-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JWU8ubwfPBjSyuR6iyX0Q2O/un/0sKvJEPeVog/Fk3Rm4N1bCN3TrBGf1+bDQPKS er/mlbFebv4T2CTESiCBUg== 0000950152-00-002526.txt : 20000331 0000950152-00-002526.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950152-00-002526 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN ELECTRIC HOLDINGS INC CENTRAL INDEX KEY: 0000059527 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 340359955 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-55406 FILM NUMBER: 586728 BUSINESS ADDRESS: STREET 1: 22801 ST CLAIR AVE CITY: CLEVELAND STATE: OH ZIP: 44117 BUSINESS PHONE: 2164818100 FORMER COMPANY: FORMER CONFORMED NAME: LINCOLN ELECTRIC CO DATE OF NAME CHANGE: 19920703 10-K 1 LINCOLN ELECTRIC HOLDINGS, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File No. 0-1402 LINCOLN ELECTRIC HOLDINGS, INC. (Exact name of registrant as specified in its charter)
Ohio 34-1860551 (State of incorporation) (I.R.S. Employer Identification No.) 22801 St. Clair Avenue, Cleveland, Ohio 44117 (Address of principal executive offices) (Zip Code)
(216) 481-8100 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Shares, without par value 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 X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the common shares held by non-affiliates as of February 29, 2000 was $693,683,582 (affiliates, for this purpose, have been deemed to be Directors of the Company and Executive Officers, and certain significant shareholders). The number of shares outstanding of the registrant's common shares as of February 29, 2000 was 43,527,501. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's proxy statement for the annual meeting of shareholders to be held on May 2, 2000 are hereby incorporated by reference into Part III. 1 2 PART I Item 1. Business As used in Item 1 of this report, the term "Company", except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc., the publicly-held parent of The Lincoln Electric Company, and other Lincoln Electric subsidiaries. The Lincoln Electric Company began operations in 1895 and was incorporated under the laws of the State of Ohio in 1906. During 1998, The Lincoln Electric Company reorganized into a holding company structure and Lincoln Electric Holdings, Inc. became the publicly-held parent of Lincoln Electric subsidiaries worldwide, including The Lincoln Electric Company. The Company is a full-line manufacturer of welding and cutting products. Welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company's welding product offering also includes regulators and torches used in oxy-fuel welding and cutting. Sales of welding products accounted for 97% of the Company's net sales in 1999. The arc welding power sources and wire feeding systems manufactured by the Company range in technology from basic units used for light manufacturing and maintenance to highly sophisticated machines for robotic applications, high production welding and fabrication. Three primary types of arc welding electrodes are produced: (1) coated manual or stick electrodes, (2) solid electrodes produced in coil form for continuous feeding in mechanized welding, and (3) cored electrodes produced in coil form for continuous feeding in mechanized welding. The Company's products are sold in both domestic and international markets. In the domestic market, products are sold directly by the Company's own sales organization as well as through distributors and retailers. In the international markets, the Company's products are sold principally by foreign subsidiary companies. The Company also has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors, agents, dealers and product users. The Company has manufacturing facilities located in the United States, Australia, Canada, Mexico, England, France, Germany, Indonesia, Ireland, Italy, the Netherlands, Norway, People's Republic of China, Spain and Turkey. In addition, the Company added manufacturing capacity in the Philippines in 1999. See Note G to the consolidated financial statements with respect to geographic area information. The Company is not dependent on a single customer or a few customers. The loss of any one customer would not have a material adverse effect on its business. The Company's business is not seasonal. Conditions in the arc welding industry are highly competitive. The Company believes that it is one of the world's largest manufacturers of consumables and equipment in a field of three or four major competitors and numerous smaller competitors. The Company continues to pursue strategies to heighten its competitiveness in international markets. Competition in the electric arc welding industry is on the basis of price, brand preference, product quality and performance, warranty, delivery, service and technical support. All of these factors have contributed to the Company's position as one of the leaders in the industry. Virtually all of the Company's products may be classified as standard commercial articles and are manufactured for stock. The Company believes its products are unique because of its highly trained technical sales force and the support of its welding research and development staff which allow it to assist 2 3 the consumers of its products in optimizing their welding applications. The Company utilizes this technical expertise to present its Guaranteed Cost Reduction Program to end users in which the Company guarantees that the user will save money in its manufacturing process when it utilizes the Company's products. This allows the Company to introduce its products to new users and to establish and maintain very close relationships with its consumers. This close relationship between the technical sales force and the direct consumers, together with its supportive relationship with its distributors, who are particularly interested in handling the broad range of the Company's products, is an important element of the Company's market success and a valuable asset of the Company. The principal raw materials essential to the Company's business are various chemicals, steel, copper and aluminum, all of which are normally available for purchase in the open market. The Company's operations are not materially dependent upon patents, licenses, franchises or concessions. The Company's facilities are subject to environmental control regulations. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings. The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes risks related to its foreign operations are mitigated due to the political and economic stability of the countries in which its largest foreign operations are located. Research activities relating to the development of new products and the improvement of existing products in 1999 were all Company-sponsored. These activities were primarily related to the development of new products. Refer to Note A to the consolidated financial statements with respect to total costs of research and development. The number of persons employed by the Company worldwide at December 31, 1999 was approximately 6,300. The table below sets forth consolidated net sales by product line for the most recent three years:
(IN THOUSANDS OF DOLLARS) 1999 1998 1997 ------------- ------------- ------------- Arc Welding and Other Welding Products $1,050,345 $1,118,169 $1,082,054 97% 94% 93% All Other 35,831 68,510 77,013 3% 6% 7% ------------- ------------- ------------- $1,086,176 $1,186,679 $1,159,067 ============= ============= =============
The decline in the "All Other" product category is due to the divestiture of the Motor business on May 31, 1999. Accordingly, no Motor business sales were reflected in the period June 1, 1999 through December 31, 1999. Item 2. Properties The Company's corporate headquarters and principal United States manufacturing facilities are located in the Cleveland, Ohio area. Total Cleveland area property consists of 227 acres, of which present 3 4 manufacturing facilities comprise an area of approximately 2,713,000 square feet. Current utilization of existing facilities is high and the Company is adding capacity as necessary. In addition to the principal facilities in Ohio, the Company operates two other manufacturing locations in the United States and 19 manufacturing locations in 15 foreign countries, the locations of which are as follows: United States: Gainesville, Georgia; Monterey Park, California. Australia: Sydney. Canada: Toronto; Mississauga. England: Sheffield. France: Grand-Quevilly. Germany: Essen. Indonesia: Cikarang. Ireland: Rathnew. Italy: Pianoro; Milano; Celle Ligure. Mexico: Mexico City; Torreon. Netherlands: Nijmegen. Norway: Andebu. People's Republic of China: Shanghai. Philippines: Quezon City. Spain: Barcelona. Turkey: Istanbul.
In 1999, additional electrode manufacturing facilities became operational in the Philippines and Mexico. In addition, the Company will open a manufacturing facility in Brazil during the year 2000. All properties relating to the Company's Cleveland, Ohio headquarters and manufacturing facilities are owned outright by the Company. In addition, the Company maintains operating leases for its distribution centers and many sales offices throughout the world. See Note J to the consolidated financial statements with respect to lease commitments. Most of the Company's foreign subsidiaries own manufacturing facilities in the foreign country where they are located. At December 31, 1999, $4.7 million of indebtedness was secured by property, plant and equipment. Item 3. 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, health, safety and environmental claims. Among such proceedings are the cases described below. The Company is a defendant or co-defendant in nine lawsuits filed against the Company in the Superior Court of California by building owners or insurers in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of January 1994. These cases include claims for compensatory damages and punitive damages, often without specification of amount, relating to the sale and use of the E70T-4 category of welding electrode. One of the complaints includes a fraud claim, as well as a claim under California's Unfair Business Practices Act. The latter claim demands restitution of all amounts paid by California purchasers for the Company's E70T-4 electrode, with interest. 4 5 As previously reported, the Company has also been a defendant or co-defendant in 12 other similar cases involving steel-framed buildings in Greater Los Angeles following the Northridge earthquake. Six of those cases were voluntarily dismissed and the Company has settled the six other cases. The Company is co-defendant in 12 cases involving individual plaintiffs alleging that exposure to manganese contained in arc welding electrode products caused the plaintiffs to develop a neurological condition known as manganism. The plaintiffs seek compensatory and, in most instances, punitive damages, usually for unspecified sums. The Company is also a co-defendant in cases alleging asbestos induced illness involving claims by approximately 20,000 plaintiffs. In each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. The Company, together with hundreds of other co-defendants, has been a defendant in state court in Morris County, Texas, in litigation on behalf of hundreds of claimants, all prior employees of a local pipe fabricator, alleging that occupational exposures caused a wide variety of illnesses. The plaintiffs sought compensatory and punitive damages of unspecified sums. In 1999, the Company agreed to settle these claims for an immaterial amount. Dismissal is expected shortly and the Company does not intend to report on these claims further. Defense and indemnity costs of the Company in product liability cases involving injuries allegedly resulting from exposure to fumes and gases in the welding environment may be affected by the outcome of pending litigation with the St. Paul Fire and Marine Insurance Company ("St. Paul"), in which St. Paul and the Company disagree about the allocation among various liability insurance policies of defense and indemnity costs of welding fume cases. Following the April, 1998 trial of the Company's case against St. Paul, the United States District Court for the Northern District of Ohio (Akron) ordered St. Paul to pay the Company compensatory damages plus prejudgment interest for misallocating past expenses related to welding fume cases. Additionally, the Court held that the Company may utilize St. Paul occurrence-based policies sold prior to 1985 for defense and verdict costs of various pending and potential future fume cases. St. Paul is appealing the decision to the U.S. Court of Appeals for the Sixth Circuit. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - ----------------------- --- ---------------------------------------------------------------- Anthony A. Massaro 56 Chairman of the Board since 1997; Chief Executive Officer since 1996; President and Chief Operating Officer since 1996; Corporate Vice President and President Lincoln Europe 1994-1995; Director of International Operations 1993-1994. John M. Stropki 49 Executive Vice President, President North America since 1995; Senior Vice President, Sales 1994-1995; General Sales Manager 1992-1994.
5 6
NAME AGE POSITION - ----------------------- --- ---------------------------------------------------------------- H. Jay Elliott 58 Senior Vice President, Chief Financial Officer and Treasurer since 1996; Vice President, Chief Financial Officer, and Treasurer 1994-1996; International Chief Financial Officer 1993-1994. Frederick G. Stueber 46 Senior Vice President, General Counsel and Secretary since 1996; Vice President, General Counsel and Secretary 1995-1996; prior thereto, partner in the law firm of Jones, Day, Reavis & Pogue. William J. Twyble 67 Senior Vice President, Engineering and Marketing since 1997; Vice President of the Company since 1996; CEO, Managing Director LEC (Australia) Pty. Ltd. 1988-1996. James E. Schilling 63 Vice President, Corporate Development since 1999; Director, Business Development since 1998; prior thereto, General Manager, Strategic Management of CBS Corporation (Westinghouse Electric Corp. prior to 1997) from 1993-1998. Raymond S. Vogt 58 Vice President, Human Resources since 1996; prior thereto, Vice President, Human Resources, AM International 1995-1996; FMC Corporation, Director of Human Resources, FMC Europe 1995; Director, Human Resources, Food Machinery Group 1991-1995.
Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended December 31, 1999. PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters The Company's Common Shares (LECO) are traded on The Nasdaq Stock Market. The number of record holders of Common Shares at December 31, 1999 was 2,684. Quarterly high and low stock prices and dividends declared for the last two years were:
1999 1998 ----------------------------------------------------------------------------- Dividends Dividends High Low Declared High Low Declared ---- --- -------- ---- ---- -------- March 31 $23.75 $17.63 $0.12 $24.19 $17.63 $0.10 June 30 23.75 18.25 0.12 24.88 20.13 0.10 September 30 22.50 18.31 0.12 25.00 16.63 0.10 December 31 22.94 18.88 0.14 23.88 18.63 0.12
Source: The Nasdaq Stock Market All per share amounts have been adjusted for the reorganization, which had the economic effect of a two-for-one stock split. 6 7 Item 6. Selected Financial Data
Year Ended December 31 ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------------- ------------ ------------ ------------- ----------- (In thousands of dollars, except per share data) Net sales $ 1,086,176 $ 1,186,679 $ 1,159,067 $ 1,109,144 $ 1,032,398 Net income 73,940 93,719 85,414 74,253 61,475 Basic earnings per share $ 1.63 $ 1.92 $ 1.73 $ 1.49 $ 1.32 Diluted earnings per share 1.62 1.91 1.73 1.49 1.32 Cash dividends declared $ 0.50 $ 0.42 $ 0.325 $ 0.24 $ 0.21 ============ ============ ============ ============ ============ Total assets $ 775,399 $ 782,906 $ 712,190 $ 647,199 $ 617,760 ============ ============ ============ ============ ============ Long-term debt $ 47,207 $ 46,766 $ 54,360 $ 64,148 $ 93,582 ============ ============ ============ ============ ============
The per share amounts presented above reflect the corporate reorganization (see Note B to the consolidated financial statements). Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL The Company is the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a full line of arc welding equipment, consumable welding products and other welding products, which represented 97% of the Company's 1999 net sales. Consolidated net sales decreased 8.5% from 1998 to $1,086 million. Excluding the results of the divested motor business, sales in 1998 would have been $1,156 million, a year-over-year decrease of 6.1%. Net income decreased 21.1% to $73.9 million or $1.62 per share (diluted). Excluding the charge for the disposal of the motor business, 1999 net income of $93.7 million remained unchanged from 1998, while diluted earnings per share increased 7.9% to $2.06 per share. The increase in EPS is attributable to decreased shares outstanding as a result of repurchases of 3,683,350 shares in 1999, representing 7.7% of the total shares outstanding at December 31, 1998. The Company believes that the high quality of its products, advanced engineering expertise and its strong distributor network, coupled with its large, technically trained sales force, has enabled the Company to continue to be a key participant in the global marketplace. The Company is one of only a few worldwide broad line manufacturers of both arc welding equipment and consumable products. With highly competitive conditions in the welding industry, the Company will continue to emphasize its status as a single source supplier, which it believes is most capable of meeting the broadest range of its customers' welding needs. Research and development expenditures were $15.4 million in 1999, compared with $17.7 million in 1998. Expenditures were primarily related to the development of new products. The Company believes that over the past three years, expenditures for research and development activities have been adequate to maintain the Company's leadership position and to introduce new products at an appropriate rate to sustain future growth. 7 8 REORGANIZATION On May 19, 1998, shareholders approved a reorganization of the capital and corporate structure of The Lincoln Electric Company (the "reorganization"). As a result of the reorganization, a new holding company, Lincoln Electric Holdings, Inc., was created. Each Common Share and each Class A Common Share (non-voting) of The Lincoln Electric Company was converted into two voting common shares of Lincoln Electric Holdings, Inc., which also had the economic effect of a two-for-one stock split. The reorganization also resulted in the authorization of 5,000,000 Preferred Shares, none of which were issued or outstanding at December 31, 1999. The historical share and per share amounts disclosed in the consolidated financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations are presented on a consistent basis reflecting the effective two-for-one stock split. RESULTS OF OPERATIONS The following table shows the Company's results of operations:
Year ended December 31 (Dollars in millions) 1999 1998 1997 -------------------------- ------------------------ ------------------------ Amount % of Sales Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- ------ ---------- Net sales $1,086.2 100.0% $1,186.7 100.0% $1,159.1 100.0% Cost of goods sold 714.4 65.8% 789.7 66.6% 777.5 67.1% --------- -------- ---------- -------- ---------- -------- Gross profit 371.8 34.2% 397.0 33.4% 381.6 32.9% Selling, general & admin. expenses 223.8 20.6% 249.6 21.0% 246.7 21.3% Loss on disposal of motor business 32.0 2.9% --- --- --- --- Operating income 116.0 10.7% 147.4 12.4% 134.9 11.6% Interest income 1.4 0.1% 4.1 0.3% 5.9 0.5% Other income 2.3 0.2% 1.2 0.1% 0.7 0.1% Interest expense (5.5) (0.5%) (5.6) (0.4%) (6.3) (0.5%) ---------- ------- ---------- ------- ---------- ------- Income before income taxes 114.2 10.5% 147.1 12.4% 135.2 11.7% Income taxes 40.3 3.7% 53.4 4.5% 49.8 4.3% --------- -------- --------- -------- --------- -------- Net income $ 73.9 6.8% $ 93.7 7.9% $ 85.4 7.4% ======== ======== ======== ======== ======== ========
Distribution costs have been reclassified from Selling, General & Administrative Expenses to Cost of Goods Sold. All periods presented in this Management's Discussion and Analysis have been restated to reflect this reclassification. 8 9 1999 COMPARED TO 1998 Net Sales. Net sales for 1999 declined 8.5% to $1,086.2 million from $1,186.7 million in 1998. Third-party sales from U.S. operations declined by 8.9% to $744.0 million from $816.6 million in 1998. U.S. domestic sales declined 6.4% from 1998. Excluding the results of the divested motor business, U.S. sales in 1998 would have been $762.9 million, reflecting a year-over-year decline of 5.3%. This sales decline was primarily volume-driven. Worldwide economic conditions, particularly in Asia, South America, and the Middle East combined to impact U.S. exports, which were down 28.6% to $66.0 million in 1999, compared with $92.5 million in 1998. Non-U.S. third-party sales declined 7.6% to $342.2 million from $370.1 million in 1998. Sales declines in the international regions were also primarily volume driven. The weakening of foreign currencies against the U.S. dollar reduced non-U.S. sales by $12.2 million or 3.5%, caused principally by the devaluation of the European and Brazilian currencies. Non-U.S. and export sales for 1999 amounted to 37.5% of the Company's total sales. Gross Profit. Gross profit declined to $371.8 million in 1999 from $397.0 million in 1998. Gross profit as a percentage of sales was 34.2% in 1999, compared with 33.4% in 1998. U.S. margins improved due to the divestiture of the motor business, improved manufacturing efficiencies, and lower raw material costs. Gross profit as a percentage of sales fell for the European operations due to lower sales volume, unfavorable manufacturing variances, product mix and downward pricing pressure related to the poor economic environment. Lower sales volume, product mix and price pressure also negatively impacted margins at the Australian operation. Selling, General and Administrative (SG&A) Expenses. Selling, general and administrative expenses were $223.8 million in 1999, or 20.6% of sales, as compared to $249.6 million, or 21.0% of sales in 1998. Included in SG&A expenses are the costs related to the Company's discretionary employee bonus program, net of hospitalization costs. The decrease in SG&A from last year is due to lower sales volume, lower planned R&D spending and lower bonus expense. Lower bonus expense was attributable to lower profitability versus objectives. The strengthening U.S. dollar reduced SG&A costs for non-U.S. operations by $3.7 million. Interest Income. Interest income decreased $2.7 million, or 65.9%, to $1.4 million in 1999. The decline reflects reduced levels of cash investments due to capital expenditures, purchases of treasury shares, an increase in the shareholder dividend payout and the increased use of lower yielding, non-taxable investments. Interest Expense. Interest expense decreased $0.1 million or 1.8% to $5.5 million in 1999. The decline reflects lower debt levels due to scheduled debt repayments. Income Taxes. Income taxes in 1999 were $40.3 million on income before income taxes of $114.2 million, an effective rate of 35.3%, as compared with income taxes of $53.4 million in 1998 on income before income taxes of $147.1 million, or an effective tax rate of 36.3%. The decrease in the effective tax rate is primarily attributable to the corporate reorganization. Net Income. Net income was $73.9 million and $93.7 million in 1999 and 1998, respectively. Excluding the charge for the disposal of the motor business, net income for 1999 was $93.7 million, which was consistent with 1998 results. The effect of exchange rate movements on net income was not material for 1999 or 1998. 9 10 1998 COMPARED TO 1997 Net Sales. Net sales for 1998 increased 2.4% to $1,186.7 million from $1,159.1 million in 1997. Third-party sales from U.S. operations increased by 2.1% to $816.6 million from $799.5 million in 1997. U.S. domestic sales increased 4.3% over 1997. Included in U.S. sales were international export sales of $92.5 million for 1998, which decreased $13 million or 12.3% from $105.5 million in 1997. Non-U.S. third-party sales increased 2.9% to $370.1 million from $359.6 million in 1997. Sales increases in the international regions were primarily volume-driven. The weakening of foreign currencies against the U.S. dollar reduced non-U.S. sales by $18.4 million or 4.7%. Non-U.S. and export sales for 1998 amounted to 39.0% of the Company's total sales. U.S. third-party sales benefited from the strong U.S. economy in the first and second quarters, and the third year of the SourceOne distributor incentive program. The worldwide economic difficulties, particularly in Asia and in Russia, Africa and the Middle East, were the primary reason for the drop in exports of U.S.-made products. U.S. and world demand was lower in the third and fourth quarters, compared with 1997 and the first half of 1998. Gross Profit. Gross profit improved to $397.0 million in 1998 from $381.6 million in 1997. Gross profit as a percentage of sales was 33.4% in 1998, compared with 32.9% in 1997. U.S. margins improved from volume efficiencies and continued cost control efforts. Gross margins have improved primarily due to increased plant utilization, favorable product mix and selected price increases. Gross profit as a percentage of sales improved for the European operations due to a more favorable product mix, product line rationalization and higher capacity utilization. Lower export sales from Australia due to the economic difficulties in Asia negatively impacted margins. Selling, General and Administrative (SG&A) Expenses. Selling, general and administrative expenses were $249.6 million in 1998, or 21.0% of sales, as compared to $246.7 million, or 21.3% of sales in 1997. Included in SG&A expenses are the costs related to the Company's discretionary employee bonus program, net of hospitalization costs. The increase in SG&A over last year is due to higher planned R&D spending, increased costs related to the U.S. and European information technology initiatives and higher bonus expense. The strengthening U.S. dollar reduced SG&A costs for non-U.S. operations by $3.9 million. Interest Income. Interest income decreased $1.8 million or 29.9% to $4.1 million in 1998. The decline reflects reduced levels of cash investments due to increased capital expenditures, purchases of treasury shares, an increase in the shareholder dividend payout and the increased use of lower yielding, non-taxable investments. Interest Expense. Interest expense decreased $0.7 million or 10.6% to $5.6 million in 1998. The decline reflects lower debt levels due to scheduled debt repayments. Income Taxes. Income taxes in 1998 were $53.4 million on income before income taxes of $147.1 million, an effective rate of 36.3%, as compared with income taxes of $49.8 million in 1997 on income before income taxes of $135.2 million, or an effective tax rate of 36.8%. The decrease in the effective tax rate reflects the higher utilization of tax credits. Net Income. Net income for 1998 was $93.7 million, as compared with net income of $85.4 million in 1997, or an increase of 9.7%. The effect of exchange rate movements on net income was not material for 1998 or 1997. 10 11 LIQUIDITY AND CAPITAL RESOURCES During 1999, the Company's debt levels increased 23.7% from $60.7 million at December 31, 1998 to $75.1 million at December 31, 1999. Total percent of debt to total capitalization increased to 14.3% at December 31, 1999 from 11.0% at December 31, 1998. The $34 million proceeds from the sale of the motor business was used primarily to repay debt. Management anticipates that the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations and, if necessary, borrowings under its existing credit facilities. Cash provided from operations was $81.1 million in 1999, a decrease of $41.0 million from $122.1 million in 1998. The primary reasons for the decrease are the increases in accounts receivables and inventories. Capital expenditures during 1999 were $63.3 million, a 22.2% decrease from 1998. Capital spending for 1999 included plant modernization efforts in the U.S., information technology initiatives in the U.S., Australia and Europe, and expanded capacity in Canada, Latin America and Asia. The Company expects to continue to add capacity and modernize facilities selectively in both the domestic and international markets. During 1998, the Company acquired a 75% interest in Indalco Alloys Inc. of Canada, Uhrhan & Schwill GmbH of Germany and a 50% equity interest in AS Kaynak of Turkey. The operating results of Indalco are included within those of the Company beginning in March 1998, and for Uhrhan & Schwill, beginning in May 1998. Equity income (loss) from AS Kaynak was included in the Consolidated Statement of Income beginning in July 1998. The results of acquired companies for 1998 were not significant. The stock repurchase program that began in 1998 has continued to lower the Company's equity base. During 1999, the Company purchased 3,683,350 shares of its common stock on the open market at a cost of $77.1 million, bringing the total shares purchased to 4,947,250 shares at a cost of $100.9 million through December 31, 1999. A total of $22.1 million in dividends was paid during 1999. In December 1999, the quarterly dividend was increased from $0.12 per share to $0.14 per share. This dividend was paid in January 2000. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, in June 1998. This Statement will become effective for the Company for fiscal year 2001. The Company is evaluating the effect of this Statement on its accounting and reporting policies, but does not presently expect adoption to have a material impact on the Company's consolidated financial statements. INFORMATION SYSTEMS IMPLEMENTATIONS AND YEAR 2000 ISSUE The Company has converted and replaced its legacy Information Technology (IT) systems and believes that with this conversion the Year 2000 Issue has been mitigated. The Company has also replaced systems used in the manufacture and distribution of its products and does not anticipate disruptions in the supply of products to its customers. The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does 11 12 not expect any significant impact to its ongoing business as a result of the Year 2000 issue. However, it is possible that the full impact of the date change, which was of concern due to computer programs that use two digits instead of four digits to define years, has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with closings at month, quarterly or year end. The Company believes that any such problems are likely to be minor and correctable. In addition, the Company could still be negatively impacted if its customers or suppliers are adversely affected by the Year 2000 or similar issues. The Company currently is not aware of any significant Year 2000 or similar problems that have arisen with respect to its customers and suppliers. IT expenditures, including system enhancements and non-IT Year 2000 projects, were $74 million through December 31, 1999, of which $14.5 million has been expensed. Substantially all of the costs incurred relate to replacement costs for hardware and software, which will provide enhanced functionality over the Company's prior IT systems. LITIGATION The Company, like other manufacturers, is subject to product liability claims that arise from time to time in the ordinary course of business. E70T-4 Litigation The Company is a defendant or co-defendant in nine lawsuits filed against the Company in the Superior Court of California by building owners or insurers in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of January 1994. These cases include claims for compensatory damages and punitive damages, often without specification of amount, relating to the sale and use of the E70T-4 category of welding electrode. One of the complaints includes a fraud claim, as well as a claim under California's Unfair Business Practices Act. The latter claim demands restitution of all amounts paid by California purchasers for the Company's E70T-4 electrode, with interest. The Company has also been a defendant or co-defendant in 12 other similar cases involving steel-frame buildings in Greater Los Angeles following the Northridge earthquake. Six of those cases were voluntarily dismissed and the Company has settled the six other cases. All settlement costs have been immaterial to the Company's consolidated financial statements. No trial on the merits has occurred to date in any of the E70T-4 cases. Moreover, as referenced above, at least one of the pending E70T-4 cases also presents theories of liability that did not exist in the cases that were dismissed or settled. Therefore, the Company is unable to make a meaningful estimate of the amount or range of possible losses that could result from an unfavorable outcome of the remaining pending or future E70T-4 litigation. Management believes the Company has substantial defenses and intends to contest such suits vigorously, that the Company has applicable insurance and that other potential defendants and their respective insurers will be identified as the lawsuits proceed. The Company's results of operations or cash flows in one or more interim or annual periods could be materially affected by unfavorable results in one or more of these cases. Based on the information known to the Company, and subject to the factors and contingencies noted herein, management believes the outcome of the Company's E70T-4 litigation should not have a material adverse impact upon the consolidated financial position of the Company. If the Company is unsuccessful in defending or otherwise satisfactorily resolving this litigation, and if insurance coverage is unavailable or inadequate, then the litigation could have a material adverse impact on the Company's consolidated financial position. 12 13 Other Litigation The Company is also a defendant in a large number of cases alleging injuries due to exposure to manganese, asbestos and other substances. In each instance, the Company is one of a large number of defendants. The Company is co-defendant in 12 cases involving individual plaintiffs alleging that exposure to manganese contained in arc welding electrode products caused the plaintiffs to develop a neurological condition known as manganism. The Company is also a co-defendant in cases involving claims by approximately 20,000 plaintiffs alleging asbestos induced illness. The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously. All costs associated with these claims, including defense and settlements, have been immaterial to the Company's consolidated financial statements. Based on the Company's historical experience in litigating these claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material adverse impact upon the Company's consolidated financial statements. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company, statements by its employees or information included in its filings with the Securities and Exchange Commission (including those portions of this Management's Discussion and Analysis that refer to the future) may contain forward-looking statements that are not historical facts. Those statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, and the Company's future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including: - - Competition. The Company operates in a highly competitive global environment and is subject to a variety of competitive factors such as pricing, the actions and strength of its competitors, and the Company's ability to maintain its position as a recognized leader in welding technology. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against other currencies. The Company's competitive position could also be adversely affected should new or emerging entrants (particularly where foreign currencies have been significantly devalued) become more active in the arc welding business. - - International Markets. The Company's long-term strategy is to increase its share in growing international markets, particularly Asia, Latin America, Central Europe and other developing markets. However, there can be no certainty that the Company will be successful in its expansion efforts. The Company is subject to the currency risks of doing business abroad, and expansion poses challenging demands within the Company's infrastructure. Further, many developing economies have deteriorated over the last 18 months and are now experiencing political and economic instability, making international growth difficult. - - Litigation. The Company, like other manufacturers, is subject to a variety of lawsuits and potential lawsuits that arise in the ordinary course of business. See Litigation discussion above and Note K to the consolidated financial statements for further discussion of litigation. - - Cyclicality and Maturity of the Welding Industry. The United States arc welding industry is both mature and cyclical. The growth of the domestic arc welding industry has been and continues to be constrained by numerous factors, including the substitution of plastics and other materials in place of fabricated metal parts 13 14 in many products and structures. Increased offshore production of fabricated steel structures has also cut into the domestic demand for arc welding products. - - Operating Factors. The Company is highly dependent on its skilled workforce and efficient production facilities, which could be adversely affected by its labor relations, business interruptions at its domestic facilities and short-term or long-term interruptions in the availability of supplies or raw materials or in transportation of finished goods. - - Research and Development. The Company's continued success depends, in part, on its ability to continue to meet customer welding needs through the introduction of new products and the enhancement of existing product design and performance characteristics. There can be no assurances that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to the operating results of the Company, or that product development will continue at a pace to sustain future growth. Item 7a. Market Risk The Company's primary financial market risks include fluctuations in currency exchange rates, commodity prices and interest rates. The Company manages these risks by using derivative financial instruments in accordance with established policies and procedures. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. The Company enters into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. During 1999, the principal transactions hedged were short-term intercompany loans and intercompany purchases. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. Gains and losses on forward foreign exchange contracts and the offsetting losses and gains on hedged transactions are reflected in the income statement. At December 31, 1999 the Company had approximately $50 million notional amount of foreign exchange contracts which primarily hedged recorded balance sheet exposures or firm commitments. The potential loss from a hypothetical 10% adverse change in foreign currency rates on the Company's open foreign exchange contracts at December 31, 1999 would not materially affect the Company's consolidated financial position, results of operations or cash flows. From time to time, the Company uses various hedging arrangements to manage the Company's exposure to price risk from commodity purchases. The primary commodity hedged is copper. 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. The potential loss from a hypothetical 10% adverse change in commodity prices on the Company's open commodity futures at December 31, 1999, would not materially affect the Company's consolidated financial position, results of operations or cash flows. The fair value of the Company's cash and short-term investment portfolio at December 31, 1999, approximated carrying value due to its short-term duration. Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 10% increase in interest rates for the issues contained in the investment portfolio and was not materially different from the year-end carrying value. At December 31, 1999, the fair value of notes payable approximated carrying value due to its short-term maturities. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 14 15 10% decrease in the Company's weighted average short-term borrowing rate at December 31, 1999, and was not materially different from the year-end carrying value. The Company utilizes an interest rate swap as a hedge to effectively change the characteristics of the interest rate of its 8.73% fixed rate debt without actually changing the debt instrument. The swap involves the exchange of the Company's 8.73% fixed rate debt for a floating rate based on a 3-month LIBOR basket swap plus a spread of 381 basis points. Payments or receipts on the agreement are recorded as adjustments to interest expense. A 1% increase in the 3-month LIBOR basket swap rate would increase the amount paid by approximately $0.4 million annually. (See Note D to the Consolidated Financial Statements for further discussion of Debt Instruments.) Item 8. Financial Statements and Supplementary Data The response to this item is submitted in a separate section of this report following the signature page. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III A definitive proxy statement will be filed pursuant to Regulation 14A of the Securities Exchange Act prior to April 30, 2000. Therefore, information required under this part, unless set forth below, is incorporated herein by reference from such definitive proxy statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements The following consolidated financial statements of the Company are included in a separate section of this report following the signature page: Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Income - Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity - Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements - December 31, 1999 Report of Independent Auditors (a) (2) Financial Statement Schedules The following consolidated financial statement schedule of the Company is included in a separate section of this report following the signature page: Schedule II - Valuation and Qualifying Accounts 15 16 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. (a) (3) Exhibits
Exhibit No. Description - ---------- -------------------------------------------------------------------------------------- 2 Agreement of Merger dated as of May 19, 1998 made by and among Lincoln Electric Merger Co., The Lincoln Electric Company, and Lincoln Electric Holdings, Inc. (filed as Exhibit (2) to Form 8-K of Lincoln Electric Holdings, Inc. dated June 2, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 3(a) Restated Articles of Incorporation of Lincoln Electric Holdings, Inc. (filed as Exhibit (3)(a) to Form 10-Q of Form 8-K of Lincoln Electric Holdings, Inc. dated June 2, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 3(b) Code of Regulations of Lincoln Electric Holdings, Inc. (filed as Exhibit (3)(b) to Form 8-K of Lincoln Electric Holdings, Inc. dated June 2, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(a) Credit Agreement dated December 20, 1995 among the Company, the Banks listed on the signature page thereof, and Society National Bank, as Agent (filed as Exhibit 4(b) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); as amended by Amendment No. 2 dated May 8, 1998; and as further amended by Amendment No. 3 dated October 23, 1998 (filed as Exhibit 10(b) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(b) Lincoln Electric Holdings, Inc. 1998 Stock Option Plan (filed as Annex F to the Registration Statement on Form S-4 of Lincoln Electric Holdings, Inc., Registration No. 333-50435, incorporated herein by reference and made a part hereof). 10(c) The Lincoln Electric Company 1988 Incentive Equity Plan (filed as Exhibit 28 to the Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No. 33-25209 and incorporated herein by reference and made a part hereof) as adopted and amended by Lincoln Electric Holdings, Inc. pursuant to an Instrument of Adoption and Amendment dated December 29, 1998 (filed as Exhibit 10(d) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
16 17
Exhibit No. Description ----------- -------------------------------------------------------------------------------------- 10(d) Form of Indemnification Agreement (filed as Exhibit 10(b) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402 and incorporated herein by reference). 10(e) The Lincoln Electric Company Supplemental Executive Retirement Plan, as amended (filed as Exhibit 10(c) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(f) The Lincoln Electric Company Deferred Compensation Plan, as amended (filed as Exhibit 10(d) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); as amended by Amendment No. 4 dated as of January 1, 1998; and as further amended by Amendment No. 5 dated as of January 1, 1998 (filed as Exhibit 10(g) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(g) Description of Management Incentive Plan (filed as Exhibit 10(e) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(h) Description of Long Term Performance Plan (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1997, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(i) Description of Non-Employee Directors' Restricted Stock Plan (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995 SEC File No. 0-1402 and incorporated herein by reference and made a part hereof) as adopted by Lincoln Electric Holdings, Inc. pursuant to an Instrument of Adoption dated December 29, 1998 (filed as Exhibit 10(j) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(j) The Lincoln Electric Company Non-Employee Directors' Deferred Compensation Plan (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof) as amended by Amendment No. 1 dated as of December 29, 1998 (filed as Exhibit 10(a) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
17 18
Exhibit No. Description - ----------- -------------------------------------------------------------------------------------- 10(k) Letter of Employment between Anthony A. Massaro and Lincoln Electric Holdings, Inc. dated March 7, 2000, filed herewith. 10(l) Summary of Employment Agreements filed herewith. 10(m) The Lincoln Electric Company Executive Benefit Plan (filed as Exhibit 10(l) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(n) Form of Severance Agreement (as entered into by the Company and the following executive officers: Mssrs. Massaro, Stropki, Elliott, Stueber and Vogt) (filed as Exhibit 10 to Form 10-Q of Lincoln Electric Holdings, Inc. for the nine months ended September 30, 1998, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(o) Form of Amendment 1 to Severance Agreement (as entered into by the Company and the following executive officers: Messrs. Stropki and Stueber), filed herewith. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Powers of Attorney. 27 Financial Data Schedule.
