1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For 9 Months Ended Commission File
September 30, 1994 No. 0-1402
THE LINCOLN ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
State of Incorporation: I.R.S. Employer
Ohio Ident. No:34-0359955
Shares of Common Stock Outstanding: 10,514,324
Shares of Class A Common Stock Outstanding: 499,840
Address of Principal Executive Offices:
22801 St. Clair Avenue
Cleveland, Ohio 44117
Registrant's Telephone Number:
(216) 481-8100
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
----- -----
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STATEMENTS OF CONSOLIDATED OPERATIONS - "UNAUDITED"
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(In thousands of dollars except per share data)
Quarter Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- -------
Net sales $230,752 $209,173 $675,450 $635,782
Cost of goods sold 140,848 128,873 413,264 396,311
-------- -------- -------- --------
Gross profit 89,904 80,300 262,186 239,471
Distribution cost/selling,
general & administrative
expenses 66,470 66,601 193,312 201,207
------- ------- ------- --------
Operating income 23,434 13,699 68,874 38,264
Other income/(expense):
Interest income 414 399 1,006 1,313
Other income 1,455 313 2,712 1,450
Interest expense (3,804) (3,952) (11,814) (13,295)
------ ------ ------- -------
Total other income/(expense) (1,935) (3,240) (8,096) (10,532)
------ ------ ------- -------
Income before income taxes
and cumulative effect of
accounting change 21,499 10,459 60,778 27,732
Provision for income taxes 9,830 6,753 26,395 18,225
------ ------- ------- -------
Income before cumulative
effect of accounting change 11,669 3,706 34,383 9,507
Cumulative effect to
January 1, 1993 of change
in method of accounting for
income taxes (Note E) 2,468
-------- -------- -------- --------
Net income $ 11,669 $ 3,706 $ 34,383 $ 11,975
======== ======== ======== ========
Net income per share:
Income before cumulative
effect of accounting
change $ 1.06 $ 0.34 $ 3.14 $ .87
Cumulative effect to
January 1, 1993 of change
in method of accounting
for income taxes 0.23
-------- -------- -------- --------
Net income $ 1.06 $ 0.34 $ 3.14 $ 1.10
======== ======== ======== ========
Dividends paid per share $ 0.18 $ 0.18 $ 0.54 $ 0.54
======== ======== ======== ========
Average number of shares
outstanding: (000's) 11,014 10,892 10,957 10,844
====== ====== ====== ======
<FN>
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(In thousands of dollars)
"Unaudited"
SEPTEMBER 30, 1994 DECEMBER 31, 1993
------------------ -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 21,310 $ 20,381
Accounts receivable (less allowance
for doubtful accounts of $4,535 in
1994 and $6,258 in 1993) 134,331 110,504
Inventories: (Note C)
Raw materials and in-process 72,234 66,987
Finished goods 81,483 76,698
-------- --------
153,717 143,685
Deferred income taxes 22,109 42,960
Prepaid expenses 2,264 3,241
Other current assets 6,841 4,937
-------- --------
TOTAL CURRENT ASSETS 340,572 325,708
OTHER ASSETS
Notes receivable from employees 3,408 4,747
Goodwill 39,871 39,732
Other 21,995 19,665
-------- --------
65,274 64,144
PROPERTY, PLANT AND EQUIPMENT
Land 13,228 12,802
Buildings 117,848 113,927
Machinery, tools and equipment 305,475 279,933
-------- --------
436,551 406,662
Less allowances for depreciation
and amortization (257,715) (236,971)
-------- --------
178,836 169,691
-------- --------
TOTAL ASSETS $584,682 $559,543
======== ========
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"Unaudited"
SEPTEMBER 30, 1994 DECEMBER 31, 1993
------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 47,577 $ 43,471
Notes payable to banks 15,456 23,198
Salaries, wages and amounts withheld 12,226 12,779
Taxes, including income 26,605 23,061
Dividends payable 1,995 1,959
Current portion of long-term debt 1,772 10,200
Accrued restructuring charges 14,039 29,618
Other current liabilities (Note D) 71,994 31,569
-------- --------
TOTAL CURRENT LIABILITIES 191,664 175,855
Long-term debt, less current portion 179,198 216,915
Deferred taxes, long-term 5,251 6,128
Other long-term liabilities 18,395 9,221
Minority interest 6,773 7,929
Shareholders' equity
Common Stock 2,103 2,076
Common Class A Capital Stock 100 100
Additional paid-in-capital 24,799 22,926
Retained earnings 165,764 137,307
Cumulative translation adjustments (9,365) (18,914)
-------- --------
183,401 143,495
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $584,682 $559,543
======== ========
<FN>
See notes to consolidated financial statements.
