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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER 0-1402
THE LINCOLN ELECTRIC COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-0359955
------------------------------- ---------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
22801 St. Clair Ave., Cleveland, Ohio 44117
---------------------------------------- ------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 481-8100
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Shares, without par value
Class A Common Shares, without par value
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 (or for such shorter period that registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting common stock held by
non-affiliates as of March 13, 1996 was $130,443,063. (Affiliates, for this
purpose, have been deemed to be Directors of the Company, and certain
significant shareholders.)
The number of shares outstanding of the issuer's classes of common stock as
of March 13, 1996 were as follows:
Common Shares........................... 10,520,987
Class A Common Shares................... 13,880,171
Class B Common Shares................... 487,117
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Total outstanding shares........... 24,888,275
==========
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the annual meeting of
shareholders to be held on May 28, 1996 are hereby incorporated by reference
into Part III.
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PART I
ITEM 1. BUSINESS
As used in Item 1 of this report, the term "Company", except as otherwise
indicated by the context, means The Lincoln Electric Company and its
subsidiaries. The Lincoln Electric Company was incorporated under the laws of
the State of Ohio in 1906. The Company is a full-line manufacturer of welding
products and integral horsepower industrial electric motors. Welding products
include arc welding machines, power sources, automated wire feeding systems,
environmental fume systems, and arc welding consumable electrodes. The Company
also sells industrial gases, regulators and torches used in oxy-fuel welding and
cutting. Sales of arc welding and other welding products accounted for 93% of
the Company's net sales in 1995.
The arc welding machines, power sources and automated wire feeding systems
manufactured by the Company range in technology from basic units used for light
manufacturing and maintenance to highly sophisticated machines for robotic
applications, high production welding and fabrication. Three primary types of
arc welding electrodes are produced: (1) coated manual or stick electrodes, (2)
solid electrodes produced in coil form for continuous feeding in mechanized
welding, and (3) cored electrodes produced in coil form for continuous feeding
in mechanized welding. The integral horsepower electric motors manufactured by
the Company range in size from 1/3 to 1,250 horsepower.
The Company's products are sold in both domestic and international markets.
In the domestic market, they are sold directly by the Company's own sales
organization as well as by distributors. In the international markets, the
Company's products are sold principally by foreign subsidiary companies. The
Company also has an international sales organization comprised of international
salesmen, direct sales distributors, agents and dealers that operate in more
than eighty-six countries. The Company has manufacturing facilities located in
the United States, Australia, Canada, Mexico, England, France, Ireland, Italy,
the Netherlands, Norway and Spain. See Note G to the consolidated financial
statements with respect to geographic area information.
The Company is not dependent on a single customer or a few customers. The
loss of any one customer would not have a material adverse effect on its
business. The Company's business is not seasonal.
Conditions in the arc welding industry are highly competitive. The Company
believes that it is one of the largest manufacturers of consumables and
machinery in a field of three or four major domestic competitors and numerous
smaller competitors covering the industry. The Company continues to pursue
strategies to heighten its competitiveness in international markets. Competition
in the electric arc welding industry is on the basis of price, brand preference,
product quality and performance, warranty, delivery, service and technical
support. All of these factors have contributed to the Company's position as one
of the leaders in the industry.
Virtually all of the Company's products may be classified as standard
commercial articles and are primarily manufactured for stock. The Company
believes its product offerings are unique because of its highly trained
technical sales force and the support of its welding research and development
staff which allow it to uniquely assist the consumers of its products in solving
their welding application problems. The Company utilizes this technical
expertise to present its Guaranteed Cost Reduction Program to end users in which
the Company guarantees that the user will save money in its manufacturing
process when it utilizes the Company's products. This allows the Company to
introduce its products to new users and to establish and maintain very close
relationships with the consumers. This close relationship between the technical
sales force and the direct consumers, together with its supportive relationship
with its distributors, who are particularly interested in handling the broad
breadth of the Company's products, is an important element of the Company's
market success and a valuable asset of the Company.
The principal raw materials essential to the Company's business are various
chemicals, steel, copper and aluminum, all of which are normally available for
purchase in the open market.
The Company's operations are not materially dependent upon patents,
trademarks, licenses, franchises or concessions.
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The Company's facilities are subject to environmental control regulations.
To date, compliance with these environmental regulations has not had a material
effect on the Company's earnings nor has it required the Company to make
significant capital expenditures.
The Company conducts a significant amount of its business and has a number
of operating facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located.
Research activities relating to the development of new products and the
improvement of existing products in 1995 were all Company-sponsored. These
activities were primarily related to the development of new products utilizing
the latest electronic technology. The number of professional employees engaged
full-time in these research activities was 109. Refer to Note A to the
consolidated financial statements with respect to total costs of research and
development.
The number of persons employed by the Company worldwide at December 31,
1995 was approximately 6,000.
The table below sets forth consolidated net sales by product line for the
most recent three years:
1995 1994 1993
---------- -------- --------
(IN THOUSANDS OF DOLLARS)
Arc Welding and Other Welding Products.......... $ 956,642 $843,643 $795,072
93% 93% 94%
All Other....................................... 75,756 62,961 50,927
7% 7% 6%
---------- -------- --------
$1,032,398 $906,604 $845,999
========= ======== ========
ITEM 2. PROPERTIES
The Company's corporate headquarters and principal United States
manufacturing facilities are located in the Cleveland, Ohio area. Total
Cleveland area property consists of 223 acres, of which present manufacturing
facilities comprise an area of approximately 2,587,000 square feet. While
current utilization of existing facilities is high, the Company is adding
capacity as necessary.
In addition to the principal facilities in Ohio, the Company operates two
other manufacturing locations in the United States plus 12 manufacturing
locations in 10 foreign countries, the locations of which are as follows:
United States: Gainesville, Georgia; Monterey Park, California.
Australia: Sydney.
Canada: Toronto.
England: Sheffield.
France: Grand-Quevilly.
Ireland: Rathnew.
Italy: Pianoro; Milano.
Mexico: Mexico City.
Netherlands: Nijmegen.
Norway: Skjelland; Stavern.
Spain: Barcelona.
Manufacturing facilities located in Germany, Venezuela, Japan and Brazil
were closed in early 1994 under the Company's restructuring program.
All property relating to the Company's Cleveland, Ohio headquarters and
manufacturing facilities is owned outright by the Company. In addition, the
Company maintains operating leases for its distribution
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centers and many sales offices throughout the world. See Note J to the
consolidated financial statements with respect to leases. Most of the Company's
foreign subsidiaries own manufacturing facilities in the foreign country where
they are located. At December 31, 1995, $5.2 million of indebtedness was secured
by property, plant and equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject, from time to time, to a variety of civil and
administrative proceedings arising out of its normal operations, including,
without limitation, employment-related actions, product liability claims, and
health, safety and environmental claims. Included in such proceedings are the
cases summarily described below, in which claimants seek recovery for injuries
allegedly resulting from exposure to fumes and gases in the welding environment.
The Company is a co-defendant in seventeen cases involving 26 plaintiffs
alleging that exposure to manganese contained in arc welding electrode products
caused the plaintiffs to develop a neurological condition known as manganism.
The plaintiffs seek compensatory and, in most instances, punitive damages,
usually for unspecified sums. Four similar cases have been tried, all resulting
in defense verdicts.
The Company is also a defendant in one case, and one of several
co-defendants in three other cases, alleging that exposure to welding fumes
generally impaired the respiratory system of nineteen plaintiffs. The plaintiffs
seek compensatory and punitive damages, in most cases for unspecified sums.
During the preceding five years, forty-one similar cases have resulted in
thirteen voluntary dismissals, seven defense verdicts or summary judgments and
twenty-one settlements for immaterial amounts.
Claims pending against the Company alleging asbestos induced illness total
approximately 19,000; in each instance, the Company is one of a large number of
defendants. Approximately 4,407 of these asbestos claims are pending in Orange
County, Texas where a motion to certify a class action was recently denied. The
asbestos claimants seek compensatory and punitive damages, in most cases for
unspecified sums. Twenty-one cases have been tried to defense verdicts.
Voluntary dismissals on such claims total approximately 15,000; summary
judgments for the defense total 78.
Included within the foregoing asbestos claims are approximately 930 claims
pending in the Circuit Court of Kanawha County, West Virginia. On September 12,
1995, a jury returned a special interrogatory in that action finding that
products manufactured and/or sold by the Company and three other welding
companies were defective in certain respects at the time of manufacture and/or
sale. Issues relating to whether or not claimants were exposed to Company
products and, if so, whether Company products caused any injury, have not been
addressed. Nor has there been any discovery relating to the plaintiffs and their
potential compensatory damage claims. The court has dismissed punitive damage
claims in that action.
The Company, together with hundreds of other co-defendants, is a defendant
in state court in Morris County, Texas, in litigation on behalf of three
thousand twenty five (3,025) claimants, all prior employees of a local pipe
fabricator, alleging that occupational exposures caused a wide variety of
illnesses. The plaintiffs seek compensatory and punitive damages of unspecified
sums.
The Company bears the costs of defending those of its product liability
cases arising and filed after 1990. In many cases where there are multiple
defendants, cost sharing efficiencies are arranged. Subject to the Company's per
claim retention under its insurance coverage, the Company has tendered the
manganese, fume, asbestos and Morris County, Texas cases to its insurance
carrier which has accepted such tender for all situations except those where
liability would result solely from asbestos; no such situations have arisen to
date. A dispute exists between the Company and its insurer as to the appropriate
policies to which these claims should be applied, and the resolution of this
dispute may provide additional coverage for such claims.
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
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also alleges that the Company breached fiduciary duties owed to these
individuals. The complaint seeks compensatory damages of $31 million and
punitive damages of eight times that amount. The Company believes that the
allegations are without merit.
The Company believes that resolution of the pending cases referred to
above, individually or in the aggregate, will not have a material effect upon
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Shares (LECO) and Class A Common Shares (LECOA) began
trading on the NASDAQ market exchange in June 1995. The number of record holders
of Common Shares and Class A Common Shares at December 31, 1995 was 2,669 and
2,566 respectively.
