<PAGE> 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, 1997 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, 1997 were as follows:
Common Shares..................................................10,488,212
Class A Common Shares..........................................13,837,697
Class B Common Shares ......................................... 486,772
----------
Total outstanding shares..............................24,812,681
===========
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THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
--------- ---------
<S> <C> <C>
Net sales $ 280,721 $ 278,712
Cost of goods sold 172,958 172,158
--------- ---------
Gross profit 107,763 106,554
Distribution cost/selling, general & administrative expenses 73,410 78,460
--------- ---------
Operating income 34,353 28,094
Other income / (expense):
Interest income 923 411
Other income 204 457
Interest expense (1,623) (2,211)
--------- ---------
Total other income / (expense) (496) (1,343)
--------- ---------
Income before income taxes 33,857 26,751
Income taxes 12,808 10,194
--------- ---------
Net income $ 21,049 $ 16,557
========= =========
Net income per share $ 0.85 $ 0.67
Cash dividends declared per share $ 0.15 $ 0.12
Average number of shares outstanding (in thousands) 24,813 24,894
See notes to these consolidated financial statements.
</TABLE>
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THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 72,683 $ 40,491
Marketable securities 6,599 109
Accounts receivable (less allowance for doubtful accounts of
$2,776 in 1997 and $2,878 in 1996) 165,349 151,287
Inventories:
Raw materials and in-process 73,500 79,100
Finished goods 86,698 91,555
--------- ---------
160,198 170,655
Deferred income taxes 10,909 10,579
Other current assets 11,693 10,088
--------- ---------
TOTAL CURRENT ASSETS 427,431 383,209
OTHER ASSETS
Goodwill - net 36,295 37,440
Other 22,899 25,311
--------- ---------
59,194 62,751
PROPERTY, PLANT AND EQUIPMENT
Land 11,302 11,710
Buildings 112,753 114,640
Machinery, tools and equipment 336,648 335,738
--------- ---------
460,703 462,088
Less: accumulated depreciation (261,838) (260,849)
--------- ---------
198,865 201,239
--------- ---------
TOTAL ASSETS $ 685,490 $ 647,199
========= =========
</TABLE>
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THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to banks $ 924 $ 2,607
Trade accounts payable 63,844 58,157
Salaries, wages and amounts withheld 29,334 18,983
Taxes, including income taxes 46,844 36,297
Dividend payable 3,721 2,977
Other current liabilities 44,503 39,976
Current portion of long-term debt 10,407 10,528
--------- ---------
TOTAL CURRENT LIABILITIES 199,577 169,525
Long-term debt, less current portion 64,030 64,148
Deferred income taxes 3,497 3,643
Other long-term liabilities 18,035 18,107
SHAREHOLDERS' EQUITY
Common Shares, without par value -- at stated capital amount:
Authorized -- 30,000,000 shares;
Outstanding -- 10,488,212 shares in 1997 and 10,484,247 shares in 1996 2,098 2,097
Class A Common Shares (non-voting), without par value --
at stated capital amount:
Authorized -- 30,000,000 shares;
Outstanding -- 13,837,697 shares in 1997 and 1996 2,768 2,768
Class B Common Shares, without par value -- at stated capital amount:
Authorized -- 2,000,000 shares;
Outstanding -- 486,772 shares in 1997 and 1996 97 97
Additional paid-in capital 103,849 103,720
Retained earnings 307,580 290,252
Cumulative translation adjustments (16,041) (7,158)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 400,351 391,776
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 685,490 $ 647,199
========= =========
See notes to these consolidated financial statements.
</TABLE>
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THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 21,049 $ 16,557
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,877 7,804
Changes in operating assets and liabilities:
(Increase) in accounts receivable (18,200) (16,035)
Decrease (increase) in inventories 6,642 (226)
(Increase) decrease in other current assets (1,854) 643
Increase in accounts payable 7,282 2,278
Increase in other current liabilities 26,741 30,439
Gross change in other noncurrent assets and liabilities 1,866 670
Other - net (186) 2,463
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,217 44,593
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,600) (7,883)
Purchase of marketable securities (6,500) --
Proceeds from sale of property, plant and equipment 110 380
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (13,990) (7,503)
FINANCING ACTIVITIES
Short-term borrowings - net (1,622) (25,700)
Long-term borrowings - net (191) (5,244)
Dividends paid (2,977) (2,988)
Other 130 (9)
-------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (4,660) (33,941)
Effect of exchange rate changes on cash and cash equivalents 625 773
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 32,192 3,922
Cash and cash equivalents at beginning of period 40,491 10,087
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 72,683 $ 14,009
======== ========
See notes to these consolidated financial statements.
