<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 nine months ended September 30, 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
September 30, 1997 were as follows:
Common Shares.......................................10,770,959
Class A Common Shares...............................13,837,697
-----------
Total outstanding shares............................24,608,656
===========
1
<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,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $291,567 $270,947 $871,923 $834,167
Cost of goods sold 181,044 166,935 539,634 513,844
-------- -------- -------- --------
Gross profit 110,523 104,012 332,289 320,323
Distribution cost / selling, general &
administrative expenses 77,120 80,304 228,258 236,316
-------- -------- -------- --------
Operating income 33,403 23,708 104,031 84,007
Other income / (expense):
Interest income 1,812 526 4,056 1,832
Other income 197 8,741 526 10,127
Interest expense (1,636) (1,872) (4,940) (5,991)
-------- -------- -------- --------
Total other income / (expense) 373 7,395 (358) 5,968
-------- -------- -------- --------
Income before income taxes 33,776 31,103 103,673 89,975
Income taxes 12,266 11,432 38,463 33,524
-------- -------- -------- --------
Net income $ 21,510 $ 19,671 $ 65,210 $ 56,451
======== ======== ======== ========
Net income per share $ 0.87 $ 0.79 $ 2.64 $ 2.27
Cash dividends declared per share $ 0.15 $ 0.12 $ 0.45 $ 0.36
Average number of shares outstanding
(in thousands) 24,609 24,859 24,719 24,874
</TABLE>
See notes to these consolidated financial statements.
2
<PAGE> 3
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 68,797 $ 40,491
Marketable securities 53,992 109
Accounts receivable (less allowance for doubtful accounts of
$3,036 in 1997 and $2,878 in 1996) 167,022 151,287
Inventories:
Raw materials and in-process 74,829 79,100
Finished goods 93,442 91,555
-------- --------
168,271 170,655
Deferred income taxes 12,136 10,579
Other current assets 22,879 10,088
-------- --------
TOTAL CURRENT ASSETS 493,097 383,209
OTHER ASSETS
Goodwill - net 35,258 37,440
Other 29,950 25,311
-------- --------
65,208 62,751
PROPERTY, PLANT AND EQUIPMENT
Land 11,775 11,710
Buildings 112,490 114,640
Machinery, tools and equipment 341,225 335,738
-------- --------
465,490 462,088
Less: accumulated depreciation (267,198) (260,849)
-------- --------
198,292 201,239
-------- --------
TOTAL ASSETS $756,597 $647,199
======== ========
</TABLE>
3
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THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to banks $ 284 $ 2,607
Trade accounts payable 57,802 58,157
Salaries, wages and amounts withheld 67,002 18,983
Taxes, including income taxes 44,666 36,297
Dividend payable 3,691 2,977
Other current liabilities 59,851 39,976
Current portion of long-term debt 10,171 10,528
-------- --------
TOTAL CURRENT LIABILITIES 243,467 169,525
Long-term debt, less current portion 63,825 64,148
Deferred income taxes 3,416 3,643
Other long-term liabilities 17,116 18,107
SHAREHOLDERS' EQUITY
Common Shares, without par value -- at stated capital amount:
Authorized -- 60,000,000 shares in 1997 and 30,000,000 shares in 1996;
Outstanding -- 10,770,959 shares in 1997 and 10,484,247 shares in 1996 2,154 2,097
Class A Common Shares (non-voting), without par value --
at stated capital amount:
Authorized -- 60,000,000 shares in 1997 and 30,000,000 shares in 1996;
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 -- none in 1997 and 2,000,000 shares in 1996;
Outstanding -- none in 1997 and 486,772 shares in 1996 - 97
Additional paid-in capital 103,697 103,720
Retained earnings 344,358 290,252
Cumulative translation adjustments (24,204) (7,158)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 428,773 391,776
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $756,597 $647,199
======== ========
</TABLE>
See notes to these consolidated financial statements.
