<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, 2000 Commission File No. 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
(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, 2000 was 42,329,824.
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,
--------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $274,238 $273,498 $556,042 $556,366
Cost of goods sold 182,265 179,910 367,954 366,211
--------- --------- --------- ---------
Gross profit 91,973 93,588 188,088 190,155
Selling, general & administrative expenses 54,373 56,907 111,052 115,390
Loss on disposal of motor business -- -- -- 32,015
-------------- -------------- -------------- -----------
Operating income 37,600 36,681 77,036 42,750
Other income / (expense):
Interest income 128 186 264 498
Other income 10,902 1,014 11,674 1,723
Interest expense (2,362) (1,505) (4,333) (2,934)
----------- ----------- ----------- -----------
Total other income / (expense) 8,668 (305) 7,605 (713)
----------- ------------ ----------- ------------
Income before income taxes 46,268 36,376 84,641 42,037
Income taxes 16,910 13,041 30,885 14,395
---------- ---------- ---------- ----------
Net income $ 29,358 $ 23,335 $ 53,756 $ 27,642
========= ========= ========= =========
Basic earnings per share $ 0.69 $ 0.51 $ 1.25 $ 0.60
Diluted earnings per share $ 0.69 $ 0.51 $ 1.25 $ 0.60
Cash dividends declared per share $ 0.14 $ 0.12 $ 0.28 $ 0.24
</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>
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
(UNAUDITED) (NOTE A)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,584 $ 8,675
Accounts receivable (less allowances of $3,853 in 2000; $3,687 in 1999) 177,243 169,986
Inventories:
Raw materials and in-process 79,926 82,451
Finished goods 109,840 109,161
-------- --------
189,766 191,612
Deferred income taxes 26,927 23,311
Other current assets 42,885 33,011
-------- --------
TOTAL CURRENT ASSETS 451,405 426,595
PROPERTY, PLANT AND EQUIPMENT
Land 12,039 11,050
Buildings 128,558 119,519
Machinery, tools and equipment 416,148 419,831
-------- --------
556,745 550,400
Less: accumulated depreciation and amortization 281,037 279,610
-------- --------
275,708 270,790
OTHER ASSETS
Goodwill - net 41,777 33,263
Other 59,600 44,751
-------- --------
101,377 78,014
-------- --------
TOTAL ASSETS $828,490 $775,399
======== ========
</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>
JUNE 30, DECEMBER 31,
2000 1999
-------------- -------------
(UNAUDITED) (NOTE A)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 14,225 $ 16,425
Trade accounts payable 55,576 64,482
Accrued employee compensation and benefits 58,277 32,326
Accrued expenses 13,659 15,202
Taxes, including income taxes 55,978 41,326
Dividend payable 5,926 6,228
Other current liabilities 32,450 28,882
Current portion of long-term debt 12,015 11,503
--------- --------
TOTAL CURRENT LIABILITIES 248,106 216,374
Long-term debt, less current portion 79,273 47,207
Deferred income taxes 27,777 28,771
Other long-term liabilities 32,260 31,532
SHAREHOLDERS' EQUITY
Preferred Shares, without par value - at stated capital amount:
Authorized - 5,000,000 shares in 2000 and 1999;
Issued and Outstanding - none in 2000 and 1999 -- --
Common Shares, without par value - at stated capital amount:
Authorized - 120,000,000 shares in 2000 and 1999; Issued - 49,283,203
shares in 2000 and 49,283,950 in 1999;
Outstanding - 42,329,824 shares in 2000 and 44,483,366 shares in 1999 4,928 4,928
Additional paid-in capital 104,894 104,891
Retained earnings 525,245 483,463
Accumulated other comprehensive income (54,008) (43,524)
Treasury shares, at cost - 6,953,379 shares in 2000 and 4,800,584 shares
in 1999 (139,985) (98,243)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 441,074 451,515
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 828,490 $775,399
========= ========
</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,
2000 1999
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 53,756 $ 27,642
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 17,111 14,348
Loss on disposal of fixed assets and motor business 7 31,368
Changes in operating assets and liabilities:
(Increase) in accounts receivable (14,150) (15,471)
Decrease (increase) in inventories 3,667 (16,906)
(Increase) in other current assets (9,941) (1,162)
(Decrease) in accounts payable (12,759) (7,942)
Increase in other current liabilities 46,014 20,518
Gross change in other non-current assets and liabilities 3,730 5,939
Other - net (944) (5,317)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 86,491 53,017
INVESTING ACTIVITIES
Capital expenditures (18,294) (42,183)
