<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, 1998 Commission File No. 0-1402
THE LINCOLN ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Ohio 34-0359955
(State of incorporation) (I.R.S. Employer Identification No.)
22801 St. Clair Avenue, Cleveland, Ohio 44117
(Address of principal executive offices) (Zip Code)
(216) 481-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's classes of common stock as of
March 31, 1998 were as follows:
<TABLE>
<S> <C>
Common Shares...................................10,773,834
Class A Common Shares...........................13,858,190
Total outstanding shares........................24,632,024
</TABLE>
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<PAGE> 2
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 302,962 $ 280,721
Cost of goods sold 185,879 172,958
--------- ---------
Gross profit 117,083 107,763
Distribution cost / selling, general & administrative expenses 78,680 73,410
--------- ---------
Operating income 38,403 34,353
Other income / (expense):
Interest income 956 923
Other income 41 204
Interest expense (1,319) (1,623)
--------- ---------
Total other income / (expense) (322) (496)
--------- ---------
Income before income taxes 38,081 33,857
Income taxes 14,351 12,808
--------- ---------
Net income $ 23,730 $ 21,049
========= =========
Basic earnings per share $ 0.96 $ 0.85
Diluted earnings per share 0.96 0.85
Cash dividends declared per share $ 0.20 $ 0.15
</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>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 85,680 $ 46,562
Marketable securities 192 10,194
Accounts receivable (less allowance for doubtful accounts
of $3,539 in 1998 and $3,071 in 1997) 178,748 163,437
Inventories:
Raw materials and in-process 91,070 80,606
Finished goods 107,063 97,962
-------- --------
198,133 178,568
Deferred income taxes 16,053 15,868
Other current assets 19,350 18,914
-------- --------
TOTAL CURRENT ASSETS 498,156 433,543
OTHER ASSETS
Goodwill - net 34,200 34,751
Other 45,207 41,861
-------- --------
79,407 76,612
PROPERTY, PLANT AND EQUIPMENT
Land 10,703 11,520
Buildings 111,797 111,353
Machinery, tools and equipment 357,352 349,085
-------- --------
479,852 471,958
Less: accumulated depreciation and amortization 273,511 269,923
-------- --------
206,341 202,035
-------- --------
TOTAL ASSETS $783,904 $712,190
======== ========
</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,
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 962 $ 1,968
Trade accounts payable 76,274 52,497
Salaries, wages and amounts withheld 35,737 18,742
Taxes, including income taxes 53,199 40,284
Dividend payable 4,926 4,922
Other current liabilities 57,370 56,138
Current portion of long-term debt 9,965 9,971
--------- ---------
TOTAL CURRENT LIABILITIES 238,433 184,522
Long-term debt, less current portion 54,296 54,360
Deferred income taxes 11,394 11,024
Other long-term liabilities 25,869 25,113
SHAREHOLDERS' EQUITY
Common Shares, without par value -- at stated capital amount:
Authorized - 60,000,000 shares;
Outstanding - 10,773,834 shares in 1998 and 10,771,007 shares in 1997 2,155 2,154
Class A Common Shares (non-voting), without par value --
at stated capital amount:
Authorized - 60,000,000 shares;
Outstanding - 13,858,190 shares in 1998 and 13,838,363 shares in 1997 2,772 2,768
Additional paid-in capital 104,312 103,722
Retained earnings 378,443 359,639
Cumulative translation adjustment (33,770) (31,112)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 453,912 437,171
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 783,904 $ 712,190
========= =========
</TABLE>
See notes to these consolidated financial statements.
