LINCOLN ELECTRIC HOLDINGS, INC. Form 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the three months ended September 30, 2005
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Commission file number
0-1402 |
LINCOLN ELECTRIC HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Ohio
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34-1860551 |
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(State or Other Jurisdiction of
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(I.R.S. Employer Identification No.) |
Incorporation or Organization) |
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22801 St. Clair Avenue, Cleveland, Ohio
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44117 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(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) Yes
o No þ
The number of shares outstanding of the registrants common shares as of September 30, 2005 was
42,042,860.
Part I. Financial Information
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)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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Net sales |
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$ |
412,013 |
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$ |
344,333 |
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$ |
1,180,817 |
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$ |
982,682 |
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Cost of goods sold |
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300,821 |
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251,595 |
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857,397 |
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705,676 |
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Gross profit |
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111,192 |
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92,738 |
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323,420 |
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277,006 |
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Selling, general & administrative expenses |
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71,471 |
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61,390 |
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210,291 |
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190,865 |
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Rationalization charges |
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1,250 |
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Operating income |
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39,721 |
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31,348 |
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111,879 |
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86,141 |
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Other income (expense): |
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Interest income |
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1,153 |
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749 |
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2,813 |
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1,990 |
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Equity earnings in affiliates |
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1,675 |
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1,130 |
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3,239 |
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3,052 |
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Other income |
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2,415 |
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602 |
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3,881 |
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2,214 |
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Interest expense |
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(2,114 |
) |
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(1,358 |
) |
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(5,982 |
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(4,401 |
) |
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Total other income |
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3,129 |
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1,123 |
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3,951 |
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2,855 |
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Income before income taxes |
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42,850 |
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32,471 |
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115,830 |
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88,996 |
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Income taxes |
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4,662 |
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9,474 |
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23,289 |
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24,029 |
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Net income |
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$ |
38,188 |
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$ |
22,997 |
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$ |
92,541 |
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$ |
64,967 |
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Per share amounts: |
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Basic earnings per share |
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$ |
0.91 |
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$ |
0.56 |
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$ |
2.22 |
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$ |
1.58 |
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Diluted earnings per share |
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$ |
0.90 |
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$ |
0.55 |
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$ |
2.20 |
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$ |
1.57 |
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Cash dividends declared per share |
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$ |
0.18 |
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$ |
0.17 |
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$ |
0.54 |
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$ |
0.51 |
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See notes to these consolidated financial statements.
3
LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(UNAUDITED) |
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(NOTE A) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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$ |
106,181 |
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$ |
92,819 |
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Marketable securities |
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50,500 |
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Accounts receivable (less allowance for doubtful accounts of $7,412 in 2005; $9,295 in 2004) |
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255,869 |
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219,496 |
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Inventories |
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Raw materials |
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74,046 |
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94,743 |
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In-process |
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34,474 |
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25,082 |
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Finished goods |
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160,534 |
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116,450 |
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269,054 |
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236,275 |
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Deferred income taxes |
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5,810 |
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3,794 |
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Other current assets |
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37,187 |
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34,716 |
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TOTAL CURRENT ASSETS |
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674,101 |
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637,600 |
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PROPERTY, PLANT AND EQUIPMENT |
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Land |
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20,865 |
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18,034 |
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Buildings |
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199,900 |
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184,008 |
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Machinery and equipment |
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532,091 |
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553,203 |
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752,856 |
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755,245 |
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Less: accumulated depreciation and amortization |
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413,684 |
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439,129 |
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339,172 |
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316,116 |
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OTHER ASSETS |
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Prepaid pension costs |
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1,792 |
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3,585 |
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Equity investments in affiliates |
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39,275 |
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36,863 |
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Intangibles, net |
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33,163 |
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12,623 |
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Goodwill |
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24,883 |
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15,849 |
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Deferred income taxes |
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1,084 |
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Long-term investments |
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27,641 |
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26,884 |
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Other |
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12,492 |
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8,560 |
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139,246 |
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105,448 |
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TOTAL ASSETS |
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$ |
1,152,519 |
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$ |
1,059,164 |
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See notes to these consolidated financial statements.
