Item 1. BUSINESS
As used in Item 1 of this report, the term "Company", except as otherwise indicated by the context, means The Lincoln Electric Company and its subsidiaries.
The Lincoln Electric Company was incorporated under the laws of the State of Ohio in 1906. The Company is engaged primarily in the design, manufacture and sale of arc welding products which constitutes 88% of the Company's business. The Company also designs, manufactures and sells integral horsepower industrial electric motors, and some subsidiaries also sell industrial gases, regulators, and torches.
The arc welding machines, power sources and automated 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 integral horsepower electric motors manufactured by the Company range in size from 1/3 to 250 horsepower. See Note H to the consolidated financial statements with respect to acquisitions by the Company.
The Company's products are sold in both domestic and international markets. In the domestic market, they are sold directly by the Company's own sales organization as well as by distributors. 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 international direct sales distributors, agents and dealers that operate in more than eighty-seven countries. The Company has manufacturing facilities located in the United States, Australia, Canada, Japan, Mexico, England, France, Ireland, Italy, the Netherlands, Norway and Spain. See Note G to the consolidated financial statements with respect to information concerning the Company's geographic segments.
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 is one of the largest manufacturers of consumables and machinery in a field of three or four major domestic competitors and numerous smaller competitors covering the industry. 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. Normally, customer orders are filled directly from finished product stock and, therefore, the backlog of orders at any particular time is relatively negligible.
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. Item 1. BUSINESS (Continued)
The Company's operations are not materially dependent upon patents, licenses, franchises or concessions.
The Company's facilities are subject to federal, state and local environmental control regulations. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings nor has it required the Company to make significant capital expenditures.
Research activities relating to the development of new products and the improvement of existing products in 1993 were all Company-sponsored. These activities were primarily related to the development of new products utilizing the latest electronic technology. The number of professional employees engaged full-time in these research activities was 142. Refer to Note A to the consolidated financial statements with respect to costs of research and development.
The number of persons employed by the Company worldwide, as an average for the year ended December 31, 1993, was 6,036. Effects of plant closures will reduce worldwide employment levels in 1994.
Geographic segment information is included in Note G to the consolidated financial statements.
Item 2.
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 230 acres, of which present manufacturing facilities comprise an area of approximately 2,698,000 square feet. Current utilization of existing facilities is estimated to be 91% of capacity.
Item 2. PROPERTIES (Continued)
Manufacturing facilities located in Germany, Venezuela, and Brazil were closed under the Company's restructuring program.
All property relating to the Company's Cleveland, Ohio headquarters and manufacturing facilities is owned outright by the Company and is unencumbered. In addition, the Company maintains leases for its distribution centers. See Note K to the consolidated financial statements with respect to leases. Most of the Company's foreign subsidiaries own manufacturing facilities in the foreign country where they are located. Some of these subsidiaries' properties are encumbered by mortgage loans. See Note D to the consolidated financial statements with respect to long-term debt.
Item 3.
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, intellectual property related actions, employment-related actions and health, safety and environmental claims and proceedings under the laws governing workers' compensation. The Company does not believe that the outcome of such legal proceedings, solely or in aggregate, will have a material adverse effect upon the financial condition of the Company.
Item 4.
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, 1993.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON CAPITAL STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Capital Stock is traded on the over-the-counter market. The number of record holders of Common Capital Stock at December 31, 1993 was 2,497.
There is a limited public trading market for Common Capital Stock purchased through the Company's Employees' Stock Purchase Plan and for Class A Common Stock distributed under the Company's Employee Stock Ownership Plan. Shares purchased are subject to a right of refusal and other restrictions as set forth in the Employees' Stock Purchase Plan. Refer to Note B to the consolidated financial statements with respect to the rights of Class A Common Stock.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (Continued)
Future dividends, which are subject to limitations under the Credit Agreement and the Senior Note Agreement, will be based on financial performance of the Company (see Note D to the consolidated financial statements for a further description of these limitations.)
Item 6.
