Lincoln Electric Holdings, Inc. — 2010 Form 10-K Summary
Business context and reporting period
Lincoln Electric designs and manufactures welding and cutting equipment and consumables, as well as brazing and soldering alloys. Its five reporting segments are North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group. This 10-K covers the fiscal year ended December 31, 2010; amounts below are in U.S. dollars, generally millions unless noted. The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $2,070.2 | $1,729.3 | +19.7% |
| Gross profit / margin | $563.8 / 27.2% | $456.3 / 26.4% | Margin +0.8 percentage points |
| Operating income / margin | $186.4 / 9.0% | $93.2 / 5.4% | +100.0% |
| Net income | $130.2 | $48.6 | +168.1% |
| Diluted EPS | $3.06 | $1.14 | +$1.92 |
| Cash provided by operations | $157.0 | $250.4 | −$93.4 |
| Capital expenditures | $60.6 | $38.2 | +$22.4 |
Sales improved across all segments as demand recovered. Consolidated sales growth included $243.1 million from volume, $91.6 million from acquisitions and $6.2 million from pricing; foreign exchange was approximately neutral. The Asia Pacific segment’s reported growth also reflected the 2009 acquisition of Jin Tai. Gross-margin improvement reflected higher sales and production volumes, cost reductions and lower product-liability costs, partly offset by an $8.5 million increase in the LIFO reserve.
Cash and cash equivalents were $366.2 million at year-end, down from $388.1 million. Management attributed lower operating cash flow mainly to working capital investment supporting higher sales; operating working capital as a percentage of sales improved to 20.7% from 23.2%. Total debt declined to $97.7 million from $123.7 million; debt to total capitalization was 7.8% versus 10.2%. The company had $145.9 million available under its $150 million revolving facility, after letters of credit, and no revolver borrowings. An $80 million senior note is due in March 2012.
2010 dividends paid were $47.4 million; dividends declared were $1.15 per share. The company repurchased 703,117 shares for $39.7 million. Total assets were $1,783.8 million, compared with $1,705.3 million in 2009.
Material changes and fourth-quarter results
2010’s recovery followed a severe 2009 downturn: sales fell 30.2% in 2009 versus 2008, and 2010 sales remained below 2008’s $2,479.1 million. Net income in 2010 also remained below 2008’s $212.3 million. In 2010, every segment reported higher sales; North America was the largest segment by sales, while Asia Pacific sales increased substantially with the inclusion of Jin Tai.
Fourth-quarter 2010 sales were $564.3 million versus $462.4 million in fourth-quarter 2009; net income was $41.5 million versus $24.3 million, and diluted EPS was $0.98 versus $0.57. Fourth-quarter 2010 net income included a $5.1 million tax benefit from a change in applicable Asia Pacific tax regulations, among other special items.
Outlook, management commentary, risks and unusual items
- Management expected 2011 capital expenditures of $50–$60 million and approximately $30 million in voluntary U.S. pension contributions. It said current pension rules did not require contributions in 2011. The filing does not provide a specific revenue or EPS forecast.
- Management said operating cash flow, existing cash and available credit were expected to fund ongoing business needs. A significant acquisition could require capital-market financing. A Russian acquisition announced in December 2010, with an expected $12 million cash price, was subject to closing conditions; the company also acquired Russian manufacturer MGM in October 2010 for approximately $28.5 million in cash and assumed debt. Arc Products was acquired in January 2011.
- GAAP 2010 results included a $3.1 million pretax charge from Venezuela’s currency remeasurement and devaluation, a $5.1 million tax benefit, net rationalization gains, and noncontrolling-interest effects. Adjusted net income was $129.6 million and adjusted diluted EPS was $3.04, versus reported net income of $130.2 million and diluted EPS of $3.06. Adjusted measures are non-GAAP and exclude specified items.
- Principal risks include cyclical industrial demand; volatility or shortages in steel, metals, components and energy; foreign currency and political risks; competition; pension asset and interest-rate exposure; and product liability. The company faced asbestos claims involving approximately 16,865 plaintiffs and manganese-related claims involving approximately 1,975 plaintiffs at year-end. Defense costs are significant, but management said it intended to contest claims and believed applicable insurance and cost-sharing arrangements were important mitigants; ultimate aggregate exposure is difficult to assess.
- Venezuela was treated as a highly inflationary economy from January 2010, with its financial statements remeasured into U.S. dollars. Changes in exchange rates and restrictions on currency conversion could affect earnings. The company also disclosed environmental, tax and other litigation contingencies; it stated compliance with environmental rules had not materially affected earnings to date.
- Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective at December 31, 2010.
Important facts for investors to verify
- Whether volume recovery and margin gains continued, and how much future growth depends on acquisitions versus underlying demand.
- Operating cash flow conversion and working-capital requirements as sales grow; 2010 operating cash flow fell despite higher earnings.
- The ability to repay or refinance the $80 million note due in March 2012 and the cost and availability of credit.
- Actual costs and cash exposure from asbestos, manganese and other product-liability claims, including the durability of insurance and co-defendant cost-sharing.
- The impact of Venezuelan currency rules, inflation and further exchange-rate changes on earnings and cash repatriation.
- Whether announced Russian transactions close as expected and deliver the stated capacity, distribution and sales benefits.