4
<PAGE> 5
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
---------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 65,210 $ 56,451
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 20,797 23,654
(Gain) on sale of fixed assets and businesses - (9,079)
Changes in operating assets and liabilities:
(Increase) in accounts receivable (23,068) (11,450)
(Increase) in inventories (4,845) (4,783)
(Increase) in other current assets (13,799) (8,731)
Increase (decrease) in accounts payable 2,316 (7,922)
Increase in other current liabilities 78,675 63,312
Gross change in other noncurrent assets and liabilities (6,882) 2,483
Other - net (1,053) (1,794)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 117,351 102,141
INVESTING ACTIVITIES
Capital expenditures (23,252) (29,627)
Purchase of marketable securities (53,895) -
Proceeds from sale of property, plant and equipment and businesses 818 19,056
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (76,329) (10,571)
FINANCING ACTIVITIES
Short-term borrowings - net (2,214) (26,808)
Long-term borrowings - net (598) (10,981)
Dividends paid (10,390) (8,958)
Other (105) (275)
-------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (13,307) (47,022)
Effect of exchange rate changes on cash and cash equivalents 591 1,837
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 28,306 46,385
Cash and cash equivalents at beginning of period 40,491 10,087
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,797 $ 56,472
======== ========
</TABLE>
See notes to these consolidated financial statements.
5
<PAGE> 6
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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 and nine months ended
September 30, 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 September 30, 1997 include provisions
for year-end bonuses and related payroll taxes of $54.7 million. The payment of
bonuses is discretionary and is subject to approval by the Board of Directors.
NOTE D - CHANGES IN CAPITAL STRUCTURE
Effective May 28, 1997, certain changes in the Company's capital structure were
implemented. Class B Common Shares were eliminated and the 486,772 outstanding
Class B Common Shares were converted into 282,747 Common Shares. Additionally,
the authorized capital was increased to 60 million Common Shares and 60 million
Class A Common Shares.
NOTE E - 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
Consolidated Statement of 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 gas distribution
businesses. Net cash proceeds of $17.4 million were received and are included in
cash flows from investing activities in the Consolidated Statement of 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 Statements 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.
6
<PAGE> 7
NOTE F - CONTINGENCIES
The Company is subject to a variety of civil and administrative proceedings
arising out of its normal operations, including those relating to product
liability claims, health, safety and environmental claims and employment-related
actions.
The Company has been named in filings made during 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, California, earthquake of
January 1994. A total of eight such cases remain pending. One of these cases,
PACIFIC DESIGN CENTER, was filed in 1997 as a class action complaint against the
Company and other unnamed "John Doe" defendants. It alleges that a certain type
of welding electrode manufactured by the Company and others was defective for
use in "moment resisting" steel frame buildings in seismically sensitive areas.
The complaint claims there may be 1,500 such buildings, with damages (including
costs of inspection, retrofitting and repairs, loss of income, and diminution of
value) exceeding $1 billion; it also seeks punitive damages.
During September 1997, the Company settled one of the individual Northridge
actions, SAINT JOHN'S MEDICAL PLAZA v. DILLINGHAM CONSTRUCTION ET. AL., which
had been set for trial in October. The Company paid $6.0 million to settle this
case. There was no significant effect on results of operations for the third
quarter, due to existing reserves and applicable insurance.
The Company is unable to make a meaningful estimate of the amount or range of
possible losses that could result from an unfavorable outcome of the remaining
pending or future earthquake-related cases. The Company's results of operations
or cash flows in one or more interim or annual periods could be materially
affected by unfavorable results in one or more of the earthquake-related cases.
Management believes the Company has substantial defenses and intends to contest
such suits vigorously, that the Company has applicable insurance and that other
potential defendants and their respective insurers will be identified as the
lawsuits proceed. Based on information known to the Company, and subject to the
factors and contingencies noted herein, management believes the outcome of the
Company's litigation should not have a material adverse effect upon the
consolidated financial position of the Company. However, if the Company is
unsuccessful in defending or otherwise satisfactorily resolving this litigation,
and if insurance coverage is unavailable or inadequate, then the litigation
could have a material adverse impact on the Company's financial position.