There is no public trading market for Class B Common Shares, which are only
issued to the Company's Employee Stock Ownership Plan.
Quarterly high and low stock prices and dividends declared for the last two
years were:
1995** 1994**
--------------------------------------------- ---------------------------
LECO* LECOA DIVIDENDS LECO* DIVIDENDS
HIGH LOW HIGH LOW DECLARED HIGH LOW DECLARED
------- ------- ------- ------- --------- ------ ------ ---------
March 31..................... $25.00 $17.00 $0.10 $ 9.13 $ 8.63 $0.09
June 30...................... 38.00 24.25 $37.25 $29.50 0.10 13.63 9.38 0.09
September 30................. 34.00 26.50 31.00 27.38 0.10 17.75 15.00 0.09
December 31.................. 27.50 21.00 28.25 21.50 0.12 19.50 17.25 0.11
- ---------------
* Source: NASDAQ; Ohio Dealers' Data Service prior to NASDAQ registration.
** On June 12, 1995, holders of record of the Company's outstanding voting
common shares as of June 5, 1995, received a dividend of one Class A Common
Share for each outstanding share of the Company's voting common shares.
Retroactive effect has been given to the stock dividend in the above per
share data.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1995 1994 1993 1992 1991
---------- -------- -------- -------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Net sales.......................... $1,032,398 $906,604 $845,999 $853,007 $833,892
Income (loss) before cumulative
effect of accounting change...... 61,475 48,008 (40,536) (45,800) 14,365
Cumulative effect of accounting
change........................... 2,468
---------- -------- -------- -------- --------
Net income (loss).................. $ 61,475 $ 48,008 $(38,068) $(45,800) $ 14,365
========= ======== ======== ======== ========
Per share:
Income (loss) before cumulative
effect of accounting change... $ 2.63 $ 2.19 $ (1.87) $ (2.12) $ .67
Cumulative effect of accounting
change........................ .12
---------- -------- -------- -------- --------
Net income (loss)................ $ 2.63 $ 2.19 $ (1.75) $ (2.12) $ .67
========= ======== ======== ======== ========
Cash dividends declared.......... $ .42 $ .38 $ .36 $ .36 $ .30
========= ======== ======== ======== ========
Total assets....................... $ 617,760 $556,857 $559,543 $603,347 $640,261
========= ======== ======== ======== ========
Long-term debt..................... $ 93,582 $194,831 $216,915 $221,470 $155,547
========= ======== ======== ======== ========
See Note C to the consolidated financial statements with respect to
restructuring activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company, now in its second century of operations, is one of the world's
largest designers and manufacturers of arc welding products, manufacturing a
full line of arc welding equipment, consumable welding products and other
welding products which represented 93% of the Company's 1995 net sales. The
Company also manufactures a broad line of integral horsepower industrial
electric motors.
For the second consecutive year, in 1995, the Company reported its highest
net sales and net income in its history. The sales increase was broadly based
and was primarily attributable to increased volume and higher selling prices as
a result of continued economic growth in served markets. The Company believes
that the high quality of its products, advanced engineering expertise and strong
distributor network, coupled with its large technically trained sales force, has
enabled the Company to be a key participant in the global market place.
The Company is one of only a few worldwide broad line manufacturers of both
arc welding equipment and consumable products. With highly competitive
conditions in the welding industry, the Company will continue to emphasize its
status as a single-source supplier, which it believes is most capable of meeting
the broadest range of its customers' welding needs.
In 1995, the Company completed a recapitalization and stock distribution,
resulting in changes to the existing classes of stock, authorization of a new
class of non-voting shares and an increase in the total number of authorized
common shares. The recapitalization modified the capital structure of the
Company while maintaining, subject to certain limitations, the voting power of
existing shareholders, thus allowing for increased flexibility in the Company's
long-term strategy. See Note B to the consolidated financial statements.
Research and development expenditures by the Company increased 6.5% to
$19.7 million in 1995 from $18.5 million in 1994. These activities were
primarily related to the development of new products. The Company believes that
over the past three years, expenditures for research and development activities
have been adequate to maintain the Company's leadership position in its product
lines and to introduce new
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products at an appropriate rate to sustain future growth. Expenditures on
research and development are expected to increase again in 1996.
RESULTS OF OPERATIONS
The following table shows the Company's results of operations for the years
ended December 31, 1995, 1994 and 1993:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993
--------------------- -------------------- -------------------
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES
-------- ---------- ------- ---------- ------ ----------
Net Sales....................... $1,032.4 100.0% $906.6 100.0% $846.0 100.0%
Cost of Goods Sold.............. 634.6 61.5% 556.2 61.3% 532.8 63.0%
-------- ---------- ------- ---------- ------ ----------
Gross Profit.................. 397.8 38.5% 350.4 38.7% 313.2 37.0%
Distribution Cost/Selling
General & Administrative
Expenses................... 289.8 28.0% 261.7 28.9% 277.0 32.7%
-------- ---------- ------- ---------- ------ ----------
Operating Income before
Restructuring Charges
(income)...................... 108.0 10.5% 88.7 9.8% 36.2 4.3%
Restructuring Charges
(income)...................... (2.7 ) (0.3)% 70.1 8.3%
-------- ---------- ------- ---------- ------ ----------
Operating Income (loss)....... 108.0 10.5% 91.4 10.1% (33.9 ) (4.0)%
Other Income.................... 2.2 .2% 3.1 0.3% 2.9 0.3%
Interest Expense, Net........... (10.6) (1.0)% (14.3 ) (1.6)% (16.0 ) (1.9)%
-------- ---------- ------- ---------- ------ ----------
Income (loss) before Income
Taxes...................... 99.6 9.7% 80.2 8.8% (47.0 ) (5.6)%
Income Taxes (benefit).......... 38.1 3.7% 32.2 3.5% (6.4 ) (0.8)%
-------- ---------- ------- ---------- ------ ----------
Net Income (loss) before
Cumulative effect of
Accounting Change.......... 61.5 6.0% 48.0 5.3% (40.6 ) (4.8)%
Cumulative effect to January 1,
1993 of change in method of
accounting for income taxes... 2.5 0.3%
-------- ---------- ------- ---------- ------ ----------
Net Income (loss)............... $ 61.5 6.0% $ 48.0 5.3% $(38.1) (4.5)%
======= ========= ======= ========= ======= =========
1995 COMPARED TO 1994
Net Sales. Net sales for 1995 were $1,032.4 million, an increase of $125.8
million or 13.9% from $906.6 million for 1994. Third-party sales from the
Company's U.S. operations were $711.9 million in 1995 or 11.0% higher than 1994
sales of $641.6 million, attributable to volume and price increases in both the
domestic and export markets. Non-U.S. third-party sales in 1995 were $320.5
million compared to $265.0 million in 1994, an increase of 20.9%. This increase
was the result of improvement in the Company's international operations as well
as improved economic conditions in the markets served, and the strengthening of
certain foreign currencies against the U.S. dollar. Strengthening foreign
currencies against the U.S. dollar increased non-U.S. sales by approximately
$15.3 million or 5.8% during the year. European sales benefited from the
previously reported restructuring of the Company's operations, increased
customer focus and a general improvement in local economies which appeared to
soften during the latter months in 1995. U.S. third-party export sales were
$81.8 million in 1995, an increase of $17.4 million or 27.0% from $64.4 million
in 1994. This increase in export sales largely reflects improved worldwide
economic conditions and an increased sales focus by the Company in the non-U.S.
market.
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Gross Profit. Gross profit increased to $397.8 million in 1995 as compared
with $350.4 million in 1994. Gross profit as a percentage of sales was flat in
1995 compared to 1994. Increased raw material and manufacturing overhead costs
plus start-up costs associated with the opening of a new motor plant were offset
by greater absorption of manufacturing expenses as a result of higher production
volumes in both the U.S. and Europe, selected price increases and cost decreases
by volume purchases.
Distribution Cost/Selling, General and Administrative (S, G & A)
Expenses. Distribution cost/selling, general and administrative expenses were
$289.8 million in 1995 or 28.0% of sales, as compared to $261.7 million or 28.9%
of sales in 1994. The decrease in S, G & A expenses as a percentage of sales is
due to improved economies of scale achieved by higher worldwide sales volume. S,
G & A for 1995 was affected by the devaluation of the Mexican peso, resulting in
a charge to operations without tax benefit of approximately $2.3 million ($3.1
million in 1994). In addition, 1995 expenses included $4.0 million of severance
costs recorded for retiring executives. Included in S, G & A expenses are the
costs related to the Company's discretionary employee bonus program, net of
hospitalization costs deducted therefrom ($66.4 million in 1995 and $59.6
million in 1994, or an increase of 11.4%).
Interest Expense, Net. Interest expense, net, was $10.6 million in 1995 as
compared with $14.3 million in 1994, a decrease which reflects the effect of
lower debt levels as a result of the recapitalization and lower interest rates.
The overall effective interest rate is higher than the prior year because a
greater proportion of the remaining debt is comprised of higher-rate senior
debt.
Income Taxes. Income taxes in 1995 were $38.1 million on income before
income taxes of $99.6 million, an effective rate of 38.3%, as compared with
income taxes of $32.2 million in 1994 on income before income taxes of $80.2
million or an effective tax rate of 40.1%. The decrease in the effective tax
rate from the prior year is principally the result of lower non-U.S. losses
without tax benefit and a lower effective tax rate on non-U.S. income.
Net Income. Net income for 1995 was $61.5 million as compared to net income
of $48.0 million in 1994, or an increase of 28.1%. 1994 net income benefited
from a net reversal of $2.7 million of restructuring charges recorded
previously.
