-----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, L9g/XXe4iOZwH1hG0zrG002uIJLPUHfkBZSmfSHnBOdz4wQXNIx1BJZ984GDr2Wg T4xDsJkz9gZPW1e5cAxaXg== /in/edgar/work/0000950152-00-007995/0000950152-00-007995.txt : 20001115 0000950152-00-007995.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950152-00-007995 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN ELECTRIC HOLDINGS INC CENTRAL INDEX KEY: 0000059527 STANDARD INDUSTRIAL CLASSIFICATION: [3540 ] IRS NUMBER: 340359955 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-55406 FILM NUMBER: 766922 BUSINESS ADDRESS: STREET 1: 22801 ST CLAIR AVE CITY: CLEVELAND STATE: OH ZIP: 44117 BUSINESS PHONE: 2164818100 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN ELECTRIC CO DATE OF NAME CHANGE: 19920703 10-Q 1 l84508ae10-q.txt LINCOLN ELECTRIC HOLDINGS, INC. 10-Q 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 nine months ended September 30, 2000 Commission File No. 0-1402 LINCOLN ELECTRIC HOLDINGS, INC. (Exact name of registrant as specified in its charter) Ohio 34-1860551 (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 class of common stock as of September 30, 2000 was 42,329,824. 1 2 LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of dollars, except per share data) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2000 1999 2000 1999 --------- --------- --------- --------- Net sales $ 251,198 $ 265,937 $ 807,240 $ 822,303 Cost of goods sold 170,047 174,704 538,001 540,915 --------- --------- --------- --------- Gross profit 81,151 91,233 269,239 281,388 Selling, general & administrative expenses 50,616 54,131 161,668 169,521 Loss on disposal of motor business -- -- -- 32,015 --------- --------- --------- --------- Operating income 30,535 37,102 107,571 79,852 Other income / (expense): Interest income 162 419 426 917 Other (expense) income (4,157) 190 7,517 1,913 Interest expense (1,858) (1,300) (6,191) (4,234) --------- --------- --------- --------- Total other income / (expense) (5,853) (691) 1,752 (1,404) --------- --------- --------- --------- Income before income taxes 24,682 36,411 109,323 78,448 Income taxes 9,007 13,108 39,892 27,503 --------- --------- --------- --------- Net income $ 15,675 $ 23,303 $ 69,431 $ 50,945 ========= ========= ========= ========= Basic earnings per share $ 0.37 $ 0.52 $ 1.62 $ 1.11 Diluted earnings per share $ 0.37 $ 0.51 $ 1.62 $ 1.11 Cash dividends declared per share $ 0.00 $ 0.12 $ 0.28 $ 0.36
See notes to these consolidated financial statements. 2 3 LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ---------- ---------- (UNAUDITED) (NOTE A) ASSETS CURRENT ASSETS Cash and cash equivalents $ 14,144 $ 8,675 Accounts receivable (less allowances of $3,408 in 2000; $3,687 in 1999) 159,057 169,986 Inventories: Raw materials and in-process 77,678 82,451 Finished goods 104,093 109,161 -------- -------- 181,771 191,612 Deferred income taxes 20,238 23,311 Other current assets 44,699 33,011 -------- -------- TOTAL CURRENT ASSETS 419,909 426,595 PROPERTY, PLANT AND EQUIPMENT Land 11,759 11,050 Buildings 127,004 119,519 Machinery, tools and equipment 415,174 419,831 -------- -------- 553,937 550,400 Less: accumulated depreciation and amortization 284,025 279,610 -------- -------- 269,912 270,790 OTHER ASSETS Goodwill - net 40,138 33,263 Other 58,099 44,751 -------- -------- 98,237 78,014 -------- -------- TOTAL ASSETS $788,058 $775,399 ======== ========
See notes to these consolidated financial statements. 3 4 LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars, except share data)
SEPTEMBER 30, DECEMBER 31, 2000 1999 --------- --------- (UNAUDITED) (NOTE A) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks $ 19,342 $ 16,425 Trade accounts payable 53,531 64,482 Accrued employee compensation and benefits 67,522 32,326 Accrued expenses 14,407 15,202 Taxes, including income taxes 41,609 41,326 Dividend payable -- 6,228 Other current liabilities 25,165 28,882 Current portion of long-term debt 13,129 11,503 --------- --------- TOTAL CURRENT LIABILITIES 234,705 216,374 Long-term debt, less current portion 48,076 47,207 Deferred income taxes 27,700 28,771 Other long-term liabilities 30,221 31,532 SHAREHOLDERS' EQUITY Preferred Shares, without par value - at stated capital amount: Authorized - 5,000,000 shares in 2000 and 1999; Issued and Outstanding - none in 2000 and 1999 -- -- Common Shares, without par value - at stated capital amount: Authorized - 120,000,000 shares in 2000 and 1999; Issued - 49,283,203 shares in 2000 and 49,283,950 in 1999; Outstanding - 42,329,824 shares in 2000 and 44,483,366 shares in 1999 4,928 4,928 Additional paid-in capital 104,894 104,891 Retained earnings 540,921 483,463 Accumulated other comprehensive income (63,402) (43,524) Treasury shares, at cost - 6,953,379 shares in 2000 and 4,800,584 shares in 1999 (139,985) (98,243) --------- --------- TOTAL SHAREHOLDERS' EQUITY 447,356 451,515 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 788,058 $ 775,399 ========= =========
