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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 1998 Commission File No. 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
AS SUCCESSOR TO THE LINCOLN ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
Ohio 34-1860551
(State of incorporation) (I.R.S. Employer Identification No.)
22801 St. Clair Avenue, Cleveland, Ohio 44117
(Address of principal executive offices) (Zip Code)
(216) 481-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the issuer's class of common stock as of
September 30, 1998 was 48,164,250.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars, except per share data)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales $ 288,106 $ 291,567 $ 901,998 $ 871,923
Cost of goods sold 176,917 181,044 553,172 539,634
--------- --------- --------- ---------
Gross profit 111,189 110,523 348,826 332,289
Distribution cost / selling, general &
administrative expenses 74,900 77,120 233,765 228,258
--------- --------- --------- ---------
Operating income 36,289 33,403 115,061 104,031
Other income / (expense):
Interest income 1,090 1,812 3,085 4,056
Other income 782 197 1,388 526
Interest expense (1,424) (1,636) (4,149) (4,940)
--------- --------- --------- ---------
Total other income / (expense) 448 373 324 (358)
--------- --------- --------- ---------
Income before income taxes 36,737 33,776 115,385 103,673
Income taxes 13,443 12,266 43,116 38,463
--------- --------- --------- ---------
Net income $ 23,294 $ 21,510 $ 72,269 $ 65,210
========= ========= ========= =========
Basic earnings per share $ 0.47 $ 0.44 $ 1.47 $ 1.32
Diluted earnings per share 0.47 0.44 1.46 1.32
Cash dividends declared per share $ 0.10 $ 0.075 $ 0.30 $ 0.225
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 81,123 $ 46,562
Marketable securities 311 10,194
Accounts receivable (less allowance for doubtful accounts
of $3,664 in 1998 and $3,071 in 1997) 177,232 163,437
Inventories:
Raw materials and in-process 87,103 80,606
Finished goods 107,286 97,962
-------- --------
194,389 178,568
Deferred income taxes 16,161 15,868
Other current assets 25,872 18,914
-------- --------
TOTAL CURRENT ASSETS 495,088 433,543
OTHER ASSETS
Goodwill - net 35,819 34,751
Other 53,908 41,861
-------- --------
89,727 76,612
PROPERTY, PLANT AND EQUIPMENT
Land 10,925 11,520
Buildings 114,284 111,353
Machinery, tools and equipment 394,083 349,085
-------- --------
519,292 471,958
Less: accumulated depreciation and amortization 286,844 269,923
-------- --------
232,448 202,035
-------- --------
TOTAL ASSETS $817,263 $712,190
======== ========
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars, except share data)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 3,281 $ 1,968
Trade accounts payable 55,334 52,497
Salaries, wages and amounts withheld 70,839 18,742
Taxes, including income taxes 42,030 40,284
Dividend payable 4,816 4,922
Other current liabilities 61,722 56,138
Current portion of long-term debt 9,906 9,971
--------- ---------
TOTAL CURRENT LIABILITIES 247,928 184,522
Long-term debt, less current portion 54,546 54,360
Deferred income taxes 11,739 11,024
Other long-term liabilities 25,948 25,113
SHAREHOLDERS' EQUITY Preferred Shares, without par value:
Authorized - 5,000,000 shares in 1998 and none in 1997;
Issued and outstanding - none -- --
Common Shares, without par value -- at stated capital amount:
Authorized - 120,000,000 shares in 1998 and 60,000,000 in 1997;
Issued - 49,283,950 shares in 1998 and 21,542,014 shares in 1997;
Outstanding - 48,164,250 shares in 1998 and 21,542,014 shares in 1997 4,928 2,154
Class A Common Shares (non-voting), without par value --
at stated capital amount:
Authorized - none in 1998 and 60,000,000 shares in 1997;
Issued and outstanding - none in 1998 and 27,676,726 shares in 1997 -- 2,768
Additional paid-in capital 104,438 103,722
Retained earnings 416,777 359,639
Accumulated other comprehensive income (28,203) (31,112)
Treasury shares, at cost, 1,119,700 shares in 1998, none in 1997 (20,838) --
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 477,102 437,171
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 817,263 $ 712,190
========= =========
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------
1998 1997
--------- ---------
OPERATING ACTIVITIES
Net income $ 72,269 $ 65,210
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 20,156 20,797
Changes in operating assets and liabilities:
Increase in accounts receivable (10,208) (23,068)
Increase in inventories (13,964) (4,845)
Increase in other current assets (6,427) (13,799)
Increase in accounts payable 455 2,316
Increase in other current liabilities 58,061 78,675
Gross change in other noncurrent assets and liabilities (3,038) (6,882)
Other - net 805 (1,053)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 118,109 117,351
INVESTING ACTIVITIES
Capital expenditures (48,599) (23,252)
Acquisitions of businesses and equity investment (10,360) --
Purchase of marketable securities (909) (53,895)
Proceeds from maturities of marketable securities 10,872 --
Proceeds from disposals of property, plant and equipment 4,047 818
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES (44,949) (76,329)
FINANCING ACTIVITIES
Short-term borrowings - net 379 (2,214)
Long-term borrowings - net (4,500) (598)
Treasury share purchases (20,838) --
Dividends paid (14,777) (10,390)
Other 500 (105)
--------- ---------
NET CASH (USED) BY FINANCING ACTIVITIES (39,236) (13,307)
Effect of exchange rate changes on cash and cash equivalents 637 591
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 34,561 28,306
Cash and cash equivalents at beginning of period 46,562 40,491
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 81,123 $ 68,797
========= =========
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
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 periods. Operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results to be expected for the
year ending December 31, 1998. 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, 1997.
