10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Ohio
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34-1860551 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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22801 St. Clair Avenue, Cleveland, Ohio
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44117 |
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(Address of principal executive offices)
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(Zip Code) |
(216) 481-8100
(Registrants telephone number, including area code)
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 þ No o
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 o No o
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 small reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The number of shares outstanding of the registrants common shares as of March 31, 2009 was
42,513,921.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
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Three Months Ended March 31, |
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2009 |
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2008 |
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Net sales |
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$ |
411,751 |
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$ |
620,227 |
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Cost of goods sold |
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321,503 |
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442,776 |
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Gross profit |
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90,248 |
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177,451 |
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Selling, general & administrative expenses |
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77,516 |
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98,961 |
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Rationalization charges |
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11,699 |
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Operating income |
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1,033 |
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78,490 |
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Other income (expense): |
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Interest income |
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1,112 |
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2,434 |
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Equity (loss) earnings in affiliates |
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(1,986 |
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549 |
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Other income |
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393 |
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499 |
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Interest expense |
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(2,562 |
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(2,981 |
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Total other (expense) income |
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(3,043 |
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501 |
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(Loss) income before income taxes |
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(2,010 |
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78,991 |
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Income taxes |
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1,584 |
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25,514 |
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Net (loss) income |
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$ |
(3,594 |
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$ |
53,477 |
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Per share amounts: |
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Basic (loss) earnings per share |
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$ |
(0.08 |
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$ |
1.25 |
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Diluted (loss) earnings per share |
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$ |
(0.08 |
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$ |
1.24 |
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Cash dividends declared per share |
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$ |
0.27 |
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$ |
0.25 |
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See notes to these consolidated financial statements.
3
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(UNAUDITED) |
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(NOTE A) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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$ |
300,452 |
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$ |
284,332 |
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Accounts receivable (less allowance for doubtful
accounts of $8,264 in 2009; $7,673 in 2008) |
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260,531 |
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299,171 |
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Inventories |
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Raw materials |
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76,932 |
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94,112 |
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Work-in-process |
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38,369 |
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49,692 |
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Finished goods |
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185,344 |
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203,128 |
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Total inventory |
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300,645 |
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346,932 |
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Deferred income taxes |
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23,143 |
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16,725 |
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Other current assets |
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66,937 |
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77,566 |
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Total Current Assets |
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951,708 |
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1,024,726 |
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Property, Plant and Equipment |
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Land |
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39,673 |
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38,745 |
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Buildings |
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259,903 |
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258,736 |
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Machinery and equipment |
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633,066 |
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643,056 |
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932,642 |
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940,537 |
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Less accumulated depreciation |
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514,576 |
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512,635 |
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Property, Plant and Equipment, Net |
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418,066 |
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427,902 |
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Other Assets |
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Prepaid pensions |
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2,553 |
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2,716 |
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Equity investments in affiliates |
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56,291 |
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62,358 |
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Intangibles, net |
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64,716 |
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65,262 |
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Goodwill |
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35,219 |
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36,187 |
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Long-term investments |
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29,930 |
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29,843 |
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Deferred income taxes |
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53,600 |
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47,397 |
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Other non-current assets |
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16,566 |
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22,414 |
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Total Other Assets |
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258,875 |
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266,177 |
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TOTAL ASSETS |
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$ |
1,628,649 |
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$ |
1,718,805 |
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See notes to these consolidated financial statements.
4
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(UNAUDITED) |
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(NOTE A) |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current Liabilities |
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Amounts due banks |
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$ |
18,061 |
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$ |
19,436 |
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Trade accounts payable |
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117,857 |
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124,388 |
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Accrued employee compensation and benefits |
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39,059 |
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47,405 |
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Accrued expenses |
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26,700 |
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25,173 |
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Accrued taxes, including income taxes |
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22,383 |
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13,305 |
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Accrued pensions |
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3,131 |
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3,248 |
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Dividends payable |
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11,450 |
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11,444 |
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Other current liabilities |
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70,738 |
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80,986 |
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Current portion of long-term debt |
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1,030 |
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31,257 |
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Total Current Liabilities |
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310,409 |
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356,642 |
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Long-Term Liabilities |
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Long-term debt, less current portion |
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89,964 |
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91,537 |
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Accrued pensions |
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181,591 |
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188,160 |
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Deferred income taxes |
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8,170 |
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8,553 |
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Accrued taxes |
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40,514 |
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40,323 |
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Other long-term liabilities |
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21,612 |
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23,617 |
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Total Long-Term Liabilities |
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341,851 |
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352,190 |
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Shareholders Equity |
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Preferred shares, without par value at stated capital amount;
authorized - 5,000,000 shares; issued and outstanding none |
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Common shares, without par value at stated capital amount; authorized -
120,000,000 shares; issued - 49,290,717 shares in 2009 and 2008;
outstanding - 42,513,921 shares in 2009 and 42,521,628 shares in 2008 |
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4,929 |
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4,929 |
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Additional paid-in capital |
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156,734 |
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155,538 |
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Retained earnings |
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1,221,737 |
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1,236,810 |
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Accumulated other comprehensive loss |
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(237,529 |
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(218,254 |
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Treasury shares, at cost - 6,776,796 shares in 2009 and 6,769,089 shares in 2008 |
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(184,136 |
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(183,807 |
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Total Shareholders Equity |
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961,735 |
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995,216 |
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Noncontrolling Interest |
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14,654 |
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14,757 |
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Total Equity |
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976,389 |
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1,009,973 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,628,649 |
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$ |
1,718,805 |
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See notes to these consolidated financial statements.
5
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Three Months Ended March 31, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net (loss) income |
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$ |
(3,594 |
) |
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$ |
53,477 |
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Adjustments to reconcile net (loss) income to net cash provided by operating
activities: |
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Depreciation and amortization |
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13,488 |
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13,907 |
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Equity losses of affiliates, net |
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3,254 |
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4 |
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Deferred income taxes |
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(13,452 |
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1,279 |
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Stock-based compensation |
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1,192 |
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1,101 |
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Amortization of terminated interest rate swaps |
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(335 |
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(233 |
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Other non-cash items, net |
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5,854 |
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1,669 |
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Changes in operating assets and liabilities, net of effects from acquisitions: |
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Decrease (increase) in accounts receivable |
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31,417 |
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(37,174 |
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Decrease (increase) in inventories |
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37,163 |
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(26,970 |
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Decrease (increase) in other current assets |
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8,473 |
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(5,307 |
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(Decrease) increase in accounts payable |
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(4,382 |
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31,172 |
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(Decrease) increase in other current liabilities |
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(3,855 |
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37,305 |
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Decrease in accrued pensions |
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(6,504 |
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(6,640 |
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Net change in other long-term assets and liabilities |
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2,944 |
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3,933 |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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71,663 |
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67,523 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Capital expenditures |
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(13,565 |
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(12,812 |
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Acquisition of businesses, net of cash acquired |
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(8,675 |
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Proceeds from sale of property, plant and equipment |
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192 |
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272 |
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NET CASH USED BY INVESTING ACTIVITIES |
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(13,373 |
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(21,215 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from short-term borrowings |
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7,065 |
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3,394 |
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Payments on short-term borrowings |
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(5,025 |
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(713 |
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Amounts due banks, net |
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(672 |
) |
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(3,636 |
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Payments on long-term borrowings |
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(30,227 |
) |
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(140 |
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Proceeds from exercise of stock options |
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16 |
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1,591 |
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Tax benefit from exercise of stock options |
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2 |
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819 |
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Purchase of shares for treasury |
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(343 |
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(18,033 |
) |
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Cash dividends paid to shareholders |
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(11,444 |
) |
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(10,720 |
) |
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NET CASH USED BY FINANCING ACTIVITIES |
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(40,628 |
) |
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(27,438 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(1,542 |
) |
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1,601 |
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INCREASE IN CASH AND CASH EQUIVALENTS |
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16,120 |
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20,471 |
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Cash and cash equivalents at beginning of period |
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284,332 |
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217,382 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
300,452 |
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$ |
237,853 |
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|
See notes to these consolidated financial statements.
6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share and per share data)
March 31, 2009
NOTE A BASIS OF PRESENTATION
As used in this report, the term Company, except as otherwise indicated by the context, means
Lincoln Electric Holdings, Inc., its wholly-owned and majority-owned subsidiaries for which it has
a controlling interest. The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (GAAP)
for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, these consolidated financial statements do not include all of the
information and notes required by GAAP for complete financial statements. However, in the opinion
of management, these consolidated financial statements contain all the adjustments (consisting of
normal recurring accruals) considered necessary to present fairly the financial position, results
of operations and changes in cash flows for the interim periods. Operating results for the three
months ended March 31, 2009 are not necessarily indicative of the results to be expected for the
year ending December 31, 2009.
The balance sheet at December 31, 2008 has been derived from the audited financial statements at
that date, but does not include all of the information and notes required by GAAP for complete
financial statements. For further information, refer to the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31,
2008.