See notes to these consolidated financial statements. 4 5 LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2000 1999 --------- --------- OPERATING ACTIVITIES Net income $ 69,431 $ 50,945 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,111 21,087 (Gain) loss on disposal of fixed assets and motor business (955) 31,373 Changes in operating assets and liabilities: (Increase) in accounts receivable (143) (21,477) Decrease (increase) in inventories 7,165 (22,358) (Increase) in other current assets (12,143) (4,614) (Decrease) increase in accounts payable (13,202) 259 Increase in other current liabilities 37,434 34,757 Gross change in other non-current assets and liabilities 1,755 7,818 Other - net 5,786 (2,946) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 121,239 94,844 INVESTING ACTIVITIES Capital expenditures (25,212) (57,265) Acquisitions of businesses and equity investment (19,258) -- Proceeds from sale of fixed assets and motor business 1,621 35,712 Other 363 162 --------- --------- NET CASH (USED) BY INVESTING ACTIVITIES (42,486) (21,391) FINANCING ACTIVITIES Proceeds from short-term borrowings 34,760 111,845 Payments on short-term borrowings (36,749) (108,444) Notes payable to banks - net 5,952 290 Proceeds from long-term borrowings 54,294 34,872 Payments on long-term borrowings (70,127) (36,206) Purchase of shares for treasury (41,741) (62,211) Cash dividends paid (18,108) (16,647) Other (94) (494) --------- --------- NET CASH (USED) BY FINANCING ACTIVITIES (71,813) (76,995) Effect of exchange rate changes on cash and cash equivalents (1,471) (1,528) --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,469 (5,070) Cash and cash equivalents at beginning of period 8,675 39,095 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,144 $ 34,025 ========= =========
See notes to these consolidated financial statements. 5 6 LINCOLN ELECTRIC HOLDINGS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2000 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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 and nine month periods ended September 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. The Company has reclassified distribution costs from selling, general & administrative expenses to cost of goods sold. Those two line items on the consolidated income statement have been restated for 1999 to conform to current year classification. 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, 1999. NOTE B - EARNINGS PER SHARE Basic and diluted earnings per share were computed as follows:
(Dollars and shares in thousands, except per share amounts) Three months ended Nine months ended ------------------ ----------------- September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ------- ------- ------- ------- Numerator: Net income $15,675 $23,303 $69,431 $50,945 ======= ======= ======= ======= Denominator: Denominator for basic earnings per share - Weighted-average shares outstanding 42,330 45,218 42,784 45,693 Effect of dilutive securities - Employee stock options 15 101 31 124 ------- ------- ------- ------- Denominator for diluted earnings per share - Adjusted weighted-average shares outstanding 42,345 45,319 42,815 45,817 ======= ======= ======= ======= Basic earnings per share $ 0.37 $ 0.52 $ 1.62 $ 1.11 Diluted earnings per share $ 0.37 $ 0.51 $ 1.62 $ 1.11
6 7 NOTE C - COMPREHENSIVE INCOME The components of comprehensive income are as follows:
Three months ended Nine months ended ------------------ ----------------- September 30, September 30, ------------- ------------- (Dollars in thousands) 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 15,675 $ 23,303 $ 69,431 $ 50,945 Other comprehensive income: Change in currency translation adjustment (9,394) 1,706 (19,878) (9,415) -------- -------- -------- -------- Comprehensive income $ 6,281 $ 25,009 $ 49,553 $ 41,530 ======== ======== ======== ========
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 final year-end LIFO inventory calculations. NOTE E - ACCRUED EMPLOYEE COMPENSATION AND BENEFITS Accrued employee compensation and benefits at September 30, 2000 include provisions for year-end bonuses and related payroll taxes of approximately $45 million related to Lincoln employees worldwide. The payment of bonuses is discretionary and is subject to approval by the Board of Directors. NOTE F - SEGMENT INFORMATION