Acquisitions of businesses and equity investment (19,254) --
Proceeds from sale of fixed assets and motor business 462 36,407
Other 5 (154)
------------ -----------
NET CASH (USED) BY INVESTING ACTIVITIES (37,081) (5,930)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 24,704 98,618
Payments on short-term borrowings (26,334) (95,661)
Notes payable to banks - net (567) 3,856
Proceeds from long-term borrowings 53,255 34,871
Payments on long-term borrowings (39,418) (35,656)
Purchase of shares for treasury (41,741) (58,923)
Cash dividends paid (12,182) (11,211)
Other (94) (493)
------------ -----------
NET CASH (USED) BY FINANCING ACTIVITIES (42,377) (64,599)
Effect of exchange rate changes on cash and cash equivalents (1,124) 403
---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,909 (17,109)
Cash and cash equivalents at beginning of period 8,675 39,095
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,584 $ 21,986
======== ========
</TABLE>
See notes to these consolidated financial statements.
5
<PAGE> 6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
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
accounting principles generally accepted in the United States 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 six month periods ended June 30, 2000 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the information
and notes required by accounting principles generally accepted in the United
States for complete financial statements.
The Company has reclassified distribution costs from selling, general &
administrative expenses to cost of goods sold. Those two line items on the
consolidated income statement have been restated for 1999 to conform to current
year classification.
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, 1999.
NOTE B - EARNINGS PER SHARE
Basic and diluted earnings per share were computed as follows:
<TABLE>
<CAPTION>
(Dollars and shares in thousands, except per share amounts) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 29,358 $ 23,335 $ 53,756 $ 27,642
======== ======== ======== ========
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 42,331 45,285 43,011 45,930
Effect of dilutive securities -
Employee stock options 37 156 54 141
-------- -------- --------- --------
Denominator for diluted earnings per share -
Adjusted weighted-average shares 42,368 45,441 43,065 46,071
======== ======== ======== ========
Basic earnings per share $0.69 $0.51 $1.25 $0.60
Diluted earnings per share $0.69 $0.51 $1.25 $0.60
</TABLE>
6
<PAGE> 7
NOTE C - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 29,358 $ 23,335 $ 53,756 $ 27,642
Other comprehensive income:
Change in currency translation adjustment (3,682) (2,822) (10,484) (11,121)
--------- --------- -------- --------
Comprehensive income $ 25,676 $ 20,513 $ 43,272 $ 16,521
======== ======== ======== ========
</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 - ACCRUED EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits at June 30, 2000 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, 2000:
Net sales to unaffiliated customers $181,011 $ 50,458 $ 42,769 $ -- $274,238
Inter-segment sales 16,134 4,360 5,041 (25,535) --
---------- ---------- ---------- ---------- --------
Total $197,145 $ 54,818 $ 47,810 $ (25,535) $274,238
======== ======== ======== ========= ========
Income before interest and income taxes $ 42,311 $ 3,745 $ 2,364 $ 82 $ 48,502
Interest income 128
Interest expense (2,362)
-----------
Income before income taxes $ 46,268
=========
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
=========
</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, 2000:
Net sales to unaffiliated customers $373,247 $ 98,099 $ 84,696 $ -- $556,042
Inter-segment sales 34,656 7,365 11,020 (53,041) --
-------- -------- -------- -------- --------
Total $407,903 $105,464 $ 95,716 $(53,041) $556,042
======== ======== ======== ======== ========
Income before interest and income taxes $ 76,909 $ 7,081 $ 4,720 $ -- $ 88,710
Interest income 264
Interest expense (4,333)
--------
Income before income taxes $ 84,641
========
Total assets $548,853 $190,910 $158,779 $(70,052) $828,490
======== ======== ======== ========= ========
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
======== ======== ======== ======== ========
</TABLE>
Included in the United States segment for the three- and six-months ended June
30, 2000 was a net gain of $10.2 million ($6.3 million after-tax) principally
due to a settlement of a dispute with one of the Company's product liability
insurance carriers. Included in the United States 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 H to these consolidated financial statements.