Item 6. SELECTED FINANCIAL DATA
See Note C to the consolidated financial statements with respect to restructuring charges in 1993 and 1992. All per share amounts have been adjusted for the ten-for-one stock split in 1993.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(all dollar amounts are in thousands of dollars)
RESULTS OF OPERATIONS
Net sales decreased by less than 1% to $846,000 in 1993 from $853,000 in 1992 and increased 1.4% from 1991 sales of $833,900. Sales in 1993 for domestic companies were up 9.7% while sales of foreign companies were down 18.3% from 1992. Excluding sales resulting from acquisitions, 1992 domestic and foreign sales increased 6.0% and decreased 10.2%, respectively, from 1991. Approximately 45% of the increase in domestic sales in 1993 (90% in 1992) was attributable to an increase in volume. The remaining 55% in 1993 (10% in 1992) was due to increases in selling prices.
Gross margin increased to $313,200 in 1993 (37.0% of sales) as compared to $299,900 in 1992 (35.2% of sales) and $312,100 in 1991 (37.4% of sales). The improvement of gross margin was attributable to price increases coupled with the effect of increased volume, which included the effect of domestic market share gains. These effects, however, were partially offset by diminishing gross margins of the non-U.S. operations.
Distribution cost/selling, general and administrative expenses were $277,000 in 1993 (32.7% of sales) as compared to $299,200 in 1992 (35.1% of sales) and 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
$270,500 in 1991 (32.4% of sales). The reduction in distribution cost/selling, general and administrative expenses in 1993 was principally the result of management's response to the recessionary pressures existing throughout Europe. Additionally, comparable results were affected by the incurrence of certain nonrecurring and non-continuing operating costs. Such costs included asset write-downs, relocation costs, various other charges relating to cost reduction efforts totaling $3,700 and $18,900 in 1993 and 1992, respectively.
In 1992, the increase in distribution cost/selling, general and administrative expenses was principally caused by a full year of operations of the Company's German subsidiary versus nine months in 1991, increased pension expense, and various adjustments discussed above. In 1991, distribution costs/selling, general and administration expenses were offset partially by the reversal of $6,200 of prior year charges relating to The Lincoln Electric Company 1988 Incentive Equity Plan.
The Company's net loss was $38,100 in 1993 as compared with $45,800 in 1992 and net income of $14,400 in 1991. Results were affected adversely by restructuring charges relating principally to the European and South American operations. These charges totaled $40,900 net-of-tax ($3.77 per share) and $23,900 without tax benefit ($2.21 per share) for 1993 and 1992, respectively (see discussion below). The 1991 results of operations included no restructuring charges.
Results for 1993 have also benefited from the cumulative effect of a change in method of accounting for income taxes, which increased net income $2,468 or $.23 per share. See Note A, "Accounting Policies," for additional information regarding the effects of the change in method in accounting for income taxes. The provision for income taxes reflects a net benefit of $6,400 on a loss before income taxes of $46,900 for 1993 which principally reflects tax benefits attributable to the plant closure and liquidation of a German subsidiary (see discussion below). For 1992, the provision for income taxes was $11,400 on a loss before income taxes of $34,400 compared to a provision of $20,000 on income before income taxes of $34,400 in 1991. The higher effective rates experienced in 1992 and 1991 were due principally to losses of foreign subsidiaries that were in net operating loss carryover positions.
RESTRUCTURING CHARGES
In 1992, the Company's restructuring program was initiated to improve efficiency and future financial results for its non-U.S. operations, principally its European markets. This decision resulted in a restructuring charge to 1992 operations of $23,900, without tax benefit.
It became evident in 1993 that the 1992 restructuring charges were not sufficient to reverse operating results in Germany, as the Company's principal German subsidiary continued to incur significant losses, experiencing eroding sales levels within the context of depressed market conditions. Accordingly, the Board of Directors decided in early 1994 to terminate the manufacturing and sales operations of its Messer Lincoln subsidiary in Germany. The intent of the action was to eliminate substantial costs in manufacturing overhead and distribution expenses in Europe, and to enable the Company to redirect its resources toward more efficient and competitive facilities that will serve the European market. Similarly, the Board of Directors decided in early 1994 that overcapacity in the weak and turbulent economies of Brazil and Venezuela required the curtailment of production operations in such markets, even though sales, marketing and distribution activities in those countries will continue. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The above-referenced decisions, which will result in the termination of approximately 800 employees, resulted in pretax restructuring charges of $70,100 for 1993 ($40,900 after tax). See Note C to the consolidated financial statements, "Restructuring Charges," for additional information.
