Lincoln Electric(LECO) - 2018 Q4 - Annual Report

Part I Business Overview Lincoln Electric Holdings, Inc. is a global manufacturer of welding, cutting, and brazing products, operating through three segments and serving diverse industrial markets - The Company is a broad-line manufacturer of welding, cutting, and brazing products, including arc welding power sources, consumable electrodes, robotic welding packages, and CNC cutting systems[10] - Business operations are structured into three segments: Americas Welding (North and South America), International Welding (Europe, Africa, Asia, Australia), and The Harris Products Group (global cutting, soldering, brazing, and U.S. retail)[13] - Major end-user markets include general fabrication, energy, heavy industries, automotive/transportation, and construction/infrastructure; the company is not dependent on any single customer for more than 10% of its total net sales[14] - Competition is based on brand, product quality, price, performance, and technical support; the company believes its technical sales force and R&D support provide a competitive advantage[15][16] - As of December 31, 2018, the company employed approximately 11,000 people worldwide[21] Risk Factors The company faces risks from economic conditions, supply chain, raw material prices, asbestos litigation, product liability, international operations, and cybersecurity - Operating results are sensitive to general economic conditions, as demand is tied to capital spending in manufacturing and industrial sectors[28] - The company is exposed to price fluctuations in key raw materials such as steel, copper, silver, and electronic components, which can be influenced by tariffs and global economic conditions[31] - As of December 31, 2018, the company was a co-defendant in cases involving approximately 3,336 plaintiffs alleging asbestos-induced illness from welding consumables[33] - The business faces potential product liability risks inherent in the design and manufacture of its products, which are used in critical applications like infrastructure and transportation[37] - International operations are significant and expose the company to risks including political and economic uncertainty, currency fluctuations, and varying legal and regulatory environments[48][50] - The business relies on information technology systems, and a significant cybersecurity breach could interrupt operations and result in financial loss or reputational damage[54] Executive Officers This section lists the company's executive officers, including their age, position, and professional background as of the reporting date Executive Officers of the Registrant | Name | Age | Position | | :--- | :--- | :--- | | Christopher L. Mapes | 57 | Chairman of the Board, President and Chief Executive Officer | | Vincent K. Petrella | 58 | Executive Vice President, Chief Financial Officer and Treasurer | | Jennifer I. Ansberry | 45 | Executive Vice President, General Counsel and Secretary | | George D. Blankenship | 56 | Executive Vice President, President, Americas Welding | | Gabriel Bruno | 51 | Executive Vice President, Finance | | Steven B. Hedlund | 52 | Executive Vice President and President, International Welding | | Michele R. Kuhrt | 52 | Executive Vice President, Chief Human Resources Officer | | Geoffrey P. Allman | 48 | Senior Vice President, Strategy and Business Development | | Thomas A. Flohn | 58 | Senior Vice President, President, Asia Pacific Region | | David J. Nangle | 62 | Executive Vice President, President, Harris Products Group | | Douglas S. Lance | 51 | Senior Vice President, President, Cleveland Operations, North America | | Michael Mintun | 56 | Senior Vice President, Sales and Marketing, North America | | Michael J. Whitehead | 45 | Senior Vice President, President, Global Automation, Cutting and Additive Business | Properties The company's headquarters and principal U.S. manufacturing facilities are in Cleveland, Ohio, with 60 facilities across 19 countries - The company's corporate headquarters and main U.S. manufacturing facilities are in Cleveland, Ohio, covering 244 acres with approximately 3 million square feet of manufacturing space[67] - The company has 60 manufacturing facilities, including joint ventures, in 19 countries, with key locations detailed by operating segment[67] Legal Proceedings The company is involved in various legal proceedings, most notably asbestos-related claims, with a history of successful defense against these allegations - As of December 31, 2018, the Company was a co-defendant in cases alleging asbestos-induced illness involving claims by approximately 3,336 plaintiffs, a net decrease of 133 claims from the prior report[70] - Since January 1, 1995, the company has seen 54,977 asbestos-related claims dismissed, won 23 defense verdicts, and had 7 plaintiff verdicts reversed or resolved after appeal[70] Part II Market for Common Equity and Related Matters This section details the company's common stock trading on NASDAQ, issuer share repurchases, and a five-year stock performance graph Issuer Purchases of Equity Securities (Q4 2018) | Period | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 1-31, 2018 | 455,734 | $86.10 | | November 1-30, 2018 | 391,845 | $83.50 | | December 1-31, 2018 | 99,898 | $82.26 | | Total | 947,477 | $84.62 | - Under its share repurchase program, the company is authorized to repurchase up to 55 million shares; through December 31, 2018, 48.8 million shares have been purchased at a cost of $1.9 billion[74] Selected Financial Data This section provides a five-year summary of key financial metrics, including net sales, net income, EPS, dividends, assets, and debt, with footnotes on special items Selected Financial Data (2014-2018) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales (in thousands) | $3,028,674 | $2,624,431 | $2,274,614 | $2,535,791 | $2,813,324 | | Net income (in thousands) | $287,066 | $247,503 | $198,399 | $127,478 | $254,686 | | Diluted earnings per share | $4.37 | $3.71 | $2.91 | $1.70 | $3.18 | | Cash dividends declared per share | $1.64 | $1.44 | $1.31 | $1.19 | $0.98 | | Total assets (in thousands) | $2,349,825 | $2,406,547 | $1,943,437 | $1,784,171 | $1,939,215 | | Long-term debt, less current portion (in thousands) | $702,549 | $704,136 | $703,704 | $350,347 | $2,488 | - 2018 results include charges of $25.3 million for rationalization, $6.7 million for pension settlements, and $4.5 million for Air Liquide Welding acquisition costs[77] - 2017 results were impacted by the Air Liquide Welding acquisition, including a $49.7 million bargain purchase gain and $15.0 million in transaction costs, as well as a $28.6 million charge related to the U.S. Tax Act[78] Management's Discussion and Analysis (MD&A) MD&A provides management's perspective on financial condition, operations, cash flows, liquidity, debt, and critical accounting policies, highlighting 2018 sales growth and tax rate impact Results of Operations In 2018, net sales grew 15.4% to $3.03 billion, driven by acquisitions and pricing, while net income increased 16.0% due to a lower effective tax rate Consolidated Results of Operations (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net sales | $3,028,674 | $2,624,431 | $2,274,614 | | Gross profit | $1,028,521 | $875,107 | $786,559 | | Operating income | $375,539 | $376,942 | $283,614 | | Net income | $287,066 | $247,503 | $198,399 | | Diluted EPS | $4.37 | $3.71 | $2.91 | Change in Net Sales (2018 vs. 2017) | Component | % Change | | :--- | :--- | | Volume | 1.1% | | Acquisitions | 9.1% | | Price | 5.6% | | Foreign Exchange | (0.3%) | | Total | 15.4% | - The effective tax rate decreased to 22.2% in 2018 from 32.4% in 2017, primarily due to the U.S. Tax Act which reduced the federal corporate income tax rate to 21%[106] - Americas Welding sales grew 12.2% in 2018, International Welding sales increased 27.0%, and The Harris Products Group sales rose 4.0%[111][116] Liquidity and Capital Resources The company maintained strong liquidity in 2018 with $329.2 million cash from operations, $358.8 million cash balance, and compliance with all debt covenants Key Cash Flow Measures (in thousands) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $329,152 | $334,845 | | Net cash provided by (used by) investing activities | $20,841 | $(272,027) | | Net cash used by financing activities | $(302,130) | $(135,037) | | Increase (decrease) in Cash and cash equivalents | $32,148 | $(52,478) | - The company repurchased $201.7 million of its common shares in 2018, a significant increase from $43.2 million in 2017[127] - Total debt stood at $702.7 million at year-end 2018, with no outstanding borrowings under its $400 million revolving credit facility[348][351] - Return on Invested Capital (ROIC) improved to 20.7% in 2018 from 16.2% in 2017[140] Critical Accounting Policies and Estimates Management identifies critical accounting policies involving significant judgments for legal and tax contingencies, deferred income taxes, pension obligations, and asset valuations - Legal and Tax Contingencies: The company accrues its best estimate for probable costs related to litigation, such as asbestos claims, and maintains liabilities for uncertain tax positions[153][156] - Pensions: Determining pension expense involves significant estimates, including the expected return on plan assets (4.9% for 2018) and the discount rate for liabilities (3.8% for 2018)[161][162] - Inventories: A substantial portion of U.S. inventories (37% in 2018) is valued on a LIFO basis, requiring estimates of year-end inventory levels and costs[165] - Goodwill and Intangibles: Annual impairment tests rely on valuation models using estimates of future cash flows, growth rates, and discount rates[170][171][172] Market Risk Disclosures The company manages market risks from currency, commodity, and interest rate fluctuations using derivative instruments, with sensitivity analysis indicating no material impact - The company uses forward foreign exchange contracts to hedge currency fluctuations, with gross notional amounts of $45.9 million for transactions and $328.5 million for balance sheet exposures at year-end 2018[181][182] - Interest rate risk on long-term debt is managed using floating interest rate swaps to convert $125 million of fixed-rate borrowings to variable rates[184] - A hypothetical 10% change in year-end exchange rates would result in a $5.8 million change to pre-tax income, offset by the underlying balance sheet exposure[182] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2018 - Based on an evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2018[188] - Management concluded that the Company's internal control over financial reporting was effective as of December 31, 2018, based on the COSO 2013 framework[189] Part III Directors, Executive Compensation, and Corporate Governance Information for Items 10-14, covering directors, executive compensation, corporate governance, security ownership, and related transactions, is incorporated by reference from the 2019 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees and Services (Item 14) is incorporated by reference from the registrant's 2019 proxy statement[194][195][196][197][198] Part IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements, schedules, and numerous exhibits, including corporate governance documents and material contracts, filed as part of the Form 10-K - This section includes the consolidated financial statements for the years ended December 31, 2018, 2017, and 2016, and the financial statement schedule for Valuation and Qualifying Accounts[200][201] - A comprehensive list of exhibits is provided, including the company's articles of incorporation, credit agreements, note purchase agreements, and various equity and compensation plans for executives and directors[202][204][206][208]