Lincoln Electric - 10-Q quarterly report FY

 

(Exact Name of Registrant as Specified in Its Charter)

(216) 481-8100
(Registrants’ 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yeso No þ

The number of shares outstanding of the registrant’s common shares as of September 30, 2005 was 42,042,860.

 

 

     Item 1. Financial Statements (Unaudited)

LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars, except per share data)
(UNAUDITED)

See notes to these consolidated financial statements.

LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)

See notes to these consolidated financial statements.

LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)

See notes to these consolidated financial statements.

LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)

See notes to these consolidated financial statements.

LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of dollars except share and per share data)
September 30, 2005

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Lincoln Electric Holdings, Inc. (the “Company”) 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 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 and nine-months ended September 30, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.

The balance sheet at December 31, 2004 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, 2004.

Certain reclassifications have been made to the prior year financial statements to conform to current year classifications.

NOTE B – STOCK-BASED COMPENSATION

Effective January 1, 2003, the Company adopted the fair value method of recording stock options contained in Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation.” All employee stock option grants beginning January 1, 2003 are expensed over the stock option vesting period based on the fair value at the date the options are granted. Prior to 2003, the Company applied the intrinsic value method permitted under SFAS No. 123, as defined in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, in accounting for the Company’s stock option plans. Accordingly, no compensation cost was recognized in years prior to 2003.

The 1998 Stock Plan as amended in May 2003, provides for the granting of options, tandem appreciation rights (“TARs”), restricted shares and deferred shares for 5,000,000 shares of Company stock to key employees over a ten-year period.

Tandem appreciation rights are granted concurrently with options, and represent the right, exercisable by surrender of the underlying option, to receive in cash, an amount equal to the increase in market value from the grant price of the Company’s common stock. TARs payable in cash require the recording of a liability and related compensation expense to be measured by the difference between the quoted market price of the number of common shares covered by the grant and the option price per common share at grant date. Any increases or decreases in the market price of the common shares between grant date and exercise date result in changes to the Company’s compensation expense. Compensation expense is accrued over the vesting period. In addition, changes in the market price of common shares after the vesting period, but prior to the exercise date, require changes in compensation expense. During the fourth quarter of 2004, the Company modified existing TARs by eliminating the cash settlement feature. This modification required that the TARs be accounted for as equity awards. The associated liability for compensation expense recognized prior to the date of modification of $2,434 was reclassified from Other non-current liabilities to Additional paid-in-capital. The unrecognized compensation cost, equal to the difference between the fair value of the TARs on the date of the modification and compensation cost previously recognized, will be recognized over the remaining vesting period of the TARs. TARs payable in common shares will be accounted for as stock options and the fair value method of accounting under SFAS No. 123 will be utilized. Subsequent changes in share values will not affect compensation expense. During 2004, 30,000 TARs were issued. There were no TARs issued during the nine months ended September 30, 2005.

Restricted shares and deferred shares require compensation expense to be measured by the quoted market price on the grant date. Expense is recognized by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any shares ultimately forfeited because the recipients fail to meet the vesting requirements. No restricted or deferred shares were issued during the nine months ended 2005 or 2004.

The Company issued 826,093 shares of common stock from treasury upon exercise of employee stock options during the nine months ended September 30, 2005.

The following table sets forth the pro forma disclosure of net income and earnings per share as if compensation expense had been recognized for the fair value of options granted prior to January 1, 2003. For purposes of this pro forma disclosure, the estimated fair value of the options granted prior to January 1, 2003 was determined using the Black-Scholes option pricing model and is amortized ratably over the vesting periods.

NOTE C – GOODWILL AND INTANGIBLE ASSETS

There were no impairments of goodwill during the first nine months of 2005. The changes in the carrying amount of goodwill by segment for the nine months ended September 30, 2005 are as follows:

Additions to goodwill for the nine month period ended September 30, 2005 primarily reflect goodwill recorded in the acquisition of J.W. Harris (Note J).

Gross intangible assets other than goodwill as of September 30, 2005 and December 31, 2004 were $46,505 and $26,716, respectively. Accumulated amortization of these intangible assets as of September 30, 2005 and December 31, 2004 was $13,342 and $14,093, respectively. The increase in gross intangible assets is primarily due to trademarks, trade names, customer relationships, patents and other proprietary technology totaling $18,300 recorded in the acquisition of J.W. Harris (Note J).

NOTE D – 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):

NOTE E – COMPREHENSIVE INCOME

The components of comprehensive income are as follows:

NOTE F – INVENTORY VALUATION

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 non-U.S. inventories, cost is determined by the first-in, first-out (FIFO) method. The valuation of inventory under the LIFO method is made at the end of each year based on inventory levels. 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. The excess of current cost over LIFO cost amounted to $63,233 at September 30, 2005 and $61,442 at December 31, 2004.

NOTE G – ACCRUED EMPLOYEE COMPENSATION AND BENEFITS

Accrued employee compensation and benefits at September 30, 2005 and 2004 include accruals for year-end bonuses and related payroll taxes of $48,097 and $38,365, respectively, related to Lincoln employees worldwide. The payment of bonuses is discretionary and is subject to approval by the Board of Directors. A majority of annual bonuses are paid in December resulting in an increasing bonus accrual during the Company’s fiscal year. The increase in the accrual from September 30, 2004 to September 30, 2005 is due to the increase in profitability of the Company.

NOTE H – SEGMENT INFORMATION

The Europe segment includes rationalization charges of $1,250 for the nine months ended September 30, 2005 (see Note I). There were no rationalization charges incurred for the nine months ended September 30, 2004.

NOTE I – RATIONALIZATION CHARGES

In the fourth quarter of 2004, the Company committed to a plan to rationalize machine manufacturing (the “French Rationalization”) at Lincoln Electric France, S.A.S. (“LE France”). In connection with the French Rationalization, the Company transferred machine manufacturing that was performed at LE France to other facilities. The Company committed to the French Rationalization as a result of the region’s decreased demand for locally-manufactured machines. In connection with the French Rationalization, the Company expects to incur a charge of approximately $2,614 (pre-tax), of which $1,188 (pre-tax) was incurred in the first nine months of 2005 and $2,292 (pre-tax) has been incurred to date. Employee severance costs associated with the termination of approximately 40 of LE France’s 179 employees were approximately $2,123 (pre-tax), of which $1,087 (pre-tax) was incurred in the first nine months of 2005.

Costs not related to employee severance are expected to total $491 (pre-tax) of which $169 (pre-tax) has been incurred to date. These other costs primarily include warehouse relocation costs and professional fees. The Company expects to incur the remaining $322 in charges related to these rationalization efforts by the end of the first quarter of 2006. As of September 30, 2005, the Company has recorded a liability of $1,379 for charges related to the French Rationalization.