4
LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of dollars)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(UNAUDITED) |
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(NOTE A) |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Amounts due banks |
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$ |
4,317 |
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$ |
2,561 |
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Trade accounts payable |
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113,091 |
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111,154 |
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Accrued employee compensation and benefits |
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74,547 |
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37,036 |
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Accrued expenses |
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20,202 |
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15,953 |
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Taxes, including income taxes |
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37,100 |
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35,789 |
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Accrued pensions, current |
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777 |
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21,163 |
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Dividends payable |
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7,568 |
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7,498 |
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Other current liabilities |
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25,164 |
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30,992 |
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Current portion of long-term debt |
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938 |
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882 |
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TOTAL CURRENT LIABILITIES |
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283,704 |
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263,028 |
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Long-term debt, less current portion |
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159,731 |
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163,931 |
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Accrued pensions |
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13,304 |
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14,457 |
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Deferred income taxes |
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27,422 |
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18,227 |
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Other long-term liabilities |
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25,351 |
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22,244 |
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SHAREHOLDERS EQUITY |
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Preferred
Shares, without par value at stated capital amount: |
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Authorized
5,000,000 shares as of September 30, 2005 and December 31, 2004;
Issued and Outstanding none |
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Common
Shares, without par value at stated capital amount: |
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Authorized
120,000,000 shares as of September 30, 2005 and December 31,
2004; Issued 49,282,306 shares as of September 30, 2005 and December 31,
2004; Outstanding 42,042,860 shares as of September 30, 2005 and
41,646,657 shares as of December 31, 2004 |
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4,928 |
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4,928 |
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Additional paid-in capital |
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123,222 |
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117,593 |
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Retained earnings |
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743,817 |
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673,010 |
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Accumulated other comprehensive loss |
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(74,013 |
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(58,678 |
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Treasury
shares, at cost 7,239,446 shares as of September 30, 2005 and
7,635,649 shares as of December 31, 2004 |
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(154,947 |
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(159,576 |
) |
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TOTAL SHAREHOLDERS EQUITY |
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643,007 |
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577,277 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
1,152,519 |
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$ |
1,059,164 |
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See notes to these consolidated financial statements.
5
LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)
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Nine months ended September 30, |
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2005 |
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2004 |
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OPERATING ACTIVITIES |
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Net income |
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$ |
92,541 |
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$ |
64,967 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Rationalization charges |
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1,250 |
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Depreciation and amortization |
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32,107 |
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|
29,418 |
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Equity earnings of affiliates, net |
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(3,239 |
) |
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(2,361 |
) |
Deferred income taxes |
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4,340 |
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(3,280 |
) |
Stock-based compensation |
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2,532 |
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|
2,431 |
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Amortization of terminated interest rate swaps |
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(1,584 |
) |
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(1,589 |
) |
Other non-cash items, net |
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(708 |
) |
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(1,853 |
) |
Changes in operating assets and liabilities, net of the effects from acquisitions: |
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Increase in accounts receivable |
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(27,540 |
) |
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(49,142 |
) |
Increase in inventories |
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(21,609 |
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(51,020 |
) |
Increase in other current assets |
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(3,727 |
) |
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(8,429 |
) |
Increase in accounts payable |
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2,546 |
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|
22,491 |
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Increase in other current liabilities |
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50,498 |
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|
73,614 |
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Contributions to pension plans |
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(31,500 |
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(30,000 |
) |
Increase in accrued pensions |
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1,083 |
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|
10,522 |
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Gross change in other long-term assets and liabilities |
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2,481 |
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(1,369 |
) |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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99,471 |
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|
54,400 |
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INVESTING ACTIVITIES |
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Capital expenditures |
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(36,171 |
) |
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(38,278 |
) |
Proceeds from sale of fixed assets |
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3,816 |
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|
1,608 |
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Sales of marketable securities |
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65,500 |
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|
15,000 |
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Purchases of marketable securities |
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(15,000 |
) |
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(9,000 |
) |
Acquisitions of businesses, net of cash acquired |
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(73,563 |
) |
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(12,511 |
) |
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NET CASH USED BY INVESTING ACTIVITIES |
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(55,418 |
) |
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(43,181 |
) |
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FINANCING ACTIVITIES |
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Proceeds from short-term debt |
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|
2,013 |
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Payments on short-term borrowings |
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(516 |
) |
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|
(2,109 |
) |
Amounts due banks, net |
|
|
5,851 |
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|
|
613 |
|
Payments on long-term borrowings |
|
|
(15,203 |
) |
|
|
(4,533 |
) |
Issuance of shares from treasury for stock options |
|
|
18,244 |
|
|
|
17,680 |
|
Purchase of shares for treasury |
|
|
(12,804 |
) |
|
|
(4,368 |
) |
Cash dividends paid |
|
|
(22,470 |
) |
|
|
(20,447 |
) |
|
|
|
|
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|
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NET CASH USED BY FINANCING ACTIVITIES |
|
|
(26,898 |
) |
|
|
(11,151 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,793 |
) |
|
|
2,253 |
|
|
|
|
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|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
13,362 |
|
|
|
2,321 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
92,819 |
|
|
|
113,885 |
|
|
|
|
|
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|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
106,181 |
|
|
$ |
116,206 |
|
|
|
|
|
|
|
|
See notes to these consolidated financial statements.
