UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2001 Commission File No. 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.(Exact name of registrant as specified in its charter)
(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 March 31, 2001 was 42,373,113.
1
LINCOLN ELECTRIC HOLDINGS, INC.
See notes to these consolidated financial statements.
2
LINCOLN ELECTRIC HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(Amounts in thousands of dollars)
3
LINCOLN ELECTRIC HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(Amounts in thousands of dollars, except share data)
4
LINCOLN ELECTRIC HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands of dollars)(UNAUDITED)
5
LINCOLN ELECTRIC HOLDINGS, INC.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)March 31, 2001
NOTE A – BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. However, in the opinion of management, these consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and changes in cash flows for the interim periods. Operating results for the three-months ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.
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, 2000.
NOTE B – EARNINGS PER SHARE
Basic and diluted earnings per share were computed as follows:
6
NOTE C – COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
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 – ACCRUED EMPLOYEE COMPENSATION AND BENEFITS
Accrued employee compensation and benefits at March 31, 2001 include provisions for year-end bonuses and related payroll taxes of approximately $12 million related to Lincoln employees worldwide. The payment of bonuses is discretionary and is subject to approval by the Board of Directors.
NOTE F – SEGMENT INFORMATION
7
NOTE G – ACQUISITIONS
During the first quarter of 2000, the Company acquired a 35% equity interest in Kuang Tai, a Taiwan-based manufacturer of welding wire for $16.7 million and 100% of C.I.F.E. S.r.l., an Italian-based manufacturer of MIG wire for $2.5 million, plus assumed debt of $17.0 million, which was accounted for as a purchase.
NOTE H – NEW ACCOUNTING PRONOUNCEMENT
On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The impact from the adoption of this Statement was not material to the Company’s consolidated financial statements.
The Company recognizes derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value of derivative instruments depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.
For derivative instruments that qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. For derivative instruments that qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows), the effective portion of the gain or loss on the derivative instrument is reported as a component of Other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any remaining gain or loss on the derivative instrument is recognized in earnings. The Company does not hedge its net investments in foreign subsidiaries. For derivative instruments not designated as hedges, the gain or loss from changes in their fair values are recognized in earnings.
NOTE I – CONTINGENCIES
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, product liability claims and health, safety and environmental claims. The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously. All costs associated with these claims, including defense and settlements, have been immaterial to the Company’s consolidated financial statements. Based on the Company’s historical experience in litigating these claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material adverse impact upon the Company’s consolidated financial statements.
8
Part 1 – Item 2
Management’s Discussion and Analysis 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, 2001 and 2000:
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000
Net Sales. Net sales for the first quarter 2001 were $252.6 million, a $29.2 million or 10.4% decline from $281.8 million last year. Net sales from U.S. operations were $166.2 million for the quarter, down 13.5% from $192.2 million for the first quarter last year. This decrease reflects lower U.S. demand due to continued softening in the industrial segment of the U.S. market. Export sales from the U.S. of $14.9 million were down $0.3 million or 2.2% from last year. U.S. exports have declined primarily in Latin America because of changes in product sourcing to locations outside the U.S., as well as poor economic conditions in certain regions of Latin America. Exports have increased into the regions of Asia and Russia, Africa and the Middle East. Non-U.S. sales decreased 3.5% to $86.4 million in the first quarter 2001, compared with $89.6 million last year. The strengthening of the U.S. dollar continues to have a negative impact on non-U.S. sales compared with last year. This negative impact on net sales was $6.2 million or 2.4% for the quarter. In local currencies, European sales increased 6.4%. In the rest of the world, the Company’s sales were relatively flat in local currencies.
Gross Profit. Gross profit of $83.4 million for the first quarter 2001 declined 13.2% or $12.7 million from last year. Gross profit as a percentage of net sales declined to 33.0% from 34.1% compared with the first quarter last year. Gross profit margins in the U.S. declined because of lower sales volumes. Non-U.S. gross margins were up year-over-year due to higher sales levels (local currencies), product mix and favorable production variances.
Selling, General & Administrative (SG&A) Expenses. SG&A expenses decreased $6.5 million or 11.5% to $50.2 million for the first quarter 2001, compared with $56.7 million for 2000. SG&A expense as a percentage of net sales declined to 19.9% from 20.1% in the 2000 period. The reduction in SG&A expenses is due primarily to lower employee costs including the costs related to the Company’s discretionary year-end employee bonus program, net of hospitalization costs. The bonus costs are down due to lower actual results compared to objectives. The final 2001 bonus payout will be subject to approval by the Company’s Board of Directors during the fourth quarter.
Interest Expense. Interest expense decreased to $1.8 million in the first quarter 2001 from $1.9 million for the same period last year. The decrease in interest expense was commensurate with decreased short- and long-term borrowings.
9
Income Taxes. Income taxes for the first quarter 2001 were $9.4 million on income before income taxes of $31.4 million, an effective rate of 30.1%, as compared with income taxes of $14.0 million on income before income taxes of $38.4 million, or an effective rate of 36.4% for the same period in 2000.
Net Income. Net income for the first quarter 2001 of $22.0 million was $2.4 million lower than last year. Diluted earnings per share for 2001 decreased to $0.52 per share from $0.56 per share in 2000. The effect of foreign currency exchange rate movements on net income was not significant.
Liquidity and Capital Resources
Cash provided from operating activities for the three months ended March 31, 2001 was $14.3 million compared with $51.2 million for 2000. Lower cash flow from operations is due to lower net income, increased inventory levels, lower income tax accruals and a lower bonus accrual.
The Company’s ratio of total debt to total capitalization decreased to 16.3% at March 31, 2001 from 17.3% at December 31, 2000. Debt was accumulated during the first quarter of 2000 to fund share repurchases and acquisitions. The Company has not purchased any of its shares since April 2000, and has consequently reduced its debt levels. Since the share repurchase program was first begun in September 1998, the Company has purchased a total of 7,125,380 shares of its common stock on the open market at a cost of $143.1 million.
Capital expenditures decreased $3.3 million to $7.8 million in the first quarter of 2001, compared with $11.1 million in 2000. This decline was predominantly related to capacity expansion in Canada, Mexico and Brazil in 2000.
The Company paid cash dividends of $6.4 million or $0.15 per share during the first three months of 2001, a 3.2% increase over the $6.2 million paid in the first quarter 2000. Cash dividends declared per share increased 7.1% year-over-year.
The quarterly dividend of $0.15 per share was paid April 14, 2001, to holders of record on March 30, 2001. On May 1, 2001, a dividend of $0.15 per share was declared which will be payable on July 15, 2001 to shareholders of record as of June 30, 2001.
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. All such forward-looking statements involve risks and uncertainties. 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 future results, including:
10
The above list of factors that could materially affect the Company’s future results is not exclusive. Any forward-looking statements reflect only the beliefs of the Company or its management at the time the statement is made.
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
During March 2001, Ranko (Ron) Cucuz was elected to the Board of Directors. Mr. Cucuz is chairman and CEO of Hayes Lemmerz International, Inc., a leading worldwide supplier of automotive components.
Item 6. Exhibits and Reports on Form 8-K – None.
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.
/s/ H. JAY ELLIOTT
May 11, 2001
11