Also in the fourth quarter of 2004, the Company committed to a plan to rationalize sales and distribution at its operations in Norway and Sweden (the “Nordic Rationalization”). In connection with the Nordic Rationalization, the Company consolidated the sales and distribution operations in Norway and Sweden into other facilities in Europe to improve efficiencies. In connection with the Nordic Rationalization, the Company has incurred charges of $1,398 (pre-tax). Employee severance costs associated with the termination of approximately 13 employees were $651 (pre-tax). The Company incurred $747 (pre-tax) in the fourth quarter of 2004 for costs not related to employee severance, which primarily include warehouse relocation costs. The Company does not expect to incur any further charges related to the Nordic Rationalization. As of September 30, 2005, the Company has recorded a liability of $358 for charges related to the Nordic Rationalization.

NOTE J – ACQUISITIONS

On April 29, 2005, the Company acquired all of the outstanding stock of the J.W. Harris Co., Inc. (“J.W. Harris”), a privately held brazing and soldering alloys manufacturer headquartered in Mason, Ohio for approximately $71,000 in cash and $15,000 of assumed debt. The Company began including the results of J.W. Harris operations in the Company’s consolidated financial statements in May 2005.

The initial purchase price allocation for this investment resulted in goodwill of approximately $8,000. The Company has not yet completed the evaluation and allocation of the purchase price as the appraisal associated with the valuation of certain tangible and intangible assets is not complete. The Company anticipates the final purchase price allocations for this transaction will be completed by the end of 2005. Included in the aggregate purchase price is $5,000 deposited in escrow accounts. Distribution of amounts in escrow is dependent on resolution of pre-closing contingencies. Amounts remaining in escrow as of the second anniversary of the closing date will be distributed to the former shareholders and will result in adjustments to the purchase price allocation.

The Company expects this acquisition to provide a strong complementary metals-joining technology and a leading position in the brazing and soldering alloys market. Headquartered in Mason, Ohio, J.W. Harris has approximately 300 employees and manufacturing plants in Ohio and Rhode Island. An international distribution center is located in Spain. Annual sales are approximately $110,000. The J.W. Harris business contributed $48,412 of sales and earnings of $0.02 per diluted share during the five months ended September 30, 2005.

In 2004, the Company invested approximately $12,000 into Shanghai Lincoln Electric (“SLE”) to acquire a 70% ownership interest and to fund the Company’s Chinese expansion program. The Company began including the results of SLE’s operations in the Company’s consolidated financial statements in June 2004. SLE is a manufacturer of flux-cored wire and other consumables located in China and will also incorporate the Company’s Chinese equipment manufacturing facilities. Equipment manufacturing is expected to commence in the first quarter of 2006.

Also in 2004, the Company purchased 70% of the Rui Tai Welding and Metal Co. Ltd. for approximately $10,000, net of cash acquired, plus debt assumed of approximately $2,000. Rui Tai subsequently changed its name to Lincoln Electric Inner Mongolia (“LEIM”). The Company began including the results of LEIM’s operations in the Company’s consolidated financial statements in July 2004. LEIM is a manufacturer of stick electrodes located in northern China.

The purchase price allocation for these investments in China resulted in goodwill of approximately $11,000.

The Company expects, in the longer-term, that these Chinese acquisitions, along with other planned investments in China, will provide a strong equipment and consumable manufacturing base in China, improve the Company’s distribution network, and strengthen the Company’s expanding market position in the Asia Pacific region. These acquired businesses generated $27,243 of sales during the nine months ended September 30, 2005 with no significant contribution to net income.

The Company continues to expand globally and periodically evaluates transactions that would involve significant capital expenditures. If additional acquisitions and major projects providing appropriate financial benefits become available, additional expenditures may be made.

NOTE K – CONTINGENCIES AND GUARANTEE

The Company, like other manufacturers, is subject from time to time to a variety of civil and administrative proceedings arising in the ordinary course of business. Such claims and litigation include, without limitation, product liability claims and health, safety and environmental claims, some of which relate to cases alleging asbestos and manganese induced illnesses. The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously. Although defense costs have been increasing, all other costs associated with these claims, including indemnity charges 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, as well as the Company’s current assessment of the underlying merits of the claims and applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate (exclusive of defense costs), will not have a material adverse impact upon the Company’s consolidated financial statements.

The Company has provided a guarantee on a loan for a joint venture of approximately $4,000 at September 30, 2005. The guarantee is provided on two loan agreements totaling $2,000 each, one which expires in February 2006 and the other expiring in May 2007. Each loan has been undertaken for the purposes of funding the joint venture’s working capital needs. The Company would become liable for any unpaid principal and accrued interest if the joint venture were to default on payment at the respective maturity dates. The Company believes the likelihood is remote that material payment will be required under these arrangements because of the current financial condition of the joint venture.

NOTE L – PRODUCT WARRANTY COSTS

The Company accrues for product warranty claims based on historical experience and the expected material and labor costs to provide warranty service. The accrual for product warranty claims is included in the Other current liabilities line item of the balance sheet. Warranty accruals have increased as a result of the effect of higher sales levels. The changes in the carrying amount of product warranty accruals for the nine months ended September 30, 2005 and 2004 are as follows:

Warranty expense was 0.5% of sales for the nine months ended September 30, 2005 and 2004.

NOTE M – LONG-TERM DEBT

During March 2002, the Company issued Senior Unsecured Notes (the “Notes”) totaling $150,000 through a private placement. The Notes have original maturities ranging from five to ten years with a weighted-average interest rate of 6.1% and an average tenure of eight years. Interest is payable semi-annually in March and September. The proceeds are being used for general corporate purposes, including acquisitions and to purchase shares under the share repurchase program. The proceeds are generally invested in short-term, highly liquid investments. The Notes contain certain affirmative and negative covenants, including restrictions on asset dispositions and financial covenants (interest coverage and funded debt-to-“EBITDA” ratios). As of September 30, 2005, the Company was in compliance with all of its debt covenants.

The maturity and interest rates of the Notes follow (in thousands):

During March 2002, the Company entered into floating rate interest rate swap agreements totaling $80,000, to convert a portion of the outstanding Notes from fixed to floating rates. These swaps were designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized in earnings. Net payments or receipts under these agreements were recognized as adjustments to interest expense. In May 2003, these

swap agreements were terminated. The gain on the termination of these swaps was $10,613, and has been deferred and is being amortized as an offset to interest expense over the terms of the related debt. The amortization of this gain reduced interest expense by $1,584 in the first nine months of 2005 and is expected to reduce annual interest expense by $2,117 in each of 2005 and 2006. At September 30, 2005, $5,485 remains to be amortized and is included in Long-term debt. The financing costs related to the $150,000 private placement are further reduced by the interest income earned on the cash balances. These short-term, highly liquid investments earned approximately $1,443 during the nine months ending September 2005.

