<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 six months ended June 30, 1998 Commission File No. 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
as Successor to The Lincoln Electric Company
(Exact name of registrant as specified in its charter)
Ohio 34-1860551
(State of incorporation) (I.R.S. Employer Identification No.)
22801 St. Clair Avenue, Cleveland, Ohio 44117
(Address of principal executive offices) (Zip Code)
(216) 481-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
The number of shares outstanding of the issuer's class of common stock as of
June 30, 1998 was 49,289,732.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 310,930 $ 299,635 $ 613,892 $ 580,356
Cost of goods sold 190,376 185,632 376,255 358,590
--------- --------- --------- ---------
Gross profit 120,554 114,003 237,637 221,766
Distribution cost / selling, general &
administrative expenses 80,185 77,728 158,865 151,138
--------- --------- --------- ---------
Operating income 40,369 36,275 78,772 70,628
Other income / (expense):
Interest income 1,039 1,321 1,995 2,244
Other income 565 125 606 329
Interest expense (1,406) (1,681) (2,725) (3,304)
--------- --------- --------- ---------
Total other income / (expense) 198 (235) (124) (731)
--------- --------- --------- ---------
Income before income taxes 40,567 36,040 78,648 69,897
Income taxes 15,322 13,389 29,673 26,197
========= ========= ========= =========
Net income $ 25,245 $ 22,651 $ 48,975 $ 43,700
========= ========= ========= =========
Basic earnings per share $ 0.51 $ 0.46 $ 0.99 $ 0.88
Diluted earnings per share 0.51 0.46 0.99 0.88
Cash dividends declared per share $ 0.10 $ 0.075 $ 0.20 $ 0.15
</TABLE>
See notes to these consolidated financial statements.
2
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 80,447 $ 46,562
Marketable securities 852 10,194
Accounts receivable (less allowance for doubtful accounts
of $3,600 in 1998 and $3,071 in 1997) 186,964 163,437
Inventories:
Raw materials and in-process 96,672 80,606
Finished goods 110,977 97,962
-------- --------
207,649 178,568
Deferred income taxes 15,857 15,868
Other current assets 25,281 18,914
-------- --------
TOTAL CURRENT ASSETS 517,050 433,543
OTHER ASSETS
Goodwill - net 35,338 34,751
Other 43,844 41,861
-------- --------
79,182 76,612
PROPERTY, PLANT AND EQUIPMENT
Land 10,327 11,520
Buildings 112,663 111,353
Machinery, tools and equipment 372,332 349,085
-------- --------
495,322 471,958
Less: accumulated depreciation and amortization 277,397 269,923
-------- --------
217,925 202,035
-------- --------
TOTAL ASSETS $814,157 $712,190
======== ========
</TABLE>
See notes to these consolidated financial statements
3
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 3,907 $ 1,968
Trade accounts payable 70,400 52,497
Salaries, wages and amounts withheld 54,163 18,742
Taxes, including income taxes 42,357 40,284
Dividend payable 4,929 4,922
Other current liabilities 62,963 56,138
Current portion of long-term debt 9,923 9,971
--------- ---------
TOTAL CURRENT LIABILITIES 248,642 184,522
Long-term debt, less current portion 54,240 54,360
Deferred income taxes 11,822 11,024
Other long-term liabilities 25,598 25,113
SHAREHOLDERS' EQUITY
Preferred Shares, without par value:
Authorized - 5,000,000 shares in 1998 and none in 1997;
Outstanding - none -- --
Common Shares, without par value -- at stated capital amount:
Authorized - 120,000,000 shares in 1998 and 60,000,000 in 1997;
Outstanding - 49,289,732 shares in 1998 and 21,542,014 shares in 1997 4,929 2,154
Class A Common Shares (non-voting), without par value --
at stated capital amount:
Authorized - none in 1998 and 60,000,000 shares in 1997;
Outstanding - none in 1998 and 27,676,726 shares in 1997 -- 2,768
Additional paid-in capital 104,617 103,722
Retained earnings 398,759 359,639
Accumulated other comprehensive income (34,450) (31,112)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 473,855 437,171
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 814,157 $ 712,190
========= =========
</TABLE>
See notes to these consolidated financial statements.
