<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1996 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
September 30, 1996 were as follows:
<TABLE>
<S> <C>
Common Shares................................10,509,098
Class A Common Shares........................13,862,861
Class B Common Shares........................ 487,117
----------
Total outstanding shares............24,859,076
==========
</TABLE>
<PAGE> 2
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $270,947 $249,525 $834,167 $781,131
Cost of goods sold 166,935 155,995 513,844 478,524
--------- --------- --------- ---------
Gross profit 104,012 93,530 320,323 302,607
Distribution cost / selling, general &
administrative expenses 80,304 68,533 236,316 216,914
--------- ---------- --------- ---------
Operating income 23,708 24,997 84,007 85,693
Other income / (expense):
Interest income 526 472 1,832 1,184
Other income 8,741 522 10,127 1,468
Interest expense (1,872) (2,518) (5,991) (10,054)
---------- ---------- ---------- ---------
Total other income / (expense) 7,395 (1,524) 5,968 (7,402)
---------- ---------- ---------- ----------
Income before income taxes 31,103 23,473 89,975 78,291
Income taxes 11,432 8,763 33,524 30,142
--------- ---------- --------- ---------
Net income $ 19,671 $ 14,710 $ 56,451 $ 48,149
======== ======== ======== ========
Net income per share (Note B) $ 0.79 $ 0.59 $ 2.27 $ 2.10
Cash dividends declared per share $ 0.12 $ 0.10 $ 0.36 $ 0.30
Average number of shares outstanding
(in thousands) 24,859 24,879 24,874 22,886
</TABLE>
Share and per share amounts reflect the additional shares issued in connection
with the public offering of Class A Common Shares in July and August of 1995.
See notes to these consolidated financial statements.
1
<PAGE> 3
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 56,472 $ 10,087
Accounts receivable (less allowance for doubtful accounts of
$3,816 at September 30, 1996 and $3,916 at December 31, 1995) 150,992 140,833
Inventories: (Note C)
Raw materials and in-process 88,736 86,335
Finished goods 94,080 96,530
---------- ----------
182,816 182,865
Deferred income taxes 13,283 9,738
Prepaid expenses 16,593 6,713
Other current assets 6,576 6,847
----------- -----------
TOTAL CURRENT ASSETS 426,732 357,083
OTHER ASSETS
Goodwill - net 37,866 39,154
Other 17,222 15,929
---------- ----------
55,088 55,083
PROPERTY, PLANT AND EQUIPMENT
Land 10,354 12,396
Buildings 116,158 123,360
Machinery, tools and equipment 350,538 354,855
--------- ---------
477,050 490,611
Less allowance for depreciation (279,026) (285,017)
--------- ---------
198,024 205,594
--------- ---------
TOTAL ASSETS $679,844 $617,760
======== ========
</TABLE>
2
<PAGE> 4
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Trade accounts payable $ 47,332 $ 53,882
Notes payable to banks 3,135 28,541
Salaries, wages and amounts withheld (Note D) 62,401 17,080
Taxes, including income taxes 40,565 33,160
Dividends payable 2,983 2,988
Current portion of long-term debt 617 1,269
Other current liabilities 42,014 31,729
---------- ---------
TOTAL CURRENT LIABILITIES 199,047 168,649
Long-term debt, less current portion 83,437 93,582
Deferred income taxes 5,530 7,063
Other long-term liabilities 14,335 13,021
Minority interest in subsidiary - 5,499
Shareholders' equity
Common Shares 2,102 2,104
Class A Common Shares 2,773 2,776
Class B Common Shares 97 97
Additional paid-in capital 103,953 102,652
Retained earnings 276,053 228,555
Cumulative translation adjustments (7,483) (6,238)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 377,495 329,946
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $679,844 $617,760
======== ========
</TABLE>
See notes to these consolidated financial statements.