(Dollars in thousands) United Other States Europe Countries Eliminations Consolidated --------- --------- --------- ------------ ------------ Three months ended September 30, 2000: Net sales to unaffiliated customers $ 167,394 $ 41,417 $ 42,387 $ -- $ 251,198 Inter-segment sales 15,356 2,688 5,655 (23,699) -- --------- --------- --------- --------- --------- Total $ 182,750 $ 44,105 $ 48,042 $ (23,699) $ 251,198 ========= ========= ========= ========= ========= Income before interest and income taxes $ 23,341 $ 107 $ 2,701 $ 229 $ 26,378 Interest income 162 Interest expense (1,858) --------- Income before income taxes $ 24,682 ========= Three months ended September 30, 1999: Net sales to unaffiliated customers $ 183,476 $ 45,148 $ 37,313 $ -- $ 265,937 Inter-segment sales 13,614 2,589 3,846 (20,049) -- --------- --------- --------- --------- --------- Total $ 197,090 $ 47,737 $ 41,159 $ (20,049) $ 265,937 ========= ========= ========= ========= ========= Income before interest and income taxes $ 32,846 $ 2,242 $ 1,524 $ 680 $ 37,292 Interest income 419 Interest expense (1,300) --------- Income before income taxes $ 36,411 =========
7 8 NOTE F - SEGMENT INFORMATION - (Continued)
(Dollars in thousands) United Other States Europe Countries Eliminations Consolidated --------- --------- --------- ------------ ------------ Nine months ended September 30, 2000: Net sales to unaffiliated customers $ 540,641 $ 139,516 $ 127,083 $ -- $ 807,240 Inter-segment sales 50,012 10,053 16,675 (76,740) -- --------- --------- --------- --------- --------- Total $ 590,653 $ 149,569 $ 143,758 $ (76,740) $ 807,240 ========= ========= ========= ========= ========= Income before interest and income taxes $ 100,250 $ 7,188 $ 7,421 $ 229 $ 115,088 Interest income 426 Interest expense (6,191) --------- Income before income taxes $ 109,323 ========= Total assets $ 524,272 $ 171,668 $ 157,335 $ (65,217) $ 788,058 ========= ========= ========= ========= ========= Nine months ended September 30, 1999: Net sales to unaffiliated customers $ 564,510 $ 142,562 $ 115,231 $ -- $ 822,303 Inter-segment sales 44,988 6,665 11,864 (63,517) -- --------- --------- --------- --------- --------- Total $ 609,498 $ 149,227 $ 127,095 $ (63,517) $ 822,303 ========= ========= ========= ========= ========= Income before interest and income taxes $ 64,017 $ 9,973 $ 6,543 $ 1,232 $ 81,765 Interest income 917 Interest expense (4,234) --------- Income before income taxes $ 78,448 ========= Total assets $ 556,670 $ 177,317 $ 130,633 $ (64,302) $ 800,318 ========= ========= ========= ========= =========
Included in the United States segment for the three months ended September 30, 2000 was a net charge of $4.4 million ($2.8 million after-tax) principally related to costs of foreign currency options purchased in connection with the lapsed Charter bid (see Note J). The nine-months ended September 30, 2000 included a net gain of $5.8 million ($3.5 million after-tax) reflecting proceeds from settlement of a dispute with one of the Company's product liability insurance carriers, offset by costs of foreign currency options purchased in connection with the lapsed Charter bid. Included in the United States segment for the nine-months ended September 30, 1999 was a $32 million pre-tax charge related to the disposal of the motor business (see Note H). NOTE G - ACQUISITIONS In January 2000, the Company purchased a 35% interest in Kuang Tai, the leading welding wire producer in the Taiwan and Mainland China welding markets, for $16.7 million in cash. The Company accounts for its investment in Kuang Tai under the equity method. In February 2000, the Company purchased 100% of the Italian-based C.I.F.E. Spa, the market leader in Europe in the production of MIG wire for the arc welding industry. The total cost of this acquisition was $2.5 million, plus debt assumed of $10.1 million, and was accounted for as a purchase. NOTE H - DISPOSAL OF MOTOR BUSINESS On May 28, 1999, the Company sold its motor business to Regal-Beloit, Inc. The Company recorded a pre-tax charge of $32 million ($19.7 million after-tax, or $0.43 per diluted share on a year-to-date basis) in the first quarter of 1999 reflecting the loss on the sale of motor business assets. Sales attributable to the motor business for the five-month period ended May 28, 1999 were $21.7 million. The corresponding operating results were not material. 8 9 NOTE I - NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement, along with its amendments SFAS No. 137 and SFAS No. 138, will become effective for the Company for fiscal year 2001. The Company is evaluating the effect of these Statements on its accounting and reporting policies, but does not presently expect adoption to have a material impact on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which applies generally accepted accounting principles to selected revenue recognition issues. SAB No. 101 will become effective for the Company as of the fourth quarter of 2000. The Company has evaluated the impact of this statement on the Company's financial statements and the adoption of SAB No. 101 will not have a material effect on the Company's