As indicated earlier, operating results of the Company's highly efficient U.S. and Canadian operations showed increased levels of profitability and market share in 1993. Although consolidated results were affected adversely in 1992 and 1993 by restructuring charges, management believes the Company is well positioned now to maximize its opportunities in the worldwide markets it serves.
RESEARCH AND DEVELOPMENT
The Company decreased its expenditures for research activities during both 1993 and 1992. However, the Company believes the current level of research and development is adequate to maintain its product lines and introduce new products at an appropriate rate to sustain future growth. Excellence in research and development is a key success factor for the Company.
LIQUIDITY AND CAPITAL RESOURCES
In March 1993, the Company entered into a $230,000 three-year, unsecured, multi-currency Credit Agreement with ten banks. The funds were used to replace the Company's then existing revolving credit agreement, its long-term borrowing arrangements with foreign banks, and to refinance and consolidate certain other foreign short-term and long-term obligations. See Note D to the consolidated financial statements, "Short-Term and Long-Term Debt," for additional information regarding the borrowing arrangement. The Credit Agreement was amended in November 1993 in order to provide for more flexible terms to accommodate the Company's restructuring program.
Total debt at December 31, 1993 was $250,300 compared to $248,600 at December 31, 1992. At December 31, 1993, debt was 64% of total capitalization (shareholders' equity and debt) compared with 56% at year-end 1992. Interest expense incurred was $17,600 in 1993 compared with $18,700 in 1992, reflecting slightly lower interest rates as compared with the prior year. This compares to interest expense of $15,700 in 1991, reflecting an increase in the average debt level.
The Company's cash flows for the years 1991 through 1993 are presented in the consolidated statements of cash flows. Cash provided from operating activities during 1993 amounted to $28,700, an increase of $5,100 as compared with $23,600 for 1992. In addition to financing, certain operating losses in Europe, cash flows from operations and additional borrowings were used primarily for investments, capital expenditures and dividends to shareholders.
In 1992, expenditures by the Company for the purchase of a small Mexican company and the additional investment in its Lincoln Norweld subsidiary totaled $37,300, compared to $48,700 in 1991 for the purchase of a German business.
The ratio of current assets to current liabilities was 1.9 at the end of 1993, compared with 2.2 at the end of 1992 reflecting a satisfactory liquidity position. Net working capital was $149,900 at December 31, 1993, as compared with $172,700 at December 31, 1992. The reduction in working capital was primarily the result of the reduction of the carrying value of assets to their net realizable value and the increases in other current liabilities in connection with the restructuring expenses. Notes payable to banks increased to $23,200 at the end of 1993, from $12,600 at the end of 1992. 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Capital expenditures in 1993 for property, plant and equipment totaled $19,100 (1992 - $34,800). These expenditures for property, plant and equipment represent the Company's commitment to its long-range objectives to enhance product quality and development, advance technology, expand capacity and reduce manufacturing costs. The Company is closely monitoring its capital outlays and commitments with such expenditures restricted to include only those projects showing potential for high internal rate of return with accelerated cash payback.
In 1993, consistent with the prior year, the Company did not pay a special dividend, paying regular dividends of $7,800 for the full year. Future dividends, which are subject to limitations under the Credit Agreement and the Senior Note Agreement, will be based upon the financial performance of the Company (see Note D to the consolidated financial statements).
The Credit Agreement and 8.98% Senior Note Agreement contain various financial covenants that place limitations on the payments of dividends, the purchase of unrestricted stock, capital expenditures, and the incurrence of additional indebtedness. While the operating losses for 1993 and 1992 have placed constraints on the Company's financial flexibility, the Company was in compliance with the financial covenants of the agreements at the end of 1993 and management believes that the Company will continue to meet such covenants throughout 1994. Management believes that the current financing arrangement and cash flow generated from operations will provide adequate funds to support the operations of the Company and satisfy both its capital requirements and regular dividend practices throughout the term of the Credit Agreement.
ENVIRONMENTAL MATTERS
The Company's U.S. facilities are subject to Federal, state and local environmental control regulations. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings nor has it required the Company to make significant capital expenditures. It is the opinion of management that the Company is in material compliance with all regulatory requirements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement requires companies to present certain investments in marketable equity securities and many debt securities at fair value. SFAS No.115 is effective for fiscal years beginning after December 15, 1993. As the Company does not hold significant portfolios of debt and marketable equity securities nor is it the Company's principal business purpose to actively acquire and sell debt and equity securities to make a profit from short-term movements in market prices, adoption of SFAS No. 115 is not expected to have any substantial impact on the financial statements.