Certain amounts have been reclassified to conform to the current period
presentation.
NOTE B - EARNINGS PER SHARE
Earnings per share amounts have been presented to conform to the requirements of
Statement of Financial Accounting Standards No. 128, Earnings per Share. The
following table sets forth the computation of basic and diluted earnings per
share (dollars and shares in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
Numerator:
Net income $23,294 $21,510 $72,269 $65,210
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 49,152 49,217 49,221 49,438
Effect of dilutive securities -
Employee stock options 244 201 244 134
------- ------- ------- -------
Denominator for diluted earnings per share -
Adjusted weighted-average shares 49,396 49,418 49,465 49,572
======= ======= ======= =======
Basic earnings per share $ 0.47 $ 0.44 $ 1.47 $ 1.32
Diluted earnings per share $ 0.47 $ 0.44 $ 1.46 $ 1.32
Share amounts have been adjusted for the recapitalization. See NOTE F of these
consolidated financial statements .
NOTE C - COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. Statement No. 130 established new standards
for the reporting and display of changes in equity that are not related to
shareholder transactions. Such items are termed other comprehensive income, and
include foreign currency translation adjustments and minimum pension liability
adjustments. Statement No. 130 had no impact on the Company's net income or
shareholders' equity. Currently, the Company's only component of other
comprehensive income is the change in the currency translation adjustment. The
components of comprehensive income for the three and nine months ended September
30, 1998 and 1997 follow (dollars in thousands):
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Three months ended Nine months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
-------- -------- -------- --------
Net income $ 23,294 $ 21,510 $ 72,269 $ 65,210
Other comprehensive income:
Change in currency translation adjustment 6,247 (2,392) 2,909 (17,046)
-------- -------- -------- --------
Comprehensive income $ 29,541 $ 19,118 $ 75,178 $ 48,164
======== ======== ======== ========
NOTE D - INVENTORY VALUATION
The valuation of inventory under the Last-In, First-Out (LIFO) method is made at
the end of each year based on inventory levels and costs at that time.
Accordingly, interim LIFO calculations, by necessity, are based on estimates of
expected year-end inventory levels and costs and are subject to final year-end
LIFO inventory calculations.
NOTE E - SALARIES, WAGES AND AMOUNTS WITHHELD
Salaries, wages and amounts withheld at September 30, 1998 include provisions
for year-end bonuses and related payroll taxes of approximately $59 million
related to Lincoln employees worldwide. The payment of bonuses is discretionary
and is subject to approval by the Board of Directors.
NOTE F - CORPORATE REORGANIZATION AND RECAPITALIZATION
On May 19, 1998, shareholders approved a reorganization of the capital and
corporate structure of The Lincoln Electric Company (the "reorganization"). As a
result of the reorganization, a new holding company, Lincoln Electric Holdings,
Inc., was created. Each Common Share and each Class A Common Share (non-voting)
of The Lincoln Electric Company was converted into two voting common shares of
Lincoln Electric Holdings, Inc., which also had the economic effect of a
two-for-one stock split. The reorganization also resulted in the authorization
of 5,000,000 Preferred Shares, none of which were issued or outstanding at
September 30, 1998. The historical share and per share amounts disclosed in
these consolidated financial statements have been restated to reflect the share
conversion.
