<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 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
September 30, 1999 was 45,128,924.
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 265,937 $ 288,106 $ 822,303 $ 901,998
Cost of goods sold 160,300 176,917 498,792 553,172
--------- --------- --------- ---------
Gross profit 105,637 111,189 323,511 348,826
Distribution cost / selling, general
& administrative expenses 68,535 74,900 211,644 233,765
Loss on disposal of motor business -- -- 32,015 --
--------- --------- --------- ---------
Operating income 37,102 36,289 79,852 115,061
Other income / (expense):
Interest income 419 1,090 917 3,085
Other income 190 782 1,913 1,388
Interest expense (1,300) (1,424) (4,234) (4,149)
--------- --------- --------- ---------
Total other income / (expense) (691) 448 (1,404) 324
--------- --------- --------- ---------
Income before income taxes 36,411 36,737 78,448 115,385
Income taxes 13,108 13,443 27,503 43,116
--------- --------- --------- ---------
Net income $ 23,303 $ 23,294 $ 50,945 $ 72,269
========= ========= ========= =========
Basic earnings per share $ 0.52 $ 0.47 $ 1.11 $ 1.47
Diluted earnings per share $ 0.51 $ 0.47 $ 1.11 $ 1.46
Cash dividends declared per share $ 0.12 $ 0.10 $ 0.36 $ 0.30
</TABLE>
See notes to these consolidated financial statements.
2
<PAGE> 3
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED) (NOTE A)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 34,025 $ 39,095
Marketable securities 51 311
Accounts receivable (less allowances of $3,862 in 1999; $3,563 in 1998) 179,881 167,830
Inventories:
Raw materials and in-process 72,709 82,030
Finished goods 112,970 104,291
-------- --------
185,679 186,321
Deferred income taxes 18,309 17,751
Other current assets 29,533 25,533
-------- --------
TOTAL CURRENT ASSETS 447,478 436,841
PROPERTY, PLANT AND EQUIPMENT
Land 11,250 11,447
Buildings 116,096 115,538
Machinery, tools and equipment 422,277 424,307
-------- --------
549,623 551,292
Less: accumulated depreciation and amortization 277,136 291,501
-------- --------
272,487 259,791
OTHER ASSETS
Goodwill - net 34,012 35,747
Other 46,341 50,527
-------- --------
80,353 86,274
-------- --------
TOTAL ASSETS $800,318 $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)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
(UNAUDITED) (NOTE A)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 6,719 $ 2,792
Trade accounts payable 59,246 60,502
Salaries, wages and amounts withheld 55,437 19,366
Taxes, including income taxes 39,227 38,434
Dividend payable 5,415 5,770
Other current liabilities 68,761 57,147
Current portion of long-term debt 11,407 11,100
--------- ---------
TOTAL CURRENT LIABILITIES 246,212 195,111
Long-term debt, less current portion 45,195 46,766
Deferred income taxes 22,595 23,158
Other long-term liabilities 32,351 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 - 45,128,924 shares in 1999 and 48,083,246 shares in 1998 4,928 4,928
Additional paid-in capital 104,855 104,641
Retained earnings 466,727 432,283
Accumulated other comprehensive income (37,666) (28,251)
Treasury shares, at cost - 4,155,026 shares in 1999 and 1,200,704 shares
in 1998 (84,879) (22,668)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 453,965 490,933
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 800,318 $ 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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 50,945 $ 72,269
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 21,087 20,156
Loss on disposal of fixed assets and motor business 31,373 2,171
Changes in operating assets and liabilities:
(Increase) in accounts receivable (21,477) (10,208)
(Increase) in inventories (22,358) (13,964)
(Increase) in other current assets (4,614) (6,427)
Increase in accounts payable 259 455
Increase in other current liabilities 34,757 58,061
Gross change in other noncurrent assets and liabilities 7,818 (3,038)
Other - net (2,946) (1,366)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 94,844 118,109
INVESTING ACTIVITIES
Capital expenditures (57,265) (48,599)
Acquisitions of businesses and equity investment (154) (10,360)
Purchase of marketable securities (748) (909)
Proceeds from maturities of marketable securities 1,064 10,872
Proceeds from sale of fixed assets and motor business 35,712 4,047
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (21,391) (44,949)
FINANCING ACTIVITIES
Short-term borrowings - net 3,691 379
Long-term borrowings - net (1,334) (4,500)
Net (purchase) reissuance of shares for treasury (62,211) (20,838)
Dividends paid (16,647) (14,777)
Other (494) 500
--------- ---------
NET CASH (USED) BY FINANCING ACTIVITIES (76,995) (39,236)
Effect of exchange rate changes on cash and cash equivalents (1,528) 637
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,070) 34,561
Cash and cash equivalents at beginning of period 39,095 46,562
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,025 $ 81,123
========= =========
</TABLE>
See notes to these consolidated financial statements.