During July 2003 and April 2004, the Company entered into various floating rate interest rate swap agreements totaling $110,000, to convert a portion of the outstanding Notes from fixed to floating rates based on the London Inter-Bank Offered Rate (“LIBOR”), plus a spread of between 179.75 and 226.5 basis points. The variable rates will be reset every six months, at which time payment or receipt of interest will be settled. These swaps are designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. Net payments or receipts under these agreements will be recognized as adjustments to interest expense. The fair value of these swaps is included in Other long-term liabilities with a corresponding decrease in Long-term debt. The fair value of these swaps at September 30, 2005 was $1,876.

Terminated swaps have increased the values of the Series A Notes from $40,000 to $41,621, the Series B Notes from $30,000 to $32,543 and the Series C Notes from $80,000 to $81,321 as of September 30, 2005. The weighted-average effective rate on the Notes for the third quarter and first nine months of 2005 was 4.0% and 3.8%.

NOTE N – NEW ACCOUNTING PRONOUNCEMENTS

In June 2005, the FASB issued Staff Position No. 143-1 “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”), which provides guidance on the accounting for obligations associated with the Directive on Waste Electrical and Electronic Equipment (the “WEEE Directive”), which was adopted by the European Union. FSP 143-1 provides guidance on accounting for the effects of the WEEE Directive with respect to historical waste and waste associated with products on the market on or before August 13, 2005. FSP 143-1 requires commercial users to account for their WEEE obligation as an asset retirement liability in accordance with FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” FSP 143-1 was required to be applied to the later of the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. The WEEE Directive has been adopted into law by the majority of European Union member countries in which the Company has significant operations. The Company adopted the provisions of FSP 143-1 as it relates to these countries with no material impact on its financial statements. The Company will apply the guidance of FSP 143-1 as it relates to the remaining European Union member countries in which it operates when those countries have adopted the WEEE Directive into law.

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143.” This interpretation defines the term “conditional asset retirement obligation” as used in FASB Statement No. 143,“Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity, in which the timing, and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 requires that an obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of this Interpretation on its financial statements.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This Statement amends the guidance in Accounting Research Bulletin No. 43 to require idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of this statement on its financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

Under SFAS No. 123(R), public companies would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a rule amending the compliance dates of SFAS No. 123(R) to allow companies to implement SFAS No. 123 (R) at the beginning of their next fiscal year, instead of the next reporting period that begins after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123(R) on January 1, 2006 using the modified-prospective method. The adoption of the standard is not expected to have a material impact on the Company’s financial statements.

FSP 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes,” for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FSP 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004” were enacted on October 22, 2004.

FSP No. 109-1 clarifies the application of SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” FSP 109-1 requires that the deduction be accounted for as a special deduction in the period earned, not as a tax-rate reduction.

FSP No. 109-2, provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on an enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is permitted time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

NOTE O – RETIREMENT ANNUITY PLANS

A summary of the components of net periodic benefit costs was as follows:

The Company terminated one of its European pension plans and incurred a settlement loss of $2,138 in the third quarter of 2005.

The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to voluntarily contribute $30,000 to its U.S. pension plans during 2005. As of September 30, 2005, the Company has voluntarily contributed $31,500 to its U.S. plans.

NOTE P – INCOME TAXES

The effective income tax rates of 20.1% and 27.0% for the nine months ended September 30, 2005 and 2004, respectively, were lower than the Company’s statutory rate primarily because of the utilization of foreign and domestic tax credits, lower taxes on non-U.S. earnings, non-recurring items in 2005 including the resolution of prior years’ tax liabilities of $7,201, and an adjustment to state deferred income taxes. The deferred tax adjustment reflects the impact of a one-time state income tax benefit of $1,807 (net of federal benefit) relating to changes in Ohio tax laws, including the effect of lower tax rates. Excluding non-recurring items, the Company’s effective tax rate for the nine months ended September 30, 2005 was 27.9%. The anticipated effective rate for 2005 depends on the level of earnings and related tax deductions achieved during the year.

The Company is the world’s largest designer and manufacturer of arc welding and cutting products, manufacturing a full line of arc welding equipment, consumable welding products and other welding and cutting products.

The Company is one of only a few worldwide broad line manufacturers of both arc welding equipment and consumable products. Welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company’s welding product offering also includes regulators and torches used in oxy-fuel welding and cutting. With the recent acquisition of J.W. Harris, the Company now has a leading global position in the brazing and soldering alloys market.

The Company invests in the research and development of arc welding equipment and consumable products in order to continue its market leading product offering. The Company continues to invest in technologies that improve the quality and productivity of welding products. In addition, the Company has been actively increasing its patent application process in order to secure its technology advantage in the United States and major international jurisdictions. The Company believes its significant investment in research and development and its highly trained technical sales force provides a competitive advantage in the marketplace.

The Company’s products are sold in both domestic and international markets. In North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company’s various manufacturing sites to distributors, agents, dealers and product users.

The Company’s major end user markets include:

The Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, England, France, Germany, Indonesia, Ireland, Italy, Mexico, the Netherlands, People’s Republic of China, Poland, Spain, Taiwan, Turkey and Venezuela.

The Company’s sales and distribution network, coupled with its manufacturing facilities, consists of five regions: North America, Latin America, Europe, Asia-Pacific and Russia, Africa and Middle East regions. These five regions are reported as three separate reportable segments: North America, Europe and Other Countries.

The principal raw materials essential to the Company’s business are various chemicals, electronics, steel, engines, brass, copper and aluminum alloys, all of which are normally available for purchase in the open market.

The Company’s facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material effect on the Company’s earnings. The Company is ISO 9001 certified at nearly all Lincoln facilities worldwide. In addition, the Company is ISO 14001 certified at all significant manufacturing facilities in the United States.

Key economic measures relevant to the Company include industrial production trends, steel consumption, purchasing manager indices, capacity utilization within durable goods manufacturers, and consumer confidence indicators. Key industries which provide a relative indication of demand drivers to the Company include farm machinery and equipment, construction and transportation, fabricated metals, electrical equipment, ship and boat building, defense, truck manufacturing and railroad equipment. Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company’s welding products.

Key operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly, and monthly depending on the needs established by operating management.

Key financial measures utilized by the Company’s executive management and operating units in order to evaluate the results of its business and in understanding key variables impacting the current and future results of the Company include: sales, gross profit, selling, general and administrative expenses, earnings before interest, taxes and bonus, operating cash flows and capital expenditures, including applicable ratios such as return on investment and average operating working capital. These measures are reviewed at monthly, quarterly and annual intervals and compared with historical periods as well as objectives established by the Board of Directors of the Company.