Certain reclassifications have been made to the prior year financial statements to conform to
current year classifications.
NOTE B STOCK-BASED COMPENSATION
The Company issued 700 and 58,688 shares of common stock from treasury upon exercise of employee
stock options during the three months ended March 31, 2009 and 2008, respectively.
Expense is recognized for all awards of stock-based compensation by allocating the aggregate grant
date fair value over the vesting period. Total stock-based compensation expense recognized in the Consolidated Statements of Income for the three months ended March 31,
2009 and 2008 was $1,192 and $1,101, respectively.
NOTE C GOODWILL AND INTANGIBLE ASSETS
The Company performs an annual impairment test of goodwill in the fourth quarter using the same
dates each year. Goodwill is tested for impairment using models developed by the Company which
incorporate estimates of future cash flows, allocations of certain assets and cash flows among
reporting units, future growth rates, established business valuation multiples and management
judgments regarding the applicable discount rates to value those estimated cash flows. In addition,
goodwill is tested as necessary if changes in circumstances or the occurrence of events indicate
potential impairment. There were no impairments of goodwill during the first three months of 2009
and 2008. Goodwill totaled $35,219 and $36,187 at March 31, 2009 and December 31, 2008,
respectively. Goodwill by segment at March 31, 2009 was $15,979 for North America, $9,113 for
Europe and $10,127 for Other Countries. At December 31, 2008, goodwill by segment was $16,085 for
North America, $9,815 for Europe and $10,287 for Other Countries.
Gross intangible assets other than goodwill as of March 31, 2009 and December 31, 2008 were $86,922
and $87,257, respectively, and related accumulated amortization was $22,206 and $21,995,
respectively. Aggregate amortization expense was $870 and $676 for the three months ended March 31,
2009 and 2008, respectively. Gross intangible assets other than goodwill with indefinite lives
totaled $17,067 at March 31, 2009 and $16,960 at December 31, 2008.
7
NOTE D (LOSS) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings
per share:
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Three Months Ended March 31, |
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2009 |
|
|
2008 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,594 |
) |
|
$ |
53,477 |
|
Denominator: |
|
|
|
|
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Basic weighted average shares outstanding |
|
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42,372 |
|
|
|
42,675 |
|
Effect of dilutive securities Stock options and awards |
|
|
196 |
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|
415 |
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Diluted weighted average shares outstanding |
|
|
42,568 |
|
|
|
43,090 |
|
|
|
|
|
|
|
|
Basic (loss) earnings per share |
|
$ |
(0.08 |
) |
|
$ |
1.25 |
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share |
|
$ |
(0.08 |
) |
|
$ |
1.24 |
|
|
|
|
|
|
|
|
NOTE E ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
The components of accumulated other comprehensive (loss) income are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net (loss) income |
|
$ |
(3,594 |
) |
|
$ |
53,477 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Unrealized gain on derivatives designated and qualifying as
cash flow hedges, net of tax
|
|
|
595 |
|
|
|
1,978 |
|
Currency translation adjustment |
|
|
(24,208 |
) |
|
|
24,668 |
|
Unrecognized amounts from defined benefit pension plans, net of tax |
|
|
4,350 |
|
|
|
386 |
|
|
|
|
|
|
|
|
Total comprehensive (loss) income |
|
|
(22,857 |
) |
|
|
80,509 |
|
Comprehensive income attributable to noncontrolling interests |
|
|
(12 |
) |
|
|
(291 |
) |
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to Lincoln Electric Holdings, Inc. |
|
$ |
(22,869 |
) |
|
$ |
80,218 |
|
|
|
|
|
|
|
|
NOTE F INVENTORY VALUATION
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 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. The valuation of LIFO inventories is made at the end of each
year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by
necessity, are based on estimates of expected year-end inventory levels and costs and are subject
to final year-end LIFO inventory calculations. The excess of current cost over LIFO cost amounted
to $90,914 at March 31, 2009 and December 31, 2008.
NOTE G ACCRUED EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits at March 31, 2009 and 2008 include accruals for year-end
bonuses and related payroll taxes of $7,082 and $31,565, respectively, related to Lincoln employees
worldwide. The payment of bonuses is discretionary and is subject to approval by the Board of
Directors. A majority of annual bonuses are paid in December resulting in an increasing bonus
accrual during the Companys fiscal year. The decrease in the accrual from March 31, 2008 to March
31, 2009 is due to the decrease in profitability of the Company.
NOTE H SEGMENT INFORMATION
The Companys primary business is the design and manufacture of arc welding and cutting products,
manufacturing a full line of arc welding equipment, consumable welding products and other welding
and cutting products. The Company manages its operations by geographic location and has two
reportable segments, North America and Europe, and combines all other operating segments as Other
Countries. Other Countries includes results of operations for the Companys businesses in
Argentina, Australia, Brazil, Colombia, India, Indonesia, Mexico, Peoples Republic of China,
Taiwan, Venezuela and
8
Vietnam. Each operating segment is managed separately because each faces a distinct economic
environment, a different customer base and a varying level of competition and market conditions.
Segment performance and resource allocation is measured based on income before interest and income
taxes. Financial information for the reportable segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Countries |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
246,656 |
|
|
$ |
93,300 |
|
|
$ |
71,795 |
|
|
$ |
|
|
|
$ |
411,751 |
|
Inter-segment sales |
|
|
17,608 |
|
|
|
2,502 |
|
|
|
1,963 |
|
|
|
(22,073 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
264,264 |
|
|
$ |
95,802 |
|
|
$ |
73,758 |
|
|
$ |
(22,073 |
) |
|
$ |
411,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before interest and income taxes |
|
$ |
8,233 |
|
|
$ |
(6,604 |
) |
|
$ |
(1,623 |
) |
|
$ |
(566 |
) |
|
$ |
(560 |
) |
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,112 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rationalization charges |
|
$ |
10,526 |
|
|
$ |
470 |
|
|
$ |
703 |
|
|
$ |
|
|
|
$ |
11,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,045,086 |
|
|
$ |
420,884 |
|
|
$ |
382,858 |
|
|
$ |
(220,179 |
) |
|
$ |
1,628,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Countries |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
371,113 |
|
|
$ |
147,445 |
|
|
$ |
101,669 |
|
|
$ |
|
|
|
$ |
620,227 |
|
Inter-segment sales |
|
|
27,066 |
|
|
|
6,925 |
|
|
|
1,566 |
|
|
|
(35,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
398,179 |
|
|
$ |
154,370 |
|
|
$ |
103,235 |
|
|
$ |
(35,557 |
) |
|
$ |
620,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes |
|
$ |
56,533 |
|
|
$ |
18,219 |
|
|
$ |
5,039 |
|
|
$ |
(253 |
) |
|
$ |
79,538 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,434 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
78,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,011,789 |
|
|
$ |
531,923 |
|
|
$ |
399,135 |
|
|
$ |
(147,196 |
) |
|
$ |
1,795,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE I RATIONALIZATION
The Company has taken actions throughout its global operations to align resources to current market
conditions that resulted in a charge of $11,699 in the first quarter of 2009. Charges by segment
were $10,526, $470 and $703 in North America, Europe and Other Countries, respectively.
Actions taken in the first quarter of 2009 included a voluntary separation incentive program
covering certain U.S.-based employees as announced on February 2, 2009. These actions are expected
to affect 350, 48 and 170 employees in North America, Europe and Other Countries, respectively.
The total cost is expected to be $11,797, of which the Company recorded rationalization charges of
$11,685 in the first quarter of 2009. At March 31, 2009, the Companys liability related to these
actions was $9,097 and was recorded in Other current liabilities. These costs relate primarily
to employee severance actions that are expected to be completed and paid by the end of 2009.
Actions taken during the fourth quarter of 2008 affected 65 employees in European businesses and 67
employees in North American businesses. The total cost of these actions is expected to be $2,712
of which $2,447 was recorded at December 31, 2008 and $14 was recorded in the three months ended
March 31, 2009. At March 31, 2009, the liability related to these actions of $528 was recorded in
Other current liabilities. These costs relate primarily to employee severance actions that are
expected to be completed and paid by the end of 2009.
The Company continues evaluating its cost structure and additional rationalization actions are
being contemplated that would result in charges in subsequent quarters. On April 21, 2009, the
Company initiated a process to rationalize a manufacturing facility in Italy and consolidate
production to an existing facility in Poland. This action would likely result in charges in the
range of $2,500 to $3,000 over the next year.
9
NOTE J ACQUISITIONS
On March 16, 2009, the Company announced that it signed definitive agreements to acquire the
remaining 52% of Jinzhou Jin Tai Welding and Metal Co., Ltd. (Jin Tai), based in Jinzhou, China.