4
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 48,975 $ 43,700
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,249 13,965
Changes in operating assets and liabilities:
(Increase) in accounts receivable (23,482) (25,545)
(Increase) decrease in inventories (29,471) 2,359
(Increase) in other current assets (6,070) (5,464)
Increase in accounts payable 16,977 5,031
Increase in other current liabilities 43,930 54,541
Gross change in other noncurrent assets and liabilities (1,754) (514)
Other - net 2,803 (98)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 65,157 87,975
INVESTING ACTIVITIES
Capital expenditures, including acquisitions (32,053) (15,739)
Purchase of marketable securities (1,567) (47,222)
Proceeds from maturities of marketable securities 10,908 --
Proceeds from sale of property, plant and equipment 2,974 706
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (19,738) (62,255)
FINANCING ACTIVITIES
Short-term borrowings - net 1,092 (1,778)
Long-term borrowings - net (4,737) (400)
Dividends paid (9,848) (6,699)
Other 2,464 128
-------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (11,029) (8,749)
Effect of exchange rate changes on cash and cash equivalents (505) 432
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 33,885 17,403
Cash and cash equivalents at beginning of period 46,562 40,491
======== ========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,447 $ 57,894
======== ========
</TABLE>
5
See notes to these consolidated financial statements.
<PAGE> 6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 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 periods. Operating results for the six months ended June 30,
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.
Certain amounts have been reclassified to conform to the current period
presentation.
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, except per share amounts):
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $25,245 $22,651 $48,975 $43,700
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share --
weighted-average shares 49,277 49,472 49,255 49,549
Effect of dilutive securities --
employee stock options 302 127 258 103
------- ------- ------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares 49,579 49,599 49,513 49,652
======= ======= ======= =======
Basic earnings per share $ 0.51 $ 0.46 $ 0.99 $ 0.88
Diluted earnings per share $ 0.51 $ 0.46 $ 0.99 $ 0.88
</TABLE>
Share amounts have been adjusted for the recapitalization. See NOTE F of these
consolidated financial statements .
NOTE C - COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. Statement No. 130 established 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 and six months ended June 30,
1998 and 1997 follow (dollars in thousands):
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<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 25,245 $ 22,651 $ 48,975 $ 43,700
Other comprehensive income:
Change in currency translation adjustment (680) (5,771) (3,338) (14,654)
-------- -------- -------- --------
Comprehensive income $ 24,565 $ 16,880 $ 45,637 $ 29,046
======== ======== ======== ========
</TABLE>
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 June 30, 1998 include provisions for
year-end bonuses and related payroll taxes of approximately $40 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 AND RECAPITALIZATION
On May 19, 1998, shareholders approved a reorganization of the capital and
corporate structure of The Lincoln Electric Company (the "reorganization"). As a
result of the reorganization, a new holding company, Lincoln Electric Holdings,
Inc., was created. Each Common Share and each Class A Common Share (non-voting)
of The Lincoln Electric Company was converted into two voting common shares of
Lincoln Electric Holdings, Inc., which also had the economic effect of a
two-for-one stock split. The reorganization also resulted in the authorization
of 5,000,000 Preferred Shares, none of which were issued or outstanding at June
30, 1998. The historical share and per share amounts disclosed in these
consolidated financial statements have been restated to reflect the share
conversion.
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.
During July 1998, a French subsidiary of the Company acquired a 50% interest in
AS Kaynak, a market leading welding products manufacturing subsidiary of
Eczacibasi Holdings, headquartered in Istanbul, Turkey. The purchase price of
the acquisition was not significant.
NOTE H - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement will become effective for fiscal years
beginning after June 15, 1999. The Company is evaluating the effect of this
Statement on its accounting and reporting policies, but does not presently
expect adoption to have a material adverse effect on the Company's consolidated
financial position or results of operations.
