1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the nine months ended September 30, 1997 Commission File No. 0-1402 THE LINCOLN ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Ohio 34-0359955 (State of incorporation) (I.R.S. Employer Identification No.) 22801 St. Clair Avenue, Cleveland, Ohio 44117 (Address of principal executive offices) (Zip Code) (216) 481-8100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ The number of shares outstanding of the issuer's classes of common stock as of September 30, 1997 were as follows: Common Shares.......................................10,770,959 Class A Common Shares...............................13,837,697 ----------- Total outstanding shares............................24,608,656 =========== 1
2 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of dollars, except share data) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $291,567 $270,947 $871,923 $834,167 Cost of goods sold 181,044 166,935 539,634 513,844 -------- -------- -------- -------- Gross profit 110,523 104,012 332,289 320,323 Distribution cost / selling, general & administrative expenses 77,120 80,304 228,258 236,316 -------- -------- -------- -------- Operating income 33,403 23,708 104,031 84,007 Other income / (expense): Interest income 1,812 526 4,056 1,832 Other income 197 8,741 526 10,127 Interest expense (1,636) (1,872) (4,940) (5,991) -------- -------- -------- -------- Total other income / (expense) 373 7,395 (358) 5,968 -------- -------- -------- -------- Income before income taxes 33,776 31,103 103,673 89,975 Income taxes 12,266 11,432 38,463 33,524 -------- -------- -------- -------- Net income $ 21,510 $ 19,671 $ 65,210 $ 56,451 ======== ======== ======== ======== Net income per share $ 0.87 $ 0.79 $ 2.64 $ 2.27 Cash dividends declared per share $ 0.15 $ 0.12 $ 0.45 $ 0.36 Average number of shares outstanding (in thousands) 24,609 24,859 24,719 24,874 </TABLE> See notes to these consolidated financial statements. 2
3 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars) (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ ASSETS <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 68,797 $ 40,491 Marketable securities 53,992 109 Accounts receivable (less allowance for doubtful accounts of $3,036 in 1997 and $2,878 in 1996) 167,022 151,287 Inventories: Raw materials and in-process 74,829 79,100 Finished goods 93,442 91,555 -------- -------- 168,271 170,655 Deferred income taxes 12,136 10,579 Other current assets 22,879 10,088 -------- -------- TOTAL CURRENT ASSETS 493,097 383,209 OTHER ASSETS Goodwill - net 35,258 37,440 Other 29,950 25,311 -------- -------- 65,208 62,751 PROPERTY, PLANT AND EQUIPMENT Land 11,775 11,710 Buildings 112,490 114,640 Machinery, tools and equipment 341,225 335,738 -------- -------- 465,490 462,088 Less: accumulated depreciation (267,198) (260,849) -------- -------- 198,292 201,239 -------- -------- TOTAL ASSETS $756,597 $647,199 ======== ======== </TABLE> 3
4 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars, except share data) (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY <S> <C> <C> CURRENT LIABILITIES Notes payable to banks $ 284 $ 2,607 Trade accounts payable 57,802 58,157 Salaries, wages and amounts withheld 67,002 18,983 Taxes, including income taxes 44,666 36,297 Dividend payable 3,691 2,977 Other current liabilities 59,851 39,976 Current portion of long-term debt 10,171 10,528 -------- -------- TOTAL CURRENT LIABILITIES 243,467 169,525 Long-term debt, less current portion 63,825 64,148 Deferred income taxes 3,416 3,643 Other long-term liabilities 17,116 18,107 SHAREHOLDERS' EQUITY Common Shares, without par value -- at stated capital amount: Authorized -- 60,000,000 shares in 1997 and 30,000,000 shares in 1996; Outstanding -- 10,770,959 shares in 1997 and 10,484,247 shares in 1996 2,154 2,097 Class A Common Shares (non-voting), without par value -- at stated capital amount: Authorized -- 60,000,000 shares in 1997 and 30,000,000 shares in 1996; Outstanding -- 13,837,697 shares in 1997 and 1996 2,768 2,768 Class B Common Shares, without par value -- at stated capital amount: Authorized -- none in 1997 and 2,000,000 shares in 1996; Outstanding -- none in 1997 and 486,772 shares in 1996 - 97 Additional paid-in capital 103,697 103,720 Retained earnings 344,358 290,252 Cumulative translation adjustments (24,204) (7,158) -------- -------- TOTAL SHAREHOLDERS' EQUITY 428,773 391,776 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $756,597 $647,199 ======== ======== </TABLE> See notes to these consolidated financial statements. 4