The following table presents the Company’s results of operations:

Net Sales. Net sales for the third quarter of 2005 increased 19.7% to $412,013 from $344,333 last year. The increase in net sales reflects an 8.2%, or $28,246 increase due to acquisitions, a 6.9%, or $23,812 increase due to price increases, an increase of 3.2%, or $11,024 due to volume, as well as, a 1.4%, or $4,598 favorable impact of foreign currency exchange rates. Net sales for North American operations increased 23.7% to $276,844 for 2005 compared to $223,726 in 2004. This increase reflects an increase of 11.8% or $26,448 due to newly acquired companies, 7.7%, or $17,170 due to price increases, an increase of 3.2%, or $7,246 in volume and a 1.0%, or $2,254 favorable impact of foreign currency exchange rates. U.S. export sales of $23,767 were up $3,668, or 18.2% from last year. European sales have increased 8.2% to $72,275 in 2005 from $66,769 in the prior year. This increase is due to an increase of 2.9%, or $1,964 due to volume, a 2.5%, or $1,671 increase due to price increases, and a 0.1%, or $81 favorable impact of foreign currency exchange rates. Other Countries sales increased 16.8% to $62,894 in 2005 from $53,838 in the prior year. This increase reflects a 9.2%, or $4,971 increase due to price increases, an increase of 4.2%, or $2,263 favorable impact of foreign currency exchange rates, and an increase of $1,814 or 3.4% due to volume.

Gross Profit. Gross profit increased 19.9% to $111,192 during the third quarter of 2005 compared to $92,738 last year. As a percentage of net sales, Gross profit increased slightly to 27.0% in the third quarter 2005 from 26.9% in the third quarter 2004. The increase reflects price increases implemented in the fourth quarter of 2004 to offset significant increases in raw material costs which accelerated in the third quarter of 2004 in North America. This increase is offset by declining margins due to increased material costs and unfavorable production variances in Europe, as well as a shift in sales mix to traditionally lower margin geographies and businesses including the effects of recent acquisitions.

Selling, General & Administrative (SG&A) Expenses. SG&A expenses increased $10,081 or 16.4%, for the third quarter of 2005, compared with 2004. The increase was primarily due to higher bonus expense of $4,080, incremental selling, general and administrative expenses of $2,244 from recently acquired businesses, as well as, higher selling expenses of $1,953 due to increased sales levels.

Equity Earnings in Affiliates. Equity earnings in affiliates increased $545 from $1,130 in the third quarter of 2004 to $1,675 in the third quarter 2005, as a result of increased earnings at the Company’s investment in Kuang Tai (Asia).

Other Income. Other income increased to $2,415 in the third quarter 2005 from $602 in the third quarter 2004. The increase was primarily due to the settlement of legal disputes totaling $1,418.

Interest Expense. Interest expense increased to $2,114 in the third quarter 2005 from $1,358 in the third quarter 2004 because of higher interest rates.

Income Taxes. Income taxes for the third quarter of 2005 were $4,662 on income before income taxes of $42,850, or an effective rate of 10.9%, as compared with income taxes of $9,474 on income before income taxes of $32,471 or an effective rate of 29.2% for the same period in 2004. The effective rates for 2005 and 2004 are lower than the Company’s statutory rate because of the utilization of foreign and domestic tax credits, lower taxes on non-U.S. earnings and a non-recurring adjustment in 2005 relating to the resolution of prior years’ tax liabilities of $7,201. Excluding this non-recurring item, the Company’s effective tax rate for the three months ended September 30, 2005 was 27.7%. The decrease in the effective tax rate, excluding the non-recurring item, from 2004 to 2005 is primarily related to an increase in pre-tax income in lower tax jurisdictions.

Net Income. Net income for the third quarter of 2005 was $38,188 compared to $22,997 last year. Diluted earnings per share for the third quarter of 2005 was $0.90 compared to $0.55 per share in 2004. Foreign currency exchange rate movements did not have a material effect on net income for 2005 or 2004.

Net Sales. Net sales for the first nine months of 2005 increased 20.2% to $1,180,817 from $982,682 last year. The increase in net sales reflects a 10.0%, or $98,320 increase due to price increases, a 6.6%, or $64,252 increase due to acquisitions, a 1.8%, or $17,793 favorable impact of foreign currency exchange rates, as well as an increase of 1.8%, or $17,770 due to volume. Net sales for North American operations increased 18.4% to $773,720 for 2005 compared to $653,383 in 2004. This increase reflects an increase of 10.6%, or $69,469 due to price increases, 7.0% or $45,490 due to newly acquired companies and a 1.0%, or $6,388 favorable impact of foreign currency exchange rates, partially offset by a decrease in volume of 0.2%, or $1,010. U.S. export sales of $70,491 were up $13,196, or 23.0% from last year. European sales have increased 11.9% to $230,932 in 2005 from $206,297 in the prior year. This increase is due to a 6.7%, or $13,781 increase due to price increases and a 3.6%, or $7,498 favorable impact of foreign currency exchange rates, as well as an increase of 0.2%, or $448 due to volume. Other Countries sales increased 43.2% to $176,165 in 2005 from $123,002 in the prior year. This increase reflects an increase of $18,332 or 14.9% due to volume, an increase of 12.9%, or $15,854 from newly acquired companies, a 12.3%, or $15,070 increase due to price increases and a 3.1%, or $3,907 favorable impact of foreign currency exchange rates.

Gross Profit. Gross profit increased 16.8% to $323,420 during the first nine months of 2005 compared to $277,006 last year. As a percentage of net sales, gross profit decreased to 27.4% in the first nine months of 2005 from 28.2% last year. The decrease as a percent of sales reflects a shift in sales mix to traditionally lower margin geographies and businesses, including the effects of recent acquisitions and declining margins due to increased material costs and unfavorable production variances in Europe. In addition, gross profit in North America was negatively impacted by an increase in product liability defense costs of $4,969. Partially offsetting this decrease were price increases implemented in the fourth quarter of 2004 to offset significant increases in raw material costs which accelerated in the third quarter of 2004 in North America. A $5,041 favorable impact of foreign currency exchange rates in the first nine months of 2005 also offset the decrease in gross profit.

Selling, General & Administrative (SG&A) Expenses. SG&A expenses increased $19,426, or 10.2%, for the first nine months of 2005, compared with 2004. The increase was primarily due to higher bonus expense of $9,114, higher selling expenses of $6,187 due to increased sales levels, as well as, incremental selling, general and administrative expenses from recently acquired businesses totaling $4,924.

Rationalization Charges. In the first nine months of 2005, the Company recorded rationalization charges of $1,250 ($848 after-tax). The rationalization charges are related to employee severance costs covering 40 employees in France, 7 employees in Norway and 6 employees in Sweden. The Company expects to incur an additional $322 in charges related to these rationalization efforts during the remainder of 2005 and the first quarter of 2006. See Note I. There were no rationalization charges in the first nine months of 2004.

