
|
|
16.3%
|
|
Rationalization and asset impairment (gains) charges
|
|
|
(384
|
)
|
|
|
|
|
29,897
|
|
|
1.7%
|
|
|
19,371
|
|
|
0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
186,430
|
|
|
9.0%
|
|
|
93,233
|
|
|
5.4%
|
|
|
295,660
|
|
|
11.9%
|
|
Interest income
|
|
|
2,381
|
|
|
0.1%
|
|
|
3,462
|
|
|
0.2%
|
|
|
8,845
|
|
|
0.4%
|
|
Equity earnings (loss) in affiliates
|
|
|
3,171
|
|
|
0.2%
|
|
|
(5,025
|
)
|
|
(0.3%
|
)
|
|
6,034
|
|
|
0.2%
|
|
Other income
|
|
|
1,817
|
|
|
0.1%
|
|
|
3,589
|
|
|
0.2%
|
|
|
1,681
|
|
|
0.1%
|
|
Interest expense
|
|
|
(6,691
|
)
|
|
(0.3%
|
)
|
|
(8,521
|
)
|
|
(0.5%
|
)
|
|
(12,155
|
)
|
|
(0.5%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
187,108
|
|
|
9.0%
|
|
|
86,738
|
|
|
5.0%
|
|
|
300,065
|
|
|
12.1%
|
|
Income taxes
|
|
|
54,898
|
|
|
2.7%
|
|
|
37,905
|
|
|
2.2%
|
|
|
87,523
|
|
|
3.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income including noncontrolling interests
|
|
|
132,210
|
|
|
6.4%
|
|
|
48,833
|
|
|
2.8%
|
|
|
212,542
|
|
|
8.6%
|
|
Noncontrolling interests in subsidiaries' earnings
|
|
|
1,966
|
|
|
0.1%
|
|
|
257
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
130,244
|
|
|
6.3%
|
|
$
|
48,576
|
|
|
2.8%
|
|
$
|
212,286
|
|
|
8.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared with 2009
Net Sales:
The table below summarizes the impacts of volume, acquisition, price and foreign currency exchange rates on Net sales for the twelve months ended
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Sales due to:
|
|
|
|
|
|
Net Sales
2009
|
|
Volume
|
|
Acquisitions
|
|
Price
|
|
Foreign
Exchange
|
|
Net Sales
2010
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Welding
|
|
$
|
858,180
|
|
$
|
150,814
|
|
$
|
|
|
$
|
(7,709
|
)
|
$
|
11,908
|
|
$
|
1,013,193
|
|
Europe Welding
|
|
|
346,383
|
|
|
30,175
|
|
|
5,331
|
|
|
(9,668
|
)
|
|
(12,296
|
)
|
|
359,925
|
|
Asia Pacific Welding
|
|
|
208,280
|
|
|
20,077
|
|
|
86,235
|
|
|
(3,165
|
)
|
|
12,665
|
|
|
324,092
|
|
South America Welding
|
|
|
99,171
|
|
|
25,724
|
|
|
|
|
|
7,432
|
|
|
(14,908
|
)
|
|
117,419
|
|
The Harris Products Group
|
|
|
217,271
|
|
|
16,264
|
|
|
|
|
|
19,303
|
|
|
2,705
|
|
|
255,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
1,729,285
|
|
$
|
243,054
|
|
$
|
91,566
|
|
$
|
6,193
|
|
$
|
74
|
|
$
|
2,070,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Welding
|
|
|
|
|
|
17.6%
|
|
|
|
|
|
(0.9%
|
)
|
|
1.4%
|
|
|
18.1%
|
|
Europe Welding
|
|
|
|
|
|
8.7%
|
|
|
1.5%
|
|
|
(2.8%
|
)
|
|
(3.5%
|
)
|
|
3.9%
|
|
Asia Pacific Welding
|
|
|
|
|
|
9.6%
|
|
|
41.4%
|
|
|
(1.5%
|
)
|
|
6.1%
|
|
|
55.6%
|
|
South America Welding
|
|
|
|
|
|
25.9%
|
|
|
|
|
|
7.5%
|
|
|
(15.0%
|
)
|
|
18.4%
|
|
The Harris Products Group
|
|
|
|
|
|
7.5%
|
|
|
|
|
|
8.9%
|
|
|
1.2%
|
|
|
17.6%
|
|
Consolidated
|
|
|
|
|
|
14.1%
|
|
|
5.3%
|
|
|
0.4%
|
|
|
|
|
|
19.7%
|
|
17
Net
sales volume for 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 was higher 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. Product pricing decreased due to changes in pricing required to remain
competitive as a result of lower material costs in the North America Welding, Europe Welding and Asia Pacific Welding segments. The increase in Net sales from acquisitions was due to the acquisition
of Jinzhou Jin Tai Welding and Metal Co, Ltd. ("Jin Tai") in July 2009 in the Asia Pacific Welding segment and the acquisition of Mezhgosmetiz-Mtsensk OAO ("MGM") in October 2010 in the Europe
Welding segment (see the "Acquisitions" section below for additional information regarding the acquisitions).
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. The Europe Welding segment
decreased primarily due to a weaker euro offset by a stronger Polish zloty. The Asia Pacific Welding
segment increased primarily due to a stronger Australian dollar and Chinese renminbi. The South America Welding segment decreased primarily due to the devaluation of the Venezuelan bolivar offset by a
stronger Brazilian real and Colombian peso. The Harris Products Group segment increased primarily due to a stronger Brazilian real offset by a weaker euro.
Gross Profit:
Gross profit increased 23.6% to $563,819 during 2010 compared with $456,268 in 2009. As a percentage of Net sales, Gross profit increased to 27.2% in
2010 from 26.4% in 2009. The increase was primarily a result of higher sales and production volumes, cost reduction initiatives and lower product liability costs of $2,905 (See "Product Liability
Costs" for additional information) partially offset by an increase to the LIFO reserve of $8,459 compared with a decrease of $28,467 in the prior year. In addition, the South America Welding segment
experienced higher inventory costs of $5,755 resulting from the change in Venezuela's functional currency to the U.S. dollar and the devaluation of the bolivar. Foreign currency exchange rates had a
$4,135 favorable translation impact in 2010.
Selling, General & Administrative ("SG&A") Expenses:
SG&A expenses increased by $44,635, or 13.4% during 2010 compared with 2009. The increase was primarily
due to higher bonus expense of $28,890, higher selling, administrative and research and development expenses of $11,562, incremental SG&A expenses from acquisitions of $4,743 and higher legal expense
of $4,237 partially offset by lower retirement costs in the U.S. of $3,794 and a gain of $2,632 resulting from the change in Venezuela's functional currency to the U.S. dollar and the devaluation of
the bolivar.
Rationalization and Asset Impairment (Gains) Charges:
In 2010, the Company recorded $384 ($894 after-tax) in gains primarily related to the sale of
assets at rationalized operations. Gains recognized on the sale of assets of $4,555 ($4,596 after-tax) in the Asia Pacific Welding segment were offset by net charges of $871 ($871
after-tax) relating to environmental costs associated with the sale of property in The Harris Products Group segment. Also, charges of $3,300 ($2,831 after-tax), consisting of
employee severance and other related costs of $2,417 ($2,030 after-tax) and asset impairment charges of $883 ($801 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. See "Rationalization and Asset Impairments" for additional information.
Interest Income:
Interest income decreased to $2,381 in 2010 from $3,462 in 2009. The decrease was primarily 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 $3,171 in 2010 compared with a loss of $5,025 in 2009. The equity loss in 2009 includes a
loss of $7,943 associated with the acquisition
18
of
Jin Tai and the related disposal of the Company's 35% interest in Kuang Tai Metal Industry Co., Ltd. ("Kuang Tai") and earnings of $5,667 as the Company's share of a gain realized on
the sale of a property by the Company's joint venture in Turkey. See "Acquisitions" for additional information.
Interest Expense:
Interest expense decreased to $6,691 in 2010 from $8,521 in 2009 primarily as a result of the translation impact of the devaluation of the
Venezuelan currency that resulted in lower interest expense from the Company's Venezuelan operation and a decrease in average debt levels.
Income Taxes:
The Company recorded $54,898 of tax expense on pre-tax income of $187,108, resulting in an effective tax rate of 29.3% for 2010. The
effective income tax rate is lower than the Company's 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. In addition, tax expense includes a decrease of $5,092 in
unrecognized tax benefits in the Asia Pacific Welding segment resulting from a change in applicable tax regulations.
The
effective income tax rate of 43.7% for 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 2010 was $130,244 compared with $48,576 in the prior year. Diluted earnings per share for 2010 were $3.06 compared with diluted earnings
of $1.14 per share in 2009. Foreign currency exchange rate movements had a favorable translation effect of $762 and $612 on Net income for 2010 and 2009, respectively.
