-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CxjyuWo20TGh6sCpTq91yNbqu9tHT8NboUBe7cvpN+4LKCVEnQF4uX90guUR214p B6J7WIAXYTYLzTYT1KQVkw== 0000950152-98-004343.txt : 19980513 0000950152-98-004343.hdr.sgml : 19980513 ACCESSION NUMBER: 0000950152-98-004343 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980512 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN ELECTRIC CO CENTRAL INDEX KEY: 0000059527 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 340359955 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-01402 FILM NUMBER: 98616842 BUSINESS ADDRESS: STREET 1: 22801 ST CLAIR AVE CITY: CLEVELAND STATE: OH ZIP: 44117 BUSINESS PHONE: 2164818100 10-Q 1 THE LINCOLN ELECTRIC COMPANY 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three months ended March 31, 1998 Commission File No. 0-1402 THE LINCOLN ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Ohio 34-0359955 (State of incorporation) (I.R.S. Employer Identification No.) 22801 St. Clair Avenue, Cleveland, Ohio 44117 (Address of principal executive offices) (Zip Code) (216) 481-8100 (Registrant's 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, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the issuer's classes of common stock as of March 31, 1998 were as follows: Common Shares...................................10,773,834 Class A Common Shares...........................13,858,190 Total outstanding shares........................24,632,024
1 2 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of dollars, except per share data) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 --------- --------- Net sales $ 302,962 $ 280,721 Cost of goods sold 185,879 172,958 --------- --------- Gross profit 117,083 107,763 Distribution cost / selling, general & administrative expenses 78,680 73,410 --------- --------- Operating income 38,403 34,353 Other income / (expense): Interest income 956 923 Other income 41 204 Interest expense (1,319) (1,623) --------- --------- Total other income / (expense) (322) (496) --------- --------- Income before income taxes 38,081 33,857 Income taxes 14,351 12,808 --------- --------- Net income $ 23,730 $ 21,049 ========= ========= Basic earnings per share $ 0.96 $ 0.85 Diluted earnings per share 0.96 0.85 Cash dividends declared per share $ 0.20 $ 0.15
See notes to these consolidated financial statements. 2 3 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars) (UNAUDITED)
MARCH 31, DECEMBER 31, 1998 1997 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 85,680 $ 46,562 Marketable securities 192 10,194 Accounts receivable (less allowance for doubtful accounts of $3,539 in 1998 and $3,071 in 1997) 178,748 163,437 Inventories: Raw materials and in-process 91,070 80,606 Finished goods 107,063 97,962 -------- -------- 198,133 178,568 Deferred income taxes 16,053 15,868 Other current assets 19,350 18,914 -------- -------- TOTAL CURRENT ASSETS 498,156 433,543 OTHER ASSETS Goodwill - net 34,200 34,751 Other 45,207 41,861 -------- -------- 79,407 76,612 PROPERTY, PLANT AND EQUIPMENT Land 10,703 11,520 Buildings 111,797 111,353 Machinery, tools and equipment 357,352 349,085 -------- -------- 479,852 471,958 Less: accumulated depreciation and amortization 273,511 269,923 -------- -------- 206,341 202,035 -------- -------- TOTAL ASSETS $783,904 $712,190 ======== ========
3 4 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars, except share data) (UNAUDITED)
MARCH 31, DECEMBER 31, 1998 1997 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks $ 962 $ 1,968 Trade accounts payable 76,274 52,497 Salaries, wages and amounts withheld 35,737 18,742 Taxes, including income taxes 53,199 40,284 Dividend payable 4,926 4,922 Other current liabilities 57,370 56,138 Current portion of long-term debt 9,965 9,971 --------- --------- TOTAL CURRENT LIABILITIES 238,433 184,522 Long-term debt, less current portion 54,296 54,360 Deferred income taxes 11,394 11,024 Other long-term liabilities 25,869 25,113 SHAREHOLDERS' EQUITY Common Shares, without par value -- at stated capital amount: Authorized - 60,000,000 shares; Outstanding - 10,773,834 shares in 1998 and 10,771,007 shares in 1997 2,155 2,154 Class A Common Shares (non-voting), without par value -- at stated capital amount: Authorized - 60,000,000 shares; Outstanding - 13,858,190 shares in 1998 and 13,838,363 shares in 1997 2,772 2,768 Additional paid-in capital 104,312 103,722 Retained earnings 378,443 359,639 Cumulative translation adjustment (33,770) (31,112) --------- --------- TOTAL SHAREHOLDERS' EQUITY 453,912 437,171 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 783,904 $ 712,190 ========= =========
See notes to these consolidated financial statements. 4 5 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 1998 1997 --------- ---------- OPERATING ACTIVITIES Net income $ 23,730 $ 21,049 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,310 6,877 Changes in operating assets and liabilities: (Increase) in accounts receivable (15,518) (18,200) (Increase) decrease in inventories (19,585) 6,642 (Increase) in other current assets (225) (1,854) Increase in accounts payable 23,388 7,282 Increase in other current liabilities 31,346 26,741 Gross change in other noncurrent assets and liabilities (1,076) 1,866 Other - net 2,175 (186) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 50,545 50,217 INVESTING ACTIVITIES Capital expenditures, including acquisitions (12,515) (7,600) Purchase of marketable securities - (6,500) Proceeds from maturities of marketable securities 10,000 - Proceeds from sale of property, plant and equipment 1,627 110 -------- -------- NET CASH (USED) BY INVESTING ACTIVITIES (888) (13,990) FINANCING ACTIVITIES Short-term borrowings - net (1,130) (1,622) Long-term borrowings - net (4,639) (191) Dividends paid (4,922) (2,977) Other 429 130 -------- -------- NET CASH (USED) BY FINANCING ACTIVITIES (10,262) (4,660) Effect of exchange rate changes on cash and cash equivalents (277) 625 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 39,118 32,192 Cash and cash equivalents at beginning of period 46,562 40,491 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 85,680 $ 72,683 ======== ========