The transaction will expand the Companys customer base and give the Company control of significant
cost-competitive MIG wire manufacturing capacity. The Company currently has a 21% direct interest
in Jin Tai and a further 27% indirect interest via its 35% interest in Taiwan-based Kuang Tai Metal
Industrial Co., Ltd. (Kuang Tai). Under the terms of the agreement, the Company will exchange
its 35% interest in Kuang Tai, pay cash of approximately $38,000 and assume Jin Tais net debt of
approximately $15,000. The transaction is subject to the approval of government regulatory
agencies, with closing expected in the third quarter of 2009, subject to the satisfaction or waiver
of customary conditions. Annual sales for Jin Tai were approximately $200,000 in 2008.
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 expands the
Companys brazing product line and increases the Companys 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 adds to the
Companys European consumables manufacturing capacity and widens the Companys commercial presence
in Western Europe. Annual sales at the time of the acquisition were approximately $40,000.
Acquired companies are included in the Companys consolidated financial statements as of the date
of acquisition.
NOTE K CONTINGENCIES AND GUARANTEE
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 claimants in
the asbestos and manganese cases seek compensatory and punitive damages, in most cases for
unspecified amounts. The Company believes it has meritorious defenses to these claims and intends
to contest such suits vigorously. Although defense costs remain significant, all other costs
associated with these claims, including indemnity charges and settlements, have been immaterial to
the Companys consolidated financial statements. Based on the Companys historical experience in
litigating these claims, including a significant number of dismissals, summary judgments and
defense verdicts in many cases and immaterial settlement amounts, as well as the Companys current
assessment of the underlying merits of the claims and applicable insurance, the Company believes
resolution of these claims and proceedings, individually or in the aggregate (exclusive of defense
costs), will not have a material adverse impact upon the Companys consolidated financial
statements.
The Company has provided a guarantee on loans for an unconsolidated joint venture of approximately
$6,017 at March 31, 2009. The guarantee is provided on four separate loan agreements. Two loans
are for $2,000 each, one which matures in May 2009 and the other maturing in July 2009. The other
two loans mature in July 2010, one for $1,355 and the other for $662. The loans were undertaken to
fund the joint ventures working capital and capital expansion needs. The Company would become
liable for any unpaid principal and accrued interest if the joint venture were to default on
payment at the respective maturity dates. The Company believes the likelihood is remote that
material payment will be required under these arrangements based on the current financial condition
of the joint venture.
NOTE L PRODUCT WARRANTY COSTS
The Company accrues for product warranty claims based on historical experience and the expected
material and labor costs to provide warranty service. Warranty services are provided for periods
up to three years from the date of sale. The accrual for product warranty claims is included in
Accrued expenses.
10
The changes in the carrying amount of product warranty accruals for the three months ended March
31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
13,736 |
|
|
$ |
12,308 |
|
Charged to costs and expenses |
|
|
2,724 |
|
|
|
5,231 |
|
Deductions |
|
|
(2,547 |
) |
|
|
(3,267 |
) |
Foreign currency translation |
|
|
(210 |
) |
|
|
261 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
13,703 |
|
|
$ |
14,533 |
|
|
|
|
|
|
|
|
Warranty expense was 0.7% and 0.8% of sales for the three months ended March 31, 2009 and 2008,
respectively.
NOTE M DEBT
During March 2002, the Company issued Senior Unsecured Notes (the Notes) totaling $150,000
through a private placement. The Notes had 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
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 March 31, 2009, the Company was in compliance with all of its debt
covenants. The Company repaid the $30,000 Series B Note on maturity in March 2009, reducing the
balance outstanding of the Notes to $80,000, which is due in 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 the gain or loss on the derivative instrument, as well as
the offsetting gain or loss 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 $10,163 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
$157 and $233 in the first three months of 2009 and 2008, respectively, and is expected to reduce
annual interest expense by $313 in 2009. At March 31, 2009, $598 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) plus a spread of between 179.75 and
226.50 basis points.
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 $178 in the first quarter of 2009
and is expected to reduce annual interest expense by $1,429 in 2009. At March 31, 2009, $4,901
remains to be amortized and is recorded in Long-term debt, less current portion. The weighted
average effective interest rate on the Notes, net of the impact of swaps, was 4.6% for the first
quarter of 2009.
During March 2009, swaps designated as fair value hedges that converted the $30,000 Series B Note
from fixed to floating interest rates matured with the underlying Note. The Company has no
outstanding interest rate swaps at March 31, 2009. At December 31, 2008, the fair value of
the swaps was an asset of $6,148 and was recorded in Other current assets and Other non-current
assets with corresponding offsets in Current portion of long-term debt and Long-term debt, less
current portion, respectively.
Revolving Credit Agreement
The Company has a $175,000 five-year revolving Credit Agreement expiring in December 2009. The
Credit Agreement may be used for general corporate purposes and may be increased subject to certain
conditions by an additional amount up to $75,000. The interest rate on borrowings under the Credit
Agreement is based on either LIBOR plus a spread based on the Companys leverage ratio or the prime
rate at the Companys election. A quarterly facility fee is payable based upon the daily
aggregate amount of commitments and the Companys leverage ratio. The Credit Agreement contains
affirmative and negative covenants including limitations on the Company with respect to
indebtedness, liens, investments, distributions, mergers and
11
acquisitions, dispositions of assets, subordinated debt and transactions with affiliates. As of
March 31, 2009, there are no borrowings under the Credit Agreement. The Company expects to replace
the Credit Agreement prior to its expiration in December 2009.
Short-term Borrowings
Amounts reported as Amounts due banks represent the short-term borrowings of the Companys
foreign subsidiaries.
NOTE N NEW ACCOUNTING PRONOUNCEMENTS
In December 2008, the Financial Accounting Standards Board (FASB) issued Staff Position 132(R)-1
(FSP FAS 132(R)-1), Employers Disclosures about Postretirement Benefit Plan Assets, an amendment
of SFAS 132(R). This standard requires disclosure about an entitys investment policies and
strategies, the categories of plan assets, concentrations of credit risk and fair value
measurements of plan assets. The standard, effective for fiscal years beginning after December 15,
2008, will increase the disclosures in the notes to the Companys financial statements related to
the assets of the Companys defined benefit pension plans.
In November 2008, the Emerging Issues Task Force issued Issue 08-6 (EITF 08-06), Equity Method
Investment Accounting Considerations. This Issue addresses the impact that SFAS 141(R) and SFAS
160 might have on the accounting for equity method investments including how the initial carrying
value of an equity method investment should be determined, how it should be tested for impairment
and how changes in classification from equity method to cost method should be treated. The Issue
is to be implemented prospectively and is effective for fiscal years beginning after December 15,
2008. The adoption of EITF 08-06 did not have a significant impact on the Companys financial
statements.
In June 2008, the FASB issued Staff Position EITF 03-6-1 (FSP EITF 03-6-1), Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This
standard determined that unvested share-based payment awards that contain rights to receive
nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are participating
securities, and thus, should be included in the two-class method of computing earnings per share.
This standard did not have a significant impact on the Companys disclosure of earnings per share.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles.
SFAS 162 identifies the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP). SFAS 162 directs
the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in conformity with
GAAP. SFAS 162 was adopted in the first quarter of 2009. The adoption of SFAS 162 did not have an
impact on the Companys financial statements.
In April 2008, the FASB issued Staff Position 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). This standard amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. Early adoption is prohibited. FSP 142-3 applies prospectively to
intangible assets acquired after adoption. The adoption of FSP 142-3 did not have a significant
impact on the Companys financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS 133. SFAS 161 requires disclosures of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are accounted for and
how derivative instruments and related hedged items affect an entitys financial position,
financial performance and cash flows. SFAS 161 is effective for fiscal years beginning after
November 15, 2008 with early adoption permitted. See Note Q for the Companys disclosures pursuant
to the adoption of SFAS 161.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements, which is an amendment of Accounting Research Bulletin 51. SFAS 160 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. SFAS 160 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. SFAS 160 is effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. The Company adopted SFAS 160 as of January 1, 2009,
applying the presentation and disclosure requirements retrospectively resulting in reclassification
of noncontrolling interests from Other non-current liabilities to Total equity. Income
attributable to noncontrolling interests
12
is included in Selling, general and administrative expenses in the Consolidated Statements of
Income and is not material to the Company. Therefore, the Company did not present income
attributable to non-controlling interests separately in the Consolidated Statements of Income.
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations. SFAS 141(R)
replaces SFAS 141, Business Combinations. SFAS 141(R) retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be
used for all business combinations and for an acquirer to be identified for each business
combination. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date that the
acquirer achieves control. SFAS 141(R) requires an acquirer to recognize the assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date
measured at their fair values as of that date with limited exceptions specified in the statement.
SFAS 141(R) applies prospectively to 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, 2008.
The adoption of SFAS 141(R) as of January 1, 2009 did not have a material impact on the Companys
financial statements.