5
<PAGE> 6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 Form 10-Q and Article 10 of
Regulation S-X. Accordingly, these consolidated financial statements do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, these consolidated financial statements contain all the
adjustments (consisting of normal recurring accruals) considered 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 nine-months
ended September 30, 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999.
The balance sheet at December 31,1998 has been derived from the audited
financial statements at that date, but does not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
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, Three months ended Nine months ended
except per share amounts) ------------------ -----------------
September 30, September 30,
------------- -------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $23,303 $23,294 $50,945 $72,269
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 45,218 49,152 45,693 49,221
Effect of dilutive securities -
Employee stock options 101 244 124 244
------- ------- ------- -------
Denominator for diluted earnings per share -
Adjusted weighted-average shares 45,319 49,396 45,817 49,465
======= ======= ======= =======
Basic earnings per share $ 0.52 $ 0.47 $ 1.11 $ 1.47
Diluted earnings per share $ 0.51 $ 0.47 $ 1.11 $ 1.46
</TABLE>
6
<PAGE> 7
NOTE C - COMPREHENSIVE INCOME
The components of comprehensive income follow:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 23,303 $ 23,294 $ 50,945 $ 72,269
Other comprehensive income:
Change in currency translation adjustment 1,706 6,247 (9,415) 2,909
-------- -------- -------- --------
Comprehensive income $ 25,009 $ 29,541 $ 41,530 $ 75,178
======== ======== ======== ========
</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 final year-end
LIFO inventory calculations.
NOTE E - SALARIES, WAGES AND AMOUNTS WITHHELD
Salaries, wages and amounts withheld at September 30, 1999 include provisions
for year-end bonuses and related payroll taxes of approximately $44 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 September 30, 1999:
Net sales to unaffiliated customers $ 183,476 $ 45,148 $ 37,313 $ -- $ 265,937
Inter-segment sales 13,614 2,589 3,846 (20,049) --
--------- --------- --------- --------- ---------
Total $ 197,090 $ 47,737 $ 41,159 $ (20,049) $ 265,937
========= ========= ========= ========= =========
Income before interest and income taxes $ 32,846 $ 2,242 $ 1,524 $ 680 $ 37,292
Interest income 419
Interest expense (1,300)
---------
Income before income taxes $ 36,411
=========
Three months ended September 30, 1998:
Net sales to unaffiliated customers $ 201,210 $ 47,620 $ 39,276 $ -- $ 288,106
Inter-segment sales 16,784 1,927 3,489 (22,200) --
--------- --------- --------- --------- ---------
Total $ 217,994 $ 49,547 $ 42,765 $ (22,200) $ 288,106
========= ========= ========= ========= =========
Income before interest and income taxes $ 32,047 $ 3,203 $ 2,828 $ (1,007) $ 37,071
Interest income 1,090
Interest expense (1,424)
---------
Income before income taxes $ 36,737
=========
</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>
Nine months ended September 30, 1999:
Net sales to unaffiliated customers $ 564,510 $ 142,562 $ 115,231 $ -- $ 822,303
Inter-segment sales 44,988 6,665 11,864 (63,517) --
--------- --------- --------- --------- ---------
Total $ 609,498 $ 149,227 $ 127,095 $ (63,517) $ 822,303
========= ========= ========= ========= =========
Income before interest and income taxes $ 64,017 $ 9,973 $ 6,543 $ 1,232 $ 81,765
Interest income 917
Interest expense (4,234)
---------
Income before income taxes $ 78,448