2009 Compared with 2008
Net Sales:
The table below summarizes the impacts of volume, acquisition, price and foreign currency exchange rates on Net sales for the twelve months ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net Sales due to:
|
|
|
|
|
|
Net Sales
2008
|
|
Volume
|
|
Acquisitions
|
|
Price
|
|
Foreign
Exchange
|
|
Net Sales
2009
|
|
Operating Segments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Welding
|
|
$
|
1,313,881
|
|
$
|
(456,826
|
)
|
$
|
|
|
$
|
15,912
|
|
$
|
(14,787
|
)
|
$
|
858,180
|
|
Europe Welding
|
|
|
538,570
|
|
|
(130,235
|
)
|
|
5,242
|
|
|
(22,510
|
)
|
|
(44,684
|
)
|
|
346,383
|
|
Asia Pacific Welding
|
|
|
230,661
|
|
|
(68,447
|
)
|
|
54,638
|
|
|
(5,471
|
)
|
|
(3,101
|
)
|
|
208,280
|
|
South America Welding
|
|
|
116,061
|
|
|
(23,831
|
)
|
|
|
|
|
13,117
|
|
|
(6,176
|
)
|
|
99,171
|
|
The Harris Products Group
|
|
|
279,958
|
|
|
(59,196
|
)
|
|
13,570
|
|
|
(14,178
|
)
|
|
(2,883
|
)
|
|
217,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
2,479,131
|
|
$
|
(738,535
|
)
|
$
|
73,450
|
|
$
|
(13,130
|
)
|
$
|
(71,631
|
)
|
$
|
1,729,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Welding
|
|
|
|
|
|
(34.8%
|
)
|
|
|
|
|
1.2%
|
|
|
(1.1%
|
)
|
|
(34.7%
|
)
|
Europe Welding
|
|
|
|
|
|
(24.2%
|
)
|
|
1.0%
|
|
|
(4.2%
|
)
|
|
(8.3%
|
)
|
|
(35.7%
|
)
|
Asia Pacific Welding
|
|
|
|
|
|
(29.7%
|
)
|
|
23.7%
|
|
|
(2.4%
|
)
|
|
(1.3%
|
)
|
|
(9.7%
|
)
|
South America Welding
|
|
|
|
|
|
(20.5%
|
)
|
|
|
|
|
11.3%
|
|
|
(5.3%
|
)
|
|
(14.6%
|
)
|
The Harris Products Group
|
|
|
|
|
|
(21.1%
|
)
|
|
4.8%
|
|
|
(5.1%
|
)
|
|
(1.0%
|
)
|
|
(22.4%
|
)
|
Consolidated
|
|
|
|
|
|
(29.8%
|
)
|
|
3.0%
|
|
|
(0.5%
|
)
|
|
(2.9%
|
)
|
|
(30.2%
|
)
|
Net
sales volume for 2009 decreased for all operating segments as a result of lower demand levels associated with the global economic recession. Product pricing was higher than the 2008 levels in the
North America Welding segment primarily due to price increases implemented to offset higher material costs and South America Welding segment primarily due to high inflation in Venezuela. Product
pricing
19
decreased
in The Harris Products Group segment due to the pass-through effect of lower commodity costs, particularly silver and copper. Product pricing decreased from prior year levels due
to changes in pricing required to remain competitive as a result of lower material costs in the 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 in the Asia Pacific Welding segment, Harris Soldas Especiais S.A. in The Harris Products Group segment in October 2008 and
Electro-Arco S.A. in the Europe Welding segment in April 2008.
With
respect to changes in Net sales due to foreign exchange, the North America Welding segment decreased primarily due to a weaker Canadian dollar and Mexican peso. The Europe Welding segment
decreased primarily due to a weaker euro, British pound and Polish zloty. The Asia Pacific Welding segment decreased primarily due to a weaker Australian dollar offset by a stronger Chinese renminbi.
The South America Welding segment decreased primarily due to a weaker Brazilian real, Argentine
peso and Colombian peso. The Harris Products Group segment decreased primarily due to a weaker Polish zloty.
Gross Profit:
Gross profit decreased 36.6% to $456,268 during 2009 compared with $720,151 in 2008. As a percentage of Net sales, Gross profit decreased to 26.4% in
2009 from 29.0% in 2008. This decrease was primarily a result of lower volumes, the liquidation of higher cost inventories and higher retirement costs in the U.S. of $15,466 offset by lower product
liability costs of $5,412 primarily due to a gain on an insurance settlement. Foreign currency exchange rates had a $12,653 unfavorable translation impact in 2009. The LIFO reserve decreased by
$28,467 as a result of decreases in commodity prices in 2009, primarily steel, and a reduction in inventory levels. The reduction in inventory levels resulted in a decrease to the LIFO reserve of
$14,254.
Selling, General & Administrative ("SG&A") Expenses:
SG&A expenses decreased $71,982, or 17.8%, during 2009 compared with 2008. The decrease was primarily
due to lower bonus expense of $56,292, lower selling, administrative and research and development expenses of $11,574, the favorable translation impact of foreign currency exchange rates of $12,785
and incremental foreign currency transaction gains of $9,172 partially offset by higher retirement costs in the U.S. of $12,120 and incremental SG&A expenses from acquisitions of $6,118. The Company
realized a gain of $2,144 on the settlement of a pension obligation during 2009 that was recorded as a reduction to SG&A expenses.
Rationalization and Asset Impairment (Gain) Charges:
In 2009, the Company recorded $29,897 ($23,789 after-tax) in charges related to rationalization
activities to align the business to current market conditions and asset impairments. These charges include $27,142 primarily related to employee severance costs, $2,061 in long-lived asset
impairment charges and a gain of $185 recognized in connection with the partial settlement of a pension plan. Rationalization activities during the year affected 1,063 employees and included the
closure of two manufacturing operations. Impairment charges on certain indefinite-lived intangible assets of $879 were also included under this caption. See "Rationalization and Asset Impairments" for
additional information.
Interest Income:
Interest income decreased to $3,462 in 2009 from $8,845 in 2008. The decrease was due to lower interest rates on Cash and cash equivalents in 2009
when compared with 2008.
Equity Earnings (Loss) in Affiliates:
Equity loss in affiliates was $5,025 in 2009 compared with earnings of $6,034 in 2008. The equity loss in 2009 includes a
loss of $7,943 associated with the acquisition of Jin Tai and the related disposal of the Company's 35% interest in Kuang Tai and income of $5,667 as the Company's share of a gain realized on the sale
of a property by the Company's joint venture in Turkey. Excluding these items, equity earnings decreased primarily as a result of losses at the Company's joint venture in Taiwan prior to the
acquisition of Jin Tai. See "Acquisitions" for additional information.
20
Interest Expense:
Interest expense decreased to $8,521 in 2009 from $12,155 in 2008 primarily as a result of a lower average debt balance from the payment of
$30,000 on the Senior Unsecured Note that matured in March 2009 and the impact of the amortization of gains on terminated interest rate swaps.
Income Taxes:
The Company recorded $37,905 of tax expense on pre-tax income of $86,738, resulting in an effective tax rate of 43.7% for 2009. The
effective tax rate exceeds the Company's statutory rate due to losses at certain non-U.S. entities, including the loss associated with the acquisition of Jin Tai and related disposal of
Kuang Tai of $7,943, with no tax benefit, partially offset by a benefit for the utilization of foreign tax credits.
Net Income:
Net income for 2009 was $48,576 compared with $212,286 in the prior year. Diluted earnings per share for 2009 were $1.14 compared with diluted earnings
of $4.93 per share in 2008. Foreign currency exchange rate movements had a favorable translation effect of $612 and $2,508 on net income for 2009 and 2008, respectively.
Non-GAAP Financial Measures
The Company reviews Adjusted operating income, Adjusted net income and Adjusted diluted earnings per share, all non-GAAP financial
measures, in assessing and evaluating the Company's underlying operating performance. These non-GAAP
financial measures exclude the impact of special items on the Company's reported financial results. Non-GAAP financial measures should be read in conjunction with the generally accepted
accounting principles ("GAAP") financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures.
The
following table presents a reconciliation of Operating income as reported to Adjusted operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Operating income as reported
|
|
$
|
186,430
|
|
$
|
93,233
|
|
$
|
295,660
|
|
Special items (pre-tax):
|
|
|
|
|
|
|
|
|
|
|
|
Rationalization (gains) charges
|
|
|
(1,267
|
)
|
|
26,957
|
|
|
2,447
|
|
|
Impairment charges
|
|
|
883
|
|
|
2,940
|
|
|
16,924
|
|
|
Venezuela functional currency change and devaluation
|
|
|
3,123
|
|
|
|
|
|
|
|
|
Pension settlement gain
|
|
|
|
|
|
(2,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income
|
|
$
|
189,169
|
|
$
|
120,986
|
|
$
|
315,031
|
|
|
|
|
|
|
|
|
|
Special
items included in Operating income during 2010 include net rationalization gains of $1,267 primarily related to gains on the disposal of assets at rationalized operations offset by charges
associated with the consolidation of manufacturing operations initiated in 2009, asset impairment charges of $883 and a net charge of $3,123 related to the change in functional currency for the
Company's operation in Venezuela to the U.S. dollar and the devaluation of the Venezuelan currency.
