1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three months ended March 31, 1997 Commission File No. 0-1402 THE LINCOLN ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Ohio 34-0359955 (State of incorporation) (I.R.S. Employer Identification No.) 22801 St. Clair Avenue, Cleveland, Ohio 44117 (Address of principal executive offices) (Zip Code) (216) 481-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the issuer's classes of common stock as of March 31, 1997 were as follows: Common Shares..................................................10,488,212 Class A Common Shares..........................................13,837,697 Class B Common Shares ......................................... 486,772 ---------- Total outstanding shares..............................24,812,681 =========== 1 2 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of dollars, except share data) (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1997 1996 --------- --------- Net sales $ 280,721 $ 278,712 Cost of goods sold 172,958 172,158 --------- --------- Gross profit 107,763 106,554 Distribution cost/selling, general & administrative expenses 73,410 78,460 --------- --------- Operating income 34,353 28,094 Other income / (expense): Interest income 923 411 Other income 204 457 Interest expense (1,623) (2,211) --------- --------- Total other income / (expense) (496) (1,343) --------- --------- Income before income taxes 33,857 26,751 Income taxes 12,808 10,194 --------- --------- Net income $ 21,049 $ 16,557 ========= ========= Net income per share $ 0.85 $ 0.67 Cash dividends declared per share $ 0.15 $ 0.12 Average number of shares outstanding (in thousands) 24,813 24,894 See notes to these consolidated financial statements. 2 3 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars) (UNAUDITED) MARCH 31, DECEMBER 31, 1997 1996 ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 72,683 $ 40,491 Marketable securities 6,599 109 Accounts receivable (less allowance for doubtful accounts of $2,776 in 1997 and $2,878 in 1996) 165,349 151,287 Inventories: Raw materials and in-process 73,500 79,100 Finished goods 86,698 91,555 --------- --------- 160,198 170,655 Deferred income taxes 10,909 10,579 Other current assets 11,693 10,088 --------- --------- TOTAL CURRENT ASSETS 427,431 383,209 OTHER ASSETS Goodwill - net 36,295 37,440 Other 22,899 25,311 --------- --------- 59,194 62,751 PROPERTY, PLANT AND EQUIPMENT Land 11,302 11,710 Buildings 112,753 114,640 Machinery, tools and equipment 336,648 335,738 --------- --------- 460,703 462,088 Less: accumulated depreciation (261,838) (260,849) --------- --------- 198,865 201,239 --------- --------- TOTAL ASSETS $ 685,490 $ 647,199 ========= ========= 3 4 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars, except share data) (UNAUDITED) MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks $ 924 $ 2,607 Trade accounts payable 63,844 58,157 Salaries, wages and amounts withheld 29,334 18,983 Taxes, including income taxes 46,844 36,297 Dividend payable 3,721 2,977 Other current liabilities 44,503 39,976 Current portion of long-term debt 10,407 10,528 --------- --------- TOTAL CURRENT LIABILITIES 199,577 169,525 Long-term debt, less current portion 64,030 64,148 Deferred income taxes 3,497 3,643 Other long-term liabilities 18,035 18,107 SHAREHOLDERS' EQUITY Common Shares, without par value -- at stated capital amount: Authorized -- 30,000,000 shares; Outstanding -- 10,488,212 shares in 1997 and 10,484,247 shares in 1996 2,098 2,097 Class A Common Shares (non-voting), without par value -- at stated capital amount: Authorized -- 30,000,000 shares; Outstanding -- 13,837,697 shares in 1997 and 1996 2,768 2,768 Class B Common Shares, without par value -- at stated capital amount: Authorized -- 2,000,000 shares; Outstanding -- 486,772 shares in 1997 and 1996 97 97 Additional paid-in capital 103,849 103,720 Retained earnings 307,580 290,252 Cumulative translation adjustments (16,041) (7,158) --------- --------- TOTAL SHAREHOLDERS' EQUITY 400,351 391,776 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 685,490 $ 647,199 ========= ========= See notes to these consolidated financial statements. 