Lincoln Electric Holdings, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are noted separately below. Lincoln Electric manufactures welding, cutting and brazing equipment and consumables through five operating segments.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net sales | $2,853.4 million | $2,694.6 million | +5.9% |
| Gross profit / margin | $866.7 million / 30.4% | $736.7 million / 27.3% | Margin +3.1 percentage points |
| Operating income / margin | $362.1 million / 12.7% | $296.7 million / 11.0% | +22.0% |
| Net income | $257.4 million | $217.2 million | +18.5% |
| Diluted EPS | $3.06 | $2.56 | +19.5% |
| Cash provided by operations | $327.5 million | $193.5 million | +$134.0 million |
Sales growth reflected volume (+1.3%), acquisitions (+4.9%) and pricing (+1.7%), partly offset by foreign exchange (-2.0%). Higher pricing and operating leverage supported margin expansion; acquired businesses generally had lower margins. Adjusted operating income was $372.8 million and adjusted diluted EPS was $3.16; these are non-GAAP measures excluding specified items.
Fourth quarter: Sales were $684.6 million versus $694.5 million in Q4 2011; net income was $62.1 million versus $57.7 million, and diluted EPS was $0.74 versus $0.68. Q4 2012 included $5.0 million of rationalization and impairment charges, primarily for manufacturing consolidation.
Segments and operating developments
- North America Welding sales rose 20.7% to $1,580.8 million, including acquisition contribution; adjusted EBIT margin improved to 17.1% from 15.8%.
- Europe Welding sales fell 11.1% to $452.2 million and Asia Pacific Welding sales fell 13.8% to $324.5 million, reflecting weaker international demand. Adjusted EBIT increased in both segments.
- South America Welding sales increased 3.1% to $161.5 million; The Harris Products Group sales declined 2.6% to $334.4 million.
- Four 2012 acquisitions—Tennessee Rand, Kaliburn, Wayne Trail and Weartech—cost approximately $143.5 million net of cash acquired and assumed debt. Goodwill increased to $132.9 million, principally reflecting acquisitions.
Cash, debt and liquidity
- Cash and cash equivalents were $286.5 million at year-end, down from $361.1 million. Operating cash flow increased, helped by lower working-capital requirements and higher earnings.
- Total debt was $20.3 million, down from $103.4 million, following repayment of an $80 million senior note. The company had no borrowings under its $300 million revolving credit facility and reported compliance with its covenants.
- Investing activities used $187.5 million, including $134.6 million for acquisitions and $52.7 million of capital expenditures. Financing activities used $216.8 million, including $81.0 million for share repurchases and $73.1 million in dividends.
- Management forecast 2013 capital expenditures of approximately $60 million and voluntary U.S. pension contributions of approximately $103 million. Management said operating cash flow, cash balances and, if needed, credit facilities should fund ongoing needs; significant acquisitions could require capital-market financing.
Material changes, outlook and risks
- 2012 included $9.4 million of rationalization and impairment charges and a $1.4 million charge from a Venezuelan labor-law change. The company expected additional costs to complete rationalization plans.
- After year-end, Venezuela devalued its currency from 4.3 to 6.3 bolivars per U.S. dollar. Management estimated an approximately $8.5 million foreign-exchange charge and $4 million gross-profit reduction from inventory effects in 2013, with Venezuelan subsidiary results expected to decline significantly.
- The Canada Revenue Agency reassessed the company’s 2004–2011 intercompany-dividend deductions, asserting $62.1 million of additional tax plus approximately $17.2 million of interest, net of tax. The company disputes the assessment and deposited the disputed amount; no tax accrual was recorded for this matter. The filing reports the deposit as $89.220 million in one disclosure and $89.448 million in its cash-flow discussion.
- At year-end, the company was a co-defendant in asbestos-related cases involving approximately 15,050 plaintiffs. It described ultimate exposure as difficult to assess; the filing reports $5.6 million of accruals for contingent liabilities overall, not a clear asbestos-only estimate. Product-liability defense costs are also variable.
- Other principal risks include cyclical industrial demand, raw-material and energy price volatility, currency movements, international operating and regulatory risks, pension funding and investment assumptions, and product liability. The company reported no customer exceeding 10% of sales.
- CEO and President John Stropki became Executive Chairman effective December 31, 2012; Christopher Mapes became President and CEO on that date. The auditor issued an unqualified opinion on the financial statements and internal controls.
Investor verification priorities
- Reconcile the CRA deposit amounts reported as $89.220 million and $89.448 million, and monitor the Tax Court dispute and potential financial-statement impact.
- Track actual 2013 Venezuela exchange-rate effects against management’s estimated charges and expected operating decline.
- Assess whether acquired businesses deliver expected sales, integration benefits and margins, given the acquisition-driven sales growth and goodwill increase.
- Monitor whether weaker demand in Europe and Asia Pacific persists and whether North American growth and margin gains continue.
- Verify execution and remaining costs of rationalization plans, and the planned $60 million capital spending and $103 million pension contribution.
- Review asbestos and other product-liability developments; the filing does not provide a clear estimate of ultimate exposure by claim category.