The net charge of $3,123 relating to the Venezuelan operations is recorded as an increase in Cost of goods sold of $5,755 and a reduction in SG&A expenses of $2,632.
Special
items included in Operating income during 2009 include rationalization and asset impairment charges of $29,897. The Company's rationalization activities to align the business to current market
conditions resulted in charges of $26,957 and impairment charges of $2,940 which were recognized for certain indefinite-lived intangible assets. Special items also include a pension settlement gain of
$2,144.
21
Special
items included in Operating income during 2008 include rationalization charges of $2,447 relating to the Company's rationalization programs that began in the fourth quarter 2008 designed to
align the business to current market conditions. Special items also include $16,924 in asset impairment charges including $13,194 of goodwill and $2,388 of long-lived assets related to two
operations in China, as well as an impairment charge of $1,342 for intangible assets in North America and Europe.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Net income as reported
|
|
$
|
130,244
|
|
$
|
48,576
|
|
$
|
212,286
|
|
Special items (after-tax):
|
|
|
|
|
|
|
|
|
|
|
|
Rationalization (gains) charges
|
|
|
(1,695
|
)
|
|
21,529
|
|
|
1,698
|
|
|
Impairment charges
|
|
|
801
|
|
|
2,260
|
|
|
16,615
|
|
|
Venezuela functional currency change and devaluation
|
|
|
3,560
|
|
|
|
|
|
|
|
|
Pension settlement gain
|
|
|
|
|
|
(2,144
|
)
|
|
|
|
|
Loss associated with the acquisition of Jin Tai
|
|
|
|
|
|
7,943
|
|
|
|
|
|
Gain on sale of property
|
|
|
|
|
|
(5,667
|
)
|
|
|
|
|
Income from tax adjustment resulting from change in applicable tax regulations
|
|
|
(5,092
|
)
|
|
|
|
|
|
|
|
Noncontrolling interests charges associated with special items
|
|
|
1,782
|
|
|
601
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$
|
129,600
|
|
$
|
73,098
|
|
$
|
230,599
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share as reported
|
|
$
|
3.06
|
|
$
|
1.14
|
|
$
|
4.93
|
|
Special items per share
|
|
|
(0.02
|
)
|
|
0.57
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
Adjusted diluted earnings per share
|
|
$
|
3.04
|
|
$
|
1.71
|
|
$
|
5.36
|
|
|
|
|
|
|
|
|
|
The
Company's 2010 rationalization activities to align the business to current market conditions resulted in net gains of $1,695 primarily related to the sale of property and asset disposals and asset
impairment charges of $801. Net income also includes a net charge of $3,560 related to the change of functional currency and devaluation of the Venezuelan currency, income of $5,092 due to an
adjustment in tax liabilities for a change in applicable tax regulations in the Asia Pacific Welding segment, a gain of $108 in noncontrolling interests related to the impairment of assets for a
majority-owned consolidated subsidiary and a charge of $1,890 in noncontrolling interests related to the disposal of assets for a majority-owned consolidated subsidiary.
Net
income for 2009 includes rationalization and asset impairment charges of $23,789. The Company's rationalization activities to align the business to current market conditions resulted in charges of
$21,529 and impairment charges of $2,260, which were recognized for certain indefinite-lived intangible assets. Net income also includes a loss of $7,943 associated with the acquisition Jin Tai, a
pension settlement gain of $2,144, a charge of $601 in noncontrolling interests associated with the pension settlement gain for a majority-owned consolidated subsidiary and a gain on the sale of a
property by the Company's joint venture in Turkey of $5,667.
Net
income for 2008 includes a charge of $1,698 relating to the Company's rationalization programs that began in the fourth quarter of 2008 designed to align the business to current market conditions.
Net income for 2008 also includes $16,615 in asset impairment charges including $13,194 of goodwill
and $2,388 of long-lived assets related to two operations in China (with no tax benefit), as well as an impairment charge of $1,033 for intangible assets in North America and Europe.
22
Liquidity and Capital Resources
The Company's cash flow from operations can be cyclical. Operational cash flow is a key driver of liquidity, providing cash and access to capital
markets. In assessing liquidity, the Company reviews working capital measurements to define areas for improvement. Management anticipates the Company will be able to satisfy cash requirements for its
ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances and, if necessary, borrowings under its existing credit facilities.
The
following table reflects changes in key cash flow measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
$ Change
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
2010 vs. 2009
|
|
2009 vs. 2008
|
|
Cash provided by operating activities:
|
|
$
|
156,978
|
|
$
|
250,350
|
|
$
|
257,449
|
|
$
|
(93,372
|
)
|
$
|
(7,099
|
)
|
Cash used by investing activities:
|
|
|
(69,400
|
)
|
|
(63,581
|
)
|
|
(115,800
|
)
|
|
(5,819
|
)
|
|
52,219
|
|
|
Capital expenditures
|
|
|
(60,565
|
)
|
|
(38,201
|
)
|
|
(72,426
|
)
|
|
(22,364
|
)
|
|
34,225
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(18,856
|
)
|
|
(25,449
|
)
|
|
(44,036
|
)
|
|
6,593
|
|
|
18,587
|
|
|
Proceeds from the sale of property, plant and equipment
|
|
|
10,021
|
|
|
557
|
|
|
662
|
|
|
9,464
|
|
|
(105
|
)
|
Cash used by financing activities:
|
|
|
(109,507
|
)
|
|
(89,072
|
)
|
|
(67,741
|
)
|
|
(20,435
|
)
|
|
(21,331
|
)
|
|
(Payments) proceeds on short-term borrowings, net
|
|
|
(18,599
|
)
|
|
(12,954
|
)
|
|
6,104
|
|
|
(5,645
|
)
|
|
(19,058
|
)
|
|
(Payments) proceeds on long-term borrowings, net
|
|
|
(8,580
|
)
|
|
(30,874
|
)
|
|
319
|
|
|
22,294
|
|
|
(31,193
|
)
|
|
Proceeds from exercise of stock options
|
|
|
3,508
|
|
|
705
|
|
|
7,201
|
|
|
2,803
|
|
|
(6,496
|
)
|
|
Tax benefit from exercise of stock options
|
|
|
1,210
|
|
|
195
|
|
|
3,728
|
|
|
1,015
|
|
|
(3,533
|
)
|
|
Purchase of shares for treasury
|
|
|
(39,682
|
)
|
|
(343
|
)
|
|
(42,337
|
)
|
|
(39,339
|
)
|
|
41,994
|
|
|
Cash dividends paid to shareholders
|
|
|
(47,364
|
)
|
|
(45,801
|
)
|
|
(42,756
|
)
|
|
(1,563
|
)
|
|
(3,045
|
)
|
(Decrease) increase in Cash and cash equivalents
|
|
|
(21,943
|
)
|
|
103,804
|
|
|
66,950
|
|
|
|
|
|
|
|
Cash and cash equivalents decreased 5.7%, or $21,943, to $366,193 as of December 31, 2010, from $388,136 as of December 31, 2009. This compares
with an increase of 36.5%, or $103,804, in Cash and cash equivalents during 2009.
Cash
provided by operating activities for 2010 decreased $93,372 from 2009. The decrease was primarily related to an increase in net operating working capital required to support higher sales levels.
Net operating working capital, defined as the sum of Accounts receivable and Total inventory less Trade accounts payable, increased $29,547 in 2010 compared with a decrease of $158,288 in 2009. This
decrease in cash resulting from the change in net operating working capital was primarily 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, improved to 20.7% at December 31, 2010 compared with 23.2% at December 31, 2009. Days sales in inventory improved to
89.8 days at December 31, 2010 from 100.8 days at December 31, 2009. Accounts receivable days improved to
55.4 days at December 31, 2010 from 56.9 days at December 31, 2009. Average days in accounts payable improved to 35.2 days at December 31, 2010 from
30.0 days at December 31, 2009.
Cash
used by investing activities increased by $5,819 for 2010 compared with 2009. Cash used in the acquisition of businesses in 2010 decreased $6,593 from 2009. Capital expenditures during 2010 were
$60,565, a $22,364 increase from 2009. The Company anticipates capital expenditures in 2011 in the range of $50,000 $60,000. Anticipated capital expenditures reflect investments
for capital maintenance, to improve operational effectiveness and the Company's 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 Company's facilities.
Cash
used by financing activities for 2010 increased $20,435 from 2009. The increase was primarily due to higher purchases of common shares for treasury of $39,339, an additional net reduction in
23
short-term
borrowings of $5,645 in the current period, partially offset by an increase in proceeds from the exercise of stock options and related tax benefits of $3,818 and the lower
repayments on the Company's long-term borrowings of $22,294 resulting from the Company's repayment of $30,000 for its Series B Senior Unsecured Note upon maturity during the first
quarter 2009. There were no Senior Unsecured Note maturities in 2010.
