UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

LINCOLN ELECTRIC HOLDINGS, INC.

(216) 481-8100

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes  [X]  No  [  ]

The number of shares outstanding of the registrant’s common shares as of June 30, 2004 was 41,221,020.

TABLE OF CONTENTS

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Part I. Financial Information

     Item 1. Financial Statements (Unaudited)

LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands of dollars, except per share data)
(UNAUDITED)

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands of dollars)
(UNAUDITED)

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands of dollars except share and per share data)
June 30, 2004

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Lincoln Electric Holdings, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. However, in the opinion of management, these consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and changes in cash flows for the interim periods. Operating results for the three and six-months ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Effective April 1, 2004, the Company realigned its reporting segments to better reflect how management assesses and manages operations. The realignment consisted of moving the Company’s Canadian operations from the Other Countries segment and combining it with the businesses previously reported as the United States segment to create the North America reporting segment. Prior period information has been reclassified to reflect this realignment.

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

NOTE B – STOCK-BASED COMPENSATION

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

In May 2003, the 1998 Stock Plan was amended by the shareholders to allow for the issuance of Tandem Appreciation Rights (TARs), deferred shares and restricted shares of the Company’s common stock. TARs payable in cash require the recording of a liability and related compensation expense to be measured by the difference between the quoted market price of the number of common shares covered by the grant and the option price per common share at grant date. Any increases or decreases in the market price of the common shares between grant date and exercise date will result in changes to the Company’s compensation expense. This compensation expense is accrued over the vesting period. For TARs payable in common shares, the TAR will be accounted for as a stock option and the fair value method of accounting under SFAS No. 123 will be utilized. Subsequent changes in share values will not affect compensation expense. During the first six months of 2004, 30,000 TARs have been issued. During 2003, 396,000 TARs were issued.

Restricted shares and deferred shares require compensation expense to be measured by the quoted market price on the grant date. Expense is recognized by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any shares ultimately forfeited because the recipients fail to meet the vesting requirements.

The Company estimates the effect of the adoption of the fair value provision of SFAS No. 123 and the effect of all stock-based awards will be approximately $0.06 per share in 2004. The Company estimates this will increase annually to approximately $0.07 — $0.08 per share by 2006. This estimate assumes the number and fair value of stock-based awards granted is similar for all years. The actual

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impact per share would be different depending on the types of stock-based awards granted, the number of stock-based awards granted, changes in the Company’s stock price or changes in the fair value of stock-based awards from the current estimate.

SFAS No. 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.

NOTE C – GOODWILL AND INTANGIBLE ASSETS

Goodwill totaled $10,054 at June 30, 2004 and consisted of $3,991 related to the European reporting segment and $6,063 related to the Other Countries reporting segment.

During the second quarter of 2004, the Company acquired 60% of the Shanghai Kuang Tai Metal Industry Co., Ltd. (“SKB”). See Note J. The initial purchase price allocation resulted in goodwill of $6,063. The Company has not yet completed the evaluation and allocation of the purchase price as the appraisals associated with the valuation of certain tangible and intangible assets are not yet complete. The Company anticipates the final purchase price allocation will be completed by the end of 2004.

Gross intangible assets at June 30, 2004 of $25,495 include accumulated amortization of $12,319. Aggregate amortization expense was $179 and $306 and $369 and $601 for the three and six months ended June 30, 2004 and 2003, respectively.

NOTE D – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share.

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NOTE E – COMPREHENSIVE INCOME

The components of comprehensive income are as follows:

For domestic inventories, cost is determined principally by the last-in, first out (“LIFO”) method. The valuation of inventory under the LIFO method is performed at the end of each year based on year-end inventory levels. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected year-end inventory levels and costs and are subject to final year-end LIFO inventory calculations. The excess of current cost over LIFO cost amounted to $44,280 and $40,554 at June 30, 2004 and December 31, 2003, respectively.

NOTE G – ACCRUED EMPLOYEE COMPENSATION AND BENEFITS

Accrued employee compensation and benefits at June 30, 2004, December 31, 2003 and June 30, 2003 include accruals for year-end bonuses and related payroll taxes of $28,051, $6,024 and $12,494, respectively, related to Lincoln employees worldwide. The payment of bonuses is discretionary and is subject to approval by the Board of Directors. The increase in the accrual from December 31, 2003 to June 30, 2004 reflects the fact that a majority of annual bonuses are paid out in December. The increase in the accrual from June 30, 2003 to June 30, 2004 is due to the increase in profitability of the Company.

NOTE H – SEGMENT INFORMATION

Effective April 1, 2004, the Company realigned its reporting segments to better reflect how management assesses and manages operations. The realignment consisted of moving the Company’s Canadian operations from the Other Countries segment and combining it with the businesses previously reported as the United States segment to create the North America reporting segment. Prior period information has been reclassified to reflect this realignment.

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The North America segment includes rationalization charges of $540 and the European segment includes rationalization charges of $1,203 in the six months ended June 30, 2003 (see Note I).

NOTE I – RATIONALIZATION CHARGES

During the first quarter of 2003, the Company recorded rationalization charges of $1,743 ($1,367 after-tax). The rationalization charges included asset impairments and severance. Non-cash asset impairment charges of $900 related to property, plant and equipment at one of the Company’s European subsidiaries where management believed the carrying values were unrecoverable. Severance charges were $843 primarily covering 57 U.S. employees. Severance charges were incurred to eliminate redundancies and improve organizational efficiency.

NOTE J – ACQUISITIONS

On June 7, 2004, the Company acquired 60% of the Shanghai Kuang Tai Metal Industry Co., Ltd. for approximately $6 million, net of cash acquired. The results of SKB’s operations since the acquisition date have been included in the Company’s second quarter 2004 consolidated financial statements. SKB is a manufacturer of flux-cored wire and other consumables located in China. The Company expects this acquisition, along with other planned investments in China, to provide a strong equipment manufacturing base in China, improve the Company’s distribution network, and strengthen the Company’s market position in the Asia Pacific region.