5 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1996 ---------- --------- OPERATING ACTIVITIES <S> <C> <C> Net income $ 65,210 $ 56,451 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,797 23,654 (Gain) on sale of fixed assets and businesses - (9,079) Changes in operating assets and liabilities: (Increase) in accounts receivable (23,068) (11,450) (Increase) in inventories (4,845) (4,783) (Increase) in other current assets (13,799) (8,731) Increase (decrease) in accounts payable 2,316 (7,922) Increase in other current liabilities 78,675 63,312 Gross change in other noncurrent assets and liabilities (6,882) 2,483 Other - net (1,053) (1,794) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 117,351 102,141 INVESTING ACTIVITIES Capital expenditures (23,252) (29,627) Purchase of marketable securities (53,895) - Proceeds from sale of property, plant and equipment and businesses 818 19,056 -------- -------- NET CASH (USED) BY INVESTING ACTIVITIES (76,329) (10,571) FINANCING ACTIVITIES Short-term borrowings - net (2,214) (26,808) Long-term borrowings - net (598) (10,981) Dividends paid (10,390) (8,958) Other (105) (275) -------- -------- NET CASH (USED) BY FINANCING ACTIVITIES (13,307) (47,022) Effect of exchange rate changes on cash and cash equivalents 591 1,837 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 28,306 46,385 Cash and cash equivalents at beginning of period 40,491 10,087 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 68,797 $ 56,472 ======== ======== </TABLE> See notes to these consolidated financial statements. 5
6 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1997 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to the preparation of the quarterly report on Form 10-Q. Accordingly, these consolidated financial statements do not include all of the information and notes required for complete financial statements. These consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) necessary to fairly present the financial position, results of operations and changes in cash flows for the interim period. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results to be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. NOTE B - INVENTORY VALUATION The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory calculation. NOTE C - SALARIES, WAGES AND AMOUNTS WITHHELD Salaries, wages and amounts withheld at September 30, 1997 include provisions for year-end bonuses and related payroll taxes of $54.7 million. The payment of bonuses is discretionary and is subject to approval by the Board of Directors. NOTE D - CHANGES IN CAPITAL STRUCTURE Effective May 28, 1997, certain changes in the Company's capital structure were implemented. Class B Common Shares were eliminated and the 486,772 outstanding Class B Common Shares were converted into 282,747 Common Shares. Additionally, the authorized capital was increased to 60 million Common Shares and 60 million Class A Common Shares. NOTE E - ACQUISITION AND DIVESTITURES In July 1996, the Company acquired Electronic Welding Systems (EWS), a designer and supplier of welding power supplies and plasma cutting equipment, based in Italy. The acquisition was accounted for as a purchase. The results of operations of EWS, which have been included in that of the Company beginning in July 1996, were not material. The net cost of the acquisition, net of cash received, of $5.5 million is included in capital expenditures in the Consolidated Statement of Cash Flows for the nine months ended September 30, 1996. Relating to this acquisition, a charge of $2.0 million ($1.2 million after-tax, or $0.05 per share) for acquired in-process research and development was recorded during the third quarter 1996. Also during the third quarter 1996, the Company sold its gas distribution businesses. Net cash proceeds of $17.4 million were received and are included in cash flows from investing activities in the Consolidated Statement of Cash Flows for the nine months ended September 30, 1996. The Company realized a gain on disposal of these businesses of $8.4 million ($5.1 million after-tax, or $0.20 per share), which is included in other income in the Consolidated Statements of Income for the three and nine months ended September 30, 1996. The operational results of these businesses were not material to the Company for the three and nine months ended September 30, 1996. 6
7 NOTE F - CONTINGENCIES The Company is subject to a variety of civil and administrative proceedings arising out of its normal operations, including those relating to product liability claims, health, safety and environmental claims and employment-related actions. The Company has been named in filings made during or after May 1996 in the Superior Court of California as a defendant or co-defendant in lawsuits filed by building owners in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge, California, earthquake of January 1994. A total of eight such cases remain pending. One of these cases, PACIFIC DESIGN CENTER, was filed in 1997 as a class action complaint against the Company and other unnamed "John Doe" defendants. It alleges that a certain type of welding electrode manufactured by the Company and others was defective for use in "moment resisting" steel frame buildings in seismically sensitive areas. The complaint claims there may be 1,500 such buildings, with damages (including costs of inspection, retrofitting and repairs, loss of income, and diminution of value) exceeding $1 billion; it also seeks punitive damages. During September 1997, the