The
Company continues to expand globally and periodically looks at transactions that would involve significant investments. The Company can fund its global expansion plans with operational cash flow,
but a significant acquisition may require access to capital markets, in particular, the long-term debt market, as well as the syndicated bank loan market. The Company's financing strategy
is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the U.S.,
and then lends funds to the specific subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made.
The
Company's debt levels decreased from $123,717 at December 31, 2009 to $97,705 at December 31, 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 capitalization decreased to 7.8% at December 31, 2010 from 10.2% at
December 31, 2009. Included in the Company's debt levels at December 31, 2010 is a senior unsecured note with a balance of $80,000, which is due in March 2012. The Company expects to
repay this balance with cash generated by operations, existing cash balances or through borrowings under its existing credit facilities.
A
total of $47,364 in dividends was paid during 2010. In January 2011, the Company paid a quarterly cash dividend of $0.31 per share, or $12,987 to shareholders of record on December 31, 2010.
The
Company has a share repurchase program for up to 15 million shares of the Company's common stock. At management's 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 year ended December 31, 2010, the Company purchased 703,117 shares at a cost of $39,682. As of
December 31, 2010, 3,081,493 shares remained available for repurchase under the stock repurchase program.
The
Company made voluntary contributions to its U.S. defined benefit plans of $41,500, $45,000 and $20,000 in 2010, 2009 and 2008, respectively. The Company expects to voluntarily contribute
approximately $30,000 to its U.S. plans in 2011. Based on current pension funding rules, the Company does not anticipate that contributions to the plans would be required in 2011.
Rationalization and Asset Impairments
The Company recorded rationalization and asset impairment net gains of $384 for the year ended December 31, 2010 resulting from
rationalization activities primarily initiated in the third and second quarters of 2009. The Company initiated a number of rationalization activities in 2009 to align its business to current market
conditions. The 2010 net gains include $4,555 primarily related to asset disposals offset by charges of $2,417 primarily related to employee severance and other related costs, $871 related to
environmental costs associated with the sale of property and $883 in asset impairment charges.
In
2009, the Company recorded $29,897 in charges related to rationalization activities to align the business to current market conditions and asset impairments. These charges include $27,142 primarily
related to employee severance costs, $2,061 in long-lived asset impairment charges and a gain of $185 recognized in connection with the partial settlement of a pension plan.
Rationalization activities during the year affected 1,063 employees and included the closure of two manufacturing operations.
24
Impairment
charges on certain indefinite-lived intangible assets of $879 were also included under this caption.
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 in 2009. The
Company recognized a net gain of $1,255 for the year ended December 31, 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 severance and
other related charges associated with the continuation of the consolidation of certain manufacturing operations of $1,990 and $427 in the Europe Welding and Asia Pacific Welding segments,
respectively, and asset impairment charges of $496 and $387 in the Europe Welding and Asia Pacific Welding segments, respectively. At December 31, 2010, a liability relating to these actions of
$501 was recognized in "Other current liabilities." The Company does not expect to recognize any further material costs associated with these actions in 2011 as they were substantially completed in
2010 and should be substantially paid by the end of 2011.
During
the second quarter of 2009, the Company initiated various rationalization activities including the closure of a manufacturing operation in The Harris Products Group segment. The Company
recognized a net charge of $871 related to environmental costs associated with the sale of a property for a rationalized operation in The Harris Products Group segment in the year ended
December 31, 2010. At December 31, 2010, a liability of $930 related primarily to employee severance benefits due to these rationalization actions was recognized in "Other current
liabilities", which will be substantially paid within the next 12 months.
In
2008, the Company recorded $19,371 in rationalization and asset impairment charges. This total includes $2,447 in rationalization charges related to workforce reductions of approximately 67
employees in The Harris Product Group and 65 employees in Europe. The actions were taken to align the business to current market conditions. Asset impairment charges of $16,924 include $15,582 to
write off goodwill and write down long-lived assets related to two businesses in China and $1,342 to write down intangible assets in North America and Europe.
Fair
values of impaired assets were determined using projected discounted cash flows.
The
Company continues evaluating its cost structure and additional rationalization actions may result in charges in future periods.
Acquisitions
On January 31, 2011, the Company acquired substantially all of the assets of SSCO Manufacturing, Inc. (d/b/a Arc Products), a
privately-held manufacturer of orbital welding systems and welding automation components based in Southern California. Orbital welding systems are designed to automatically weld pipe and
tube in difficult to access locations and for mission-critical applications requiring high weld integrity and sophisticated quality monitoring capabilities. The acquisition will complement the
Company's ability to serve global customers in the nuclear, power generation and process industries worldwide. Arc Products had annual sales of approximately $5,000 in 2010.
On
December 28, 2010, the Company signed a definitive agreement to acquire all of the outstanding stock of OOO Severstal-metiz: welding consumables, a leading manufacturer of welding
consumables in Russia and a subsidiary of OAO Severstal, one of the world's leading vertically integrated steel and mining companies. The purchase price is expected to be approximately $12,000 in
cash. The transaction
25
has
been approved by Russian regulatory authorities and is expected to close during the first quarter of 2011, subject to the satisfaction or waiver of other closing conditions. The acquisition will
add to the Company's manufacturing capacity and distribution channels in Russia and complement the recent MGM acquisition. Sales for OOO Severstal-metiz during 2010 were approximately $40,000.
On
October 29, 2010, the Company acquired all of the outstanding stock of MGM, a privately-held welding wire manufacturer based in the Orel region of Russia, for approximately
$28,500 in cash and assumed debt. This acquisition represents the Company's 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.
On
July 29, 2009, the Company completed the acquisition of 100% of Jin Tai, based in Jinzhou, China. This transaction expanded the Company's 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 Company's previous non-controlling direct interest in Jin Tai was $8,675. The carrying values of the Company's interests in Kuang Tai and Jin Tai were $29,368 and
$9,973, respectively. The excess carrying value over fair value of these interests resulted in a loss on the transaction of $7,943 recorded in "Equity earnings (loss) in affiliates."
The
Company previously reported its proportional share of Jin Tai's net income under the equity method in "Equity earnings (loss) in affiliates." Jin Tai's sales were $186,774 in 2008 and $74,834 in
2009 prior to the acquisition. Jin Tai's sales of $53,956 after the acquisition were included in "Net sales" for 2009. The pro forma impact on the results of operations if the acquisition had been
completed as of the beginning of both 2009 and 2008 would not have been significant.
On
October 1, 2008, the Company acquired a 90% interest in a leading Brazilian manufacturer of brazing products for approximately $24,000 in cash and assumed debt. The newly acquired company,
based in Sao Paulo, is being operated as Harris Soldas Especiais S.A. This acquisition expanded the Company's brazing product line and increased the Company's presence in the South American
market. Annual sales at the time of the acquisition were approximately $30,000.
On
April 7, 2008, the Company acquired all of the outstanding stock of Electro-Arco S.A. ("Electro-Arco"), a privately-held manufacturer of welding
consumables headquartered near Lisbon, Portugal, for approximately $24,000 in cash and assumed debt. This acquisition added to the Company's European consumables manufacturing capacity and widened the
Company's commercial presence in Western Europe. Annual sales at the time of the acquisition were approximately $40,000.
Acquired
companies are included in the Company's consolidated financial statements as of the date of acquisition.
Debt
During March 2002, the Company issued Senior Unsecured Notes (the "Notes") totaling $150,000 through a private placement. The Notes have original
maturities ranging from five to ten years with a weighted-average interest rate of 6.1% and an average tenure of eight years. Interest is payable semi-annually in March and September. The
proceeds are being used for general corporate purposes,
26
including
acquisitions, and are generally invested in short-term, highly liquid investments. The Notes contain certain affirmative and negative covenants, including restrictions on asset
dispositions and financial covenants (interest coverage and funded debt-to-EBITDA, as defined in the Notes agreement, ratios). As of December 31, 2010, the Company was
in compliance with all of its covenants under the Notes agreement. The Company repaid the $40,000 Series A Notes and the $30,000 Series B Notes in March 2007 and March 2009,
respectively, reducing the balance outstanding of the Notes to $80,000, which is due March 2012.
During
March 2002, the Company entered into floating rate interest rate swap agreements totaling $80,000 to convert a portion of the Notes outstanding from fixed to floating rates. These swaps were
designated as fair value hedges and, as such, the gains or losses on the derivative instrument, as well as the offsetting gains or losses on the hedged item attributable to the hedged risk, were
recognized in earnings. Net payments or receipts under these agreements were recognized as adjustments to "Interest
expense." In May 2003, these swap agreements were terminated. The gain of $10,613 on the termination of these swaps was deferred and is being amortized as an offset to "Interest expense" over the
remaining life of the Notes. The amortization of this gain reduced "Interest expense" by $206 in 2010, $313 in 2009 and $958 in 2008, and is expected to reduce annual "Interest expense" by $206 in
2011. At December 31, 2010, $236 remains to be amortized and is recorded in "Long-term debt, less current portion."
During
July 2003 and April 2004, the Company entered into various floating rate interest rate swap agreements totaling $110,000 to convert a portion of the Notes outstanding from fixed to floating
rates based on the London Inter-Bank Offered Rate ("LIBOR"). These swaps were designated and qualified as fair value hedges and, as such, the gains or losses on the derivative instrument,
as well as the offsetting gains or losses on the hedged item, were recognized in earnings. Net payments or receipts under these agreements were recognized as adjustments to "Interest expense."
