<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, 1999 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, 1999 was 45,298,324.
1
<PAGE> 2
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,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $273,498 $310,930 $556,366 $613,892
Cost of goods sold 166,597 190,376 338,492 376,255
-------- -------- -------- --------
Gross profit 106,901 120,554 217,874 237,637
Distribution cost / selling, general
& administrative expenses 70,220 80,185 143,109 158,865
Loss on disposal of motor business -- -- 32,015 --
-------- -------- -------- --------
Operating income 36,681 40,369 42,750 78,772
Other income / (expense):
Interest income 186 1,039 498 1,995
Other income 1,014 565 1,723 606
Interest expense (1,505) (1,406) (2,934) (2,725)
-------- -------- -------- --------
Total other income / (expense) (305) 198 (713) (124)
-------- -------- -------- --------
Income before income taxes 36,376 40,567 42,037 78,648
Income taxes 13,041 15,322 14,395 29,673
-------- -------- -------- --------
Net income $ 23,335 $ 25,245 $ 27,642 $ 48,975
======== ======== ======== ========
Basic earnings per share $ 0.51 $ 0.51 $ 0.60 $ 0.99
Diluted earnings per share $ 0.51 $ 0.51 $ 0.60 $ 0.99
Cash dividends declared per share $ 0.12 $ 0.10 $ 0.24 $ 0.20
</TABLE>
See notes to these consolidated financial statements.
2
<PAGE> 3
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 21,986 $ 39,095
Marketable securities 351 311
Accounts receivable (less allowances of $3,640 in 1999; $3,563 in 1998) 172,892 167,830
Inventories:
Raw materials and in-process 75,358 82,030
Finished goods 104,047 104,291
---------- ----------
179,405 186,321
Deferred income taxes 20,799 17,751
Other current assets 26,124 25,533
---------- ----------
TOTAL CURRENT ASSETS 421,557 436,841
PROPERTY, PLANT AND EQUIPMENT
Land 10,978 11,447
Buildings 114,411 115,538
Machinery, tools and equipment 406,836 424,307
--------- ---------
532,225 551,292
Less: accumulated depreciation and amortization 269,860 291,501
--------- ---------
262,365 259,791
OTHER ASSETS
Goodwill - net 34,046 35,747
Other 47,434 50,527
--------- ---------
81,480 86,274
--------- ---------
TOTAL ASSETS $765,402 $782,906
========= =========
</TABLE>
See notes to these consolidated financial statements.
3
<PAGE> 4
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars, except share data)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 9,769 $ 2,792
Trade accounts payable 50,513 60,502
Salaries, wages and amounts withheld 45,751 19,366
Taxes, including income taxes 32,331 38,434
Dividend payable 5,436 5,770
Other current liabilities 70,800 57,147
Current portion of long-term debt 11,342 11,100
-------- --------
TOTAL CURRENT LIABILITIES 225,942 195,111
Long-term debt, less current portion 45,671 46,766
Deferred income taxes 23,439 23,158
Other long-term liabilities 32,691 26,938
SHAREHOLDERS' EQUITY
Preferred Shares, without par value - at stated capital amount:
Authorized - 5,000,000 shares in 1999 and 1998;
Issued and Outstanding - none. -- --
Common Shares, without par value - at stated capital amount:
Authorized - 120,000,000 shares in 1999 and 1998;
Issued - 49,283,950 shares in 1999 and 1998;
Outstanding - 45,298,324 shares in 1999 and 48,083,246 shares in 1998 4,928 4,928
Additional paid-in capital 104,855 104,641
Retained earnings 448,839 432,283
Accumulated other comprehensive income (39,372) (28,251)
Treasury shares, at cost - 3,985,626 shares in 1999 and 1,200,704 shares
in 1998 (81,591) (22,668)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 437,659 490,933
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $765,402 $782,906
======== ========
</TABLE>
See notes to these consolidated financial statements.