=========
Total assets $ 556,670 $ 177,317 $ 130,633 $ (64,302) $ 800,318
========= ========= ========= ========= =========
Nine months ended September 30, 1998:
Net sales to unaffiliated customers $ 621,709 $ 156,069 $ 124,220 $ -- $ 901,998
Inter-segment sales 56,135 6,658 9,819 (72,612) --
--------- --------- --------- --------- ---------
Total $ 677,844 $ 162,727 $ 134,039 $ (72,612) $ 901,998
========= ========= ========= ========= =========
Income before interest and income taxes $ 97,391 $ 11,929 $ 9,489 $ (2,360) $ 116,449
Interest income 3,085
Interest expense (4,149)
---------
Income before income taxes $ 115,385
=========
Total assets $ 574,385 $ 191,263 $ 118,170 $ (66,555) $ 817,263
========= ========= ========= ========= =========
</TABLE>
Included in the United States geographic segment for the nine months ended
September 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
$0.43 per diluted share on a year-to-date basis) in the first quarter of 1999
reflecting the loss on the sale of motor business assets. Sales attributable to
the motor business for the three-month period ended September 30, 1998 were $13
million. Motor business sales totalled $23 million for the five-month period
ended May 28, 1999. For the nine-month period ended September 30, 1998, motor
business sales were $43 million. 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 AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- --------------------------------------------------------------------------
OPERATIONS
- ----------
The following table sets forth the Company's results of operations for the
three- and nine-month periods ended September 30, 1999 and 1998 (dollars in
millions):
<TABLE>
<CAPTION>
Three months ended September 30,
1999 1998
-------------------- -------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $265.9 100.0% $288.1 100.0%
Cost of goods sold 160.3 60.3% 176.9 61.4%
------ ----- ------ -----
Gross profit 105.6 39.7% 111.2 38.6%
Distribution cost / selling, general and
administrative expenses 68.5 25.7% 74.9 26.0%
------ ----- ------ -----
Operating income 37.1 14.0% 36.3 12.6%
Interest income 0.4 0.2% 1.1 0.4%
Other income 0.2 0.1% 0.7 0.3%
Interest expense (1.3) (0.5%) (1.4) (0.5%)
------ ----- ------ -----
Income before income taxes 36.4 13.7% 36.7 12.8%
Income taxes 13.1 4.9% 13.4 4.7%
------ ----- ------ -----
Net income $ 23.3 8.8% $ 23.3 8.1%
====== ===== ====== =====
Nine months ended September 30,
1999 1998
-------------------- ---------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $822.3 100.0% $902.0 100.0%
Cost of goods sold 498.8 60.7% 553.2 61.3%
------ ----- ------ -----
Gross profit 323.5 39.3% 348.8 38.7%
Distribution cost / selling, general and
administrative expenses 211.7 25.7% 233.7 25.9%
Loss on disposal of motor business 32.0 3.9% -- --
------ ----- ------ -----
Operating income 79.8 9.7% 115.1 12.8%
Interest income 0.9 0.1% 3.1 0.3%
Other income 1.9 0.2% 1.3 0.2%
Interest expense (4.2) (0.5%) (4.1) (0.5%)
------ ----- ------ -----
Income before income taxes 78.4 9.5% 115.4 12.8%
Income taxes 27.5 3.3% 43.1 4.8%
------ ----- ------ -----
Net income $ 50.9 6.2% $ 72.3 8.0%
====== ===== ====== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
- --------------------------------------------------------------------
SEPTEMBER 30, 1998
- ------------------
NET SALES. Net sales for the third quarter 1999 declined $22.2 million or 7.7%
to $265.9 million from $288.1 million last year. Net sales from U.S. operations
were $183.5 million for the quarter, down 8.8% from $201.2 million for the third
quarter last year. Excluding the results of the divested motor business, U.S.