The initial purchase price allocation resulted in goodwill of $6,063. The Company has not yet completed the evaluation and allocation of the purchase price as the appraisals associated with the valuation of certain tangible and intangible assets are not yet complete. The Company anticipates the final purchase price allocation will be completed by the end of 2004.

The Company also anticipates purchasing an additional 10% of SKB during the third quarter of 2004 for approximately $2 million bringing its total direct ownership to 70%, in addition to the indirect ownership through its investments in Kuang Tai Metal Industrial Co. Ltd. and Tenwell Development, PTE Ltd. Concurrent with this increased ownership, all China equipment manufacturing will also be incorporated into the SKB operations.

In July, 2004, the Company purchased 70% of the Rui Tai Welding and Metal Co. Ltd. (“Rui Tai”) for approximately $10 million (see Note Q). Rui Tai is a manufacturer of stick electrodes located in northern China.

Combined annual sales for SKB and Rui Tai of between $50 — $60 million are expected from these businesses. The Company anticipates these investments to be accretive to earnings by approximately $0.02 per share in 2004.

On October 30, 2003, the Company purchased the Century and Marquette welding and cutting equipment accessories and the Century battery charger businesses of Clore Automotive LLC for approximately $2.9 million. These products and brands, which have leading positions in the automotive after-market and retail channels, are complementary to Lincoln’s existing retail and professional products business. Annual sales for these businesses are expected to be approximately $10 million.

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NOTE K – CONTINGENCIES AND GUARANTEE

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

The Company has provided a guarantee on a loan for a joint venture. The Company believes the likelihood is remote that material payment will be required under this arrangement because of the current financial condition of the joint venture. The Company’s estimated maximum exposure under this arrangement at June 30, 2004 was approximately $4,000.

NOTE L – PRODUCT WARRANTY COSTS

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

NOTE M – LONG-TERM DEBT

During March 2002, the Company issued Senior Unsecured Notes (the “Notes”) totaling $150,000 through a private placement. The Notes, as shown in the table below, have original maturities ranging from five to ten years with a weighted average interest rate of 6.1% and an average tenure of eight years. Interest is payable semi-annually in March and September. The proceeds are being used for general corporate purposes, including acquisitions and to purchase shares under the Company’s share repurchase program. A majority of the proceeds were invested during the quarter in short-term, highly liquid investments. The Notes contain certain affirmative and negative covenants, including restrictions on asset dispositions and financial covenants (interest coverage and funded debt-to-“EBITDA” ratios). As of June 30, 2004, the Company is in compliance with all of its debt covenants.

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

During March 2002, the Company entered into floating rate interest rate swap agreements totaling $80,000, to convert a portion of the outstanding Notes from fixed to floating rates. These swaps were designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized in earnings. In May 2003, these swap agreements were terminated. The gain on the termination of these swaps of $10,613 was deferred and is being amortized as an offset to interest expense over the terms of the related debt. The amortization of this gain reduced interest expense by $1,056 in the first half of 2004 and is expected to reduce annual interest expense by $2,100 in each of 2004 and 2005. Interest expense related to the $150,000 private placement is further reduced by the interest income earned on the cash balances. These short-term, highly liquid investments earned 1.5%, or approximately $679 during the first half of 2004. At June 30, 2004, $8,136 remains to be amortized and is included in Long-term debt.

In July, 2003, the Company entered into floating rate interest rate swap agreements with amounts totaling $50,000, to convert a portion of the outstanding Notes from fixed to floating rates based on the London Inter-Bank Offered Rate (“LIBOR”), plus a spread

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of between 201.75 and 226.5 basis points. In April 2004, the Company entered into floating rate interest rate swap agreements with amounts totaling $60,000, to convert a portion of the outstanding Notes from fixed to floating rates based on LIBOR, plus a spread of between 179.75 and 217.9 basis points. The variable rates will be reset every six months, at which time payment or receipt of interest will be settled. These swaps are designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk will be recognized in earnings. Net payments or receipts under these agreements will be recognized as adjustments to interest expense. The fair value of these swaps is included in Other liabilities, with a corresponding decrease in Long-term debt. The fair value of these swaps at June 30, 2004 is $2,587.

Both the terminated and the current swaps have increased the recorded fair values of the Series A Notes from $40,000 to $43,076, the Series B Notes from $30,000 to $32,766 and decreased the recorded fair value of the Series C Notes from $80,000 to $79,707 as of June 30, 2004. The weighted average effective rates on the Notes for the second quarters and first six months of 2004 and 2003 were 2.7% and 4.4% and 3.2% and 4.7%, respectively.

NOTE N – NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”. Interpretation No. 46 provides guidance for identifying a controlling interest in a Variable Interest Entity (“VIE”) established by means other than voting interests. Interpretation No. 46 also requires consolidation of a VIE by an enterprise that holds such a controlling interest. The effective date for this Interpretation for the Company, as amended by FASB Staff Position No. FIN 46-6, was March 31, 2004. The adoption of this Interpretation did not have an impact on the financial statements of the Company.

Effective December 31, 2003, the Company adopted SFAS No. 132 (revised) “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132 requires additional disclosures relating to pensions and other postretirement benefits. The Company has made the required disclosures in these financial statements (see Note O).The adoption of this Statement did not have an impact on the financial statements of the Company.

NOTE O – RETIREMENT ANNUITY PLANS

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

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to voluntarily contribute $30,000 to its U.S. pension plans during 2004. As of June 30, 2004, $20,000 of contributions have been made. The Company presently anticipates contributing an additional $10,000 to fund its U.S. pension plans in 2004.