See notes to these consolidated financial statements. 5 6 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1998 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to the preparation of the quarterly report on Form 10-Q. Accordingly, these consolidated financial statements do not include all of the information and notes required for complete financial statements. These consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) necessary to fairly present the financial position, results of operations and changes in cash flows for the interim period. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. NOTE B - EARNINGS PER SHARE Earnings per share amounts have been presented to conform to the requirements of Statement of Financial Accounting Standards No. 128, Earnings per Share. The following table sets forth the computation of basic and diluted earnings per share (dollars and shares in thousands):
1998 1997 ------- ------- Numerator: Net income $23,730 $21,049 ======= ======= Denominator: Denominator for basic earnings per share -- weighted-average shares 24,617 24,813 Effect of dilutive securities -- employee stock options 102 36 ------- ------- Denominator for diluted earnings per share -- adjusted weighted-average shares 24,719 24,849 ======= ======= Basic earnings per share $ 0.96 $ 0.85 Diluted earnings per share $ 0.96 $ 0.85
NOTE C - COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Statement No. 130 establishes new standards for the reporting and display of changes in equity that are not related to shareholder transactions. Such items are termed other comprehensive income, and would include foreign currency translation adjustments and minimum pension liability adjustments. Statement No. 130 had no impact on the Company's net income or shareholders' equity. Currently, the Company's only component of other comprehensive income is the change in the currency translation adjustment. The components of comprehensive income for the three months ended March 31, 1998 and 1997 follow (dollars in thousands):
1998 1997 -------- -------- Net income $ 23,730 $ 21,049 Other comprehensive income: Change in currency translation adjustment (2,658) (8,883) -------- -------- Comprehensive income $ 21,072 $ 12,166 ======== ========
6 7 NOTE D - INVENTORY VALUATION The valuation of inventory under the Last-In, First-Out (LIFO) method 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 the final year-end LIFO inventory calculation. NOTE E - SALARIES, WAGES AND AMOUNTS WITHHELD Salaries, wages and amounts withheld at March 31, 1998 include provisions for year-end bonuses and related payroll taxes of approximately $21 million related to Lincoln employees worldwide. The payment of bonuses is discretionary and is subject to approval by the Board of Directors. NOTE F - CORPORATE REORGANIZATION Subject to approval at the annual shareholders meeting on May 19, 1998 and the filing of a Certificate of Merger as authorized by the Board of Directors, the Company plans to implement a reorganization of its capital and corporate structure (the "reorganization"). As a result of the reorganization, a new holding company, Lincoln Electric Holdings, Inc., will be created. Existing domestic and international operations would then fall under Lincoln Electric Holdings, Inc. as the publicly-held parent company. Lincoln Electric Holdings, Inc. has filed an S-4 registration statement with the Securities and Exchange Commission registering its shares. Each Common Share and each Class A Common Share of the Company will be converted into two voting common shares of Lincoln Electric Holdings, Inc., which has the economic effect of a two-for-one stock split. The new company will have one class of voting common shares traded on the Nasdaq National Market. NOTE G - ACQUISITIONS During the first quarter of 1998 the Company's Canadian subsidiary acquired a 75% interest in Indalco Alloys, Inc. of Canada. The purchase price of the acquisition was not significant. Indalco is a premier supplier of aluminum welding wire and related products. The acquisition was accounted for as a purchase. The results of Indalco, which were not significant, were included in the Company's results of operations beginning in March 1998. During April 1998, a German subsidiary of the Company purchased the assets and business of Uhrhan & Schwill GmbH, located in Germany, a leader in the design and installation of welding systems for pipe mills. The purchase price of the acquisition was not significant. 7 8 Part 1 - Item 2 MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------ The following table sets forth the Company's results of operations for the three month periods ended March 31, 1998 and 1997:
Three months ended March 31, ----------------------------------------------------- (dollars in millions) 1998 1997 ------------------------- ------------------------- Amount % of Sales Amount % of Sales ---------- ----------- ---------- ----------- Net sales $303.0 100.0% $280.7 100.0% Cost of goods sold 185.9 61.4% 173.0 61.6% ------ ------ ------ ------ Gross profit 117.1 38.6% 107.7 38.4% Distribution cost / selling, general and administrative expenses 78.7 26.0% 73.4 26.2% ------ ------ ------ ------ Operating income 38.4 12.6% 34.3 12.2% Interest income 1.0 0.3% 0.9 0.3% Other income 0.0 0.0% 0.2 0.1% Interest expense (1.3) (0.4%) (1.6) (0.5%) ------ ------ ------ ------ Income before income taxes 38.1 12.5% 33.8 12.1% Income taxes 14.4 4.7% 12.8 4.6% ------ ------ ------ ------ Net income $ 23.7 7.8% $ 21.0 7.5% ====== ====== ====== ======