Equity Earnings in Affiliates. Equity earnings in affiliates increased $187 from $3,052 in the first nine months of 2004 to $3,239 in 2005, due to increased earnings at the Company’s investment in AS Kaynak (Turkey), partially offset by a decrease in earnings at Kuang Tai (Asia).

Other Income. Other income increased to $3,881 in the nine months ending September 2005 from $2,214 in the nine months ending September 2004. The increase was primarily due the settlement of legal disputes totaling $1,418.

Interest Expense. Interest expense increased to $5,982 in the nine months ending September 2005 from $4,401 in the nine months ending September 2004 because of higher interest rates.

Income Taxes. Income taxes for the first nine months of 2005 were $23,289 on income before income taxes of $115,830, an effective rate of 20.1%, as compared with income taxes of $24,029 on income before income taxes of $88,996 or an effective rate of 27.0% for the same period in 2004. The effective rates for 2005 and 2004 are lower than the Company’s statutory rate primarily because of the utilization of foreign and domestic tax credits, lower taxes on non-U.S. earnings, non-recurring items in 2005 including the resolution of prior years’ tax liabilities of $7,201, and an adjustment to state deferred income taxes totaling $1,807. The deferred tax adjustment reflects the impact of a one-time state income tax benefit relating to changes in Ohio tax laws, including the effect of lower tax rates. Excluding these non-recurring items the Company’s effective tax rate for the nine months ended September 30, 2005 was 27.9%. The increase in the effective tax rate, excluding these non-recurring items, is primarily related to an increase in pre-tax income.

Net Income. Net income for the first nine months of 2005 was $92,541 compared to $64,967 last year. Diluted earnings per share for the nine months ending September 30, 2005 was $2.20 compared to $1.57 per share in 2004. Foreign currency exchange rate movements did not have a material effect on net income in 2005 or 2004.

The Company’s cash flow from operations, while cyclical, has been reliable and consistent. The Company has relatively unrestricted access to capital markets. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets. In assessing liquidity, the Company reviews working capital measurements to define areas of improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances and, if necessary, borrowings under its existing credit facilities.

The following table reflects changes in key cash flow measures:

Cash and cash equivalents increased 14.4%, or $13,362 to $106,181 as of September 30, 2005, from $92,819 as of December 31, 2004. This compares to a $2,321 increase in cash and cash equivalents during the same period in 2004.

Cash provided by operating activities increased by $45,071 for the first nine months of 2005 compared to 2004. The increase was primarily related to an increase in Net income and less of an increase in Accounts receivable and Inventories when compared to the same period in 2004. Accounts receivable increased less in the current year as the Company did not experience a growth in sales during the first nine months of 2005 as significant as during the same period in 2004. The increases in cash provided by operating activities were partially offset by less of an increase in Accounts payable and other current liabilities, primarily accrued income taxes, than occurred in the first nine months of 2004. Average days in accounts payable decreased to 38.1 days at September 30, 2005 from 43.1 days at December 31, 2004. This was offset by a decrease in days sales in inventory from 120.6 days at December 31, 2004 to 115.8 days at September 30, 2005, and a decrease in accounts receivable days from 60.7 days at December 31, 2004 to 59.8 days at September 30, 2005.

Cash used by investing activities increased $12,237 for the first nine months of 2005 compared to 2004. The increase was primarily due to the acquisition of J.W. Harris for approximately $71,000, net of cash acquired. This was partially offset by a net increase in the proceeds from the sale of marketable securities of $44,500. Capital expenditures during the first nine months of 2005 were $36,171, a $2,107 decrease from 2004. The Company anticipates capital expenditures in 2005 of approximately $50,000. Anticipated capital expenditures reflect the need to expand the Company’s manufacturing capacity due to an increase in customer demand. Management critically evaluates all proposed capital expenditures and requires each project to increase efficiency, reduce costs or promote business growth. Management does not anticipate any unusual future cash outlays relating to capital expenditures.

Cash used by financing activities increased $15,747 in the first nine months of 2005 compared to 2004. The increase was primarily due to an increase in payments on long-term borrowings of $10,670 and an increase in treasury share purchases during 2005 of $8,436.

The Company’s debt levels decreased from $167,374 at December 31, 2004, to $164,986 at September 30, 2005. Debt to total capitalization decreased to 20.4% at September 30, 2005, from 22.5% at December 31, 2004.

The Company’s Board of Directors authorized share repurchase programs for up to 15 million shares of the Company’s common stock. During the nine months ended September 30, 2005, the Company purchased 429,890 shares of its common stock on the open market at a cost of $12,804. Total shares purchased through the share repurchase programs were 10,241,673 shares at a cost of $216,266 through September 30, 2005.

In July 2005, the Company paid a quarterly cash dividend of 18 cents per share, or $7,485 to shareholders of record on June 30, 2005.

On April 29, 2005, the Company acquired all of the outstanding stock of the J.W. Harris Co., Inc. (“J.W. Harris”), a privately held brazing and soldering alloys manufacturer headquartered in Mason, Ohio for approximately $71,000 in cash and $15,000 of assumed debt. The Company began including the results of J.W. Harris operations in the Company’s consolidated financial statements in May 2005.

The initial purchase price allocation for this investment resulted in goodwill of approximately $8,000. The Company has not yet completed the evaluation and allocation of the purchase price as the appraisal associated with the valuation of certain tangible and intangible assets is not complete. The Company anticipates the final purchase price allocations for this transaction will be completed by the end of 2005. Included in the aggregate purchase price is $5,000 deposited in escrow accounts. Distribution of amounts in escrow is dependent on resolution of pre-closing contingencies. Amounts remaining in escrow as of the second anniversary of the closing date will be distributed to the former shareholders and will result in adjustments to the purchase price allocation.

The Company expects this acquisition to provide a strong complementary metals-joining technology and a leading position in the brazing and soldering alloys market. Headquartered in Mason, Ohio, J.W. Harris has approximately 300 employees and manufacturing plants in Ohio and Rhode Island. An international distribution center is located in Spain. Annual sales are approximately $110,000. The J.W. Harris business contributed $48,412 of sales and earnings of $0.02 per diluted share during the five months ended September 30, 2005.

In 2004, the Company invested approximately $12,000 into Shanghai Lincoln Electric (“SLE”) to acquire a 70% ownership interest and to fund the Company’s Chinese expansion program. The Company began including the results of SLE’s operations in the Company’s consolidated financial statements in June 2004. SLE is a manufacturer of flux-cored wire and other consumables located in China and will also incorporate the Company’s Chinese equipment manufacturing facilities. Equipment manufacturing is expected to commence in the first quarter of 2006.