3
<PAGE> 5
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 56,451 $ 48,149
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 23,654 20,307
(Gain) on sale of fixed assets and businesses (9,079) (524)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (11,450) (19,504)
(Increase) in inventories (4,783) (34,593)
(Increase) in other current assets (8,731) (1,975)
(Decrease) in accounts payable (7,922) (674)
Increase in other current liabilities 63,312 57,141
Decrease (increase) in other noncurrent assets 1,174 (623)
Increase in other noncurrent liabilities 1,309 4,435
Other - net (1,794) 1,305
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 102,141 73,444
INVESTING ACTIVITIES
Capital expenditures (29,627) (36,126)
Proceeds from sale of property, plant and equipment and businesses 19,056 1,508
---------- ----------
NET CASH (USED) BY INVESTING ACTIVITIES (10,571) (34,618)
FINANCING ACTIVITIES
Proceeds, net of underwriting discount, from the sale of Class A
Common Shares - 81,180
Short-term borrowings - net (26,808) 350
Proceeds from long-term borrowings 5,058 246,476
Repayments on long-term borrowings (16,039) (359,348)
Cash dividends paid (8,958) (6,610)
Other (275) 3,565
------------ -----------
NET CASH (USED) BY FINANCING ACTIVITIES (47,022) (34,387)
Effect of exchange rate changes on cash and cash equivalents 1,837 (448)
----------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 46,385 3,991
Cash and cash equivalents at beginning of period 10,087 10,424
---------- ----------
Cash and cash equivalents at end of period $ 56,472 $ 14,415
========= =========
</TABLE>
See notes to these consolidated financial statements.
4
<PAGE> 6
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine months ended September
30, 1996 are not necessarily indicative of the results to be expected for the
year ending December 31, 1996. 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, 1995.
NOTE B - EARNINGS PER SHARE
On May 24, 1995, the Board of Directors of the Company authorized a dividend
payable on June 12, 1995 to shareholders of record on June 5, 1995 of one Class
A Common Share for each outstanding Common Share (formerly known as Common
Stock) and Class B Common Share (formerly known as Class A Common Stock). In
July and August of 1995, the Company sold 2,863,507 Class A Common Shares in an
underwritten public offering. The per share amounts and the shares used in the
computation of per share amounts for the nine months ended September 30, 1995
have been adjusted to reflect the recapitalization and dividend distribution.
NOTE C - 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 D - SALARIES, WAGES AND AMOUNTS WITHHELD
Salaries, wages and amounts withheld at September 30, 1996 include provisions
for possible year-end bonuses and related payroll taxes of $50.1 million. The
payment of bonuses is wholly discretionary and is determined each year by the
Board of Directors.
NOTE E - SUPPLEMENTAL EARNINGS PER SHARE INFORMATION
In 1995, the Company received net proceeds of approximately $81.2 million in
connection with the public offering of Class A Common Shares, as described in
Note B above, which were used to reduce the Company's outstanding indebtedness.
Had the proceeds been received and applied to reduce indebtedness as of January
1, 1995, pro forma net income per share for the nine months ended September 30,
1995 would have been $2.00. On a pro forma basis, net income per share for the
three months ended September 30, 1995 would have been unchanged.
5
<PAGE> 7
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - ACQUISITION AND DIVESTITURES
In July 1996, the Company acquired Electronic Welding Systems (EWS), a designer
and supplier of welding power supplies and plasma cutting equipment, based in
Italy. The acquisition was accounted for as a purchase. The results of
operations of EWS, which have been included in that of the Company beginning in
July 1996, were not material. The net cost of the acquisition, net of cash
received, of $5.5 million is included in capital expenditures in the Statement
of Consolidated Cash Flows for the nine months ended September 30, 1996.
Relating to this acquisition, a charge of $2.0 million ($1.2 million after-tax,
or $0.05 per share) for acquired in-process research and development was
recorded during the third quarter 1996.
Also during the third quarter 1996, the Company sold its Louisiana and Alaska
gas distribution businesses. Net cash proceeds of $17.4 million were received
and are included in cash flows from investing activities in the Statement of
Consolidated Cash Flows for the nine months ended September 30, 1996. The
Company realized a gain on disposal of these businesses of $8.4 million ($5.1
million after-tax, or $0.20 per share), which is included in other income in the
Consolidated Statement of Income for the three and nine months ended September
30, 1996. The operational results of these businesses were not material to the
Company for the three and nine months ended September 30, 1996 and 1995.