consolidated financial statements. NOTE J - SUBSEQUENT EVENT On October 20, 2000, the Company's offer to purchase Charter plc, a British industrial holding company, lapsed. Therefore, the acquisition will not be completed. As a result, the Company will take additional after-tax charges of approximately $17 million during the fourth quarter of 2000 representing remaining costs associated with the lapsed bid. In connection with the acquisition process, the Company had ceased dividend payments and also suspended its share repurchase program. Payment of dividends and the appropriateness of share repurchases will be considered in the ordinary course of business by the Board of Directors during the fourth quarter of 2000. NOTE K - CONTINGENCIES The Company is defendant or co-defendant in five lawsuits filed in the Superior Court of California by building owners or insurers in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of January 1994. These cases include claims for compensatory damages and punitive damages, often without specification of amount, relating to the sale and use of the E70T-4 category of welding electrode. The Company has also been a defendant or co-defendant in 16 other similar cases involving steel-frame buildings in Greater Los Angeles following the Northridge earthquake. Nine of those cases were voluntarily dismissed, six other cases were settled, and one case was tried to a jury, resulting in a verdict in favor of the Company. All settlement costs have been immaterial to the Company's consolidated financial statements. One or more of the plaintiffs in the five pending lawsuits have sought relief in amounts which, if assessed against the Company, could materially affect the Company's results of operations or cash flows in one or more interim or annual periods and which, if unsuccessfully defended against and not adequately covered by insurance, could have a material adverse effect on the Company's financial position. However, the Company believes it has meritorious defenses to these lawsuits and intends to contest them vigorously. Based on the Company's experience to date in litigating these claims, including the defense verdict, the dismissals, and the immaterial settlements referenced above, and the Company's belief that is has applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material adverse impact on the Company's consolidated financial statements. The Company is also subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, other product liability claims and health, safety and environmental claims (including claims relating to exposures to welding fumes). The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously. All costs associated with these claims, including defense and settlements, have been immaterial to the Company's consolidated financial statements. Based on the Company's experience in litigating these claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material adverse impact on the Company's consolidated financial statements. 9 10 Part I - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the Company's results of operations for the three- and nine-month periods ended September 30, 2000 and 1999:
(dollars in millions) Three months ended September 30, 2000 1999 -------------------- -------------------- Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- Net sales $251.2 100.0% $265.9 100.0% Cost of goods sold 170.1 67.7% 174.7 65.7% ------ ------ ------ ------ Gross profit 81.1 32.3% 91.2 34.3% Selling, general & administrative expenses 50.6 20.1% 54.1 20.3% ------ ------ ------ ------ Operating income 30.5 12.2% 37.1 14.0% Interest income 0.2 0.1% 0.4 0.1% Other income (4.1) (1.7%) 0.2 0.1% Interest expense (1.9) (0.8%) (1.3) (0.5%) ------ ------ ------ ------ Income before income taxes 24.7 9.8% 36.4 13.7% Income taxes 9.0 3.5% 13.1 4.9% ------ ------ ------ ------ Net income $ 15.7 6.3% $ 23.3 8.8% ====== ====== ====== ====== (dollars in millions) Nine months ended September 30, 2000 1999 -------------------- -------------------- Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- Net sales $ 807.2 100.0% $822.3 100.0% Cost of goods sold 538.0 66.7% 541.0 65.8% ------- ------ ------ ------ Gross profit 269.2 33.3% 281.3 34.2% Selling, general & administrative expenses 161.6 20.0% 169.5 20.6% Loss on disposal of motor business -- -- 32.0 3.9% ------- ------ ------ ------ Operating income 107.6 13.3% 79.8 9.7% Interest income 0.4 0.1% 0.9 0.1% Other income 7.5 0.9% 1.9 0.2% Interest expense (6.2) (0.8%) (4.2) (0.5%) ------- ------ ------ ------ Income before income taxes 109.3 13.5% 78.4 9.5% Income taxes 39.9 4.9% 27.5 3.3% ------- ------ ------ ------ Net income $ 69.4 8.6% $ 50.9 6.2% ======= ======= ====== ======