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<PAGE> 5
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------
1998 1997
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 23,730 $ 21,049
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,310 6,877
Changes in operating assets and liabilities:
(Increase) in accounts receivable (15,518) (18,200)
(Increase) decrease in inventories (19,585) 6,642
(Increase) in other current assets (225) (1,854)
Increase in accounts payable 23,388 7,282
Increase in other current liabilities 31,346 26,741
Gross change in other noncurrent assets and liabilities (1,076) 1,866
Other - net 2,175 (186)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,545 50,217
INVESTING ACTIVITIES
Capital expenditures, including acquisitions (12,515) (7,600)
Purchase of marketable securities - (6,500)
Proceeds from maturities of marketable securities 10,000 -
Proceeds from sale of property, plant and equipment 1,627 110
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (888) (13,990)
FINANCING ACTIVITIES
Short-term borrowings - net (1,130) (1,622)
Long-term borrowings - net (4,639) (191)
Dividends paid (4,922) (2,977)
Other 429 130
-------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (10,262) (4,660)
Effect of exchange rate changes on cash and cash equivalents (277) 625
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 39,118 32,192
Cash and cash equivalents at beginning of period 46,562 40,491
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 85,680 $ 72,683
======== ========
</TABLE>
See notes to these consolidated financial statements.
5
<PAGE> 6
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to the preparation of the
quarterly report on Form 10-Q. Accordingly, these consolidated financial
statements do not include all of the information and notes required for complete
financial statements. These consolidated financial statements contain all the
adjustments (consisting of normal recurring accruals) necessary to fairly
present the financial position, results of operations and changes in cash flows
for the interim period. Operating results for the three months ended March 31,
1998 are not necessarily indicative of the results to be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
NOTE B - EARNINGS PER SHARE
Earnings per share amounts have been presented to conform to the requirements of
Statement of Financial Accounting Standards No. 128, Earnings per Share. The
following table sets forth the computation of basic and diluted earnings per
share (dollars and shares in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Numerator:
Net income $23,730 $21,049
======= =======
Denominator:
Denominator for basic earnings per share --
weighted-average shares 24,617 24,813
Effect of dilutive securities --
employee stock options 102 36
------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares 24,719 24,849
======= =======
Basic earnings per share $ 0.96 $ 0.85
Diluted earnings per share $ 0.96 $ 0.85
</TABLE>
NOTE C - COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. Statement No. 130 establishes new standards
for the reporting and display of changes in equity that are not related to
shareholder transactions. Such items are termed other comprehensive income, and
would include foreign currency translation adjustments and minimum pension
liability adjustments. Statement No. 130 had no impact on the Company's net
income or shareholders' equity. Currently, the Company's only component of other
comprehensive income is the change in the currency translation adjustment. The
components of comprehensive income for the three months ended March 31, 1998 and
1997 follow (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net income $ 23,730 $ 21,049
Other comprehensive income:
Change in currency translation adjustment (2,658) (8,883)
-------- --------
Comprehensive income $ 21,072 $ 12,166
======== ========
</TABLE>
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NOTE D - INVENTORY VALUATION
The valuation of inventory under the Last-In, First-Out (LIFO) method is made at
the end of each year based on inventory levels and costs at that time.
Accordingly, interim LIFO calculations, by necessity, are based on estimates of
expected year-end inventory levels and costs and are subject to the final
year-end LIFO inventory calculation.
NOTE E - SALARIES, WAGES AND AMOUNTS WITHHELD
Salaries, wages and amounts withheld at March 31, 1998 include provisions for
year-end bonuses and related payroll taxes of approximately $21 million related
to Lincoln employees worldwide. The payment of bonuses is discretionary and is
subject to approval by the Board of Directors.
NOTE F - CORPORATE REORGANIZATION
Subject to approval at the annual shareholders meeting on May 19, 1998 and the
filing of a Certificate of Merger as authorized by the Board of Directors, the
Company plans to implement a reorganization of its capital and corporate
structure (the "reorganization"). As a result of the reorganization, a new
holding company, Lincoln Electric Holdings, Inc., will be created. Existing
domestic and international operations would then fall under Lincoln Electric
Holdings, Inc. as the publicly-held parent company. Lincoln Electric Holdings,
Inc. has filed an S-4 registration statement with the Securities and Exchange
Commission registering its shares. Each Common Share and each Class A Common
Share of the Company will be converted into two voting common shares of Lincoln
Electric Holdings, Inc., which has the economic effect of a two-for-one stock
split. The new company will have one class of voting common shares traded on the
Nasdaq National Market.