6
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 Companys 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 Companys 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 Companys 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 Companys
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.
7
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
$ |
38,188 |
|
|
$ |
22,997 |
|
|
$ |
92,541 |
|
|
$ |
64,967 |
|
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects |
|
|
395 |
|
|
|
16 |
|
|
|
1,563 |
|
|
|
1,483 |
|
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards granted,
net of related tax effects |
|
|
(507 |
) |
|
|
(571 |
) |
|
|
(2,361 |
) |
|
|
(3,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
38,076 |
|
|
$ |
22,442 |
|
|
$ |
91,743 |
|
|
$ |
63,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.91 |
|
|
$ |
0.56 |
|
|
$ |
2.22 |
|
|
$ |
1.58 |
|
Basic, pro forma |
|
$ |
0.91 |
|
|
$ |
0.54 |
|
|
$ |
2.20 |
|
|
$ |
1.54 |
|
Diluted, as reported |
|
$ |
0.90 |
|
|
$ |
0.55 |
|
|
$ |
2.20 |
|
|
$ |
1.57 |
|
Diluted, pro forma |
|
$ |
0.90 |
|
|
$ |
0.54 |
|
|
$ |
2.18 |
|
|
$ |
1.53 |
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
41,932 |
|
|
|
41,378 |
|
|
|
41,695 |
|
|
|
41,073 |
|
Diluted |
|
|
42,336 |
|
|
|
41,778 |
|
|
|
42,103 |
|
|
|
41,349 |
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Countries |
|
|
Consolidated |
|
Balance as of January 1, 2005 |
|
$ |
|
|
|
$ |
4,568 |
|
|
$ |
11,281 |
|
|
$ |
15,849 |
|
Additions |
|
|
9,502 |
|
|
|
|
|
|
|
|
|
|
|
9,502 |
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
(301 |
) |
|
|
(301 |
) |
Foreign exchange effects on prior balance |
|
|
100 |
|
|
|
(463 |
) |
|
|
196 |
|
|
|
(167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2005 |
|
$ |
9,602 |
|
|
$ |
4,105 |
|
|
$ |
11,176 |
|
|
$ |
24,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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).
8
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,188 |
|
|
$ |
22,997 |
|
|
$ |
92,541 |
|
|
$ |
64,967 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share
Weighted-average shares outstanding |
|
|
41,932 |
|
|
|
41,378 |
|
|
|
41,695 |
|
|
|
41,073 |
|
Effect of dilutive securities Employee stock options |
|
|
404 |
|
|
|
400 |
|
|
|
408 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share Adjusted
weighted-average shares outstanding |
|
|
42,336 |
|
|
|
41,778 |
|
|
|
42,103 |
|
|
|
41,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.91 |
|
|
$ |
0.56 |
|
|
$ |
2.22 |
|
|
$ |
1.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.90 |
|
|
$ |
0.55 |
|
|
$ |
2.20 |
|
|
$ |
1.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE E COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income |
|
$ |
38,188 |
|
|
$ |
22,997 |
|
|
$ |
92,541 |
|
|
$ |
64,967 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives
designated and qualified as
cash flow hedges, net of tax |
|
|
(77 |
) |
|
|
(634 |
) |
|
|
(673 |
) |
|
|
(458 |
) |
Currency translation adjustment |
|
|
3,787 |
|
|
|
4,468 |
|
|
|
(14,662 |
) |
|
|
604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
41,898 |
|
|
$ |
26,831 |
|
|
$ |
77,206 |
|
|
$ |
65,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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.