4
<PAGE> 5
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 27,642 $ 48,975
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 14,348 13,249
Loss on disposal of fixed assets and motor business 31,368 2,783
Changes in operating assets and liabilities:
(Increase) in accounts receivable (15,471) (23,482)
(Increase) in inventories (16,906) (29,471)
(Increase) in other current assets (1,162) (6,070)
(Decrease) increase in accounts payable (7,942) 16,977
Increase in other current liabilities 20,518 43,930
Gross change in other noncurrent assets and liabilities 5,939 (1,754)
Other - net (5,317) 20
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 53,017 65,157
INVESTING ACTIVITIES
Capital expenditures, including acquisitions (42,183) (32,053)
Purchase of marketable securities (154) (1,567)
Proceeds from maturities of marketable securities 154 10,908
Proceeds from sale of fixed assets and motor business 36,407 2,974
Other (154) --
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (5,930) (19,738)
FINANCING ACTIVITIES
Short-term borrowings - net 6,813 1,092
Long-term borrowings - net (785) (4,737)
Net (purchase) reissuance of shares for treasury (58,923) --
Dividends paid (11,211) (9,848)
Other (493) 2,464
-------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (64,599) (11,029)
Effect of exchange rate changes on cash and cash equivalents 403 (505)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,109) 33,885
Cash and cash equivalents at beginning of period 39,095 46,562
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,986 $ 80,447
======== ========
</TABLE>
See notes to these consolidated financial statements.
5
<PAGE> 6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999
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. However, in the opinion of management, these consolidated
financial statements contain all the adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position, results of
operations and changes in cash flows for the interim periods. Operating results
for the three- and six-months ended June 30, 1999 are not necessarily indicative
of the results to be expected for the year ending December 31, 1999. 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, 1998.
NOTE B - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(Dollars and shares in thousands,
except per share amounts) Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 23,335 $ 25,245 $ 27,642 $ 48,975
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 45,285 49,277 45,930 49,255
Effect of dilutive securities -
Employee stock options 156 302 141 258
-------- -------- -------- --------
Denominator for diluted earnings per share -
Adjusted weighted-average shares 45,441 49,579 46,071 49,513
======== ======== ======== ========
Basic earnings per share $ 0.51 $ 0.51 $ 0.60 $ 0.99
Diluted earnings per share $ 0.51 $ 0.51 $ 0.60 $ 0.99
</TABLE>
NOTE C - COMPREHENSIVE INCOME
The components of comprehensive income follow:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
(Dollars in thousands) --------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 23,335 $ 25,245 $ 27,642 $ 48,975
Other comprehensive income:
Change in currency translation adjustment (2,822) (680) (11,121) (3,338)
-------- -------- -------- --------
Comprehensive income $ 20,513 $ 24,565 $ 16,521 $ 45,637
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
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 final year-end
LIFO inventory calculations.
NOTE E - SALARIES, WAGES AND AMOUNTS WITHHELD
Salaries, wages and amounts withheld at June 30, 1999 include provisions for
year-end bonuses and related payroll taxes of approximately $30 million related
to Lincoln employees worldwide. The payment of bonuses is discretionary and is
subject to approval by the Board of Directors.
NOTE F - SEGMENT INFORMATION
<TABLE>
<CAPTION>
(Dollars in thousands) United Other
States Europe Countries Eliminations Consolidated
---------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 1999:
Net sales to unaffiliated customers $186,306 $ 48,444 $ 38,748 $ -- $273,498
Inter-segment sales 15,157 2,363 4,426 (21,946) --
-------- ---------- -------- -------- --------
Total $201,463 $ 50,807 $ 43,174 $(21,946) $273,498
======== ========== ======== ======== ========
Income before interest and income taxes $ 31,957 $ 3,668 $ 2,262 $ (192) $ 37,695
Interest income 186
Interest expense (1,505)
--------
Income before income taxes $ 36,376
========
Three months ended June 30, 1998:
Net sales to unaffiliated customers $211,803 $ 54,245 $ 44,882 $ -- $310,930
Inter-segment sales 19,086 2,345 3,552 (24,983) --
-------- ---------- -------- -------- --------
Total $230,889 $ 56,590 $ 48,434 $ (24,983) $310,930
======== ========== ======== ========= ========
Income before interest and income taxes $ 33,625 $ 4,438 $ 3,484 $ (613) $ 40,934
