<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, 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
September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 251,198 $ 265,937 $ 807,240 $ 822,303
Cost of goods sold 170,047 174,704 538,001 540,915
--------- --------- --------- ---------
Gross profit 81,151 91,233 269,239 281,388
Selling, general & administrative expenses 50,616 54,131 161,668 169,521
Loss on disposal of motor business -- -- -- 32,015
--------- --------- --------- ---------
Operating income 30,535 37,102 107,571 79,852
Other income / (expense):
Interest income 162 419 426 917
Other (expense) income (4,157) 190 7,517 1,913
Interest expense (1,858) (1,300) (6,191) (4,234)
--------- --------- --------- ---------
Total other income / (expense) (5,853) (691) 1,752 (1,404)
--------- --------- --------- ---------
Income before income taxes 24,682 36,411 109,323 78,448
Income taxes 9,007 13,108 39,892 27,503
--------- --------- --------- ---------
Net income $ 15,675 $ 23,303 $ 69,431 $ 50,945
========= ========= ========= =========
Basic earnings per share $ 0.37 $ 0.52 $ 1.62 $ 1.11
Diluted earnings per share $ 0.37 $ 0.51 $ 1.62 $ 1.11
Cash dividends declared per share $ 0.00 $ 0.12 $ 0.28 $ 0.36
</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,
2000 1999
---------- ----------
(UNAUDITED) (NOTE A)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,144 $ 8,675
Accounts receivable (less allowances of $3,408 in 2000; $3,687 in 1999) 159,057 169,986
Inventories:
Raw materials and in-process 77,678 82,451
Finished goods 104,093 109,161
-------- --------
181,771 191,612
Deferred income taxes 20,238 23,311
Other current assets 44,699 33,011
-------- --------
TOTAL CURRENT ASSETS 419,909 426,595
PROPERTY, PLANT AND EQUIPMENT
Land 11,759 11,050
Buildings 127,004 119,519
Machinery, tools and equipment 415,174 419,831
-------- --------
553,937 550,400
Less: accumulated depreciation and amortization 284,025 279,610
-------- --------
269,912 270,790
OTHER ASSETS
Goodwill - net 40,138 33,263
Other 58,099 44,751
-------- --------
98,237 78,014
-------- --------
TOTAL ASSETS $788,058 $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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED) (NOTE A)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 19,342 $ 16,425
Trade accounts payable 53,531 64,482
Accrued employee compensation and benefits 67,522 32,326
Accrued expenses 14,407 15,202
Taxes, including income taxes 41,609 41,326
Dividend payable -- 6,228
Other current liabilities 25,165 28,882
Current portion of long-term debt 13,129 11,503
--------- ---------
TOTAL CURRENT LIABILITIES 234,705 216,374
Long-term debt, less current portion 48,076 47,207
Deferred income taxes 27,700 28,771
Other long-term liabilities 30,221 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 540,921 483,463
Accumulated other comprehensive income (63,402) (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 447,356 451,515
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 788,058 $ 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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 69,431 $ 50,945
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 26,111 21,087
(Gain) loss on disposal of fixed assets and motor business (955) 31,373
Changes in operating assets and liabilities:
(Increase) in accounts receivable (143) (21,477)
Decrease (increase) in inventories 7,165 (22,358)
(Increase) in other current assets (12,143) (4,614)
(Decrease) increase in accounts payable (13,202) 259
Increase in other current liabilities 37,434 34,757
Gross change in other non-current assets and liabilities 1,755 7,818
Other - net 5,786 (2,946)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 121,239 94,844
INVESTING ACTIVITIES
Capital expenditures (25,212) (57,265)
Acquisitions of businesses and equity investment (19,258) --
Proceeds from sale of fixed assets and motor business 1,621 35,712
Other 363 162
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (42,486) (21,391)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 34,760 111,845
Payments on short-term borrowings (36,749) (108,444)
Notes payable to banks - net 5,952 290
Proceeds from long-term borrowings 54,294 34,872
Payments on long-term borrowings (70,127) (36,206)
Purchase of shares for treasury (41,741) (62,211)
Cash dividends paid (18,108) (16,647)
Other (94) (494)
--------- ---------
NET CASH (USED) BY FINANCING ACTIVITIES (71,813) (76,995)
Effect of exchange rate changes on cash and cash equivalents (1,471) (1,528)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,469 (5,070)
Cash and cash equivalents at beginning of period 8,675 39,095
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,144 $ 34,025
========= =========
</TABLE>
See notes to these consolidated financial statements.