NOTE G - ACQUISITIONS
During the first quarter of 1998 the Company's Canadian subsidiary acquired a
75% interest in Indalco Alloys, Inc. of Canada. The purchase price of the
acquisition was not significant. Indalco is a premier supplier of aluminum
welding wire and related products. The acquisition was accounted for as a
purchase. The results of Indalco, which were not significant, were included in
the Company's results of operations beginning in March 1998.
During April 1998, a German subsidiary of the Company purchased the assets and
business of Uhrhan & Schwill GmbH, located in Germany, a leader in the design
and installation of welding systems for pipe mills. The purchase price of the
acquisition was not significant.
During July 1998, a French subsidiary of the Company acquired a 50% equity
interest in AS Kaynak, a market leading welding products manufacturing
subsidiary of Eczacibasi Holdings, headquartered in Istanbul, Turkey. The
purchase price of the acquisition was not significant. The Company will account
for its investment in AS Kaynak under the equity method. Equity earnings of this
investment have been recorded under the caption Other income in the Consolidated
Statement of Income
NOTE H - NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement will become effective for the Company for
fiscal year 2000. The Company is evaluating the effect of this statement on its
accounting and
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reporting policies, but does not presently expect adoption to have a material
impact on the Company's consolidated financial position or results of
operations.
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
and nine month periods ended September 30, 1998 and 1997:
Three months ended September 30,
-----------------------------------------------------------
(dollars in millions) 1998 1997
------------------------- -------------------------
Amount % of Sales Amount % of Sales
-------- ---------- -------- ----------
Net sales $ 288.1 100.0% $ 291.6 100.0%
Cost of goods sold 176.9 61.4% 181.1 62.1%
-------- ------- -------- -------
Gross profit 111.2 38.6% 110.5 37.9%
Distribution cost / selling, general
and administrative expenses 74.9 26.0% 77.1 26.4%
-------- ------- -------- -------
Operating income 36.3 12.6% 33.4 11.5%
Interest income 1.1 0.4% 1.8 0.6%
Other income 0.7 0.3% 0.2 0.1%
Interest expense, net (1.4) (0.5%) (1.6) (0.6%)
-------- ------- -------- -------
Income before income taxes 36.7 12.8% 33.8 11.6%
Income taxes 13.4 4.7% 12.3 4.2%
-------- ------- -------- -------
Net income $ 23.3 8.1% $ 21.5 7.4%
======== ======= ======== =======
Nine months ended September 30,
-----------------------------------------------------------
(dollars in millions) 1998 1997
------------------------- -------------------------
Amount % of Sales Amount % of Sales
-------- ---------- -------- ----------
Net sales $ 902.0 100.0% $ 871.9 100.0%
Cost of goods sold 553.2 61.3% 539.6 61.9%
-------- ------- -------- -------
Gross profit 348.8 38.7% 332.3 38.1%
Distribution cost / selling, general
and administrative expenses 233.7 25.9% 228.3 26.2%
-------- ------- -------- -------
Operating income 115.1 12.8% 104.0 11.9%
Interest income 3.1 0.3% 4.1 0.5%
Other income 1.3 0.2% 0.5 0.1%
Interest expense, net (4.1) (0.5%) (4.9) (0.6%)
-------- ------- -------- -------
Income before income taxes 115.4 12.8% 103.7 11.9%
Income taxes 43.1 4.8% 38.5 4.4%
-------- ------- -------- -------
Net income $ 72.3 8.0% $ 65.2 7.5%
======== ======= ======== =======
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
- ------------------------------------------------------------------------------
30, 1997
- --------
NET SALES. Net sales for the quarter ended September 30, 1998 declined $3.5
million or 1.2% to $288.1 million from $291.6 million for the third quarter last
year. Net sales from U.S. operations were $201.2 million for the quarter, down
1.9% from $205.0 million for the third quarter last year. The softening of
export demand for U.S.-made products was
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the primary factor affecting sales volumes compared to the third quarter last
year. The worldwide economic difficulties, particularly in Asia and in Russia,
Africa and the Middle East, led to a drop in U.S. exports to $21.4 million in
the quarter, compared with $27.9 million last year. Non-U.S. sales increased
0.3% to $86.9 million for the third quarter 1998, compared with $86.6 million in
the third quarter last year. The declining value of certain foreign currencies
against the U.S. dollar continued to have a net overall negative impact on
non-U.S. sales. In local currencies, non-U.S. sales increased 4.7% over the
third quarter last year.