NOTE G - NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") 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.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information. This
statement requires disclosure of selected financial and descriptive information
for each operating segment based on management's internal organizational
decision-making structure. Additional information is required on a company-wide
basis for revenues by product or service, revenues and identifiable assets by
geographic location and information about significant customers. As required by
the statement, the Company will begin presenting such information in its
financial statements for the year-ending December 31, 1998.
7
<PAGE> 8
Part 1 - Item 2
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations for the three
and nine month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended September 30,
----------------------------------------------------------------
(amounts in millions of dollars) 1997 1996
----------------------------- -----------------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $291.6 100.0% $270.9 100.0%
Cost of goods sold 181.1 62.1% 166.9 61.6%
------- ------ ------- ------
Gross profit 110.5 37.9% 104.0 38.4%
Distribution cost / selling, general
and administrative expenses 77.1 26.4% 80.3 29.6%
------- ------ -------- ------
Operating income 33.4 11.5% 23.7 8.8%
Interest income 1.8 0.6% 0.5 0.2%
Other income 0.2 0.1% 8.7 3.2%
Interest expense 1.6 0.6% 1.8 0.7%
------- ------ -------- ------
Income before income taxes 33.8 11.6% 31.1 11.5%
Income taxes 12.3 4.2% 11.4 4.2%
------- ------ -------- ------
Net income $ 21.5 7.4% $ 19.7 7.3%
======= ====== ======== ======
<CAPTION>
Nine months ended September 30,
---------------------------------------------------------------
(amounts in millions of dollars) 1997 1996
--------------------------- -----------------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C>
Net sales $871.9 100.0% $834.2 100.0%
Cost of goods sold 539.6 61.9% 513.9 61.6%
------- ------ ------- ------
Gross profit 332.3 38.1% 320.3 38.4%
Distribution cost / selling, general
and administrative expenses 228.3 26.2% 236.3 28.3%
------- ------ ------- ------
Operating income 104.0 11.9% 84.0 10.1%
Interest income 4.1 0.5% 1.8 0.2%
Other income 0.5 0.1% 10.1 1.2%
Interest expense 4.9 0.6% 5.9 0.7%
------- ------ ------- ------
Income before income taxes 103.7 11.9% 90.0 10.8%
Income taxes 38.5 4.4% 33.5 4.0%
------- ------ ------- ------
Net income $ 65.2 7.5% $ 56.5 6.8%
======= ====== ======= ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
- --------------------------------------------------------------------
SEPTEMBER 30, 1996
- ------------------
NET SALES. Net sales for the quarter ended September 30, 1997 increased $20.7
million or 7.6% to $291.6 million from $270.9 million for the same period last
year. Net sales from U.S. operations totaled $205.0 million for the quarter
ended September 30, 1997, an increase of 10.4% or $19.3 million over the prior
year. Prior year U.S. results included incremental sales of $4.2 million for gas
distribution businesses, sold during the third quarter of 1996. Sales growth
from U.S. operations was due to growth in both domestic and export sales. U.S.
export sales increased $5.0 million or 21.8% to $27.9 million for the third
quarter of 1997, from $22.9 million last year. Non-U.S. sales increased 1.6% to
$86.6 million for the third quarter 1997, compared to $85.2 million last year,
despite a decline in the relative strength of foreign currencies against the
U.S. dollar. For the third quarter of 1997 changes in exchange rates, primarily
caused by weakening European currencies, had an overall negative impact on
non-U.S. sales of $8.4 million. Company-wide, sales growth was achieved largely
through increased volume.
8
<PAGE> 9
GROSS PROFIT. Gross profit of $110.5 million for the third quarter 1997
increased 6.3% or $6.5 million from the prior year. Gross profit as a percentage
of net sales declined to 37.9% compared with 38.4% for the third quarter last
year. Margin percentages have been affected by increased product liability and
defense costs, the costs of insurance proceedings, increases in sales in
non-U.S. markets with lower margins and by the incremental loss of higher margin
gas distribution sales.