Interest income 1,039
Interest expense (1,406)
--------
Income before income taxes $ 40,567
========
</TABLE>
7
<PAGE> 8
NOTE F - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
(Dollars in thousands) United Other
States Europe Countries Eliminations Consolidated
---------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1999:
Net sales to unaffiliated customers $381,034 $ 97,414 $ 77,918 $ -- $556,366
Inter-segment sales 31,374 4,076 8,018 (43,468) --
-------- ---------- -------- --------- --------
--
Total $412,408 $ 101,490 $ 85,936 $ (43,468) $556,366
======== ========= ======== ========= ========
Income before interest and income taxes $ 31,171 $ 7,731 $ 5,019 $ 552 $ 44,473
Interest income 498
Interest expense (2,934)
---------
Income before income taxes $ 42,037
=========
Total assets $521,508 $173,184 $129,840 $ (59,130) $ 765,402
======== ======== ======== ========= =========
Six months ended June 30, 1998:
Net sales to unaffiliated customers $420,499 $108,449 $ 84,944 $ -- $ 613,892
Inter-segment sales 39,351 4,731 6,330 (50,412) --
-------- ---------- -------- --------- ---------
Total $459,850 $113,180 $ 91,274 $ (50,412) $ 613,892
======== ======== ======== ========= =========
Income before interest and income taxes $ 65,344 $ 8,726 $ 6,661 $ (1,353) $ 79,378
Interest income 1,995
Interest expense (2,725)
---------
Income before income taxes $ 78,648
=========
Total assets $576,409 $175,065 $116,340 $ (53,657) $ 814,157
======== ======== ======== ========= =========
</TABLE>
Included in the United States geographic segment for the six months ended June
30, 1999 was a $32 million pre-tax charge related to the disposal of the motor
business. See NOTE G to these consolidated financial statements.
NOTE G - DISPOSAL OF MOTOR BUSINESS
On May 28, 1999, the Company sold its motor business to Regal-Beloit, Inc. The
Company recorded a pre-tax charge of $32 million ($19.7 million after-tax, or
$0.42 per diluted share) in the first quarter of 1999 reflecting the loss on the
sale of motor business assets. Sales of the motor business for the two- and
three-month periods ended May 28, 1999 and June 30, 1998 were $9 million and $15
million, respectively, and were $23 million and $30 million, respectively, for
the five- and six-month periods ended May 28, 1999 and June 30, 1998. The
operating results of the motor business for the periods presented were not
material.
NOTE H - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement will become effective for the Company for
fiscal year 2001. 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 impact on the Company's consolidated financial position or
results of operations.
8
<PAGE> 9
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, 1999 and 1998 (dollars in millions):
<TABLE>
<CAPTION>
Three months ended June 30,
1999 1998
---------------------- ----------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $273.5 100.0% $310.9 100.0%
Cost of goods sold 166.6 60.9% 190.3 61.2%
------ ----- ------ -----
Gross profit 106.9 39.1% 120.6 38.8%
Distribution cost/selling,
general and administrative
expenses 70.2 25.7% 80.2 25.8%
------ ----- ------ -----
Operating income 36.7 13.4% 40.4 13.0%
Interest income 0.2 0.1% 1.0 0.3%
Other income 1.0 0.3% 0.6 0.2%
Interest expense (1.5) (0.5%) (1.4) (0.4%)
------ ----- ------ -----
Income before income taxes 36.4 13.3% 40.6 13.1%
Income taxes 13.1 4.8% 15.4 5.0%
------ ----- ------ -----
Net income $ 23.3 8.5% $ 25.2 8.1%
====== ===== ====== =====
Six months ended June 30,
1999 1998
---------------------- ----------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $556.4 100.0% $613.9 100.0%
Cost of goods sold 338.6 60.8% 376.3 61.3%
------ ----- ------ -----
Gross profit 217.8 39.2% 237.6 38.7%
Distribution cost/selling,
general and administrative 143.1 25.7% 158.8 25.9%
expenses
Loss on disposal of motor
business 32.0 5.8% -- --
------ ----- ------ -----
Operating income 42.7 7.7% 78.8 12.8%
Interest income 0.5 0.1% 2.0 0.3%
Other income 1.7 0.3% 0.6 0.1%
Interest expense (2.9) (0.5%) (2.7) (0.4%)
------ ----- ------ -----
Income before income taxes 42.0 7.6% 78.7 12.8%
Income taxes 14.4 2.6% 29.7 4.8%
------ ----- ------ -----
Net income $ 27.6 5.0% $ 49.0 8.0%
====== ===== ====== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
- -----------------------------------------------------------------------------
NET SALES. Net sales for the second quarter 1999 declined $37.4 million or 12.0%
to $273.5 million from $310.9 million last year. Net sales from U.S. operations
were $186.3 million for the quarter, down 12.0% from $211.8 million for the
second quarter last year. Excluding the results of the recently divested motor
business, U.S. sales in 1998 would have been $206.3 million, reflecting a
year-over-year decline of 9.7%. The sales decline was primarily volume driven.