During
February 2009, the Company terminated swaps with a notional value of $80,000 and realized a gain of $5,079. This gain was deferred and is being amortized over the remaining life of the Notes.
The amortization of this gain reduced "Interest expense" by $1,661 and $1,429 in 2010 and 2009, respectively, and is expected to reduce annual "Interest expense" by $1,661 in 2011. At
December 31, 2010, $1,989 remains to be amortized and is included in "Long-term debt, less current portion."
During
March 2009, swaps designated as fair value hedges that converted the $30,000 Series B Notes from fixed to floating interest rates matured with the underlying Notes. The Company has no
interest rate swaps outstanding at December 31, 2010. The weighted average effective rate on the Notes, net of the impact of swaps, was 4.0% and 4.1% for 2010 and 2009, respectively.
At
December 31, 2010 and 2009, the fair value of long-term debt, including the current portion, was approximately $88,120 and $91,365, respectively, which was determined using
available market information and methodologies requiring judgment. Since considerable judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount
which could be realized in a current market exchange.
Revolving Credit Agreement
On November 18, 2009, the Company entered into an Amended and Restated Credit Agreement ("Credit Agreement") for a $150,000 revolving credit
facility to be used for general corporate purposes. This Credit Agreement amended and restated the Company's $175,000 revolving credit agreement that was entered into on December 17, 2004 and
had a maturity date in December 2009. The Credit Agreement has a three-year term and may be increased, subject to certain conditions, by an additional amount up to $75,000 at any time not
later than 180 days prior to the last day of the term. The interest
27
rate
on borrowings is based on either LIBOR or the prime rate, plus a spread based on the Company's leverage ratio, at the Company's election. A quarterly facility fee is payable based upon the daily
aggregate amount of commitments and the Company's leverage ratio.
The
Credit Agreement contains customary affirmative, negative and financial covenants for credit facilities of this type, including limitations on the Company with respect to liens, investments,
distributions, mergers and acquisitions, dispositions of assets, transactions with affiliates and a fixed charges coverage ratio and total leverage ratio. As of December 31, 2010, the Company
was in compliance with all of its covenants and there were no borrowings under the Credit Agreement, but had letters of credit outstanding totaling $4,097, which reduced the availability under the
Credit Agreement to $145,903.
Short-term Borrowings
The Company's short-term borrowings included in "Amounts due banks" were $11,283 and $34,577 at December 31, 2010 and 2009,
respectively, and represent the borrowings of foreign subsidiaries at weighted average interest rates of 17.10% and 8.35%, respectively. The primary reason for the increase in the weighted average
interest rate is the shift during 2010 in short-term borrowings from geographic areas with lower interest rates to areas with higher interest rates.
Contractual Obligations and Commercial Commitments
The Company's contractual obligations and commercial commitments as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
Total
|
|
2011
|
|
2012 to
2013
|
|
2014 to
2015
|
|
2016 and
Beyond
|
|
Long-term debt
|
|
$
|
82,328
|
|
$
|
864
|
|
$
|
80,395
|
|
$
|
253
|
|
$
|
816
|
|
Interest on long-term debt
|
|
|
6,605
|
|
|
5,138
|
|
|
1,343
|
|
|
45
|
|
|
79
|
|
Capital lease obligations
|
|
|
1,869
|
|
|
931
|
|
|
772
|
|
|
79
|
|
|
87
|
|
Short-term debt
|
|
|
11,283
|
|
|
11,283
|
|
|
|
|
|
|
|
|
|
|
Interest on short-term debt
|
|
|
812
|
|
|
812
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
34,421
|
|
|
10,567
|
|
|
12,417
|
|
|
5,818
|
|
|
5,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
137,318
|
|
$
|
29,595
|
|
$
|
94,927
|
|
$
|
6,195
|
|
$
|
6,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2010, there was $38,393 of tax liabilities related to unrecognized tax benefits. Because of the high degree of uncertainty regarding the timing of future cash outflows
associated with these liabilities, the Company is unable to estimate the years in which settlement will occur with the respective taxing authorities. See Note 10 to the Company's consolidated
financial statements for further discussion.
The
Company expects to contribute approximately $30,000 to the U.S. pension plans in 2011.
Stock-Based Compensation
On April 28, 2006, the shareholders of the Company approved the 2006 Equity and Performance Incentive Plan, as amended ("EPI Plan"), which
replaced the 1998 Stock Plan, as amended and restated in May 2003. The EPI Plan provides for the granting of options, appreciation rights, restricted shares, restricted stock units and
performance-based awards up to an additional 3,000,000 of the Company's common shares. In addition, on April 28, 2006, the shareholders of the Company approved
28
the
2006 Stock Plan for Non-Employee Directors, as amended ("Director Plan"), which replaced the Stock Option Plan for Non-Employee Directors adopted in 2000. The Director Plan
provides for the granting of options, restricted shares and restricted stock units up to an
additional 300,000 of the Company's common shares. At December 31, 2010, there were 1,835,822 common shares available for future grants under all plans.
Under
these plans, options and restricted shares granted were 301,937 in 2010, 386,305 in 2009 and 316,264 in 2008. The Company issued shares of common stock from treasury upon all exercises of stock
options and the granting of restricted stock awards in 2010, 2009 and 2008.
Expense
is recognized for all awards of stock-based compensation by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any stock options,
restricted or deferred shares ultimately forfeited because recipients fail to meet vesting requirements. Total stock-based compensation expense recognized in the Consolidated Statements of
Income for 2010, 2009 and 2008 was $8,213, $5,432 and $4,738, respectively. The related tax benefit for 2010, 2009 and 2008 was $3,112, $2,058 and $1,793, respectively. As of December 31, 2010,
total unrecognized stock-based compensation expense related to nonvested stock options and restricted shares was $13,579, which is expected to be recognized over a weighted average period
of approximately 34 months.
The
aggregate intrinsic value of awards outstanding at December 31, 2010, based on the Company's closing stock price of $65.27 as of the last business day of the year ended December 31,
2010, which would have been received by the optionees had all awards been exercised on that date, was $50,501. The aggregate intrinsic value of awards exercisable at December 31, 2010, based on
the Company's closing stock price of $65.27 as of the last business day of the year ended December 31, 2010, which would have been received by the optionees had all awards been exercised on
that date, was $28,857. The total intrinsic value of stock awards exercised during 2010 and 2009 was $5,006 and $2,236, respectively. Intrinsic value is the amount by which the fair value of the
underlying stock exceeds the exercise price of the awards.
Product Liability Costs
Product liability costs have been significant particularly with respect to welding fume claims. Costs incurred are volatile and are largely related
to trial activity. The costs associated with these claims are predominantly defense costs which are recognized in the periods incurred. Product liability costs decreased $2,905 in 2010 compared with
2009 primarily due to increased insurance reimbursement and reversal of reserves following successful appeals.
The
long-term impact of the welding fume loss contingency, in the aggregate, on operating results, operating cash flows and access to capital markets is difficult to assess, particularly
since claims are in many different stages of development and the Company benefits significantly from cost sharing with co-defendants and insurance carriers. Moreover, the Company has been
largely successful to date in its defense of these claims and indemnity payments have been
immaterial. If cost sharing dissipates for some currently unforeseen reason, or the Company's trial experience changes overall, it is possible on a longer term basis that the cost of resolving this
loss contingency could materially reduce the Company's operating results, cash flows and restrict capital market access.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts
outstanding under the Company's Credit Agreement.
29
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 Company's 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 a significant impact on the Company's
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
transferor's continuing involvement in transferred financial assets. ASC 860 must be applied as of the beginning of each reporting entity's 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 Company's financial statements.
In
December 2007, the FASB issued ASC 810 (formerly SFAS 160, "
Noncontrolling Interests in Consolidated Financial Statements
"). ASC 810 clarifies
that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. ASC 810 changes the way
the consolidated statement of income is presented thus requiring consolidated net income to be reported at amounts that include the amounts attributable to both parent and the noncontrolling interest.
This pronouncement was effective for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2008. The Company has adopted these provisions applying the
presentation and disclosure requirements retrospectively resulting in reclassification of noncontrolling interests in the Consolidated Balance Sheets from "Other long-term liabilities" to
"Total equity." The Company also changed retrospectively the presentation of income attributable to noncontrolling interests in the Consolidated Statements of Income to separately disclose income
attributable to noncontrolling interests as "Noncontrolling interests in subsidiaries' earnings."
30
Prior
to this change, income attributable to noncontrolling interests was included in "Selling, general and administrative expenses."
New Accounting Standards to be Adopted:
In December 2010, the FASB issued ASU No. 2010-29,
"Business Combinations (Topic 805) Disclosure of
Supplementary Pro Forma Information for Business Combinations a consensus of the FASB Emerging Issues Task Force."