Company settled one of the individual Northridge actions, SAINT JOHN'S MEDICAL PLAZA v. DILLINGHAM CONSTRUCTION ET. AL., which had been set for trial in October. The Company paid $6.0 million to settle this case. There was no significant effect on results of operations for the third quarter, due to existing reserves and applicable insurance. The Company is unable to make a meaningful estimate of the amount or range of possible losses that could result from an unfavorable outcome of the remaining pending or future earthquake-related cases. The Company's results of operations or cash flows in one or more interim or annual periods could be materially affected by unfavorable results in one or more of the earthquake-related cases. Management believes the Company has substantial defenses and intends to contest such suits vigorously, that the Company has applicable insurance and that other potential defendants and their respective insurers will be identified as the lawsuits proceed. Based on information known to the Company, and subject to the factors and contingencies noted herein, management believes the outcome of the Company's litigation should not have a material adverse effect upon the consolidated financial position of the Company. However, if the Company is unsuccessful in defending or otherwise satisfactorily resolving this litigation, and if insurance coverage is unavailable or inadequate, then the litigation could have a material adverse impact on the Company's financial position. NOTE G - NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which simplifies the computation of earnings per share (EPS), specifically focusing on the computation of weighted average shares outstanding. SFAS 128 is required to be adopted in the fourth quarter of 1997. The Company expects the adoption of SFAS 128 to result in immaterial changes in the amounts currently reported for weighted average shares outstanding. Accordingly, no impact on EPS is expected. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement requires disclosure of selected financial and descriptive information for each operating segment based on management's internal organizational decision-making structure. Additional information is required on a company-wide basis for revenues by product or service, revenues and identifiable assets by geographic location and information about significant customers. As required by the statement, the Company will begin presenting such information in its financial statements for the year-ending December 31, 1998. 7
8 Part 1 - Item 2 MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the Company's results of operations for the three and nine month periods ended September 30, 1997 and 1996: <TABLE> <CAPTION> Three months ended September 30, ---------------------------------------------------------------- (amounts in millions of dollars) 1997 1996 ----------------------------- ----------------------------- Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- <S> <C> <C> <C> <C> Net sales $291.6 100.0% $270.9 100.0% Cost of goods sold 181.1 62.1% 166.9 61.6% ------- ------ ------- ------ Gross profit 110.5 37.9% 104.0 38.4% Distribution cost / selling, general and administrative expenses 77.1 26.4% 80.3 29.6% ------- ------ -------- ------ Operating income 33.4 11.5% 23.7 8.8% Interest income 1.8 0.6% 0.5 0.2% Other income 0.2 0.1% 8.7 3.2% Interest expense 1.6 0.6% 1.8 0.7% ------- ------ -------- ------ Income before income taxes 33.8 11.6% 31.1 11.5% Income taxes 12.3 4.2% 11.4 4.2% ------- ------ -------- ------ Net income $ 21.5 7.4% $ 19.7 7.3% ======= ====== ======== ====== <CAPTION> Nine months ended September 30, --------------------------------------------------------------- (amounts in millions of dollars) 1997 1996 --------------------------- ----------------------------- Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- <S> <C> Net sales $871.9 100.0% $834.2 100.0% Cost of goods sold 539.6 61.9% 513.9 61.6% ------- ------ ------- ------ Gross profit 332.3 38.1% 320.3 38.4% Distribution cost / selling, general and administrative expenses 228.3 26.2% 236.3 28.3% ------- ------ ------- ------ Operating income 104.0 11.9% 84.0 10.1% Interest income 4.1 0.5% 1.8 0.2% Other income 0.5 0.1% 10.1 1.2% Interest expense 4.9 0.6% 5.9 0.7% ------- ------ ------- ------ Income before income taxes 103.7 11.9% 90.0 10.8% Income taxes 38.5 4.4% 33.5 4.0% ------- ------ ------- ------ Net income $ 65.2 7.5% $ 56.5 6.8% ======= ====== ======= ====== </TABLE> THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED - -------------------------------------------------------------------- SEPTEMBER 30, 1996 - ------------------ NET SALES. Net sales for the quarter ended September 30, 1997 increased $20.7 million or 7.6% to $291.6 million from $270.9 million for the same period last year. Net sales from U.S. operations totaled $205.0 million for the quarter ended September 30, 1997, an increase of 10.4% or $19.3 million over the prior year. Prior year U.S. results included incremental sales of $4.2 million for gas distribution businesses, sold during the third quarter of 1996. Sales growth from U.S. operations was due to growth in both domestic and export sales. U.S. export sales increased $5.0 million or 21.8% to $27.9 million for the third quarter of 1997, from $22.9 million last year. Non-U.S. sales increased 1.6% to $86.6 million for the third quarter 1997, compared to $85.2 million last year, despite a decline in the relative strength of foreign currencies against the U.S. dollar. For the third quarter of 1997 changes in exchange rates, primarily caused by weakening European currencies, had an overall negative impact on non-U.S. sales of $8.4 million. Company-wide, sales growth was achieved largely through increased volume. 8