9
NOTE H SEGMENT INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
America |
|
|
Europe |
|
|
Countries |
|
|
Eliminations |
|
|
Consolidated |
|
Three months ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
276,844 |
|
|
$ |
72,275 |
|
|
$ |
62,894 |
|
|
$ |
|
|
|
$ |
412,013 |
|
Inter-segment sales |
|
|
13,636 |
|
|
|
5,604 |
|
|
|
3,777 |
|
|
|
(23,017 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
290,480 |
|
|
$ |
77,879 |
|
|
$ |
66,671 |
|
|
$ |
(23,017 |
) |
|
$ |
412,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes |
|
$ |
33,798 |
|
|
$ |
4,704 |
|
|
$ |
5,374 |
|
|
$ |
(65 |
) |
|
$ |
43,811 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,153 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,114 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
223,726 |
|
|
$ |
66,769 |
|
|
$ |
53,838 |
|
|
$ |
|
|
|
$ |
344,333 |
|
Inter-segment sales |
|
|
10,658 |
|
|
|
6,594 |
|
|
|
4,866 |
|
|
|
(22,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
234,384 |
|
|
$ |
73,363 |
|
|
$ |
58,704 |
|
|
$ |
(22,118 |
) |
|
$ |
344,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes |
|
$ |
19,813 |
|
|
$ |
8,626 |
|
|
$ |
4,497 |
|
|
$ |
144 |
|
|
$ |
33,080 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
749 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,358 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
32,471 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
773,720 |
|
|
$ |
230,932 |
|
|
$ |
176,165 |
|
|
$ |
|
|
|
$ |
1,180,817 |
|
Inter-segment sales |
|
|
42,002 |
|
|
|
17,712 |
|
|
|
9,504 |
|
|
|
(69,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
815,722 |
|
|
$ |
248,644 |
|
|
$ |
185,669 |
|
|
$ |
(69,218 |
) |
|
$ |
1,180,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes |
|
$ |
86,895 |
|
|
$ |
18,306 |
|
|
$ |
13,647 |
|
|
$ |
151 |
|
|
$ |
118,999 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,813 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,982 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
115,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
767,602 |
|
|
$ |
259,266 |
|
|
$ |
221,346 |
|
|
$ |
(95,695 |
) |
|
$ |
1,152,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
$ |
653,383 |
|
|
$ |
206,297 |
|
|
$ |
123,002 |
|
|
$ |
|
|
|
$ |
982,682 |
|
Inter-segment sales |
|
|
27,938 |
|
|
|
20,556 |
|
|
|
13,642 |
|
|
|
(62,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
681,321 |
|
|
$ |
226,853 |
|
|
$ |
136,644 |
|
|
$ |
(62,136 |
) |
|
$ |
982,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes |
|
$ |
60,370 |
|
|
$ |
19,036 |
|
|
$ |
11,632 |
|
|
$ |
369 |
|
|
$ |
91,407 |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,401 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
88,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
736,198 |
|
|
$ |
245,135 |
|
|
$ |
180,064 |
|
|
$ |
(78,186 |
) |
|
$ |
1,083,211 |
|
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
regions 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 Frances 179 employees were approximately $2,123 (pre-tax), of which $1,087 (pre-tax) was
incurred in the first nine months of 2005.
10
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 Companys 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 Companys Chinese expansion program. The Company
began including the results of SLEs operations in the Companys 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 Companys 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 LEIMs operations in the Companys 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 Companys
distribution network, and strengthen the Companys 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.