NOTE O RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The components of total pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
3,566 |
|
|
$ |
4,264 |
|
Interest cost |
|
|
10,732 |
|
|
|
9,674 |
|
Expected return on plan assets |
|
|
(10,592 |
) |
|
|
(12,581 |
) |
Amortization of prior service cost |
|
|
15 |
|
|
|
20 |
|
Amortization of net loss |
|
|
6,611 |
|
|
|
420 |
|
|
|
|
|
|
|
|
Defined benefit plans |
|
|
10,332 |
|
|
|
1,797 |
|
Multi-employer plans |
|
|
304 |
|
|
|
393 |
|
Defined contribution plans |
|
|
1,230 |
|
|
|
1,894 |
|
|
|
|
|
|
|
|
Total pension expense |
|
$ |
11,866 |
|
|
$ |
4,084 |
|
|
|
|
|
|
|
|
The Company has voluntarily contributed $9,000 to its U.S. plans in the first three months of 2009
and expects to contribute $30,000 to its U.S. plans in 2009. The actual amounts contributed to the
pension plans are determined at the Companys discretion.
The Company is in the process of terminating the Harris Calorific Limited (Harris Ireland)
Pension Plan. The Company expects to receive approximately $1,870 in 2009 upon final settlement.
NOTE P INCOME TAXES
The Company recorded $1,584 of tax expense on a pre-tax loss of $2,010, resulting in an effective
tax rate of (78.8)% for the three months ended March 31, 2009. The effective tax rate is lower
than the expected benefit at the Companys statutory rate primarily because of losses at certain
non-U.S. entities for which no tax benefit has been provided. The rate also includes a benefit for
the utilization of foreign tax credits.
The effective income tax rate of 32.3% for the three months ended March 31, 2008 is lower than the
Companys statutory rate primarily because of the utilization of foreign tax credits, lower taxes
on non-U.S. earnings and the utilization of foreign tax loss carryforwards.
The anticipated effective rate for 2009 depends on the amount of earnings in various tax
jurisdictions and the level of related tax deductions achieved during the year.
As of March 31, 2009, the Company had $33,924 of unrecognized tax benefits. If recognized,
approximately $19,989 would be recorded as a component of income tax expense.
The Company files income tax returns in the U.S. and various state, local and foreign
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and
local or non-U.S. income tax examinations by tax authorities for years
13
before 2004. The Company anticipates no significant changes to its total unrecognized tax
benefits through the end of the first quarter of 2010. The Company is currently subject to an
Internal Revenue Service audit for the 2005-2006 tax years and an Italian tax audit for 2005.
NOTE Q DERIVATIVES AND FAIR VALUE
The Company uses derivatives to manage exposures to currency exchange rates, interest rates and
commodity prices arising in the normal course of business. Derivative contracts to hedge currency
and commodity exposures are generally written on a short-term basis but may cover exposures for up
to two years while interest rate contracts may cover longer periods consistent with the terms of
the underlying debt. The Company does not enter into derivatives for trading or speculative
purposes.
All derivatives are recorded at fair value on the balance sheet. The accounting for gains and
losses resulting from changes in fair value depends on the use of the derivative and whether it is
designated and qualifies for hedge accounting. The Company formally documents the relationship of
the hedge with the hedged item as well as the risk-management strategy for all designated hedges.
Both at inception and on an ongoing basis, the hedging instrument is assessed as to its
effectiveness, when applicable. If and when a derivative is determined not to be highly effective
as a hedge, or the underlying hedged transaction is no longer likely to occur, or the derivative is
terminated, hedge accounting is discontinued. The cash flows from settled derivative contracts are
recorded in operating activities in the Consolidated Statements of Cash Flows. Hedge
ineffectiveness was immaterial in 2008 and for the three months ended March 31, 2009.
The Company is subject to the credit risk of the counterparties to derivative instruments.
Counterparties include a number of major banks and financial institutions. The Company manages
individual counterparty exposure by monitoring the credit rating of the counterparty and the size
of financial commitments and exposures between the Company and the counterparty. None of the
concentrations of risk with any individual counterparty was considered significant at March 31,
2009. The Company does not expect any counterparties to fail to meet their obligations.
Cash flow hedges
Certain foreign currency forward contracts were qualified and designated as cash flow hedges. The
total notional amount of these short-term contracts at March 31, 2009 was $27,039. The effective
portions of the fair value gains or losses on these cash flow hedges were recorded in Other
comprehensive income (OCI) and subsequently reclassified to Cost of goods sold or Sales for
hedges of purchases and sales, respectively, as the underlying hedged transactions affect earnings.
For the three months ended March 31, 2009, the Company reclassified a loss of $147 from OCI to
Selling, general and administrative expenses based on the probability of the forecasted
transactions no longer occurring.
Fair value hedges
Certain interest rate contracts (swaps) were qualified and designated as fair value hedges. In
February 2009, the Company terminated swaps that were designated as fair value hedges that
converted notional amounts of $80,000 of debt from fixed to floating interest rates. The gain of
$5,079 realized on termination was deferred and is being amortized as an offset to interest expense
over the remaining life of the Note. The fair value gains or losses on these contracts prior to
settlement were recognized in earnings and offset by fair value losses or gains on the fixed-rate
borrowings. See Note M for further information.
In March 2009, swaps designated as fair value hedges that converted notional amounts of $30,000 of
debt from fixed to floating interest rates matured with the underlying Note. The fair value gains
or losses on these contracts were recognized in earnings and offset by fair value losses or gains
on the fixed-rate borrowings. See Note M for further information.
Derivatives not designated as hedging instruments
The Company has certain foreign exchange forward contracts which were not designated as hedges
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. These derivatives
were held as economic hedges of certain balance sheet exposures. The total notional amount of
these short-term contracts was $110,875 at March 31, 2009. The fair value gains or losses from
these contracts were recognized currently in Selling, general and administrative expenses,
offsetting the losses or gains on the exposures being hedged.
The Company dedesignated commodity forward contracts at the inception of 2009 that had previously
been designated and qualified as cash flow hedges. These contracts consist of aluminum, copper and
nickel forward contracts with notional amounts, in thousands of pounds, of 2,525, 2,325 and 222,
respectively, at March 31, 2009. The effective portion of the fair
14
value gains or losses on these instruments were recorded in OCI while the instruments were
designated and qualified as cash flow hedges. Realized gains and losses were reclassified to Cost
of goods sold as the underlying hedged transactions affected earnings. For the three months ended
March 31, 2009, the Company reclassified a loss of $852 from OCI to earnings based on the
probability of the forecasted transactions no longer occurring. The Company expects $1,924 related
to existing contracts to be reclassified from OCI to earnings over the next 12 months as the hedged
purchase transactions are realized. Subsequent to dedesignation, the fair value gains or losses on
these instruments were recognized currently in Selling, general and administrative expenses.
Fair values of derivative instruments in the Consolidated Balance Sheet follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
|
|
Other |
|
|
Other |
|
|
Other |
|
|
|
Current |
|
|
Current |
|
|
Non-current |
|
|
|
Assets |
|
|
Liabilities |
|
|
Liabilities |
|
Designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
1,511 |
|
|
$ |
527 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
|
379 |
|
|
|
408 |
|
|
|
|
|
Commodity contracts |
|
|
|
|
|
|
4,932 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
1,890 |
|
|
$ |
5,867 |
|
|
$ |
212 |
|
|
|
|
|
|
|
|
|
|
|
The effects of derivative instruments on the Consolidated Statement of Income for the three months
ended March 31, 2009 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
Ended |
|
Derivatives by hedge designation |
|
Classification of gains (losses) |
|
March 31, 2009 |
|
Fair value hedges: |
|
|
|
|
|
|
Interest rate swaps |
|
Interest expense |
|
$ |
181 |
|
|
|
|
|
|
|
|
Not designated as hedges: |
|
|
|
|
|
|
Foreign exchange contracts |
|
Selling, general & administrative expenses |
|
|
(302 |
) |
Commodity contracts |
|
Selling, general & administrative expenses |
|
|
576 |
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
|
|
|
Ended |
|
Total recognized in OCI, net of tax |
|
March 31, 2009 |
|
|
Reclassified from OCI to: |
|
March 31, 2009 |
|
Foreign exchange contracts |
|
$ |
1,133 |
|
|
Sales |
|
$ |
(177 |
) |
|
|
|
|
|
|
Cost of goods sold |
|
|
2,219 |
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
(2,626 |
) |
|
Cost of goods sold |
|
|
(2,804 |
) |
Assets and liabilities that are within the provisions of SFAS 157, such as the Companys derivative
contracts, are valued at fair value using the market and income valuation approaches. The Company
uses the market approach to value similar assets and liabilities in active markets and the income
approach that consists of discounted cash flow models that take into account the present value of
future cash flows under the terms of the contracts using current market information as of the
reporting date.