In December 1990, the FASB issued new rules in SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective in 1993 domestically and effective for non-U.S. plans in 1995. In November 1992, the FASB issued Statement No. 112, "Employers' Accounting for Postemployment Benefits." The Company is required to implement the Statement in the first quarter of 1994. These statements have no impact on the consolidated financial position or results of operations because the Company does not provide for any postretirement or postemployment benefits other than pensions. Item 8.
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.
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 29, 1994. Therefore, information required under this part will be incorporated herein by reference from such definitive proxy statement.
PART IV
Item 14.
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:
Statements of Consolidated Financial Condition--December 31, 1993 and 1992 Statements of Consolidated Operations--Years ended December 31, 1993, 1992 and 1991 Statements of Consolidated Shareholders' Equity--Years ended December 31, 1993, 1992 and 1991 Statements of Consolidated Cash Flows--Years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements--December 31, 1993 Reports of Independent Auditors
(a) (2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedules of the Company are included in a separate section of this report following the signature page:
Schedule II--Amounts Receivable from Related Parties and Underwriters, Promoters and Employees Other than Related Parties Schedule V--Property, Plant and Equipment Schedule VI--Accumulated Depreciation, Depletion, and Amortization of Property, Plant and Equipment Schedule VIII--Valuation and Qualifying Accounts Schedule IX--Short-Term Borrowings Schedule X--Supplementary Income Statement Information
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.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued)
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued)
Upon request, The Lincoln Electric Company 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. Ellis F. Smolik, Secretary-Treasurer, The Lincoln Electric Company, 22801 St. Clair Avenue, Cleveland, Ohio 44117, Phone: (216) 481-8100.
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.
THE LINCOLN ELECTRIC COMPANY ---------------------------- (Registrant)
/s/ Ellis F. Smolik -------------------------- Ellis F. Smolik, Senior Vice President, Chief Financial Officer, Secretary-Treasurer and Director 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 30, 1994.
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1993
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors The Lincoln Electric Company
We have audited the consolidated financial statements of The Lincoln Electric Company and subsidiaries listed in the accompanying index to financial statements Item 14(a1). Our audits also included the financial statement schedules listed in the Index at Item 14 (a2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the consolidated financial statements of The Lincoln Electric Company (Australia) Proprietary Limited and subsidiaries and, for 1992 and 1991, the consolidated financial statements of Lincoln-Norweld B.V. and subsidiaries and the financial statements of Messer Lincoln GmbH and its subsidiary, all consolidated subsidiaries, which statements reflect total assets constituting 5% in 1993 and 41% in 1992 and total revenues constituting 5% in 1993 and 36% in 1992 and 1991 of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for The Lincoln Electric Company (Australia) Proprietary Limited and subsidiaries and, for 1992 and 1991, Lincoln-Norweld B.V. and subsidiaries and Messer Lincoln GmbH and its subsidiary, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. 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 and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Lincoln Electric Company and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes.
/s/ Ernst & Young ------------------------------ ERNST & YOUNG
Cleveland, Ohio March 25, 1994
To the Board of Directors of The Lincoln Electric Company (Australia) Proprietary Limited
REPORT OF INDEPENDENT ACCOUNTANTS ---------------------------------
In our opinion, the consolidated balance sheets and the related consolidated statements of income and retained earnings and of cash flows (none of which are presented separately herein) present fairly, in all material respects, the financial position of The Lincoln Electric Company (Australia) Proprietary Limited and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse
Parramatta, Australia March 9, 1994
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars except per share data)
December 31, 1993
NOTE A--ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Lincoln Electric Company and its subsidiaries (the "Company") after elimination of all significant intercompany accounts and transactions.
CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES: Inventories are valued at the lower of cost or market. The Company determines cost by the last-in, first-out (LIFO) method, and subsidiary companies determine cost by the first-in, first-out (FIFO) method. At December 31, 1993 and 1992, approximately 45% and 34%, respectively, of total inventories were valued using the LIFO method. The excess of current cost over LIFO cost amounted to $48,490 at December 31, 1993 and $48,555 at December 31, 1992. During 1992, certain LIFO inventories were reduced, resulting in liquidations of LIFO inventory quantities carried at the lower costs of prior years, as compared with their 1992 costs. The effect of these liquidations was to reduce the 1992 net loss after tax, by $1,018 ($.09 per share).