NOTE P – INCOME TAXES

The effective income tax rates of 25.7% and 21.6% for the six months ended June 30, 2004 and 2003, respectively, are lower than the Company’s statutory rate primarily because of the utilization of foreign and domestic tax credits, lower taxes on non-U.S. earnings and the utilization of foreign tax loss carryforwards. The effective rate for the three months ended June 30, 2004 reflects an adjustment to bring the effective rate for the six months ended June 30, 2004 to 25.7% from 22.8% recorded in the first quarter. The anticipated effective rate for 2004 depends on the level of earnings and related tax deductions achieved during the year.

NOTE Q – SUBSEQUENT EVENT

In July, 2004, the Company purchased 70% of the Rui Tai Welding and Metal Co. Ltd. for approximately $10 million. Rui Tai is a manufacturer of stick electrodes located in northern China. The Company expects this acquisition, along with other planned investments in China, to provide a strong equipment manufacturing base in China, improve the Company’s distribution network, and strengthen the Company’s market position in the Asia Pacific region. Annual sales for Rui Tai are expected to be approximately $18 — $21 million.

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Part 1 – Financial Information

Item 2. 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 and cutting products.

The Company is one of only a few worldwide broad line manufacturers of both arc welding equipment and consumable products. Welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company’s welding product offering also includes regulators and torches used in oxy-fuel welding and cutting.

The Company continues to invest in the research and development of these arc welding equipment and consumable products in order to continue its market leading product offering. Although the industry is considered mature, the Company continues to invest in technologies that improve the quality and productivity of welding products. The Company believes its continued investment in research and development and its highly trained technical sales force provides a competitive advantage in the marketplace.

The Company’s products are sold in both domestic and international markets. In North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of North America, the Company 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’s major end user markets include:

•		general metal forming and fabrication,
•		infrastructure including oil and gas pipelines and platforms, buildings and bridges and power generation,
•		the transportation and defense industries (automotive/trucks, rail, ships and aerospace),
•		equipment manufacturers in construction, farming and mining,
•		retail resellers, and
•		rental market.

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

The Company’s sales and distribution network, coupled with its manufacturing facilities, consists of five regions: North America, Latin America, Europe, Asia-Pacific and Russia, Africa and Middle East regions. These five regions are combined and managed as three separate reportable segments: North America, Europe and Other Countries. Effective April 1, 2004, the Company realigned its reporting segments in order to better reflect how management assesses and manages operations. The realignment consisted of moving the Company’s Canadian operations from the Other Countries segment and combining it with the businesses previously reported as the United States segment to create the North America reporting segment.

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

The Company’s facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material effect on the Company’s earnings. The Company is ISO9001 certified at nearly all Lincoln facilities worldwide. In addition, the Company is ISO14001 certified at all major U.S. facilities.

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Key indicators

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

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

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

RESULTS OF OPERATIONS

The following table presents the Company’s Consolidated Statements of Income in dollars and as a percentage of net sales:

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Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Net Sales. Net sales for the second quarter of 2004 increased 25.2% to $331.8 million from $265.0 million last year. This increase in sales consists of a 16.6% increase in volume, a 7.3% increase due to price increases and a favorable impact of foreign currency exchange rates of $3.6 million. Net sales for North American operations increased 25.5% to $223.9 million for the second quarter of 2004, compared to $178.4 million for last year. This increase reflects increased demand of 17.9%, primarily to domestic markets. In addition to the effects of volume, North American sales increased by 7.4% due to price increases and also reflect a $0.4 million favorable impact of foreign currency exchange rates. U.S. export sales of $20.3 million were up $3.0 million, or 17.3% from last year. U.S. exports have increased into Latin America, Asia Pacific and the Russia, Africa and Middle East regions, primarily due to higher demand. European sales have increased 22.7% to $71.3 million in 2004 from $58.1 million in 2003. This increase consists of increased demand of 12.7%, a 2.8% increase due to price increases and a $4.1 million favorable impact of foreign currency exchange rates. Other Countries sales increased 28.5% to $36.6 million from $28.5 million. This increase reflects increased demand of 16.0% and 15.7% increase due to price increases, partially offset by a $0.9 million unfavorable impact of foreign currency exchange rates.

Gross Profit. Gross profit increased 43.1% to $100.3 million during the second quarter of 2004 compared to $70.1 million last year. Gross profit as a percentage of net sales increased to 30.2% from 26.4%, compared with the second quarter of last year. Gross profit margins in all segments increased due to higher sales volume and price increases, partially offset by higher material costs and a $0.5 million reduction in the favorable impact from foreign currency exchange rates when compared to last year. Since 2003, the Company has experienced an increase in raw material prices, including metals and chemicals. In addition, energy costs continue to increase resulting in higher operating costs including transportation and freight. As demand continues to increase in the U.S. industrial sector, the Company expects these costs to remain at relatively high levels. However, the Company believes a number of factors, including price increases, product mix and overhead absorption, will allow it to maintain or increase gross profit margins, despite increased costs.

Selling, General & Administrative (SG&A) Expenses. SG&A expenses increased $16.9 million, or 32.5% for the second quarter of 2004, compared with 2003. The increase was primarily due to higher bonus expense of $10.6 million, stock-based compensation expense of $1.8 million, increases in various professional fees, including Sarbanes-Oxley compliance and a $0.7 million unfavorable impact due to foreign exchange translation. These increases were partially offset by lower pension expense of $0.5 million and lower foreign exchange transaction losses of $1.0 million.

Equity Earnings in Affiliates. Equity earnings in affiliates remained flat in the second quarter of 2004 compared to the prior year. During June, 2004, the Company purchased a majority ownership in the Shanghai Kuang Tai Metal Industry Co., Ltd. (“SKB”) as described below, under “Liquidity and Capital Resources — Acquisitions.” Effective June 2004, SKB’s results are included in the Company’s consolidated results and not Equity Earnings in Affiliates. As a result of the acquisition, the Company estimates that on an annual basis, Equity Earnings in Affiliates will be approximately $0.5 million less.