sales in 1998 would have been $187.9 million, reflecting a year-over-year
decline of 2.3%. The sales decline was primarily volume driven. Worldwide
economic conditions, particularly in Asia, South America and the Middle East,
continued to impact U.S. exports, which were down 19.6% to $17.2 million in the
quarter, compared with $21.4 million last year. Non-U.S. sales decreased 5.2% to
$82.4 million in the third quarter 1999, compared with $86.9 million last year.
The strengthening of the U.S. dollar has negatively impacted non-U.S. sales by
2.3%, caused principally by the devaluation of the European and Brazilian
currencies. In local currencies, non-U.S. sales declined by 2.9%.
9
<PAGE> 10
GROSS PROFIT. Gross profit of $105.6 million for the third quarter 1999
decreased 5.0% or $5.6 million from last year. Gross profit as a percentage of
net sales increased to 39.7% compared with 38.6% for the third quarter last
year. Gross profit percentage increased over the third quarter of 1998 due to
the absence of motor sales, 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 $6.4 million or 8.5% to $68.5 million for the third quarter
1999, compared with $74.9 million for 1998. SG&A expense as a percentage of net
sales declined to 25.7% from 26.0% 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 due to planned
reductions in selling and research and development costs and a $4.2 million
decline in the bonus provision in 1999 compared with 1998. 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 decreased to $1.3 million in the third
quarter 1999 from $1.4 million for the same period last year. The decline in
interest expense is attributable to the scheduled paydown of long-term debt.
INCOME TAXES. Income taxes for the third quarter 1999 were $13.1 million on
income before income taxes of $36.4 million, an effective rate of 36.0%, as
compared with income taxes of $13.4 million on income before income taxes of
$36.7 million, or an effective rate of 36.6% for the same period in 1998. This
lower rate reflects tax planning initiatives in the U.S., and a change in the
mix of earnings among foreign subsidiaries.
NET INCOME. Net income for the third quarter 1999 was equal to that of last year
at $23.3 million. Diluted earnings per share for 1999 increased to $0.51 per
share from $0.47 per share in 1998 because of share repurchases. The effect of
foreign currency exchange rate movements on net income was not significant.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
- ------------------------------------------------------------------
SEPTEMBER 30, 1998
- ------------------
NET SALES. Net sales for the first nine months of 1999 decreased $79.7 million
or 8.8% to $822.3 million from $902 million last year. Net sales from U.S.
operations were $564.5 million for 1999, down 9.2% from $621.7 million last
year. Excluding the results of the recently divested motor business, U.S. sales
in 1998 would have been $603.4 million, a year-over-year decrease of 6.4%. U.S.
exports were down 30.8% to $49.4 million in the period, compared with $71.4
million last year. Non-U.S. sales were $257.8 million in 1999, down 8.0% from
$280.3 million a year ago. The strengthening of the U.S. dollar has negatively
impacted non-U.S. sales by 3.0%, caused principally by the devaluation of the
European, Brazilian and Mexican currencies. In local currencies, non-U.S. sales
have declined by 5.2%. The sales decline worldwide was primarily volume driven.
GROSS PROFIT. Gross profit of $323.5 million for 1999 decreased $25.3 million or
7.3% from last year. Gross profit as a percentage of net sales improved to 39.3%
compared with 38.7% for last year, due to the absence of motors sales subsequent
to May 28, 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 $211.7 million, a $22.0 million or 9.4% improvement over $233.7
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 $15 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.
