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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.
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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
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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
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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
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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
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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
======== ========
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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.
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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.
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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