15
SFAS 157 classifies the inputs used to measure fair value into the following hierarchy:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities. |
|
|
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or
unadjusted quoted prices for identical or similar assets or liabilities in markets
that are not active, or inputs other than quoted prices that are observable for
the asset or liability. |
|
|
|
Level 3
|
|
Unobservable inputs for the asset or liability. |
The following table provides a summary of the fair values of assets and liabilities under SFAS 157:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2009 Using |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
Significant Other |
|
|
Significant |
|
|
Balance as of |
|
|
for Identical |
|
Observable |
|
|
Unobservable |
Description |
|
March 31, 2009 |
|
|
Assets (Level 1) |
|
Inputs (Level 2) |
|
|
Inputs (Level 3) |
Derivatives, net liability
|
|
$ |
(4,189 |
) |
|
$
|
|
$ |
(4,189 |
) |
|
$ |
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As used in this report, the term Company, except as otherwise indicated by the context, means
Lincoln Electric Holdings, Inc., its wholly-owned and majority-owned subsidiaries for which it has
a controlling interest. The following discussion and analysis of the Companys results of
operations and financial position should be read in conjunction with the audited consolidated
financial statements and related notes included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2008 and the unaudited consolidated financial statements and related notes
included in this Quarterly Report on Form 10-Q. This report contains forward-looking statements
that involve risks and uncertainties. Actual results may differ materially from those indicated in
the forward-looking statements. See Risk Factors in Part II, Item 1A of this report for more
information regarding forward-looking statements.
General
The Company is the worlds largest designer and manufacturer of arc welding and cutting products
manufacturing a full 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 both arc welding equipment
and consumable products. Welding products include arc welding power sources, wire feeding systems,
robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The
Companys welding 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 equipment and consumable
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 provide a competitive advantage in the marketplace.
The Companys 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 Companys various
manufacturing sites to distributors and product users.
16
The Companys 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, Colombia, France, Germany, India,
Indonesia, Italy, Mexico, the Netherlands, Peoples Republic of China, Poland, Portugal, Spain,
Taiwan, Turkey, United Kingdom, Venezuela and Vietnam.
The Companys sales and distribution network, coupled with its manufacturing facilities, are
reported as two separate reportable segments, North America and Europe, with all other operating
segments combined and reported as Other Countries.
The principal raw materials essential to the Companys business are various chemicals, electronics,
steel, engines, brass, copper and aluminum alloys, all of which are normally available for purchase
in the open market.
The Companys facilities are subject to environmental regulations. To date, compliance with these
environmental regulations has not had a material effect on the Companys earnings. The Company is
ISO 9001 certified at nearly all facilities worldwide. In addition, the Company is ISO 14001
certified at all significant manufacturing facilities in the United States and is working to gain
certification at its remaining United States facilities, as well as the remainder of its facilities
worldwide.
Key Indicators
Key economic measures relevant to the Company include industrial production trends, steel
production, 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 Companys 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 Companys 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; earnings before interest and taxes; earnings before interest, taxes and bonus; 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.
17
Results of Operations
The following table presents the Companys results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
Amount |
|
|
% of Sales |
|
|
Amount |
|
|
% of Sales |
|
|
Amount |
|
|
% |
|
Net sales |
|
$ |
411,751 |
|
|
|
100.0 |
% |
|
$ |
620,227 |
|
|
|
100.0 |
% |
|
$ |
(208,476 |
) |
|
|
(33.6 |
%) |
Cost of goods sold |
|
|
321,503 |
|
|
|
78.1 |
% |
|
|
442,776 |
|
|
|
71.4 |
% |
|
|
(121,273 |
) |
|
|
(27.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
90,248 |
|
|
|
21.9 |
% |
|
|
177,451 |
|
|
|
28.6 |
% |
|
|
(87,203 |
) |
|
|
(49.1 |
%) |
Selling, general & administrative
expenses |
|
|
77,516 |
|
|
|
18.8 |
% |
|
|
98,961 |
|
|
|
16.0 |
% |
|
|
(21,445 |
) |
|
|
(21.7 |
%) |
Rationalization charges |
|
|
11,699 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
11,699 |
|
|
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
1,033 |
|
|
|
0.3 |
% |
|
|
78,490 |
|
|
|
12.7 |
% |
|
|
(77,457 |
) |
|
|
(98.7 |
%) |
Interest income |
|
|
1,112 |
|
|
|
0.3 |
% |
|
|
2,434 |
|
|
|
0.4 |
% |
|
|
(1,322 |
) |
|
|
(54.3 |
%) |
Equity (loss) earnings in affiliates |
|
|
(1,986 |
) |
|
|
(0.5 |
%) |
|
|
549 |
|
|
|
0.1 |
% |
|
|
(2,535 |
) |
|
|
(461.7 |
%) |
Other income |
|
|
393 |
|
|
|
0.1 |
% |
|
|
499 |
|
|
|
0.1 |
% |
|
|
(106 |
) |
|
|
(21.2 |
%) |
Interest expense |
|
|
(2,562 |
) |
|
|
(0.6 |
%) |
|
|
(2,981 |
) |
|
|
(0.5 |
%) |
|
|
419 |
|
|
|
(14.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(2,010 |
) |
|
|
(0.5 |
%) |
|
|
78,991 |
|
|
|
12.7 |
% |
|
|
(81,001 |
) |
|
|
(102.5 |
%) |
Income taxes |
|
|
1,584 |
|
|
|
0.4 |
% |
|
|
25,514 |
|
|
|
4.1 |
% |
|
|
(23,930 |
) |
|
|
(93.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3,594 |
) |
|
|
(0.9 |
%) |
|
$ |
53,477 |
|
|
|
8.6 |
% |
|
$ |
(57,071 |
) |
|
|
(106.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Net Sales: Net sales for the first quarter of 2009 decreased 33.6% to $411,751 from $620,227 in
the first quarter of 2008. The decrease in Net sales reflects a $208,223 (33.6%) decrease due to
volume, a $28,510 (4.6%) increase due to price, a $9,385 (1.5%) increase from acquisitions and a
$38,148 (6.2%) unfavorable impact as a result of changes in foreign currency exchange rates. Net
sales for the North American operations decreased 33.5% to $246,656 in the first quarter of 2009
compared to $371,113 in the first quarter of 2008. This decrease reflects a decrease of $135,143
(36.4%) due to volume, a $16,136 (4.3%) increase due to price and a $5,450 (1.5%) decrease as a
result of changes in foreign currency exchange rates. Net sales for the European operations
decreased 36.7% to $93,300 in the first quarter of 2009 compared to $147,445 in the first quarter
of 2008. This decrease reflects a decrease of $37,772 (25.6%) due to volume, an $893 (0.6%)
increase due to price, a $5,242 (3.6%) increase from acquisitions and a $22,508 (15.3%) unfavorable
impact as a result of changes in foreign currency exchange rates. Net sales for Other Countries
decreased 29.4% to $71,795 in the first quarter of 2009 compared to $101,669 in the first quarter
of 2008. This decrease reflects a decrease of $35,308 (34.7%) due to volume, an $11,481 (11.3%)
increase due to price, a $4,143 (4.1%) increase from acquisitions and a $10,190 (10.0%) unfavorable
impact as a result of changes in foreign currency exchange rates.
Gross Profit: Gross profit decreased 49.1% to $90,248 during the first quarter of 2009 compared to
$177,451 in the first quarter of 2008. As a percentage of Net sales, Gross profit decreased to
21.9% in the first quarter of 2009 from 28.6% in the first quarter of 2008. This decrease was
primarily a result of declining volumes, the liquidation of higher cost inventories and higher
retirement costs in the U.S. of $2,376 offset by lower product liability costs of $3,835 primarily
due to an insurance settlement. Foreign currency exchange rates had a $7,281 unfavorable
translation impact in the first quarter of 2009.
Selling, General & Administrative (SG&A) Expenses: SG&A expenses decreased $21,445 (21.7%) in the
first quarter of 2009 compared to the first quarter of 2008. The decrease was primarily due to
lower bonus expense of $23,121 and the favorable translation impact of foreign currency exchange
rates of $7,856 partially offset by higher retirement costs in the U.S. of $3,336.
Rationalization Charges: In the first quarter of 2009, the Company recorded $11,699 ($7,428
after-tax) in charges related to rationalization activities at facilities around the world. The
charges are primarily employee severance as the Company adjusts its cost base to current market
conditions.
Interest Income: Interest income decreased to $1,112 in the first quarter of 2009 from $2,434 in
the first quarter of 2008. The decrease was due to lower interest rate investments in 2009 when
compared to 2008.
Equity (Loss) Earnings in Affiliates: Equity earnings in affiliates was a loss of $1,986 in the
first quarter of 2009 compared to earnings of $549 in the first quarter of 2008 primarily as a
result of decreased earnings at the Companys joint venture investment in Taiwan.
18
Interest Expense: Interest expense decreased to $2,562 in the first quarter of 2009 from $2,981
in the first quarter of 2008 primarily as a result of interest rate swaps lowering the effective
interest rate on the Companys Senior Unsecured Notes partially offset by higher debt levels at
foreign subsidiaries in the first quarter of 2009. See Note M to the Companys consolidated
financial statements for further discussion.
Income Taxes: The Company recorded $1,584 of tax expense on a pre-tax loss of $2,010, resulting
in an effective tax rate of (78.8)% for the three months ended March 31, 2009. The effective tax
rate is lower than the expected benefit at the Companys statutory rate primarily because of losses
at certain non-U.S. entities for which no tax benefit has been provided. The rate also includes a
benefit for the utilization of foreign tax credits.
