LINCOLN ELECTRIC HOLDINGS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts)

Edgar Glimpses |
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read together with the Company's unaudited consolidated
financial statements and other financial information included elsewhere in this
Quarterly Report on Form 10-Q.
General
The Company is the world's largest designer and manufacturer of arc welding and
cutting products, manufacturing a broad line of arc welding equipment,
consumable welding products and other welding and cutting products.  Welding
products include arc welding power sources, CNC and plasma cutters, wire feeding
systems, robotic welding packages, integrated automation systems, fume
extraction equipment, consumable electrodes, fluxes and welding accessories and
specialty welding consumables and fabrication. The Company's product offering
also includes oxy-fuel cutting systems and regulators and torches used in
oxy-fuel welding, cutting and brazing. In addition, the Company has a leading
global position in the brazing and soldering alloys market.
The Company's products are sold in both domestic and international markets. 

In

the Americas, products are sold principally through industrial distributors,
retailers and directly to users of welding products.  Outside of the Americas,
the Company has an international sales organization comprised of Company
employees and agents who sell products from the Company's various manufacturing
sites to distributors and product users.
As of , the Company's business units were aligned into three
operating segments. The operating segments consist of Americas Welding,
International Welding and The Harris Products Group.  The Americas Welding
segment includes welding operations in North and South America. The
International Welding segment primarily includes welding operations in Europe,
Africa, Asia and Australia. The Harris Products Group includes the Company's
global cutting, soldering and brazing businesses as well as its retail business
in the United States.
Effective , the Company concluded that it no longer met the
accounting criteria for control over its Venezuelan subsidiary based on
deteriorating conditions in Venezuela; therefore, the Company deconsolidated the
financial statements of the Venezuelan subsidiary and began reporting the
results under the cost method of accounting. As a result, beginning , the Company no longer includes the results of the Venezuelan subsidiary in
its consolidated financial statements.

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Results of Operations
The following table shows the Company's results of operations:
                                                           Three Months 

Ended ,

                                                                                            Increase (Decrease)
                                          2017                        2016                     2017 vs 2016
                                  Amount      % of Sales      Amount      % of Sales           $              %
Net sales                       $ 580,897                   $ 550,722                      30,175             5.5 %
Cost of goods sold                377,041                     361,620                      15,421             4.3 %
Gross profit                      203,856         35.1 %      189,102         34.3 %       14,754             7.8 %
Selling, general &
administrative expenses           122,370         21.1 %      113,810         20.7 %        8,560             7.5 %
Operating income                   81,486         14.0 %       75,292         13.7 %        6,194             8.2 %
Interest income                       777                         430                         347            80.7 %
Equity earnings in affiliates         795                         626                         169            27.0 %
Other income                          956                         661                         295            44.6 %
Interest expense                   (6,114 )                    (3,827 )                     2,287            59.8 %
Income before income taxes         77,900         13.4 %       73,182         13.3 %        4,718             6.4 %
Income taxes                       22,052                      19,558                       2,494            12.8 %
Effective tax rate                   28.3 %                      26.7 %
Net income including
non-controlling interests          55,848                      53,624                       2,224             4.1 %
Non-controlling interests in
subsidiaries' income (loss)             4                         (14 )                        18           128.6 %
Net income                      $  55,844          9.6 %    $  53,638          9.7 %        2,206             4.1 %
Diluted earnings per share      $    0.84                   $    0.76                        0.08            10.5 %


Net Sales:
The following table summarizes the impacts of volume, acquisitions, price and
foreign currency exchange rates on Net sales for the three months ended
 on a consolidated basis:
                                                          Change in Net Sales due to:
                         Net Sales                                                                          Net Sales
                           2016          Volume       Acquisitions       Price        Foreign Exchange         2017
Lincoln Electric
Holdings, Inc.         $   550,722     $  16,124     $      3,338     $  11,437     $         (724 )       $  580,897
Lincoln Electric
Holdings, Inc.
(excluding
Venezuela)                 545,742        21,104            3,338        11,437               (724 )          580,897

% Change
Lincoln Electric
Holdings, Inc.                               2.9 %            0.6 %         2.1 %             (0.1 %)             5.5 %
Lincoln Electric
Holdings, Inc.
(excluding
Venezuela)                                   3.9 %            0.6 %         2.1 %             (0.1 %)             6.4 %


Net sales increased in the three months ended  primarily as a
result of improved volume due to higher demand and increased product pricing.
Net sales for the first three months of 2016 include $4,980 in sales from the
Company's Venezuelan operations. The increase in net sales from acquisitions was
driven by an acquired company within Americas Welding.
Gross Profit:
Gross profit for the three months ended  increased, as a percent
of sales, compared to the prior year due to higher volumes and favorable product
mix. The quarter ended  includes a last-in, first-out ("LIFO")
charge of $1,682 compared with no charge or credit taken in the prior year
period.