The Company paid $6.0 million in September 1997 to settle a lawsuit related to
alleged property damage claimed to have been discovered after the 1994
Northridge earthquake. The settlement had no material effect on earnings due to
existing reserves and applicable insurance. See NOTE F of the unaudited
consolidated financial statements contained herein for further discussion on
remaining litigation.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses decreased $3.2 million to $77.1 million for the third quarter 1997 as
compared with 1996.
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). The Company's ongoing efforts at cost reduction and control have
resulted in the lower SG&A expense as a percentage of sales.
Included in SG&A expenses are costs related to the Company's discretionary
year-end employee bonus program, net of hospitalization costs, of $19.0 million
in the third quarter 1997 compared with $16.7 million in the 1996 period. The
bonus payout is subject to approval by the Company's Board of Directors during
the fourth quarter.
INTEREST INCOME. Interest income increased to $1.8 million for the third quarter
1997 from $0.5 million for the same period last year. The higher interest income
is the result of the larger balance of cash and marketable securities.
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
gas distribution businesses. The sale of these businesses did not significantly
impact operating results for the three months ended September 30, 1996.
INTEREST EXPENSE. As a result of reduced debt levels, interest expense declined
12.6% to $1.6 million for the quarter ended September 30, 1997 compared to $1.8
million for the third quarter 1996.
INCOME TAXES. Income taxes for the quarter ended September 30, 1997 were $12.3
million on income before income taxes of $33.8 million, an effective rate of
36.3%, as compared with income taxes of $11.4 million on income before income
taxes of $31.1 million, or an effective rate of 36.7% 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 9.3% to $21.5 million or $0.87 per share from
$19.7 million or $0.79 per share for the third quarter 1996. The effect of the
strengthening U.S. dollar against foreign currencies on net income was not
significant.
9
<PAGE> 10
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
- ------------------------------------------------------------------
SEPTEMBER 30, 1996
- ------------------
NET SALES. Net sales for the nine months ended September 30, 1997 increased
$37.7 million or 4.5% to $871.9 million from $834.2 million for the same period
last year. Net sales from the Company's U.S. operations totaled $601.3 million
for the first nine months of 1997, an increase of 5.4% or $30.7 million over the
prior year. Prior year U.S. sales included incremental sales of $14.3 million
for gas distribution businesses, sold during the third quarter of 1996. U.S.
export sales increased 18.6% to $81.7 million for the first nine months of 1997,
compared with $68.9 million in 1996. Non-U.S. sales were $270.6 million for the
nine months ended September 1997, compared to $263.6 million in 1996, an
increase of 2.7%. The strengthening of the U.S. dollar, predominantly against
European currencies, had an adverse impact on non-U.S. sales of $19.0 million on
a year-over-year basis. Sales increases were primarily due to volume gains.
GROSS PROFIT. Gross profit increased 3.7% or $12.0 million to $332.3 million
through September 30, 1997 from $320.3 million in 1996. Margin percentages have
been impacted by increased product liability and defense costs, increases in
sales in non-U.S. markets with lower margins and by the loss of higher margin
gas distribution sales.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses decreased $8.0 million or 3.4% to $228.3 million for the nine months
ended September 30, 1997 as compared with 1996. SG&A expenses for 1996 included
a $3.4 million charge ($2.1 million after tax, or $0.08 per share) for costs
related to a litigation settlement, 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. The exclusion of the gas distribution
businesses resulted in a reduction of reported SG&A costs of $6.4 million on a
year-over-year basis. The effect of exchange rate changes served to reduce SG&A
expenses by $4.5 million. The decline in SG&A expenses as a percentage of sales
reflects continuing cost control initiatives.
Included in SG&A expenses are costs related to the Company's discretionary
year-end employee bonus program, net of hospitalization costs, of $54.7 million
through September 30, 1997 compared with $50.4 million in the 1996 period.
INTEREST INCOME. Larger balances of cash and marketable securities has resulted
in a 121.4% increase in interest income to $4.1 million for 1997 from $1.8
million for 1996.