Distribution costs have been reclassified from Selling, general & administrative expenses to Cost of goods sold. 1999 data presented in this Management's Discussion and Analysis has been restated to reflect this reclassification. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES. Net sales for the third quarter 2000 were $251.2 million, a decline of 5.5% from $265.9 million last year. The U.S. operations had net sales of $167.4 million for the quarter, a decrease of 8.8% from $183.5 million for the third quarter last year. This decline was due to lower demand from industrial customers and distributors. Export sales from the U.S. were $15.8 million, a decrease of $1.4 million or 8.1% from last year. Non-U.S. sales increased 1.7% to $83.8 million in the third quarter 2000, from $82.4 million last year. The strengthening of the U.S. dollar, particularly against the Euro, continued to negatively impact non-U.S. sales during the third quarter 2000. In local currencies, European sales increased 7.5% over last year. The February 2000 acquisition of C.I.F.E. Spa in Italy has contributed to the European sales increase. Sales in the rest of the world increased 13.6% as volume in Asia, Latin America and Canada improved from the addition of new manufacturing capacity over the last two years. 10 11 GROSS PROFIT. Gross profit declined 11.1% to $81.1 million for the third quarter 2000 compared with $91.2 million last year. Gross profit as a percentage of net sales decreased 2.0% to 32.3%. Gross profit margins in the U.S. declined slightly due to under-recovered overhead from the low sales volumes and reduced production. Non-U.S. gross margins were down year-over-year due to a change in sales mix to lower margin products, competitive pricing pressures and lower plant utilization in Europe. SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $3.5 million or 6.5% to $50.6 million for the third quarter 2000, compared with $54.1 million for 1999. SG&A expense as a percentage of net sales declined to 20.1% from 20.3% in the 1999 period. SG&A expenses include costs related to the Company's discretionary year-end employee bonus program, net of hospitalization costs. The reduction in SG&A expenses were due to continuing expense reduction efforts and reduced bonus expense offset somewhat by increased foreign currency transaction losses. Expected bonus costs are accrued in proportion to profitability. Reduced bonus costs are due to lower achievement versus pre-bonus profitability objectives. The final 2000 bonus payout will be subject to approval by the Company's Board of Directors during the fourth quarter. OTHER INCOME. Other income for the third quarter 2000 included a net $4.4 million charge ($2.8 million after-tax), principally related to costs of foreign currency options purchased in connection with the lapsed Charter bid. INTEREST EXPENSE. Interest expense of $1.9 million in the third quarter 2000 increased from $1.3 million for the same period last year. The increase in interest expense corresponded to higher debt levels incurred earlier in 2000 to fund share repurchases through April and the acquisitions of C.I.F.E. Spa and a 35% stake in Kuang Tai during the first quarter of 2000. INCOME TAXES. Income taxes for the third quarter 2000 were $9.0 million on income before income taxes of $24.7 million, an effective rate of 36.5%, as compared with income taxes of $13.1 million on income before income taxes of $36.4 million, or an effective rate of 36.0% for the same period in 1999. NET INCOME. Net income for the third quarter 2000 decreased 32.6% to $15.7 million from $23.3 million last year. Diluted earnings per share for 2000 declined to $0.37 per share from $0.51 per share in 1999. Excluding the net charges from other income as described above, net income for the third quarter 2000 would have been $18.5 million, or $0.44 per diluted share. The effect of foreign currency exchange rate movements on net income was not material. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 NET SALES. Net sales for the first nine months of 2000 were $807.2 million, a $15.1 million decrease from the prior year. Included in net sales last year were $21.7 million in sales from the divested motor business. Excluding these sales from the prior year, continuing business sales increased $6.7 million or 0.8%. Net sales for the U.S. operations were $540.6 million for the period, down 4.2% from $564.5 million last year. Excluding sales of the divested motor business, U.S. sales in the first nine months of 1999 would have been $542.7 million, resulting in continuing businesses declining 0.4%. Market growth experienced during the first quarter has decreased as industrial customer and distributor demand has slowed due to market softness. Export sales from the U.S. were $46.8 million, down $2.6 million or 5.3% from last year. U.S. exports have been negatively impacted by the strengthening