5
<PAGE> 6
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 nine month periods ended September 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 Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $15,675 $23,303 $69,431 $50,945
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
Weighted-average shares outstanding 42,330 45,218 42,784 45,693
Effect of dilutive securities -
Employee stock options 15 101 31 124
------- ------- ------- -------
Denominator for diluted earnings per share -
Adjusted weighted-average shares outstanding 42,345 45,319 42,815 45,817
======= ======= ======= =======
Basic earnings per share $ 0.37 $ 0.52 $ 1.62 $ 1.11
Diluted earnings per share $ 0.37 $ 0.51 $ 1.62 $ 1.11
</TABLE>
6
<PAGE> 7
NOTE C - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
(Dollars in thousands) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 15,675 $ 23,303 $ 69,431 $ 50,945
Other comprehensive income:
Change in currency translation adjustment (9,394) 1,706 (19,878) (9,415)
-------- -------- -------- --------
Comprehensive income $ 6,281 $ 25,009 $ 49,553 $ 41,530
======== ======== ======== ========
</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 September 30, 2000 include
provisions for year-end bonuses and related payroll taxes of approximately $45
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, 2000:
Net sales to unaffiliated customers $ 167,394 $ 41,417 $ 42,387 $ -- $ 251,198
Inter-segment sales 15,356 2,688 5,655 (23,699) --
--------- --------- --------- --------- ---------
Total $ 182,750 $ 44,105 $ 48,042 $ (23,699) $ 251,198
========= ========= ========= ========= =========
Income before interest and income taxes $ 23,341 $ 107 $ 2,701 $ 229 $ 26,378
Interest income 162
Interest expense (1,858)
---------
Income before income taxes $ 24,682
=========
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
=========
</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, 2000:
Net sales to unaffiliated customers $ 540,641 $ 139,516 $ 127,083 $ -- $ 807,240
Inter-segment sales 50,012 10,053 16,675 (76,740) --
--------- --------- --------- --------- ---------
Total $ 590,653 $ 149,569 $ 143,758 $ (76,740) $ 807,240
========= ========= ========= ========= =========
Income before interest and income taxes $ 100,250 $ 7,188 $ 7,421 $ 229 $ 115,088
Interest income 426
Interest expense (6,191)
---------
Income before income taxes $ 109,323
=========
Total assets $ 524,272 $ 171,668 $ 157,335 $ (65,217) $ 788,058
========= ========= ========= ========= =========
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
========= ========= ========= ========= =========
</TABLE>
Included in the United States segment for the three months ended September 30,
2000 was a net charge of $4.4 million ($2.8 million after-tax) principally
related to costs of foreign currency options purchased in connection with the
lapsed Charter bid (see Note J). The nine-months ended September 30, 2000
included a net gain of $5.8 million ($3.5 million after-tax) reflecting proceeds
from settlement of a dispute with one of the Company's product liability
insurance carriers, offset by costs of foreign currency options purchased in
connection with the lapsed Charter bid. Included in the United States 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 H).
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 China 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
$0.43 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 five-month period ended May 28, 1999 were $21.7
million. The corresponding operating results were not material.
8
<PAGE> 9
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS
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.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which applies generally accepted accounting principles to selected revenue
recognition issues. SAB No. 101 will become effective for the Company as of the
fourth quarter of 2000. The Company has evaluated the impact of this statement
on the Company's financial statements and the adoption of SAB No. 101 will not
have a material effect on the Company's consolidated financial statements.
NOTE J - SUBSEQUENT EVENT
On October 20, 2000, the Company's offer to purchase Charter plc, a British
industrial holding company, lapsed. Therefore, the acquisition will not be
completed. As a result, the Company will take additional after-tax charges of
approximately $17 million during the fourth quarter of 2000 representing
remaining costs associated with the lapsed bid. In connection with the
acquisition process, the Company had ceased dividend payments and also suspended
its share repurchase program. Payment of dividends and the appropriateness of
share repurchases will be considered in the ordinary course of business by the
Board of Directors during the fourth quarter of 2000.
NOTE K - CONTINGENCIES
The Company is defendant or co-defendant in five 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 16 other
similar cases involving steel-frame buildings in Greater Los Angeles following
the Northridge earthquake. Nine of those cases were voluntarily dismissed, six
other cases were settled, and one case was tried to a jury, resulting in a
verdict in favor of the Company. All settlement costs have been immaterial to
the Company's consolidated financial statements.