NOTE G - ACQUISITIONS
During the first quarter of 1998 the Company's Canadian subsidiary acquired a
75% interest in Indalco Alloys, Inc. of Canada. The purchase price of the
acquisition was not significant. Indalco is a premier supplier of aluminum
welding wire and related products. The acquisition was accounted for as a
purchase. The results of Indalco, which were not significant, were included in
the Company's results of operations beginning in March 1998.
During April 1998, a German subsidiary of the Company purchased the assets and
business of Uhrhan & Schwill GmbH, located in Germany, a leader in the design
and installation of welding systems for pipe mills. The purchase price of the
acquisition was not significant.
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<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
month periods ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------------------------
(dollars in millions) 1998 1997
------------------------- -------------------------
Amount % of Sales Amount % of Sales
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net sales $303.0 100.0% $280.7 100.0%
Cost of goods sold 185.9 61.4% 173.0 61.6%
------ ------ ------ ------
Gross profit 117.1 38.6% 107.7 38.4%
Distribution cost / selling, general and
administrative expenses 78.7 26.0% 73.4 26.2%
------ ------ ------ ------
Operating income 38.4 12.6% 34.3 12.2%
Interest income 1.0 0.3% 0.9 0.3%
Other income 0.0 0.0% 0.2 0.1%
Interest expense (1.3) (0.4%) (1.6) (0.5%)
------ ------ ------ ------
Income before income taxes 38.1 12.5% 33.8 12.1%
Income taxes 14.4 4.7% 12.8 4.6%
------ ------ ------ ------
Net income $ 23.7 7.8% $ 21.0 7.5%
====== ====== ====== ======
</TABLE>
NET SALES. Net sales for the quarter ended March 31, 1998 increased $22.3
million or 7.9% to $303.0 million from $280.7 million for the first quarter last
year. Consolidated sales growth was driven primarily by increased volume. Net
sales from U.S. operations totaled $208.7 million for the quarter ended March
31, 1998, an increase of 8.0% or $15.5 million over the prior year. Sales growth
from U.S. operations was due to growth in domestic sales. U.S. export sales were
down slightly at $26.1 million for the first quarter of 1998, from $26.8 million
last year. Non-U.S. sales increased 7.7% to $94.3 million for the first quarter
1998, compared to $87.5 million last year, despite the continued weakness of
foreign currencies against the U.S. dollar. For the first quarter of 1998
changes in exchange rates, principally caused by weaker European currencies, had
a negative impact on non-U.S. sales of $7.4 million. In local currencies,
non-U.S. sales grew more than 16% over the first quarter 1997. For the first
quarter 1998, the Canadian, European and Latin American operations posted sales
gains over first quarter 1997.
GROSS PROFIT. Gross profit of $117.1 million for the first quarter 1998
increased 8.7% or $9.4 million from the prior year. Gross profit as a percentage
of net sales increased to 38.6% compared with 38.4% for the first quarter last
year. Gross margin percentage increased due to increased plant utilization.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses increased $5.3 million to $78.7 million for the first quarter 1998 as
compared with $73.4 million for the first quarter 1997. SG&A expenses include
costs related to the Company's discretionary year-end employee bonus program,
net of hospitalization costs. Bonus costs provided during the first quarter 1998
increased to $20.5 million from $17.3 million in the 1997 period. Expected bonus
costs are accrued in proportion to profitability, which has improved over 1997.
The final bonus payout will be subject to approval by the Company's Board of
Directors during the fourth quarter. The higher SG&A expenses were also the
result of increased distribution costs which generally increase in proportion to
sales. SG&A expense as a percentage of sales has declined to 26.0% from 26.2% in
the 1997 period due to greater efficiencies of scale.