1994 COMPARED TO 1993
Net Sales. Net sales for 1994 were $906.6 million, an increase of $60.6
million or 7.2% from $846.0 million for 1993. Net sales for 1993 include the
sales of manufacturing operations (principally in Germany) that were closed in
early 1994. Excluding the 1993 sales of the closed operations, sales for 1994
increased 17.0%. A portion of this increase was due to the absorption by the
Company's other manufacturing operations of the sales formerly made by the
closed operations. Third-party sales from the Company's U.S. operations were
$641.6 million in 1994 or 18.1% higher than 1993 sales of $543.5 million,
attributable to volume and price increases. Non-U.S. third-party sales in 1994
were $265.0 million compared to $302.5 million in 1993, a decrease of 12.4%.
Excluding the 1993 sales of the closed operations, non-U.S. sales for 1994
increased 14.7% over non-U.S. sales for 1993 reflecting improved economic
conditions in Europe and elsewhere in the world. U.S. third-party export sales
were $64.4 million in 1994, an increase of $6.3 million or 10.8% from $58.1
million in 1993. This increase in export sales largely reflects improved
worldwide economic conditions. In 1994, sales of certain new products were
restricted by capacity limitations inherent in tooling up production which have
now been resolved.
Gross Profit. Gross profit increased to $350.4 million in 1994 as compared
with $313.2 million in 1993. Gross profit as a percentage of sales improved to
38.7% in 1994 from 37.0% in 1993. This improvement in gross profit is largely
attributable to a greater percentage of total sales coming from the
higher-margin U.S. operations in 1994. In addition, 1993 gross profit was
unfavorably affected by lower gross profit levels for the manufacturing
operations closed in early 1994.
Distribution Cost/Selling, General and Administrative (S, G & A)
Expenses. Distribution cost/selling, general and administrative expenses were
$261.7 million in 1994 or 28.9% of sales, as compared to $277.0
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million or 32.7% of sales in 1993. The decrease in these expenses as a
percentage of sales evidences the effects of the closing of the German
subsidiary, the Company's restructuring program and management's initiatives to
control operating costs throughout the Company. The higher expense level in 1993
was principally due to the inclusion of the operating results of the Company's
closed German subsidiary. Included in S, G & A expenses are the costs related to
the Company's discretionary employee bonus program, net of hospitalization costs
deducted therefrom ($59.6 million in 1994 and $53.5 million in 1993 or an
increase of 11.4%).
Interest Expense, Net. Interest expense, net, was $14.3 million in 1994 as
compared with $16.0 million in 1993, a decrease which reflects the effect of
lower debt levels offset partially by higher interest rates.
Income Taxes. Income taxes in 1994 were $32.2 million on income before
income taxes of $80.2 million, an effective rate of 40.1%, as compared to a tax
benefit of $6.4 million on a loss before income taxes of $47.0 million in 1993.
The 1993 tax benefit principally reflects the tax benefits attributable to the
plant closure and liquidation of the German subsidiary. Results from 1993 also
benefited from the cumulative effect of a change in accounting for income taxes,
which decreased the net loss by $2.5 million or $0.12 per share.
Net Income. As a result of the restructuring programs in 1992 and 1993 and
the improvement in economic conditions in Europe, the United States and Canada,
net income for 1994 was $48.0 million as compared to a net loss of $38.1 million
in 1993. Results in 1993 were adversely affected by a $40.9 million after-tax
restructuring charge. 1994 results benefited from a net reversal of $2.7 million
of restructuring charges recorded previously.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position significantly improved during 1995 as a
result of positive operating cash flow as well as the recapitalization. The
Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future primarily with cash generated by
operations and borrowings under its existing credit facilities.
Cash provided from operations was $65.5 million in 1995 versus $68.7
million in 1994, a decrease of $3.2 million or 4.7%. This decrease in cash flow
resulted from increased working capital offset by the Company's increase in net
income. Accounts receivable balances increased due to higher sales and a slight
increase in collection periods. Although the increase in inventory balance
reflects higher sales volume, management plans to reduce overall inventory
levels by the utilization of more "just-in-time" inventory methods and changes
in production planning methodology.
Capital expenditures for property, plant and equipment amounted to $48.4
million in 1995 as compared to $37.4 million in 1994, or an increase of $11.0
million. These expenditures for property, plant and equipment represent the
Company's continued commitment to support and develop advanced technologies,
support new products, expand current capacity and reduce future manufacturing
costs. In particular, the Company has modernized and expanded its motor division
by establishing a separate facility in Cleveland, Ohio, which is dedicated to
motor manufacturing and increased testing and design capacity to be able to
reduce costs and increase output. Investments to meet scheduled higher industry
efficiency standards will continue. The Company expects to add capacity and
modernize facilities selectively in the domestic market, and it also expects
measured investment to encourage overseas growth.
The Company completed its recapitalization in 1995 which included the
authorization of Class A Common Shares, a new class of non-voting common shares.
The recapitalization included a distribution payable on June 12, 1995, to
holders of record of the Company's outstanding voting common shares as of June
5, 1995, of a dividend of one Class A Common Share for each outstanding share of
the Company's voting common shares. Prior to the adoption of the
recapitalization, the Company had two authorized and outstanding classes of
voting common shares. As a result, the Company's authorized capital consists of
two voting classes, the Common Shares, without par value (formerly the "Common
Stock"), and the Class B Common Shares, without par value (formerly the "Class A
Common Stock"), and one non-voting class, the Class A Common Shares (the new
"Class A Common Shares"). In addition, the recapitalization included an
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increase in the total number of authorized common shares of all classes from 17
million to 62 million shares consisting of 30 million Common Shares, 30 million
Class A Common Shares and 2 million Class B Common Shares.
In 1995, the Company successfully completed a public offering by selling
2,863,507 Class A Common Shares and realized $81.2 million in proceeds, net of
the underwriters' discount. The proceeds from the offering were used to reduce
debt, which has improved the Company's leverage and enhanced its financial
position.
In December 1995, the Company entered into a new $200 million unsecured,
multi-currency Credit Agreement ("Credit Agreement"). The Credit Agreement
provides more favorable pricing levels, and the financial covenants which
require interest coverage and funded debt to capital ratios are less
restrictive, a result of the Company's improved liquidity and financial
position. See Note D to the consolidated financial statements for additional
information regarding the terms and financial covenants of the Company's
borrowing arrangements. The Company's available borrowings under the Credit
Agreement as of December 31, 1995 amounted to $190 million. At December 31,
1995, $10 million was outstanding under the Credit Agreement.
Total debt at December 31, 1995 was $123.4 million compared to $212.9
million at December 31, 1994, reflecting the reduction in debt from funds
generated by the public offering and cash flow from operating activities. At
December 31, 1995, total debt was 27.2% of total capitalization compared with
52.3% at year-end 1994.
A total of $9.1 million in dividends was paid in 1995. In addition, the
Board of Directors has declared a cash dividend of $0.12 per share, payable on
April 15, 1996, to shareholders of record on March 29, 1996.
CHANGES IN ACCOUNTING STANDARDS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. SFAS No. 121 requires long-lived assets, primarily
property, plant and equipment, identified intangible assets, and excess of cost
over net assets of businesses acquired, to be reviewed for impairment losses
whenever events or changes in circumstances indicate the carrying amount may not
be recovered through future net cash flows generated by the assets. The Company
will adopt SFAS No. 121 in 1996 and believes the effect of adoption will not be
material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report
following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
A definitive proxy statement will be filed pursuant to Regulation 14A of
the Securities Exchange Act prior to April 30, 1996. Therefore, information
required under this part, unless set forth below, is incorporated herein by
reference from such definitive proxy statement.
NAME AGE POSITION
- ------------------------- --- --------------------------------------------------------
Donald F. Hastings 67 Chairman of the Board and Chief Executive Officer of the
Company since 1992; President of the Company 1987-1992.
Frederick W. Mackenbach 65 President, Chief Operating Officer and Director of the
Company between 1992 and March 31, 1996; President of
Latin America 1991-1992; District Manager 1976-1991.
9
11
NAME AGE POSITION
- ------------------------- --- --------------------------------------------------------
Anthony Massaro 52 President Elect and Chief Operating Officer of the
Company, effective April 1, 1996; Corporate Vice
President and President Lincoln Europe since 1994;
Director of International Operations 1993-1994; prior
thereto, as a corporate officer with Westinghouse
Electric Corporation, served as Vice President and then
as President and a Member of the Management Committee
with responsibilities worldwide.
David J. Fullen 64 Executive Vice President, Engineering and Marketing
since 1995; Senior Vice President, Machine and Motor
Division 1994; Vice President -- Machine and Motor
Division 1989-1994.
John M. Stropki 45 Executive Vice President, North America since 1995;
Senior Vice President, Sales 1994-1995; General Sales
Manager 1992-1994; District Manager 1986-1992.
Richard C. Ulstad 56 Senior Vice President, Manufacturing effective March 19,
1996; Senior Vice President, Consumable Division
1994-1996; Vice President -- Manufacturing Electrode
Division 1992-1994; Superintendent -- Electrode Division
1984-1992.
H. Jay Elliott 54 Senior Vice President, Chief Financial Officer, and
Treasurer effective January 24, 1996; Vice President,
Chief Financial Officer, and Treasurer 1994-1995;
International Chief Financial Officer 1993-1994; prior
thereto, Assistant Comptroller of The Goodyear Tire &
Rubber Company responsible at various times for
Corporate Strategic Planning, Finance Director of North
American Tires and International Vice President --
Finance.
Frederick G. Stueber 42 Senior Vice President, General Counsel and Secretary
effective January 24, 1996; Vice President, General
Counsel and Secretary since February 1995; prior
thereto, partner in the law firm of Jones, Day, Reavis &
Pogue.
Frederick W. Anderson 43 Vice President, Manufacturing -- Machine Division since
1994; Plant Manager Machine and Motor Division
1993-1994; Plant Superintendent 1989-1993.
Paul J. Beddia 62 Vice President, Government and Public Affairs since
1996; Vice President, Human Resources 1989-1996.
Dennis D. Crockett 53 Vice President, Consumable Research and Development
since 1993; Chief Engineer, Consumables Research and
Development 1987-1993.