GROSS PROFIT. Gross profit of $111.2 million for the third quarter 1998
increased 0.6% or $0.7 million from the prior year. Gross profit as a percentage
of net sales increased to 38.6% compared with 37.9% for the third quarter last
year. Gross margin percentage increased over that of last year due to higher
factory utilization and improved product sales mix.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses decreased $2.2 million or 2.9% to $74.9 million for the third quarter
1998 as compared with $77.1 million for 1997. SG&A expense as a percentage of
sales has declined to 26.0% from 26.4% in the 1997 period. The lower SG&A costs
were the result of productivity improvements and cost containment measures,
particularly related to distribution and selling costs.
SG&A expenses include costs related to the Company's discretionary year-end
employee bonus program, net of hospitalization, of $18.9 million in the third
quarter 1998, compared with $19.0 million in the 1997 period. The final bonus
payout will be subject to approval by the Company's Board of Directors during
the fourth quarter.
INTEREST EXPENSE. Scheduled debt payments reduced debt levels and resulted in
interest expense declining $0.2 million to $1.4 million for the quarter ended
September 30, 1998 compared to $1.6 million for the third quarter 1997.
INCOME TAXES. Income taxes for the quarter ended September 30, 1998 were $13.4
million on income before income taxes of $36.7 million, an effective rate of
36.6%, as compared with income taxes of $12.3 million on income before income
taxes of $33.8 million, or an effective rate of 36.3% for the same period in
1997. The change in the effective rate over the prior year was largely the
result of the differing mix of earnings among subsidiaries.
NET INCOME. Net income increased 8.3% to $23.3 million or $0.47 per share
(diluted) from $21.5 million or $0.44 per share (diluted) for the third quarter
1997. The effect of foreign currency exchange rate movements on net income was
not significant.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
- --------------------------------------------------------------------------------
1997
- ----
NET SALES. Net sales for the nine months ended September 30, 1998 were $902.0
million, an increase of $30.1 million or 3.4% from $871.9 million for the same
period last year. Net sales from U.S. operations were $621.7 million for the
nine months ended September 30, 1998, up 3.4% or $20.4 million over the prior
year. This increase was due to market share gains domestically, which led to
U.S. domestic sales growth of 5.9% over the same period last year. U.S. export
sales were down $10.3 million or 12.6% for the first nine months of 1998, from
$81.7 million last year. Reflecting the troubled state of their economies, sales
in 1998 declined to the Asian region and the Russia, Africa and Middle East
region. Non-U.S. sales increased 3.6% to $280.3 million through September 30,
1998, compared with $270.6 million last year. Currency exchange rates, caused by
the strength of the U.S. dollar, had a negative impact on non-U.S. sales of
$17.0 million. In local currencies, non-U.S. sales through September 30, 1998
rose almost 10% over 1997.
GROSS PROFIT. Gross profit of $348.8 million for the first nine months of 1998
increased 5.0% or $16.5 million from the prior year. Gross profit as a
percentage of net sales increased 0.6% to 38.7% for 1998. Gross margin
percentage improved primarily due to increased plant utilization and favorable
product mix.
DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A
expenses increased $5.4 million or 2.4% to $233.7 million for the first nine
months of 1998, compared with $228.3 million for 1997. SG&A expenses include
costs related to the Company's discretionary year-end employee bonus program,
net of hospitalization costs. Bonus costs provided during the first nine months
of 1998 were $59.1 million compared with $54.7 million in 1997.
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Expected bonus costs are accrued in proportion to profitability, which has
improved over 1997. The final bonus payout will be subject to approval by the
Company's Board of Directors during the fourth quarter. The higher sales volume
has led to higher distribution costs. During 1998, the Company has also
increased spending on information systems related to computer upgrades and the
year 2000 issue. The Company's continued cost efficiency efforts resulted in
SG&A expense as a percentage of sales declining to 25.9% from 26.2% in the 1997
period.
INTEREST EXPENSE. Reduced debt levels from annual debt payments has resulted in
interest expense declining to $4.1 million for the nine months of 1998 compared
with $4.9 million for 1997.
INCOME TAXES. Income taxes for the nine months ended September 30, 1998 were
$43.1 million on income before income taxes of $115.4 million, an effective rate
of 37.4%, as compared with income taxes of $38.5 million on income before income
taxes of $103.7 million, or an effective rate of 37.1% for the same period in
1997. The increase in the 1998 effective rate over the prior year was primarily
the result of certain foreign subsidiaries exhausting net operating loss
carryforwards in 1997 and the mix of earnings among subsidiaries in 1998.