Worldwide economic conditions, particularly in Asia and South America, continued
to impact U.S. exports, which were down 37.2% to $15.0 million in the quarter,
compared with $23.9 million last year. Non-U.S. sales decreased 12.0% to $87.2
million in the second quarter 1999, compared with $99.1 million last year. The
strengthening of the U.S. dollar has negatively impacted non-U.S. sales by 3.7%,
caused principally by the devaluation of the European, Brazilian and Mexican
currencies. In local currencies, non-U.S.
sales declined by 8.7%.
9
<PAGE> 10
GROSS PROFIT. Gross profit of $106.9 million for the second quarter 1999
decreased 11.4% or $13.7 million from last year. Gross profit as a percentage of
net sales increased to 39.1% compared with 38.8% for the second quarter last
year. Gross profit percentage increased over the second quarter of 1998 due to
the absence of motors sales in June 1999, improved manufacturing efficiencies
and lower raw material costs. Motor sales commanded lower margins than welding
product sales.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses decreased $10.0 million or 12.4% to $70.2 million for the second
quarter 1999, compared with $80.2 million for 1998. SG&A expense as a percentage
of net sales declined to 25.7% from 25.8% in the 1998 period. SG&A expenses
include costs related to the Company's discretionary year-end employee bonus
program, net of hospitalization costs. The reduction in SG&A expenses were
primarily due to lower distribution costs and a $5.4 million decline in the
bonus provision in 1999 compared with 1998. Distribution costs are generally
incurred in proportion to sales levels. Expected bonus expenses are accrued in
proportion to expected profitability. Lower bonus accruals are attributable to
lower profitability versus objectives, excluding bonus costs, compared to the
prior year. The final bonus payout will be subject to approval by the Company's
Board of Directors during the fourth quarter.
INTEREST EXPENSE. Interest expense has increased to $1.5 million in the second
quarter 1999 from $1.4 million for the same period last year. The slight
increase was due primarily to non-U.S. borrowings for working capital funding.
INCOME TAXES. Income taxes for the second quarter 1999 were $13.1 million on
income before income taxes of $36.4 million, an effective rate of 35.8%, as
compared with income taxes of $15.4 million on income before income taxes of
$40.6 million, or an effective rate of 37.8% for the same period in 1998. This
lower rate reflects tax planning initiatives in the U.S., the change in the mix
of earnings among foreign subsidiaries and the impact of the motor business
divestiture.
NET INCOME. Net income for the second quarter 1999 decreased $1.9 million or
7.6% compared with the same period last year. Earnings per share for 1999 was
equal to 1998 because of share repurchases. The effect of foreign currency
exchange rate movements on net income was not significant.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
- -------------------------------------------------------------------------
NET SALES. Net sales for the first half of 1999 decreased $57.5 million or 9.4%
to $556.4 million from $613.9 million last year. Net sales from U.S. operations
were $381 million for 1999, down 9.4% from $420.5 million last year. When sales
of the motor business are excluded from June 1998, U.S. sales would have been
$415 million, a year-over-year decrease of 8.2%. U.S. exports were down 35.6% to
$32.2 million in the period, compared with $50 million last year. Non-U.S. sales
were $175.4 million in 1999, down 9.3% from $193.4 million a year ago. The
strengthening of the U.S. dollar has negatively impacted non-U.S. sales by 3.3%,
caused principally by the devaluation of the Canadian, Brazilian and Mexican
currencies. In local currencies, non-U.S. sales have declined by 6.2%.
GROSS PROFIT. Gross profit of $217.8 million for 1999 decreased $19.8 million or
8.3% from last year. Gross profit as a percentage of net sales improved to 39.2%
compared with 38.7% for last year. Gross profit percentage increased due the
absence of motor business sales in June 1999, improved manufacturing
efficiencies and lower raw material costs. Motor sales commanded lower margins
than welding product sales.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses were $143.1 million, a $15.7 million or 9.9% improvement over $158.8
million last year. SG&A expense as a percentage of net sales dropped to 25.7%
from 25.9% in the 1998 period. The decrease in SG&A expenses were primarily due
to lower distribution costs and a $10.8 million decline in the bonus provision
in 1999 compared with 1998. Distribution costs are generally incurred in
proportion to sales. Bonus expenses are accrued in proportion to expected
profitability and lower bonus accruals are a consequence of lower profitability
versus objectives, excluding bonus costs, compared to the prior year. The final
bonus payout will be subject to approval by the Company's Board of Directors
during the fourth quarter.