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STATEMENTS OF CONSOLIDATED CASH FLOWS - "UNAUDITED"
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(In thousands of dollars)
Nine Months Ended
SEPTEMBER 30
----------------------
1994 1993
------- --------
OPERATING ACTIVITIES
Net income $34,383 $ 11,975
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,903 21,712
Cumulative effect of accounting change (2,468)
Provision (Benefit) for deferred income taxes 19,974 (487)
Minority interest 364 (336)
Change in operating assets and liabilities:
(Increase) in accounts receivable (19,962) (14,874)
(Increase) decrease in inventories (4,591) 7,199
(Increase) in other current assets (1,018) (12,601)
Increase in accounts payable 2,256 742
Increase in other current liabilities 26,462 36,054
Gross change in other noncurrent assets (3,003) 7,446
Gross change in other noncurrent liabilities 5,999 4,021
Other-net 2,836 429
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 83,603 58,812
INVESTING ACTIVITIES
Purchases of property, plant and equipment (23,223) (11,697)
Proceeds from sale of property, plant and equipment 2,614 2,025
Acquisition of minority interest (8,518)
------- -------
NET CASH (USED) BY INVESTING ACTIVITIES (20,609) (18,190)
FINANCING ACTIVITIES
Proceeds from the sale of common stock under the
Employees' Stock Purchase Plan 1,438 679
Short-term borrowings-net (6,130) 33,181
Repayment on short-term borrowings, maturities
greater than three months (24,734) (19,512)
Proceeds on short-term borrowings, maturities
greater than three months 22,476
Proceeds from long-term borrowings 232,286 23,746
Repayments on long-term borrowings (282,378) (69,032)
Dividends paid (5,903) (5,832)
Other (429) (344)
-------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (63,374) (37,114)
Effect of exchange rate changes on cash and
cash equivalents 1,309 (1,275)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 929 2,233
Cash and cash equivalents at beginning of period 20,381 20,627
------- -------
Cash and cash equivalents at end of period $ 21,310 $ 22,860
======= =======
Cash paid during the period: Interest $ 12,484 $ 15,281
Income taxes $ 5,107 $ 10,325
<FN>
See notes to consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS "UNAUDITED"
(In thousands of dollars except per share data)
September 30, 1994
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and contain the adjustments
(consisting of only normal recurring accruals) necessary to fairly present the
financial position, results of operations and changes in cash flows for the
interim periods. Results of operations for any interim period are not
necessarily indicative of the results to be expected for the year. 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, 1993.
NOTE B - RECLASSIFICATIONS
Certain reclassifications have been made to amounts previously presented to
conform with the current reporting presentations.
NOTE C - INVENTORY VALUATION
An actual valuation of inventory under the LIFO method can be made only at the
end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs. Since
these are subject to many forces beyond management's control, interim results
are subject to the final year-end LIFO inventory valuation.
NOTE D - OTHER CURRENT LIABILITIES
Other current liabilities includes provisions for anticipated year-end bonus,
Employees' Stock Ownership Plan and contributions. These expenditures are
discretionary each year as determined by the Board of Directors
NOTE E - CHANGE IN THE METHOD OF ACCOUNTING FOR INCOME TAXES
Effective January 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Under Statement No. 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Prior to the adoption of Statement No. 109, income tax expense was
determined using the deferred method. Deferred tax expense was based on items
of income and expense that were reported in different years in the financial
statements and tax returns and were measured at the tax rate in effect in the
year the difference originated.
As permitted by Statement No. 109, the Company has elected not to restate the
financial statements of any prior years. The effect of the change on pretax
income for the nine months ended September 30, 1993 was not material; however,
the cumulative effect of the change increased net income by $2,468 or $.23 per
share.