The objective of ASU No. 2010-29 is to
address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. This standard is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company is currently evaluating the
impact of ASU No. 2010-29, but does not expect it will have a significant impact on the Company's financial statements.
In
October 2009, the FASB issued ASU No. 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 No. 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. Alternatively, adoption may be on
a retrospective basis and early application is permitted. The Company is currently evaluating the impact of ASU No. 2009-13, but does not expect it will have a significant impact on
the Company's financial statements.
Critical Accounting Policies
The Company's consolidated financial statements are based on the selection and application of significant accounting policies, which require
management to make estimates and assumptions. These estimates and assumptions are reviewed periodically by management and compared to historical trends to determine the accuracy of estimates and
assumptions used. If warranted, these estimates and assumptions may be changed as current trends are assessed and updated. Historically, the Company's estimates have been determined to be reasonable.
No material changes to the Company's accounting policies were made during 2010. The Company believes the following are some of the more critical judgment areas in the application of its accounting
policies that affect its financial condition and results of operations.
Legal and Tax 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 costs associated with these claims are predominantly defense costs, which are recognized in the periods incurred. Insurance reimbursements mitigate these costs and,
where reimbursements are probable, they are recognized in the applicable period. With respect to costs other than defense costs (i.e., for liability and/or settlement or other resolution),
reserves are recorded when it is probable that the contingencies will have an unfavorable outcome. The Company accrues its best estimate of the probable costs, after a review of the facts with
management and counsel and taking into account past experience. If an unfavorable outcome is determined to be reasonably possible but not probable, or if the amount of loss cannot be reasonably
estimated, disclosure is provided for material claims or litigation. Many of the current cases
31
are
in differing procedural stages and information on the circumstances of each claimant, which forms the basis for judgments as to the validity or ultimate disposition of such actions, varies
greatly. Therefore, in many situations a range of possible losses cannot be made. Reserves are adjusted as facts and circumstances change and related management assessments of the underlying merits
and the likelihood of outcomes change. Moreover, reserves only cover identified and/or asserted claims. Future claims could, therefore, give rise to increases to such reserves. See Note 14 to
the Company's consolidated financial statements and the "Legal Proceedings" section of this Annual Report on Form 10-K for further discussion of legal contingencies.
The
Company is subject to taxation from U.S. federal, state, municipal and international jurisdictions. The calculation of current income tax expense is based on the best information available and
involves significant management judgment. The actual income tax liability for each jurisdiction in any year can in some instances be ultimately determined several years after the financial statements
are published.
The
Company maintains reserves for estimated income tax exposures for many jurisdictions. Exposures are settled primarily through the completion of audits within each individual tax jurisdiction or
the closing of a statute of limitation. Exposures can also be affected by changes in applicable tax law or other factors, which may cause management to believe a revision of past estimates is
appropriate. Management believes that an appropriate liability has been established for income tax exposures; however, actual results may materially differ from these estimates.
Translation of Foreign Currencies
Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the dates of the Consolidated Balance Sheets; revenue
and expense accounts are translated at monthly exchange rates. Translation adjustments are reflected as a component of Total equity. For subsidiaries operating in highly inflationary economies, both
historical and current exchange rates are used in translating balance sheet accounts, and translation adjustments are included in Net income.
Foreign
currency transaction losses are included in "Selling, general & administrative expenses" and were $118, $226 and $10,409 in 2010, 2009 and 2008, respectively.
Venezuela Foreign Currency
Effective January 1, 2010, the financial statements of the Company's Venezuelan operation have been remeasured into the Company's 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 U.S. dollars at the official (government established) exchange rates. An unregulated parallel market that existed for exchanging bolivars for U.S. dollars through
securities transactions was terminated by the Venezuelan government on May 17, 2010 and subsequently established as a regulated market on June 9, 2010.
The
official exchange rate in Venezuela had been fixed at 2.15 bolivars to 1 U.S. dollar for several years. On January 8, 2010, the Venezuelan government announced the devaluation of its
currency relative to the U.S. 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.
In
December 2010, the Venezuelan government announced the elimination of the Essential Rate effective as of January 1, 2011. The impact of the elimination of the Essential Rate on the
Company's consolidated results of operations is not expected to be significant.
32
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
Company's Venezuelan operation are reported under highly inflationary accounting rules as of January 1, 2010. Under highly inflationary accounting, the financial statements of the Company's
Venezuelan operation have been remeasured into the Company's reporting currency and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current
earnings, rather than "Accumulated other comprehensive loss" on the Company's Consolidated Balance Sheet.
Future
impacts to earnings of applying highly inflationary accounting for Venezuela on the Company's consolidated financial statements will be dependent upon movements in the applicable exchange rates
between the bolivar and the U.S. dollar and the amount of monetary assets and liabilities included in the Company's Venezuelan operation's balance sheet. At December 31, 2010, the net
bolivar-denominated monetary liability position was $4,715. In addition, the Company participates in Venezuelan sovereign debt offerings from time to time as a means of converting bolivars to U.S.
dollars. The conversion of bolivars to U.S. 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 second half of 2010, the Company acquired $7,672 of Venezuelan sovereign debt at the Non-Essential Rate, which was immediately sold at
a discount for $6,022. The sale of the Venezuelan sovereign debt resulted in a loss of $1,650 recognized in "Selling, general and administrative expenses."
The
devaluation of the bolivar and the change to the U.S. dollar as the functional currency 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 for the year ended December 31, 2010.
Deferred Income Taxes
Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of
assets and liabilities and operating loss and tax credit carryforwards. The Company does not provide deferred income taxes on unremitted earnings of certain non-U.S. subsidiaries, which
are deemed permanently reinvested. It is not practicable to calculate the deferred taxes associated with the remittance of these earnings. Deferred income taxes associated with earnings of $4,690 that
are not expected to be permanently reinvested were not significant. At December 31, 2010, the Company had approximately $136,814 of gross deferred tax assets related to deductible temporary
differences and tax loss and credit carryforwards which may reduce taxable income in future years.
In
assessing the realizability of deferred tax assets, the Company assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company
considers the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At December 31, 2010, a valuation allowance
of $38,451 was recorded against these deferred tax assets based on this assessment. The Company believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will
be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company's assessment of future taxable income or tax planning strategies
changes.
33
Pensions
The Company maintains a number of defined benefit and defined contribution plans to provide retirement benefits for employees. These plans are
maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA"), local statutory law or as determined by the Board of Directors. The plans
generally provide benefits based upon years of service and compensation. Pension plans are funded except for a domestic non-qualified pension plan for certain key employees and certain
foreign plans.
A
substantial portion of the Company's pension amounts relates to its defined benefit plan in the United States. The fair value of plan assets is determined at December 31 of each year.
A
significant element in determining the Company's pension expense is the expected return on plan assets. At the end of each year, the expected return on plan assets is determined based on the
weighted average expected return of the various asset classes in the plan's portfolio and the targeted allocation of plan assets. The asset class return is developed using historical asset return
performance as well as current market conditions such as inflation, interest rates and equity market performance. The Company determined this rate to be 7.9% and 8.2% at December 31, 2010 and
2009, respectively. The assumed long-term rate of return on assets is applied to the market value of plan assets. This produces the expected return on plan assets included in pension
expense. The difference between this expected return and the actual return on plan assets is deferred and amortized over the average remaining service period of active employees expected to receive
benefits under the plan. The amortization of the net deferral of past losses will increase future pension expense. During 2010, investment returns were 13.2% compared with a return of 16.3% in 2009. A
25 basis point change in the expected return on plan assets would increase or decrease pension expense by approximately $1,600.
Another
significant element in determining the Company's pension expense is the discount rate for plan liabilities. To develop the discount rate assumption to be used, the Company refers to the yield
derived from matching projected pension payments with maturities of a portfolio of available non-callable bonds rated AA- or better. The Company determined this rate to be 5.3%
at December 31, 2010. A 25 basis point change in the discount rate would increase or decrease pension expense by approximately $2,000.
Pension
expense relating to the Company's defined benefit plans was $29,123, $34,774 and $4,613 in 2010, 2009 and 2008, respectively. The Company expects 2011 defined benefit pension expense to
decrease by approximately $4,000 to $5,000.
The
Company made voluntary contributions to its U.S. defined benefit plans of $41,500, $45,000 and $20,000 in 2010, 2009 and 2008, respectively. The Company expects to voluntarily contribute $30,000
to its U.S. plans in 2011. Based on current pension funding rules, the Company does not anticipate that contributions to the plans would be required in 2011.
Inventories
Inventories are valued at the lower of cost or market. Fixed manufacturing overhead costs are allocated to inventory based on normal production
capacity and abnormal manufacturing costs are recognized as period costs. For most domestic inventories, cost is determined principally by the last-in, first-out ("LIFO")
method, and for non-U.S. inventories, cost is determined by the first-in, first-out ("FIFO") method. An actual valuation of the inventory under the LIFO method can
be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end
inventory levels and costs. Because these are subject to many factors beyond management's control, annual results may differ from interim
34
results
as they are subject to the final year-end LIFO inventory valuation. The excess of current cost over LIFO cost was $70,906 at December 31, 2010 and $62,447 at
December 31, 2009.