Other Income. Other income increased by $1.0 million in the second quarter of 2004. The increase is primarily due to higher investment income on long-term investment assets.

Interest Expense. Interest expense was $1.3 million in the second quarter of 2004, compared to $2.0 million in the prior year, a decrease of 35.0%. The decrease in interest expense was primarily due to the effect of interest rate swaps, including the amortization of a gain on the termination of interest rate swaps, as described below under “Liquidity and Capital Resources — Long-term debt.” The amortization of this gain reduced interest expense by $0.5 million in the second quarter of 2004 and is expected to reduce annual interest expense by $2.1 million in each of 2004 and 2005.

Income Taxes. Income taxes for the second quarter of 2004 were $9.2 million on income before income taxes of $32.9 million, an effective rate of 28%, as compared with income taxes of $3.9 million on income before income taxes of $18.1 million, or an effective rate of 21.6% for the same period in 2003. The effective rate for the three months ended June 30, 2004 reflects an adjustment to bring the effective rate for the six months ended June 30, 2004 to 25.7% from 22.8% in the first quarter. The effective rates for 2004 and 2003 are lower than the Company’s statutory rate primarily because of the utilization of foreign and domestic tax credits, lower taxes on non-U.S. earnings and the utilization of foreign tax loss carryforwards. The anticipated effective rate for 2004 depends on the level of earnings and related tax deductions achieved during the year.

Net Income. Net income for the second quarter of 2004 was $23.7 million compared to $14.2 million last year. Diluted earnings per share for the second quarter of 2004 were $0.57 compared to $0.34 per share in 2003. Foreign currency exchange rate movements did not have a material effect on net income for the second quarters of 2004 and 2003.

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Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Net Sales. Net sales for the first half of 2004 increased 24.1% to $638.3 million from $514.2 million last year. The increase in net sales reflects a 16.4% increase in volume and a 4.6% increase due to price increases, as well as a favorable impact of foreign currency exchange rates of $16.3 million. Net sales for North American operations increased 24% to $429.6 million for the first half of 2004, compared to $346.4 million for last year. This increase reflects increased demand of 18.9%, a 4.4% increase due to price increases and a $2.5 million favorable impact of foreign currency exchange rates. U.S. export sales of $37.2 million were up $6.2 million, or 20.0% from last year. U.S. exports have increased into Latin America, Asia Pacific and the Russia, Africa and Middle East regions, primarily due to higher demand and the weaker U.S. dollar. European sales have increased 21.0% to $139.5 million in 2004 from $115.3 million in the prior year. This increase reflects increased demand of 9.8%, a 0.6% increase due to price increases and a $12.2 million favorable impact of foreign currency exchange rates. Other Countries sales increased 31.8% to $69.2 million in the first half of 2004 from $52.5 million in the prior year. This increase reflects increased demand of 14.3%, a 14.4% increase due to price increases and a $1.6 million favorable impact of foreign currency exchange rates.

Gross Profit. Gross profit increased 34.0% to $184.2 million during the first half of 2004 compared to $137.5 million last year. Gross profit as a percentage of net sales increased to 28.9% in 2004 from 26.8% last year. Gross profit margins in North America and Europe increased due to higher sales volumes and price increases, partially offset by higher material costs. Other Countries gross margins in the first half of 2004 were relatively flat compared to the prior year as the favorable effects of higher sales volume and price increases were offset by higher material costs. Since 2003, the Company has experienced an increase in raw material prices, including metals and chemicals. In addition, energy costs continue to increase resulting in higher operating costs including transportation and freight. As demand continues to increase in the U.S. industrial sector, the Company expects these costs to remain at relatively high levels. However, the Company believes a number of factors, including price increases, product mix and overhead absorption, will allow it to maintain or increase gross profit margins, despite increased costs. Foreign currency exchange rates had positive effects on gross profit of approximately $2.3 million, or 1.3% during the first half of 2004 when compared to the first half of 2003.

Selling, General & Administrative (SG&A) Expenses. SG&A expenses increased $26.9 million, or 26.2%, for the first six months of 2004, compared with 2003. The increase was primarily due to higher bonus expense of $15.8 million, stock-based compensation expense of $2.4 million, $3.7 million in selling costs as a result of increased volume, increases in various professional fees and a $3.6 million unfavorable impact due to foreign exchange translation. These increases were partially offset by lower pension expense of $0.9 million and lower foreign exchange transaction losses of $1.4 million.

Rationalization Charges. During the first quarter of 2003, the Company recorded rationalization charges of $1.7 million ($1.3 million after-tax). The rationalization charges were related to asset impairments and severance charges. Non-cash asset impairment charges of $0.9 million relate to property, plant and equipment at one of the Company’s European subsidiaries where management believes the carrying values are unrecoverable. Severance charges were $0.8 million primarily covering 57 U.S. employees. Severance charges were incurred to eliminate redundancies and improve organizational efficiency.

Equity Earnings in Affiliates. Equity earnings in affiliates increased $0.3 million in the first half of 2004 compared to the prior year, primarily due to higher earnings of the Company’s investments in AS Kaynak in Turkey and Kuang Tai in Asia. During June, 2004, the Company purchased a majority ownership in the Shanghai Kuang Tai Metal Industry Co., Ltd., as described below, under “Acquisitions. Effective June 2004, SKB’s results are included in the Company’s consolidated results and not Equity Earnings in Affiliates. As a result of the acquisition, the Company estimates that on an annual basis, Equity Earnings in Affiliates will be approximately $0.5 million less.

Other Income. Other income increased $0.2 million in the first half of 2004. The increase is primarily due to higher investment income on long-term investment assets, partially offset by a gain on the sale of land in 2003.