NET INCOME. Net income increased 10.8% to $72.3 million or $1.46 per share
(diluted) from $65.2 million or $1.32 per share (diluted) for 1997. The effect
of the strengthening U.S. dollar against foreign currencies on net income was
not significant.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided from operating activities for the nine months ended September 30,
1998 was $118.1 million compared with $117.4 million for 1997. During the third
quarter, specific efforts targeted at working capital efficiency have resulted
in improvements in working capital over the second quarter.
Capital expenditures for the nine months ended September 30, 1998 increased
$25.3 million to $48.6 million as compared with $23.3 million in 1997. The
increase in capital spending over 1997 was related to additional electrode
manufacturing capacity in China, Canada and Mexico and spending on information
systems in the U.S., Europe and Australia.
During 1998 the Company acquired Indalco Alloys Inc. of Canada, Uhrhan & Schwill
GmbH of Germany and a 50% equity interest in AS Kaynak of Turkey. The operating
results of Indalco are included within those of the Company beginning in March
1998, and for Uhrhan & Schwill, beginning in May 1998. The results of acquired
companies for the first nine months of 1998 were not significant.
The Company's ratio of total debt to total capitalization decreased to 12.4% at
September 30, 1998 from 13.2% at December 31, 1997.
During September 1998, the Company began purchasing shares of its common stock
on the open market under its share repurchase program. Through the end of the
third quarter, the Company purchased 1,119,700 shares at an average price of
$18.61 per share.
The Company paid cash dividends of $14.8 million or $0.30 per share during the
first nine months of 1998.
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:
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- - 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 for the year-ended December 31,
1997, as well as the update set forth in the quarterly report on Form
10-Q for the six months ended June 30, 1998. See also NOTE K of the
audited consolidated financial statements for the year-ended December
31, 1997.
- - 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 affected the domestic demand for arc welding
products.
- - 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.
INFORMATION SYSTEMS IMPLEMENTATIONS AND YEAR 2000 ISSUE
- -------------------------------------------------------
The Company is presently replacing many of its legacy Information Technology
(IT) Systems and believes that with conversions to new software and computer
systems, the Year 2000 Issue will be mitigated. Accordingly, all of the
Company's business units are actively involved in its Year 2000 conversion plan.
The Company will utilize both internal and external resources to replace and
test software.
The Company is also replacing systems used in the manufacture and distribution
of its products and does not anticipate any disruption in the supply of products
to its customers. In addition, to assure continuous flow of products to end
customers, the Company has surveyed and is now assessing Year 2000 readiness on
the part of the Company's supply chain. The majority of the suppliers responding
to the Company's survey indicated that they were in the process of implementing
their own Year 2000 compliance programs. Based upon the outcome of the
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Company's final assessment of its external supply chain components, business
process and systems contingency plans are being developed and will be
implemented accordingly.
The Company has completed or is currently on schedule with various phases of its
compliance program and has made significant progress towards the completion of
its total planned efforts. The Company expects the Year 2000 compliance efforts
to be substantially completed by the second quarter of 1999.
The incremental cost of Information Systems expenditures, including system
enhancements and non-IT Year 2000 projects, is estimated at $65 million, of
which $55 million is expected to be capitalized. The Company's total project
cost and estimated time to complete the project are based on presently available
information.
The Company plans to complete its IT Implementation and Year 2000 projects and
have all systems compliant before December 31, 1999. However, there are no
assurances that the systems of other companies on which the Company relies also
will be Year 2000 compliant. Any failure by the Company to meet its current
timetable or by the Company's vendors or customers to achieve Year 2000
compliance could have a material adverse effect on the Company's systems,
results of operations and financial condition.
Part II - Other Information
Item 1. Legal Proceedings - None.
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 Description
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(10) Form of Severance Agreement (as entered into by
the Company and the following executive
officers: Mssrs. Massaro, Stropki, Elliott,
Stueber and Vogt)
(27) Financial Data Schedule.
(b) Reports on Form 8-K - None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LINCOLN ELECTRIC HOLDINGS, INC.
/s/ H. JAY ELLIOTT
- -----------------------------
H. Jay Elliott
Senior Vice President,
Chief Financial Officer and Treasurer
November 13, 1998
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