INTEREST EXPENSE. As a result of reduced debt levels from annual debt payments,
interest expense declined almost 19% to $1.3 million for the quarter ended March
31, 1998 compared to $1.6 million for the first quarter 1997.
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INCOME TAXES. Income taxes for the quarter ended March 31, 1998 were $14.4
million on income before income taxes of $38.1 million, an effective rate of
37.7%, as compared with income taxes of $12.8 million on income before income
taxes of $33.8 million, or an effective rate of 37.8% for the same period in
1997. The effective tax rate for the year ended December 31, 1997 was 36.8%. The
increase in the 1998 effective rate over that of the full year 1997 was
primarily the result of certain foreign subsidiaries exhausting net operating
loss carryforwards in 1997 and the mix of earnings among subsidiaries in 1998.
NET INCOME. Net income increased 12.7% to $23.7 million or $0.96 per share
(diluted) from $21.0 million or $0.85 per share (diluted) for the first quarter
1997. The effect of the strengthening U.S. dollar against foreign currencies on
net income was not significant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided from operating activities for the three months ended March 31,
1998 increased slightly to $50.5 million compared to $50.2 million for the first
three months of 1997. The Company's continued sales growth has led to increased
investment in working capital.
Capital expenditures for the three months ended March 31, 1998 increased $4.9
million as compared with the same period in 1997. Capital expenditures for 1998
include the acquisition of Indalco Alloys Inc. of Canada. The operating results
of Indalco are included within those of the Company beginning in March 1998. The
results of Indalco for the first quarter 1998 were not significant. The majority
of the remaining incremental capital spending over 1997 was related to the
construction of an electrode manufacturing plant for the Company's joint venture
in China. The Company continues to selectively add capacity and modernize
facilities in domestic and other international markets as necessary.
The Company's ratio of total debt to total capitalization decreased to 12.6% at
March 31, 1998 from 13.2% at December 31, 1997.
The Company paid a cash dividend of $4.9 million or $0.20 per share in January
1998.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
- ----------------------------------------------
From time to time, information provided by the Company, statements by its
employees or information included in its filings with the Securities and
Exchange Commission (including those portions of this Management's Discussion
and Analysis that refer to the future) may contain forward-looking statements
that are not historical facts. Those statements are "forward-looking" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements, and the Company's future performance, operating
results, financial position and liquidity, are subject to a variety of factors
that could materially affect results, including:
- - Litigation. The Company, like other manufacturers, is subject to a variety
of lawsuits and potential lawsuits that arise in the ordinary course of
business. See "Item 1. Legal Proceedings" within the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, as well as the
update in this report. See also NOTE K of the audited consolidated
financial statements for the year-ended December 31, 1997.
- - Competition. The Company operates in a highly competitive global
environment, and is subject to a variety of competitive factors such as
pricing, the actions and strength of its competitors, and the Company's
ability to maintain its position as a recognized leader in welding
technology. The intensity of foreign competition is substantially affected
by fluctuations in the value of the United States dollar against other
currencies. The Company's competitive position could also be adversely
affected should new or emerging entrants become more active in the arc
welding business.
- - International Markets. The Company's long term strategy is to increase its
share in growing international markets, particularly Asia, Latin America,
Central Europe and other developing markets. However, there can be no
9
<PAGE> 10
certainty that the Company will be successful in its expansion efforts. The
Company is subject to the currency risks of doing business abroad and
expansion poses challenging demands within the Company's infrastructure.
Further, many developing economies have a significant degree of political
and economic instability, which may adversely affect the Company's
international operations.
- - Cyclicality and Maturity of the Welding Industry. The United States arc
welding industry is both mature and cyclical. The growth of the domestic
arc welding industry has been and continues to be constrained by numerous
factors, including the substitution of plastics and other materials in
place of fabricated metal parts in many products and structures. Increased
offshore production of fabricated steel structures has also cut into the
domestic demand for arc welding products.