One or more of the plaintiffs in the five 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 is 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 I - 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, 2000 and 1999:
<TABLE>
<CAPTION>
(dollars in millions) Three months ended September 30,
2000 1999
-------------------- --------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $251.2 100.0% $265.9 100.0%
Cost of goods sold 170.1 67.7% 174.7 65.7%
------ ------ ------ ------
Gross profit 81.1 32.3% 91.2 34.3%
Selling, general & administrative expenses 50.6 20.1% 54.1 20.3%
------ ------ ------ ------
Operating income 30.5 12.2% 37.1 14.0%
Interest income 0.2 0.1% 0.4 0.1%
Other income (4.1) (1.7%) 0.2 0.1%
Interest expense (1.9) (0.8%) (1.3) (0.5%)
------ ------ ------ ------
Income before income taxes 24.7 9.8% 36.4 13.7%
Income taxes 9.0 3.5% 13.1 4.9%
------ ------ ------ ------
Net income $ 15.7 6.3% $ 23.3 8.8%
====== ====== ====== ======
<CAPTION>
(dollars in millions) Nine months ended September 30,
2000 1999
-------------------- --------------------
Amount % of Sales Amount % of Sales
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Net sales $ 807.2 100.0% $822.3 100.0%
Cost of goods sold 538.0 66.7% 541.0 65.8%
------- ------ ------ ------
Gross profit 269.2 33.3% 281.3 34.2%
Selling, general & administrative expenses 161.6 20.0% 169.5 20.6%
Loss on disposal of motor business -- -- 32.0 3.9%
------- ------ ------ ------
Operating income 107.6 13.3% 79.8 9.7%
Interest income 0.4 0.1% 0.9 0.1%
Other income 7.5 0.9% 1.9 0.2%
Interest expense (6.2) (0.8%) (4.2) (0.5%)
------- ------ ------ ------
Income before income taxes 109.3 13.5% 78.4 9.5%
Income taxes 39.9 4.9% 27.5 3.3%
------- ------ ------ ------
Net income $ 69.4 8.6% $ 50.9 6.2%
======= ======= ====== ======
</TABLE>
Distribution costs have been reclassified from Selling, general & administrative
expenses to Cost of goods sold. 1999 data presented in this Management's
Discussion and Analysis has been restated to reflect this reclassification.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES. Net sales for the third quarter 2000 were $251.2 million, a decline
of 5.5% from $265.9 million last year. The U.S. operations had net sales of
$167.4 million for the quarter, a decrease of 8.8% from $183.5 million for the
third quarter last year. This decline was due to lower demand from industrial
customers and distributors. Export sales from the U.S. were $15.8 million, a
decrease of $1.4 million or 8.1% from last year. Non-U.S. sales increased 1.7%
to $83.8 million in the third quarter 2000, from $82.4 million last year. The
strengthening of the U.S. dollar, particularly against the Euro, continued to
negatively impact non-U.S. sales during the third quarter 2000. In local
currencies, European sales increased 7.5% over 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 13.6% as volume in Asia,
Latin America and Canada improved from the addition of new manufacturing
capacity over the last two years.
10
<PAGE> 11
GROSS PROFIT. Gross profit declined 11.1% to $81.1 million for the third quarter
2000 compared with $91.2 million last year. Gross profit as a percentage of net
sales decreased 2.0% to 32.3%. Gross profit margins in the U.S. declined
slightly due to under-recovered overhead from the low sales volumes and reduced
production. 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 lower
plant utilization in Europe.
SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $3.5
million or 6.5% to $50.6 million for the third quarter 2000, compared with $54.1
million for 1999. SG&A expense as a percentage of net sales declined to 20.1%
from 20.3% 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 continuing expense reduction
efforts and reduced bonus expense offset somewhat by increased foreign currency
transaction losses. 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 third quarter 2000 included a net $4.4
million charge ($2.8 million after-tax), principally related to costs of foreign
currency options purchased in connection with the lapsed Charter bid.
INTEREST EXPENSE. Interest expense of $1.9 million in the third quarter 2000
increased from $1.3 million for the same period last year. The increase in
interest expense corresponded to higher debt levels incurred earlier in 2000 to
fund share repurchases through April 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 third quarter 2000 were $9.0 million on
income before income taxes of $24.7 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 36.0% for the same period in 1999.
NET INCOME. Net income for the third quarter 2000 decreased 32.6% to $15.7
million from $23.3 million last year. Diluted earnings per share for 2000
declined to $0.37 per share from $0.51 per share in 1999. Excluding the net
charges from other income as described above, net income for the third quarter
2000 would have been $18.5 million, or $0.44 per diluted share. The effect of
foreign currency exchange rate movements on net income was not material.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
NET SALES. Net sales for the first nine months of 2000 were $807.2 million, a
$15.1 million decrease from the prior 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 $6.7 million or 0.8%.