</TABLE>
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THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
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,
1997 are not necessarily indicative of the results to be expected for the year
ending December 31, 1997. 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, 1996.
NOTE B - 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 C - SALARIES, WAGES AND AMOUNTS WITHHELD
Salaries, wages and amounts withheld at March 31, 1997 include provisions for
year-end bonuses and related payroll taxes of $17.6 million. The payment of
bonuses is discretionary and is subject to approval by the Board of Directors.
NOTE D - NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which
simplifies the computation of earnings per share (EPS), specifically focusing on
the computation of weighted average shares outstanding. SFAS 128 is required to
be adopted in the fourth quarter of 1997. The Company expects the adoption of
SFAS 128 to result in immaterial changes in the amounts currently reported for
weighted average shares outstanding. Accordingly, no impact on EPS is expected.
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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, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------------------------
(amounts in millions of dollars) 1997 1996
-------------------------- ----------------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $ 280.7 100.0% $ 278.7 100.0%
Cost of goods sold 173.0 61.6% 172.2 61.8%
-------- ------- -------- --------
Gross profit 107.7 38.4% 106.5 38.2%
Distribution cost/selling, general
and administrative expenses 73.4 26.2% 78.4 28.2%
-------- ------- -------- --------
Operating income 34.3 12.2% 28.1 10.0%
Other income 0.2 0.1% 0.5 0.2%
Interest expense, net (0.7) (0.2%) (1.8) (0.6%)
-------- -------- -------- --------
Income before income taxes 33.8 12.1% 26.8 9.6%
Income taxes 12.8 4.6% 10.2 3.7%
-------- -------- -------- --------
Net income $ 21.0 7.5% $ 16.6 5.9%
======== ======== ======== ========
</TABLE>
NET SALES. Net sales for the quarter ended March 31, 1997 increased $2.0
million or 0.7% to $280.7 million from $278.7 million for the same period last
year. Net sales from the Company's U.S. operations totaled $193.2 million for
the first three months of 1997, an increase of 1.2% or $2.2 million over the
prior year. Prior year U.S. sales include the results of the Company's gas
distribution businesses, which were sold during the third quarter of 1996.
Excluding the incremental impact of those operations, U.S. sales increased
$7.0 million or 3.8% over first quarter 1996. The U.S. sales growth was led by
strong growth in export sales, which increased $4.4 million or 19.6% to $26.8
million for the first quarter of 1997, compared with $22.4 last year. Non-U.S.
sales were $87.5 million through March 1997, compared to $87.7 million for the
first quarter last year. The strengthening U.S. dollar against, principally,
European currencies had an overall negative impact on non-U.S. sales of $4.0
million on a year-over-year basis. Excluding the impact of currency changes,
non-U.S. sales increased 4.3% from the comparable period in 1996. Both the
U.S. and non-U.S. sales increases were achieved through volume growth.
GROSS PROFIT. Gross profit increased 1.1% or $1.2 million to $107.7 million
for the first quarter 1997. Benefiting from higher plant utilization and
operating efficiencies, gross profit as a percentage of sales increased to
38.4% for 1997 compared with 38.2% for 1996.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses decreased $5.0 million or 6.4% to $73.4 million for the first quarter
1997 as compared with 1996. SG&A expenses for 1996 include a $3.4 million charge
($2.1 million after tax, or $0.08 per share) for costs related to a litigation
settlement. Excluding these charges, SG&A expenses decreased $1.6 million or
2.1% from the prior year. The effect of exchange rate changes on SG&A expenses
was a decrease of approximately $0.9 million. The decline in SG&A expenses as a
percentage of sales reflects continuing cost control measures and increased
operational efficiencies.
Included in SG&A expenses are costs related to the Company's discretionary
year-end employee bonus program, net of hospitalization costs, of $17.3 million
in the first quarter 1997 compared with $17.0 million in the 1996 period. The
bonus payout is subject to approval by the Company's Board of Directors during
the fourth quarter.