James R. Delaney 47 Corporate Vice President and President Lincoln Latin
America since 1994; President Lincoln Electric South
America 1993-1994; Vice President of Lincoln Latin
America 1992; Vice President of Lincoln Mexicana
1988-1992.
Joseph G. Doria 46 Vice President of the Company since 1995; President and
Chief Executive Officer, Lincoln Electric Company of
Canada since 1992; Executive Vice President and Chief
Operating Officer 1990-1992; Assistant to the President
1986-1990.
Paul F. Fantelli 51 Vice President, Business Development since 1994;
Assistant to the Chief Executive Officer 1992-1994;
President and Chief Executive Officer of the Company's
subsidiary, Harris Calorific 1990-1992.
10
12
NAME AGE POSITION
- ------------------------- --- --------------------------------------------------------
Ronald A. Nelson 46 Vice President, Machine Research and Development since
1994; Chief Engineer -- Machine and Motor Division
1993-1994; Service Manager 1989-1993.
Gary M. Schuster 40 Vice President, Motor Division since 1995; General
Manager, Motor Division 1993-1994; Manager, Factory of
the Future 1991-1993.
Richard J. Seif 48 Vice President, Marketing since 1994; Director of
Marketing 1991-1994; Project Manager 1989-1991.
S. Peter Ullman 46 Vice President of the Company since 1995; President and
Chief Executive Officer, Harris Calorific Division of
Lincoln Electric since 1995; President and COO, Harris
Calorific Division 1992-1995.
John H. Weaver 57 Vice President, Export Sales since 1994: International
Sales Manager 1987-1994.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are included
in a separate section of this report following the signature page:
Statements of Consolidated Financial Condition -- December 31, 1995 and
1994
Statements of Consolidated Operations -- Years ended December 31, 1995,
1994 and 1993
Statements of Consolidated Shareholders' Equity -- Years ended December 31,
1995, 1994 and 1993
Statements of Consolidated Cash Flows -- Years ended December 31, 1995,
1994 and 1993
Notes to Consolidated Financial Statements -- December 31, 1995
Report of Independent Auditors
(A) (2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of the Company is
included in a separate section of this report following the signature page:
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore,
have been omitted.
(A) (3) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
3(a) Restated Articles of Incorporation of The Lincoln Electric Company (filed as
exhibit 4.1 to the Registration Statement on Form S-3 of The Lincoln Electric
Company, as filed and amended on June 26, 1995, SEC Registration No. 33-58881
and incorporated herein by reference and made a part hereof).
11
13
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
3(b) Restated Code of Regulations of The Lincoln Electric Company (filed as Exhibit 2
to the Registration Statement on Form 8-A for the Class A Common Shares of The
Lincoln Electric Company filed on June 5, 1995 and incorporated herein by
reference and made a part hereof).
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(a)
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; 8.98%
Senior Note Due November 26, 2003 (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 October 31, 1994 (filed as Exhibit 4(a) to Form 10-Q of
The Lincoln Electric Company for the period ended September 30, 1994, SEC File
No. 0-1402 and incorporated herein by reference and made a part hereof); and as
further amended by letter dated December 20, 1995 filed herewith.
4(b) Credit Agreement dated December 20, 1995 among the Company, the Banks listed on
the signature page thereof, and Society National Bank, as Agent, and filed
herewith.
10(a) The Lincoln Electric Company 1988 Incentive Equity Plan (filed as Exhibit 28 to
the Form
S-8 Registration Statement of The Lincoln Electric Company, SEC File No.
33-25209 and incorporated herein by reference and made a part hereof).
10(b) Form of Indemnification Agreement (filed as Exhibit 10(b) to Form 10-K of the
Lincoln Electric Company for the year ended December 31, 1994, SEC File No.
0-1402 and incorporated herein by reference).
10(c) The Lincoln Electric Company Supplemental Executive Retirement Plan, as amended,
filed herewith.
10(d) The Lincoln Electric Company Deferred Compensation Plan, as amended, filed
herewith.
10(e) Description of Management Incentive Plan, filed herewith.
10(f) Description of Non-Employee Directors' Restricted Stock Plan, filed herewith as
set forth in resolutions of the Board of Directors dated March 30, 1995.
10(g) The Lincoln Electric Company Non-Employee Directors' Deferred Compensation Plan,
filed herewith.
10(h) Retirement Agreement between the Company and Frederick W. Mackenbach dated
November 8, 1995, filed herewith.
10(i) Employment Agreement between the Company and Anthony A. Massaro dated July 14,
1993, as amended on January 1, 1994 (filed as Exhibit 10(e) to Form 10-K of The
Lincoln Electric Company for the year ended December 31, 1994, SEC File No.
0-1402, and incorporated herein by reference).
10(j) Employment Agreement between the Company and H. Jay Elliott dated June 22, 1993
(filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the
year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by
reference).
10(k) Employment Agreement between the Company and Frederick G. Stueber dated February
22, 1995 (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company
for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated
herein by reference).
10(l) The Lincoln Electric Company Employee Savings Plan (filed on Form S-8
Registration Statement of The Lincoln Electric Company, SEC File No. 33-64187
and incorporated herein by reference and made a part hereof).
12
14
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------
10(m) 1995 Lincoln Stock Purchase Plan (filed on Form S-8 Registration Statement of
The Lincoln Electric Company, SEC File No. 33-64189 and incorporated herein by
reference and made a part hereof).
11 Computation of earnings per share.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
Upon request, The Lincoln Electric Company will furnish to security holders
copies of any exhibit to the Form 10-K report upon payment of a reasonable fee.
Any requests should be made in writing to: Mr. H. Jay Elliott, Senior Vice
President, Chief Financial Officer and Treasurer, The Lincoln Electric Company,
22801 St. Clair Avenue, Cleveland, Ohio 44117, Phone: (216) 481-8100.
(B) NO REPORTS ON FORM 8-K WERE FILED DURING THE LAST QUARTER OF THE PERIOD
COVERED BY THIS REPORT.
13
15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
THE LINCOLN ELECTRIC COMPANY
(Registrant)
By: /s/ H. JAY ELLIOTT
--------------------
H. Jay Elliott
Senior Vice President, Chief
Financial Officer
and Treasurer
(principal financial and
accounting officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 15, 1996.
/s/ DONALD F. HASTINGS /s/ FREDERICK W. MACKENBACH
- --------------------------- ----------------------------
Donald F. Hastings, Chairman of the Frederick W. Mackenbach, President,
Board and Chief Executive Officer Chief Operating Officer and Director
(principal executive officer)
/s/ H. JAY ELLIOTT /s/ HARRY CARLSON
- --------------------------- ---------------------------
H. Jay Elliott, Senior Vice President, Harry Carlson, Director
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
/s/ EDWARD E. HOOD
- --------------------------- ---------------------------
David H. Gunning, Director Edward E. Hood, Jr., Director
/s/ PAUL E. LEGO /s/ HUGH L. LIBBY
- --------------------------- ---------------------------
Paul E. Lego, Director Hugh L. Libby, Director
/s/ DAVID C. LINCOLN /s/ EMMA S. LINCOLN
- --------------------------- ---------------------------
David C. Lincoln, Director Emma S. Lincoln, Director
/s/ KATHRYN JO LINCOLN
- --------------------------- ---------------------------
G. Russell Lincoln, Director Kathryn Jo Lincoln, Director
/s/ HENRY L. MEYER III
- --------------------------- ---------------------------
Henry L. Meyer III, Director Lawrence O. Selhorst, Director
/s/ CRAIG R. SMITH /s/ FRANK L. STEINGASS
- --------------------------- ---------------------------
Craig R. Smith, Director Frank L. Steingass, Director
/s/ HENRY L. MEYER III
- ---------------------------
Henry L. Meyer III, Director
/s/ CRAIG R. SMITH
- ---------------------------
Craig R. Smith, Director
14
16
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2) AND ITEM 14(D)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1995
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
15
17
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
The Lincoln Electric Company
We have audited the consolidated financial statements of The Lincoln
Electric Company and subsidiaries listed in the accompanying Index to financial
statements at Item 14 (a1). Our audits also included the financial statement
schedule listed in the Index at Item 14 (a2). These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Lincoln Electric Company and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note A to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Cleveland, Ohio
February 27, 1996
16
18
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
DECEMBER 31
---------------------
1995 1994
-------- --------
(IN THOUSANDS OF
DOLLARS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................ $ 10,087 $ 10,424
Accounts receivable (less allowances of $3,916 in 1995; $4,251 in
1994)............................................................. 140,833 126,007
Inventories
Raw materials and in-process...................................... 86,335 72,302
Finished goods.................................................... 96,530 82,974
-------- --------
182,865 155,276
Deferred income taxes -- Note E...................................... 9,738 11,601
Prepaid expenses..................................................... 6,713 2,899
Other current assets................................................. 6,847 7,220
-------- --------
TOTAL CURRENT ASSETS................................................... 357,083 313,427
OTHER ASSETS
Notes receivable from employees...................................... 287 3,151
Goodwill............................................................. 39,154 39,213
Other................................................................ 15,642 16,855
-------- --------
55,083 59,219
PROPERTY, PLANT AND EQUIPMENT
Land................................................................. 12,396 12,655
Buildings............................................................ 123,360 118,903
Machinery, tools and equipment....................................... 354,855 312,957
-------- --------
490,611 444,515
Less allowances for depreciation and amortization.................... 285,017 260,304
-------- --------
205,594 184,211
-------- --------
TOTAL ASSETS........................................................... $617,760 $556,857
======== ========
17
19
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
DECEMBER 31
---------------------
1995 1994
-------- --------
(IN THOUSANDS OF
DOLLARS, EXCEPT SHARE
DATA)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable............................................... $ 53,882 $ 54,766
Notes payable to banks -- Note D..................................... 28,541 15,843
Salaries, wages and amounts withheld................................. 17,080 12,405
Taxes, including income taxes -- Note E.............................. 33,160 21,783
Dividend payable..................................................... 2,988 2,203
Current portion of long-term debt -- Note D.......................... 1,269 2,272
Other current liabilities............................................ 31,729 34,845
-------- --------
TOTAL CURRENT LIABILITIES.............................................. 168,649 144,117
LONG-TERM DEBT, less current portion -- Note D......................... 93,582 194,831
DEFERRED INCOME TAXES -- Note E........................................ 7,063 6,631
OTHER LONG-TERM LIABILITIES............................................ 13,021 10,337
MINORITY INTEREST IN SUBSIDIARIES...................................... 5,499 6,808
SHAREHOLDERS' EQUITY -- Note B
Common Shares, without par value -- at stated capital amount:
Authorized -- 30,000,000 shares; Outstanding -- 10,520,987
shares in 1995 and 10,514,324 shares in 1994, net of 4,346,516
treasury shares at December 31, 1994........................... 2,104 2,103
Class A Common Shares (non-voting), without par value -- at stated
capital amount:
Authorized -- 30,000,000 shares; Outstanding -- 13,880,171
shares..................................................... 2,776
Class B Common Shares, without par value -- at stated capital amount:
Authorized -- 2,000,000 shares; Outstanding -- 487,117 shares at
December 31, 1995 and 499,840 shares at December 31, 1994...... 97 100
Additional paid-in capital........................................... 102,652 25,447
Retained earnings.................................................... 228,555 176,965
Cumulative translation adjustments................................... (6,238) (10,482)
-------- --------
329,946 194,133
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $617,760 $556,857
======== ========
Share amounts reflect the recapitalization (see Note B).
