Lincoln Electric Holdings, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures below are unaudited. Unless stated otherwise, financial amounts are in millions of U.S. dollars.
Business context
Lincoln Electric designs and manufactures welding, cutting, brazing and soldering products, selling globally through distributors, retailers and direct channels. Its five operating segments are North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group. Management attributed 2011 sales growth to stronger demand and modest market-share gains, along with acquisitions, pricing and favorable currency translation.
Key financial metrics
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $2,694.6 | $2,070.2 | +30.2% |
| Gross profit / margin | $736.7 / 27.3% | $563.8 / 27.2% | +30.7%; margin +0.1 pp |
| Operating income / margin | $296.7 / 11.0% | $186.4 / 9.0% | +59.1% |
| Net income | $217.2 | $130.2 | +66.8% |
| Diluted EPS | $2.56 | $1.53 | +67.3% |
| Operating cash flow | $193.5 | $157.0 | +$36.5 |
| Capital expenditures | $65.8 | $60.6 | +$5.2 |
Cash and cash equivalents were $361.1 at year-end, down $5.1. Investing activities used $130.8, including $66.2 for acquisitions. Financing activities used $63.4, including $51.9 in dividends and $37.0 in treasury-share purchases. Working capital absorbed cash as net operating working capital rose $110.5; inventory days increased to 92.5 from 89.8.
Total debt was $103.4, versus $97.7 a year earlier; debt to total capitalization was 8.0%, versus 7.8%. Of debt, $80.0 of senior unsecured notes was due in March 2012 and classified as current. The company reported $149.9 available under its $150.0 revolving facility at year-end, with no borrowings and covenant compliance. Current assets were $1,219.3 and current liabilities $471.0.
Fourth-quarter 2011 unaudited sales were $694.5 versus $564.3 in fourth-quarter 2010; net income was $57.7 versus $41.5, and diluted EPS was $0.68 versus $0.49.
Material changes versus prior period
- Sales increased across all five segments. Consolidated sales growth included $306.0 from volume, $120.9 from acquisitions, $142.9 from pricing and $54.6 from foreign exchange.
- Operating margin improved to 11.0% from 9.0%, reflecting higher volume, pricing and operating leverage. Higher material costs and lower margins at certain acquired businesses offset some improvement.
- SG&A rose 16.4% to $439.8, notably due to higher bonus expense, selling, administrative and R&D spending, acquisition costs and currency effects.
- Operating cash flow improved, but the larger working-capital investment and acquisition spending increased cash used in investing activities.
- New 2011 acquisitions were Techalloy, Torchmate, Severstal and Arc Products. The acquisitions expanded consumables, cutting and automation offerings and Russian/CIS presence.
Outlook, risks and unusual items
- Outlook: No specific sales or earnings guidance is provided. Management expected 2012 capital expenditures of about $65.0 and voluntary U.S. pension contributions of about $30.0. It expected to repay the $80.0 notes due in March 2012 using operating cash, existing cash or credit facilities, and expected to replace its revolving credit agreement before its November 2012 expiry; replacement terms were not assured.
- Near-term financial considerations: The 2011 effective tax rate was 28.0%, including a $4.8 favorable tax-audit settlement adjustment. The 2012 pension expense was expected to increase by approximately $7–$9 due to actuarial losses. The pension plans’ funded status was a deficit of $242.5 at year-end.
- Legal contingencies: At year-end, the company was a co-defendant in manganese-related claims involving about 806 plaintiffs and asbestos-related claims involving about 16,781 plaintiffs. Defense costs remain significant, although historical outcomes were largely favorable and the company reports insurance and cost-sharing arrangements. A January 2012 agreement provided for dismissal with prejudice of substantially all pending manganese claims, subject to conditions; failure to satisfy them could resume litigation and increase costs.
- Other risks: Results are cyclical and sensitive to industrial capital spending, raw-material and energy prices, currency movements, international operating conditions, competition, pension assumptions and product-liability exposure. Venezuela’s highly inflationary accounting and currency restrictions create potential earnings volatility. Management reported no goodwill impairment in 2011; goodwill fair value exceeded carrying value by at least 10% in each reporting unit at the test date.
- Reporting and unusual items: 2011 included $0.3 of rationalization and impairment charges and the $4.8 tax benefit. The two-for-one stock split completed in May 2011 is reflected retrospectively in per-share data. The independent auditor issued unqualified opinions on the financial statements and internal control; management also concluded controls were effective.
Important facts for investors to verify
- Whether the March 2012 note repayment and November 2012 credit-facility replacement occurred on expected terms.
- Whether sales, margins and cash generation remain strong after separating organic volume and pricing from acquisitions and foreign exchange.
- How working-capital needs, particularly inventory, affect operating cash flow as demand changes.
- Developments and conditions affecting the manganese-claim dismissal agreement, asbestos litigation, insurance recovery and defense costs.
- Actual 2012 pension expense and contributions compared with management’s estimates, given the lower discount rate and actuarial losses.
- Whether the expected $65.0 of capital expenditures and continuing acquisition plans are funded without materially increasing debt.