of the U.S. dollar and the shifting of product sourcing of Latin American customers to other Company locations outside the U.S. The Company's non-U.S. sales increased 3.4% to $266.6 million in the first nine months of 2000, compared with $257.8 million last year. The strengthening of the U.S. dollar during the first nine months of 2000 negatively impacted non-U.S. sales, mostly in Europe. In local currencies, European sales increased 10.6% from last year. The February 2000 acquisition of C.I.F.E. Spa in Italy was the principal factor in the European sales increase. Sales in the rest of the world increased 10.3% (11.5% in local currencies). Manufacturing capacity expansion in Canada, Mexico and Asia have positively impacted sales for 2000. GROSS PROFIT. Gross profit declined 4.3% to $269.2 million for the first nine months of 2000 compared with $281.3 million last year. Gross profit as a percentage of net sales dropped 0.9% from the prior year to 33.3% in 2000. Excluding the results of the motor business, U.S. gross profit margins declined slightly due to unfavorable manufacturing variances 11 12 caused by lower plant utilization. Non-U.S. gross margins were also down year-over-year because of lower plant utilization, competitive pricing pressures in developing markets and rising raw materials cost. SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses declined $7.9 million or 4.7% to $161.6 million for the first nine months of 2000, compared with $169.5 million for 1999. SG&A expense as a percentage of net sales improved to 20.0% from 20.6% in the 1999 period. SG&A expenses include costs related to the Company's discretionary year-end employee bonus program, net of hospitalization costs. The reduction in SG&A expenses were due to planned reductions in selling, marketing and administrative costs and reduced bonus costs. Expected bonus costs are accrued in proportion to profitability. Reduced bonus costs are due to lower achievement versus pre-bonus profitability objectives. The final 2000 bonus payout will be subject to approval by the Company's Board of Directors during the fourth quarter. LOSS ON DISPOSAL OF MOTOR BUSINESS. On May 28, 1999, the Company sold its motor business. The Company recorded a pre-tax charge of $32 million ($19.7 million after-tax, or $0.43 per diluted share on a year-to-date basis) in the first quarter of 1999 reflecting the loss on the sale of its motor business assets. Sales of the motor business for the five-month period ended May 28, 1999 were $21.7 million. The corresponding operating results were not material. OTHER INCOME. Other income for the nine months of 2000 includes a $5.8 million gain ($3.5 million after-tax), related to proceeds received in settlement of a dispute with one of the Company's product liability insurance carriers net of charges related to the cost of foreign currency options purchased in connection with the lapsed Charter bid. INTEREST EXPENSE. Interest expense increased 47.6% to $6.2 million in 2000 compared with $4.2 million for the same period last year. The increase in interest expense was the result of higher borrowings incurred earlier in 2000 to fund the share repurchase program and the acquisitions of C.I.F.E. Spa and a 35% interest in Kuang Tai. INCOME TAXES. Income taxes for the first nine months of 2000 were $39.9 million on income before income taxes of $109.3 million, an effective rate of 36.5%, as compared with income taxes of $27.5 million on income before income taxes of $78.4 million, or an effective rate of 35.1% for the same period in 1999. Excluding the charge for the disposal of the motor business, the effective income tax rate would have been 36.0% for the first nine months of 1999. NET INCOME. Net income for the first nine months of 2000 increased 36.3% to $69.4 million from $50.9 million last year. Excluding non-recurring items from 2000 and the charge for the motor disposal from 1999, net income would have been $65.9 million in 2000 and $70.6 million in 1999 and diluted earnings per share would have been flat between 2000 and 1999 at $1.54 per share. The effect of foreign currency exchange rate movements on net income was not material. LIQUIDITY AND CAPITAL RESOURCES Cash provided from operating activities for the nine months ended September 30, 2000 improved 27.8% to $121.2 million compared with $94.8 million in 1999. Higher cash flow from operations is due to improvements in inventory and receivables management, the timing of income tax payments and the proceeds from an insurance settlement. The Company's ratio of total debt to total capitalization increased to 15.3% at September 30, 2000 from 14.3% at December 31, 1999. Additional debt was accumulated during the first quarter of 2000 to fund share repurchases, an equity investment and an acquisition. At the end of the second quarter 