Interest Expense. Interest expense was $3.0 million in the first half of 2004, compared to $4.1 million in the prior year, a decrease of 26.8%. The decrease in interest expense was primarily due to the effect of interest rate swaps, including the amortization of a gain on the termination of interest rate swaps, as described below under “Liquidity and Capital Resources — Long-term debt”. The amortization of this gain reduced interest expense by $1.1 million in the first half of 2004 and is expected to reduce annual interest expense by $2.1 million in each of 2004 and 2005.

Income Taxes. Income taxes for the first half of 2004 were $14.5 million on income before income taxes of $56.5 million, an effective rate of 25.7%, as compared with income taxes of $7.2 million on income before income taxes of $33.6 million, or an effective rate of 21.6% for the same period in 2003. The effective rates for 2004 and 2003 are lower than the Company’s statutory rate primarily

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because of the utilization of foreign and domestic tax credits, lower taxes on non-U.S. earnings and the utilization of foreign tax loss carryforwards. The anticipated effective rate for 2004 depends on the level of earnings and related tax deductions achieved during the year.

Net Income. Net income for the first half of 2004 was $42.0 million compared to $26.4 million last year. Diluted earnings per share for the first half of 2004 was $1.02 compared to $0.63 per share in 2003. Foreign currency exchange rate movements did not have a material effect on net income for the first halves of 2004 and 2003.

LIQUIDITY AND CAPITAL RESOURCES

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

The following table reflects changes in key cash flow measures:

Cash and cash equivalents increased 5.5%, or $9.3 million, to $179.8 million as of June 30, 2004, from $170.5 million as of December 31, 2003. This compares to a $14.2 million increase in cash and cash equivalents during the same period in 2003.

Cash provided from operations decreased by $2.1 million for the first half of 2004 compared to the first half of 2003. The decrease was primarily related to increases in Accounts receivable and Inventories as a result of higher sales and increased production levels. This decrease was partially offset by an increase in net income, an increase in Accounts payable as a result of increased production, an increase in Accrued employee compensation and benefits as a result of higher bonus accruals and an increase in Accrued taxes as a result of increased income taxes. Despite an increase in working capital, average working capital to sales improved 2.5% year over year. This improvement reflects an improvement in accounts receivable days from 62.7 at June 30, 2003 to 61.7 at June 30, 2004, partially offset by an increase in days sales in inventory from 112.1 days at June 30, 2003 to 114.2 days at June 30, 2004.

Cash used by investing activities increased $13.6 million for the first half of 2004, compared to 2003. The increase was primarily due to an increase in capital expenditures and the acquisition of SKB (as described below under “Acquisitions”). Capital expenditures during the first half of 2004 were $20.3 million, a $6.5 million increase from 2003. The Company anticipates capital expenditures to approximate depreciation in 2004, or approximately $35 to $40 million. Management critically evaluates all proposed capital expenditures and requires each project to either increase efficiency, reduce costs or promote business growth. Management does not anticipate any unusual future cash outlays relating to capital expenditures.

Cash used by financing activities decreased $12.7 million for the first half of 2004, compared to 2003. The decrease was primarily due to a reduction in treasury share purchases during 2004 of $12.2 million and higher proceeds received from stock option exercises during 2004 of $12.0 million, partially offset by non-comparable proceeds from the termination of interest rate swaps during 2003 of $10.6 million.

The Company’s debt levels decreased from $173.4 million at December 31, 2003, to $164.1 million at June 30, 2004. Total percent of debt to total capitalization decreased to 24.1% at June 30, 2004, from 26.6% at December 31, 2003.

The Company’s Board of Directors has authorized share repurchase programs for up to 15 million shares of the Company’s common stock. During 2004, the Company purchased 104,972 shares of its common stock on the open market at a cost of $2.9 million. Total

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shares purchased through the share repurchase programs were 9,762,783 shares at a cost of $202.0 million through June 30, 2004.

A total of $13.4 million in dividends was paid during the first half of 2004. In July 2004, the Company paid a quarterly cash dividend of 17 cents per share to shareholders of record on June 30, 2004.

Acquisitions

On June 7, 2004, the Company acquired 60% of the Shanghai Kuang Tai Metal Industry Co., Ltd. for approximately $6 million, net of cash acquired. The results of SKB’s operations since the acquisition date have been included in the Company’s second quarter 2004 consolidated financial statements. SKB is a manufacturer of flux-cored wire and other consumables located in China. The Company expects this acquisition, along with other planned investments in China, to provide a strong equipment manufacturing base in China, improve the Company’s distribution network, and strengthen the Company’s market position in the Asia Pacific region.

The initial purchase price allocation resulted in goodwill of $6.1 million. The Company has not yet completed the evaluation and allocation of the purchase price as the appraisals associated with the valuation of certain tangible and intangible assets are not yet complete. The Company anticipates the final purchase price allocation will be completed by the end of 2004.

The Company also anticipates purchasing an additional 10% of SKB during the third quarter of 2004 for approximately $2 million bringing its total direct ownership to 70%, in addition to the indirect ownership through its investments in Kuang Tai Metal Industrial Co. Ltd. and Tenwell Development, PTE Ltd. Concurrent with this increased ownership, all China equipment manufacturing will also be incorporated into the SKB operations.

In July, 2004, the Company purchased 70% of the Rui Tai Welding and Metal Co. Ltd. (“Rui Tai”) for approximately $10 million (see Note Q). Rui Tai is a manufacturer of stick electrodes located in northern China.

Annual sales for both SKB and Rui Tai of between $50 — $60 million are expected from these businesses. The Company anticipates these investments to be accretive to earnings by approximately $0.02 per share in 2004.

On October 30, 2003, the Company purchased the Century and Marquette welding and cutting equipment accessories and the Century battery charger businesses of Clore Automotive LLC for $2.9 million. These products and brands, which have leading positions in the automotive after-market and retail channels, are complementary to Lincoln’s existing retail and professional products business. Annual sales for these businesses are expected to be approximately $10 million.