NOTE G - ACQUISITIONS
In January 2000, the Company purchased a 35% interest in Kuang Tai, the leading
welding wire producer in the Taiwan and mainland Chinese welding markets, for
$16.7 million in cash. The Company accounts for its investment in Kuang Tai
under the equity method.
In February 2000, the Company purchased 100% of the Italian-based C.I.F.E. Spa,
the market leader in Europe in the production of MIG wire for the arc welding
industry. The total cost of this acquisition was $2.5 million, plus debt assumed
of $10.1 million, and was accounted for as a purchase.
NOTE H - 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 attributable to the motor business for the
two- and five-month periods ended May 28, 1999 were $8.6 million and $21.7
million, respectively. The corresponding operating results were not material.
8
<PAGE> 9
NOTE I - NEW ACCOUNTING PRONOUNCEMENT
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement, along with its amendments SFAS No. 137 and
SFAS No. 138, will become effective for the Company for fiscal year 2001. The
Company is evaluating the effect of these Statements on its accounting and
reporting policies, but does not presently expect adoption to have a material
impact on the Company's consolidated financial statements.
NOTE J - PENDING ACQUISITION
On April 26, 2000, the Company made a recommended cash offer in the United
Kingdom to purchase all of the outstanding shares of Charter plc, a British
industrial holding company, for approximately $716 million in cash (using an
estimated exchange rate of $1.52 to (pound)1). The total cost of the
transaction, including refinanced debt, is expected to be approximately $1.2
billion and will be financed by committed bank facilities. The Company has
ceased dividend payments pursuant to the terms of the new credit agreements
until such time that acquisition debt is reduced to appropriate levels. The
Company has also suspended its share repurchase program, pending the outcome of
the proposed acquisition. The closing date of this transaction, expected to
occur during the fourth quarter of 2000, is dependent upon a number of
conditions, including regulatory approval.
NOTE K - CONTINGENCIES
The Company is a defendant or co-defendant in nine lawsuits filed in the
Superior Court of California by building owners or insurers in Los Angeles
County arising from alleged property damage claimed to have been discovered
after the Northridge earthquake of January 1994. These cases include claims for
compensatory damages and punitive damages, often without specification of
amount, relating to the sale and use of the E70T-4 category of welding
electrode. The Company has also been a defendant or co-defendant in 12 other
similar cases involving steel-frame buildings in Greater Los Angeles following
the Northridge earthquake. Six of those cases were voluntarily dismissed and
the Company has settled the six other cases. All settlement costs have been
immaterial to the Company's consolidated financial statements.
During the second quarter one of the nine pending lawsuits, WESTSIDE
ASSOCIATES V. LINCOLN ELECTRIC, went to trial. This case claimed strict
liability, negligent failure to warn, fraud, punitive damages, and an alleged
violation of California's Unfair Business Practices Act. During the trial the
court dismissed the fraud claim and the claim for punitive damages. The jury
returned a verdict in favor of the Company on claims of negligence and strict
liability for failure to warn. The plaintiff has stated that it intends to
appeal.
One or more of the plaintiffs in the nine pending lawsuits have sought relief
in amounts which, if assessed against the Company, could materially affect the
Company's results of operations or cash flows in one or more interim or annual
periods and which, if unsuccessfully defended against and not adequately
covered by insurance, could have a material adverse effect on the Company's
financial position. However, the Company believes it has meritorious defenses
to these lawsuits and intends to contest them vigorously. Based on the
Company's experience to date in litigating these claims, including the defense
verdict, the dismissals, and the immaterial settlements referenced above, and
the Company's belief that it has applicable insurance, the Company believes
resolution of these claims and proceedings, individually or in the aggregate,
will not have a material adverse impact on the Company's consolidated financial
statements.
The Company is also subject, from time to time, to a variety of civil and
administrative proceedings arising out of its normal operations, including,
without limitation, other product liability claims and health, safety and
environmental claims (including claims relating to exposures to welding fumes).