Also in 2004, the Company purchased 70% of the Rui Tai Welding and Metal Co. Ltd. for approximately $10,000, net of cash acquired, plus debt assumed of approximately $2,000. Rui Tai subsequently changed its name to Lincoln Electric Inner Mongolia (“LEIM”). The Company began including the results of LEIM’s operations in the Company’s consolidated financial statements in July 2004. LEIM is a manufacturer of stick electrodes located in northern China.

The purchase price allocation for these investments in China resulted in goodwill of approximately $11,000.

The Company expects, in the longer-term, that these Chinese acquisitions, along with other planned investments in China, will provide a strong equipment and consumable manufacturing base in China, improve the Company’s distribution network, and strengthen the Company’s expanding market position in the Asia Pacific region. These acquired businesses generated $27,243 of sales during the nine months ended September 30, 2005 with no significant contribution to net income.

The Company continues to expand globally and periodically evaluates transactions that would involve significant capital expenditures. The Company’s operational cash flow can fund the global expansion plans, but a significant acquisition would require access to the capital markets, in particular, the public and/or private bond market, as well as the syndicated bank loan market. The Company’s financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the U.S., and then lends funds to the specific subsidiary that requires funding. If additional acquisitions and major projects providing appropriate financial benefits become available, additional expenditures may be made.

During March 2002, the Company issued Senior Unsecured Notes (the “Notes”) totaling $150,000 through a private placement. The Notes have original maturities ranging from five to ten years with a weighted-average interest rate of 6.1% and an average tenure of eight years. Interest is payable semi-annually in March and September. The proceeds are being used for general corporate purposes, including acquisitions and to purchase shares under the share repurchase program. The proceeds are generally invested in short-term, highly liquid investments. The Notes contain certain affirmative and negative covenants, including restrictions on asset dispositions and financial covenants (interest coverage and funded debt-to-“EBITDA” ratios). As of September 30, 2005, the Company was in compliance with all of its debt covenants.

The maturity and interest rates of the Notes follow (in thousands):

During March 2002, the Company entered into floating rate interest rate swap agreements totaling $80,000, to convert a portion of the outstanding Notes from fixed to floating rates. These swaps were designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized in earnings. Net payments or receipts under these agreements were recognized as adjustments to interest expense. In May 2003, these swap agreements were terminated. The gain on the termination of these swaps was $10,613, and has been deferred and is being amortized as an offset to interest expense over the terms of the related debt. The amortization of this gain reduced interest expense by $1,584 in the first nine months of 2005 and is expected to reduce annual interest expense by $2,117 in each of 2005 and 2006. At September 30, 2005, $5,485 remains to be amortized and is included in Long-term debt. The financing costs related to the $150,000 private placement are further reduced by the interest income earned on the cash balances. These short-term, highly liquid investments earned approximately $1,443 during the nine months ending September 2005.

During July 2003 and April 2004, the Company entered into various floating rate interest rate swap agreements totaling $110,000, to convert a portion of the outstanding Notes from fixed to floating rates based on the London Inter-Bank Offered Rate (“LIBOR”), plus a spread of between 179.75 and 226.5 basis points. The variable rates will be reset every six months, at which time payment or receipt of interest will be settled. These swaps are designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. Net payments or receipts under these agreements will be recognized as adjustments to interest expense. The fair value of these swaps is included in Other long-term liabilities with a corresponding decrease in Long-term debt. The fair value of these swaps at September 30, 2005 was $1,876.

Terminated swaps have increased the values of the Series A Notes from $40,000 to $41,621, the Series B Notes from $30,000 to $32,543 and the Series C Notes from $80,000 to $81,321 as of September 30, 2005. The weighted-average effective rate on the Notes for the third quarter and first nine months of 2005 was 4.0% and 3.8%.

Effective January 1, 2003, the Company adopted the fair value method of recording stock options contained in Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation.” All employee stock option grants beginning January 1, 2003 are expensed over the stock option vesting period based on the fair value at the date the options are granted. Prior to 2003, the Company applied the intrinsic value method permitted under SFAS No. 123, as defined in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, in accounting for the Company’s stock option plans. Accordingly, no compensation cost was recognized in years prior to 2003.

The 1998 Stock Plan as amended in May 2003, provides for the granting of options, tandem appreciation rights (“TARs”), restricted shares and deferred shares for 5,000,000 shares of Company stock to key employees over a ten-year period.

Tandem appreciation rights are granted concurrently with options, and represent the right, exercisable by surrender of the underlying option, to receive in cash, an amount equal to the increase in market value from the grant price of the Company’s common stock.

TARs payable in cash require the recording of a liability and related compensation expense to be measured by the difference between the quoted market price of the number of common shares covered by the grant and the option price per common share at grant date. Any increases or decreases in the market price of the common shares between grant date and exercise date result in changes to the Company’s compensation expense. Compensation expense is accrued over the vesting period. In addition, changes in the market price of common shares after the vesting period, but prior to the exercise date, require changes in compensation expense. During the fourth quarter of 2004, the Company modified existing TARs by eliminating the cash settlement feature. This modification required that the TARs be accounted for as equity awards. The associated liability for compensation expense recognized prior to the date of modification of $2,434 was reclassified from Other non-current liabilities to Additional paid-in-capital. The unrecognized compensation cost, equal to the difference between the fair value of the TARs on the date of the modification and compensation cost previously recognized, will be recognized over the remaining vesting period of the TARs. TARs payable in common shares will be accounted for as stock options and the fair value method of accounting under SFAS No. 123 will be utilized. Subsequent changes in share values will not affect compensation expense. During 2004, 30,000 TARs were issued. There were no TARs issued during the nine months ended September 30, 2005.

Restricted shares and deferred shares require compensation expense to be measured by the quoted market price on the grant date. Expense is recognized by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any shares ultimately forfeited because the recipients fail to meet the vesting requirements. No restricted or deferred shares were issued during the nine months ended 2005 or 2004.

The Company issued 826,093 shares of common stock from treasury upon exercise of employee stock options during the nine months ended September 30, 2005.

Product liability expenses have been increasing, particularly with respect to the increased number of welding fume claims. The costs associated with these claims are predominantly defense costs, which are recognized in the periods incurred. Net expenditures on product liability increased approximately $4,969 in the nine months 2005 compared to last year. These net expenditures are projected to increase by approximately $5,000 – $7,000 in 2005 compared to 2004. See Note K. The long-term impact of the welding fume loss contingency, in the aggregate, on operating cash flows and capital markets access is difficult to assess, particularly since claims are in many different stages of development and the Company benefits significantly from cost sharing with co-defendants and insurance carriers. Moreover, the Company has been largely successful to date in its defense of these claims and indemnity payments have been immaterial. If cost sharing dissipates for some currently unforeseen reason, or the Company’s trial experience changes overall, it is possible on a longer term basis that the cost of resolving this loss contingency could reduce the Company’s operating results and cash flow and restrict capital market access.