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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
and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------------------
(dollars in millions) 1998 1997
------------------ -------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $310.9 100.0% $299.6 100.0%
Cost of goods sold 190.3 61.2% 185.6 61.9%
------ ------ ------ ------
Gross profit 120.6 38.8% 114.0 38.1%
Distribution cost / selling, general and
administrative expenses 80.2 25.8% 77.7 26.0%
------ ------ ------ ------
Operating income 40.4 13.0% 36.3 12.1%
Interest income 1.0 0.3% 1.3 0.4%
Other income 0.6 0.2% 0.1 0.0%
Interest expense (1.4) (0.4%) (1.7) (0.5%)
------ ------ ------ ------
Income before income taxes 40.6 13.1% 36.0 12.0%
Income taxes 15.4 5.0% 13.3 4.4%
------ ------ ------ ------
Net income $ 25.2 8.1% $ 22.7 7.6%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------
(dollars in millions) 1998 1997
----------------- ------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $613.9 100.0% $580.4 100.0%
Cost of goods sold 376.3 61.3% 358.6 61.8%
------ ------ ------ ------
Gross profit 237.6 38.7% 221.8 38.2%
Distribution cost / selling, general and
administrative expenses 158.8 25.9% 151.2 26.1%
------ ------ ------ ------
Operating income 78.8 12.8% 70.6 12.1%
Interest income 2.0 0.3% 2.3 0.4%
Other income 0.6 0.1% 0.3 0.1%
Interest expense (2.7) (0.4%) (3.3) (0.6%)
------ ------ ------ ------
Income before income taxes 78.7 12.8% 69.9 12.0%
Income taxes 29.7 4.8% 26.2 4.5%
------ ------ ------ ------
Net income $ 49.0 8.0% $ 43.7 7.5%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
- -----------------------------------------------------------------------------
NET SALES. Net sales for the quarter ended June 30, 1998 increased $11.3 million
or 3.8% to $310.9 million from $299.6 million for the second quarter last year.
Consolidated sales growth was driven by increased volume and selected price
increases. Net sales from U.S. operations totaled $211.8 million for the quarter
ended June 30, 1998, an increase of 4.3% or $8.7 million over the prior year. As
was the case in the first quarter, sales growth from U.S. operations was driven
by increased domestic sales, up 6.7% from the second quarter last year. U.S.
exports of $23.9 million were down 11.6% from last year, predominantly due to
declining sales to the Asian region and changes to product sourcing
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arrangements for the Russia, Africa and Middle Eastern region. Non-U.S. sales
increased 2.7% to $99.1 million for the second quarter 1998, compared to $96.5
million in the second quarter last year. The value of foreign currencies
continued to decline against the U.S. dollar, however, the rate of decline of
European currencies slowed in the second quarter. The weakening of the Canadian
and Australian dollars had the most significant impact on the Company during the
second quarter. In local currencies, non-U.S. sales increased almost 9% over the
second quarter last year.
GROSS PROFIT. Gross profit of $120.6 million for the second quarter 1998
increased 5.7% or $6.6 million from the prior year. Gross profit as a percentage
of net sales increased to 38.8% compared with 38.1% for the second quarter last
year. Gross margin percentage was up over the same period last year due to
higher factory utilization and improved product sales mix.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses increased $2.5 million to $80.2 million for the second quarter 1998 as
compared with $77.7 million for the second quarter 1997. SG&A expenses include
costs related to the Company's discretionary year-end employee bonus program,
net of hospitalization costs. Bonus costs during the second quarter 1998
increased to $19.7 million from $18.4 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. SG&A expenses were also higher in the
quarter due to an increased level of distribution costs, which generally move in
proportion to sales, and increased spending on information systems. SG&A expense
as a percentage of sales has declined to 25.8% from 26.0% in the 1997 period.
INTEREST EXPENSE. Scheduled debt payments reduced debt levels, and as a result,
interest expense declined 16.4% to $1.4 million for the quarter ended June 30,
1998 compared to $1.7 million for the second quarter 1997.
INCOME TAXES. Income taxes for the quarter ended June 30, 1998 were $15.4
million on income before income taxes of $40.6 million, an effective rate of
37.8%, as compared with income taxes of $13.3 million on income before income
taxes of $36 million, or an effective rate of 37.1% for the same period in 1997.
The increase in the effective rate over the prior year 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 11.5% to $25.2 million or $0.51 per share
(basic and diluted) from $22.7 million or $0.46 per share (basic and diluted)
for the second quarter 1997. The effect of the strengthening U.S. dollar against
foreign currencies on net income was not significant.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES. Net sales for the six months ended June 30, 1998 increased $33.5
million or 5.8% to $613.9 million from $580.4 million for the same period last
year. Consolidated sales growth was driven principally by increased volume. Net
sales from U.S. operations totaled $420.5 million for the six months ended June
30, 1998, an increase of 6.1% or $24.1 million over the prior year. This sales
growth was due to increased domestic sales. U.S. export sales were down 7.1% to
$50 million for the first half of 1998, from $53.8 million last year. In the
first half of 1998, exports declined to the Asian region and the Russia, Africa
and Middle East region was affected by product sourcing changes between non-U.S.