The Company believes it has meritorious defenses to these claims and intends to
contest such suits vigorously. All costs associated with these claims,
including defense and settlements, have been immaterial to the Company's
consolidated financial statements. Based on the Company's experience in
litigating these claims, including a significant number of dismissals, summary
judgments and defense verdicts in many cases and immaterial settlement amounts,
the Company believes resolution of these claims and proceedings, individually
or in the aggregate, will not have a material adverse impact on the Company's
consolidated financial statements.
9
<PAGE> 10
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 six-month periods ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended June 30,
(dollars in millions)
2000 1999
----- ----
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $ 274.2 100.0% $273.5 100.0%
Cost of goods sold 182.2 66.5% 179.9 65.8%
------- ------- ------ -------
Gross profit 92.0 33.5% 93.6 34.2%
Selling, general & administrative expenses 54.4 19.8% 56.9 20.8%
------- ------- ------ -------
Operating income 37.6 13.7% 36.7 13.4%
Interest income 0.1 0.0% 0.2 0.1%
Other income 10.9 4.0% 1.0 0.3%
Interest expense (2.3) (0.8%) (1.5) (0.5%)
------- ------- ------ -------
Income before income taxes 46.3 16.9% 36.4 13.3%
Income taxes 16.9 6.2% 13.1 4.8%
------- ------- ------ -------
Net income $ 29.4 10.7% $ 23.3 8.5%
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30,
(dollars in millions)
2000 1999
----- ----
Amount % of Sales Amount % of Sales
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Net sales $556.0 100.0% $556.4 100.0%
Cost of goods sold 367.9 66.2% 366.3 65.8%
------- ------- ------- -------
Gross profit 188.1 33.8% 190.1 34.2%
Selling, general & administrative expenses 111.1 19.9% 115.4 20.7%
Loss on disposal of motor business -- -- 32.0 5.8%
------- ------- ------- -------
Operating income 77.0 13.9% 42.7 7.7%
Interest income 0.2 0.0% 0.5 0.1%
Other income 11.7 2.1% 1.7 0.3%
Interest expense (4.3) (0.8%) (2.9) (0.5%)
------- ------- ------- -------
Income before income taxes 84.6 15.2% 42.0 7.6%
Income taxes 30.8 5.5% 14.4 2.6%
------- ------- ------- -------
Net income $ 53.8 9.7% $ 27.6 5.0%
======= ======= ====== =======
</TABLE>
Distribution costs have been reclassified from Selling, general & administrative
expenses to Cost of goods sold. All periods presented in this Management's
Discussion and Analysis have been restated to reflect this reclassification.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales for the second quarter 2000 were $274.2 million, a 0.3%
increase from $273.5 million last year. Net sales last year included $8.6
million in sales from the divested motor business. Excluding these sales from
the prior year, continuing business sales increased $9.3 million or 3.5%. The
U.S. operations had net sales of $181 million for the quarter, down 2.8% from
$186.3 million for the second quarter last year. Excluding sales of the divested
motor business, U.S. sales in the second quarter 1999 would have been $177.7
million, a year-over-year increase of 1.9%. The rate of U.S. sales growth has
slowed in the second quarter due to the softening of the industrial market
sector. Export sales from the U.S. were $15.8 million, up $0.8 million or 5.3%
from last year. Non-U.S. sales increased 6.9% to $93.2 million in the second
quarter 2000, compared with $87.2 million last year. The U.S. dollar continued
to strengthen during the second quarter 2000, which negatively impacted non-U.S.
sales, mainly in Europe. In local currencies, European sales increased
10
<PAGE> 11
14.8% from last year. The February 2000 acquisition of C.I.F.E. Spa in Italy has
contributed to the European sales increase. Sales in the rest of the world
increased 10.4% as volume in Asia and Canada improved.
GROSS PROFIT. Gross profit slipped 1.7% to $92 million for the second quarter
2000 compared with $93.6 million last year. Gross profit as a percentage of net
sales declined 0.7% to 33.5%. Excluding the results of the motor business from
the prior year, gross profit margins in the U.S. declined slightly due to
unfavorable manufacturing variances. Non-U.S. gross margins were down
year-over-year due to a change in sales mix to lower margin products and
competitive pricing pressures.
SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $2.5
million or 4.4% to $54.4 million for the second quarter 2000, compared with
$56.9 million for 1999. SG&A expense as a percentage of net sales declined to
19.8% from 20.8% in the 1999 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
administrative costs, reduced bonus expense and increased foreign currency
transaction gains. Expected bonus costs are accrued in proportion to
profitability. Reduced bonus costs are due to lower achievement versus pre-bonus
profitability objectives. The final 2000 bonus payout will be subject to
approval by the Company's Board of Directors during the fourth quarter.
OTHER INCOME. Other income for the second quarter 2000 includes a $10.2 million
gain ($6.3 million after-tax), principally related to proceeds received in
settlement of a dispute with one of the Company's product liability insurance
carriers.
INTEREST EXPENSE. Interest expense of $2.3 million in the second quarter 2000
increased more than 50% from $1.5 million for the same period last year. The
increase in interest expense corresponded to higher debt levels to fund the
share repurchase program and the acquisitions of C.I.F.E. Spa and a 35% stake in
Kuang Tai during the first quarter of 2000.
INCOME TAXES. Income taxes for the second quarter 2000 were $16.9 million on
income before income taxes of $46.3 million, an effective rate of 36.5%, as
compared with income taxes of $13.1 million on income before income taxes of
$36.4 million, or an effective rate of 35.8% for the same period in 1999. The
higher effective income tax rate is due to greater operating losses at non-U.S.
subsidiaries in the current year with no tax benefit.
NET INCOME. Net income for the second quarter 2000 increased 25.8% to $29.4
million from $23.3 million last year. Diluted earnings per share for 2000
increased to $0.69 per share from $0.51 per share in 1999. Excluding the net
gain described above, net income for the second quarter 2000 would have been
$23.1 million, or $0.54 per diluted share. The effect of foreign currency
exchange rate movements on net income was not significant.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
NET SALES. Net sales for the first half of 2000 were $556 million, a $0.4
million decrease from last year. Included in net sales last year were $21.7
million in sales from the divested motor business. Excluding these sales from
the prior year, continuing business sales increased $21.3 million or 4.0%. Net
sales for the U.S. operations were $373.2 million for the period, down 2.0% from
$381 million last year. Excluding sales of the divested motor business, U.S.
sales in the first half of 1999 would have been $359.3 million, resulting in
continuing businesses increasing 3.9%. Higher demand during the first quarter of
2000 drove the increase. However, U.S. sales growth slowed during the second
quarter of 2000 due to the softening of the industrial market sector. Export
sales from the U.S. were $31 million, down $1.2 million or 3.7% from last year.
U.S. exports have been negatively impacted by the strengthening of the U.S.
dollar. Non-U.S. sales increased 4.2% to $182.8 million in the first half of
2000, compared with $175.4 million last year. The strengthening of the U.S.
dollar during the first half of 2000 negatively impacted non-U.S. sales, most
significantly in Europe. In local currencies, European sales increased 12.1%
from last year. The February 2000 acquisition of C.I.F.E. Spa in Italy has
contributed to the European sales increase. Sales in the rest of the world
increased 8.7% as sales volumes increase in Asia, Canada and Mexico from the
additional manufacturing capacity added during the last two years.
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GROSS PROFIT. Gross profit declined 1.1% to $188.1 million for the first half of
2000 compared with $190.1 million last year. Gross profit as a percentage of net
sales dropped 0.4% to 33.8%. Excluding the results of the motor business, U.S.
gross profit margins declined slightly due to unfavorable manufacturing
variances. Non-U.S. gross margins were down year-over-year due to a change in
sales mix to lower margin products, competitive pricing pressures and rising raw
materials cost.
SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $4.3
million or 3.7% to $111.1 million for the first half of 2000, compared with
$115.4 million for 1999. SG&A expense as a percentage of net sales declined to
19.9% from 20.7% in the 1999 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
administrative and research and development costs, reduced bonus costs and
increased foreign currency transaction gains. Expected bonus costs are accrued
in proportion to profitability. Reduced bonus costs are due to lower achievement
versus pre-bonus profitability objectives. The final 2000 bonus payout will be
subject to approval by the Company's Board of Directors during the fourth
quarter.