See notes to consolidated financial statements.
18
20
STATEMENTS OF CONSOLIDATED OPERATIONS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
------------------------------------
1995 1994 1993
---------- -------- --------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
Net sales................................................. $1,032,398 $906,604 $845,999
Cost of goods sold........................................ 634,551 556,259 532,795
---------- -------- --------
Gross profit.............................................. 397,847 350,345 313,204
Distribution cost/selling, general & administrative
expenses................................................ 289,812 261,681 277,003
Restructuring charges (income) -- Note C.................. (2,735) 70,079
---------- -------- --------
Operating income (loss)................................... 108,035 91,399 (33,878)
Other income (expense):
Interest income......................................... 1,664 1,442 1,627
Other income............................................ 2,231 3,067 2,922
Interest expense........................................ (12,346) (15,740) (17,621)
---------- -------- --------
(8,451) (11,231) (13,072)
---------- -------- --------
Income (loss) before income taxes and cumulative effect of
accounting change....................................... 99,584 80,168 (46,950)
Income taxes (benefit) -- Note E.......................... 38,109 32,160 (6,414)
---------- -------- --------
Income (loss) before cumulative effect of accounting
change.................................................. 61,475 48,008 (40,536)
Cumulative effect to January 1, 1993 of change in method
of accounting for income taxes--Note A.................. 2,468
---------- -------- --------
Net income (loss)......................................... $ 61,475 $ 48,008 $(38,068)
========== ======== ========
Per share:
Income (loss) before cumulative effect of accounting
change............................................... $ 2.63 $ 2.19 $ (1.87)
Cumulative effect of accounting change.................. .12
---------- -------- --------
Net income (loss)....................................... $ 2.63 $ 2.19 $ (1.75)
========== ======== ========
Per share amounts reflect the June 12, 1995 stock dividend (see Note B).
See notes to consolidated financial statements.
19
21
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
CLASS A COMMON CLASS B COMMON
COMMON SHARES SHARES SHARES ADDITIONAL CUMULATIVE
-------------------- -------------------- ---------------- PAID IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
----------- ------ ----------- ------ ------- ------ ---------- -------- ----------- --------
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA.)
BALANCE, JANUARY
1, 1993....... 1,033,346 $ 207 45,062 $ 9 $ 23,067 $183,183 $(7,743) $198,723
Net loss.... (38,068) (38,068)
Cash
Dividends
Declared -
$ .36 per
share..... (7,808) (7,808)
Shares Sold
to
Employees... 3,648 1 678 679
Shares
Issued
under
Incentive
Equity
Plan...... 1,151 224 224
Ten-For-One
Stock
Split..... 9,343,305 1,868 405,558 81 (1,949)
Shares
Issued to
ESOP...... 49,220 10 906 916
Adjustment
for the
Year...... (11,171) (11,171)
----------- ------ ------- ------ ---------- -------- ----------- --------
BALANCE,
DECEMBER 31,
1993.......... 10,381,450 2,076 499,840 100 22,926 137,307 (18,914) 143,495
Net
Income.... 48,008 48,008
Cash
Dividends
declared -
$ .38 per
share..... (8,350) (8,350)
Shares Sold
to
Employees... 107,520 22 2,063 2,085
Shares
Issued
Under
Incentive
Equity
Plan...... 25,354 5 458 463
Adjustment
for the
Year...... 8,432 8,432
----------- ------ ------- ------ ---------- -------- ----------- --------
BALANCE,
DECEMBER 31,
1994.......... 10,514,324 2,103 499,840 100 25,447 176,965 (10,482) 194,133
Net
Income.... 61,475 61,475
Cash
Dividends
Declared -
$ .42 per
share..... (9,885) (9,885)
Shares
Issued
Under
Incentive
Equity
Plan...... 2,500 99 99
Stock
Dividend... 11,016,664 $2,203 (2,203)
Shares Sold
in Public
Offering,
net of
expenses... 2,863,507 573 79,296 79,869
Repurchase
of Class B
Shares.... (12,723) (3) (111) (114)
Shares
Issued to
Non-Employee
Directors... 4,163 1 124 125
Adjustment
for the
Year...... 4,244 4,244
----------- ------ ----------- ------ ------- ------ ---------- -------- ----------- --------
BALANCE,
DECEMBER 31,
1995.......... 10,520,987 $2,104 13,880,171 $2,776 487,117 $ 97 $102,652 $228,555 $(6,238) $329,946
========== ======= ========== ======= ======= ======= ========= ======== ========== ========
See notes to consolidated financial statements.
20
22
STATEMENTS OF CONSOLIDATED CASH FLOWS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income (loss).......................................... $ 61,475 $ 48,008 $(38,068)
Adjustments to reconcile net income (loss) to net cash
provided
by operating activities:
Depreciation and amortization....................... 29,742 27,960 30,545
Deferred income taxes............................... 2,810 31,862 (32,501)
Cumulative effect of accounting change.............. (2,468)
Foreign exchange loss (gain)........................ 1,558 4,047 (348)
Minority interest................................... (333) 416 (358)
Provision for restructuring......................... (2,735) 68,370
Changes in operating assets and liabilities net of
effects from
acquisitions:
(Increase) in accounts receivable.............. (13,082) (14,003) (6,228)
(Increase) decrease in inventories............. (25,648) (6,476) 10,654
(Increase) in other current assets............. (2,879) (1,447) (1,331)
Increase (decrease) in accounts payable........ (1,375) 9,929 2,856
Increase (decrease) in other current
liabilities................................. 11,045 (31,026) (2,928)
Gross change in other noncurrent assets and
liabilities................................. 1,991 2,458 (1,124)
Other--net..................................... 152 (327) 1,662
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 65,456 68,666 28,733
INVESTING ACTIVITIES
Purchases of property, plant and equipment............... (48,351) (37,366) (19,090)
Sales of property, plant and equipment................... 2,909 5,099 2,599
Acquisition of minority interest......................... (8,518)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES...................... (45,442) (32,267) (25,009)
FINANCING ACTIVITIES
Proceeds from the sale of Common Shares.................. 81,180 2,085 679
Proceeds from short-term borrowings...................... 39,774 56,405 305
Payments on short-term borrowings........................ (39,991) (59,293) (12,736)
Notes payable to banks -- net............................ 11,966 (5,122) (9,470)
Proceeds from long-term borrowings....................... 204,476 317,669 603,405
Payment on long-term borrowings.......................... (309,111) (351,793) (576,445)
Dividends paid........................................... (9,100) (8,106) (7,791)
Other.................................................... 562 838 (210)
-------- -------- --------
NET CASH USED BY FINANCING ACTIVITIES...................... (20,244) (47,317) (2,263)
Effect of exchange rate changes on cash and cash
equivalents.............................................. (107) 961 (1,707)
-------- -------- --------
DECREASE IN CASH AND CASH EQUIVALENTS...................... (337) (9,957) (246)
Cash and cash equivalents at beginning of year............. 10,424 20,381 20,627
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR................... $ 10,087 $ 10,424 $ 20,381
======== ======== ========
See notes to consolidated financial statements.
21
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
DECEMBER 31, 1995
NOTE A -- ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of The Lincoln Electric Company and its subsidiaries (the
"Company") after elimination of all significant intercompany accounts,
transactions and profits.
Cash Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market. For
domestic inventories, cost is determined principally by the last-in, first-out
(LIFO) method, and for foreign inventories cost is determined by the first-in,
first-out (FIFO) method. At December 31, 1995 and 1994, approximately 63% and
62%, respectively, of total inventories were valued using the LIFO method. The
excess of current cost over LIFO cost amounted to $55,300 at December 31, 1995
and $51,739 at December 31, 1994.
Property, Plant and Equipment: Property, plant and equipment, including
facilities and equipment under capital leases (not material), are stated at cost
and include improvements which significantly extend the useful lives of existing
plant and equipment. Depreciation and amortization are computed by both
accelerated and straight-line methods over useful lives ranging from 3 to 20
years for machinery, tools and equipment, and up to 50 years for buildings. Net
gains or losses related to asset dispositions are recognized in earnings in the
period in which dispositions occur.
Research and Development: Research and development costs, which are
expensed as incurred, were $19,736 in 1995, $18,473 in 1994 and $19,210 in 1993.
Goodwill: The excess of the purchase price over the fair value of net
assets acquired (goodwill) is amortized on a straight-line basis over periods
not exceeding 40 years. Amounts are stated net of accumulated amortization of
$6,750 and $5,784 in 1995 and 1994, respectively.