The effective income tax rate of 32.3% for the three months ended March 31, 2008 is lower than the
Companys statutory rate primarily because of the utilization of foreign tax credits, lower taxes
on non-U.S. earnings and the utilization of foreign tax loss carryforwards.
Net (Loss) Income: The net loss for the first quarter of 2009 was $3,594 compared to net income
of $53,477 in the first quarter of 2008. Diluted loss per share for the first quarter of 2009 was
$(0.08) compared to earnings of $1.24 per share in the first quarter of 2008. Foreign currency
exchange rate movements had a favorable translation effect of $1,320 and $1,865 on net income for
the first quarter of 2009 and 2008, respectively.
Liquidity and Capital Resources
The Companys cash flow from operations, while cyclical, has been reliable and strong. 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 of 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
2008 |
|
Change |
Cash provided by operating activities: |
|
$ |
71,663 |
|
|
$ |
67,523 |
|
|
$ |
4,140 |
|
Cash used by investing activities: |
|
|
(13,373 |
) |
|
|
(21,215 |
) |
|
|
7,842 |
|
Capital expenditures |
|
|
(13,565 |
) |
|
|
(12,812 |
) |
|
|
(753 |
) |
Acquisition of businesses, net of cash acquired |
|
|
|
|
|
|
(8,675 |
) |
|
|
8,675 |
|
Cash used by financing activities: |
|
|
(40,628 |
) |
|
|
(27,438 |
) |
|
|
(13,190 |
) |
Proceeds from (payments on) short-term borrowings, net |
|
|
1,368 |
|
|
|
(955 |
) |
|
|
2,323 |
|
Payments on long-term borrowings |
|
|
(30,227 |
) |
|
|
(140 |
) |
|
|
(30,087 |
) |
Purchase of shares for treasury |
|
|
(343 |
) |
|
|
(18,033 |
) |
|
|
17,690 |
|
Cash dividends paid to shareholders |
|
|
(11,444 |
) |
|
|
(10,720 |
) |
|
|
(724 |
) |
Increase in Cash and cash equivalents |
|
|
16,120 |
|
|
|
20,471 |
|
|
|
(4,351 |
) |
Cash and cash equivalents increased 5.7% or $16,120 during the first three months of 2009, to
$300,452 as of March 31, 2009 from $284,332 as of December 31, 2008. This compares to an increase
of 9.4% or $20,471 to $237,853 during the first three months of 2008.
Cash provided by operating activities increased by $4,140 for the first three months of 2009
compared to 2008. The increase was primarily related to lower accounts receivable and inventory as
the Company liquidated working capital commensurate with the decline in demand levels when compared
to 2008. Average operating working capital to sales was 28.0% at March 31, 2009 compared with
26.1% at December 31, 2008 and 22.4% at March 31, 2008. Days sales in inventory increased to 126.1
days at March 31, 2009 from 115.8 days at December 31, 2008 and 108.4 days at March 31, 2008.
Accounts receivable days increased to 61.0 at March 31, 2009 from to 55.0 days at December 31, 2008
and 59.6 days at March 31, 2008. Average days in accounts payable increased to 36.9 days at March
31, 2009 from 32.1 days at December 31, 2008 and decreased from 44.5 days at March 31, 2008.
Cash used by investing activities for the first three months of 2009 compared with 2008 decreased
by $7,842. This reflects a decrease in cash used in the acquisition of businesses of $8,675
partially offset by an increase in capital expenditures of $753 to $13,565 from $12,812 in 2008.
The Company anticipates capital expenditures in 2009 in the range of $45,000 $55,000.
19
Anticipated capital expenditures reflect investments to improve operational effectiveness and the
Companys 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 Companys facilities.
Management does not currently anticipate any unusual future cash outlays relating to capital
expenditures.
Cash used by financing activities increased $13,190 to $40,628 in the first three months of 2009
compared with the first three months of 2008. The increase was primarily due to the repayment of
the Companys $30,000 Series B Senior Unsecured Note on maturity during the first quarter of 2009
partially offset by lower purchases of shares for treasury of $17,690.
The Company has investments in Venezuela, which currently require the approval of a government
agency to convert local currency to U.S. dollars at official government rates. Government approval
for currency conversion to satisfy U.S. dollar liabilities to foreign suppliers, including payables
to Lincoln affiliates, has lagged payment due dates from time to time in the past, resulting in
higher cash balances and higher past due U.S. dollar payables within our Venezuelan subsidiary. If
the Company settled its Venezuelan subsidiarys U.S. dollar liabilities using unofficial, parallel
currency exchange mechanisms as of March 31, 2009, it would result in a currency exchange loss of
approximately $1,920.
The Companys debt levels decreased from $142,230 at December 31, 2008, to $109,055 at March 31,
2009. Debt to total invested capital decreased to 10.0% at March 31, 2009 from 12.3% at December
31, 2008.
The Companys Board of Directors has authorized share repurchase programs for up to 15 million
shares of the Companys common stock. Total shares purchased through the share repurchase programs
were 11,215,390 shares at a cost of $274,531 through March 31, 2009.
In April 2009, the Company paid a quarterly cash dividend of $0.27 per share, or $11,450, to
shareholders of record on March 31, 2009.
Rationalization
The Company has taken actions throughout its global operations to align resources to current market
conditions that resulted in a charge of $11,699 in the first quarter of 2009. Charges by segment
were $10,526, $470 and $703 in North America, Europe and Other Countries, respectively.
Actions taken in the first quarter of 2009 included a voluntary separation incentive program
covering certain U.S.-based employees as announced on February 2, 2009. These actions are expected
to affect 350, 48 and 170 employees in North America, Europe and Other Countries, respectively.
The total cost is expected to be $11,797, of which the Company recorded rationalization charges of
$11,685 in the first quarter of 2009. At March 31, 2009, the Companys liability related to these
actions was $9,097 and was recorded in Other current liabilities. These costs relate primarily
to employee severance actions that are expected to be completed and paid by the end of 2009.
Actions taken during the fourth quarter of 2008 affected 65 employees in European businesses and 67
employees in North American businesses. The total cost of these actions is expected to be $2,712
of which $2,447 was recorded at December 31, 2008 and $14 was recorded in the three months ended
March 31, 2009. At March 31, 2009, the liability related to these actions of $528 was recorded in
Other current liabilities. These costs relate primarily to employee severance actions that are
expected to be completed and paid by the end of 2009.
The Company continues evaluating its cost structure and additional rationalization actions are
being contemplated that would result in charges in subsequent quarters. On April 21, 2009, the
Company initiated a process to rationalize a manufacturing facility in Italy and consolidate
production to an existing facility in Poland. This action would likely result in charges in the
range of $2,500 to $3,000 over the next year.
Acquisitions
On March 16, 2009, the Company announced that it signed definitive agreements to acquire the
remaining 52% of Jinzhou Jin Tai Welding and Metal Co., Ltd. (Jin Tai), based in Jinzhou, China.
The transaction will expand the Companys customer base and give the Company control of significant
cost-competitive MIG wire manufacturing capacity. The Company currently
has a 21% direct interest in Jin Tai and a further 27% indirect interest via its 35% interest in
Taiwan-based Kuang Tai Metal Industrial Co., Ltd. (Kuang Tai). Under the terms of the agreement,
the Company will exchange its 35% interest in Kuang Tai, pay cash of approximately $38,000 and
assume Jin Tais net debt of approximately $15,000. The transaction is subject to
20
the approval of
government regulatory agencies, with closing expected in the third quarter of 2009, subject to the
satisfaction or waiver of customary conditions. Annual sales for Jin Tai were approximately
$200,000 in 2008.
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 expands the
Companys brazing product line and increases the Companys 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 adds to the
Companys European consumables manufacturing capacity and widens the Companys commercial presence
in Western Europe. Annual sales at the time of the acquisition were approximately $40,000.
Acquired companies are included in the Companys 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 had 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
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 March 31, 2009, the Company was in compliance with all of its debt
covenants. The Company repaid the $30,000 Series B Note on maturity in March 2009, reducing the
balance outstanding of the Notes to $80,000, which is due in 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 the gain or loss on the derivative instrument, as well as
the offsetting gain or loss 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 $10,163 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
$157 and $233 in the first three months of 2009 and 2008, respectively, and is expected to reduce
annual interest expense by $313 in 2009. At March 31, 2009, $598 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) plus a spread of between 179.75 and
226.50 basis points.
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 $178 in the first quarter of 2009
and is expected to reduce annual interest expense by $1,429 in 2009. At March 31, 2009, $4,901
remains to be amortized and is recorded in Long-term debt, less current portion. The weighted
average effective interest rate on the Notes, net of the impact of swaps, was 4.6% for the first
quarter of 2009.