Lincoln companies. Non-U.S. sales increased 5.1% to $193.4 million for the first
half of 1998, compared to $184 million last year. Weakening foreign exchange
rates, caused by weaker European currencies and the Canadian and Australian
dollars, had a negative impact on non-U.S. sales of $13.2 million. In local
currencies, non-U.S. sales grew more than 12.3% over the first half of 1997.
GROSS PROFIT. Gross profit of $237.6 million for the first half of 1998
increased 7.2% or $15.8 million from the prior year. Gross profit as a
percentage of net sales increased to 38.7% compared with 38.2% for the first
half of last year. Gross margin percentage improved primarily due to increased
plant utilization.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses increased $7.6 million to $158.8 million for the first half of 1998 as
compared with $151.2 million for the same period of 1997. SG&A expenses
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<PAGE> 10
include costs related to the Company's discretionary year-end employee bonus
program, net of hospitalization costs. Bonus costs provided during the first
half of 1998 increased to $40.2 million from $35.7 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. SG&A costs have also
increased due to higher distribution costs and increased information systems
spending. SG&A expense as a percentage of sales has declined to 25.9% from 26.1%
in the 1997 period due to greater efficiency through economies of scale.
INTEREST EXPENSE. Reduced debt levels from annual debt payments has resulted in
an interest expense decline of over 17% to $2.7 million for the six months ended
June 30, 1998 compared to $3.3 million for the first half of 1997.
INCOME TAXES. Income taxes for the six months ended June 30, 1998 were $29.7
million on income before income taxes of $78.7 million, an effective rate of
37.7%, as compared with income taxes of $26.2 million on income before income
taxes of $69.9 million, or an effective rate of 37.5% for the same period in
1997. The increase in the 1998 effective rate over the prior year 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 12.1% to $49 million or $0.99 per share (basic
and diluted) from $43.7 million or $0.88 per share (basic and diluted) for the
six months ended 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 six months ended June 30, 1998
decreased $22.8 million to $65.2 million compared to $88 million for the first
six months of 1997. The Company's continued sales growth has led to an increased
investment in working capital.
Capital expenditures for the six months ended June 30, 1998 increased $16.3
million as compared with the same period in 1997. Capital expenditures for 1998
include the acquisition of Indalco Alloys Inc. of Canada and Uhrhan & Schwill
GmbH of Germany. The operating results of Indalco are included within those of
the Company beginning in March 1998, and for Uhrhan & Schwill, beginning in May
1998. The results of acquired companies for the first six months of 1998 were
not significant. The majority of the remaining incremental capital spending over
1997 was related to the construction of an electrode manufacturing plant in
China, spending on information systems requirements in the U.S. and in Europe
and expansion of plant capacity in Canada.
The Company's ratio of total debt to total capitalization decreased to 12.6% at
June 30, 1998 from 13.2% at December 31, 1997.
The Company paid cash dividends of $9.8 million or $0.20 per share during the
first six months of 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.
10
<PAGE> 11
- - 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 affected 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 Implementations 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 projects and have all systems compliant before December 31,
1999. The Company has initiated a communication program with its vendors to
determine the potential risks associated with third party systems failures.
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 Information Systems
expenditures, including Asia and Europe, and including system enhancements
and non-IT Year 2000 projects is estimated at $40 to $50 million, and is
being funded through operating cash flows. Of the total project cost,
approximately $35 million to $45 million is expected to 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
11
<PAGE> 12
Item 1. Legal Proceedings
In addition to the dismissal reported in the Company's March 31, 1998 report on
Form 10-Q, two other pending lawsuits arising from alleged property damage
claimed to have been discovered after the 1994 Northridge earthquake were
ordered dismissed upon voluntary request of the plaintiffs. The Company also
agreed to settle two such cases for immaterial amounts.
Following trial of the Company's coverage case against St. Paul Fire and Marine
Insurance Company, the United States District Court for the Northern District of
Ohio (Akron) ordered St. Paul to pay the Company compensatory damages plus
prejudgment interest for misallocating past expenses related to welding fume
claims. Additionally, the Court held that the Company may utilize St. Paul
occurrence-based policies sold prior to 1985 for defense and verdict costs of
various potential future fume cases. St. Paul has stated that it intends to
appeal the decision, which defers final resolution of the dispute.
