Lincoln Electric Holdings, Inc. — 2013 Form 10-K
Business context and reporting period. The company designs and manufactures welding, cutting, brazing and soldering products, operating across five segments: North America, Europe, Asia Pacific and South America Welding, and The Harris Products Group. This annual report covers the fiscal year ended December 31, 2013; quarterly figures below are unaudited. Unless noted otherwise, financial amounts are in millions of U.S. dollars.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $2,852.7 | $2,853.4 |
| Gross profit / margin | $942.7 / 33.0% | $866.7 / 30.4% |
| Operating income / margin | $407.0 / 14.3% | $362.1 / 12.7% |
| Net income / margin | $293.8 / 10.3% | $257.4 / 9.0% |
| Diluted EPS | $3.54 | $3.06 |
| Cash from operating activities | $338.9 | $327.5 |
| Cash and cash equivalents at year-end | $299.8 | $286.5 |
| Total debt at year-end | $19.1 | $20.3 |
- 2013 year-end current assets were $1,130.8 million and current liabilities $456.9 million, equivalent to a current ratio of approximately 2.5x. The company had no borrowings under its $300 million revolving credit facility and reported compliance with its covenants.
- Capital expenditures were $76.0 million. Cash used for acquisitions was $53.2 million; share repurchases used $167.9 million and cash dividends totaled $49.3 million.
- 2013 diluted EPS included $0.23 per share of special-item charges; adjusted diluted EPS, a non-GAAP measure, was $3.77.
Material changes versus comparable periods
- Full-year sales were essentially flat. Volume fell 2.7% and foreign exchange reduced sales 0.6%, offset by acquisition contributions of 3.2% and pricing of 0.1%. Management attributed lower volumes to soft demand in domestic and international markets.
- Gross margin improved to 33.0% from 30.4%, and operating income rose 12.4%. The company cited favorable geographic mix, stable pricing and lower input costs; SG&A increased 6.5%, partly due to acquisitions and employee compensation.
- Net income increased 14.1%, and diluted EPS increased from $3.06 to $3.54. Results included $12.2 million of charges related to the Venezuelan currency devaluation, as well as rationalization and impairment charges and a loss on land sale.
- Segment results diverged: North America Welding sales rose 4.6%; South America Welding sales rose 21.3%; Asia Pacific Welding sales fell 17.9%; Europe Welding fell 5.0%; and Harris Products Group fell 7.8%. Asia Pacific adjusted EBIT declined 75.0%, while South America adjusted EBIT rose substantially, reflecting pricing and operating improvements, including Venezuelan inflation-related pricing.
- In the fourth quarter, sales were $714.8 million versus $684.6 million a year earlier; net income was $88.3 million versus $62.1 million, and diluted EPS was $1.07 versus $0.74.
Outlook, commentary, risks and unusual items
- The company forecast 2014 capital expenditures of $60 million to $80 million and expected voluntary U.S. pension contributions of about $20 million. Management expected defined-benefit pension expense to decrease by approximately $15 million to $18 million. The filing provides no specific revenue or earnings guidance.
- Management said operating cash flow, cash balances and, if needed, credit facilities should fund ongoing operations. A significant acquisition could require capital-market or bank financing.
- Venezuela is a highly inflationary economy. The 2013 official exchange-rate devaluation caused an $8.1 million foreign-exchange transaction loss and $4.1 million of higher cost of goods sold. The company used the official rate of 6.3 bolivars per U.S. dollar at filing time, while noting future exchange-rate effects and currency-conversion restrictions were uncertain. Venezuelan operations generated $25.6 million of reported 2013 net income.
- Key exposures include cyclical industrial demand, raw-material and energy-price volatility, foreign-exchange movements, international political and operating risks, competition, product liability, pension assumptions, and environmental and cybersecurity risks.
- Asbestos litigation involved approximately 14,601 plaintiffs at year-end. The company reported a $2.7 million accrual for contingent liabilities and said outcomes and aggregate exposure were difficult to assess; it intends to defend the claims.
- A Canadian tax reassessment disputes the deductibility of intercompany dividends for 2004–2011, asserting $58.8 million of tax plus approximately $16.0 million of interest. The company deposited $84.1 million, recorded as a non-current asset, made no accrual for this reassessment, and intends to contest it. An unfavorable outcome could materially affect the statements in the period decided.
- The company completed acquisitions of Robolution and Burlington in 2013 to expand automation and cutting solutions; their combined 2013 revenues were approximately $35 million. Purchase-price allocations were preliminary.
Important facts for investors to verify
- Whether improved margins and earnings can persist despite flat sales, soft demand and weakness in Asia Pacific.
- Venezuela’s applicable exchange rate, restrictions on converting or repatriating funds, and the resulting earnings and cash exposure.
- The progress and potential financial impact of the CRA dispute, including the treatment and recoverability of the $84.1 million deposit.
- Developments in asbestos and other product-liability claims, insurance coverage, and the adequacy of recorded contingencies.
- Acquisition integration, returns on acquired businesses, and the company’s planned capital spending, pension contributions, dividends and buybacks.