LOSS ON DISPOSAL OF MOTOR BUSINESS. The Company recorded a pre-tax charge of $32
million ($19.7 million after-tax, or $0.43 per diluted share on a year-to-date
basis) in the first quarter of 1999 related to the sale of its motor
10
<PAGE> 11
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
nine-months ended September 30, 1998 were $43 million. The operating results of
the motor business for the periods presented were not material.
INTEREST EXPENSE. Interest expense increased to $4.2 million in 1999 from $4.1
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 nine months of 1999 were $27.5 million
on income before income taxes of $78.4 million, an effective rate of 35.1%, as
compared with income taxes of $43.1 million on income before income taxes of
$115.4 million, or an effective rate of 37.4% 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 nine months 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 $70.6 million for the first nine months of 1999 decreased $1.7 million
or 2.2% compared with the same period last year, while diluted earnings per
share increased 5.5% over the same period to $1.54 from $1.46 in 1998. 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 nine months ended September 30,
1999 was $94.8 million compared with $118.1 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 12.2% at
September 30, 1999 from 11.0% at December 31, 1998. 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 third quarter of 1999, the Company purchased 169,400 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 4,288,150 shares of its
common stock on the open market at a cost of $87.3 million through September 30,
1999. During the nine months ended September 30, 1999, the Company spent $63.5
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,
at September 30, 1999, the Company had 5,711,850 shares available for repurchase
under its authorized share repurchase program.
Capital expenditures increased $8.7 million to $57.3 million in the first nine
months of 1999, compared with $48.6 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 last quarter of 1999 as spending on
information systems decreases. Including the acquisitions of businesses and
equity investments, capital spending for 1999 approximated that of 1998.
During 1998, the Company acquired Indalco Alloys Inc. of Canada, Uhrhan &
Schwill GmbH of Germany and a 50% equity interest in AS Kaynak of Turkey. The
operating results of Indalco are included with those of the Company beginning in
March 1998, and for Uhrhan & Schwill, beginning in May 1998. The results of
acquired companies for the first nine months of 1998 were not significant.
The Company paid cash dividends of $16.6 million or $0.36 per share during the
first nine months of 1999, a 12.7% increase over the $14.8 million paid in 1998.
Cash dividends declared per share increased 20% year over year.
The quarterly dividend of $0.12 per share was paid October 15, 1999, to holders
of record on September 30, 1999.
11
<PAGE> 12
INFORMATION SYSTEMS IMPLEMENTATION AND YEAR 2000 ISSUE
- ------------------------------------------------------
The Company has converted and replaced its legacy Information Technology (IT)
systems and believes that with this conversion the Year 2000 Issue has been
mitigated. Accordingly, all of the Company's business units were actively
involved in these conversions. The Company utilized both internal and external
resources to replace and test the new software for Year 2000 readiness.
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 Company's
final assessment of its external supply chain components, business process and
systems contingency plans have been developed. Communication with the Company's
supply chain components is being maintained.
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 its compliance program relating to IT areas and will
continue to monitor IT application and infrastructure software as vendors
provide Year 2000 related product upgrades.
Incremental spending for Information Systems expenditures, including system
enhancements and non-IT Year 2000 projects, was $79 million through September
30, 1999, of which $14.5 million has been expensed. Substantially all of the
costs incurred relate to replacement costs for hardware and software, which will
provide enhanced functionality over current IT systems.
The Company completed its IT Implementation and Year 2000 projects and believes,
based on the testing, that all systems are compliant. 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 from 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
or its vendors or customers to achieve Year 2000 compliance could have a
material adverse affect 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:
- - 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 or its 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.
12
<PAGE> 13
- - 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.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 27 - Financial Data Schedule.
(b) Reports on Form 8-K - None.
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINCOLN ELECTRIC HOLDINGS, INC.
/s/ H. JAY ELLIOTT
- -------------------------------------
H. Jay Elliott
Senior Vice President,
Chief Financial Officer and Treasurer
November 15, 1999
14
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