Item 2. Changes in Securities
On June 2, 1998, the Company amended its Articles of Incorporation to increase
the total number of authorized shares to 120,000,000 common shares, without par
value ("Common Shares"), and 5,000,000 preferred shares, without par value.
Item 3. Defaults Upon Senior Securities -- None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual meeting of The Lincoln Electric Company ("Lincoln")
was held on May 19, 1998.
(b) No response is required.
(c) The following matters were voted upon by security holders:
(i) ELECTION OF DIRECTORS. The shareholders voted in favor of
electing the following persons as Directors of Lincoln for
terms ending as specified:
<TABLE>
<CAPTION>
Votes
Votes For Withheld Term
--------- -------- ----
<S> <C> <C> <C>
Kathryn Jo Lincoln 9,550,887 113,215 2001
Anthony A. Massaro 9,548,645 115,457 2001
G. Russell Lincoln 9,551,467 112,635 2001
John M. Stropki, Jr. 9,521,718 142,384 2000
Craig R. Smith 9,548,315 115,787 1999
</TABLE>
Upon the consummation of the Reorganization (as defined
below) the Directors of Lincoln identified in this item (c)
and the Directors whose terms continued after Lincoln's
Annual Meeting were elected as Directors of the Company to
hold terms ending at the same time as the terms they were
serving for Lincoln.
(ii) REORGANIZATION. The shareholders approved a proposal to
convert each of Lincoln's Common Shares and Class A Common
Shares into two Common Shares with the result that the
shareholders of Lincoln would be shareholders of the Company
(the "Reorganization").
12
<PAGE> 13
<TABLE>
<CAPTION>
Class A
Common Shares Common Shares
------------- -------------
<S> <C> <C>
Votes For 8,909,261 10,600,779
Votes Against 86,469 105,355
Shares Abstain 65,686 35,049
Broker Non-votes 602,686 0
</TABLE>
(iii) 1998 STOCK OPTION PLAN. The shareholders approved a
proposal for the adoption of the 1998 Stock Option Plan
which allows awards for stock options for the purchase of
up to an aggregate of 5,000,000 Common Shares.
<TABLE>
<CAPTION>
<S> <C>
Votes For 8,152,714
Votes Against 814,049
Shares Abstain 94,653
Broker Non-votes 602,686
</TABLE>
(iv) Appointment of Independent Auditors. The shareholders
ratified the appointment of the firm of Ernst & Young as
independent auditors to examine the books of account and
other records of the Company for the fiscal year ending
December 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
Votes For 9,494,787
Votes Against 116,335
Shares Abstain 52,980
Broker Non-votes 0
</TABLE>
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
(1) A report on Form 8-K was filed on
May 19, 1998 which incorporated a press
release by the Company disclosing
shareholder approval of the corporate
reorganization which resulted in the holding
company structure and a single class of
common stock.
(2) A report on Form 8-K was filed on
June 2, 1998 which described the corporate
reorganization. Filed as exhibits to the
Form 8-K were the Agreement of Merger, which
effected the holding company structure; the
Restated Articles of Incorporation of
Lincoln Electric Holdings, Inc.; and the
Code of Regulations of Lincoln Electric
Holdings, Inc.
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.
LINCOLN ELECTRIC HOLDINGS, INC.
/s/ H. JAY ELLIOTT
- ------------------------
H. Jay Elliott
Senior Vice President,
Chief Financial Officer and Treasurer
August 13, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 80,447
<SECURITIES> 852
<RECEIVABLES> 190,564
<ALLOWANCES> 3,600
<INVENTORY> 207,649
<CURRENT-ASSETS> 517,050
<PP&E> 495,322
<DEPRECIATION> 277,397
<TOTAL-ASSETS> 814,157
<CURRENT-LIABILITIES> 248,642
<BONDS> 0
0
0
<COMMON> 4,929
<OTHER-SE> 468,926
<TOTAL-LIABILITY-AND-EQUITY> 814,157
<SALES> 613,892
<TOTAL-REVENUES> 613,892
<CGS> 376,255
<TOTAL-COSTS> 376,255
<OTHER-EXPENSES> 156,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,725
<INCOME-PRETAX> 78,648
<INCOME-TAX> 29,673
<INCOME-CONTINUING> 48,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,975
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.99
</TABLE>
