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 3 Months Ended Commission File
March 31, 1995 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: 10,516,824
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
--- ---
2
STATEMENTS OF CONSOLIDATED OPERATIONS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(Amounts in thousands of dollars except per share data)
"UNAUDITED"
Three months ended March 31
----------------------------
1995 1994
-------- --------
Net sales $263,407 $210,525
Cost of goods sold 161,545 128,559
-------- --------
Gross profit 101,862 81,966
Distribution cost/selling, general
& administrative expenses 71,815 61,024
-------- --------
Operating income 30,047 20,942
Other income/(expense):
Interest income 392 293
Other income 394 448
Interest expense (3,977) (3,898)
-------- --------
Total other income/(expense) (3,191) (3,157)
-------- --------
Income before income taxes 26,856 17,785
Income taxes 10,802 7,378
-------- --------
Net income $ 16,054 $ 10,407
======== ========
Net income per share $ 1.46 $ 0.96
Dividends paid $ 0.20 $ 0.18
Average number of shares
outstanding: (in 000's of shares) 11,015 10,896
-1-
3
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(in thousands of dollars)
"Unaudited"
March 31, 1995 December 31, 1994
-------------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 10,524 $ 10,424
Accounts receivable (less allowance
for doubtful accounts of $4,414 in
1995 and $4,251 in 1994) 150,602 126,007
Inventories: (Note B)
Raw materials and in-process 79,648 72,302
Finished goods 92,617 82,974
--------- --------
172,265 155,276
Deferred income taxes 10,924 11,601
Prepaid expenses 3,197 2,899
Other current assets 7,840 7,220
-------- --------
TOTAL CURRENT ASSETS 355,352 313,427
OTHER ASSETS
Notes receivable from employees 2,952 3,151
Goodwill, net 39,469 39,213
Other 17,640 16,855
-------- --------
60,061 59,219
PROPERTY, PLANT AND EQUIPMENT
Land 13,072 12,655
Buildings 121,702 118,903
Machinery, tools and equipment 327,526 312,957
-------- --------
462,300 444,515
Less allowances for depreciation
and amortization (270,592) (260,304)
-------- --------
191,708 184,211
-------- --------
TOTAL ASSETS $607,121 $556,857
======== ========
-2-
4
"Unaudited"
March 31, 1995 December 31, 1994
-------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 62,600 $ 54,766
Notes payable to banks 16,229 15,843
Salaries, wages and amounts withheld 13,101 12,405
Taxes, including income taxes 43,232 21,783
Dividends payable 2,241 2,203
Current portion of long-term debt 2,065 2,272
Accrued restructuring charges 9,045 8,968
Other current liabilities (Note C) 47,140 25,877
-------- --------
TOTAL CURRENT LIABILITIES 195,653 144,117
Long-term debt, less current portion 174,526 194,831
Deferred income taxes, long-term 6,358 6,631
Other long-term liabilities 10,597 10,337
Minority interest in subsidiaries 6,887 6,808
Shareholders' equity
Common Stock 2,103 2,103
Class A Common Stock 100 100
Additional paid-in-capital 25,546 25,447
Retained earnings 190,816 176,965
Cumulative translation adjustments (5,465) (10,482)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 213,100 194,133
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $607,121 $556,857
========= =========
-3-
5
STATEMENTS OF CONSOLIDATED CASH FLOWS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
"UNAUDITED"
(in thousands of dollars)
Three Months Ended
March 31
----------------------
1995 1994
------- --------
OPERATING ACTIVITIES
Net income $16,054 $ 10,407
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,469 7,189
Foreign exchange (gain) loss 2,055 483
Employee stock ownership plan 229
Minority interest 129 121
Change in operating assets and liabilities
net of effects from acquisitions:
(Increase) in accounts receivable (21,745) (15,482)
(Increase) decrease in inventories (14,392) 5,099
(Increase) in other current assets (1,652) (1,093)
Increase in accounts payable 7,495 1,655
Increase in other current liabilities 40,855 23,508
Gross change in other noncurrent assets (1,066) (1,209)
Gross change in other noncurrent liabilities (408) (562)
Other-net 9 (64)
NET CASH PROVIDED BY OPERATING ACTIVITIES --------- -------
33,803 30,281
INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,688) (6,466)
Proceeds from sale of property, plant and
equipment 160 602
------ ------
NET CASH (USED) BY INVESTING ACTIVITIES (10,528) (5,864)
FINANCING ACTIVITIES
Short-term borrowings-net (818) (8,401)
Repayment on short-term borrowings, maturities
greater than three months (9,053) (13,770)
Proceeds on short-term borrowings, maturities
greater than three months 9,520 10,595
Proceeds from long-term borrowings 70,450 122,651
Repayments on long-term borrowings (93,961) (129,435)
Dividends paid (2,203) (1,959)
Other 102 (840)
NET CASH (USED) BY FINANCING ACTIVITIES ------- -------
(25,963) (21,159)
Effect of exchange rate changes on cash and
cash equivalents 2 788 668
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 100 3,926
Cash and cash equivalents at beginning of period 10,424 20,381
------- -------
Cash and cash equivalents at end of period $ 10,524 $ 24,307
======= =======
Cash paid during the period: Interest $ 2,400 $ 4,406
Income taxes $ 1,726 $ 2,876
-4-
6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS "UNAUDITED"
March 31, 1995
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and contain all 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 period. Operating results for the three months ended March 31, 1995
are not necessarily indicative of the results to be expected for the year ended
December 31, 1995. 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, 1994.