During March 2009, swaps designated as fair value hedges that converted the $30,000 Series B Note
from fixed to floating interest rates matured with the underlying Note. The Company has no
outstanding interest rate swaps at March 31, 2009. At December 31, 2008, the fair value of
the swaps was an asset of $6,148 and was recorded in Other current assets and Other non-current
assets with corresponding offsets in Current portion of long-term debt and Long-term debt, less
current portion, respectively.
Revolving Credit Agreement
The Company has a $175,000 five-year revolving Credit Agreement expiring in December 2009. The
Credit Agreement may be used for general corporate purposes and may be increased subject to certain
conditions by an additional amount up to
$75,000. The interest rate on borrowings under the Credit Agreement is based on either LIBOR plus
a spread based on the Companys leverage ratio or the prime rate at the Companys election. A
quarterly facility fee is payable based upon the daily aggregate amount of commitments and the
Companys leverage ratio. The Credit Agreement contains affirmative and negative
21
covenants
including limitations on the Company with respect to indebtedness, liens, investments,
distributions, mergers and acquisitions, dispositions of assets, subordinated debt and transactions
with affiliates. As of March 31, 2009, there are no borrowings under the Credit Agreement. The
Company expects to replace the Credit Agreement prior to its expiration in December 2009.
Short-term Borrowings
Amounts reported as Amounts due banks represent the short-term borrowings of the Companys
foreign subsidiaries.
Stock-based compensation
The Company issued 700 and 58,688 shares of common stock from treasury upon exercise of employee
stock options during the three months ended March 31, 2009 and 2008, respectively.
Expense is recognized for all awards of stock-based compensation by allocating the aggregate grant
date fair value over the vesting period. Total stock-based compensation expense recognized in the
Consolidated Statements of Income for the three months ended March 31, 2009 and 2008 was $1,192 and
$1,101, respectively.
Product liability expense
Product liability expenses have been significant, particularly with respect to welding fume claims.
Costs incurred are volatile and largely related to trial activity. The costs associated with
these claims are predominantly defense costs, which are recognized in the periods incurred. See
Note K to the consolidated financial statements for further discussion.
The long-term impact of the welding fume loss contingency in the aggregate on 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 Companys trial experience changes overall,
it is possible on a longer term basis that the cost of resolving this loss contingency could
materially reduce the Companys operating results and cash flow and restrict capital market access.
Off-Balance Sheet Financial Instruments
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 Companys Credit
Agreement. The Company has also provided a guarantee on loans for an unconsolidated joint venture
of approximately $6,017 at March 31, 2009. The Company believes the likelihood is remote that
material payment will be required under this arrangement because of the current financial condition
of the joint venture.
New Accounting Pronouncements
In December 2008, the Financial Accounting Standards Board (FASB) issued Staff Position 132(R)-1
(FSP FAS 132(R)-1), Employers Disclosures about Postretirement Benefit Plan Assets, an amendment
of SFAS 132(R). This standard requires disclosure about an entitys investment policies and
strategies, the categories of plan assets, concentrations of credit risk and fair value
measurements of plan assets. The standard, effective for fiscal years beginning after December 15,
2008, will increase the disclosures in the notes to the Companys financial statements related to
the assets of the Companys defined benefit pension plans.
In November 2008, the Emerging Issues Task Force issued Issue 08-6 (EITF 08-06), Equity Method
Investment Accounting Considerations. This Issue addresses the impact that SFAS 141(R) and SFAS
160 might have on the accounting for equity method investments including how the initial carrying
value of an equity method investment should be determined, how it should be tested for impairment
and how changes in classification from equity method to cost method should be treated. The Issue
is to be implemented prospectively and is effective for fiscal years beginning after December 15,
2008. The adoption of EITF 08-06 did not have a significant impact on the Companys financial
statements.
In June 2008, the FASB issued Staff Position EITF 03-6-1 (FSP EITF 03-6-1), Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This
standard determined that unvested share-based payment awards that contain rights to receive
nonforfeitable dividends or dividend equivalents (whether paid or unpaid) are
22
participating securities, and thus, should be included in the two-class method of computing
earnings per share. This standard did not have a significant impact on the Companys disclosure of
earnings per share.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles.
SFAS 162 identifies the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP). SFAS 162 directs
the GAAP hierarchy to the entity, not the independent auditors, as the entity is responsible for
selecting accounting principles for financial statements that are presented in conformity with
GAAP. SFAS 162 was adopted in the first quarter of 2009. The adoption of SFAS 162 did not have an
impact on the Companys financial statements.
In April 2008, the FASB issued Staff Position 142-3, Determination of the Useful Life of
Intangible Assets (FSP 142-3). This standard amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008 and interim periods
within those fiscal years. Early adoption is prohibited. FSP 142-3 applies prospectively to
intangible assets acquired after adoption. The adoption of FSP 142-3 did not have a significant
impact on the Companys financial statements.
In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of SFAS 133. SFAS 161 requires disclosures of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are accounted for and
how derivative instruments and related hedged items affect an entitys financial position,
financial performance and cash flows. SFAS 161 is effective for fiscal years beginning after
November 15, 2008 with early adoption permitted. See Note Q for the Companys disclosures pursuant
to the adoption of SFAS 161.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements, which is an amendment of Accounting Research Bulletin 51. SFAS 160 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. SFAS 160 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. SFAS 160 is effective for fiscal years and interim periods within those fiscal years
beginning on or after December 15, 2008. The Company adopted SFAS 160 as of January 1, 2009,
applying the presentation and disclosure requirements retrospectively resulting in reclassification
of noncontrolling interests from Other non-current liabilities to Total equity. Income
attributable to noncontrolling interests is included in Selling, general and administrative
expenses in the Consolidated Statements of Income and is not material to the Company. Therefore,
the Company did not present income attributable to non-controlling interests separately in the
Consolidated Statements of Income.
In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations. SFAS 141(R)
replaces SFAS 141, Business Combinations. SFAS 141(R) retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be
used for all business combinations and for an acquirer to be identified for each business
combination. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date that the
acquirer achieves control. SFAS 141(R) requires an acquirer to recognize the assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date
measured at their fair values as of that date with limited exceptions specified in the statement.
SFAS 141(R) applies prospectively to 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, 2008.
The adoption of SFAS 141(R) as of January 1, 2009 did not have a material impact on the Companys
financial statements.
Critical Accounting Policies
The Companys 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 Companys
estimates have been determined to be reasonable. No material changes to the Companys accounting
policies were made from the prior period. 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.
23
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 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, will vary 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 K to the consolidated
financial statements and the legal proceedings section of this Quarterly Report on Form 10-Q 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.
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 of $166 have been provided on earnings of $1,632 that are not expected to be
permanently reinvested. At March 31, 2009, the Company had approximately $144,243 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 March 31, 2009, a valuation allowance of
$20,533 had been 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 Companys assessment of future taxable income or tax planning
strategies changes.
Pensions
The Company maintains a number of defined benefit and defined contribution plans to provide
retirement benefits for employees in the U.S., as well as employees outside the U.S. These plans
are maintained and contributions are made in accordance with the Employee Retirement Income
Security Act of 1974, 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.
The Company records liabilities equal to the underfunded status and assets equal to the overfunded
status of defined benefit plans by measuring the difference between the fair value of plan assets
and the projected benefit obligation. The market-related value of plan assets was determined using
fair values at December 31. As of December 31, 2008, the Company recognized liabilities of
$191,408, prepaid assets of $2,716 and accumulated other comprehensive loss of $194,696 (after-tax)
24
for its defined benefit pension plans. A substantial portion of the Companys pension amounts
relate to its defined benefit plan in the United States.
A significant element in determining the Companys 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 plans 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 8.25% for its U.S. plans at
December 31, 2008. 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 2008, investment returns in the Companys U.S. pension plans were a
decline of 22.2%. A 25 basis point change in the expected return on plan assets would increase or
decrease pension expense by approximately $1,400.
Another significant element in determining the Companys pension expense is the discount rate for
plan liabilities. To develop the discount rate assumption, 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 6.13% for its U.S. plans at
December 31, 2008. A 25 basis point change in the discount rate would increase or decrease pension
expense by approximately $2,000.
Pension expense relating to the Companys defined benefit plans was $4,613 in 2008. The Company
expects 2009 pension expense to increase by approximately $36,830.
The Company has voluntarily contributed $9,000 to its U.S. plans in the first three months of 2009
and expects to contribute $30,000 to its U.S. plans in 2009. The actual amounts contributed to the
pension plans are determined at the Companys discretion.
Inventories and Reserves
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 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. The valuation of LIFO inventories is made at the end of each
year based on inventory levels and costs at that time. The excess of current cost over LIFO cost
amounted to $90,914 at March 31, 2009. The Company reviews the net realizable value of inventory
in detail 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 Companys
estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales
may be required. Historically, the Companys reserves have approximated actual experience.
Accounts Receivable and Allowance
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 Companys
reserves have approximated actual experience.
Impairment of Long-Lived Assets
In accordance with SFAS 144, Accounting for the Impairment or Disposal of 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.