LOSS ON DISPOSAL OF MOTOR BUSINESS. On May 28, 1999, the Company sold its 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 reflecting
the loss on the sale of its motor business assets. Sales of the motor business
for the five-month period ended May 28, 1999 were $21.7 million. The
corresponding operating results were not material.
OTHER INCOME. Other income for the first half of 2000 includes a $10.2 million
gain ($6.3 million after-tax), principally related to proceeds received in
settlement of a dispute with one of the Company's product liability insurance
carriers.
INTEREST EXPENSE. Interest expense increased 47.7% to $4.3 million in 2000
compared with $2.9 million for the same period last year. The increase in
interest expense was the result of higher borrowings to fund the share
repurchase program and the acquisitions of C.I.F.E. Spa and a 35% interest in
Kuang Tai.
INCOME TAXES. Income taxes for the first half of 2000 were $30.8 million on
income before income taxes of $84.6 million, an effective rate of 36.5%, as
compared with income taxes of $14.4 million on income before income taxes of $42
million, or an effective rate of 34.2% for the same period in 1999. Excluding
the charge for the disposal of the motor business, the effective income tax rate
would have been 36.0% for the first half of 1999.
NET INCOME. Net income for the first six months of 2000 increased 94.5% to $53.8
million from $27.6 million last year. Excluding the gain on the insurance
settlement from 2000 and the charge for the motor disposal from 1999, net income
would have been $47.5 million and $47.3 million in 2000 and 1999, respectively;
diluted earnings per share would have increased to $1.10 per share in 2000 from
$1.02 per share in 1999. 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, 2000
was $86.5 million compared with $53 million for 1999. Higher cash flow from
operations is due to improvements in working capital management, principally
inventory and the timing of income tax payments.
The Company's ratio of total debt to total capitalization increased to 19.3% at
June 30, 2000 from 14.3% at December 31, 1999. Additional debt was accumulated
during the first quarter of 2000 to fund share repurchases, an equity investment
and acquisitions. At the end of the second quarter 2000, the Company received
proceeds of a settlement related to a legal dispute with one of its product
liability insurance carriers. These proceeds were used to pay down short-term
and long-term borrowings. During the first half of 2000, the Company purchased
2,178,130 shares of its common stock at a cost of $42.2 million. Since the share
repurchase program was first begun in September 1998, the Company has purchased
a total of 7,125,380 shares of its common stock on the open market at a cost of
$143.1 million through April 2000. On May 2, 2000, the share repurchase program
was suspended, pending the outcome of the proposed acquisition of Charter plc.
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<PAGE> 13
Capital expenditures during the first half of 2000 decreased significantly from
$42.2 million in 1999, to $18.3 million in 2000. The decline was largely related
to spending on information systems in the U.S. and Europe in 1999 that did not
recur in 2000. During the first half of 2000, the Company acquired a 35%
interest in Kuang Tai, a Taiwan-based manufacturer of welding wire for $16.7
million and 100% of C.I.F.E. Spa, an Italian-based manufacturer of MIG wire for
$2.5 million, plus assumed debt of $10.1 million.
The Company paid cash dividends of $12.2 million or $0.28 per share during the
first six months of 2000, a 8.7% increase over the $11.2 million paid in the
first half of 1999.
The quarterly dividend of $0.14 per share was paid on July 14, 2000, to holders
of record on June 30, 2000. This was the final dividend payment since the
Company announced the indefinite suspension of dividends as part of the
financing arrangements related to the pending acquisition of Charter plc.
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:
- Business Acquisition. The Company currently plans to complete its
acquisition of the shares of Charter plc during the fourth quarter of 2000.
While management believes the acquisition presents an excellent strategic
business opportunity, there is also a significant degree of uncertainty
involved in major acquisitions, particularly given that Charter plc holds
two principal business units: the ESAB welding and cutting business, and
the Howden industrial fan business. The Company expects to dedicate
significant resources towards a successful acquisition. To finance the
acquisition, the Company will initially be highly leveraged and there are
restrictions in the applicable credit agreements on uses of cash for
capital spending and shareholder dividends.