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Selling, General & Administrative ("SG&A") Expenses:
The increase in SG&A expenses for the three months ended  as
compared to  was due to higher bonus expense and salaries and
wages, transaction costs related to a potential acquisition and higher
incremental SG&A expenses from acquisitions, partially offset by favorable
foreign exchange.
Equity Earnings in Affiliates:
Equity earnings in affiliates has remained relatively flat in the comparable
periods.
Interest Expense:
The increase for the three months ended  as compared to  was due to interest accrued on higher borrowings in 2017.
Income Taxes:
The effective income tax rate is higher for the three months ended  as compared to  primarily due to higher U.S. tax deductions
in 2016 and changes in the mix of earnings between tax rate jurisdictions.
Net Income:
Net income for three months ended  increased as compared to the
prior year period primarily due to higher volumes and improved margins, offset
by transaction costs related to a potential acquisition.

Segment Results Net Sales: The table below summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the three months ended :

                                                            Change in Net Sales due to:
                           Net Sales                                                            Foreign       Net Sales
                              2016        Volume (1)      Acquisitions (2)     Price (3)       Exchange         2017
Operating Segments
Americas Welding          $  359,008     $   14,761      $          3,338     $    5,520     $      697      $ 383,324
International Welding        124,305          3,347                     -          3,199         (1,963 )      128,888
The Harris Products Group     67,409         (1,984 )                   -          2,718            542         68,685

% Change
Americas Welding                                4.1 %                 0.9 %          1.5 %          0.2 %          6.8 %
International Welding                           2.7 %                   -            2.6 %         (1.6 %)         3.7 %
The Harris Products Group                      (2.9 %)                  -   

4.0 % 0.8 % 1.9 %



(1) Increase for Americas Welding and International Welding due to improving
demand in certain end markets. The decrease for The Harris Products Group was
driven by the retail market.
(2) Increase primarily due to the acquisition of Vizient Manufacturing Solutions
within Americas Welding (refer to Note 3 to the consolidated financial
statements for a discussion of the Company's recent acquisitions).
(3) Increase in all segments due to increased product pricing as a result of
higher input costs.


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Adjusted Earnings Before Interest and Income Taxes ("Adjusted EBIT"):
Segment performance is measured and resources are allocated based on a number of
factors, the primary profit measure being Adjusted EBIT. EBIT is defined as
Operating income plus Equity earnings in affiliates and Other income. EBIT is
adjusted for special items as determined by management such as the impact of
rationalization activities, certain asset impairment charges and gains or losses
on disposals of assets.
The following table presents Adjusted EBIT by segment:
                                                                              Increase (Decrease)
                                    Three Months Ended March 31,                 2017 vs. 2016
                                      2017                 2016               $                 %
Americas Welding:
Net sales                       $      383,324       $      359,008          24,316               6.8 %
Inter-segment sales                     22,460               23,831          (1,371 )            (5.8 %)
Total Sales                     $      405,784       $      382,839          22,945               6.0 %

Adjusted EBIT                   $       68,723       $       61,438           7,285              11.9 %
As a percent of total sales (1)           16.9 %               16.0 %                             0.9 %
International Welding:
Net sales                       $      128,888       $      124,305           4,583               3.7 %
Inter-segment sales                      4,285                4,426            (141 )            (3.2 %)
Total Sales                     $      133,173       $      128,731           4,442               3.5 %

Adjusted EBIT                   $        9,605       $        6,233           3,372              54.1 %
As a percent of total sales (2)            7.2 %                4.8 %                             2.4 %
The Harris Products Group:
Net sales                       $       68,685       $       67,409           1,276               1.9 %
Inter-segment sales                      2,300                2,303              (3 )            (0.1 %)
Total Sales                     $       70,985       $       69,712           1,273               1.8 %

Adjusted EBIT                   $        8,460       $        7,711             749               9.7 %
As a percent of total sales (3)           11.9 %               11.1 %                             0.8 %
Corporate / Eliminations:
Inter-segment sales             $      (29,045 )     $      (30,560 )         1,515               5.0 %
Adjusted EBIT (4)                           64                1,197          (1,133 )           (94.7 %)
Consolidated:
Net sales                       $      580,897       $      550,722          30,175               5.5 %

Adjusted EBIT                   $       86,852       $       76,579          10,273              13.4 %

As a percent of sales                     15.0 %               13.9 %                             1.1 %


(1)    Increase for the three months ended March 31, 2017 as compared to

driven by higher Net sales volume and improved margins due

       to favorable mix.