The
Company reviews the net realizable value of inventory on an on-going basis, with consideration given to deterioration, obsolescence and other factors. If actual market conditions
differ from those projected by management, and the Company's estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales may be required. Historically, the
Company's reserves have approximated actual experience.
Accounts Receivable
The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for
products delivered. The Company estimates this allowance based on the age of the related receivable, knowledge of the financial condition of customers, review of historical receivables and reserve
trends and other pertinent information. If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may
be required. Historically, the Company's reserves have approximated actual experience.
Long-Lived Assets
The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable long-lived
assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the
appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, a loss is recognized to the extent that carrying
value exceeds fair value. Fair value is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including the discounted value of estimated future cash flows.
Goodwill and Intangibles
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets in the fourth quarter using the same dates each
year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment. The fair value of each indefinite-lived intangible asset is compared to its carrying
value and an impairment charge is recorded if the carrying value exceeds the fair value. Goodwill is tested by comparing the fair value of each reporting unit with its carrying value. If the carrying
value of the reporting unit exceeds its fair value, the implied value of goodwill is compared to its carrying value and impairment is recognized to the extent that the carrying value exceeds the
implied fair value.
Fair
values are determined using established business valuation multiples and models developed by the Company that incorporate allocations of certain assets and cash flows among reporting units,
estimates of market participant assumptions of future cash flows, future growth rates and the applicable discount rates to value estimated cash flows. Changes in economic and operating conditions
impacting these assumptions could result in asset impairments in future periods.
The
fair value of goodwill for all of the Company's operating business units exceeded its carrying value by at least 10% as of the testing date during the fourth quarter of 2010. Key assumptions in
estimating the reporting unit's fair value include assumed market participant assumptions of revenue growth, operating margins and the rate used to discount future cash flows. Actual revenue growth
and operating margins below the assumed market participant assumptions or an increase in the discount
35
rate
would have a negative impact on the fair value of the reporting unit that could result in a goodwill impairment charge in a future period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company's primary financial market risks include fluctuations in currency exchange rates, commodity prices and interest rates. The Company manages these risks by using derivative financial
instruments in accordance with established policies and procedures. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
Included
below is a sensitivity analysis based upon a hypothetical 10% weakening or strengthening in the U.S. dollar compared to foreign currency exchange rates at December 31, 2010, a 10%
change in commodity prices, and a 100 basis point increase in effective interest rates under the Company's current borrowing arrangements. The contractual derivative and borrowing arrangements in
effect at December 31, 2010 were compared to the hypothetical foreign exchange, commodity price, or interest rates in the sensitivity analysis to determine the effect on income before taxes,
interest expense, or accumulated other comprehensive loss. The analysis takes into consideration any offset that would result from changes in the value of the hedged asset or liability.
Foreign Currency Exchange Risk
The Company enters into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. At December 31, 2010, the Company hedged certain third-party and intercompany
purchases and sales. At December 31, 2010,
the Company had foreign exchange contracts with a notional value of approximately $33,221. At December 31, 2010, a hypothetical 10% weakening of the U.S. dollar would not materially affect the
Company's financial statements.
Commodity Price Risk
From time to time, the Company uses various hedging arrangements to manage exposures to price risk from commodity purchases. These hedging
arrangements have the effect of locking in for specified periods the prices the Company will pay for the volume to which the hedge relates. A hypothetical 10% adverse change in commodity prices on the
Company's open commodity futures at December 31, 2010 would not materially affect the Company's financial statements.
Interest Rate Risk
As of December 31, 2010, the Company had no interest rate swaps outstanding.
The
fair value of the Company's Cash and cash equivalents at December 31, 2010 approximated carrying value. The Company's financial instruments are subject to concentrations of credit risk. The
Company has minimized this risk by entering into investments with a number of major banks and financial institutions and investing in high-quality instruments. The Company does not expect
any counterparties to fail to meet their obligations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
response to this item is submitted in a separate section of this Annual Report on Form 10-K following the signature page.
36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on
Form 10-K.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, the
Company conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2010 based on the framework in "Internal Control
Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under such framework, management concluded that the Company's
internal control over financial reporting was effective as of December 31, 2010.
The
effectiveness of the Company's internal control over financial reporting as of December 31, 2010 has been audited by Ernst & Young LLP, an independent registered public
accounting firm, as stated in their report, which is included elsewhere in this Annual Report on Form 10-K and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that occurred during the fourth quarter of 2010 that materially
affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
37
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
Company is expected to file its 2011 proxy statement pursuant to Regulation 14A of the Exchange Act prior to April 30, 2011.
Except
for the information set forth below concerning our Executive Officers, the information required by this item is incorporated by reference from the 2011 proxy statement.
EXECUTIVE OFFICERS OF THE REGISTRANT
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
John M. Stropki, Jr.
|
|
60
|
|
Chairman of the Board since October 13, 2004; Director since 1998; Chief Executive Officer and President since June 3, 2004; Chief Operating Officer from May 1, 2003 to June 3, 2004; Executive Vice
President from 1995 to June 3, 2004; and President, North America from 1996 to 2003.
|
Vincent K. Petrella
|
|
50
|
|
Senior Vice President, Chief Financial Officer and Treasurer since October 7, 2005; Vice President, Chief Financial Officer
and Treasurer from February 4, 2004 to October 7, 2005; and Vice President, Corporate Controller from 2001 to 2003.
|
Frederick G. Stueber
|
|
57
|
|
Senior Vice President, General Counsel and Secretary since 1996.
|
George D. Blankenship
|
|
48
|
|
Senior Vice President; President, Lincoln Electric North America since July 30, 2009; Senior Vice President, Global
Engineering from October 7, 2005 to July 30, 2009; Vice President, Global Engineering from May 5, 2005 to October 7, 2005; President, Lincoln Electric North America of The Lincoln Electric Company since July 30, 2009; Senior
Vice President; President, Lincoln Cleveland of The Lincoln Electric Company from January 8, 2008 to July 30, 2009; Senior Vice President, U.S. Operations of The Lincoln Electric Company from October 7, 2005 to January 8, 2008;
Vice President, Cleveland Operations of The Lincoln Electric Company from June 6, 2005 to October 7, 2005; and Vice President, Engineering and Quality Assurance of The Lincoln Electric Company from 2000 to June 6, 2005.
|
Gretchen A. Farrell
|
|
48
|
|
Senior Vice President, Human Resources and Compliance since July 30, 2009; Vice President, Human Resources from May 5,
2005 to July 30, 2009; and Vice President, Human Resources of The Lincoln Electric Company since March 5, 2003.
|
Thomas A. Flohn
|
|
50
|
|
Vice President; President, Lincoln Electric Europe, Middle East & Africa (EMEA) since July 1, 2010; Vice President;
President, Lincoln Asia Pacific from January 1, 2005 to June 30, 2010; and Vice President of Sales and Marketing, Lincoln Electric Asia Pacific from May 1, 1999 to December 31, 2004.
|
38
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
David M. LeBlanc
|
|
46
|
|
Senior Vice President; President, Lincoln Electric International since July 30, 2009; Vice President; President, Lincoln Electric Europe and
Russia from March 10, 2008 to July 30, 2009; Vice President; President, Lincoln Electric Europe from September 1, 2005 to March 10, 2008; and Vice President; President, Lincoln Electric Latin America from January 1, 2002 to
August 31, 2005.
|
The
Company has been advised that there is no arrangement or understanding among any one of the officers listed and any other persons pursuant to which he or she was elected as an officer. The
executive officers are elected by the Board of Directors normally for a term of one year and/or until the election of their successors.
ITEM 11. EXECUTIVE COMPENSATION
The
information required by this item is incorporated by reference from the 2011 proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except
for the information set forth below regarding our equity plans, the information required by this item is incorporated by reference from the 2011 proxy statement.
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities
to be Issued
Upon Exercise of
Outstanding Options
(a)
|
|
Weighted Average
Exercise Price of
Outstanding Options
(b)
|
|
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected
in Column (a))
(c)
|
|
Equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
Approved by security holders
|
|
|
2,151,777
|
|
$
|
48.79
|
|
|
1,835,822
|
|
|
Not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,151,777
|
|
|
48.79
|
|
|
1,835,822
|
|
|
|
|
|
|
|
|
|
|
For
further information on the Company's equity compensation plans, see Note 1 and Note 7 to the Company's consolidated financial statements included in Item 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The
information required by this item is incorporated by reference from the 2011 proxy statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this item is incorporated by reference from the 2011 proxy statement.