(b) The Company did not file any reports on Form 8-K during the fourth quarter of 1999. (c) The exhibits which are listed under Item 14 (a) (3) are filed in a separate section of the report following the signature page or incorporated by reference herein. (d) The financial statement schedule which is listed under item 14 (a) (2) is filed in a separate section of the report following the signature page. Upon request, Lincoln Electric Holdings, Inc. will furnish to security holders copies of any exhibit to the Form 10-K report upon payment of a reasonable fee. Any requests should be made in writing to: Mr. H. Jay Elliott, Senior Vice President, Chief Financial Officer and Treasurer, Lincoln Electric Holdings, Inc., 22801 St. Clair Avenue, Cleveland, Ohio 44117; Phone: (216) 481-8100. 18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. -------------------------------- (Registrant) By: /s/ H. JAY ELLIOTT ------------------- H. Jay Elliott, Senior Vice President, Chief Financial Officer and Treasurer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2000. /s/ ANTHONY A. MASSARO /s/ H. JAY ELLIOTT - ------------------------------------ ------------------------------------------- Anthony A. Massaro, Chairman of the H. Jay Elliott, Senior Vice President, Board, President and Chief Executive Chief Financial Officer and Treasurer Officer (principal executive officer) (principal financial and accounting officer) /s/ JOHN M. STROPKI - ------------------------------------ John M. Stropki, Director of the Company, Executive Vice President, President North America /s/ URSULA M. BURNS /s/ DAVID C. LINCOLN - ------------------------------------ ------------------------------------------- Ursula M. Burns, Director David C. Lincoln, Director /s/ HARRY CARLSON /s/ G. RUSSELL LINCOLN - ------------------------------------ ------------------------------------------- Harry Carlson, Director G. Russell Lincoln, Director /s/ THOMAS A. CORCORAN /s/ KATHRYN JO LINCOLN - ------------------------------------ ------------------------------------------- Thomas A. Corcoran, Director Kathryn Jo Lincoln, Director /s/ DAVID H. GUNNING /s/ HENRY L. MEYER III - ------------------------------------ ------------------------------------------- David H. Gunning, Director Henry L. Meyer III, Director /s/ EDWARD E. HOOD, JR /s/ FRANK L. STEINGASS - ------------------------------------ ------------------------------------------- Edward E. Hood, Jr., Director Frank L. Steingass, Director /s/ PAUL E. LEGO - ------------------------------------ Paul E. Lego, Director
19 20 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(c) AND 14(d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1999 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES 20 21 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Lincoln Electric Holdings, Inc. We have audited the accompanying consolidated financial statements of Lincoln Electric Holdings, Inc. and subsidiaries listed in the accompanying Index to Financial Statements at Item 14 (a)(1). Our audits also included the financial statement schedule listed in the Index at Item 14 (a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lincoln Electric Holdings, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. ERNST & YOUNG LLP Cleveland, Ohio February 1, 2000 21 22 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 1999 1998 ----------- ----------- (In thousands of dollars) ASSETS CURRENT ASSETS Cash and cash equivalents $ 8,675 $ 39,095 Marketable securities 38 311 Accounts receivable (less allowances of $3,687 in 1999; $3,563 in 1998) 169,986 167,830 Inventories Raw materials and in-process 82,451 82,030 Finished goods 109,161 104,291 ----------- ----------- 191,612 186,321 Deferred income taxes 23,311 17,751 Other current assets 32,973 25,533 ---------- ---------- TOTAL CURRENT ASSETS 426,595 436,841 PROPERTY, PLANT AND EQUIPMENT Land 11,050 11,447 Buildings 119,519 115,538 Machinery, tools and equipment 419,831 424,307 --------- --------- 550,400 551,292 Less: accumulated depreciation and amortization 279,610 291,501 --------- --------- 270,790 259,791 OTHER ASSETS Goodwill 33,263 35,747 Other 44,751 50,527 ---------- ---------- 78,014 86,274 ---------- ---------- TOTAL ASSETS $775,399 $782,906 ======== ========
22 23 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 1999 1998 ----------- ----------- (In thousands of dollars, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks $ 16,425 $ 2,792 Trade accounts payable 64,482 60,502 Accrued employee compensation and benefits 32,326 31,979 Accrued expenses 15,202 19,768 Taxes, including income taxes 41,326 38,434 Dividend payable 6,228 5,770 Other current liabilities 28,882 24,766 Current portion of long-term debt 11,503 11,100 ----------- ----------- TOTAL CURRENT LIABILITIES 216,374 195,111 Long-term debt, less current portion 47,207 46,766 Deferred income taxes 28,771 23,158 Other long-term liabilities 31,532 26,938 SHAREHOLDERS' EQUITY Preferred Shares, without par value - at stated capital amount: Authorized - 5,000,000 shares in 1999 and none in 1998; Issued and Outstanding - none -- -- Common Shares, without par value - at stated capital amount: Authorized - 120,000,000 shares in 1999 and 1998; Issued - 49,283,950 shares in 1999 and 1998; Outstanding - 44,483,366 shares in 1999 and 48,083,246 shares in 1998 4,928 4,928 Additional paid-in capital 104,891 104,641 Retained earnings 483,463 432,283 Accumulated other comprehensive income (43,524) (28,251) Treasury shares, at cost - 4,800,584 shares in 1999 and 1,200,704 in 1998 (98,243) (22,668) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 451,515 490,933 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $775,399 $782,906 ======== ========
See notes to these consolidated financial statements. 23 24 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 1999 1998 1997 ----------- ----------- ----------- (In thousands of dollars, except per share data) Net sales $1,086,176 $1,186,679 $1,159,067 Cost of goods sold 714,397 789,690 777,535 ----------- ----------- ----------- Gross profit 371,779 396,989 381,532 Selling, general & administrative expenses 223,761 249,581 246,670 Loss on disposal of motor business 32,015 --- --- ----------- ----------- ----------- Operating income 116,003 147,408 134,862 Other income (expense): Interest income 1,413 4,119 5,877 Other income 2,352 1,213 770 Interest expense (5,517) (5,676) (6,349) ------------ ----------- ----------- (1,752) (344) 298 ------------ ----------- ----------- Income before income taxes 114,251 147,064 135,160 Income taxes 40,311 53,345 49,746 ----------- ----------- ----------- Net income $ 73,940 $ 93,719 $ 85,414 =========== =========== =========== Basic earnings per share $ 1.63 $ 1.92 $ 1.73 =========== =========== =========== Diluted earnings per share $ 1.62 $ 1.91 $ 1.73 =========== =========== ===========
See notes to these consolidated financial statements. 24 25 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Class A Class B (In thousands of dollars, except Common Common Common Additional Paid-in per share data) Shares Shares Shares Capital Retained Earnings - -------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1997 $ 2,097 $ 2,768 $ 97 $ 103,720 $ 290,252 Comprehensive income: Net income 85,414 Currency translation adjustment Total comprehensive income Cash dividends declared - $0.325 per share (16,027) Shares issued to non-employee directors 1 112 Conversion of Class B Common Shares to Common Shares 56 (97) (153) Exercise of non-qualified stock options 43 - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 2,154 2,768 - 103,722 359,639 Comprehensive income: Net income 93,719 Currency translation adjustment Total comprehensive income Cash dividends declared - $0.42 per share (20,442) Shares issued to non-employee directors 1 110 Purchase of shares for treasury Exercise of non-qualified stock options 3 4 1,635 (173) Conversion of Class A Common Shares to Common Shares 2,772 (2,772) (779) Retirement of Common Shares (2) (47) (460) - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 4,928 - - 104,641 432,283 Comprehensive income: Net income 73,940 Minimum pension liability adjustment Currency translation adjustment Total comprehensive income Cash dividends declared - $0.50 per share (22,520) Shares issued to non-employee directors 20 Purchase of shares for treasury Exercise of non-qualified stock options 230 (240) - -------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ 4,928 $ - $ - $ 104,891 $ 483,463 ==========================================================================================================================
Accumulated Other (In thousands of dollars, except Comprehensive per share data) Income Treasury Shares Total - ------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1997 $ (7,158) $ - $391,776 Comprehensive income: Net income 85,414 Currency translation adjustment (23,954) (23,954) Total comprehensive income 61,460 Cash dividends declared - $0.325 per share (16,027) Shares issued to non-employee directors 113 Conversion of Class B Common Shares to Common Shares (194) Exercise of non-qualified stock options 43 - ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 (31,112) - 437,171 Comprehensive income: Net income 93,719 Currency translation adjustment 2,861 2,861 Total comprehensive income 96,580 Cash dividends declared - $0.42 per share (20,442) Shares issued to non-employee directors 111 Purchase of shares for treasury (23,823) (23,823) Exercise of non-qualified stock options 1,155 2,624 Conversion of Class A Common Shares to Common Shares (779) Retirement of Common Shares (509) - ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 (28,251) (22,668) 490,933 Comprehensive income: Net income 73,940 Minimum pension liability adjustment (792) (792) Currency translation adjustment (14,481) (14,481) Total comprehensive income 58,667 Cash dividends declared - $0.50 per share (22,520) Shares issued to non-employee directors 95 115 Purchase of shares for treasury (77,105) (77,105) Exercise of non-qualified stock options 1,435 1,425 - ------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ (43,524) $ (98,243) $451,515 ===========================================================================================
See notes to these consolidated financial statements. 25 26 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1999 1998 1997 ----------- ----------- ----------- (In thousands of dollars) OPERATING ACTIVITIES Net income $ 73,940 $ 93,719 $ 85,414 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,122 28,079 28,431 Deferred income taxes 862 10,199 987 Loss (gain) on sale of fixed assets and motor business 31,276 (292) 166 Changes in operating assets and liabilities net of effects from acquisitions: (Increase) in accounts receivable (16,077) (2,167) (22,089) (Increase) in inventories (30,169) (6,007) (18,361) (Increase) in other current assets (8,228) (6,120) (10,115) Increase (decrease) in accounts payable 6,286 5,768 (2,135) (Decrease) increase in other current liabilities (7,445) (1,467) 23,591 Gross change in other long-term assets and liabilities 3,145 1,770 1,135 Other, net (1,640) (1,397) 1,886 ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 81,072 122,085 88,910 INVESTING ACTIVITIES Capital expenditures (63,323) (81,411) (37,296) Acquisitions of businesses and equity investments -- (10,820) -- Purchases of marketable securities and other investments (1,666) (910) (66,260) Proceeds from sale of marketable securities 1,930 10,872 44,364 Proceeds from sale of fixed assets and businesses 36,356 4,577 909 ----------- ----------- ----------- NET CASH (USED) BY INVESTING ACTIVITIES (26,703) (77,692) (58,283) FINANCING ACTIVITIES Proceeds from short-term borrowings 124,392 49,147 41,371 Payments on short-term borrowings (121,036) (49,147) (41,491) Notes payable to banks - net 10,087 (87) (404) Proceeds from long-term borrowings 46,925 320 84 Payments on long-term borrowings (46,129) (11,324) (10,314) Purchase of shares for treasury (75,575) (22,668) -- Cash dividends paid (22,063) (19,594) (14,082) Other (707) 124 -- ----------- ----------- ----------- NET CASH (USED) BY FINANCING ACTIVITIES (84,106) (53,229) (24,836) Effect of exchange rate changes on cash and cash equivalents (683) 1,369 280 ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (30,420) (7,467) 6,071 Cash and cash equivalents at beginning of year 39,095 46,562 40,491 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,675 $ 39,095 $ 46,562 =========== =========== ===========