- 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, 1999, as well as the
update in this report. See also Note K to the consolidated financial
statements for the year-ended December 31, 1999 and in this report.
- 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.
- 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 decreased the
domestic demand for arc welding products in the Company's largest market.
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<PAGE> 14
- 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
As previously reported, the Company is a defendant or co-defendant in nine
lawsuits filed in the Superior Court of California by building owners or
insurers in Los Angeles County arising from alleged property damage claimed to
have been discovered after the Northridge earthquake of January 1994. These
cases generally include claims for compensatory damages and punitive damages,
often without specification of amount, relating to the sale and use of the
E70T-4 category of welding electrode.
During the second quarter one of the nine pending lawsuits, WESTSIDE
ASSOCIATES V. LINCOLN ELECTRIC, went to trial. This case claimed strict
liability, negligent failure to warn, fraud, punitive damages, and an alleged
violation of California's Unfair Business Practices Act. During the trial the
court dismissed the fraud claim and the claim for punitive damages. The jury
returned a verdict in favor of the Company on claims of negligence and strict
liability for failure to warn. The plaintiff has stated that it intends to
appeal.
On June 30, 2000, the Company settled its previously reported dispute with St.
Paul Fire and Marine Insurance Company relating to occurrence-based policies
sold to the Company prior to 1985 and their applicability to welding fume cases.
The settlement included a lump sum payment for past misallocation and also
provides the Company with ongoing support for defense and indemnity relating to
current and future liability cases.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
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 2, 2000.
(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 2003:
<TABLE>
<CAPTION>
Votes
Votes for Against
---------- -------
<S> <C> <C>
David C. Lincoln 22,708,979 332,327
Henry L. Meyer III 22,701,974 319,332
Frank L. Steingass 22,728,944 312,362
John M. Stropki, Jr. 22,757,904 283,402
</TABLE>
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<PAGE> 15
(ii) AMENDMENTS TO THE COMPANY'S CODE OF REGULATIONS. The shareholders
approved amendments to the following provisions of the Company's Code
of Regulations:
- Article II, Paragraph 3 - to permit notice of shareholder
meetings to be given by any means allowed by Ohio law;
- Article II, Paragraph 5 - to permit proxies to be voted by any
means allowed by Ohio law; and
- Article VI, Paragraph 1 - to permit the Directors to create
Committees as allowed by Ohio law.
Votes For 18,123,395
Votes Against 608,585
Shares Abstain 112,008
(iii) STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS. The shareholders ratified
the adoption of the Stock Option Plan for Non-Employee Directors (the
"Plan"), which allows for the grant of stock options for the purchase
of up to an aggregate of 500,000 Common Shares. The Plan replaced the
Non-Employee Directors' Restricted Stock Plan, which was terminated.
Votes For 21,321,967
Votes Against 1,671,981
Shares Abstain 47,358
(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, 2000.
Votes For 22,998,767
Votes Against 25,199
Shares Abstain 27,370
Item 5. Other Information - None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. 10 (p) - Amended and Restated Credit and Guaranty Agreement
dated as of July 20, 2000 among Lincoln Electric Holdings, Inc., the
Lincoln Electric Company, certain subsidiaries of Lincoln Electric
Holdings, Inc., Lincoln Electric Global Limited, the lenders listed
therein, Credit Suisse First Boston Corporation, J.P. Morgan
Securities, Inc. and Morgan Guaranty Trust Company of New York.
Exhibit No. 10 (q) - Bridge Loan Agreement dated as of April 25, 2000
among Lincoln Electric Holdings, Inc., J.P. Morgan Ventures Corporation
and Credit Suisse First Boston Corporation.
Exhibit No. 10 (r) - Amendment Number One to the Bridge Loan Agreement
dated July 20, 2000 by and among Lincoln Electric Holdings, Inc., J.P.
Morgan Ventures Corporation and Credit Suisse First Boston Corporation.
Exhibit No. 27 - Financial Data Schedule.
(b) Reports on Form 8-K - None.
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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 14, 2000
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