The carrying value of goodwill is reviewed if facts and circumstances
indicate a potential impairment of carrying value utilizing relevant cash flow
and profitability information.
Translation of Foreign Currencies: Asset and liability accounts are
translated into U.S. dollars using exchange rates in effect at the balance sheet
date; revenue and expense accounts are translated at average monthly exchange
rates. Translation adjustments are reflected as a component of shareholders'
equity.
Transaction gains and losses are included in the statements of consolidated
operations in distribution cost/selling, general and administrative expenses.
The Company recorded transaction losses of $1,930 in 1995, $3,746 in 1994 and
$228 in 1993. The higher level of transaction losses in 1995 and 1994 is
attributable to the effect of the devaluation of the Mexican peso on a U.S.
dollar denominated debt obligation which was less in 1995 than it was in 1994.
This U.S. dollar denominated debt was settled in 1995.
Financial Instruments: The Company utilizes forward exchange contracts to
hedge exposure to exchange rate fluctuations on certain intercompany loans,
purchase and sales transactions and other intercompany commitments. Any
contracts that are entered into are written on a short-term basis, are not held
for trading purposes, and are not held for purposes of speculation. Gains and
losses on all forward exchange contracts described herein are not material and
are recognized in the statements of consolidated operations in the periods the
exchange rates change. At December 31, 1995, the Company had $35 million of
outstanding forward exchange contracts. These forward exchange contracts are
principally denominated in the French Franc ($7,134), British Pound ($6,127),
Dutch Guilder ($18,231) and Norwegian Krone ($2,885).
22
24
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments. No counterparties are
expected to fail to meet their obligations given their high credit ratings, so
the Company usually does not obtain collateral for these instruments.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions in certain circumstances that affect the amounts reported in the
accompanying consolidated financial statements and notes. Actual results could
differ from these estimates.
Accounting Change: 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. As permitted by Statement No. 109, the Company elected
not to restate the financial statements of any prior year. The cumulative effect
of the change decreased the net loss for 1993 by $2,468 or $.12 per share.
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", was issued. SFAS No. 121 requires long-lived assets, primarily
property, plant and equipment, identified intangible assets, and excess of cost
over net assets of businesses acquired, to be reviewed for impairment losses
whenever events or changes in circumstances indicate the carrying amount may not
be recovered through future net cash flows generated by the assets. The Company
will adopt SFAS No. 121 in 1996 and believes the effect of adoption will not be
material.
Net Income (Loss) per Share: Net income (loss) per share is based on the
average number of all shares outstanding during the year (23,350,254 in 1995;
21,939,982 in 1994 and 21,703,982 in 1993).
Supplemental Earnings per Share: In 1995, the Company sold Class A Common
Shares in an underwritten public offering (see Note B). The proceeds of the
offering were used to reduce the Company's outstanding indebtedness. Had the
proceeds been received and applied to reduce indebtedness as of January 1, 1995,
net income per share for 1995 would have been $2.54, compared to $2.06 for 1994,
if the proceeds were received and applied to reduce indebtedness as of January
1, 1994.
Other: Included in distribution cost/selling, general & administrative
expenses are the costs related to the Company's discretionary employee bonus,
net of hospitalization costs deducted therefrom ($66,357 in 1995; $59,559 in
1994; and $53,450 in 1993.) Certain reclassifications have been made to prior
year financial statements to conform to current year classifications.
NOTE B -- RECAPITALIZATION AND OTHER EQUITY TRANSACTIONS
The Company completed a recapitalization in 1995 that included the
authorization of Class A Common Shares, which is a new class of non-voting
common shares. The recapitalization included a distribution payable on June 12,
1995, to holders of record of the Company's outstanding voting common shares as
of June 5, 1995, of a dividend of one Class A Common Share for each outstanding
share of the Company's voting common shares. Retroactive effect has been given
to the stock dividend in the computation of all per share data in these
financial statements.
Prior to the adoption of the recapitalization, the Company had two
authorized and outstanding classes of voting common shares. As a result of the
recapitalization, the Company's authorized capital consists of two voting
classes, the Common Shares, without par value (formerly the "Common Stock"), and
the Class B Common Shares, without par value (formerly the "Class A Common
Stock"), and one non-voting class, the Class A Common Shares (the new "Class A
Common Shares").
23
25
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The recapitalization included an increase in the total number of authorized
common shares of all classes from 17 million to 62 million shares consisting of
30 million Common Shares, 30 million Class A Common Shares and 2 million Class B
Common Shares.
On June 29, 1995, the Company sold in an underwritten public offering
2,796,914 Class A Common Shares for $28.35 per share, net of the underwriting
discount. The closing date for the transaction was July 6, 1995 at which time
the Company received the net proceeds of $79.3 million which were used to reduce
debt of the Company. On August 2, 1995, the Company sold an additional 66,593
Class A Common Shares for $28.35 per share under an over allotment provision of
the Underwriting Agreement and received additional net proceeds of $1.9 million
which were also used to reduce debt of the Company.
The Lincoln Electric Company Employees' Stock Purchase Plan ("Plan") which
provided that employees could purchase shares of the Company's Common Stock,
when offered, at its book value, was terminated by the Board of Directors
effective March 30, 1995. Under the Plan, the Company had the option to
repurchase the shares, but in 1992 the Company suspended the repurchase of all
shares under the Plan. Upon termination of the Plan, all shares issued under the
Plan (1,639,686) became unrestricted shares. In May 1995, the shareholders
approved the 1995 Lincoln Stock Purchase Plan ("Purchase Plan"), which provides
employees the ability to purchase open market shares on a commission free basis
up to a limit of ten thousand dollars annually. There were no purchases during
1995 under this Purchase Plan.
The Lincoln Electric Company 1988 Incentive Equity Plan ("Incentive Equity
Plan") provides for the award or sale of Common Shares and Class A Common Shares
to officers and other key employees of the Company and its subsidiaries.
Following grants of deferred stock in 1989, the terms of which were satisfied in
1991, the Company distributed a total of 32,524 Common Shares (including 524
Shares issued for dividends accrued during the deferral period) of which 10,660
Common Shares were distributed in 1992, 11,510 Common Shares in 1993, and 10,354
Common Shares in 1994 (and a corresponding number of Class A Common Shares were
distributed at the time of the 1995 stock dividend). These shares, along with
15,000 Common Shares issued to a former officer of the Company and corresponding
Class A Common Shares received in the 1995 stock dividend, are restricted as to
resale rights with the Company having a right of first refusal at a purchase
price based on the book value of the shares. Additionally in 1994, 15,000 shares
of restricted stock (after the stock dividend, 30,000 shares) were issued to two
officers of the Company, with scheduled vesting that will be satisfied over time
and completed in January 1997. In 1995, 5,000 shares of restricted stock were
issued to another officer with vesting over a six year period. At December 31,
1995, there were no other outstanding awards under the Plan, and 1,899,952
shares (949,976 Common Shares and 949,976 Class A Common Shares) are reserved
for future issuance under the Incentive Equity Plan.
The Lincoln Electric Company Employee Stock Ownership Plan (the "ESOP") is
a non-contributory profit-sharing plan established to provide deferred
compensation benefits for all eligible employees. The cost of the plan is borne
by the Company through contributions to an employee stock ownership trust as
determined annually by the Board of Directors. In May 1989, shareholders
authorized 2,000,000 shares of Class B Common Shares (formerly the "Class A
Common Stock"), without par value. The Company's Common Shares and Class B
Common Shares are identical in all respects, except that holders of Class B
Common Shares are subject to certain transfer restrictions and the Class B
Common Shares are only issued to the ESOP. In 1995 and 1994, no shares were
issued to the ESOP. In 1993, the Company issued 49,220 shares to the ESOP with
an estimated fair value of $916 which was recorded as compensation expense. The
difference between the total stated capital amount of $.20 per share and the
estimated fair value was recorded as additional paid-in-capital. At December 31,
1995 and 1994, 1,500,160 authorized but unissued shares are available for future
issuance to the ESOP. In 1995, the Company repurchased 12,723 Class B Common
Shares for $114.
In May 1995, the shareholders approved The Lincoln Non-Employee Directors'
Restricted Stock Plan ("Non-Employee Directors' Plan"). The Non-Employee
Directors' Plan provides for distributions of ten
24
26
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thousand dollars worth of Common Shares to each non-employee Director as part of
an annual retainer. During 1995, 4,163 shares were issued to 13 non-employee
Directors under this Plan.
NOTE C -- RESTRUCTURING CHARGES
In 1993 the Company substantially completed its plan to downsize and
streamline its foreign operations (principally in Europe) and close
manufacturing facilities in Germany, Japan and South America. Management's
decisions resulted in a restructuring charge in 1993 of $70,100 ($40,900 after
tax or $1.88 per share) which was comprised of (1) asset write-downs in the
amount of $45,900 including goodwill of $8,900; (2) severance and other
redundancy costs of $27,500; and (3) a net credit of $3,300 comprised of a claim
settlement and other restructuring liabilities including estimated losses
through the final facility closing dates in 1994.
In 1994 all of the planned facility closings were completed and one of the
facilities was disposed of. In total, approximately 1,400 employees were
terminated as a result of the 1993 program and prior year program. In 1994 the
restructuring accruals were adjusted to reflect management's current cost
estimates to complete the program which resulted in a credit to income of
$2,735.
In 1995, an additional facility was sold. The restructuring accrual at
December 31, 1995 (included in other current liabilities) is $5,555. The
remaining expenditures, which include costs related to the sale of the remaining
facilities closed and holding costs to be incurred through the estimated date of
disposal, are anticipated to be incurred in 1996.