2000, the Company received proceeds of a settlement related to a legal dispute with one of its product liability insurance carriers. These proceeds were used to pay down short-term and long-term borrowings. During the first nine months of 2000, the Company purchased 2,178,130 shares of its common stock at a cost of $42.2 million. Since the share repurchase program was first begun in September 1998, the Company has purchased a total of 7,125,380 shares of its common stock on the open market at a cost of $143.1 million through April 2000. On May 2, 2000, the share repurchase program was suspended, pending the outcome of the proposed acquisition of Charter plc. Capital expenditures during the first nine months of 2000 decreased significantly from $57.3 million through September 1999, to $25.2 million in 2000. The decline was largely related to spending on information systems in the U.S. and Europe in 1999 that did not recur in 2000. In addition, the Company is no longer expanding plant production capacity as 12 13 market growth has slowed. During the first nine months of 2000, the Company acquired a 35% interest in Kuang Tai, a Taiwan-based manufacturer of welding wire for $16.7 million and 100% of C.I.F.E. Spa, an Italian-based manufacturer of MIG wire for $2.5 million, plus assumed debt of $10.1 million. The Company paid cash dividends of $18.1 million or $0.42 per share during the first nine months of 2000. A quarterly dividend of $0.14 per share was paid on July 14, 2000, to holders of record on June 30, 2000. This was the last dividend payment since the Company announced the indefinite suspension of dividends as part of the financing arrangements related to the lapsed Charter bid. Payment of dividends and the appropriateness of share repurchases will be considered in the ordinary course of business by the Board of Directors during the fourth quarter of 2000. SUBSEQUENT EVENT On October 20, 2000, the Company's offer to purchase Charter plc, a British industrial holding company, lapsed. Therefore, the acquisition will not be completed. As a result, the Company will take additional after-tax charges of approximately $17 million during the fourth quarter of 2000 representing remaining costs associated with the lapsed bid. 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: - - 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 (particularly where foreign currencies have been significantly devalued) 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 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. - - 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 decreased the domestic demand for arc welding products in the Company's largest market. - - 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 3. Legal Proceedings" within the Company's annual report on Form 10-K for the year-ended December 31, 1999, as well as the update in this report. See also Note K to the consolidated financial statements for the year-ended December 31, 1999 and in this report. 13 14 - - 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. - - 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. Part II - Other Information Item 1. Legal Proceedings As previously reported, the Company is a defendant or co-defendant in five lawsuits filed in the Superior Court of California by building owners or insurers in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of January 1994. These cases generally include claims for compensatory and punitive damages, often without specification of amount, relating to the sale and use of the E70T-4 category of welding electrode. During the third quarter final judgement in favor of the Company was entered in WESTSIDE ASSOCIATES V. LINCOLN ELECTRIC, a case similar to those five mentioned in the preceding paragraph which was tried in the second quarter. Plaintiff decided not to appeal. Three other similar cases were also voluntarily dismissed in the third quarter. 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. Due to current work related responsibilities at Xerox Corporation, Ursula M. Burns resigned as a Director of the Company effective October 10, 2000. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit No. 27 - Financial Data Schedule (b) Reports on Form 8-K - None. 14 15 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. LINCOLN ELECTRIC HOLDINGS, INC. /s/ H. JAY ELLIOTT - ----------------------- H. Jay Elliott Senior Vice President, Chief Financial Officer and Treasurer November 14, 2000 15 EX-27 2 l84508aex27.txt EXHIBIT 27
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 14,144 0 162,465 3,408 181,771 419,909 553,937 284,025 788,058 234,705 48,076 0 0 4,928 442,428 788,058 807,240 807,240 538,001 538,001 153,725 0 6,191 109,323 39,892 69,431 0 0 0 69,431 1.62 1.62
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