4 5 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1997 1996 -------- --------- OPERATING ACTIVITIES Net income $ 21,049 $ 16,557 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,877 7,804 Changes in operating assets and liabilities: (Increase) in accounts receivable (18,200) (16,035) Decrease (increase) in inventories 6,642 (226) (Increase) decrease in other current assets (1,854) 643 Increase in accounts payable 7,282 2,278 Increase in other current liabilities 26,741 30,439 Gross change in other noncurrent assets and liabilities 1,866 670 Other - net (186) 2,463 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 50,217 44,593 INVESTING ACTIVITIES Purchases of property, plant and equipment (7,600) (7,883) Purchase of marketable securities (6,500) -- Proceeds from sale of property, plant and equipment 110 380 -------- -------- NET CASH (USED) BY INVESTING ACTIVITIES (13,990) (7,503) FINANCING ACTIVITIES Short-term borrowings - net (1,622) (25,700) Long-term borrowings - net (191) (5,244) Dividends paid (2,977) (2,988) Other 130 (9) -------- -------- NET CASH (USED) BY FINANCING ACTIVITIES (4,660) (33,941) Effect of exchange rate changes on cash and cash equivalents 625 773 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 32,192 3,922 Cash and cash equivalents at beginning of period 40,491 10,087 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 72,683 $ 14,009 ======== ======== See notes to these consolidated financial statements. 5 6 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1997 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to the preparation of the quarterly report on Form 10-Q. Accordingly, these consolidated financial statements do not include all of the information and notes required for complete financial statements. These consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) necessary to fairly present the financial position, results of operations and changes in cash flows for the interim period. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. NOTE B - INVENTORY VALUATION The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory calculation. NOTE C - SALARIES, WAGES AND AMOUNTS WITHHELD Salaries, wages and amounts withheld at March 31, 1997 include provisions for year-end bonuses and related payroll taxes of $17.6 million. The payment of bonuses is discretionary and is subject to approval by the Board of Directors. NOTE D - NEW ACCOUNTING STANDARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which simplifies the computation of earnings per share (EPS), specifically focusing on the computation of weighted average shares outstanding. SFAS 128 is required to be adopted in the fourth quarter of 1997. The Company expects the adoption of SFAS 128 to result in immaterial changes in the amounts currently reported for weighted average shares outstanding. Accordingly, no impact on EPS is expected. 6 7 Part 1 - Item 2 MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the Company's results of operations for the three month periods ended March 31, 1997 and 1996: Three months ended March 31, ---------------------------------------------------------- (amounts in millions of dollars) 1997 1996 -------------------------- ---------------------------- Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- Net sales $ 280.7 100.0% $ 278.7 100.0% Cost of goods sold 173.0 61.6% 172.2 61.8% -------- ------- -------- -------- Gross profit 107.7 38.4% 106.5 38.2% Distribution cost/selling, general and administrative expenses 73.4 26.2% 78.4 28.2% -------- ------- -------- -------- Operating income 34.3 12.2% 28.1 10.0% Other income 0.2 0.1% 0.5 0.2% Interest expense, net (0.7) (0.2%) (1.8) (0.6%) -------- -------- -------- -------- Income before income taxes 33.8 12.1% 26.8 9.6% Income taxes 12.8 4.6% 10.2 3.7% -------- -------- -------- -------- Net income $ 21.0 7.5% $ 16.6 5.9% ======== ======== ======== ======== NET SALES. Net sales for the quarter ended March 31, 1997 increased $2.0 million or 0.7% to $280.7 million from $278.7 million for the same period last year. Net sales from the Company's U.S. operations totaled $193.2 million for the first three months of 1997, an increase of 1.2% or $2.2 million over the prior year. Prior year U.S. sales include the results of the Company's gas distribution businesses, which were sold during the third quarter of 1996. Excluding the incremental impact of those operations, U.S. sales increased $7.0 million or 3.8% over first quarter 1996. The U.S. sales growth was led by strong growth in export sales, which increased $4.4 million or 19.6% to $26.8 million for the first quarter of 1997, compared with $22.4 last year. Non-U.S. sales were $87.5 million through March 1997, compared to $87.7 million for the first quarter last year. The strengthening U.S. dollar against, principally, European currencies had an overall negative impact on non-U.S. sales of $4.0 million on a year-over-year basis. Excluding the impact of currency changes, non-U.S. sales increased 4.3% from the comparable period in 1996. Both the U.S. and non-U.S. sales increases were