Net sales for the U.S. operations were $540.6 million for the period, down 4.2%
from $564.5 million last year. Excluding sales of the divested motor business,
U.S. sales in the first nine months of 1999 would have been $542.7 million,
resulting in continuing businesses declining 0.4%. Market growth experienced
during the first quarter has decreased as industrial customer and distributor
demand has slowed due to market softness. Export sales from the U.S. were $46.8
million, down $2.6 million or 5.3% from last year. U.S. exports have been
negatively impacted by the strengthening of the U.S. dollar and the shifting of
product sourcing of Latin American customers to other Company locations outside
the U.S. The Company's non-U.S. sales increased 3.4% to $266.6 million in the
first nine months of 2000, compared with $257.8 million last year. The
strengthening of the U.S. dollar during the first nine months of 2000 negatively
impacted non-U.S. sales, mostly in Europe. In local currencies, European sales
increased 10.6% from last year. The February 2000 acquisition of C.I.F.E. Spa in
Italy was the principal factor in the European sales increase. Sales in the rest
of the world increased 10.3% (11.5% in local currencies). Manufacturing capacity
expansion in Canada, Mexico and Asia have positively impacted sales for 2000.
GROSS PROFIT. Gross profit declined 4.3% to $269.2 million for the first nine
months of 2000 compared with $281.3 million last year. Gross profit as a
percentage of net sales dropped 0.9% from the prior year to 33.3% in 2000.
Excluding the results of the motor business, U.S. gross profit margins declined
slightly due to unfavorable manufacturing variances
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caused by lower plant utilization. Non-U.S. gross margins were also down
year-over-year because of lower plant utilization, competitive pricing pressures
in developing markets and rising raw materials cost.
SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses declined $7.9
million or 4.7% to $161.6 million for the first nine months of 2000, compared
with $169.5 million for 1999. SG&A expense as a percentage of net sales improved
to 20.0% from 20.6% 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 selling, marketing and administrative costs and reduced bonus
costs. 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 $0.43 per diluted share on a year-to-date basis) 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 nine months of 2000 includes a $5.8 million
gain ($3.5 million after-tax), related to proceeds received in settlement of a
dispute with one of the Company's product liability insurance carriers net of
charges related to the cost of foreign currency options purchased in connection
with the lapsed Charter bid.
INTEREST EXPENSE. Interest expense increased 47.6% to $6.2 million in 2000
compared with $4.2 million for the same period last year. The increase in
interest expense was the result of higher borrowings incurred earlier in 2000 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 nine months of 2000 were $39.9 million
on income before income taxes of $109.3 million, an effective rate of 36.5%, as
compared with income taxes of $27.5 million on income before income taxes of
$78.4 million, or an effective rate of 35.1% 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 nine months of 1999.
NET INCOME. Net income for the first nine months of 2000 increased 36.3% to
$69.4 million from $50.9 million last year. Excluding non-recurring items from
2000 and the charge for the motor disposal from 1999, net income would have been
$65.9 million in 2000 and $70.6 million in 1999 and diluted earnings per share
would have been flat between 2000 and 1999 at $1.54 per share. The effect of
foreign currency exchange rate movements on net income was not material.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operating activities for the nine months ended September 30,
2000 improved 27.8% to $121.2 million compared with $94.8 million in 1999.
Higher cash flow from operations is due to improvements in inventory and
receivables management, the timing of income tax payments and the proceeds from
an insurance settlement.
The Company's ratio of total debt to total capitalization increased to 15.3% at
September 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 an acquisition. 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 nine months 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.
Capital expenditures during the first nine months of 2000 decreased
significantly from $57.3 million through September 1999, to $25.2 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. In addition, the Company is
no longer expanding plant production capacity as
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market growth has slowed. During the first nine months 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 $18.1 million or $0.42 per share during the
first nine months of 2000.
A quarterly dividend of $0.14 per share was paid on July 14, 2000, to holders of
record on June 30, 2000. This was the last dividend payment since the Company
announced the indefinite suspension of dividends as part of the financing
arrangements related to the lapsed Charter bid.
Payment of dividends and the appropriateness of share repurchases will be
considered in the ordinary course of business by the Board of Directors during
the fourth quarter of 2000.
SUBSEQUENT EVENT
On October 20, 2000, the Company's offer to purchase Charter plc, a British
industrial holding company, lapsed. Therefore, the acquisition will not be
completed. As a result, the Company will take additional after-tax charges of
approximately $17 million during the fourth quarter of 2000 representing
remaining costs associated with the lapsed bid.
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:
- 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.
- 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.
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- 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 five
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 and punitive damages, often
without specification of amount, relating to the sale and use of the E70T-4
category of welding electrode.
During the third quarter final judgement in favor of the Company was entered in
WESTSIDE ASSOCIATES V. LINCOLN ELECTRIC, a case similar to those five mentioned
in the preceding paragraph which was tried in the second quarter. Plaintiff
decided not to appeal. Three other similar cases were also voluntarily dismissed
in the third quarter.
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. Due to current work related
responsibilities at Xerox Corporation, Ursula M. Burns resigned as a
Director of the Company effective October 10, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) 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
November 14, 2000
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