(2)    Increase for the three months ended  as compared to

driven by higher Net sales volumes, improved margins due to

favorable mix and lower SG&A costs as a percent of sales. SG&A costs



included favorable foreign exchange, partially offset by higher bonus

       expense and salaries and wages.


(3)    Increase for the three months ended  as compared to

due to favorable mix, offset by lower Net sales volume in

the retail market.

(4) The three months ended excludes transaction costs related

       to a proposed acquisition as discussed in Note 3.



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Non-GAAP Financial Measures
The Company reviews Adjusted operating income, Adjusted net income, Adjusted
diluted earnings per share and Return on invested capital, all non-GAAP
financial measures, in assessing and evaluating the Company's underlying
operating performance. These non-GAAP financial measures exclude the impact of
special items on the Company's reported financial results. Non-GAAP financial
measures should be read in conjunction with the generally accepted accounting
principles in the United States ("GAAP") financial measures, as non-GAAP
measures are a supplement to, and not a replacement for, GAAP financial
measures. From time to time management evaluates and discloses to investors the
non-GAAP measure Free cash flow ("FCF").  FCF is defined as Net cash provided by
operating activities less Capital expenditures. The Company considers FCF to be
a liquidity measure that provides useful information to management and investors
about how the amount of cash generated by our business, after the purchase of
property and equipment, can be used for debt service, acquisitions, paying
dividends and repurchasing our common shares.
The following table presents a reconciliation of Operating income, Net income
and Diluted earnings per share as reported to Adjusted operating income,
Adjusted net income and Adjusted earnings per share:
                                               Three Months Ended                   

2016

Operating income as reported             $        81,486                 $ 

75,292

Special items (pre-tax):
Acquisition transaction costs (1)                  3,615                        -
Adjusted operating income                $        85,101                 $ 75,292

Net income as reported                   $        55,844                 $ 53,638
Special items (after-tax):
Acquisition transaction costs (1)                  2,734                    

-

Adjusted net income                      $        58,578                 $ 

53,638


Diluted earnings per share as reported   $          0.84                 $  

0.76

Special items (1)                                   0.04                    

-

Adjusted diluted earnings per share      $          0.88                 $  

0.76

(1) Related to proposed acquisition as discussed in Note 3.


Liquidity and Capital Resources
The Company's cash flow from operations can be cyclical.  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 for 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, borrowings
under its existing credit facilities and raising debt in capital markets.
The Company continues to expand globally and periodically looks at transactions
that would involve significant investments.  The Company can fund its global
expansion plans with operational cash flow, but a significant acquisition may
require access to capital markets, in particular, the long-term debt market, as
well as the syndicated bank loan market.  The Company's financing strategy is to
fund itself at the lowest after-tax cost of funding.  Where possible, the
Company utilizes operational cash flows and raises capital in the most efficient
market, usually the United States, and then lends funds to the specific
subsidiary that requires funding.  If additional acquisitions providing
appropriate financial benefits become available, additional expenditures may be
made.

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The following table reflects changes in key cash flow measures:

                                                            Three Months 

Ended ,

                                                         2017            2016         $ Change
Cash provided by operating activities (1)            $    76,240     $    24,718        51,522
Cash used by investing activities (2)                    (42,959 )        (8,427 )     (34,532 )
Capital expenditures                                     (12,037 )        (8,885 )      (3,152 )
Purchase of marketable securities, net of proceeds       (31,125 )             -       (31,125 )
Cash used by financing activities (3)                    (17,643 )      (105,148 )      87,505
Proceeds from short-term borrowings, net                     107          21,787       (21,680 )
Purchase of shares for treasury                             (403 )      (102,488 )     102,085
Cash dividends paid to shareholders                      (22,986 )       

(22,625 ) (361 ) Increase (decrease) in Cash and cash equivalents (4) 22,261 (83,187 )