If additional acquisitions and major projects providing financial benefits become available, additional expenditures may be made.

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

Long-term debt

During March 2002, the Company issued Senior Unsecured Notes (the “Notes”) totaling $150 million through a private placement. The Notes, as shown in the table below, have original maturities ranging from five to ten years with a weighted average interest rate of 6.1% and an average tenure of eight years. Interest is payable semi-annually in March and September. The proceeds are being used for general corporate purposes, including acquisitions and to purchase shares under the Company’s share repurchase program. A majority of the proceeds were invested during the quarter in short-term, highly liquid investments. The Notes contain certain affirmative and negative covenants, including restrictions on asset dispositions and financial covenants (interest coverage and funded debt-to-“EBITDA” ratios). As of June 30, 2004, the Company is in compliance with all of its debt covenants.

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

During March 2002, the Company entered into floating rate interest rate swap agreements totaling $80 million, to convert a portion of the outstanding Notes from fixed to floating rates. These swaps were designated as fair value hedges, and as such, the gain or loss on

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the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk were recognized in earnings. In May 2003, these swap agreements were terminated. The gain on the termination of these swaps of $10.6 million was deferred and is being amortized as an offset to interest expense over the terms of the related debt. The amortization of this gain reduced interest expense by $1.1 million in the first half of 2004 and is expected to reduce annual interest expense by $2.1 million in each of 2004 and 2005. Interest expense related to the $150 million private placement is further reduced by the interest income earned on the cash balances. These short-term, highly liquid investments earned 1.5%, or approximately $0.7 million, during the first half of 2004. At June 30, 2004, $8.1 million remains to be amortized and is included in Long-term debt.

In July, 2003, the Company entered into floating rate interest rate swap agreements with amounts totaling $50 million, to convert a portion of the outstanding Notes from fixed to floating rates based on the London Inter-Bank Offered Rate (“LIBOR”), plus a spread of between 201.75 and 226.5 basis points. In April 2004, the Company entered into floating rate interest rate swap agreements with amounts totaling $60 million, to convert a portion of the outstanding Notes from fixed to floating rates based on LIBOR, plus a spread of between 179.75 and 217.9 basis points. The variable rates will be reset every six months, at which time payment or receipt of interest will be settled. These swaps are designated as fair value hedges, and as such, the gain or loss on the derivative instrument, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk will be recognized in earnings. Net payments or receipts under these agreements will be recognized as adjustments to interest expense. The fair value of these swaps is included in Other liabilities, with a corresponding decrease in Long-term debt. The fair value of these swaps at June 30, 2004 is $2.5 million.

Both the terminated and the current swaps have increased the recorded fair values of the Series A Notes from $40 million to $43.1 million, the Series B Notes from $30 million to $32.8 million and decreased the recorded fair value of the Series C Notes from $80 million to $79.7 million as of June 30, 2004. The weighted average effective rates on the Notes for the second quarters and first six months of 2004 and 2003 were 2.7% and 4.4% and 3.2% and 4.7%, respectively.

Stock-based compensation

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

In May 2003, the 1998 Stock Plan was amended by the shareholders to allow for the issuance of Tandem Appreciation Rights (TARs), deferred shares and restricted shares of the Company’s common stock. TARs payable in cash require the recording of a liability and related compensation expense to be measured by the difference between the quoted market price of the number of common shares covered by the grant and the option price per common share at grant date. Any increases or decreases in the market price of the common shares between grant date and exercise date will result in changes to the Company’s compensation expense. This compensation expense is accrued over the vesting period. For TARs payable in common shares, the TAR will be accounted for as a stock option and the fair value method of accounting under SFAS No. 123 will be utilized. Subsequent changes in share values will not affect compensation expense. During the first six months of 2004, 30,000 TARs have been issued. During 2003, 396,000 TARs were issued.

Restricted shares and deferred shares require compensation expense to be measured by the quoted market price on the grant date. Expense is recognized by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any shares ultimately forfeited because the recipients fail to meet the vesting requirements.

The Company estimates the effect of the adoption of the fair value provision of SFAS No. 123 and the effect of all stock-based awards will be approximately $0.06 per share in 2004. The Company estimates this will increase annually to approximately $0.07 — $0.08 per share by 2006. This estimate assumes the number and fair value of stock-based awards granted is similar for all years. The actual impact per share would be different depending on the types of stock-based awards granted, the number of stock-based awards granted, changes in the Company’s stock price or changes in the fair value of stock-based awards from the current estimate.

Product liability expense

Gross product liability expenses, before insurance reimbursements, have been increasing, particularly with respect to the increased number of welding fume claims. The costs associated with these claims are predominantly defense costs, which are recognized in the periods incurred. See Note K. The long term impact of the welding fume loss contingency in the aggregate on operating cash flows and capital markets access is difficult to assess, particularly since claims are in many different stages of development and the

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Company benefits significantly from cost sharing with co-defendants and insurance carriers. Moreover, the Company has been largely successful to date in its defense of these claims and indemnity payments have been immaterial. If cost sharing dissipates for some currently unforeseen reason, or the Company’s trial experience changes overall, it is possible on a longer term basis that the cost of resolving this loss contingency could reduce the Company’s operating results and cash flow and restrict capital market access.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company’s Credit Agreement. Outstanding letters of credit at June 30, 2004 were immaterial. The Company has also provided a guarantee on a loan for a joint venture. The Company believes the likelihood is remote that material payment will be required under this arrangement because of the current financial condition of the joint venture. The Company’s estimated maximum exposure under this arrangement at June 30, 2004 was approximately $4 million.

NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”. Interpretation No. 46 provides guidance for identifying a controlling interest in a Variable Interest Entity (“VIE”) established by means other than voting interests. Interpretation No. 46 also requires consolidation of a VIE by an enterprise that holds such a controlling interest. The effective date for this Interpretation for the Company, as amended by FASB Staff Position No. FIN 46-6, was March 31, 2004. The adoption of this Interpretation did not have an impact on the financial statements of the Company.

Effective December 31, 2003, the Company adopted SFAS No. 132 (revised) “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132 requires additional disclosures relating to pensions and other postretirement benefits. The Company has made the required disclosures in these financial statements (see Note O). The adoption of this Statement did not have an impact on the financial statements of the Company.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make estimates and assumptions. These estimates and assumptions are reviewed periodically by management and compared to historical trends to determine the accuracy of estimates and assumptions used. If warranted, these estimates and assumptions may be changed as current trends are assessed and updated. Historically, the Company’s estimates have been determined to be reasonable and accurate. No material adjustments to the Company’s accounting policies have been made in 2004. The Company believes the following are some of the more critical judgment areas in the application of its accounting policies that affect its financial condition and results of operations.

Legal And Tax Contingencies

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

The Company often faces challenges from domestic and foreign tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the exposure associated with various filing positions, the Company records reserves for probable exposures. Based on

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management’s evaluation of those tax positions, the Company believes it has appropriately accrued for probable exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of recorded reserves, the effective tax rate in a given financial statement period may be materially impacted.

Deferred Income Taxes

Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of assets and liabilities and operating loss and tax credit carryforwards. The Company does not provide deferred income taxes on unremitted earnings of non-U.S. subsidiaries, as such funds are deemed permanently reinvested. At June 30, 2004, the Company has approximately $71 million of deferred tax assets related to deductible temporary differences and tax loss and credit carryforwards which will reduce taxable income in future years.

In assessing the realizability of deferred tax assets, the Company assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income in making this assessment. At June 30, 2004, a valuation allowance of $13.1 million has been recorded against these deferred tax assets based on this assessment. The Company believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company’s assessment of future taxable income or tax planning strategies changes.

Pensions

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

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

During 2003, investment gains in the Company’s U.S. pension plans were approximately 26%. In addition, the Company made $40 million of voluntary contributions during 2003, an increase of $20 million over 2002. Although interest rates declined in 2003, the substantial increase in invested assets will reduce 2004 pension expense. Pension expense relating to the Company’s defined benefit plans for the first six months of 2004 was approximately $3.0 million lower than the first six months of 2003. This decrease was partially offset by an increase of $0.8 million, for the same periods, relating to the Company’s defined contribution plans. The Company estimates pension expense will decrease by approximately $4 — $5 million in 2004. The Company expects to voluntarily contribute $30 million to its U.S. pension plans during 2004, of which $20 million has been contributed during the first six months of 2004.

At the end of each year, the Company determines the discount rate to be used for plan liabilities. In estimating this rate, the Company looks to rates of return on high quality, fixed-income investments that receive one of the two highest ratings given by a recognized ratings agency. At December 31, 2003, the Company determined this rate to be 6.2%.

Inventories and Reserves

Inventories are valued at the lower of cost or market. For domestic inventories, cost is determined principally by the last-in, first-out (LIFO) method, and for non-U.S. inventories, cost is determined by the first-in, first-out (FIFO) method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. The excess of current cost over LIFO cost amounted to $44.3 million at June 30, 2004. The Company reviews the net realizable value of inventory in detail on an on-going basis, with consideration given to deterioration, obsolescence and other factors. If actual market conditions differ from those projected by management, and the Company’s estimates prove to be inaccurate, write-downs of inventory values and adjustments to cost of sales may be required. Historically, the Company’s reserves have approximated actual experience.

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Accounts Receivable and Allowances

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

Impairment of Long-Lived Assets

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

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

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. All such forward-looking statements involve risks and uncertainties. Such forward-looking statements, and the Company’s future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect future results, including:

•		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 become more active in the arc welding business.
•		Economic and Market Conditions. The Company is subject to general economic, business and industry conditions which can adversely affect the Company’s results of operations. The Company’s revenues and profits depend significantly on the overall demand for arc welding and cutting products. Capital spending in the manufacturing and other industrial sectors can adversely affect the Company’s results of operations. If economic and market conditions deteriorate, the Company’s results of operations could be adversely affected.
•		International Markets. The Company’s long-term strategy is to increase its share in growing international markets, particularly Asia, Latin America, Eastern 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 the possible effects of international terrorism and hostilities. Moreover, international expansion poses challenging demands within the Company’s infrastructure.
•		Cyclicality and Maturity of the Welding and Cutting Industry. The United States arc welding and cutting industry is both mature and cyclical. The growth of the domestic arc welding and cutting industry has been and continues to be constrained by numerous factors, including the increased cost of steel and the substitution of plastics and other materials in place of fabricated metal parts in many products and structures. Increased offshore production of fabricated steel structures has also decreased the domestic demand for arc welding and cutting products in the Company’s largest market.

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•		Litigation. The Company, like other manufacturers in the U.S. market, is subject to a variety of product liability lawsuits and potential lawsuits that arise in the ordinary course of business. While past experience has generally shown these cases to be immaterial, product liability cases in the U.S. against the Company, particularly with respect to welding fumes, continue to increase and past experience may not be predictive of the future.
•		Operating Factors. The Company is highly dependent on its skilled workforce and efficient production facilities, which could be adversely affected by its labor relations, business interruptions and short-term or long-term interruptions in the availability of supplies or raw materials or in the transportation of finished goods.
•		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.
•		Raw Materials and Energy Costs. In the normal course of business, the Company is exposed to market risk or price fluctuations related to the purchase of commodities (primarily steel) and energy used in the manufacture of its products. The Company’s market risk strategy has generally been to obtain competitive prices for products and services as dictated by supply and demand. In addition, the Company uses various hedging arrangements to manage exposures to price risk from commodity and energy purchases. The Company’s results of operations may be adversely affected by shortages of supply. The Company’s results of operations may also be negatively affected by increases in prices to the extent these increases can not be passed on to customers.