9 GROSS PROFIT. Gross profit of $110.5 million for the third quarter 1997 increased 6.3% or $6.5 million from the prior year. Gross profit as a percentage of net sales declined to 37.9% compared with 38.4% for the third quarter last year. Margin percentages have been affected by increased product liability and defense costs, the costs of insurance proceedings, increases in sales in non-U.S. markets with lower margins and by the incremental loss of higher margin gas distribution sales. The Company paid $6.0 million in September 1997 to settle a lawsuit related to alleged property damage claimed to have been discovered after the 1994 Northridge earthquake. The settlement had no material effect on earnings due to existing reserves and applicable insurance. See NOTE F of the unaudited consolidated financial statements contained herein for further discussion on remaining litigation. DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $3.2 million to $77.1 million for the third quarter 1997 as compared with 1996. Third quarter 1996 SG&A expenses included a $2.0 million charge ($1.2 million after-tax, or $0.05 per share) related to in-process research and development acquired with the purchase of Electronic Welding Systems, and executive retirement and severance costs of $5.5 million ($3.3 million after-tax, or $0.13 per share). The Company's ongoing efforts at cost reduction and control have resulted in the lower SG&A expense as a percentage of sales. Included in SG&A expenses are costs related to the Company's discretionary year-end employee bonus program, net of hospitalization costs, of $19.0 million in the third quarter 1997 compared with $16.7 million in the 1996 period. The bonus payout is subject to approval by the Company's Board of Directors during the fourth quarter. INTEREST INCOME. Interest income increased to $1.8 million for the third quarter 1997 from $0.5 million for the same period last year. The higher interest income is the result of the larger balance of cash and marketable securities. OTHER INCOME. For the third quarter 1996, other income included an $8.4 million gain ($5.1 million after-tax, or $0.20 per share) on the sale of the Company's gas distribution businesses. The sale of these businesses did not significantly impact operating results for the three months ended September 30, 1996. INTEREST EXPENSE. As a result of reduced debt levels, interest expense declined 12.6% to $1.6 million for the quarter ended September 30, 1997 compared to $1.8 million for the third quarter 1996. INCOME TAXES. Income taxes for the quarter ended September 30, 1997 were $12.3 million on income before income taxes of $33.8 million, an effective rate of 36.3%, as compared with income taxes of $11.4 million on income before income taxes of $31.1 million, or an effective rate of 36.7% for the same period in 1996. The effective tax rate for the year ended December 31, 1996 was 37.0%. NET INCOME. Net income increased 9.3% to $21.5 million or $0.87 per share from $19.7 million or $0.79 per share for the third quarter 1996. The effect of the strengthening U.S. dollar against foreign currencies on net income was not significant. 9
10 NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED - ------------------------------------------------------------------ SEPTEMBER 30, 1996 - ------------------ NET SALES. Net sales for the nine months ended September 30, 1997 increased $37.7 million or 4.5% to $871.9 million from $834.2 million for the same period last year. Net sales from the Company's U.S. operations totaled $601.3 million for the first nine months of 1997, an increase of 5.4% or $30.7 million over the prior year. Prior year U.S. sales included incremental sales of $14.3 million for gas distribution businesses, sold during the third quarter of 1996. U.S. export sales increased 18.6% to $81.7 million for the first nine months of 1997, compared with $68.9 million in 1996. Non-U.S. sales were $270.6 million for the nine months ended September 1997, compared to $263.6 million in 1996, an increase of 2.7%. The strengthening of the U.S. dollar, predominantly against European currencies, had an adverse impact on non-U.S. sales of $19.0 million on a year-over-year basis. Sales increases were primarily due to volume gains. GROSS PROFIT. Gross profit increased 3.7% or $12.0 million