NOTE D -- SHORT-TERM AND LONG-TERM DEBT
DECEMBER 31,
-------------------
1995 1994
------- --------
Short-term debt:
Notes payable to banks at interest rates from 5.36% to 12.50%
(5.6625% to 11.25% in 1994)................................. $28,541 $ 15,843
======= ========
Long-term debt:
Multi-currency Credit Agreement, due October 1, 1997........... $100,947
Multi-currency Credit Agreement, due December 20, 2000
(5.975%).................................................... $10,000
8.73% Senior Note due 2003 (eight equal annual principal
payments commencing in 1996)................................ 75,000 75,000
Other borrowings due through 2023, interest at 2.00% to 6.20%
(2.00% to 13.74% in 1994)................................... 9,850 21,156
------- --------
94,850 197,103
Less current portion........................................... 1,268 2,272
------- --------
Total.................................................. $93,582 $194,831
======= ========
In December 1995, the Company entered into a new $200 million unsecured,
multi-currency Credit Agreement. The terms of the new Credit Agreement which
expires December 20, 2000, provide for annual extensions. The new Credit
Agreement provides more favorable pricing levels and less restrictive covenants.
The interest rate on outstanding borrowings is determined based upon defined
leverage rates for the pricing options selected. The interest rate can range
from LIBOR plus .20% to LIBOR plus .30% depending upon the defined leverage
rate. The agreement also provides for a facility fee ranging from .10% to .15%
per annum based upon the daily aggregate amount of the commitment.
Simultaneously, with the signing of the Credit Agreement, the $75,000 8.73%
Senior Note due in 2003 was amended to conform with the financial covenants of
the new Credit Agreement, which requires interest coverage and funded debt to
capital ratios.
25
27
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal payment due in 1996 ($9,375,000) on the 8.73% Senior Note is
classified as long-term debt as the Company intends to refinance the amount on a
long-term basis under the Multi-currency Credit Agreement.
Maturities of long-term debt for the five years succeeding December 31,
1995 are $1,268 in 1996, $10,510 in 1997, $10,117 in 1998, $9,752 in 1999,
$29,002 in 2000 and $34,201 thereafter.
At December 31, 1995, loans amounting to $5,177 were collateralized by
property and equipment.
Total interest paid was $12,606 in 1995, $17,400 in 1994 and $19,000 in
1993. Weighted average interest rates on notes payable to bank at December 31,
1995 and 1994 were 6.4% and 6.8%, respectively.
NOTE E -- INCOME TAXES
The components of income (loss) before income taxes and cumulative effect
of accounting change are as follows:
1995 1994 1993
------- ------- --------
U.S................................................... $80,351 $70,703 $ 43,345
Non-U.S............................................... 19,233 9,465 (90,295)
------- ------- --------
Total....................................... $99,584 $80,168 $(46,950)
======= ======= ========
Components of income tax expense (benefit) for the years ended December 31,
are as follows:
1995 1994 1993
------- ------- --------
Current:
Federal............................................. $24,605 $(8,379) $ 21,032
Non-U.S............................................. 5,465 4,143 2,227
State and local..................................... 5,229 4,534 2,828
------- ------- --------
35,299 298 26,087
Deferred:
Federal............................................. 2,576 31,223 (32,980)
Non-U.S............................................. 234 639 479
------- ------- --------
2,810 31,862 (32,501)
------- ------- --------
Total....................................... $38,109 $32,160 $ (6,414)
======= ======= ========
26
28
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between total income tax expense (benefit) and the amount
computed by applying the statutory Federal income tax rate to income (loss)
before income taxes and cumulative effect of accounting change are as follows:
1995 1994 1993
------- ------- --------
Statutory rate of 35% applied to pre-tax income
(loss).............................................. $34,854 $28,059 $(16,432)
Effect of state and local income taxes, net of Federal
tax benefit......................................... 3,399 2,947 1,838
Differences in income taxes on non-U.S. earnings and
remittances......................................... (2,175) (1,158) 336
Non-U.S. losses and unrecognized tax benefits......... 1,570 2,113 8,308
Foreign sales corporation............................. (961) (838) (703)
Other -- net.......................................... 1,422 1,037 239
------- ------- --------
Total....................................... $38,109 $32,160 $ (6,414)
======= ======= ========
Total income tax payments, net of refunds, were $22,428 in 1995, $6,115 in
1994 and $19,400 in 1993.
At December 31, 1995, the Company's foreign subsidiaries had net operating
loss carryforwards of approximately $61,000 which expire in various years from
1996 through 2002, except for $20,000 for which there is no expiration date.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1995 and 1994, are as follows:
1995 1994
-------- --------
Deferred tax assets:
Net operating loss carryforwards............................ $ 20,917 $ 20,898
U.S. foreign tax credits.................................... 1,797 954
State income taxes.......................................... 926 1,220
Inventory adjustments....................................... (1,003) 3,279
Other accrual accounts...................................... 5,826 4,394
Employee benefits........................................... 1,983 1,269
Other asset adjustments..................................... 4,996 3,756
Pension adjustments......................................... 2,038 2,417
Other deferred tax assets................................... 3,021 1,092
-------- --------
40,501 39,279
Valuation allowance........................................... (21,955) (20,824)
-------- --------
18,546 18,455
Deferred tax liabilities:
Depreciation................................................ (11,820) (9,325)
Pension adjustments......................................... (1,401) (3,004)
Other deferred tax liabilities.............................. (2,650) (1,156)
-------- --------
(15,871) (13,485)
-------- --------
Total............................................... $ 2,675 $ 4,970
======== ========
The Company does not provide deferred income taxes on unremitted earnings of
foreign subsidiaries as such funds are deemed permanently reinvested to finance
foreign expansion and meet operational needs on an
27
29
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ongoing basis. Upon distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income taxes subject to an
adjustment for foreign tax credits and withholding taxes payable to the various
foreign countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities associated
with its calculation; however, unrecognized non-U.S. tax credits and non-U.S.
withholding taxes paid upon distribution would be available to reduce some
portion of the U.S. liability.
NOTE F -- RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
The Company and its subsidiaries maintain a number of defined benefit and
defined contribution plans to provide retirement benefits for their employees in
the United States as well as their employees in foreign countries. These plans
are maintained and contributions are made in accordance with the Employee
Retirement Income Security Act of 1974, local statutory law or as determined by
the Board of Directors. The plans generally provide benefits based upon years of
service and compensation. Pension costs accrued are funded except for the cost
associated with a supplemental employee retirement plan for certain key
employees.
A summary of the components of total pension expense is as follows:
1995 1994 1993
-------- -------- --------
U.S. Plans:
Service cost -- benefits earned during the year... $ 7,375 $ 7,155 $ 6,115
Interest cost on projected benefit obligation..... 21,847 19,601 18,158
Actual return on plan assets...................... (37,696) (18,795) (19,569)
Net amortization and deferral..................... 17,819 (528) 1,441
-------- -------- --------
Net pension cost of defined benefit plans......... 9,345 7,433 6,145
Defined contribution plans........................ 154 258 193
-------- -------- --------
Total U.S. plans.......................... 9,499 7,691 6,338
Non-U.S. Plans:
Service cost -- benefits earned during the year... 1,476 1,524 1,422
Interest cost on projected benefit obligation..... 2,291 2,207 2,253
Actual return on plan assets...................... (3,186) (932) (4,506)
Net amortization and deferral..................... 374 (1,717) 2,000
-------- -------- --------
Net pension cost of defined benefit plans......... 955 1,082 1,169
Defined contribution plans........................ 687 702 1,326
-------- -------- --------
Total Non-U.S. plans...................... 1,642 1,784 2,495
-------- -------- --------
Total pension expense..................... $ 11,141 $ 9,475 $ 8,833
======== ======== ========
28
30
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The funded status of the U.S. and Non-U.S. plans at December 31, 1995 and
1994 is as follows:
U.S. NON-U.S.
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
Actuarial present value of accumulated
benefit obligations:
Vested.............................. $261,132 $218,754 $ 26,659 $ 24,902
Nonvested........................... 9,407 9,797 1,080 881
-------- -------- -------- --------
$270,539 $228,551 $ 27,739 $ 25,783
======== ======== ======== ========
Actuarial present value of projected
benefit obligations.................... $309,359 $258,661 $ 31,153 $ 29,020
Plan assets at fair value................ 282,843 243,802 35,270 32,272
-------- -------- -------- --------
Plan assets in excess of (less than)
projected benefit obligations.......... (26,516) (14,859) 4,117 3,252
Unrecognized net (gain) loss........ 16,725 155 (1,759) (1,410)
Unrecognized prior service cost..... 12,651 13,839 505 389
Unrecognized net assets at January
1, 1994 and 1993, net of
amortization...................... (2,581) (2,910) (1,359) (1,519)
Minimum Liability................... (1,208) (2,183) (321) (480)
-------- -------- -------- --------
Accrued retirement annuity expense
recognized in the balance sheet... $ (929) $ (5,958) $ 1,183 $ 232
======== ======== ======== ========
The increase in the actuarial present value of accumulated benefit
obligations ("ABO") for the domestic plans is largely due to the change in the
discount rate from 8.25% to 7.5% as well as the normal one year's additional
accrual of benefit under all plans. The increase in the ABO for the foreign
plans is largely due to the normal one year's accrual of additional benefits.
Assumptions used in accounting for the defined benefit plans as of December
31, 1995 and 1994 for both the U.S. and Non-U.S. plans were as follows:
NON-U.S.
U.S. PLANS PLANS
------------- ------------
1995 1994 1995 1994
---- ----- ---- ----
Weighted-average discount rates....................... 7.5% 8.25% 8.1% 8.2%
Projected rates of increase in compensation........... 5.5% 5.5% 4.8% 4.8%
Expected rates of return on plan assets............... 9.0% 9.0% 8.4% 8.5%
Plan assets for the U.S. plans consist principally of deposit
administration contracts and an investment contract with an insurance company.
Other assets held by the U.S. plans not under insurance contracts are invested
in equity and fixed income securities. Plan assets for the non-U.S. plans are
invested in non-U.S. insurance contracts and non-U.S. equity and fixed income
securities.
The Company does not have and does not provide for any postretirement or
postemployment benefits other than pensions.