6
<PAGE> 8
Part 1 - 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, 1996 and 1995:
<TABLE>
<CAPTION>
Three months ended September 30,
----------------------------------------------------------
(amounts in millions of dollars) 1996 1995
--------------------------- -----------------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $270.9 100.0% $249.5 100.0%
Cost of goods sold 166.9 61.6% 156.0 62.5%
------ ------ ------ ------
Gross profit 104.0 38.4% 93.5 37.5%
Distribution cost / selling, general
and administrative expenses 80.3 29.6% 68.5 27.5%
------ ------ ------ ------
Operating income 23.7 8.8% 25.0 10.0%
Other income 8.7 3.2% 0.5 0.2%
Interest expense, net 1.3 0.5% 2.0 0.8%
------ ------ ------ ------
Income before income taxes 31.1 11.5% 23.5 9.4%
Income taxes 11.4 4.2% 8.8 3.5%
------ ------ ------ ------
Net income $ 19.7 7.3% $ 14.7 5.9%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------------------------------
(amounts in millions of dollars) 1996 1995
------------------------- -------------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $834.2 100.0% $781.1 100.0%
Cost of goods sold 513.9 61.6% 478.5 61.3%
------ ------ ------ ------
Gross profit 320.3 38.4% 302.6 38.7%
Distribution cost/selling, general
and administrative expenses 236.3 28.3% 216.9 27.8%
------ ------ ------ ------
Operating income 84.0 10.1% 85.7 10.9%
Other income 10.1 1.2% 1.4 0.2%
Interest expense, net 4.1 0.5% 8.8 1.1%
------ ------ ------ ------
Income before income taxes 90.0 10.8% 78.3 10.0%
Income taxes 33.5 4.0% 30.2 3.8%
------ ------ ------ ------
Net income $ 56.5 6.8% $ 48.1 6.2%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
- ------------------------------------------------------------------------------
30, 1995
- --------
NET SALES. Net sales for the quarter ended September 30, 1996 increased $21.4
million or 8.6% to $270.9 million from $249.5 million for the quarter ended
September 30, 1995. Net sales from the Company's U.S. operations totaled $185.7
million for the third quarter of 1996, an increase of 7.5% or $13.0 million over
the prior year. U.S. third party export sales included in these amounts were
$22.9 million for the third quarter of 1996, an increase of 16.8% from $19.6
million in the third quarter of 1995. Non-U.S. sales totaled $85.2 million for
the third quarter of 1996, representing an increase of 10.9% or $8.4 million
over the third quarter of 1995. The largest portion of the sales increases from
both U.S. and non-U.S. operations was due to improved volume. The effect of
exchange rate movements on non-U.S. sales was not significant for the quarter
ended September 30, 1996.
7
<PAGE> 9
Beginning in July 1996, the results of operations of the Company include that of
the newly-acquired Electronic Welding Systems based in Italy. The effect of this
acquisition on the operational results of the Company, exclusive of a one-time
charge described below, was not material.
GROSS PROFIT. Gross profit increased to $104.0 million for the third quarter
1996, an increase of $10.5 million or 11.2% from the third quarter of 1995.
Gross profit as a percentage of net sales increased 0.9% from the prior year to
38.4%. Included in prior year domestic gross profit were start-up costs for the
electric motor plant of $1.5 million, or 0.6% of third quarter 1995 consolidated
net sales. The exclusion of these start-up costs and manufacturing cost
improvements have resulted in improved domestic gross profit percentages
compared to the prior year. Non-U.S. margin percentages slightly declined due to
increased competitive pressures.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses increased $11.8 million to $80.3 million for the third quarter 1996 as
compared to 1995. Third quarter 1996 SG&A expenses included a $2.0 million
charge ($1.2 million after-tax, or $0.05 per share) related to in-process
research and development acquired with the purchase of Electronic Welding
Systems and executive retirement and severance costs of $5.5 million ($3.3
million after-tax, or $0.13 per share). Prior year SG&A expenses for the third
quarter included a reduction in certain discretionary employee costs and a
charge for executive retirement and severance; the net impact of these two items
served to reduce third quarter 1995 SG&A costs by $1.6 million ($1.0 million
after-tax, or $0.04 per share). Excluding these non-recurring charges, SG&A
expenses increased from the third quarter last year due to higher planned sales
promotion costs and human resource requirements, both in the U.S. and
internationally. Included in SG&A expenses are costs of $16.7 million and $13.9
million for the third quarters 1996 and 1995, respectively, related to the
Company's discretionary employee bonus program, net of hospitalization costs.
The final bonus payout for 1996 is subject to approval by the Company's Board of
Directors during the fourth quarter.
OTHER INCOME. For the third quarter 1996, other income included an $8.4 million
gain ($5.1 million after-tax, or $0.20 per share) on the sale of the Company's
Louisiana and Alaska gas distribution businesses. The sale of these businesses
did not significantly impact operating results for the three months ended
September 30, 1996.