to $332.3 million through September 30, 1997 from $320.3 million in 1996. Margin percentages have been impacted by increased product liability and defense costs, increases in sales in non-U.S. markets with lower margins and by the loss of higher margin gas distribution sales. DISTRIBUTION COST/SELLING, GENERAL & ADMINISTRATIVE (SG&A) EXPENSES. SG&A expenses decreased $8.0 million or 3.4% to $228.3 million for the nine months ended September 30, 1997 as compared with 1996. SG&A expenses for 1996 included a $3.4 million charge ($2.1 million after tax, or $0.08 per share) for costs related to a litigation settlement, a $2.0 million charge ($1.2 million after-tax, or $0.05 per share) for acquired in-process research and development, and a $5.5 million charge ($3.3 million after-tax, or $0.13 per share) for executive retirement and severance costs. The exclusion of the gas distribution businesses resulted in a reduction of reported SG&A costs of $6.4 million on a year-over-year basis. The effect of exchange rate changes served to reduce SG&A expenses by $4.5 million. The decline in SG&A expenses as a percentage of sales reflects continuing cost control initiatives. Included in SG&A expenses are costs related to the Company's discretionary year-end employee bonus program, net of hospitalization costs, of $54.7 million through September 30, 1997 compared with $50.4 million in the 1996 period. INTEREST INCOME. Larger balances of cash and marketable securities has resulted in a 121.4% increase in interest income to $4.1 million for 1997 from $1.8 million for 1996. OTHER INCOME. For the nine months ended September 30, 1996, other income includes an $8.4 million gain ($5.1 million after-tax, or $0.20 per share) from the sale of gas distribution businesses. The sale of these businesses did not significantly impact operating results for the nine months ended September 30, 1996. INTEREST EXPENSE. Interest expense declined 17.5% to $4.9 million for the nine months ended September 30, 1997 compared to $5.9 million for 1996. This decrease is a result of lower debt levels. INCOME TAXES. Income taxes for the nine months ended September 30, 1997 were $38.5 million on income before income taxes of $103.7 million, an effective rate of 37.1%, as compared with income taxes of $33.5 million on income before income taxes of $90.0 million, or an effective rate of 37.2% for the same period in 1996. The effective tax rate for the year ended December 31, 1996 was 37.0%. NET INCOME. Net income increased 15.5% to $65.2 million or $2.64 per share from $56.5 million or $2.27 per share for 1996. The effect of the strengthening U.S. dollar against other currencies on net income was not significant. 10
11 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash provided from operating activities for the nine months ended September 30, 1997 increased 15.0% to $117.4 million from $102.1 million for the first nine months of 1996. Improved working capital management and higher earnings has resulted in the improved cash flow. Capital expenditures for the nine months ended September 30, 1997 decreased $6.3 million as compared with the same period in 1996 due to the timing of acquisitions and joint venture investments. Capital expenditures for 1996 include the $5.5 million acquisition of Electronic Welding Systems. The Company continues to invest to maintain and improve capacity and infrastructure as supported by market requirements. Included in net cash used by investing activities for 1996 are the net cash proceeds of $17.4 million from the sale of the gas distribution businesses. The Company's ratio of total debt to total capitalization decreased to 14.8% at September 30, 1997 from 16.5% at December 31, 1996. Dividends paid through September 30, 1997 were $0.42 per share or $10.4 million. A dividend of $0.15 per share or $3.7 million was paid on October 15, 1997. NEW ACCOUNTING PRONOUNCEMENTS - ----------------------------- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which simplifies the computation of earnings per share (EPS), including the computation of weighted average shares outstanding. SFAS 128 is required to be adopted in the fourth quarter of 1997. The Company expects the adoption of SFAS 128 to result in immaterial changes in the amounts currently reported for weighted average shares outstanding, and accordingly, no impact on EPS is expected. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information. This statement requires disclosure of selected financial and descriptive information for each operating segment based on management's internal organizational decision-making structure. Additional information is required on a company-wide basis for revenues by product or service, revenues and identifiable assets by geographic location and information about significant customers. As required by the statement, the Company will begin presenting such information in its financial statements for the year-ending December 31, 1998. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS - ---------------------------------------------- From time to time, information provided by the Company, statements by its employees or information included in its filings with the Securities and Exchange Commission (including those portions of this Management's Discussion and Analysis that refer to the future) may contain forward-looking statements that are not historical facts. Those statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, and the Company's future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including: - - Litigation. The Company, like other manufacturers, is subject to a variety of lawsuits and potential lawsuits that arise in the ordinary course of business. See "Item 1. Legal Proceedings" within the Company's Annual Report on Form 10-K for the year ending December 31, 1996, as well as the update in this report. While product liability costs have not generally been material to the Company's results of operations, they have increased recently, particularly as a result of litigation relating to the 1994 Northridge earthquake. See NOTE F of the unaudited consolidated financial statements contained herein for further discussion on remaining litigation. - - Competition. The Company operates in a highly competitive global environment, and is subject to a variety of competitive factors such as pricing, the actions and strength of its competitors, and the Company's ability to 11
12 maintain its position as a recognized leader in welding technology. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against other currencies. The Company's competitive position could also be adversely affected should new or emerging entrants become more active in the arc welding business. - - International Markets. The Company's long term strategy is to increase its share in growing international markets, particularly Asia, Latin America, Central Europe and other developing markets. However, there can be no certainty that the Company will be successful in its expansion efforts. The Company is subject to the currency risks of doing business abroad and expansion poses challenging demands within the Company's infrastructure. Further, many developing economies have a significant degree of political and economic instability, which may adversely affect the Company's international operations. - - Cyclicality and Maturity of the Welding Industry. The United States arc welding industry is both mature and cyclical. The growth of the domestic arc welding industry has been and continues to be constrained by numerous factors, including the substitution of plastics and other materials in place of fabricated metal parts in many products and structures. Increased offshore production of fabricated steel structures has also cut into the domestic demand for arc welding products. - - Operating Factors. The Company is highly dependent on its skilled workforce and efficient production facilities, which could be adversely affected by its labor relations, business interruptions at its domestic facilities and short-term or long-term interruptions in the availability of supplies or raw materials or in transportation of finished goods. - - Research and Development. The Company's continued success depends, in part, on its ability to continue to meet customer welding needs through the introduction of new products and the enhancement of existing product design and performance characteristics. There can be no assurances that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to the operating results of the Company, or that product development will continue at a pace to sustain future growth. - - Motor Division. The Company has made substantial capital investments to modernize and expand its production of electric motors. While management believes that the profitability of this investment will improve, success is largely dependent on increased market penetration. Part II - Other Information Item 1. Legal Proceedings During September 1997, the Company settled one individual lawsuit relating to the 1994 Northridge earthquake, SAINT JOHN'S MEDICAL PLAZA v. DILLINGHAM CONSTRUCTION ET. AL., which had been set for trial in October. Included in the terms of the court approved settlement is a Company payment of $6.0 million. The case remains pending against a number of co-defendants. To assist management on a current basis as it makes strategic decisions relating to the Northridge litigation, the Board of Directors established a special committee of the Board during the third quarter of 1997. Item 2. Changes in Securities -- None. Item 3. Defaults Upon Senior Securities -- None. Item 4. Submission of Matters to a Vote of Security Holders -- None. Item 5. Other Information -- None. 12
13 Item 6. Exhibits and Reports on Form 8-K (a) Exhibit No Description ---------- ----------- (27) Financial Data Schedule. (b) Reports on Form 8-K -- None. 13
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. THE LINCOLN ELECTRIC COMPANY /s/ H. JAY ELLIOTT - -------------------------- H. Jay Elliott Senior Vice President, Chief Financial Officer and Treasurer October 30, 1997 14