11
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 Companys consolidated
financial statements. Based on the Companys 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 Companys 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 Companys 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 ventures 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charged to |
|
|
|
|
|
Balance |
|
|
beginning |
|
costs and |
|
|
|
|
|
at end |
|
|
of year |
|
expenses |
|
Deductions |
|
of period |
Nine months
ended September 30,
2005 |
|
$ |
6,800 |
|
|
$ |
6,246 |
|
|
$ |
(5,104 |
) |
|
$ |
7,942 |
|
Nine months ended
September 30, 2004 |
|
$ |
5,893 |
|
|
$ |
5,000 |
|
|
$ |
(4,859 |
) |
|
$ |
6,034 |
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due |
|
Matures |
|
Interest Rate |
Series A |
|
$ |
40,000 |
|
|
March 2007 |
|
|
5.58 |
% |
Series B |
|
$ |
30,000 |
|
|
March 2009 |
|
|
5.89 |
% |
Series C |
|
$ |
80,000 |
|
|
March 2012 |
|
|
6.36 |
% |
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
12
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:
13
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 Companys 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 laws 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months Ended September 30, |
|
|
Nine months Ended September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Service cost benefits earned during the period |
|
$ |
4,341 |
|
|
$ |
2,929 |
|
|
$ |
13,198 |
|
|
$ |
11,643 |
|
Interest cost on projected benefit obligation |
|
|
9,290 |
|
|
|
8,610 |
|
|
|
27,343 |
|
|
|
26,362 |
|
Expected return on plan assets |
|
|
(11,771 |
) |
|
|
(10,980 |
) |
|
|
(35,374 |
) |
|
|
(32,336 |
) |
Amortization of prior service cost |
|
|
761 |
|
|
|
779 |
|
|
|
2,110 |
|
|
|
2,225 |
|
Amortization of net loss |
|
|
2,846 |
|
|
|
2,432 |
|
|
|
6,739 |
|
|
|
6,498 |
|
Termination benefits |
|
|
|
|
|
|
|
|
|
|
177 |
|
|
|
|
|
Settlement losses |
|
|
2,138 |
|
|
|
|
|
|
|
2,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost of defined benefit plans |
|
$ |
7,605 |
|
|
$ |
3,770 |
|
|
$ |
16,331 |
|
|
$ |
14,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
14
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 Companys 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 Companys 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.
15
Part 1 Financial Information
Item 2.
Managements Discussion and Analysis of Financial Condition and
Results of Operations
(In thousands of dollars except share and per share data)
GENERAL
The Company is the worlds 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
Companys 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 Companys 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 Companys various
manufacturing sites to distributors, agents, dealers and product users.
The Companys major end user markets include:
|
|
general metal fabrication, |
|
|
infrastructure including oil and gas pipelines and platforms, buildings and bridges and power generation, |
|
|
transportation and defense industries (automotive/trucks, rail, ships and aerospace), |
|
|
equipment manufacturers in construction, farming and mining, |
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, Peoples Republic of China, Poland, Spain, Taiwan, Turkey
and Venezuela.
The Companys 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 Companys 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 Companys facilities are subject to environmental regulations. To date, compliance with these
environmental regulations has not had a material effect on the Companys 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.
16
Key indicators
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
Companys 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 Companys 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.
RESULTS OF OPERATIONS