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Part 1 - Item 2
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars except per share data)
Net sales for the quarter ended September 30, 1994 were $230,800 or 10.3%,
higher than the $209,200 reported for the similar prior year period. For the
first nine months of 1994, net sales were $675,500, or 6.2%, higher than the
$635,800 net sales reported for the prior year's nine-month period.
Domestic net sales were up 17.3%, or $25,000, for the third quarter of 1994,
and 17.7%, or $72,300, for the first nine months of 1994 compared to the
similar periods in 1993. The domestic market is expected to continue its
positive growth throughout the remainder of the year. The Company's foreign
markets experienced a decrease of 5.3%, or $3,400, in net sales for the third
quarter of 1994 compared to the similar period in 1993 and for the first nine
months of 1994, net sales were down 14.3%, or $32,600, compared to the prior
year's similar nine month period. The decline in foreign sales is the direct
result of the closing of certain manufacturing facilities, principally in
Germany and South America at the end of 1993. Although a portion of these
sales were absorbed by other foreign manufacturing facilities, the
comparability between periods has been affected. Overall operating results for
the nine months of 1994 have been positively impacted by the Company's 1993
decision to close several manufacturing facilities in an effort to reduce
foreign operating losses. Management anticipates that these effects will
continue throughout the remainder of 1994.
Gross profit was $89,900 (39.0% of sales) in the third quarter of 1994, as
compared with $80,300 (38.4% of sales) for the same period in 1993. Gross
profit for the first nine months of 1994 was $262,200 (38.8% of sales) as
compared with $239,500 (37.7% of sales) for the similar period in 1993.
Improvement in gross profit was largely attributable to the domestic sales
volume increases, coupled with the effects of improved absorption of
manufacturing costs and the relative stability of these costs in relation to
the price increases realized during 1994. In addition, overall gross profit
was enhanced by the effects of improved efficiencies of foreign operations and
manufacturing facility closings at the end of 1993.
Distribution cost/selling, general and administrative expenses were $66,500
(28.8% of sales) for the third quarter of 1994 and $66,600 (31.8% of sales) for
the same period in 1993. For the nine months ended September 30, 1994,
distribution cost/selling, general and administrative expenses were $193,300
(28.6% of sales) compared to $201,200 (31.6% of sales) for the similar period
in 1993. The decrease of distribution cost/selling, general and administrative
expenses in relation to sales volume evidences the effect of prior year's
restructuring and management's measures in the current year to control
operating costs throughout its foreign operations.
Operating income increased to $23,400 (10.1% of sales) in the third quarter of
1994, as compared with $13,700 (6.5% of sales) for the prior period. For the
nine months ended September 30, 1994, operating income was $68,900 (10.2% of
sales) as compared with $38,300 (6.0% of sales) for the comparable prior year
period.
Income taxes for the quarter ended September 30, 1994 were $9,800 on income
before income taxes of $21,500, compared with income taxes of $6,800 on similar
income in 1993 of $10,500. For the nine months ended September 30, 1994,
income taxes were $26,400 on income before income taxes of $60,800, compared
with $18,200 on income before income taxes and cumulative effect of accounting
change of $27,700 for the comparable prior period of 1993. The decrease in the
effective tax rate is principally the result of the decrease in the amount of
foreign losses without tax benefits made possible by the prior year's
restructuring.
Net income increased to $11,700, or $1.06 per share, for the quarter ended
September 30, 1994 as compared with $3,700, or $.34 per share, for the prior
year period. Net income for the first nine months of 1994 was $34,400, or
$3.14 per share, as compared with $9,500, or $.87 per share, for the comparable
year-ago period, excluding the cumulative effect of accounting change of
$2,500, or $.23 per share, reported in 1993.
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MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Continued (In thousands of dollars)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the nine months ended September 30, 1994 and 1993
are presented in the consolidated statements of cash flows. Cash provided from
operating activities for the nine months ended September 30, 1994 amounted to
$83,600 compared to $58,800 for the comparable period in 1993. Cash flows from
operations for 1994 were used primarily for net capital expenditures of
$20,600, net debt repayments of $58,500 and the payment of dividends in the
amount of $5,900. These uses of cash offset by the proceeds from other
financing activities and positive translation effects resulted in an increase
in cash and cash equivalents to $21,300 at September 30, 1994 compared to
$20,400 at December 31, 1993.