The Cleveland, Ohio area operations have a Guaranteed Continuous Employment
Plan covering substantially all employees, which, in general, states that the
Company will provide work for at least 75% of every standard work week
(presently 40 hours). This plan does not guarantee employment when the Company's
ability to continue normal operations is seriously restricted by events beyond
the control of the
29
31
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company. The Company has reserved the right to terminate this plan effective at
the end of a calendar year by giving notice of such termination not less than
six months prior to the end of such year.
NOTE G -- INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
The Company's primary business is the design, manufacture and sale, in the
domestic and international markets of arc and other welding products and related
gases used in the welding process. The Company also designs, manufactures and
sells integral horsepower industrial electric motors. Financial information by
geographic areas follows:
UNITED OTHER
STATES EUROPE COUNTRIES ELIMINATIONS TOTAL
-------- -------- --------- ------------ ----------
1995:
Net sales to
unaffiliated
customers........... $711,940 $201,672 $118,786 $1,032,398
Inter-geographic
sales............... 53,347 15,662 9,092 $(78,101)
-------- -------- --------- ------------ ----------
Total.......... $765,287 $217,334 $127,878 $(78,101) $1,032,398
======== ======== ======== =========== =========
Pre-tax profit
(loss).............. $ 79,737 $ 10,172 $ 10,956 $ (1,281) $ 99,584
Identifiable assets.... 404,972 194,319 80,921 (62,452) 617,760
1994:
Net sales to
unaffiliated
customers........... $641,607 $156,803 $108,194 $ 906,604
Inter-geographic
sales............... 40,876 10,558 7,060 $(58,494)
-------- -------- --------- ------------ ----------
Total.......... $682,483 $167,361 $115,254 $(58,494) $ 906,604
======== ======== ======== =========== =========
Pre-tax profit
(loss).............. $ 68,316 $ 7,891 $ 4,062 $ (101) $ 80,168
Identifiable assets.... 350,012 165,722 76,129 (35,006) 556,857
1993:
Net sales to
unaffiliated
customers........... $543,458 $211,268 $ 91,273 $ 845,999
Inter-geographic
sales............... 29,077 6,663 4,806 $(40,546)
-------- -------- --------- ------------ ----------
Total.......... $572,535 $217,931 $ 96,079 $(40,546) $ 845,999
======== ======== ======== =========== =========
Pre-tax profit
(loss).............. $ 42,570 $(68,865) $(22,903 ) $ 2,248 $ (46,950)
Identifiable assets.... 389,247 172,136 69,871 (71,711) 559,543
Intercompany sales between geographic regions are accounted for at prices
comparable to normal, customer sales and are eliminated in consolidation.
Export sales (excluding intercompany sales) from the United States were
$81,770 in 1995, $64,400 in 1994 and $58,100 in 1993.
NOTE H -- ACQUISITIONS
In June 1993, the Company purchased the outstanding minority interest in
its subsidiary in Spain for approximately $8,500. The transaction was accounted
for as a purchase and the increased interest in the results of operations was
included in the consolidated statements of operations from the transaction date.
NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has various financial instruments, including cash, cash
equivalents and short and long-term debt. The Company has determined the
estimated fair value of these financial instruments by using available
30
32
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
market information and appropriate valuation methodologies which require
judgment. Accordingly, the use of different market assumptions or estimation
methodologies could have a material effect on the estimated fair value amounts.
The total notional value of forward currency exchange contracts at December 31,
1995 is $35 million.
The carrying amounts and estimated fair value of the Company's significant
other financial instruments at December 31, 1995 are as follows:
CARRYING FAIR
AMOUNTS VALUE
-------- --------
Cash and Cash Equivalents..................................... $10,087 $ 10,087
Notes Payable to Banks........................................ 28,541 28,541
Long-Term Debt................................................ 94,850 101,026
Forward Contracts............................................. (167 ) (167)
NOTE J -- OPERATING LEASES
The Company leases sales offices, warehouses and distribution centers,
office equipment and data processing equipment. Such leases, some of which are
noncancellable, and in many cases, include renewals, expire at various dates.
The Company pays most maintenance, insurance and tax expenses relating to leased
assets. Rental expense was $8,852 in 1995, $9,226 in 1994 and $9,864 in 1993.
At December 31, 1995, total minimum lease payments for noncancellable
operating leases are as follows:
1996.................................... $ 8,022
1997.................................... 6,467
1998.................................... 5,187
1999.................................... 4,422
2000.................................... 2,991
Thereafter.............................. 4,620
-------
Total......................... $31,709
=======
NOTE K -- CONTINGENCIES
The Company and its subsidiaries are involved in various litigation in the
ordinary conduct of its business. Based on information known to the Company,
Management believes the outcome of all pending litigation will not have a
material effect upon the financial position of the Company.
31
33
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- QUARTERLY FINANCIAL DATA (UNAUDITED)
1995 MAR 31 JUN 30 SEP 30 DEC 31
----------------------------------------- -------- -------- -------- --------
Net sales................................ $263,407 $268,199 $249,525 $251,267
Gross profit............................. 101,862 107,215 93,530 95,240
Income before income taxes............... 26,856 27,962 23,473 21,293
Net income............................... 16,054 17,385 14,710 13,326
Net income per share (a) (b)............. $ 0.73 $ 0.79 $ 0.59 $ 0.54
DEC
1994 MAR 31 JUN 30 SEP 30 31(C)
----------------------------------------- -------- -------- -------- --------
Net sales................................ $210,525 $234,173 $230,752 $231,154
Gross profit............................. 81,966 90,316 89,904 88,159
Income before income taxes............... 17,785 21,494 21,499 19,390
Net income............................... 10,407 12,307 11,669 13,625
Net income per share (b)................. $ 0.48 $ 0.56 $ 0.53 $ 0.62
- ---------------
(a) Net income per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in 1995
does not equal the total computed for the year due to stock transactions
which occurred during 1995.
(b) Per share amounts reflect the June 12, 1995 stock dividend (see Note B).
(c) Includes $2,500 of net adjustments to various expense accruals and $3,140
for the devaluation of the Mexican peso, offset partially by net favorable
inventory adjustments of $1,900 and adjustments to restructuring accruals of
$3,235. Also includes a favorable $2,000 adjustment to income taxes to
reflect the annual effective income tax rate.
32
34
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS (2) END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) DEDUCTIONS PERIOD
- -----------------------------------------------------------------------------------------------------
Allowance for doubtful
accounts:
Year ended December 31,
1995....................... $4,251 $ 944 $ 194(1) $1,473 $3,916
Year ended December 31,
1994....................... $6,258 $ 995 $ 117(1) $3,119(3) $4,251
Year ended December 31,
1993....................... $5,434 $2,037 $ (723)(1) $ 490 $6,258
- ---------------
(1) Currency translation adjustment.
(2) Uncollectible accounts written-off, net of recoveries.
(3) Includes $2,480 relating to accounts written off during 1994 in connection
with the Company's restructuring activities.
33
35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ---------------------------------------------------------------------------------
3(a) Restated Articles of Incorporation of The Lincoln Electric Company (filed as
Exhibit 4.1 to the Registration Statement on Form S-3 of The Lincoln Electric
Company, as filed and amended on June 26, 1995, SEC Registration No. 33-58881 and
incorporated herein by reference and made a part hereof).
3(b) Restated Code of Regulations of The Lincoln Electric Company (filed as Exhibit 2
to the Registration Statement on Form 8-A for the Class A Common Shares of The
Lincoln Electric Company filed on June 5, 1995 and incorporated herein by
reference and made a part hereof).
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(a) 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; 8.98% Senior Note Due
November 26, 2003 (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 October 31, 1994 (filed as Exhibit 4(a) to Form 10-Q of The Lincoln
Electric Company for the period ended September 30, 1994, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof); and as further amended
by letter dated December 20, 1995 filed herewith.
4(b) Credit Agreement dated December 20, 1995 among the Company, the Banks listed on
the signature page thereof, and Society National Bank, as Agent, and filed
herewith.
10(a) The Lincoln Electric Company 1988 Incentive Equity Plan (filed as Exhibit 28 to
the Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No.
33-25209 and incorporated herein by reference and made a part hereof).
10(b) Form of Indemnification Agreement (filed as Exhibit 10(b) to Form 10-K of The
Lincoln Electric Company for the year ended December 31, 1994, SEC File No.
0-1402 and incorporated herein by reference).
10(c) The Lincoln Electric Company Supplemental Executive Retirement Plan, as amended,
filed herewith.
10(d) The Lincoln Electric Company Deferred Compensation Plan, as amended, filed
herewith.
10(e) Description of Management Incentive Plan, filed herewith.
10(f) Description of Non-Employee Directors' Restricted Stock Plan, filed herewith as
set forth in resolutions of the Board of Directors dated March 30, 1995.
10(g) The Lincoln Electric Company Non-Employee Directors' Deferred Compensation Plan,
filed herewith.
10(h) Retirement Agreement between the Company and Frederick W. Mackenbach dated
November 8, 1995, filed herewith.
10(i) Employment Agreement between the Company and Anthony A. Massaro dated July 14,
1993, as amended on January 1, 1994 (filed as Exhibit 10(e) to Form 10-K of The
Lincoln Electric Company for the year ended December 31, 1994, SEC File No.
0-1402, and incorporated herein by reference).
34
36
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ---------------------------------------------------------------------------------
10(j) Employment Agreement between the Company and H. Jay Elliott dated June 22, 1993
(filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year
ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by
reference).
10(k) Employment Agreement between the Company and Frederick G. Stueber dated February
22, 1995 (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company for
the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by
reference).
10(l) The Lincoln Electric Company Employee Savings Plan (filed on Form S-8
Registration Statement of The Lincoln Electric Company, SEC File No. 33-64187 and
incorporated herein by reference and made a part hereof).
10(m) 1995 Lincoln Stock Purchase Plan (filed on Form S-8 Registration Statement of The
Lincoln Electric Company, SEC File No. 33-64189 and incorporated herein by
reference and made a part hereof).
11 Computation of earnings per share.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
35