The following table presents the Companys results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
2005 |
|
2004 |
|
Change |
(dollars in thousands) |
|
Amount |
|
|
% of Sales |
|
Amount |
|
|
% of Sales |
|
Amount |
|
|
% |
Net sales |
|
$ |
412,013 |
|
|
|
100.0 |
% |
|
$ |
344,333 |
|
|
|
100.0 |
% |
|
$ |
67,680 |
|
|
|
19.7 |
% |
Cost of goods sold |
|
|
300,821 |
|
|
|
73.0 |
% |
|
|
251,595 |
|
|
|
73.1 |
% |
|
|
49,226 |
|
|
|
19.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
111,192 |
|
|
|
27.0 |
% |
|
|
92,738 |
|
|
|
26.9 |
% |
|
|
18,454 |
|
|
|
19.9 |
% |
Selling, general & administrative expenses |
|
|
71,471 |
|
|
|
17.4 |
% |
|
|
61,390 |
|
|
|
17.8 |
% |
|
|
10,081 |
|
|
|
16.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
39,721 |
|
|
|
9.6 |
% |
|
|
31,348 |
|
|
|
9.1 |
% |
|
|
8,373 |
|
|
|
26.7 |
% |
Interest income |
|
|
1,153 |
|
|
|
0.3 |
% |
|
|
749 |
|
|
|
0.2 |
% |
|
|
404 |
|
|
|
53.9 |
% |
Equity earnings in affiliates |
|
|
1,675 |
|
|
|
0.4 |
% |
|
|
1,130 |
|
|
|
0.3 |
% |
|
|
545 |
|
|
|
48.2 |
% |
Other income |
|
|
2,415 |
|
|
|
0.6 |
% |
|
|
602 |
|
|
|
0.2 |
% |
|
|
1,813 |
|
|
|
301.2 |
% |
Interest expense |
|
|
(2,114 |
) |
|
|
(0.5 |
%) |
|
|
(1,358 |
) |
|
|
(0.4 |
%) |
|
|
(756 |
) |
|
|
55.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
42,850 |
|
|
|
10.4 |
% |
|
|
32,471 |
|
|
|
9.4 |
% |
|
|
10,379 |
|
|
|
32.0 |
% |
Income taxes |
|
|
4,662 |
|
|
|
1.1 |
% |
|
|
9,474 |
|
|
|
2.7 |
% |
|
|
(4,812 |
) |
|
|
(50.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
38,188 |
|
|
|
9.3 |
% |
|
$ |
22,997 |
|
|
|
6.7 |
% |
|
$ |
15,191 |
|
|
|
66.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
2005 |
|
2004 |
|
Change |
|
|
Amount |
|
|
% of Sales |
|
Amount |
|
|
% of Sales |
|
Amount |
|
|
% |
Net sales |
|
$ |
1,180,817 |
|
|
|
100.0 |
% |
|
$ |
982,682 |
|
|
|
100.0 |
% |
|
$ |
198,135 |
|
|
|
20.2 |
% |
Cost of goods sold |
|
|
857,397 |
|
|
|
72.6 |
% |
|
|
705,676 |
|
|
|
71.8 |
% |
|
|
151,721 |
|
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
323,420 |
|
|
|
27.4 |
% |
|
|
277,006 |
|
|
|
28.2 |
% |
|
|
46,414 |
|
|
|
16.8 |
% |
Selling, general & administrative expenses |
|
|
210,291 |
|
|
|
17.8 |
% |
|
|
190,865 |
|
|
|
19.4 |
% |
|
|
19,426 |
|
|
|
10.2 |
% |
Rationalization charges |
|
|
1,250 |
|
|
|
0.1 |
% |
|
|
|
|
|
|
0.0 |
% |
|
|
1,250 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
111,879 |
|
|
|
9.5 |
% |
|
|
86,141 |
|
|
|
8.8 |
% |
|
|
25,738 |
|
|
|
29.9 |
% |
Interest income |
|
|
2,813 |
|
|
|
0.2 |
% |
|
|
1,990 |
|
|
|
0.2 |
% |
|
|
823 |
|
|
|
41.4 |
% |
Equity earnings in affiliates |
|
|
3,239 |
|
|
|
0.3 |
% |
|
|
3,052 |
|
|
|
0.3 |
% |
|
|
187 |
|
|
|
6.1 |
% |
Other income |
|
|
3,881 |
|
|
|
0.3 |
% |
|
|
2,214 |
|
|
|
0.2 |
% |
|
|
1,667 |
|
|
|
75.3 |
% |
Interest expense |
|
|
(5,982 |
) |
|
|
(0.5 |
%) |
|
|
(4,401 |
) |
|
|
(0.4 |
%) |
|
|
(1,581 |
) |
|
|
35.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
115,830 |
|
|
|
9.8 |
% |
|
|
88,996 |
|
|
|
9.1 |
% |
|
|
26,834 |
|
|
|
30.2 |
% |
Income taxes |
|
|
23,289 |
|
|
|
2.0 |
% |
|
|
24,029 |
|
|
|
2.5 |
% |
|
|
(740 |
) |
|
|
(3.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
92,541 |
|
|
|
7.8 |
% |
|
$ |
64,967 |
|
|
|
6.6 |
% |
|
$ |
27,574 |
|
|
|
42.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
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
Companys 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 Companys 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 Companys 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.
18
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 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 Companys 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 Companys 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 Companys 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.