See notes to these consolidated financial statements. 26 27 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars except share and per share data) December 31, 1999 NOTE A - SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of Lincoln Electric Holdings, Inc. and its wholly owned and majority-owned subsidiaries (the "Company") after elimination of all significant intercompany accounts, transactions and profits. Minority ownership interest in consolidated subsidiaries, which is not material, is recorded in Other Long-term Liabilities. Cash Equivalents and Marketable Securities: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments with maturities between three and twelve months are considered to be marketable securities classified as held-to-maturity. Marketable securities are carried at cost, with realized gains and losses recorded to income. Inventories: 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. At December 31, 1999 and 1998, approximately 64% and 63%, respectively, of total inventories were valued using the LIFO method. The excess of current cost over LIFO cost amounted to $40,365 at December 31, 1999 and $50,240 at December 31, 1998. Equity Investments: Investments in businesses in which the Company holds between a 20% and 50% ownership interest are accounted for using the equity method of accounting. Under the equity method, the investment is carried at cost plus the Company's proportionate share of the net income or loss of the business since the date of acquisition. Property, Plant and Equipment: Property, plant and equipment are stated at cost and include improvements which significantly extend the useful lives of existing plant and equipment. Depreciation and amortization are computed by both accelerated and straight-line methods over useful lives ranging from 3 to 20 years for machinery, tools and equipment, and up to 50 years for buildings. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur. Goodwill: The excess of the purchase price over the fair value of net assets acquired is amortized on a straight-line basis over periods not exceeding 40 years. Amounts are stated net of accumulated amortization of $11,163 and $10,323 in 1999 and 1998, respectively. Long-lived Assets: The carrying value of long-lived assets is reviewed if facts and circumstances indicate a potential impairment of carrying value may have occurred utilizing relevant cash flow and profitability information. Impairment losses are recorded when the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. Revenue Recognition: The Company recognizes revenue at the time of product shipment. 27 28 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE A - SIGNIFICANT ACCOUNTING POLICIES - (Continued) Translation of Foreign Currencies: Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the date of the consolidated balance sheet; revenue and expense accounts are translated at monthly exchange rates. Translation adjustments are reflected as a component of shareholders' equity. For subsidiaries operating in highly inflationary economies, both historical and current exchange rates are used in translating balance sheet accounts, and translation adjustments are included in net income. Transaction gains and losses are included in Selling, general & administrative expenses and were not material. Financial Instruments: The Company, on a limited basis, uses forward exchange contracts to hedge exposure to exchange rate fluctuations on certain intercompany loans, purchase and sales transactions and other intercompany commitments. Contracts are written on a short-term basis and are not held for trading or speculation purposes. Gains and losses on all forward exchange contracts are recognized in the consolidated statements of income. Research and Development: Research and development costs, which are expensed as incurred, were $15,403 in 1999, $17,719 in 1998 and $16,547 in 1997. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates. 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). All periods presented have been adjusted for the reorganization (see Note B), which had the economic effect of a two-for-one stock split.
1999 1998 1997 -------- -------- -------- Numerator: Net income $ 73,940 $ 93,719 $ 85,414 ======== ======== ======== Denominator: Denominator for basic earnings per share - Weighted-average shares outstanding 45,445 48,935 49,384 Effect of dilutive securities - Employee stock options 130 135 148 -------- -------- ------- Denominator for diluted earnings per share - Adjusted weighted-average shares outstanding 45,575 49,070 49,532 ====== ====== ====== Basic earnings per share $ 1.63 $ 1.92 $ 1.73 Diluted earnings per share $ 1.62 $ 1.91 $ 1.73
28 29 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE A - SIGNIFICANT ACCOUNTING POLICIES - (Continued) Reclassification: During the fourth quarter of 1999, the Company reclassified distribution costs from Selling, general & administrative expenses to Cost of goods sold. Cost of goods sold and Selling, general & administrative expenses have been restated for all periods presented. Certain reclassifications have been made to prior year financial statements to conform to current year classifications. New Accounting Pronouncement: In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement will become effective for the Company for fiscal year 2001. The Company is evaluating the effect of this statement on its accounting and reporting policies, but does not presently expect adoption to have a material impact on the Company's consolidated financial statements. Other: Included in Selling, general & administrative expenses are the costs related to the Company's discretionary employee bonus, net of hospitalization costs, of $60,074 in 1999, $76,491 in 1998 and $74,953 in 1997. NOTE B - SHAREHOLDERS' EQUITY In 1999, the Board of Directors authorized an additional share repurchase program of up to 5,000,000 shares of the Company's outstanding Common Shares to satisfy obligations under its stock plan. This share repurchase program is in addition to the 5,000,000 shares authorized for repurchase by the Board of Directors in September 1998. In 1999, the Company purchased 3,683,350 shares at an average cost of $20.93 per share bringing the total shares purchased through December 31, 1999 to 4,947,250 at an average cost of $20.40 per share. On May 19, 1998, shareholders approved a reorganization of the capital and corporate structure of The Lincoln Electric Company (the "reorganization"). As a result of the reorganization, a new holding company, Lincoln Electric Holdings, Inc., was created. Each Common Share and each Class A Common Share (non-voting) of The Lincoln Electric Company was converted into two voting common shares of Lincoln Electric Holdings, Inc., which also had the economic effect of a two-for-one stock split. The reorganization also resulted in the authorization of 5,000,000 Preferred Shares, none of which were issued or outstanding at December 31, 1999 or 1998. The Preferred Shares were authorized to provide the Company flexibility in future financing or acquisitions, and to render or discourage an attempt by another person or entity to obtain control of the Company. The Company's Articles of Incorporation allow the Board of Directors the discretion to issue one or more series of Preferred Shares with terms that meet the needs of a particular transaction. Each issuance of Preferred Shares may have distinct dividend rights, conversion rights and liquidation preferences. The historical share and per share amounts disclosed in these consolidated financial statements have been restated to reflect the share conversion. 29 30 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE C - STOCK PLANS The 1998 Stock Option Plan ("Stock Option Plan") was adopted by the shareholders to replace The Lincoln Electric Company 1988 Incentive Equity Plan ("Incentive Equity Plan") which expired in May 1998. The Stock Option Plan provides for the grant of options for 5,000,000 shares of Company stock to key employees over a ten-year period. The following table summarizes the option activity for the three years ended December 31, 1999 under both the Stock Option Plan and the Incentive Equity Plan:
Options Exercise Prices ----------- ----------------- Balance, January 1, 1997 891,180 $13.63 - $17.00 Granted 193,000 $17.63 - $19.19 Exercised (2,664) $13.63 - $15.00 Canceled (36,936) $15.00 - $17.00 ------------ Balance, December 31, 1997 1,044,580 $13.63 - $19.19 Granted 294,700 $22.38 Exercised (144,416) $13.63 - $17.00 Canceled (8,334) $13.63 - $19.19 ------------- Balance, December 31, 1998 1,186,530 $13.63 - $22.38 Granted 459,100 $19.88 Exercised (78,296) $13.63 - $17.00 ---------- Balance, December 31, 1999 1,567,334 $13.63 - $22.38 ========= Options exercisable at December 31, 1999 864,405 $13.63 - $22.38 ==========
Included above are options for 335,180 shares, at exercise prices of $15.00 and $17.00 per share, which were granted in 1996 to current employees in settlement of a lawsuit over performance awards relating to prior years. These options are exercisable over five- and ten-year periods and are fully vested, non-qualified and non-transferable. At December 31, 1999 and 1998, there were 202,198 and 225,162, respectively, of these options outstanding. All other options granted under both the Stock Option Plan and the Incentive Equity Plan are outstanding for a term of ten years from the date of grant. The majority of the options granted under both plans vest ratably over a period of three years from the grant date. The exercise prices of all options were equal to the fair market value of the Company's shares at the date of grant. As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company has continued to record stock-based compensation in accordance with the intrinsic value method established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Under the intrinsic method, compensation expense is measured as the excess, if any, of the market price at the date of grant over the exercise price of the options. Accordingly, no compensation expense was recognized upon the award of these stock options. SFAS 123 requires pro forma disclosure of the effect on net income and earnings per share when applying the fair value method of valuing stock-based compensation. The following table sets forth the pro forma disclosure of net income and earnings per share using the Black-Scholes option pricing model. For purposes of this pro forma disclosure, the estimated fair value of the options is amortized ratably over the vesting periods. 30 31 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE C - STOCK PLANS - (Continued)
1999 1998 1997 ----------------------- ----------------------- ----------------------- Pro Forma Reported Pro Forma Reported Pro Forma Reported --------- -------- --------- -------- --------- -------- Net income $72,513 $ 73,940 $ 92,763 $ 93,719 $ 84,740 $ 85,414 Basic earnings per share 1.60 1.63 1.90 1.92 1.72 1.73 Diluted earnings per share 1.59 1.62 1.89 1.91 1.71 1.73
In estimating the fair value of options granted, an expected option life of ten years was used and the other weighted average assumptions were as follows:
1999 1998 1997 -------- -------- -------- Expected volatility 34.90% 30.80% 22.55% Dividend yield 2.72% 2.16% 2.14% Risk-free interest rate 6.41% 4.66% 5.74%
For the three years ended December 31, 1999, there were no awards or sales of shares associated with the Incentive Equity Plan. At December 31, 1999, there were 4,246,200 Common Shares reserved for future issuance under the Stock Option Plan. The Lincoln Non-Employee Directors' Restricted Stock Plan ("Non-Employee Directors' Plan") was adopted in May 1995. The Non-Employee Directors' Plan provides for distributions of ten thousand dollars worth of Common Shares to each non-employee Director as part of an annual retainer. Shares issued in connection with this plan were 5,174 in 1999, 5,654 in 1998 and 7,930 in 1997. In 1997, 1,236 shares were forfeited under the service requirements of the plan. The 1995 Lincoln Stock Purchase Plan provides employees the ability to purchase open market shares on a commission-free basis up to a limit of ten thousand dollars annually. Under this plan, there were 18,313 shares purchased in 1999, 7,619 shares purchased in 1998, and 13,352 shares purchased in 1997. NOTE D - SHORT-TERM AND LONG-TERM DEBT At December 31, 1999 and 1998, long-term debt consisted of the following:
1999 1998 -------- -------- 8.73% Senior Note due 2003 (four equal annual principal payments remaining) $ 37,500 $ 46,875 Credit Agreement, interest at 6.35% 10,000 -- Other borrowings due through 2023, interest at 2.0% to 12.4% 11,210 10,991 --------- --------- 58,710 57,866 Less current portion 11,503 11,100 --------- --------- Total $ 47,207 $ 46,766 ========= =========