INTEREST EXPENSE, NET. Interest expense, net was $1.3 million for the quarter
ended September 30, 1996 compared to $2.0 million for the quarter ended
September 30, 1995, a decrease of 35.0%. The reduced net interest expense was
due to increased operational cash flow used to pay down short-term borrowings
during 1996.
INCOME TAXES. Income taxes for the quarter ended September 30, 1996 were $11.4
million on income before income taxes of $31.1 million, an effective rate of
36.7%, as compared with income taxes of $8.8 million on income before taxes of
$23.5 million, or an effective rate of 37.4% for the same period in 1995. The
decreased effective tax rate reflects the projected utilization of foreign net
operating loss carryforwards and increased utilization of foreign tax credits.
NET INCOME. Net income increased 34.0% to $19.7 million or $0.79 per share for
the quarter ended September 30, 1996 compared with $14.7 million or $0.59 per
share for the comparable period in 1995. As discussed in Note E to the
consolidated financial statements, the recapitalization had no material effect
on the net income of the Company for the quarter ended September 30, 1995.
8
<PAGE> 10
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
1995
- ----
NET SALES. Net sales for the nine months ended September 30, 1996 increased
$53.1 million or 6.8% to $834.2 million from $781.1 million for the nine months
ended September 30, 1995. Net sales from the Company's U.S. operations totaled
$570.6 million for the first nine months of 1996, an increase of 5.4% or $29.1
million over the prior year. U.S. third party export sales included in these
amounts were $68.9 million for the nine months ended September 30, 1996, an
increase of $8.2 million or 13.5% from $60.7 million during the first nine
months of 1995. Non-U.S. sales were $263.6 million for the first nine months of
1996, an increase of 10.0% or $24.0 million over the first nine months of 1995.
The increase in U.S. net sales over the prior year was due to both price and
volume increases, while overseas sales growth was driven primarily by increased
sales volume. The effect of exchange rate movements on non-U.S. sales was not
significant for the nine months ended September 30, 1996.
GROSS PROFIT. Gross profit increased to $320.3 million through September 1996,
an increase of $17.7 million or 5.8% from the first nine months of 1995. Gross
profit as a percentage of net sales decreased to 38.4% from 38.7%. In the U.S.,
gross margin percentages have increased over the prior year, principally a
result of start-up costs associated with the Company's electric motor plant and
manufacturing trainee costs occurring in the prior year. The Company's non-U.S.
operations have experienced lower margins due to competitive and market factors.
As a larger portion of the Company's sales growth has been generated from
non-U.S. sales, gross margin percentage has declined on a consolidated basis.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses increased $19.4 million to $236.3 million for the first nine months of
1996 from $216.9 million for the first nine months of 1995. SG&A expenses for
the Company's U.S. operations through September 1996 were $169.1 million, which
includes certain one-time charges: a $3.4 million charge ($2.1 million
after-tax, or $0.08 per share) for costs related to the settlement of a class
action lawsuit initiated by a former director and officer of the Company; a $2.0
million charge ($1.2 million after-tax, or $0.05 per share) for acquired
in-process research and development; and a $5.5 million charge ($3.3 million
after-tax, or $0.13 per share) for executive retirement and severance costs.
SG&A expenses for the nine months ended September 1995 reflect a charge to
earnings without tax benefit of approximately $2.3 million ($0.10 per share)
related to the devaluation of the Mexican peso on a U.S. dollar-denominated loan
at the Company's Mexican subsidiary, which was settled in 1995, and total
charges of $3.4 million ($2.0 million after-tax, or $0.09 per share) related to
executive retirement and severance costs. Excluding non-recurring costs, SG&A
expenses increased from the prior year due to strategic sales initiatives
producing higher promotion costs, increased distribution costs as a result of
the higher sales volume, greater research and development spending and
additional human resource requirements. Reflected in SG&A expenses are costs
related to the Company's discretionary year-end employee bonus program, net of
hospitalization costs, of $50.4 million and $49.4 million for the nine months
ended September 30, 1996 and 1995, respectively. The final bonus payout for 1996
is subject to approval by the Company's Board of Directors during the fourth
quarter.