The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s Credit Agreement. Outstanding letters of credit at September 30, 2005 were immaterial. The Company has also provided a guarantee on a loan for a joint venture of $4,000 at September 30, 2005. The Company believes the likelihood is remote that material payment will be required under this arrangement because of the current financial condition of the joint venture.

In June 2005, the FASB issued Staff Position No. 143-1 “Accounting for Electronic Equipment Waste Obligations” (“FSP 143-1”), which provides guidance on the accounting for obligations associated with the Directive on Waste Electrical and Electronic Equipment (the “WEEE Directive”), which was adopted by the European Union. FSP 143-1 provides guidance on accounting for the effects of the WEEE Directive with respect to historical waste and waste associated with products on the market on or before August 13, 2005. FSP 143-1 requires commercial users to account for their WEEE obligation as an asset retirement liability in accordance with FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” FSP 143-1 was required to be applied to the later of the first reporting period ending after June 8, 2005 or the date of the adoption of the WEEE Directive into law by the applicable European Union member country. The WEEE Directive has been adopted into law by the majority of European Union member countries in which the Company has significant operations. The Company adopted the provisions of FSP 143-1 as it relates to these countries with no material impact on its financial statements. The Company will apply the guidance of FSP 143-1 as it relates to the remaining European Union member countries in which it operates when those countries have adopted the WEEE Directive into law.

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143.” This interpretation defines the term “conditional asset retirement obligation” as used in FASB Statement No. 143,“Accounting for Asset Retirement Obligations,” as a legal obligation to perform an asset retirement activity, in which the timing, and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 requires that an obligation to perform an asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company is currently evaluating the impact of this Interpretation on its financial statements.

In November 2004, the FASB issued SFAS No. 151 “Inventory Costs — an amendment of ARB No. 43, Chapter 4.” This Statement amends the guidance in Accounting Research Bulletin No. 43 to require idle facility expense, freight, handling costs, and wasted material (spoilage) be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of this statement on its financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment,” which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 123(R) supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate, based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures, either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

Under SFAS No. 123(R), public companies would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a rule amending the compliance dates of SFAS No. 123(R) to allow companies to implement SFAS No. 123 (R) at the beginning of their next fiscal year, instead of the next reporting period that begins after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS No. 123(R) on January 1, 2006 using the modified-prospective method. The adoption of the standard is not expected to have a material impact on the Company’s financial statements.

FSP 109-1, Application of FASB Statement No. 109, “Accounting for Income Taxes,” for the Tax Deduction Provided to U.S. Based Manufacturers by the American Job Creation Act of 2004, and FSP 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004” were enacted on October 22, 2004.

FSP No. 109-1 clarifies the application of SFAS No. 109 to the new law’s tax deduction for income attributable to “domestic production activities.” The fully phased-in deduction is up to nine percent of the lesser of taxable income or “qualified production activities income.” FSP 109-1 requires that the deduction be accounted for as a special deduction in the period earned, not as a tax-rate reduction.

FSP No. 109-2, provides guidance under FASB Statement No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on an enterprises’ income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is permitted time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

The Company’s consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make estimates and assumptions. These estimates and assumptions are reviewed periodically by management and compared to historical trends to determine the accuracy of estimates and assumptions used. If warranted, these estimates and assumptions may be changed as current trends are assessed and updated. Historically, the Company’s estimates have been determined to be reasonable. No material adjustments to the Company’s accounting policies have been made in 2005. The Company believes the following are some of the more critical judgment areas in the application of its accounting policies that affect its financial condition and results of operations.

The Company, like other manufacturers, is subject from time to time to a variety of civil and administrative proceedings arising in the ordinary course of business. Such claims and litigation include, without limitation, product liability claims and health, safety and environmental claims, some of which relate to cases alleging asbestos and manganese-induced illnesses. The costs associated with these claims are predominantly defense costs, which are recognized in the periods incurred. Insurance reimbursements mitigate these costs and, where reimbursements are probable; they are recognized in the applicable period. With respect to costs other than defense costs (i.e., for liability and/or settlement or other resolution), reserves are recorded when it is probable that the contingencies will have an unfavorable outcome. The Company accrues its best estimate of the probable costs, after a review of the facts with management and counsel and taking into account past experience. If an unfavorable outcome is determined to be reasonably possible but not probable, or if the amount of loss cannot be reasonably estimated, disclosure is provided for material claims or litigation. Many of the current cases are in preliminary procedural stages and insufficient information exists upon which judgments can be made as to the validity or ultimate disposition of such actions. Therefore, in many situations a range of possible losses cannot be made at this time. Reserves are adjusted as facts and circumstances change and related management assessments of the underlying merits and the likelihood of outcomes change. Moreover, reserves only cover identified and/or asserted claims. Future claims could, therefore, give rise to increases to such reserves. See Note K to the Consolidated Financial Statements and the Legal Proceedings section of this Quarterly Report on Form 10-Q for further discussion of legal contingencies.

The Company is subject to taxation from U.S. federal, state, municipal and international jurisdictions. The calculation of current income tax expense is based on the best information available and involves significant management judgment. The actual income tax liability for each jurisdiction in any year can in some instances be ultimately determined several years after the financial statements are published.

The Company maintains reserves for estimated income tax exposures for many jurisdictions. Exposures are settled primarily through the settlement of audits within each individual tax jurisdiction or the closing of a statute of limitation. Exposures can also be affected by changes in applicable tax law or other factors, which may cause management to believe a revision of past estimates is appropriate. Management believes that an appropriate liability has been established for income tax exposures; however, actual results may materially differ from these estimates.

Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of assets and liabilities and operating loss and tax credit carryforwards. The Company does not provide deferred income taxes on unremitted earnings of certain non-U.S. subsidiaries which are deemed permanently reinvested. It is not practicable to calculate the deferred taxes associated with the remittance of these earnings. Deferred income taxes of $2,618 have been provided on earnings of $10,955 that are not expected to be permanently reinvested. At September 30, 2005, the Company had approximately $60,965 of gross deferred tax assets related to deductible temporary differences and tax loss and credit carryforwards which will reduce taxable income in future years.

In assessing the realizability of deferred tax assets, the Company assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At September 30, 2005, a valuation allowance of $18,704 had been recorded against these deferred tax assets based on this assessment. The Company believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company’s assessment of future taxable income or tax planning strategies changes.

The Company accounts for its defined benefit plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” which requires amounts recognized in financial statements be determined on an actuarial basis. A substantial portion of the Company’s pension amounts relate to its defined benefit plan in the United States.