31 32 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE D - SHORT-TERM AND LONG-TERM DEBT - (Continued) The Company's $200 million unsecured, multi-currency Credit Agreement expires June 30, 2002. The terms of the Credit Agreement provide for annual extensions. The interest rate on outstanding borrowings is determined based upon defined leverage rates for the pricing options selected. The interest rate can range from the London Interbank Offered Rate ("LIBOR") plus 0.165% to LIBOR plus 0.25% depending upon the defined leverage rate. The agreement also provides for a facility fee ranging from 0.085% to 0.15% per annum based upon the daily aggregate amount of the commitment. The Credit Agreement and the 8.73% Senior Note due in 2003 contain financial covenants which require the same interest coverage and funded debt-to-capital ratios. At December 31, 1999 the Company had borrowed $10,000 under short-term credit lines in the United States, with an additional uncommitted borrowing capacity of $45,000. Short-term borrowings of foreign subsidiaries were $6,425 and $2,792 at December 31, 1999 and 1998, at weighted-average interest rates of 6.8% and 6.7%, respectively. Uncommitted additional borrowing capacity of foreign subsidiaries was $17,000 at December 31, 1999. In August 1997, the Company entered into an interest rate swap agreement to convert its fixed rate 8.73% Senior Note due 2003 to a floating rate based on a 3-month LIBOR basket swap plus a spread of 381 basis points. The agreement caps the floating rate, including the spread, at 10%. The floating rate in effect at December 31, 1999 was 8.477%. The arrangement provides for the receipt or payment of interest, on a quarterly basis, through the loan expiration date. The notional value of the agreement, which decreases in future years with annual debt payments on the Senior Note, was $37,500 at December 31, 1999. Net receipts or payments under the agreement are recognized as an adjustment to interest expense. Maturities of long-term debt for the five years succeeding December 31, 1999 are $11,503 in 2000, $22,025 in 2001, $9,786 in 2002, $11,767 in 2003, $430 in 2004 and $3,199 thereafter. Total interest paid was $5,534 in 1999, $5,593 in 1998 and $6,329 in 1997. NOTE E - INCOME TAXES The components of income before income taxes are as follows:
1999 1998 1997 ------------ ----------- ---------- U.S. $ 91,236 $123,586 $112,411 Non-U.S. 23,015 23,478 22,749 --------- --------- --------- Total $114,251 $147,064 $135,160 ========= ========= =========
32 33 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE E - INCOME TAXES - (Continued) Components of income tax expense (benefit) are as follows:
1999 1998 1997 ------------ ------------ --------- Current: Federal $ 28,620 $ 26,724 $ 32,060 Non-U.S. 4,838 9,020 8,909 State and local 5,991 7,402 7,790 ----------- ----------- --------- 39,449 43,146 48,759 Deferred: Federal (2,463) 11,016 3,215 Non-U.S. 3,325 (817) (2,228) ----------- ----------- --------- 862 10,199 987 ----------- ----------- --------- Total $ 40,311 $ 53,345 $ 49,746 =========== =========== =========
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:
1999 1998 1997 ------------- ------------ ----------- Statutory rate of 35% applied to pre-tax income $39,988 $51,472 $47,306 Effect of state and local income taxes, net of Federal tax benefit 3,894 4,811 5,063 Taxes in excess of (less than) the U.S. tax rate on non- U.S. earnings, including utilization of tax loss carryforwards and losses with no benefit 218 (14) (1,281) Foreign sales corporation (1,460) (1,975) (1,235) Other - net (2,329) (949) (107) ------------ ----------- ----------- Total $40,311 $53,345 $49,746 ------------ ----------- ----------- Effective tax rate 35.3% 36.3% 36.8% ===== ===== ====
Total income tax payments, net of refunds, were $34,361 in 1999, $44,432 in 1998 and $44,648 in 1997. At December 31, 1999, certain non-U.S. subsidiaries had tax loss carryforwards of approximately $49,950 that expire in various years from 2000 through 2009, except for $23,839 for which there is no expiration date. 33 34 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE E - INCOME TAXES - (Continued) Significant components of deferred tax assets and liabilities at December 31, 1999 and 1998, were as follows:
1999 1998 ---------- --------- Deferred tax assets: Tax loss and credit carryforwards $ 17,849 $ 15,199 State income taxes 2,614 2,873 Inventory 7,081 5,022 Other accruals 15,509 11,516 Employee benefits 5,194 5,490 Pension obligations 3,633 4,049 Other 14,075 9,614 ---------- --------- 65,955 53,763 Valuation allowance (16,623) (14,351) ----------- --------- 49,332 39,412 Deferred tax liabilities: Property, plant and equipment (24,101) (21,763) Pension obligations (10,748) (12,779) Other (19,943) (9,287) --------- --------- (54,792) (43,829) --------- --------- Total ($ 5,460) ($ 4,417) ========= =========
The Company does not provide deferred income taxes on unremitted earnings of non-U.S. subsidiaries, as such funds are deemed permanently reinvested in properties, plant and working capital. It is not practicable to calculate the deferred taxes associated with the remittance of these investments. NOTE F - RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS The Company and its subsidiaries maintain a number of defined benefit and defined contribution plans to provide retirement benefits for employees in the United States as well as employees outside the U.S. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974, local statutory law or as determined by the Board of Directors. The plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for a supplemental executive retirement plan for certain key employees. Substantially all U.S. employees are covered under a 401(k) savings plan in which they may invest 1% or more of eligible compensation, limited to maximum amounts as determined by the Internal Revenue Service. The plan provides for Company matching contributions of 25% of the first 6% of employee compensation contributed to the plan. The plan includes a feature in which participants could elect to receive an annual Company contribution of 2% of their base pay in exchange for forfeiting accelerated benefits under the pension plan. 34 35 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE F - RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS - -(Continued) The changes in the pension plans' benefit obligations were as follows:
1999 1998 ---- ---- Obligation at January 1 $438,704 $394,104 Service cost 13,955 13,013 Interest cost 29,618 28,180 Participant contributions 476 4,488 Plan amendments 492 883 Actuarial (gain) loss (39,620) 19,184 Benefit payments (21,171) (20,013) Settlements -- 178 Currency translation 678 (1,313) ----------- ---------- Obligation at December 31 $423,132 $438,704 =========== ==========
The changes in the fair values of the pension plans' assets were as follows:
1999 1998 ---- ---- Plan assets at January 1 $431,161 $389,669 Actual return on plan assets 59,680 42,598 Employer contributions 4,736 15,963 Participant contributions 476 4,488 Benefit payments (21,171) (20,013) Currency translation 929 (1,544) ----------- ---------- Plan assets at December 31 $475,811 $431,161 =========== ==========
The funded status of the pension plans at December 31, 1999 and 1998 was as follows:
1999 1998 ---- ---- Plan assets in excess of (less than) projected benefit obligations $ 52,679 $ (7,543) Unrecognized net (gain) loss (44,604) 18,322 Unrecognized prior service cost 10,696 11,041 Unrecognized transition assets, net (1,830) (2,176) ---------- ---------- Prepaid pension expense recognized in the balance sheet $ 16,941 $ 19,644 ========== ==========
The net prepaid pension expense recognized in the consolidated balance sheets was composed of:
1999 1998 ---- ---- Prepaid pension cost $ 26,279 $ 27,581 Accrued pension liability (12,010) (10,164) Intangible asset 1,880 2,227 Other comprehensive income 792 -- ----------- ------------- Prepaid pension expense recognized in the balance sheet $ 16,941 $ 19,644 =========== =============
35 36 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE F - RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS - -(Continued) A domestic non-qualified pension plan comprised the largest portion of the pension plans in which the accumulated benefit obligation (ABO) exceeded plan assets at December 31, 1999 and 1998. The aggregate ABO of such plans at December 31, 1999 and 1998 was $11,998 and $9,872, respectively; the aggregate fair value of plan assets was $0 at December 31, 1999 and 1998. A summary of the components of total pension expense was as follows:
1999 1998 1997 --------- --------- ---------- Service cost - benefits earned during the year $ 13,955 $ 13,013 $ 11,319 Interest cost on projected benefit obligation 29,618 28,180 26,906 Expected return on plan assets (37,148) (34,494) (30,286) Amortization of transition asset (453) (452) (472) Amortization of prior service cost 1,272 1,123 775 Amortization of net loss 347 318 89 --------- --------- ---------- Net pension cost of defined benefit plans 7,591 7,688 8,331 Settlement, curtailments and special termination benefits -- 178 393 Defined contribution plans 2,393 2,090 2,255 -------- -------- --------- Total pension expense $ 9,984 $ 9,956 $10,979 ======= ======= =======
Weighted average assumptions used in accounting for the defined benefit plans as of December 31, 1999 and 1998 were as follows:
1999 1998 ---- ---- Discount rate 7.6% 7.0% Rate of increase in compensation 4.9% 4.9% Expected return on plan assets 8.9% 8.9%
U.S. plan assets consist of fixed income and equity securities. Non-U.S. plan assets are invested in non-U.S. insurance contracts and non-U.S. equity and fixed income securities. The Company does not have, and does not provide for, any postretirement or postemployment benefits other than pensions. The Cleveland, Ohio, area operations have a Guaranteed Continuous Employment Plan covering substantially all employees which, in general, provides that the Company will provide work for at least 75% of every standard work week (presently 40 hours). This plan does not guarantee employment when the Company's ability to continue normal operations is seriously restricted by events beyond the control of the Company. The Company has reserved the right to terminate this plan effective at the end of a calendar year by giving notice of such termination not less than six months prior to the end of such year. 36 37 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE G - SEGMENT INFORMATION The Company's primary business is the design, manufacture and sale, in the U.S. and international markets of arc, cutting and other welding products. The Company manages its operations by geographic location, and has three reportable segments: operations located in the United States, Europe and all other foreign countries. Each operating unit is managed separately because each faces a distinct economic environment, a different customer base, and a varying level of competition and market sophistication. Segment performance and resource allocation is measured based on income before interest and income taxes. The accounting policies of the reportable segments are the same as those described in Note A - Significant Accounting Policies. Financial information for the reportable segments follows:
United Other States Europe Countries Eliminations Consolidated ------ --------- --------- ------------ ------------ 1999: Net sales to unaffiliated customers $744,035 $186,615 $155,526 $ -- $1,086,176 Inter-segment sales 62,439 9,668 16,378 (88,485) -- -------- -------- -------- -------- ---------- Total $806,474 $196,283 $171,904 $(88,485) $1,086,176 ======== ======== ======== ======== ========== Income before interest and income taxes $ 99,870 $ 10,599 $ 8,090 $ (204) $ 118,355 Interest income 1,413 Interest expense (5,517) ---------- Income before income taxes $ 114,251 ========== Total assets $543,948 $164,978 $140,064 $(73,591) $ 775,399 Capital expenditures 38,996 7,045 19,008 (1,726) 63,323 Depreciation and amortization 18,645 6,847 4,255 (625) 29,122 1998: Net sales to unaffiliated customers $816,562 $208,782 $161,335 $ -- $1,186,679 Inter-segment sales 69,586 9,775 12,030 (91,391) -- -------- -------- -------- -------- ---------- Total $886,148 $218,557 $173,365 $(91,391) $1,186,679 ======== ======== ======== ======== ========== Income before interest and income taxes $125,693 $ 14,935 $ 10,191 $ (2,198) $ 148,621 Interest income 4,119 Interest expense (5,676) ---------- Income before income taxes $ 147,064 ========== Total assets $542,462 $186,666 $119,344 $(65,566) $ 782,906 Capital expenditures 52,632 11,109 19,542 (1,872) 81,411 Depreciation and amortization 18,431 6,704 3,485 (541) 28,079
37 38 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE G - SEGMENT INFORMATION - (Continued)