19
LIQUIDITY AND CAPITAL RESOURCES
The Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
(Dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
Change |
|
Cash provided by operating activities: |
|
$ |
99,471 |
|
|
$ |
54,400 |
|
|
$ |
45,071 |
|
Cash used by investing activities: |
|
|
(55,418 |
) |
|
|
(43,181 |
) |
|
|
(12,237 |
) |
Capital expenditures |
|
|
(36,171 |
) |
|
|
(38,278 |
) |
|
|
2,107 |
|
Sales (purchases) of marketable securities, net |
|
|
50,500 |
|
|
|
6,000 |
|
|
|
44,500 |
|
Acquisitions, net of cash received |
|
|
(73,563 |
) |
|
|
(12,511 |
) |
|
|
(61,052 |
) |
Cash used by financing activities: |
|
|
(26,898 |
) |
|
|
(11,151 |
) |
|
|
(15,747 |
) |
Payments on long-term borrowings |
|
|
(15,203 |
) |
|
|
(4,533 |
) |
|
|
(10,670 |
) |
Purchase of shares for treasury |
|
|
(12,804 |
) |
|
|
(4,368 |
) |
|
|
(8,436 |
) |
Issuance of treasury shares for stock options |
|
|
18,244 |
|
|
|
17,680 |
|
|
|
564 |
|
Cash dividends paid to shareholders |
|
|
(22,470 |
) |
|
|
(20,447 |
) |
|
|
(2,023 |
) |
Increase in Cash and cash equivalents |
|
|
13,362 |
|
|
|
2,321 |
|
|
|
11,041 |
|
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 Companys
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 Companys 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 Companys Board of Directors authorized share repurchase programs for up to 15 million shares
of the Companys 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.
20
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.
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 Companys 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 Companys Chinese expansion program. The Company
began including the results of SLEs operations in the Companys 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 Companys 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 LEIMs operations in the Companys 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 Companys
distribution network, and strengthen the Companys 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 Companys 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 Companys
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.
21
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Due |
|
Matures |
|
Interest Rate |
Series A |
|
$ |
40,000 |
|
|
March 2007 |
|
|
5.58 |
% |
Series B |
|
$ |
30,000 |
|
|
March 2009 |
|
|
5.89 |
% |
Series C |
|
$ |
80,000 |
|
|
March 2012 |
|
|
6.36 |
% |
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%.
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 Companys 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 Companys common stock.
22
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 Companys
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 expense
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 Companys trial experience changes overall, it is possible on a
longer term basis that the cost of resolving this loss contingency could reduce the Companys
operating results and cash flow and restrict capital market access.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
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 Companys 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.
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.
23
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 Companys 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 laws 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.
24
CRITICAL ACCOUNTING POLICIES
The Companys 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 Companys
estimates have been determined to be reasonable. No material adjustments to the Companys
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.
Legal And Tax Contingencies
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
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 Companys assessment of future taxable income or tax
planning strategies changes.
25
Pensions
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 Companys pension amounts relate to its defined
benefit plan in the United States.
A significant element in determining the Companys 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 Companys 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 Companys 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 and Reserves
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 Companys estimates prove to be inaccurate, write-downs of inventory values and
adjustments to cost of sales may be required. Historically, the Companys reserves have
approximated actual experience.
Accounts Receivable and Allowances
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 Companys reserves have
approximated actual experience.
26
Impairment of Long-Lived Assets
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 managements judgment. Any changes in key assumptions about the Companys
businesses and their prospects, or changes in market conditions, could result in an impairment
charge.