The above list of factors that could materially affect the Company’s future results is not all inclusive. Any forward-looking statements reflect only the beliefs of the Company or its management at the time the statement is made.

Item 3. Quantitative and Qualitative Disclosures About 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 the quarters and six months ended June 30, 2004 and 2003, the principal transactions hedged were 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 in Selling, general and administrative expenses. At June 30, 2004, the Company had approximately $46.8 million of foreign exchange contracts which primarily hedged recorded balance sheet exposures or intercompany purchases. The potential loss from a hypothetical 10% adverse change in foreign currency rates on the Company’s open foreign exchange contracts at June 30, 2004 would not materially affect the Company’s financial statements.

From time to time, the Company uses various hedging arrangements to manage exposures to price risk from commodity and energy purchases. The primary commodities hedged are aluminum, copper and natural gas. 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 June 30, 2004, would not materially affect the Company’s financial statements.

The fair value of the Company’s cash and cash equivalents at June 30, 2004, 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.

The Company uses floating rate swaps to convert a portion of its $150 million fixed-rate, long-term borrowings into short-term variable interest rates. The Company uses the short-cut method to account for these swaps as prescribed in SFAS No. 133, “Accounting for Derivative and Hedging Activities.” A hypothetical decrease of 10% in the floating rate would not materially affect the Company’s financial statements. See discussion in “Liquidity – Long-term debt.”

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At June 30, 2004, the fair value of Amounts due banks approximated the carrying values due to its short-term maturities. Market risk was estimated as the potential increase in fair value resulting from a hypothetical 10% decrease in the Company’s weighted-average short-term borrowing rate at June 30, 2004, and was not materially different from the year-end carrying value.

Item 4. Controls and Procedures

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

Part II – Other Information

Item 1. Legal Proceedings

The Company is subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, product liability claims and health, safety and environmental claims. Among such proceedings are the cases described below.

At June 30, 2004, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 37,552 plaintiffs, which is a net increase of 1,079 claims from those previously reported. In each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. Since January 1, 1995, the Company has been a co-defendant in other similar cases that have been resolved as follows: 12,995 of those claims were dismissed, 9 were tried to defense verdicts, 3 were tried to plaintiff verdicts and 252 were decided in favor of the Company following summary judgment motions. On May 12, 2004, a Pennsylvania state court jury in Philadelphia County in an asbestos trial involving a single claimant returned a verdict against the Company and another co-defendant. The verdict amount was a total of $525,000, which would be shared between the two defendants and a substantial portion of which would be covered by insurance. The Company has appealed or will appeal judgments based on verdicts against the Company and believes it will prevail on the merits.

At June 30, 2004, the Company was a co-defendant in cases alleging manganese induced illness involving claims by 9,580 plaintiffs, which is a net increase of 464 from those previously reported. In each instance, the Company is one of a large number of defendants. The claimants in cases alleging manganese induced illness seek compensatory and, in most instances, punitive damages, usually for unspecified sums. The claimants allege that exposure to manganese contained in welding consumables caused the plaintiffs to develop adverse neurological conditions, including a condition known as manganism. Many of the cases are single plaintiff cases but some multi-claimant cases have been filed (including alleged class actions in various states and multi-claimant actions in Mississippi and West Virginia). At June 30, 2004, cases involving 4,818 claimants were filed in or transferred to federal court (Northern District of Ohio) where the Judicial Panel on MultiDistrict Litigation has consolidated these cases for pretrial proceedings (the “MDL Court”). On April 2, 2004, the Company, together with other co-defendants, removed the multi-claimant action pending in state court in West Virginia (with 2,447 claimants) to federal court in West Virginia. On June 17, 2004, the Company, together with other co-defendants, filed a motion before the MDL Court to exclude from manganese trials any expert testimony that welding fumes cause or accelerate the onset of Parkinson’s Disease.

On October 28, 2003, an Illinois state court jury in a manganese trial involving one claimant returned a verdict against the Company and two unaffiliated co-defendants. The verdict amount was $1 million, which will be reduced significantly by payments by the two unaffiliated co-defendants. A substantial portion of the remaining amount is to be covered by insurance. The Company has appealed the judgment based on this verdict and believes it has meritorious grounds for appeal.

Since January 1, 1995, the Company has been a co-defendant in similar cases involving claims by 1,747 claimants that have been resolved as follows: 1,728 of those claims were dismissed, 6 were tried to defense verdicts in favor of the Company, 1 was tried to a hung jury, which upon retrial resulted in a plaintiff’s verdict (which is being appealed as noted above), and 12 were settled. In addition, plaintiffs have dropped the class claims from all 10 cases transferred to the MDL Court that were originally filed as purported class actions.

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Item 2. Changes in Securities and Use of Proceeds – None.

Item 3. Defaults Upon Senior Securities – None.

Item 4. Submission of Matters to a Vote of Security Holders

(a)		The Annual Meeting of Lincoln Electric Holdings, Inc. (“Lincoln”) was held on April 29, 2004.
(b)		No response is required.
(c)		The following matters were voted upon by security holders:

(i)

Election of Directors. The shareholders voted in favor of electing the following persons as Directors of Lincoln:

(ii)

Appointment of Independent Auditors. The shareholders ratified the appointment of the firm of Ernst & Young, LLP as independent auditors to examine the books of account and other records of the Company for the fiscal year ending December 31, 2004.

(d)

Not applicable.

Item 5. Other Information – None.

Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits

(b)

Reports on Form 8-K

The Company furnished a Current Report on Form 8-K (items 7 and 12) dated April 15, 2004 that included its first quarter ended March 31, 2004 earnings release.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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