achieved through volume growth. GROSS PROFIT. Gross profit increased 1.1% or $1.2 million to $107.7 million for the first quarter 1997. Benefiting from higher plant utilization and operating efficiencies, gross profit as a percentage of sales increased to 38.4% for 1997 compared with 38.2% for 1996. DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $5.0 million or 6.4% to $73.4 million for the first quarter 1997 as compared with 1996. SG&A expenses for 1996 include a $3.4 million charge ($2.1 million after tax, or $0.08 per share) for costs related to a litigation settlement. Excluding these charges, SG&A expenses decreased $1.6 million or 2.1% from the prior year. The effect of exchange rate changes on SG&A expenses was a decrease of approximately $0.9 million. The decline in SG&A expenses as a percentage of sales reflects continuing cost control measures and increased operational efficiencies. Included in SG&A expenses are costs related to the Company's discretionary year-end employee bonus program, net of hospitalization costs, of $17.3 million in the first quarter 1997 compared with $17.0 million in the 1996 period. The bonus payout is subject to approval by the Company's Board of Directors during the fourth quarter. 7 8 INTEREST EXPENSE, NET. Interest expense, net was $0.7 million for the quarter ended March 31, 1997 compared to $1.8 million for the first quarter 1996, a decrease of 61.1%. The decreased net interest expense is a result of lower debt levels and from increased interest income generated from higher balances in cash and cash equivalents. INCOME TAXES. Income taxes for the quarter ended March 31, 1997 were $12.8 million on income before income taxes of $33.8 million, an effective rate of 37.8%, as compared with income taxes of $10.2 million on income before income taxes of $26.8 million, or an effective rate of 38.1% for the same period in 1996. The effective tax rate for the year ended December 31, 1996 was 37.0%. NET INCOME. Net income increased 27.1% to $21.0 million or $0.85 per share from $16.6 million or $0.67 per share for the first quarter 1996. Net income for the quarter ended March 31, 1996 reflects a charge for a legal settlement amounting to $2.1 million or $0.08 per share, as discussed above. The effect of the strengthening U.S. dollar against other currencies on net income was not significant. LIQUIDITY AND CAPITAL RESOURCES Cash provided from operating activities for the quarter ended March 31, 1997 was $50.2 million compared with $44.6 million for the first quarter 1996. Increased earnings and the continuing improvement in the management of working capital has resulted in increased operational cash flow. Capital expenditures for property, plant and equipment were relatively flat as compared with the same period in 1996 and reflect the Company's continuing emphasis on maintaining and improving capacity and infrastructure. The Company's ratio of total debt to total capitalization decreased to 15.8% at March 31, 1997 from 16.5% at December 31, 1996. The Company paid a cash dividend of $3.0 million or $0.12 per share in January 1997. NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which simplifies the computation of earnings per share (EPS), including the computation of weighted average shares outstanding. SFAS 128 is required to be adopted in the fourth quarter of 1997. The Company expects the adoption of SFAS 128 to result in immaterial changes in the amounts currently reported for weighted average shares outstanding, and accordingly, no impact on EPS is expected. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company, statements by its employees or information included in its filings with the Securities and Exchange Commission (including those portions of this Management's Discussion and Analysis that refer to the future) may contain forward-looking statements that are not historical facts. Those statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, and the Company's future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including: 8 9 - Competition. The Company operates in a highly competitive global environment, and is subject to a variety of competitive factors such as pricing, the actions and strength of its competitors, and the Company's ability to maintain its position as a recognized leader in welding technology. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against other currencies. The Company's competitive position could also be adversely affected should new or emerging entrants become more active in the arc welding business. - International Markets. The Company's long term strategy is to increase its share in growing international markets, particularly Asia, Latin America, Central Europe and other developing markets. However, there can be no certainty that the Company will be successful in its expansion efforts. The Company is subject to the currency risks of doing business abroad and expansion poses challenging demands within the Company's infrastructure. Further, many developing economies have a significant degree of political and economic instability, which may adversely affect the Company's international operations. - Cyclicality and Maturity of the Welding Industry. The United States arc welding industry is both mature and cyclical. The growth of the domestic arc welding industry has been and continues to be constrained by numerous factors, including the substitution of plastics and other materials in place of fabricated metal parts in many products and structures. Increased offshore production of fabricated steel structures has also cut into the domestic demand for arc welding products. - Litigation. The Company, like other manufacturers, is subject to a variety of lawsuits and potential lawsuits that arise in the ordinary course of business. See "Item 1. Legal Proceedings" within the Company's Annual Report on Form 10-K, as well as the update in this report. While historical litigation costs have not been material to the Company, there can be no assurance that this will remain the case, or that insurance coverage will be adequate. - Operating Factors. The Company is highly dependent on its skilled workforce and efficient production facilities, which could be adversely affected by its labor relations, business interruptions at its domestic facilities and short-term or long-term interruptions in the availability of supplies or raw materials or in transportation of finished goods. - Research and Development. The Company's continued success depends, in part, on its ability to continue to meet customer welding needs through the introduction of new products and the enhancement of existing product design and performance characteristics. There can be no assurances that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to the operating results of the Company, or that product development will continue at a pace to sustain future growth. - Motor Division. The Company has made substantial capital investments to modernize and expand its production of electric motors. While management believes that the profitability of this investment will improve, success is largely dependent on increased market penetration. The Company is in the process of revising its sales and marketing programs. 9 10 Part II - Other Information Item 1. Legal Proceedings As described in "Item 3. Legal Proceedings" of the Company's Annual Report on Form 10-K for 1996 (Commission File 0-1402), the Company has been named, in filings made on or after May 1996 in the Superior Court of California, as a defendant or co-defendant in lawsuits filed by building owners in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of 1994, and seeking compensatory damages and in some instances punitive damages relating to the sale and use of the E70T-4 category of welding electrode. Several of these cases were removed during the first quarter of 1997 to the Federal District of California, Central District. All but one of the cases, including the PACIFIC DESIGN CENTER case, have now been remanded to state court. Item 2. Changes in Securities -- None. Item 3. Defaults Upon Senior Securities -- None. Item 4. Submission of Matters to a Vote of Security Holders -- None. Item 5. Other Information -- None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit No. (27) Financial Data Schedule. (b) Reports on Form 8-K (1) A report on Form 8-K was filed on January 6, 1997 which incorporated a press release by the Company responding to newspaper articles discussing the role of welding electrodes in seismic zone applications. (2) A report on Form 8-K was filed on January 24, 1997 which disclosed certain lawsuits in which the Company was named as a co-defendant arising from property damage claimed to have been discovered after the Northridge, California, earthquake of 1994. The complaints alleged that a certain category of welding electrode manufactured by the Company and other defendants was defective for use in seismic zone building construction. The Company disclosed its intention to vigorously defend against all actions. 10 11 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE LINCOLN ELECTRIC COMPANY /s/ H. JAY ELLIOTT - -------------------------- H. Jay Elliott Senior Vice President, Chief Financial Officer and Treasurer May 9, 1997 11