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 Managements 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 Companys future
performance, operating results, financial position and liquidity, are subject to a variety of
factors that could materially affect future results, including:
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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 Companys ability to maintain its position as a recognized leader in
welding technology. The intensity of foreign competition is substantially affected by
fluctuations in the value of the United States dollar against other currencies. The Companys
competitive position could also be adversely affected should new or emerging entrants become
more active in the arc welding business. |
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Economic and Market Conditions The Company is subject to general economic,
business and industry conditions which can adversely affect the Companys results of
operations. The Companys revenues and profits depend significantly on the overall demand for
arc welding and cutting products. Capital spending in the manufacturing and other industrial
sectors can adversely affect the Companys results of operations. If economic and market
conditions deteriorate, the Companys results of operations could be adversely affected. |
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International Markets. The Companys long-term strategy is to increase its share
in growing international markets, particularly Asia (with emphasis in China), Latin America, Eastern Europe and other
developing markets. However, there can be no certainty that the Company will be successful in
achieving its investment and return objectives defined within its
expansion plans. The Company is subject to the currency risks of doing business abroad,
and the possible effects of international terrorism and hostilities. Moreover, international
expansion poses challenging demands within the Companys infrastructure. |
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Cyclicality and Maturity of the Welding and Cutting Industry. The United States
arc welding and cutting industry is both mature and cyclical. The growth of the domestic arc
welding and cutting industry has been and continues to be constrained by numerous factors,
including the increased cost of steel and 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 decreased the domestic demand for arc welding and
cutting products in the Companys largest market. |
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Litigation. The Company, like other manufacturers in the U.S. market, is subject
to a variety of product liability lawsuits and potential lawsuits that arise in the ordinary
course of business. While past experience has generally shown these cases to be
immaterial, product liability cases in the U.S. against the Company, particularly with respect
to welding fumes, continue to increase and past experience may not be predictive of the future. |
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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 and short-term or long-term interruptions in the availability of
supplies or raw materials or in the transportation of finished goods. |
27
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Research and Development. The Companys 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. |
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Raw Materials and Energy Costs. In the normal course of business, the Company is
exposed to market risk and price fluctuations related to the purchase of commodities
(primarily steel) and energy used in the manufacture of its products. The Companys market
risk strategy has generally been to obtain competitive prices for products and services as
dictated by supply and demand. In addition, the Company uses various hedging arrangements to
manage exposures to price risk from commodity and energy purchases, though there is no
effective and available hedging technique for steel. The Companys results of operations may
be adversely affected by shortages of supply. The Companys results of operations may also be
negatively affected by increases in prices to the extent these increases can not be passed on
to customers. |
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Section 404 of the Sarbanes-Oxley Act of 2002. The Company evaluated its internal
controls systems in order to allow management to report on, and the Companys Independent
Registered Public Accounting Firm to attest to, the Companys
internal controls over financial reporting as of December
31, 2004, as required by Section 404 of the Sarbanes-Oxley Act. The Company performed the
system and process valuation and testing required to comply with the management certification
and auditor attestation requirements of Section 404. The Company was able to fully implement
the requirements relating to internal controls over financial
reporting and all other aspects of Section 404 for the
year ended December 31, 2004. However, the Company cannot be certain as to its ability to
comply with Section 404 in future periods. If the Company is not able to comply with the
requirements of Section 404 in future periods, the Company might be subject to sanctions or
investigation by regulatory authorities, such as the Securities and Exchange Commission or
NASDAQ. Any such action could adversely affect the Companys financial results and the market
price of its common stock. |
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Regulatory Factors. The Company is subject to increasingly complex environmental
regulations affecting international manufacturers, including those relating to air and water
emissions and waste. In addition, the Company must comply with standards specifically related
to the design, production and labeling of electrical equipment. As the Company expands its
global production platform, this additional regulatory complexity will increase the Companys
compliance requirements. |
The above list of factors that could materially affect the Companys 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Companys 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 Companys 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.
Foreign Currency Exchange Risk
The Company enters into forward foreign exchange contracts principally to hedge the currency
fluctuations in transactions denominated in foreign currencies, thereby limiting the Companys 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 Companys
financial statements.
28
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 Companys financial statements.
Commodity Price Risk
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
Companys open commodity futures at September 30, 2005 would not materially affect the Companys
financial statements.
Interest Rate Risk
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 Companys financial statements. See discussion in Liquidity Long-term
debt.
The fair value of the Companys 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.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Companys disclosure controls and
procedures as of the end of the period covered by this Form 10-Q. Based on that evaluation, the
Companys management, including the Chief Executive Officer and Chief Financial Officer, concluded
that the Companys disclosure controls and procedures are operating effectively as designed. There
have been no changes in the Companys 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 Companys internal control over financial reporting.
Part II Other Information
Item 1. Legal Proceedings
The Company is subject, from time to time, to a variety of civil and administrative proceedings
arising out of its normal operations, including, without limitation, product liability claims and
health, safety and environmental claims. Among such proceedings are the cases described below.
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).
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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 plaintiffs 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 plaintiffs 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.
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31.1 |
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Certification by the Chairman, President and Chief Executive Officer
pursuant to Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934. |
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31.2 |
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Certification by the Senior Vice President, Chief Financial Officer
and Treasurer pursuant to Rules 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934. |
|
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
LINCOLN ELECTRIC HOLDINGS, INC.
/s/ VINCENT K. PETRELLA
Vincent K. Petrella,
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
October 31, 2005
30