OTHER INCOME. As discussed above, other income includes an $8.4 million gain
($5.1 million after-tax, or $0.20 per share) from the sale of the Company's gas
distribution businesses. The sale of these businesses did not significantly
impact operating results for the nine months ended September 30, 1996.
INTEREST EXPENSE, NET. Interest expense, net was $4.1 million for the nine
months ended September 30, 1996 compared to $8.8 million for the first nine
months of 1995, a decrease of 53.4%. Lower interest expense is a result of the
reduction in debt levels from the proceeds of the equity offering and from
greater operating cash flows.
9
<PAGE> 11
INCOME TAXES. Income taxes for the nine months ended September 30, 1996 were
$33.5 million on income before income taxes of $90.0 million, an effective tax
rate of 37.2%, as compared with income taxes of $30.2 million on income before
taxes of $78.3 million, an effective rate of 38.6% for the same period in 1995.
The decreased effective tax rate reflects the projected utilization of foreign
net operating loss carryforwards. The effective tax rate for the year ended
December 31, 1995 was 38.3%.
NET INCOME. Net income increased 17.5% to $56.5 million or $2.27 per share for
the nine months ended September 30, 1996 compared with $48.1 million or $2.10
per share through September 1995. The net effect of non-recurring SG&A costs and
the gain on the sale of the gas distribution businesses, as described above,
served to reduce net income for the nine months ended September 30, 1996 by $1.5
million or $0.06 per share. See supplemental earnings per share information in
Note E to the consolidated financial statements regarding the pro forma effect
of reduced interest cost and additional shares issued in connection with the
1995 public offering.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided from operating activities for the nine months ended September 30,
1996 was $102.1 million compared with $73.4 million for the same period in 1995.
Through an improvement in inventory and receivables management compared to the
prior year period, the Company has been able to achieve sales growth without a
proportionate increase in working capital.
Capital expenditures decreased to $29.6 million for the first nine months of
1996 compared to $36.1 million for the same period in 1995. Capital expenditures
for 1996 include $5.5 million related to the purchase of Electronic Welding
Systems. Capital spending in 1995 included the new electric motor facility in
Cleveland, Ohio and added welding consumable manufacturing capacity. Included in
net cash used by investing activities for 1996 are the net cash proceeds of
$17.4 million from the sale of the Louisiana and Alaska gas distribution
businesses.
Increased operating cash flow during 1996 improved the financial position of the
Company at September 30, 1996 as compared to 1995. The ratio of total debt to
total capitalization improved to 18.8% at September 30, 1996 from 27.2% at
December 31, 1995 and 24.4% at September 30, 1995.
The Company paid total cash dividends of $9.0 million or $0.36 per share during
the first nine months of 1996.
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 become more active in the arc
welding business.
10
<PAGE> 12
- - 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.
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.
- - 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 quarterly
report under the Securities Exchange Act of 1934, as amended, for the
period ending June 30, 1996. See also the related disclosure in this
report. While historical litigation costs have not been material to the
Company, there can be no assurance that this will remain the case, or that
insurance coverage will be adequate.
- - 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.
- - 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. The Company is in the
process of revising its sales and marketing programs.
11
<PAGE> 13
Part II - Other Information
Item 1. Legal Proceedings
The Company has sued St. Paul Fire and Marine Insurance Company over the
allocation among various liability insurance policies of defense and indemnity
costs of certain welding fume cases in which the Company is a defendant.
Decisions by Federal District Courts in Ohio and Minnesota have resolved a venue
controversy and the dispute is proceeding under the name of LINCOLN ELECTRIC CO.
v. ST. PAUL'S FIRE & MARINE INSURANCE CO. in Federal District Court in Ohio.
On May 22, 1996, the Company was added as a co-defendant in a property damage
case pending in Superior Court, California, County of Los Angeles, SAINT JOHN'S
MEDICAL PLAZA v. DILLINGHAM CONSTRUCTION ET.AL. The seven count complaint names
the Company as an additional defendant on two of the seven counts, negligence
and strict product liability. The complaint alleges that an electrode
manufactured by the Company was used in the construction of a medical office
building that experienced structural damage as a result of the January 1994
earthquake in Southern California. Compensatory damages in excess of $10 million
and unspecified punitive damages are sought. Certain of the defendants have
filed cross-claims against the Company, and the Company has cross-claimed
against those defendants.
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 27 -- Financial Data Schedule.
(b) Reports on Form 8-K -- None.
12
<PAGE> 14
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
November 13, 1996
13
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