OTHER INCOME. For the nine months ended September 30, 1996, other income
includes an $8.4 million gain ($5.1 million after-tax, or $0.20 per share) from
the sale of gas distribution businesses. The sale of these businesses did not
significantly impact operating results for the nine months ended September 30,
1996.
INTEREST EXPENSE. Interest expense declined 17.5% to $4.9 million for the nine
months ended September 30, 1997 compared to $5.9 million for 1996. This decrease
is a result of lower debt levels.
INCOME TAXES. Income taxes for the nine months ended September 30, 1997 were
$38.5 million on income before income taxes of $103.7 million, an effective rate
of 37.1%, as compared with income taxes of $33.5 million on income before income
taxes of $90.0 million, or an effective rate of 37.2% 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 15.5% to $65.2 million or $2.64 per share from
$56.5 million or $2.27 per share for 1996. The effect of the strengthening U.S.
dollar against other currencies on net income was not significant.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided from operating activities for the nine months ended September 30,
1997 increased 15.0% to $117.4 million from $102.1 million for the first nine
months of 1996. Improved working capital management and higher earnings has
resulted in the improved cash flow.
Capital expenditures for the nine months ended September 30, 1997 decreased $6.3
million as compared with the same period in 1996 due to the timing of
acquisitions and joint venture investments. Capital expenditures for 1996
include the $5.5 million acquisition of Electronic Welding Systems. The Company
continues to invest to maintain and improve capacity and infrastructure as
supported by market requirements. Included in net cash used by investing
activities for 1996 are the net cash proceeds of $17.4 million from the sale of
the gas distribution businesses.
The Company's ratio of total debt to total capitalization decreased to 14.8% at
September 30, 1997 from 16.5% at December 31, 1996.
Dividends paid through September 30, 1997 were $0.42 per share or $10.4 million.
A dividend of $0.15 per share or $3.7 million was paid on October 15, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
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.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures About Segments of an Enterprise and Related Information. This
statement requires disclosure of selected financial and descriptive information
for each operating segment based on management's internal organizational
decision-making structure. Additional information is required on a company-wide
basis for revenues by product or service, revenues and identifiable assets by
geographic location and information about significant customers. As required by
the statement, the Company will begin presenting such information in its
financial statements for the year-ending December 31, 1998.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements by its
employees or information included in its filings with the Securities and
Exchange Commission (including those portions of this Management's Discussion
and Analysis that refer to the future) may contain forward-looking statements
that are not historical facts. Those statements are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, and the Company's future performance, operating
results, financial position and liquidity, are subject to a variety of factors
that could materially affect results, including:
- - Litigation. The Company, like other manufacturers, is subject to a variety
of lawsuits and potential lawsuits that arise in the ordinary course of
business. See "Item 1. Legal Proceedings" within the Company's Annual
Report on Form 10-K for the year ending December 31, 1996, as well as the
update in this report. While product liability costs have not generally
been material to the Company's results of operations, they have increased
recently, particularly as a result of litigation relating to the 1994
Northridge earthquake. See NOTE F of the unaudited consolidated financial
statements contained herein for further discussion on remaining litigation.
- - 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
11
<PAGE> 12
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.
- - 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.
Part II - Other Information
Item 1. Legal Proceedings
During September 1997, the Company settled one individual lawsuit relating to
the 1994 Northridge earthquake, SAINT JOHN'S MEDICAL PLAZA v. DILLINGHAM
CONSTRUCTION ET. AL., which had been set for trial in October. Included in the
terms of the court approved settlement is a Company payment of $6.0 million. The
case remains pending against a number of co-defendants.
To assist management on a current basis as it makes strategic decisions relating
to the Northridge litigation, the Board of Directors established a special
committee of the Board during the third quarter of 1997.
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.
12
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No Description
---------- -----------
(27) Financial Data Schedule.
(b) Reports on Form 8-K -- None.
13
<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
October 30, 1997
14
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