United Other States Europe Countries Eliminations Consolidated ------ --------- --------- ------------ ------------ 1997: Net sales to unaffiliated customers $799,442 $204,858 $154,767 $ -- $ 1,159,067 Inter-segment sales 65,812 11,475 8,033 (85,320) -- -------- -------- -------- ---------- ----------- Total $865,254 $216,333 $162,800 $ (85,320) $ 1,159,067 ======== ======== ======== ======== =========== Income before interest and income taxes $112,565 $ 10,014 $ 14,427 $ (1,374) $ 135,632 Interest income 5,877 Interest expense (6,349) ----------- Income before income taxes $ 135,160 =========== Total assets $489,431 $163,519 $ 96,850 $ (37,610) $ 712,190 Capital expenditures 23,632 5,264 8,418 (18) 37,296 Depreciation and amortization 18,812 7,713 2,376 (470) 28,431
The United States segment includes a $32,015 charge in 1999 related to the sale of the motor business. See Note H for further information. Intercompany sales between reportable segments are accounted for at prices comparable to normal, customer sales and are eliminated in consolidation. Export sales (excluding intercompany sales) from the United States were $66,019 in 1999, $92,461 in 1998 and $105,464 in 1997. No individual customer comprised more than 10% of the Company's total revenues for the three years ended December 31, 1999. The geographic split of the Company's revenues, based on customer location, and property, plant and equipment was as follows:
1999 1998 1997 ------------ ----------- ---------- Revenues: United States $ 678,017 $ 724,101 $ 693,979 Foreign countries 408,159 462,578 465,088 ---------- ----------- ----------- Total $1,086,176 $ 1,186,679 $ 1,159,067 ========== =========== =========== Property, plant and equipment: United States $ 176,256 $ 174,188 $ 138,935 Foreign countries 99,494 89,375 65,454 Eliminations (4,960) (3,772) (2,354) ---------- ----------- ----------- Total $ 270,790 $ 259,791 $ 202,035 ========== =========== ===========
Revenues derived from customers and property, plant and equipment in any individual foreign country were not material for disclosure. 38 39 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE H - ACQUISITIONS AND DIVESTITURE On May 28, 1999 the Company sold its motor business to Regal-Beloit, Inc. The Company recorded a pre-tax charge of $32,015 ($19,721 after-tax, or $0.43 per diluted share) reflecting the loss on the sale of motor business assets. The results of operations from the motor business were not material to the Company for the years ended December 31, 1999, 1998 and 1997. During the first quarter of 1998 the Company's Canadian subsidiary acquired a 75% interest in Indalco Alloys, Inc. of Canada. The purchase price was not significant. Indalco is a premier supplier of aluminum welding wire and related products. The acquisition was accounted for as a purchase. In April 1998, a German subsidiary of the Company purchased the assets and business of Uhrhan & Schwill GmbH, located in Germany, a leader in the design and installation of welding systems for pipe mills. The purchase price was not significant. In July 1998, a French subsidiary of the Company acquired a 50% equity interest in AS Kaynak, a market leading welding products manufacturing subsidiary of Eczacibasi Holdings, headquartered in Istanbul, Turkey. The purchase price was not significant. The Company accounts for its investment in AS Kaynak under the equity method. NOTE I - FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has various financial instruments, including cash, cash equivalents, marketable securities, short-and long-term debt, forward contracts, and an interest rate swap. The Company has determined the estimated fair value of these financial instruments by using available market information and appropriate valuation methodologies that require judgment. The Company enters into forward exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its committed exposures. This hedging minimizes the impact of foreign exchange rate movements on the Company's operating results. The total notional value of forward currency exchange contracts was $50,030 at December 31, 1999 and $24,592 at December 31, 1998, which approximated fair value. The carrying amounts and estimated fair value of the Company's significant financial instruments at December 31, 1999 and 1998 were as follows:
December 31, 1999 December 31, 1998 --------------------------- ---------------------------- Carrying Fair Carrying Fair Amounts Value Amounts Value ------- -------- ------- -------- Cash and cash equivalents $ 8,675 $ 8,675 $ 39,095 $ 39,095 Marketable securities 38 38 311 311 Notes payable to banks 16,425 16,425 2,792 2,792 Long-term debt (including current portion) 58,710 58,342 57,866 59,911 Interest rate swap agreements payable -- 561 -- 426
39 40 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE J - OPERATING LEASES The Company leases sales offices, warehouses and distribution centers, office equipment and data processing equipment. Such leases, some of which are noncancelable and, in many cases, include renewals, expire at various dates. The Company pays most maintenance, insurance and taxes relating to leased assets. Rental expense was $8,902 in 1999, $7,297 in 1998 and $7,851 in 1997. At December 31, 1999, total minimum lease payments for noncancelable operating leases were as follows: 2000 $ 6,519 2001 4,108 2002 2,499 2003 1,822 2004 1,402 Thereafter 1,464 ---------- Total $17,814 ==========
NOTE K - CONTINGENCIES The Company is a defendant or co-defendant in nine lawsuits filed against the Company in the Superior Court of California by building owners or insurers in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of January 1994. These cases include claims for compensatory damages and punitive damages, often without specification of amount, relating to the sale and use of the E70T-4 category of welding electrode. One of the complaints includes a fraud claim, as well as a claim under California's Unfair Business Practices Act. The latter claim demands restitution of all amounts paid by California purchasers for the Company's E70T-4 electrode, with interest. The Company has also been a defendant or co-defendant in 12 other similar cases involving steel-frame buildings in Greater Los Angeles following the Northridge earthquake. Six of those cases were voluntarily dismissed and the Company has settled the six other cases. All settlement costs have been immaterial to the Company's consolidated financial statements. No trial on the merits has occurred to date in any of the E70T-4 cases. Moreover, as referenced above, at least one of the pending E70T-4 cases also presents theories of liability that did not exist in the cases that were dismissed or settled. Therefore, the Company is unable to make a meaningful estimate of the amount or range of possible losses that could result from an unfavorable outcome of the remaining pending or future E70T-4 litigation. Management believes the Company has substantial defenses and intends to contest such suits vigorously, and that the Company has applicable insurance and that other potential defendants and their respective insurers will be identified as the lawsuits proceed. The Company's results of operations or cash flows in one or more interim or annual periods could be materially affected by unfavorable results in one or more of these cases. Based on information known to the Company, and subject to the factors and contingencies noted herein, management believes the outcome of the Company's E70T-4 litigation should not have a material adverse impact upon the consolidated financial position of the Company. If the Company is unsuccessful in defending or otherwise satisfactorily resolving this litigation, and if insurance coverage is unavailable or inadequate, then the litigation could have a material adverse impact on the Company's consolidated financial position. 40 41 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE K - CONTINGENCIES - (Continued) The Company is also subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, other product liability claims and health, safety and environmental claims (including claims relating to exposures to welding fumes). The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously. All costs associated with these claims, including defense and settlements, have been immaterial to the Company's consolidated financial statements. Based on the Company's historical experience in litigating these claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material adverse impact on the Company's consolidated financial statements. NOTE L - QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 MAR 31 JUN 30 SEP 30 DEC 31 ---- --------- --------- --------- --------- Net sales $ 282,868 $ 273,498 $ 265,937 $ 263,873 Gross profit 96,567 93,588 91,233 90,391 Income before income taxes 5,661 36,376 36,411 35,803 Net income 4,307 23,335 23,303 22,995 Basic earnings per share $ 0.09 $ 0.51 $ 0.52 $ 0.51 Diluted earnings per share $ 0.09 $ 0.51 $ 0.51 $ 0.51 1998 MAR 31 JUN 30 SEP 30 DEC 31 ---- --------- --------- --------- --------- Net sales $ 302,962 $ 310,930 $ 288,106 $ 284,681 Gross profit 101,219 104,773 96,744 94,253 Income before income taxes 38,081 40,567 36,737 31,679 Net income 23,730 25,245 23,294 21,450 Basic earnings per share $ 0.48 $ 0.51 $ 0.47 $ 0.45 Diluted earnings per share $ 0.48 $ 0.51 $ 0.47 $ 0.44
The Gross Profit results for all periods presented above reflect the reclassification of distribution costs from Selling, General & Administrative Expenses to Cost of Goods Sold. See Note A to these consolidated financial statements. The quarter-ended March 31, 1999 includes a $32,015 pre-tax charge ($19,721 after-tax or $0.43 per diluted share) related to the sale of the motor business. See Note H for further information. The quarterly earnings per share (EPS) amounts are each calculated independently. Therefore, the sum of the quarterly EPS amounts do not equal the annual totals due to share transactions that occurred during the years presented. 41 42 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES (In thousands of dollars)
Additions ---------------------------- (1) Charged Balance at Charged to to other Balance beginning costs and accounts (2) at end Description of period expenses (describe) Deductions of period - ----------- --------- -------- ---------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1999 $3,563 $ 927 $ (289) $ 514 $3,687 Year ended December 31, 1998 $3,071 $ 794 $ (12) $ 290 $3,563 Year ended December 31, 1997 $2,878 $1,022 $ (455) $ 374 $3,071
(1) -- Currency translation adjustment. (2) -- Uncollectable accounts written-off, net of recoveries. 42 EX-10.K 2 EXHIBIT 10(K) 1 EXHIBIT 10(k) March 7, 2000 Mr. Anthony A. Massaro 1030 Hillcreek Lane Gates Mills, OH 44040 Re: Supplemental Retirement, Retention and Termination Benefits Dear Tony: This letter supercedes in its entirety the letter of employment dated July 14, 1993, as amended May 26, 1998, by and between The Lincoln Electric Company ("LEI") and you, which specified the terms of your employment with LEI. This letter sets forth the supplemental retirement, retention and termination benefits that the Compensation and Executive Development Committee of the Board of Directors of Lincoln Electric Holdings, Inc. (the "Company"), the parent of LEI, have determined will be provided to you. All other terms and conditions of your employment with the Company, including base salary, annual bonus and long-term compensation shall be determined by the Company, through its Compensation and Executive Development Committee. You will participate in The Lincoln Electric Company Retirement Annuity Program in the same manner as other employees of the Company. Additionally, you will participate in The Lincoln Electric Company Supplemental Executive Retirement Plan (the "SERP"), which provides a full benefit after forty-five years of service with the Company and a normal retirement age of 60. In this regard, the Company has credited you with twenty-nine years of service under the SERP at your employment starting date of August 1, 1993. Your "participation factor" under the SERP is 1.0, and the annual benefit limit under the SERP will not apply in your case. The SERP will become payable if the Company terminates your employment for reasons other than Termination for Cause (as defined in the SERP), in which case the payment amount, if paid prior to age 65 will be at 61% through 1999, rising one percentage point each following year until it reaches 65%, with a reduction for service short of forty-five years based upon multiplying the payable amount by the ratio of qualified service to forty-five years, and actuarially reduced based on age; provided, however, that the payment amount will instead be determined under the provisions of the SERP (with the standard reductions provided under the SERP) if such determination results in a higher payment. It is understood that should you voluntarily leave the Company prior to age 60 without the approval of the Compensation and Executive Development Committee, no entitlement to the SERP exists. In the event of your voluntary retirement prior to age 60, approval of the Compensation and Executive Development Committee will not be unreasonably withheld. Except as otherwise modified above, the terms of the SERP will govern your benefits under the SERP. 2 Mr. Anthony A. Massaro March 7, 2000 Page 2 of 3 The Company agrees to pay to you (as provided below) the following Retention Benefit amounts, provided that you are employed by the Company as of the vesting date set forth next to such amount, (unless pro rating of payments is applied as noted below, in which case the vesting date is the termination date) and provided, further, that the Company does not terminate your employment in a Termination for Cause:
RETENTION BENEFIT CUMULATIVE VESTED VESTING DATE VESTING LEVELS RETENTION BENEFIT - ------------ -------------- ----------------- December 31, 2000 $ 400,000 $ 400,000 December 31, 2001 400,000 800,000 December 31, 2002 400,000 1,200,000 December 31, 2003 400,000 1,600,000 December 31, 2004 400,000 2,000,000
Notwithstanding anything to the contrary in the SERP, the Retention Benefits provided in this paragraph shall not be included in your Final Average Pay (as determined in the SERP) for the purposes of determining your benefits under the SERP. At the end of each calendar quarter, an amount of $100,000 shall be credited to your account under the Company's Deferred Compensation Plan as an "Employment Agreement Contribution" (as defined in the Deferred Compensation Plan). Such account shall be credited at the end of each quarter with interest at the prime rate as in effect from time to time. The Retention Benefits credited pursuant to Employment Agreement Contributions shall be paid in accordance with the terms of the Deferred Compensation Plan. In the event that your employment with the Company is terminated for any reason before December 31, 2004, you will forfeit all Retention Benefits that are not vested in accordance with the foregoing schedule. If the Company terminates your employment for reason other than Termination for Cause, or if you terminate your employment with the Company for Good Reason, or upon your retirement, disability or death, you (or your beneficiaries or estate, as the case may be) will receive a pro rata payment of the Retention Benefit attributable to the year of such termination. Such pro rata payment will be determined by multiplying the Retention Benefit for the year of termination by a fraction, the numerator of which is the number of full completed days in such year through the effective date of termination, and the denominator of which is 365. 2 3 Mr. Anthony A. Massaro March 7, 2000 Page 3 of 3 If the Company terminates your employment for any reason other than Termination for Cause, or if you terminate for Good Reason, you will receive a lump sum severance payment equal to two years' then base salary plus annual bonus at target. For purposes of this letter, "Termination for Cause" shall have the same meaning as provided in the SERP, and "Good Reason" means, without your prior written consent, a significant adverse change in the nature or scope of your duties with the Company, including failure to re-elect you as Chief Executive Officer. Very truly yours, /s/ Edward E. Hood, Jr. Edward E. Hood, Jr. Chairman, Compensation and Executive Development Committee ACCEPTED: /s/ Anthony A. Massaro Anthony A. Massaro March 8, 2000 3 EX-10.L 3 EXHIBIT 10(L) 1 EXHIBIT 10(l) LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES SUMMARY OF EMPLOYMENT AGREEMENTS Messrs. Elliott and Stueber entered into employment agreements in June 1993 and February 1995, respectively. Those agreements contain many terms that are no longer in effect. Certain terms do, however, survive. Surviving terms grant credited service for purposes of the SERP of 32, and 22 years, respectively, as of their respective dates of hire, assuming a normal retirement age of 60 and service of 45 years at age 65 for both. Mr. Elliott has a participation factor under the SERP of 100%. Mr. Elliott's agreement provides that his SERP benefits will not be offset by his former employer's defined contribution plan (but will be offset by his former employer's defined benefit plan). The agreement for Mr. Elliott also provides for severance pay equal to one year's base salary if he is terminated without cause. The agreement for Mr. Stueber provides that if he is terminated without cause, prior to his sixth anniversary, he will be entitled to severance pay equal to three times his total compensation (base and bonus) for the preceding year. Thereafter, through his tenth anniversary, severance pay equals one year's total compensation. EX-10.O 4 EXHIBIT 10(O) 1 EXHIBIT 10(o) AMENDMENT 1 TO SEVERANCE AGREEMENT THIS AMENDMENT, is made this 6th day of March, 2000, by and between Lincoln Electric Holdings, Inc. (the "Company") and _______________ ("Executive"). WHEREAS, the Company and Executive have entered into an agreement, dated September 9, 1998, specifying severance benefits that would apply to Executive upon a change in control of the Company (the "Severance Agreement"); WHEREAS, the Compensation Committee of the Board of Directors of the Company have approved certain changes to the terms of Executive's retirement arrangement with the Company which are specified in the Severance Agreement; and WHEREAS, the Company and Executive desire to amend the Severance Agreement to reflect the changes approved by the Compensation Committee. NOW THEREFORE, 1. The third paragraph of Annex A of the Severance Agreement is hereby amended in its entirety, effective as of the date hereof, to read as follows: "3. Performance Awards. All performance awards granted prior to a Change in Control under the Company's Long-Term Incentive Program or any successor plan, if any, for the open performance periods will be paid in accordance with the provisions of such Program at the greater of target or actual performance on the Executive's Termination Date." 2. The fifth paragraph of Annex A of the Severance Agreement is hereby amended in its entirety, effective as of the date hereof, to read as follows: "5. Supplemental Executive Retirement Plan. For purposes of determining the Executive's benefit under the Supplemental Executive Retirement Plan or any successor thereto, the Executive (a) will be credited with the number of years of continuous service equal to the number of his actual years of continuous service at his Termination Date plus the number of years of continuous service he would have had if he had continued his employment throughout the greater of (i) one year or (ii) the remainder of the Severance Period, (b) will be considered to have attained his actual chronological age at his Termination Date age plus the greater of (i) one additional year of chronological age or (ii) additional years of chronological 1 2 age equal to the number of years and months included in the remainder of the Severance Period, and (c) will become fully vested under the Supplemental Executive Retirement Plan as of his Termination Date." * * * EXECUTED this 6th day of March, 2000. LINCOLN ELECTRIC HOLDINGS, INC. By: -------------------------------- Title: ------------------------ ------------------------------- 2 EX-21 5 EXHIBIT 21 1 EXHIBIT 21 LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT The Company's significant subsidiaries, all of which are included in its consolidated financial statements, are listed in the following table:
COUNTRY OF PERCENT NAME INCORPORATION OWNERSHIP ---- ------------- --------- The Lincoln Electric Company United States 100 Harris Calorific Limited Ireland 100 Harris Calorific S.r.l. Italy 100 Harris Calorific, Inc. United States 100 Indalco Alloys, Inc. Canada 75 Kaynak Teknigi Sanayi ve Ticaret A.S. Turkey 50 Lincoln Electric (Shanghai Holdings) Pte. Ltd. People's Republic of China 84 Lincoln Electric (U.K.) Limited United Kingdom 100 Lincoln Electric Company (Australia) Proprietary Limited Australia 100 Lincoln Electric Company of Canada Limited Canada 100 Lincoln Electric Do Brasil Ltda. Brazil 100 Lincoln Electric France S.A. France 100 Lincoln Electric Italia S.r.l. Italy 100 Lincoln Electric Mexicana, S.A. de C.V. Mexico 100 Lincoln Electric Manufactura, S.A. de C.V. Mexico 100 Lincoln Electric Norge AS Norway 100 Lincoln Electric Philippines, Inc. The Philippines 60 Lincoln Global Inc. United States 100 Lincoln Smitweld B.V. The Netherlands 100 Lincoln Smitweld GmbH Germany 100 Lincoln-KD, S.A. Spain 100 PT Lincoln Austenite Indonesia Indonesia 60 Sacit S.r.l. Italy 100 The Lincoln Electric Company (Asia Pacific) Pte. Ltd. Singapore 100
The Company has omitted the names of its subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary" within the meaning of Rule 1-02 contained in Regulation S-X. 43 EX-23 6 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following registration statements of our report dated February 1, 2000, with respect to the consolidated financial statements and schedule of Lincoln Electric Holdings, Inc. (successor to The Lincoln Electric Company) and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1999: Form S-8 Registration Statement of Lincoln Electric Holdings, Inc. for the 1998 Stock Option Plan (Form S-8 No. 333 - 58305) Post-effective Amendment No. 1 to Form S-8 Registration Statement of Lincoln Electric Holdings, Inc. (as successor to The Lincoln Electric Company) for The Lincoln Electric Company Employee Savings Plan (Form S-8 No. 033 - 64187) Post-effective Amendment No. 1 to Form S-8 Registration Statement of Lincoln Electric Holdings, Inc. (as successor to The Lincoln Electric Company) for The Lincoln Electric Company 1988 Incentive Equity Plan (Form S-8 No. 033 - 25210) Post-effective Amendment No. 1 to Form S-8 Registration Statement of Lincoln Electric Holdings, Inc. (as successor to The Lincoln Electric Company) for the 1995 Lincoln Stock Purchase Plan (Form S-8 No. 033 - 64189) ERNST & YOUNG LLP Cleveland, Ohio March 28, 2000 44 EX-24 7 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY Directors of Lincoln Electric Holdings, Inc. Each of the undersigned Directors of Lincoln Electric Holdings, Inc. hereby appoints Anthony A. Massaro, H. Jay Elliott and Frederick G. Stueber, and each of them, as attorneys for the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned in the capacity specified, to prepare or cause to be prepared, to execute and to file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Act"), an annual report on Form 10-K for the year ended December 31, 1999 relating to Lincoln Electric Holdings, Inc., such other periodic reports as may be required pursuant to the Act, amendments and exhibits to any of the foregoing and any and all other documents to be filed with the Securities and Exchange Commission or elsewhere pertaining to such reports, with full power and authority to take any other action deemed necessary or appropriate to effect the filing of the documents. Executed the date set forth below.
/s/ John M. Stropki /s/ Ursula M. Burns - -------------------------------------- ---------------------------------------- ------------------------------- Anthony A. Massaro, Director John M. Stropki, Director Ursula M. Burns, Director March ___, 2000 March 28, 2000 March 27, 2000 /s/ Thomas A. Corcoran /s/ David H. Gunning - -------------------------------------- ---------------------------------------- ------------------------------- Harry Carlson, Director Thomas A. Corcoran, Director David H. Gunning, Director March ___, 2000 March 28, 2000 March 28, 2000 /s/ Edward E. Hood, Jr. /s/ Paul E. Lego /s/ David C. Lincoln - -------------------------------------- ---------------------------------------- ------------------------------- Edward E. Hood, Jr., Director Paul E. Lego, Director David C. Lincoln, Director March 28, 2000 March 28, 2000 March 28, 2000 - -------------------------------------- ---------------------------------------- ------------------------------- G. Russell Lincoln, Director Kathryn Jo Lincoln, Director Henry L. Meyer III, Director March ___, 2000 March ___, 2000 March ___, 2000 /s/ Frank L. Steingass - -------------------------------------- Frank L. Steingass, Director March 28, 2000
EX-27 8 EXHIBIT 27
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 8,675 38 173,673 3,687 191,612 426,595 550,400 279,610 775,399 216,374 47,207 0 0 4,928 446,587 775,399 1,086,176 1,086,176 714,397 714,397 252,011 0 5,517 114,251 40,311 73,940 0 0 0 73,940 1.63 1.62
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