Total debt at September 30, 1994 was $196,400 compared to $250,300 at December
31, 1993. At September 30, 1994, debt was 52% of total capitalization
(shareholders' equity and debt) compared with 64% at year-end 1993. The
improvement in the ratio of debt to total capitalization was the result of the
reduction in debt and the increase in shareholders' equity as a result of the
earnings for the nine-month period ended September 30, 1994 and the cyclical
nature of the Company's cash requirements. Management points out, however,
that the payment of incentive bonuses at the end of 1994 will result in an
increase in the debt-to-equity ratio as compared to the ratio at September 30,
1994.
The ratio of current assets to current liabilities was 1.8 at the end of the
third quarter of 1994, compared to 1.9 at the prior year-end which reflects a
satisfactory liquidity position.
On October 31, 1994, the Company's Credit Agreement and 8.98% Senior Note
Agreement were amended. The Amendment, which permits an accounts receivable
financing agreement up to $50 million, extended the due date of the credit
facility to October 1, 1997 and modified certain of the terms (interest and
commitment fees) and financial covenants. The Company's borrowing capacity
under the Credit Agreement was $230,000 but on October 31, 1994, the Company
elected to reduce the capacity to $200,000.
The Company's amended credit facility and 8.98% Senior Note Agreement contain
various financial covenants that place limitations on the payments of
dividends, the purchase of unrestricted stock, capital expenditures, and the
incurrence of additional indebtedness. While the losses for 1993 and 1992 have
placed constraints on the Company's financial flexibility, the Company is in
compliance with the financial covenants of the agreements and management
believes that the Company will continue to meet such covenants. Management
believes that the current financing arrangement and cash flows generated from
operations will provide adequate funds to support the operations of the Company
and satisfy both its capital requirements and operating needs throughout the
term of the Credit Agreement. The Company reviews its dividend on a quarterly
basis.
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Part II - Other Information
Item 1. Legal proceedings -- No change.
Item 2. Changes in Securities -- No change.
Item 3. Defaults Upon Senior Securities -- None.
Item 4. Submission of Matter to a vote of Security Holdings -- None.
Item 5. Other Information -- None.
Item 6. Exhibits and Reports on Form 8-K:
Exhibit No. Description
----------- ----------------------------------------------------
4(a) Note Agreement dated November 20, 1991 between
The Prudential Insurance Company of America and the
Company (filed as Exhibit 4 to Form 10-K of The Lincoln
Electric Company for the year ended December 31, 1991,
SEC File No. 0-1402 and incorporated by reference and
made a part hereof); as amended by letter dated March
18, 1993; 8.98% Senior Note Due November 26, 2003
(filed as Exhibit 4(b) to Form 10-K of The Lincoln
Electric Company for the year ended December 31, 1992,
SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof); as further amended
by letter dated as of November 19, 1993 (filed as
Exhibit 4(a) to Form 10-K of The Lincoln Electric
Company for the year ended December 31, 1993, SEC File
No. 0-1402 and incorporated herein by reference and
made a part hereof); as further amended by letter
dated as of October 31, 1994 (filed herewith).
4(b) Credit Agreement dated March 18, 1993 among
the Company, the Banks listed on the signature
page thereof, and Society National Bank, as Agent
(filed as Exhibit 4(b) to Form 10-K of The Lincoln
Electric Company for the year ended December 31, 1992,
SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof), as amended by
Amendment No. 1 to Credit Agreement dated November 19,
1993 (filed as Exhibit 4(b) to Form 10-K of The Lincoln
Electric Company for the year ended December 31, 1993,
SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof); as further amended
by Amendment No. 2 to Credit Agreement dated October
31, 1994 (filed herewith).
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LINCOLN ELECTRIC COMPANY
/s/ Jay Elliott /s/ Graham A. Peters
- ---------------------------- -----------------------------
Jay Elliott Graham A. Peters
Vice President, Chief Financial Corporate Controller
Officer, Treasurer and Acting
Secretary
November 14, 1994 November 14, 1994
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