10
<PAGE> 11
LOSS ON DISPOSAL OF MOTOR BUSINESS. The Company recorded a pre-tax charge of $32
million ($19.7 million after-tax, or $0.42 per diluted share) in the first
quarter of 1999 related to the sale of its motor business. This sale was
completed at the end of May 1999. Sales of the motor business for 1999 through
the May 28 disposal date were $23 million and for the six-months ended June 30,
1998 were $30 million. The operating results of the motor business for the
periods presented were not material.
INTEREST EXPENSE. Interest expense increased to $2.9 million in 1999 from $2.7
million for the same period last year. The increase was caused principally by
local working capital borrowings by non-U.S. entities and by increased
borrowings in the U.S. to finance share repurchases.
INCOME TAXES. Income taxes for the first half of 1999 were $14.4 million on
income before income taxes of $42.0 million, an effective rate of 34.2%, as
compared with income taxes of $29.7 million on income before income taxes of
$78.7 million, or an effective rate of 37.7% for the same period in 1998.
Excluding the charge for the disposal of the motor division, the effective
income tax rate would have been 36.0% for the first half of 1999. This lower
rate reflects tax planning initiatives in the U.S. and the change in the mix of
earnings among foreign subsidiaries.
NET INCOME. Excluding the charge for the disposal of the motor business, net
income of $47.3 million for the first half of 1999 decreased $1.7 million or
3.5% compared with the same period last year, while diluted earnings per share
increased 3% over the same period to $1.02. The increase in EPS is attributable
to the decreased shares outstanding as a result of the share repurchases
occurring since September 1998. The effect of foreign currency exchange rate
movements on net income was not significant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided from operating activities for the six months ended June 30, 1999
was $53 million compared with $65.2 million for 1998. Lower cash flow from
operations is due to greater use of working capital and lower non-cash bonus
accruals due to lower than planned pre-bonus profitability.
The Company's ratio of total debt to total capitalization increased to 13.2% at
June 30, 1999 from 11.0% at December 31, 1998. Long-term debt was accumulated
during the first quarter to supplement funding for share repurchases and higher
levels of capital spending. This debt was repaid during the second quarter using
a portion of the $34 million proceeds from the sale of the motor business. The
stock repurchase program has continued to lower the Company's equity base.
During the second quarter of 1999, the Company purchased 97,300 shares of its
common stock. Since September 1998, when the original 5,000,000 share repurchase
program began, the Company has purchased a total of 4,118,750 shares of its
common stock on the open market at a cost of $84 million through June 30, 1999.
During the six months ended June 30,1999, the Company spent $59 million on
common stock repurchases. In 1999 the Board of Directors authorized an
additional share repurchase program of up to 5,000,000 shares. Accordingly, the
Company has 5,881,250 shares available for repurchase under its authorized share
repurchase program.
Capital expenditures increased $10.1 million to $42.2 million in the first half
of 1999, compared with $32.1 million in 1998. This increase was predominantly
related to spending on information systems in the U.S. and Europe and additional
manufacturing capacity in Mexico and Canada. The rate of capital spending is
expected to decline during the second half of 1999 as spending on information
systems decreases. The amount of capital spending for the full year 1999 is
expected to be comparable to that of 1998.
During 1998, the Company acquired a 75% interest in Indalco Alloys Inc. of
Canada whose operating results are included within those of the Company
beginning in March 1998. The results of Indalco for the periods presented were
not significant.
The Company paid cash dividends of $11.2 million or $0.24 per share during the
first half of 1999, a 13.8% increase over the $9.8 million paid in 1998.
11
<PAGE> 12
INFORMATION SYSTEMS IMPLEMENTATION AND YEAR 2000 ISSUE
- ------------------------------------------------------
The Company has replaced many of its legacy Information Technology (IT) Systems
and believes that with conversions to new software and computer systems, the
Year 2000 Issue will be mitigated. Accordingly, all of the Company's business
units are actively involved in its Year 2000 conversion plan. The Company is
utilizing both internal and external resources to replace and test software.