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INTEREST EXPENSE, NET. Interest expense, net was $0.7 million for the quarter
ended March 31, 1997 compared to $1.8 million for the first quarter 1996, a
decrease of 61.1%. The decreased net interest expense is a result of lower debt
levels and from increased interest income generated from higher balances in cash
and cash equivalents.
INCOME TAXES. Income taxes for the quarter ended March 31, 1997 were $12.8
million on income before income taxes of $33.8 million, an effective rate of
37.8%, as compared with income taxes of $10.2 million on income before income
taxes of $26.8 million, or an effective rate of 38.1% for the same period in
1996. The effective tax rate for the year ended December 31, 1996 was 37.0%.
NET INCOME. Net income increased 27.1% to $21.0 million or $0.85 per share
from $16.6 million or $0.67 per share for the first quarter 1996. Net income
for the quarter ended March 31, 1996 reflects a charge for a legal settlement
amounting to $2.1 million or $0.08 per share, as discussed above. The effect
of the strengthening U.S. dollar against other currencies on net income was
not significant.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities for the quarter ended March 31, 1997 was
$50.2 million compared with $44.6 million for the first quarter 1996. Increased
earnings and the continuing improvement in the management of working capital has
resulted in increased operational cash flow.
Capital expenditures for property, plant and equipment were relatively flat as
compared with the same period in 1996 and reflect the Company's continuing
emphasis on maintaining and improving capacity and infrastructure.
The Company's ratio of total debt to total capitalization decreased to 15.8%
at March 31, 1997 from 16.5% at December 31, 1996.
The Company paid a cash dividend of $3.0 million or $0.12 per share in January
1997.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which
simplifies the computation of earnings per share (EPS), including the
computation of weighted average shares outstanding. SFAS 128 is required to be
adopted in the fourth quarter of 1997. The Company expects the adoption of SFAS
128 to result in immaterial changes in the amounts currently reported for
weighted average shares outstanding, and accordingly, no impact on EPS is
expected.
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:
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- 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 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 Annual Report on Form 10-K, as well as the update 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.
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Part II - Other Information
Item 1. Legal Proceedings
As described in "Item 3. Legal Proceedings" of the Company's Annual Report on
Form 10-K for 1996 (Commission File 0-1402), the Company has been named, in
filings made on or after May 1996 in the Superior Court of California, as a
defendant or co-defendant in lawsuits filed by building owners in Los Angeles
County arising from alleged property damage claimed to have been discovered
after the Northridge earthquake of 1994, and seeking compensatory damages and
in some instances punitive damages relating to the sale and use of the E70T-4
category of welding electrode. Several of these cases were removed during the
first quarter of 1997 to the Federal District of California, Central District.
All but one of the cases, including the PACIFIC DESIGN CENTER case, have now
been remanded to state court.
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.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
(1) A report on Form 8-K was filed on January 6, 1997
which incorporated a press release by the Company
responding to newspaper articles discussing the role
of welding electrodes in seismic zone applications.
(2) A report on Form 8-K was filed on January 24, 1997
which disclosed certain lawsuits in which the Company
was named as a co-defendant arising from property
damage claimed to have been discovered after the
Northridge, California, earthquake of 1994. The
complaints alleged that a certain category of welding
electrode manufactured by the Company and other
defendants was defective for use in seismic zone
building construction. The Company disclosed its
intention to vigorously defend against all actions.
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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 9, 1997
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 72,683
<SECURITIES> 6,599
<RECEIVABLES> 168,125
<ALLOWANCES> 2,776
<INVENTORY> 160,198
<CURRENT-ASSETS> 427,431
<PP&E> 460,703
<DEPRECIATION> 261,838
<TOTAL-ASSETS> 685,490
<CURRENT-LIABILITIES> 199,577
<BONDS> 64,030
<COMMON> 4,963
0
0
<OTHER-SE> 395,388
<TOTAL-LIABILITY-AND-EQUITY> 685,490
<SALES> 280,721
<TOTAL-REVENUES> 280,721
<CGS> 172,958
<TOTAL-COSTS> 172,958
<OTHER-EXPENSES> 72,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,623
<INCOME-PRETAX> 33,857
<INCOME-TAX> 12,808
<INCOME-CONTINUING> 21,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,049
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