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Impairment of Goodwill and Intangibles
The Company performs an annual impairment test of goodwill and other 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 as required under SFAS 142,
Goodwill and Other Intangible Assets. 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 models developed by the Company which incorporate estimates of
future cash flows, allocations of certain assets and cash flows among reporting units, future
growth rates, established business valuation multiples and management judgments regarding 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.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Companys exposure to market risk since December 31,
2008. See Item 7A in the Companys Annual Report on Form 10-K for the year ended December 31,
2008.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures as of the end of the period covered by this Form 10-Q. Based on that evaluation, the
Companys management, including the Chief Executive Officer and Chief Financial Officer, concluded
that the Companys disclosure controls and procedures are operating effectively as designed. There
have been no changes in the Companys internal controls or in other factors that occurred during
the period covered by this Form 10-Q that materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. 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 March 31, 2009, the Company was a co-defendant in cases alleging asbestos induced illness
involving claims by approximately 20,823 plaintiffs, which is a net decrease of 197 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: 34,700 of those claims were dismissed, eleven were tried to defense verdicts,
four were tried to plaintiff verdicts, one was resolved by agreement for an immaterial amount and
555 were decided in favor of the Company following summary judgment motions.
At March 31, 2009, the Company was a co-defendant in cases alleging manganese induced illness
involving claims by approximately 3,762 plaintiffs, which is a net increase of 734 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 March 31, 2009, cases involving 2,118 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 (the MDL Court).
Plaintiffs have also filed eight class actions seeking medical monitoring in state courts, six of
which have been removed and transferred to the MDL Court. A motion to strike all class action
allegations in those six cases was granted by the MDL Court on August 4, 2008. The class action
complaint filed in Ohio was also dismissed by the plaintiff on August 22, 2008, leaving one
potential state court class action. In addition, plaintiffs filed a class action complaint seeking
medical monitoring on behalf of current and former welders in eight states, including three states
covered by the single-state
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class actions, in the United States District Court for the Northern District of California. This
case was also transferred to the MDL Court. A motion to certify a medical monitoring class related
to this case was denied on September 14, 2007 and the 16 individual claimants dismissed their
claims on March 20, 2008. Since January 1, 1995, the Company has been a co-defendant in similar
cases that have been resolved as follows: 12,831 of those claims were dismissed, 20 were tried to
defense verdicts in favor of the Company and four were tried to plaintiff verdicts. 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 (which was reversed by an intermediate appellate
court on November 26, 2008 and is the subject of further appellate review). On February 11, 2009,
a jury returned a verdict in one such case in favor of the Company and two co-defendants in the
Superior Court of California for the County of Alameda. On April 1, 2009, the MDL Court denied
post trial motions filed by the co-defendants and entered final judgment against the Company and
two co-defendants in one of the cases in which a plaintiff verdict had been obtained on March 6,
2008. The judgment awards an aggregate amount of damages of $2,420, $720 of which were
compensatory ($366 of which were allocable to the Company) and $1,700 of which were punitive ($750
of which were allocable to the Company). The Court also granted plaintiffs motion for costs and
attorneys fees totaling $2,173 ($1,105 of which were allocable to the Company). The Company will
appeal this judgment.
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 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 liquidity, are subject to a variety of factors that could materially affect
results, including those 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.
The risks and uncertainties described below and all of the other information in this report should
be carefully considered. These risks and uncertainties are not the only ones we face. 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 Companys financial condition,
results of operations and access to capital markets.
The Companys operating results are sensitive to changes in general economic conditions.
Recessionary economic cycles, higher interest rates, inflation, higher tax rates and other changes
in tax laws or other economic factors could adversely affect demand for the Companys products.
The deepening industrial downturn affecting the U.S. and global economies will continue to
negatively impact investment activity within key geographic and market segments served by the
Company. In addition, the continuing financial market turmoil may limit the Companys access to
capital markets. There can be no assurances that government responses to the disruptions in the
financial and broader industrial markets will restore market confidence.
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 and aluminum alloys, 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 the type of steel used to
manufacture our products has experienced periods of significant price volatility and has been
subject to periodic shortages due to global economic factors. We have also experienced substantial
volatility in
27
prices for other raw materials, including metals, chemicals and energy costs. Our operating
margins will be dependent on our ability to manage the impact of
volatility in supply and related costs.
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 March 31, 2009, we were a co-defendant in cases alleging manganese induced illness involving
claims by approximately 3,762 plaintiffs and a co-defendant in cases alleging asbestos induced
illness involving claims by approximately 20,823 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: 12,831 of those claims were dismissed, 20 were tried to defense verdicts in favor of us
and four were tried to plaintiff verdicts. In addition, 13 claims were resolved by agreement for
immaterial amounts and one was decided in favor of us following a motion for summary judgment
(which was reversed by an intermediate appellate court on November 26, 2008 and is the subject of
further appellate review). Since January 1, 1995, we have been a co-defendant in asbestos cases
that have been resolved as follows: 34,700 of those claims were dismissed, eleven were tried to
defense verdicts, four were tried to plaintiff verdicts, one was resolved by agreement for an
immaterial amount and 555 were decided in favor of us 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 cash flows and 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 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 products are used in a variety of applications, including infrastructure projects such as oil
and gas 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 welding products are designed for use in specific applications, and if a product is
used inappropriately, personal injury or property damage may result. For example, in the period
between 1994 and 2000, we were a defendant or co-defendant in 21 lawsuits filed by building owners
or insurers in Los Angeles County, California. The plaintiffs in those cases alleged that certain
buildings affected by the 1994 Northridge earthquake sustained property damage in part because a
particular electrode used in the construction of those buildings was unsuitable for that use. In
the Northridge cases, one case was tried to a defense verdict in favor of us, 12 were voluntarily
dismissed, seven were settled and we received summary judgment in our favor in another.
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 it will continue to be available
on terms acceptable to us.
The cyclicality and maturity of the United States arc welding and cutting industry may adversely
affect our performance.
The United States arc welding and cutting industry is a mature industry that is cyclical in nature.
The growth of the domestic arc welding and cutting industry has been and continues to be
constrained by factors such as the increased cost of steel and increased offshore production of
fabricated steel structures. 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
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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, the Company has completed and continues to pursue
acquisitions or joint ventures in the Peoples Republic of China in order to strategically position
resources to increase our presence in this growing market. 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 involve the expenditure of significant funds
and management time. 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 would require access to the capital markets. Further, we may not be able
to successfully integrate any acquired business with our existing businesses or recognize expected
benefits from any completed acquisition.
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 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. Accordingly, we may
spend a proportionately greater amount on research and development than some of our competitors.
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 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. If our products, services, support and cost
structure do not enable us to compete successfully based on any of those criteria, our operations,
results and prospects could suffer.
Further, in the past decade, the United States arc welding industry 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 are subject to the risks
associated with doing business outside the United States.
Our long-term strategy is to continue to increase our share in growing international markets,
particularly Asia (with emphasis in China and India), Latin America, Eastern Europe and other
developing markets. There are a number of risks in doing business abroad, which may impede our
ability to achieve our strategic objectives relating to our foreign operations. Many developing
countries, like Venezuela, have a significant degree of political and economic uncertainty that may
impede our ability to implement and achieve our foreign growth objectives. International business
subjects us to numerous U.S. and foreign laws and regulations, including regulations relating to
import-export control, technology transfer restrictions, repatriation of earnings, 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 or agents 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.
Moreover, social unrest, the absence of trained labor pools and the uncertainties associated with
entering into joint ventures or similar arrangements in foreign countries have slowed our business
expansion into some developing economies. Our presence
29
in China has been facilitated in part through joint venture agreements with local organizations.
While this strategy has allowed us to gain a footprint in China while leveraging the experience of
local organizations, it also presents corporate governance and management challenges.
Our foreign operations also subject us to the risks of international terrorism and hostilities and
to foreign currency risks, including exchange rate fluctuations and limits on the repatriation of
funds.
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.
Our operations depend on maintaining a skilled workforce, and any interruption in our workforce
could negatively impact our results of operations and financial condition.
We are dependent on our highly trained technical sales force and the support of our welding
research and development staff. Any interruption of our workforce, including interruptions due to
unionization efforts, changes in labor relations or shortages of appropriately skilled individuals
for our research, production and sales forces 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.
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 and waste management. Further,
it is our policy to apply strict standards for environmental protection to sites 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 in the European Union. 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 sites can be imposed retroactively and on a joint and several basis.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
ITEM 5. OTHER INFORMATION None.
ITEM 6. EXHIBITS
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(a) Exhibits
31.1 |
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Certification by the Chairman, President and Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934. |
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31.2 |
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Certification by the Senior Vice President, Chief Financial Officer and Treasurer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934. |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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Signature
Pursuant to the requirements 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.
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LINCOLN ELECTRIC HOLDINGS, INC. |
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/s/ Vincent K. Petrella
Vincent K. Petrella
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Senior Vice President,
Chief Financial Officer and Treasurer |
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(principal financial and accounting officer) |
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May 1, 2009 |
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