The Company has also replaced systems used in the manufacture and distribution
of its products and does not anticipate disruptions in the supply of products to
its customers. In addition, to assure continuous flow of products to end
customers, the Company has surveyed and continues to assess Year 2000 readiness
on the part of the Company's supply chain. The majority of the suppliers
responding to the Company's survey indicated that they were in the process of
implementing their own Year 2000 compliance programs. Based upon the outcome of
the Company's final assessment of its external supply chain components, business
process and systems contingency plans are being developed and implemented.
Although plans have not yet been completed, the Company anticipates these plans
will include identification of alternative suppliers and will result in
increasing inventory safety stocks.
The Company's Year 2000 readiness activities include IT areas such as business
systems, technical infrastructure and end-user computing and non-IT areas such
as manufacturing, warehousing and servicing equipment, environmental operations,
supplier base and end products. These activities require the identification of
affected systems and equipment, performance of an impact analysis, development
of a compliance strategy and the implementation and testing of remediation.
The Company has completed or is currently on schedule with various phases of its
compliance program and has made significant progress towards the completion of
its total planned efforts. The Company substantially completed its Year 2000
compliance efforts relating to IT areas during the second quarter of 1999.
Incremental spending for Information Systems expenditures, including system
enhancements and non-IT Year 2000 projects, was $67 million through June 30,
1999, of which $13.7 million has been expensed. The Company expects to incur
approximately $4 million to $5 million to complete these projects. Substantially
all of the costs to be incurred relate to replacement costs for hardware and
software which will provide enhanced functionality over current IT systems. Cash
flows related to these costs have been and will continue to be provided by funds
generated from operations. The Company's total project cost and estimated time
to complete the project are based on presently available information. The
Company requires periodic project status reporting, and cost estimates are
revised as information becomes available.
The Company plans to complete its IT Implementation and Year 2000 projects and
have all systems compliant before December 31, 1999. However, there are no
assurances that the systems of other companies on which the Company relies also
will be Year 2000 compliant. Disruptions caused by suppliers or customers would
impair the Company's ability to obtain materials and services for production or
the ability to sell to customers. If a disruption occurred, the Company would
experience lost sales and profits. The Company's assessment and remediation
program is addressing this uncertainty but its ability to ascertain the
readiness of its suppliers and customers is limited. Any failure by the Company
to meet its current timetable or by the Company's vendors or customers to
achieve Year 2000 compliance could have a material adverse effect on the
Company's systems, results of operations and financial condition.
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:
12
<PAGE> 13
- - Information Systems Implementation and Year 2000 Issue. The Company has
replaced many of its legacy systems and believes that with conversions to
new software, the Year 2000 Issue will be mitigated. However, disruptions
caused by suppliers or customers due to the Year 2000 issue would impair
the Company's ability to obtain materials and services for production or
the ability to sell to customers. Any failure by the Company to meet its
current timetable or by the Company's vendors or customers to achieve Year
2000 compliance could have a material adverse effect on the Company's
systems, results of operations and financial condition. See also
"Information Systems Implementation and Year 2000 Issue" above.
- - 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 3. Legal Proceedings" within the Company's annual
report on Form 10-K for the year-ended December 31, 1998, as well as the
update in the first quarter 1999 Form 10-Q. See also Note K to the
consolidated financial statements for the year-ended December 31, 1998.
- - 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 (particularly where foreign
currencies have been significantly devalued) 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 deteriorated over the last two
years and are now experiencing significant degrees of political and
economic instability, making international growth difficult.
- - 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 in the Company's largest market.
- - 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.
Part II - Other Information
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
13
<PAGE> 14
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Lincoln Electric Holdings, Inc.
("Lincoln") was held on May 4, 1999.
(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 in 2002:
<TABLE>
<CAPTION>
Votes
Votes For Withheld
--------- --------
<S> <C> <C>
Harry Carlson 34,445,827 328,368
Thomas A. Corcoran 34,418,415 355,780
David H. Gunning 34,475,820 298,375
Edward E. Hood, Jr. 34,471,662 302,533
Paul E. Lego 34,432,909 341,286
</TABLE>
(ii) 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, 1999.
Votes For 34,660,872
Votes Against 43,259
Shares Abstain 70,064
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 27 - Financial Data Schedule.
(b) Reports on Form 8-K - None.
14
<PAGE> 15
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, 1999
15
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