NOTE B - INVENTORY VALUATION
The actual valuation of inventory under the 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. Accordingly, interim results are subject
to the final year-end LIFO inventory calculation.
NOTE C - OTHER CURRENT LIABILITIES
Other current liabilities includes provisions for possible year-end bonuses and
related payroll taxes of $17.6 million. The payment of bonuses is wholly
discretionary and is determined each year by the Board of Directors.
-5-
7
Part 1 - Item 2
Management's Discussion of Financial Condition and Results
of Operations
Net Sales. Net sales for the quarter ended March 31, 1995 increased by 25.1%
to $263.4 million, as compared with net sales of $210.5 million reported for
the comparable period in 1994. Net sales from the Company's U.S. operations
totaled $182.8 million for the first quarter of 1995, representing an increase
of 20.9% or $31.5 million over the comparable prior year period. Non-U.S.
sales totaled $80.6 million for the first quarter of 1995, representing an
increase of 36.0% or $21.4 million over the same period in 1994. Both sales
increases were attributable to increases in volume and price with volume being
the more important factor. European sales also benefited from the partial
regaining of market share in Germany where in 1994 market share had been lost
because of the 1993 restructuring activities. Assuming economic activity in
the U.S. and Western Europe continues to expand, sales in these regions are
expected to remain strong for the balance of the year, but not with the
percentage increases achieved in the first quarter of 1995. Currency
translation had a positive effect of approximately $2.8 million on 1995
non-U.S. sales. Total U.S. third party and intercompany export sales were
$31.9 million for the first quarter of 1995, an increase of 26.7% from $25.2
million reported in the prior year period. This increase reflects improved
worldwide economic conditions and the effect of additional distributors.
Gross Profit. Gross profit increased to $101.9 million in the first quarter of
1995, as compared with $82.0 million for the same period in 1994. Gross profit
as a percentage of sales declined slightly to 38.7% in the first quarter of
1995 from 38.9% in the comparable period in 1994. U.S. margins were 38.9%
which was a decrease from 1994's first quarter margin of 39.7% principally
caused by the first quarter's sales growth being proportionally higher in lower
margin machines and motors. This trend is expected to continue. Higher U.S.
material and other manufacturing costs incurred in the quarter were essentially
offset by higher selling prices.
Distribution Cost/Selling, General & Administrative Expenses.
Distribution cost/selling, general & administrative expenses were $71.8 million
or 27.3% of sales (26.4% at the Company's U.S. operations) for the first
quarter of 1995. This compares with expenses of $61.0 million or 29.0% of
sales (28.2% at the Company's U.S. operations) for the same period in 1994.
Expenses for 1995 were unfavorably affected by further devaluation of the
Mexican Peso resulting in a charge to operations without tax benefit of
approximately $2.3 million in the first quarter of 1995. The decrease in
expenses as a percentage of sales is attributable to increased sales volume and
resulting operating leverage. Included in distribution cost/selling, general &
administrative expenses are costs ($19.8 million in 1995 and $17.4 million in
1994) related to the Company's discretionary year-end employee bonus program
which is subject to Board of Directors approval.
-6-
8
Management's Discussion of Financial Condition and Results
of Operations
Interest Expense, Net. Interest expense, net was $3.6 million for the quarter
ended March 31, 1995 which was unchanged from the prior year period as higher
interest rates for 1995 were offset by lower debt levels.