39
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The
following consolidated financial statements of the Company are included in a separate section of this report following the signature page and certifications:
Report
of Independent Registered Public Accounting Firm
Report
of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated
Balance Sheets December 31, 2010 and 2009
Consolidated
Statements of Income Years ended December 31, 2010, 2009 and 2008
Consolidated
Statements of Equity Years ended December 31, 2010, 2009 and 2008
Consolidated
Statements of Cash Flows Years ended December 31, 2010, 2009 and 2008
Notes
to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
The
following consolidated financial statement schedule of the Company is included in a separate section of this report following the signature page:
Schedule II
Valuation and Qualifying Accounts
All
other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable,
and therefore, have been omitted.
(a)(3) Exhibits
|
|
|
Exhibit No.
|
|
Description
|
3.1
|
|
Restated Articles of Incorporation of Lincoln Electric Holdings, Inc. (filed as Annex B to Form S-4 of Lincoln Electric Holdings, Inc., Registration No. 333-50435, filed on April 17, 1998,
and incorporated herein by reference and made a part hereof).
|
3.2
|
|
Amended and Restated Code of Regulations of Lincoln Electric Holdings, Inc. (as Amended on November 3, 2009) (filed as Exhibit 3.2 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three
months ended September 30, 2009, SEC File No. 0-01402 and incorporated herein by reference and made a part hereof).
|
10.1
|
|
Amended and Restated Credit Agreement dated November 18, 2009 among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co.,
Inc., Vernon Tool Co., Ltd., Lincoln Global, Inc., the financial institutions listed in Annex A thereof, and KeyBank National Association, as Letter of Credit Issuer and Administrative Agent (filed as Exhibit 10.1 to
Form 8-K of Lincoln Electric Holdings, Inc. filed on November 20, 2009, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
40
|
|
|
Exhibit No.
|
|
Description
|
10.2
|
|
Note Purchase Agreement dated March 12, 2002 between Lincoln Electric Holdings, Inc. and The Lincoln Electric Company and the Purchasers listed in Schedule A thereof (filed as Exhibit 10(q) to
Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended March 31, 2002, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.3
|
|
Amended and Restated Note Purchase and Private Shelf Agreement between Lincoln Electric Holdings, Inc., The Lincoln Electric Company and The Prudential Insurance Company of America dated as of April 30, 2002
(filed as Exhibit 10(v) to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended June 30, 2002, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.4
|
|
Amendment No. 1 to the Amended and Restated Note Purchase and Private Shelf Agreement dated as of December 14, 2006 (filed as Exhibit 10(d) to Form 10-K of Lincoln Electric Holdings, Inc. for
the year ended December 31, 2006, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.5*
|
|
1998 Stock Plan (Amended, Restated and Renamed as of May 1, 2003) (filed as Appendix B to the Lincoln Electric Holdings, Inc. proxy statement dated March 31, 2003, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
10.6*
|
|
Amendment No. 1 to the 1998 Stock Plan (Amended, Restated and Renamed Effective May 1, 2003) dated October 20, 2006 (filed as Exhibit 10.6 to Form 10-K of Lincoln Electric Holdings, Inc.
for the year ended December 31, 2007, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.7*
|
|
1988 Incentive Equity Plan (filed as Exhibit 28 to the Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No. 33-25209 and incorporated herein by reference and made a part hereof)
as adopted and amended by Lincoln Electric Holdings, Inc. pursuant to an Instrument of Adoption and Amendment dated December 29, 1998 (filed as Exhibit 10(d) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended
December 31, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.8*
|
|
Amendment No. 2 to the 1988 Incentive Equity Plan dated October 20, 2006 (filed as Exhibit 10.8 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2007, SEC
File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.9*
|
|
Form of Indemnification Agreement (filed as Exhibit A to The Lincoln Electric Company 1987 proxy statement, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
|
10.10*
|
|
Supplemental Executive Retirement Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009, SEC File
No. 0-1402 and incorporated herein by reference and made part hereof).
|
10.11*
|
|
Deferred Compensation Plan for Executives (Amended and Restated as of January 1, 2004) (filed as Exhibit 10(h) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31,
2003, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
41
|
|
|
Exhibit No.
|
|
Description
|
10.12*
|
|
Amendment No. 1 to the Deferred Compensation Plan for Executives (Amended and Restated as of January 1, 2004) (filed as Exhibit 10.2 to Form 8-K of Lincoln Electric Holdings, Inc. on
February 1, 2005, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.13*
|
|
Instrument of Termination of the Deferred Compensation Plan for Executives (filed as Exhibit 10.2 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 4, 2006, SEC File No. 0-1402
and incorporated herein by reference and made a part hereof).
|
|
|
|
10.14*
|
|
Deferred Compensation Plan for Certain Retention Agreements and Other Contractual Arrangements (Amended and Restated as of January 1, 2004) (filed as Exhibit 10(i) to Form 10-K of Lincoln Electric
Holdings, Inc. for the year ended December 31, 2003, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.15*
|
|
Non-Employee Directors' Deferred Compensation Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.3 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009,
SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.16*
|
|
Description of Management Incentive Plan (filed as Exhibit 10(e) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof).
|
10.17*
|
|
Description of Long-Term Performance Plan (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1997, SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof).
|
10.18*
|
|
Form of Severance Agreement (as entered into by the Company and the following executive officers: Messrs. Stropki, Petrella, Stueber, LeBlanc and Blankenship) (filed as Exhibit 10.1 to Form 10-Q of
Lincoln Electric Holdings, Inc. for the three months ended June 30, 2009, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.19*
|
|
Stock Option Plan for Non-Employee Directors (filed as Exhibit 10(p) to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended March 31, 2000, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
10.20*
|
|
Amendment No. 1 to the Stock Option Plan for Non-Employee Directors dated October 20, 2006 (filed as Exhibit 10.26 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended
December 31, 2007, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.21*
|
|
Summary of Cash Long-Term Incentive Plan, as amended (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on April 6, 2005, SEC File No. 0-1402 and incorporated herein
by reference and made a part hereof).
|
10.22*
|
|
Letter Agreement between John M. Stropki, Jr. and Lincoln Electric Holdings, Inc. dated October 12, 2004 (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on
October 18, 2004, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.23*
|
|
2005 Deferred Compensation Plan for Executives (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.2 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009,
SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
42
|
|
|
Exhibit No.
|
|
Description
|
10.24*
|
|
2006 Equity and Performance Incentive Plan (filed as Appendix B to the Lincoln Electric Holdings, Inc. proxy statement dated March 28, 2006, SEC File No. 0-1402 and incorporated herein by reference and
made a part hereof).
|
10.25*
|
|
Amendment No. 1 to the 2006 Equity and Performance Incentive Plan dated October 20, 2006 (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended
March 31, 2007, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.26*
|
|
Amendment No. 2 to the 2006 Equity and Performance Incentive Plan (filed as Exhibit 10.5 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
10.27*
|
|
2006 Stock Plan for Non-Employee Directors (filed as Appendix C to the Lincoln Electric Holdings, Inc. proxy statement dated March 28, 2006, SEC File No. 0-1402 and incorporated herein by reference
and made a part hereof).
|
10.28*
|
|
Amendment No. 1 to the 2006 Stock Plan for Non-Employee Directors dated October 20, 2006 (filed as Exhibit 10.2 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended
March 31, 2007, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.29*
|
|
Amendment No. 2 to the 2006 Stock Plan for Non-Employee Directors dated July 26, 2007 (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended
September 30, 2007, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.30*
|
|
2007 Management Incentive Compensation Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.4 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009, SEC
File No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.31*
|
|
Form of Restricted Shares Agreement for Non-Employee Directors (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended September 30, 2010, SEC File
No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.32*
|
|
Form of Restricted Shares Agreement for Executive Officers (filed as Exhibit 10.2 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended September 30, 2010, SEC File
No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.33*
|
|
Form of Stock Option Agreement for Non-Employee Directors (filed as Exhibit 10.3 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended September 30, 2010, SEC File
No. 0-1402 and incorporated herein by reference and made a part hereof).
|
10.34*
|
|
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.4 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended September 30, 2010, SEC File No. 0-1402
and incorporated herein by reference and made a part hereof).
|
10.35*
|
|
Form of Restricted Shares Agreement for Non-Employee Directors (for awards made on or after December 1, 2010) (filed herewith).
|
10.36*
|
|
Form of Restricted Shares Agreement for Executive Officers (for awards made on or after December 1, 2010) (filed herewith).
|
43
|
|
|
Exhibit No.
|
|
Description
|
10.37*
|
|
Form of Stock Option Agreement for Executive Officers (for awards made on or after December 1, 2010) (filed herewith).
|
21
|
|
Subsidiaries of the Registrant.
|
23
|
|
Consent of Independent Registered Public Accounting Firm.
|
24
|
|
Powers of Attorney.
|
31.1
|
|
Certification by the President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
31.2
|
|
Certification by the Senior Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|
32.1
|
|
Certifications 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
|
-
*
-
Reflects
management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.
-
**
-
In
accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Annual Report on
Form 10-K 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.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
By:
|
|
/s/ VINCENT K. PETRELLA
Vincent K. Petrella
Senior Vice President,
Chief Financial
Officer and Treasurer
(principal financial and accounting officer)
February 28, 2011
|
45