A significant element in determining the Company’s pension expense is the expected return on plan assets. The expected return on plan assets is determined based on the expected long-term rate of return on the plan assets and the market-related value of plan assets. Upon adoption of SFAS No. 87, the market-related value of plan assets could be determined by either fair value or a calculated value recognizing changes in fair value in a systematic and rational manner over not more than five years. The method chosen must be applied consistently year to year. The Company used fair values at December 31 for the market-related value of plan assets. The assumed long-term rate of return on assets is applied to the market value of plan assets. This produces the expected return on plan assets included in pension expense. The difference between this expected return and the actual return on plan assets is deferred and amortized over the average remaining service period of active employees expected to receive benefits under the plan. The amortization of the net deferral of past losses will increase future pension expense.

During 2004, investment gains in the Company’s U.S. pension plans were approximately 11.3%. The Company made $30,000 of voluntary contributions during 2004, approximately $40,000 in 2003 and $31,500 during the first nine months of 2005. Pension expense relating to the Company’s defined benefit plans for the first nine months of 2005 was $1,939 higher than the first nine months of 2004 as a result of settlement losses incurred on the termination of a European pension plan. Excluding the settlement loss, the Company estimates 2005 pension expense will not be materially different than 2004.

At the end of each year, the Company determines the discount rate to be used for plan liabilities. To develop the discount rate assumption to be used, the Company looks to rates of return on high quality, fixed-income investments which match the expected cash flow of future plan obligations. At December 31, 2004, the Company determined this rate to be 5.9%.

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 non-U.S. inventories, cost is determined by the first-in, first-out (FIFO) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. The excess of current cost over LIFO cost amounted to $63,233 at September 30, 2005. The Company reviews the net realizable value of inventory in detail on an on-going basis, with consideration given to deterioration, obsolescence and other factors. If actual market conditions differ from those projected by management, and the Company’s estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales may be required. Historically, the Company’s reserves have approximated actual experience.

The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for products delivered. The Company estimates this allowance based on knowledge of the financial condition of customers, review of historical receivables and reserve trends and other pertinent information. If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required. Historically, the Company’s reserves have approximated actual experience.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”the Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows and established business valuation multiples.

The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management’s judgment. Any changes in key assumptions about the Company’s businesses and their prospects, or changes in market conditions, could result in an impairment charge.

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.

The Company’s primary financial market risks include fluctuations in currency exchange rates, commodity prices and interest rates. The Company manages these risks by using derivative financial instruments in accordance with established policies and procedures. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

Included below is a sensitivity analysis based upon a hypothetical 10 % weakening or strengthening in the U.S. dollar compared to the September 30, 2005 foreign currency rates, a 10% change in commodity prices, and a 100 basis point increase in effective interest rates under the Company’s current borrowing arrangements. The contractual derivative and borrowing arrangements in effect at September 30, 2005 were compared to the hypothetical foreign exchange, commodity price, or interest rates in the sensitivity analysis to determine the effect on Income before taxes, Interest expense, or Accumulated other comprehensive loss. The analysis takes into consideration any offset that would result from changes in the value of the hedged asset or liability.

The Company enters into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting the Company’s risk that would otherwise result from changes in exchange rates. At September 30, 2005, the Company hedged third party and intercompany purchases and sales. At September 30, 2005, the Company had foreign exchange contracts with a notional value of approximately $28,613. At September 30, 2005, a hypothetical 10 % weakening of the U.S. dollar would not materially affect the Company’s financial statements.

At September 30, 2005, the Company also had foreign exchange contracts with a notional value of approximately $21,254 which hedged intercompany loans. Any loss resulting from a hypothetical 10 % weakening of the U.S. dollar would be offset by the associated gain on the underlying intercompany loan receivable and would not materially affect the Company’s financial statements.

From time to time, the Company uses various hedging arrangements to manage exposures to price risk from commodity purchases. These hedging arrangements have the effect of locking in for specified periods (at predetermined prices or ranges of prices) the prices the Company will pay for the volume to which the hedge relates. A hypothetical 10 % adverse change in commodity prices on the Company’s open commodity futures at September 30, 2005 would not materially affect the Company’s financial statements.

The Company uses floating rate swaps to convert a portion of its $150,000 fixed-rate, long-term borrowings into short-term variable interest rates. An increase in interest expense resulting from a hypothetical increase of 100 basis points in the September 30, 2005 floating rate would not materially affect the Company’s financial statements. See discussion in “Liquidity — Long-term debt.”

The fair value of the Company’s cash and cash equivalents and marketable securities at September 30, 2005, approximated carrying value due to their short-term duration. These financial instruments are also subject to concentrations of credit risk. The Company has minimized this risk by entering into investments with major banks and financial institutions and investing in several high-quality instruments. The Company does not expect any counterparties to fail to meet their obligations.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are operating effectively as designed. There have been no changes in the Company’s internal controls or in other factors that occurred during the period covered by this Form 10-Q that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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.

At September 30, 2005, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 35,795 plaintiffs, which is a net decrease of 3,063 claims from those 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. Since January 1, 1995, the Company has been a co-defendant in other similar cases that have been resolved as follows: 18,129 of those claims were dismissed, 9 were tried to defense verdicts, 4 were tried to plaintiff verdicts and 298 were decided in favor of the Company following summary judgment motions. The Company has appealed or will appeal the 4 judgments based on verdicts against the Company.

At September 30, 2005, the Company was a co-defendant in cases alleging manganese induced illness involving claims by approximately 8,622 plaintiffs, which is a net decrease of 2,941 from those previously reported at June 30, 2005. In each instance, the Company is one of a large number of defendants. The claimants in cases alleging manganese induced illness seek compensatory and punitive damages, in most cases for unspecified sums. The claimants allege that exposure to manganese contained in welding consumables caused the plaintiffs to develop adverse neurological conditions, including a condition known as manganism. Many of the cases are single plaintiff cases but some multi-claimant cases have been filed, including alleged class actions in various states. At September 30, 2005, cases involving 5,052 claimants were filed in or transferred to federal court where the Judicial Panel on MultiDistrict Litigation has consolidated these cases for pretrial proceedings in the Northern District of Ohio (the “MDL Court”).

Since January 1, 1995, the Company has been a co-defendant in similar cases that have been resolved as follows: 5,483 of those claims were dismissed, 7 were tried to defense verdicts in favor of the Company, 2 were tried to hung juries, 1 of which resulted in a plaintiff’s verdict upon retrial, and 1 of which resulted in a defense verdict (subsequently, however, a motion for a new trial has been granted) and 12 were settled for immaterial amounts. The Company has appealed the 1 case tried to a plaintiff’s verdict. In addition, class action claims in 10 cases transferred to the MDL Court that were originally filed as purported class actions have been dropped. However, plaintiffs have filed new class actions seeking medical monitoring in seven state courts, five of which have been removed to the MDL Court.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – 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.

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/ VINCENT K. PETRELLA
Vincent K. Petrella, Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
October 31, 2005