Income Taxes. Income taxes for the quarter ended March 31, 1995 were $10.8
million on income before income taxes of $26.9 million, an effective rate of
40.2%, as compared with income taxes of $7.4 million on income before taxes of
$17.8 million, or an effective rate of 41.5% for the same period in 1994. The
decrease in the effective tax rate reflects the utilization of tax loss
carryovers principally for the Company's European subsidiaries for which
valuation allowances were previously provided against the related deferred tax
asset.
Net Income. Net income increased 54.3% to $16.1 million or $1.46 per share for
the quarter ended March 31, 1995 as compared with $10.4 million or $.96 per
share for the comparable period in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for the quarters ended March 31, 1995 and 1994 are
presented in the consolidated statements of cash flows. Cash provided from
operating activities for the quarter ended March 31, 1995 amounted to $33.8
million compared with $30.3 million for the comparable period in 1994. Cash
flows from operations for 1995 were used primarily for net capital expenditures
of $10.5 million, net debt repayments of $23.9 million and the payment of
dividends in the amount of $2.2 million.
Total debt at March 31, 1995 was $192.8 million compared to $212.9 million at
December 31, 1994. At March 31, 1995, total debt was 47.5% of total
capitalization (shareholders' equity plus total debt), as compared with 52.3%
at the end of 1994. The improvement in the ratio of total debt to total
capitalization was due to a combination of reduced debt levels, and increased
equity as a result of earnings for the quarter, net of dividend payments, and
the favorable effects of currency translation of $5.0 million in the first
quarter of 1995.
The Company is committed to reducing its debt levels in 1995 and is also
addressing the need for additional capacity to meet the demand for its
products. While the Company's debt agreements place limitations on capital
expenditures, capital expenditures for 1995 are expected to increase over 1994
net expenditures which were $32.3 million.
-7-
9
Management's Discussion of Financial Condition and Results
of Operations
The Company's Board of Directors believes that the Company's future growth and
success would be enhanced by a reduction in the Company's leverage and access
to greater capital. The Company is pursuing a recapitalization authorizing a
new class of non-voting common shares (the "Non-Voting Shares"). The
authorization of the Non-Voting Shares requires shareholder approval, which is
being solicited in connection with the Company's annual meeting scheduled to be
held on May 23, 1995. The recapitalization anticipates that the Board of
Directors, following shareholder approval, would authorize a stock dividend of
one Non-Voting Share for each outstanding share of the Company's voting common
stock. The Company would then engage in a public offering of Non-Voting
Shares. On April 27, 1995, the Company filed a Registration Statement on Form
S - 3 with the Securities and Exchange Commission for the purpose of
registering Non-Voting Shares for sale to the public. The size and timing of
such offering is dependent on a variety of factors, many of which are outside
the Company's control.
There is no certainty that such offering will be accomplished. In the event
such offering is not accomplished, the Company would reconsider alternative
sources of equity financing. There is no certainty that any such alternatives
will be approved by the Company's Board of Directors or, if so approved, be
available. While additional capital resources would allow a higher rate of
capital expenditures and provide more flexibility for growth, management
believes that the current financing arrangements and the cash flows generated
from operations will provide adequate funds to support the existing operations
of the Company and satisfy both its capital requirements and regular dividend
practices throughout the term of the Credit Agreement.
Part II - Other Information
Item 1. Legal proceedings
Ellis F. Smolik filed a proposed class action on April 27, 1995 in Common Pleas
Court, Cuyahoga County, Ohio, alleging that the Company breached the terms of
incentive stock award agreements with him and 49 others. According to the
complaint, under those agreements these individuals were entitled to, but did
not receive, an aggregate of approximately 530,000 shares of common stock of
the Company based on what the complaint says was the Company's financial
performance in the years 1989 through 1991. The complaint also alleges that
the Company breached fiduciary duties owed to these individuals. The complaint
seeks compensatory damages of $31 million, calculated by reference to the
current market price of Company stock, and punitive damages of eight times that
amount. Mr. Smolik voluntarily retired as an officer of the Company in 1994,
at age 75, without reference to these allegations. The Company believes that
the allegations are without merit and that the damage claims are not
supportable. The Company has tendered the matter to its insurance carrier and
it plans a vigorous defense.
-8-
10
Part II - Other Information
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
(a) Exhibit No.
(27) Financial Data Schedule
(99) Press release dated March 30, 1995 relating to
proposed recapitalization plan.
-9-
11
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 and Treasurer
May 15, 1995 May 15, 1995
-10-