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
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 June 30, 2001 was 42,383,658.
LINCOLN ELECTRIC HOLDINGS, INC.
See notes to these consolidated financial statements.
2
3
LINCOLN ELECTRIC HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(Amounts in thousands of dollars, except share data)
4
5
June 30, 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 six-months and three-months ended June 30, 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.
Certain amounts have been reclassified in order to conform to current year presentation.
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 June 30, 2001 include provisions for year-end bonuses and related payroll taxes of approximately $22 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 F – SEGMENT INFORMATION – (Continued)
Included in the United States segment for the three- and six-months ended June 30, 2000 was a net gain of $10.2 million ($6.3 million after-tax) principally due to a settlement of a dispute with one of the Company’s product liability insurance carriers.
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 PRONOUNCEMENTS
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
8
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 is recognized in earnings.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. Goodwill and intangibles deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of approximately $1.1 million ($0.02 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not yet determined the impact, if any, these impairment tests will have on the financial statements of the Company.
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.
9
Part 1 – Item 2Operations" -->
Management’s Discussion and Analysis of Financial Condition and Results ofOperations
The following table sets forth the Company’s results of operations for the three- and six-month periods ended June 30, 2001 and 2000:
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net Sales. Net sales for the second quarter 2001 were $249.4 million, a $24.8 million or 9.0% decline from $274.2 million last year. Net sales from U.S. operations were $164.5 million for the quarter, down 9.1% from $181.0 million for the second 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 $15.4 million were down $0.4 million or 2.5% from last year. U.S. exports to Asia and Latin America have declined due to poor economic conditions in those regions. Also, in Latin America changes in product sourcing to locations outside the U.S. affected export sales. Exports have increased into the regions of Canada and Russia, Africa and the Middle East. Non-U.S. sales decreased 8.9% to $84.9 million in the second quarter 2001, compared with $93.2 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 $6.3 million or 2.5% for the quarter. In local currencies, European sales decreased 1.2%. In the rest of the world, the Company’s sales decreased 3.4% in local currencies.
10
Gross Profit. Gross profit of $80.0 million for the second quarter 2001 declined 13.0% or $12.0 million from last year. Gross profit as a percentage of net sales declined to 32.1% from 33.5% compared with the second 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 lower distribution costs and favorable production variances resulting from production efficiencies.
Selling, General & Administrative (SG&A) Expenses. SG&A expenses decreased $6.4 million or 11.8% to $48.0 million for the second quarter 2001, compared with $54.4 million for 2000. SG&A expense as a percentage of net sales declined to 19.3% from 19.8% in the 2000 period. The reduction in SG&A expenses is due primarily to cost reductions and lower employee costs including the costs related to the Company’s discretionary year-end employee bonus program, net of hospitalization costs. 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.
Other Income. Other income for the second quarter of 2001 decreased to $0.7 million compared with $10.9 million for 2000. Other income for the second quarter of 2000 included a pre-tax gain of $10.2 million ($6.3 million after tax), principally from an insurance settlement regarding product liability coverage.
Interest Expense. Interest expense decreased to $1.6 million in the second quarter 2001 from $2.3 million for the same period last year. The decrease in interest expense was commensurate with decreased short and long-term borrowings. In the second quarter of 2000, the Company incurred higher debt levels to fund share repurchases, the acquisition of C.I.F.E. S.r.l. and a 35% interest in Kuang Tai during the first quarter of 2000.
Income Taxes. Income taxes for the second quarter 2001 were $9.4 million on income before income taxes of $31.2 million, an effective rate of 30.1%, as compared with income taxes of $16.9 million on income before income taxes of $46.3 million, or an effective rate of 36.5% for the same period in 2000.
Net Income. Net income for the second quarter 2001 of $21.8 million was $7.6 million lower than last year. Diluted earnings per share for 2001 decreased to $0.51 per share from $0.69 per share in 2000. Net income in the second quarter of 2000 included the pre-tax gain mentioned above. Excluding this gain, net income would have been $23.1 million or $0.54 per diluted share. The effect of foreign currency exchange rate movements on net income was not significant.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net Sales. Net sales for the first half of 2001 were $502.0 million, a $54.0 million or 9.7% decline from $556.0 million last year. Net sales from U.S. operations were $330.7 million for the first half, down 11.4% from $373.2 million for the first half of 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 $30.3 million were down $0.7 million or 2.3% 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 Canada and Russia, Africa and the Middle East. Non-U.S. sales decreased 6.3% to $171.3 million in the first half of 2001, compared with $182.8 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 $12.5 million or 2.4% for the half. In local currencies, European sales increased 2.5%. In the rest of the world, the Company’s sales decreased 1.7% in local currencies.