(1) Cash provided by operating activities increased for the three months ended
, compared with the three months ended . The
increase was primarily due to contributions to the U.S. defined benefit plans in
the prior year and improved company performance.
(2) Cash used by investing activities increased for the three months ended , compared with the three months ended .  The increase was
predominantly due to the purchase of marketable securities. The Company
currently anticipates capital expenditures of $65,000 to $75,000 in 2017.
Anticipated capital expenditures reflect investments for capital maintenance to
improve operational effectiveness.  Management critically evaluates all proposed
capital expenditures and expects each project to increase efficiency, reduce
costs, promote business growth or improve the overall safety and environmental
conditions of the Company's facilities.
(3) Cash used by financing activities decreased in the three months ended , compared with the three months ended .  The decrease was
due to lower purchases of common shares for treasury.
(4) Cash and cash equivalents increased 5.9%, or $22,261, to $401,440 during the
three months ended , from $379,179 as of .  This
increase was predominantly due to cash provided by operating activities offset
by the purchase of marketable securities and cash dividends paid to
shareholders. The increase in Cash and cash equivalents during the three months
ended  compares to a decrease of 27.3% during the three months
ended . At , $294,095 of Cash and cash equivalents
was held by international subsidiaries and may be subject to U.S. income taxes
and foreign withholding taxes if repatriated to the U.S.
The Company's total debt remained consistent as compared to .
Total debt to total invested capital decreased to 47.4% at  from
49.8% at .
In , the Company paid a cash dividend of $0.35 per share, or $23,028,
to shareholders of record on .
Working Capital Ratios
                                      March 31, 2017      December 31, 2016     March 31, 2016
Average operating working capital
to net sales (1)                              17.1 %               15.6 %               19.0 %
Days sales in Inventories                         97.5                  92.1               103.9
Days sales in Accounts receivable                 50.1                  47.7                51.3
Average days in Trade accounts
payable                                           50.3                  48.9                44.8


(1) Average operating working capital to net sales is defined as the sum of Accounts receivable and Inventories less Trade accounts payable as of period end divided by annualized rolling three months of Net sales.

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Return on Invested Capital
The Company reviews return on invested capital ("ROIC") in assessing and
evaluating the Company's underlying operating performance. ROIC is a non-GAAP
financial measure that the Company believes is a meaningful metric to investors
in evaluating the Company's financial performance and may be different than the
method used by other companies to calculate ROIC. ROIC is defined as rolling 12
months of Adjusted net income excluding tax-effected interest income and expense
divided by invested capital. Invested capital is defined as total debt, which
includes Short-term debt and Long-term debt, less current portions, plus Total
equity.
ROIC for the twelve months ended  and 2016 were as follows:
                                                            Twelve Months Ended March 31,
                                                              2017                 2016
Net income                                             $       200,605     

$ 112,762 Rationalization and asset impairment charges, net of tax of $1,776

                                                        -      

18,181

Loss on deconsolidation of Venezuelan subsidiary,
net of tax of $1,097                                            33,251                     -
Income tax valuation reversals                                  (7,196 )                   -
Pension settlement charges, net of tax of $55,428                    -      

87,310

Venezuela currency devaluation                                       -      

27,214

Acquisition transaction costs, net of tax of $880
(1)                                                              2,734                     -
Adjusted net income                                    $       229,394       $       245,467
Plus: Interest expense, net of tax of $8,180 and
$9,114 in 2017 and 2016, respectively                           13,186      

14,693

Less: Interest income, net of tax of $934 and $977 in 2017 and 2016, respectively

                                   1,505                 1,574

Adjusted net income before tax effected interest $ 241,075

 $       258,586

Invested Capital                                         March 31, 2017       March 31, 2016
Short-term debt                                        $         2,136       $        24,844
Long-term debt, less current portion                           703,378               350,106
Total debt                                                     705,514               374,950
Total equity                                                   784,124               892,669
Invested capital                                       $     1,489,638       $     1,267,619
Return on invested capital                                        16.2 %                20.4 %

(1) Related to proposed acquisition as discussed in Note 3.


New Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a discussion of new
accounting pronouncements.

Acquisitions

Refer to Note 3 to the consolidated financial statements for a discussion of the Company's recent acquisitions.

Debt

Refer to Note 10 to the consolidated financial statements for a discussion of the Company's debt.



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Forward-looking Statements
The Company's expectations and beliefs concerning the future contained in this
report are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.  These statements reflect management's
current expectations and involve a number of risks and uncertainties.
Forward-looking statements generally can be identified by the use of words such
as "may," "will," "expect," "intend," "estimate," "anticipate," "believe,"
"forecast," "guidance" or words of similar meaning.  Actual results may differ
materially from such statements due to a variety of factors that could adversely
affect the Company's operating results.  The factors include, but are not
limited to: general economic and market conditions; the effectiveness of
operating initiatives; completion of planned divestitures; interest rates;
disruptions, uncertainty or volatility in the credit markets that may limit our
access to capital; currency exchange rates and devaluations; adverse outcome of
pending or potential litigation; actual costs of the Company's rationalization
plans; possible acquisitions, including the Company's ability to enter into a
definitive agreement for the purchase of Air Liquide's welding business and the
ability to successfully complete such acquisition; market risks and price
fluctuations related to the purchase of commodities and energy; global
regulatory complexity; and the possible effects of events beyond our control,
such as political unrest, acts of terror and natural disasters, on the Company
or its customers, suppliers and the economy in general.  For additional
discussion, see "Item 1A. Risk Factors" in the Company's Annual Report on
Form 10-K for the year ended .

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