- - Operating Factors. The Company is highly dependent on its skilled
workforce and efficient production facilities, which could be adversely
affected by its labor relations, business interruptions at its domestic
facilities and short-term or long-term interruptions in the availability of
supplies or raw materials or in transportation of finished goods.
- - Information Systems Implementation and Year 2000 Issue. The Company is
presently replacing many of its legacy systems and believes that with
conversions to new software, the Year 2000 Issue will be mitigated.
However, if such modifications and conversions are not made, or are not
completed in a timely fashion, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company will utilize both internal and external resources to replace
and test software. The Company plans to complete its Information Systems
and Year 2000 project and have all systems compliant before December 31,
1999. However, there are no assurances that the systems of other companies
on which the Company's systems rely also will be timely converted or that
any such failure to convert by another company would not have an adverse
effect on the Company's systems. The total cost of the Information System
project is estimated at $30 million to $40 million and is being funded
through operating cash flows. Of the total project cost, approximately $25
million to $35 million will be capitalized. The Company's total project
cost and estimated time to complete the project are based on presently
available information.
- - Research and Development. The Company's continued success depends, in
part, on its ability to continue to meet customer welding needs through the
introduction of new products and the enhancement of existing product design
and performance characteristics. There can be no assurances that new
products or product improvements, once developed, will meet with customer
acceptance and contribute positively to the operating results of the
Company, or that product development will continue at a pace to sustain
future growth.
- - Motor Division. The Company has made substantial capital investments to
modernize and expand its production of electric motors. While management
believes that the profitability of this investment will improve, success is
largely dependent on increased market penetration.
Part II - Other Information
Item 1. Legal Proceedings
One of the lawsuits arising from alleged property damage claimed to have been
discovered after the 1994 Northridge earthquake was ordered dismissed upon the
voluntary request of the plaintiff, and the plaintiff in another of these
lawsuits has similarly requested dismissal. Complaints in two of the remaining
lawsuits were amended to include fraud claims, and in one of these two cases the
court ordered the fraud claim dismissed. In the other lawsuit, WESTSIDE
ASSOCIATES, LTD. V. LINCOLN ELECTRIC CO., the amended complaint also includes a
count under California's Unfair Business Practices Act which demands, inter
alia, restitution of all amounts paid by purchasers for the Company's E70T-4
electrode, with interest, plus a permanent injunction requiring the Company to
inspect all steel-framed buildings in "Greater Los Angeles" and to remove and
replace any E70T-4 welds.
10
<PAGE> 11
Item 2. Changes in Securities -- None.
Item 3. Defaults Upon Senior Securities -- None.
Item 4. Submission of Matters to a Vote of Security Holders -- None.
Item 5. Other Information -- None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
----------- -----------
(27) Financial Data Schedule.
(b) Reports on Form 8-K -- None.
11
<PAGE> 12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LINCOLN ELECTRIC COMPANY
/S/ H. JAY ELLIOTT
- -----------------------------
H. Jay Elliott
Senior Vice President,
Chief Financial Officer and Treasurer
May 12, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 85,680
<SECURITIES> 192
<RECEIVABLES> 182,287
<ALLOWANCES> 3,539
<INVENTORY> 198,133
<CURRENT-ASSETS> 498,156
<PP&E> 479,852
<DEPRECIATION> 273,511
<TOTAL-ASSETS> 783,904
<CURRENT-LIABILITIES> 238,433
<BONDS> 54,296
0
0
<COMMON> 4,927
<OTHER-SE> 448,985
<TOTAL-LIABILITY-AND-EQUITY> 783,904
<SALES> 302,962
<TOTAL-REVENUES> 302,962
<CGS> 185,879
<TOTAL-COSTS> 185,879
<OTHER-EXPENSES> 77,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,319
<INCOME-PRETAX> 38,081
<INCOME-TAX> 14,351
<INCOME-CONTINUING> 23,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,730
<EPS-PRIMARY> 0.96
<EPS-DILUTED> 0.96
</TABLE>