NET SALES. Net sales for the quarter ended March 31, 1998 increased $22.3 million or 7.9% to $303.0 million from $280.7 million for the first quarter last year. Consolidated sales growth was driven primarily by increased volume. Net sales from U.S. operations totaled $208.7 million for the quarter ended March 31, 1998, an increase of 8.0% or $15.5 million over the prior year. Sales growth from U.S. operations was due to growth in domestic sales. U.S. export sales were down slightly at $26.1 million for the first quarter of 1998, from $26.8 million last year. Non-U.S. sales increased 7.7% to $94.3 million for the first quarter 1998, compared to $87.5 million last year, despite the continued weakness of foreign currencies against the U.S. dollar. For the first quarter of 1998 changes in exchange rates, principally caused by weaker European currencies, had a negative impact on non-U.S. sales of $7.4 million. In local currencies, non-U.S. sales grew more than 16% over the first quarter 1997. For the first quarter 1998, the Canadian, European and Latin American operations posted sales gains over first quarter 1997. GROSS PROFIT. Gross profit of $117.1 million for the first quarter 1998 increased 8.7% or $9.4 million from the prior year. Gross profit as a percentage of net sales increased to 38.6% compared with 38.4% for the first quarter last year. Gross margin percentage increased due to increased plant utilization. DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses increased $5.3 million to $78.7 million for the first quarter 1998 as compared with $73.4 million for the first quarter 1997. SG&A expenses include costs related to the Company's discretionary year-end employee bonus program, net of hospitalization costs. Bonus costs provided during the first quarter 1998 increased to $20.5 million from $17.3 million in the 1997 period. Expected bonus costs are accrued in proportion to profitability, which has improved over 1997. The final bonus payout will be subject to approval by the Company's Board of Directors during the fourth quarter. The higher SG&A expenses were also the result of increased distribution costs which generally increase in proportion to sales. SG&A expense as a percentage of sales has declined to 26.0% from 26.2% in the 1997 period due to greater efficiencies of scale. INTEREST EXPENSE. As a result of reduced debt levels from annual debt payments, interest expense declined almost 19% to $1.3 million for the quarter ended March 31, 1998 compared to $1.6 million for the first quarter 1997. 8 9 INCOME TAXES. Income taxes for the quarter ended March 31, 1998 were $14.4 million on income before income taxes of $38.1 million, an effective rate of 37.7%, as compared with income taxes of $12.8 million on income before income taxes of $33.8 million, or an effective rate of 37.8% for the same period in 1997. The effective tax rate for the year ended December 31, 1997 was 36.8%. The increase in the 1998 effective rate over that of the full year 1997 was primarily the result of certain foreign subsidiaries exhausting net operating loss carryforwards in 1997 and the mix of earnings among subsidiaries in 1998. NET INCOME. Net income increased 12.7% to $23.7 million or $0.96 per share (diluted) from $21.0 million or $0.85 per share (diluted) for the first quarter 1997. The effect of the strengthening U.S. dollar against foreign currencies on net income was not significant. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash provided from operating activities for the three months ended March 31, 1998 increased slightly to $50.5 million compared to $50.2 million for the first three months of 1997. The Company's continued sales growth has led to increased investment in working capital. Capital expenditures for the three months ended March 31, 1998 increased $4.9 million as compared with the same period in 1997. Capital expenditures for 1998 include the acquisition of Indalco Alloys Inc. of Canada. The operating results of Indalco are included within those of the Company beginning in March 1998. The results of Indalco for the first quarter 1998 were not significant. The majority of the remaining incremental capital spending over 1997 was related to the construction of an electrode manufacturing plant for the Company's joint venture in China. The Company continues to selectively add capacity and modernize facilities in domestic and other international markets as necessary. The Company's ratio of total debt to total capitalization decreased to 12.6% at March 31, 1998 from 13.2% at December 31, 1997. The Company paid a cash dividend of $4.9 million or $0.20 per share in January 1998. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS - ---------------------------------------------- From time to time, information provided by the Company, statements by its employees or information included in its filings with the Securities and Exchange Commission (including those portions of this Management's Discussion and Analysis that refer to the future) 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. Such forward-looking statements, and the Company's future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including: - - Litigation. The Company, like other manufacturers, is subject to a variety of lawsuits and potential lawsuits that arise in the ordinary course of business. See "Item 1. Legal Proceedings" within the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as well as the update in this report. See also NOTE K of the audited consolidated financial statements for the year-ended December 31, 1997. - - Competition. The Company operates in a highly competitive global environment, and is subject to a variety of competitive factors such as pricing, the actions and strength of its competitors, and the Company's ability to maintain its position as a recognized leader in welding technology. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against other currencies. The Company's competitive position could also be adversely affected should new or emerging entrants become more active in the arc welding business. - - International Markets. The Company's long term strategy is to increase its share in growing international markets, particularly Asia, Latin America, Central Europe and other developing markets. However, there can be no 9 10 certainty that the Company will be successful in its expansion efforts. The Company is subject to the currency risks of doing business abroad and expansion poses challenging demands within the Company's infrastructure. Further, many developing economies have a significant degree of political and economic instability, which may adversely affect the Company's international operations. - - Cyclicality and Maturity of the Welding Industry. The United States arc welding industry is both mature and cyclical. The growth of the domestic arc welding industry has been and continues to be constrained by numerous factors, including the substitution of plastics and other materials in place of fabricated metal parts in many products and structures. Increased offshore production of fabricated steel structures has also cut into the domestic demand for arc welding products. - - Operating Factors. The Company is highly dependent on its skilled workforce and efficient production facilities, which could be adversely affected by its labor relations, business interruptions at its domestic facilities and short-term or long-term interruptions in the availability of supplies or raw materials or in transportation of finished goods. - - Information Systems Implementation and Year 2000 Issue. The Company is presently replacing many of its legacy systems and believes that with conversions to new software, the Year 2000 Issue will be mitigated. However, if such modifications and conversions are not made, or are not completed in a timely fashion, the Year 2000 Issue could have a material impact on the operations of the Company. The Company will utilize both internal and external resources to replace and test software. The Company plans to complete its Information Systems and Year 2000 project and have all systems compliant before December 31, 1999. However, there are no assurances that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. The total cost of the Information System project is estimated at $30 million to $40 million and is being funded through operating cash flows. Of the total project cost, approximately $25 million to $35 million will be capitalized. The Company's total project cost and estimated time to complete the project are based on presently available information. - - Research and Development. The Company's continued success depends, in part, on its ability to continue to meet customer welding needs through the introduction of new products and the enhancement of existing product design and performance characteristics. There can be no assurances that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to the operating results of the Company, or that product development will continue at a pace to sustain future growth. - - Motor Division. The Company has made substantial capital investments to modernize and expand its production of electric motors. While management believes that the profitability of this investment will improve, success is largely dependent on increased market penetration. Part II - Other Information Item 1. Legal Proceedings One of the lawsuits arising from alleged property damage claimed to have been discovered after the 1994 Northridge earthquake was ordered dismissed upon the voluntary request of the plaintiff, and the plaintiff in another of these lawsuits has similarly requested dismissal. Complaints in two of the remaining lawsuits were amended to include fraud claims, and in one of these two cases the court ordered the fraud claim dismissed. In the other lawsuit, WESTSIDE ASSOCIATES, LTD. V. LINCOLN ELECTRIC CO., the amended complaint also includes a count under California's Unfair Business Practices Act which demands, inter alia, restitution of all amounts paid by purchasers for the Company's E70T-4 electrode, with interest, plus a permanent injunction requiring the Company to inspect all steel-framed buildings in "Greater Los Angeles" and to remove and replace any E70T-4 welds. 10 11 Item 2. Changes in Securities -- 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 and Reports on Form 8-K (a) Exhibit No. Description ----------- ----------- (27) Financial Data Schedule. (b) Reports on Form 8-K -- None. 11 12 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. THE LINCOLN ELECTRIC COMPANY /S/ H. JAY ELLIOTT - ----------------------------- H. Jay Elliott Senior Vice President, Chief Financial Officer and Treasurer May 12, 1998 12 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 85,680 192 182,287 3,539 198,133 498,156 479,852 273,511 783,904 238,433 54,296 0 0 4,927 448,985 783,904 302,962 302,962 185,879 185,879 77,683 0 1,319 38,081 14,351 23,730 0 0 0 23,730 0.96 0.96
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