Gross Profit. Gross profit of $163.4 million for the first half of 2001 declined 13.1% or $24.7 million from last year. Gross profit as a percentage of net sales declined to 32.6% from 33.8% compared with the first half of 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), lower distribution costs, product mix and favorable production variances resulting from production efficiencies.
Selling, General & Administrative (SG&A) Expenses. SG&A expenses decreased $12.9 million or 11.6% to $98.2 million for the first half of 2001, compared with $111.1 million for 2000. SG&A expense as a percentage of net sales declined to 19.6% from 19.9% in the 2000 period. The reduction in SG&A expenses is due primarily to cost reductions and lower employee costs including the costs related to the Company’s discretionary year-end employee bonus program,
11
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.
Other Income. Other income for the first half of 2001 decreased to $0.5 million compared with $11.7 million for 2000. Other income for 2000 included a pre-tax gain of $10.2 million ($6.3 million after tax), principally from an insurance settlement regarding product liability coverage.
Interest Expense. Interest expense decreased to $3.4 million in the first half of 2001 from $4.3 million for the same period last year. The decrease in interest expense was commensurate with decreased short and long-term borrowings. In the first half of 2000, the Company incurred higher debt levels to fund share repurchases, the acquisition of C.I.F.E. S.r.l. and a 35% interest in Kuang Tai.
Income Taxes. Income taxes for the first half of 2001 were $18.8 million on income before income taxes of $62.6 million, an effective rate of 30.1%, as compared with income taxes of $30.8 million on income before income taxes of $84.6 million, or an effective rate of 36.5% for the same period in 2000.
Net Income. Net income for the first half of 2001 of $43.8 million was $10.0 million lower than last year. Diluted earnings per share for 2001 decreased to $1.03 per share from $1.25 per share in 2000. The net income in the first half of 2000 included a pre-tax gain mentioned above. Excluding this gain, net income would have been $47.5 million or $1.10 per diluted share. 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 six months ended June 30, 2001 was $55.1 million compared with $86.5 million for 2000. Lower cash flow from operations is primarily due to a lower net income and lower accruals for taxes and bonuses.
The Company’s ratio of total debt to total capitalization decreased to 14.1% at June 30, 2001 from 17.3% at December 31, 2000. Debt was accumulated during the first half 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. The Company is authorized to purchase up to an additional 2,874,620 shares under the repurchase program.
Capital expenditures increased $1.5 million to $19.8 million in the first half of 2001, compared with $18.3 million in 2000. This increase was predominantly related to equipment purchases in the U.S.
The Company paid cash dividends of $12.7 million or $0.30 per share during the first six months of 2001, a 4.1% increase over the $12.2 million paid in the first six months of 2000. Cash dividends declared per share increased 7.1% year-over-year.
The quarterly dividend of $0.15 per share was paid July 15, 2001, to holders of record on June 30, 2001.
New Accounting Pronouncements
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase
12
in net income of approximately $1.1 million ($0.02 per share) per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not yet determined the impact, if any, these impairment tests will have on the financial statements of the Company.
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:
The above list of factors that could materially affect the Company’s future results is not all inclusive. Any forward-looking statements reflect only the beliefs of the Company or its management at the time the statement is made.
13
Part II – Other Information
Item 1. 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, product liability claims and health, safety and environmental claims. Among such proceedings are the cases described below.
The Company is also a co-defendant in cases alleging asbestos induced illness involving claims by approximately 23,200 plaintiffs, of which claims by 19,212 plaintiffs were previously reported. In each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. The Company has been a co-defendant in other similar cases that have been resolved over the last 5 years involving 9,595 claimants. 9,527 of those claims were dismissed, eight were tried to defense verdicts and 60 were decided in favor of the Company following summary judgement motions.
14
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.
August 10, 2001
15