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, including facilities and equipment under capital leases, 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 the accelerated and straight-line methods. In 1993, property, plant and equipment for manufacturing facilities that were closed were written down to their estimated net realizable value.
RESEARCH AND DEVELOPMENT: Research and development costs, which are expensed as incurred, were $17,762 in 1993, $20,540 in 1992 and $21,311 in 1991.
GOODWILL: The excess of the purchase price over the fair value of net assets acquired (goodwill) is amortized on a straight-line basis over periods not exceeding 40 years. Amounts are stated net of accumulated amortization of $2,363 and $2,170 in 1993 and 1992, respectively.
TRANSLATION OF FOREIGN CURRENCIES: For subsidiaries in countries which do not have highly inflationary economies, asset and liability accounts are translated to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average exchange rates. Translation adjustments are reflected as a component of shareholders' equity.
For subsidiaries in countries with highly inflationary economies (Venezuela and Brazil) inventories, property, plant and equipment and related depreciation are translated to U.S. dollars at historical exchange rates. Other asset and liability accounts are translated at exchange rates in effect at the balance sheet date and revenues and expenses, excluding depreciation, are translated at average exchange rates. Translation adjustments for these subsidiaries, as well as transaction gains and losses of all other subsidiaries, are included in the statements of consolidated operations in distribution cost/selling, general and administrative expenses. The Company recorded transaction losses in 1993 of $228 and $859 in 1992. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars except per share data)
December 31, 1993
NOTE A--ACCOUNTING POLICIES-(Continued)
ACCOUNTING CHANGE: Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes." Under Statement No. 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement No. 109, income tax expense was determined using the deferred method under which deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. As permitted by Statement No. 109, the Company has elected not to restate the financial statements of any prior year. The cumulative effect of the change decreased the loss for 1993 by $2,468 or $.23 per share.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share is based on the average number of shares outstanding during the year as adjusted for the ten-for-one stock split discussed in Note B.
RECLASSIFICATIONS: Certain reclassifications have been made to amounts previously presented to conform with the current reporting presentation.
NOTE B--SHAREHOLDERS' EQUITY
On May 25, 1993, the Company's shareholders approved an increase in the number of authorized shares to 17 million without par value in conjunction with a ten-for-one stock split of the Company's Common Capital and Class A Common Stock. This action became effective on June 1, 1993, for shareholders of record as of that date. A total of 9,343,305 shares of Common Capital Stock and 405,558 shares of Class A Common Capital Stock were issued in connection with the stock split. Additionally, 4,031,451 shares were issued for stock held in treasury. The stated value of the Common Capital and Class A Common Capital Stock remains unchanged at $.20 per share. As a result of the stock split, all per share and appropriate share amounts have been adjusted to reflect the stock split.
The Lincoln Electric Company Employees' Stock Purchase Plan ("Plan") provides that employees may purchase shares of the Company's Common Capital Stock, when offered, at its estimated fair value. The Company also has the option to repurchase shares issued under the Plan at their estimated fair value. In 1992, the Company instituted a temporary suspension on the repurchase of all shares of stock issued and outstanding. Future repurchase of stock by the Company will be contingent upon authorization and resolution of the Board of Directors. At December 31, 1993, all unissued shares (4,618,550) were available for sale under the Plan of which 774,656 shares were reserved or subscribed.
The Lincoln Electric Company 1988 Incentive Equity Plan ("Incentive Equity Plan") provided for the award or sale of Common Capital Stock to officers and other key employees of the Company and its subsidiaries. The first program, implemented under the Plan in 1988, which provided for deferred stock awards, was completed as of December 31, 1991. Shares remain available under the Incentive Equity Plan to officers and other key employees. Distribution of shares was based on certain specified performance and other conditions being satisfied. As a result of such conditions being fulfilled with respect to certain of the Company's subsidiaries, the Company awarded 32,000 shares; 10,660 distributed in each April of 1992 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars except per share data)
December 31, 1993
NOTE B--SHAREHOLDERS' EQUITY--(Continued)
and 1993, and 10,680 shares in April of 1994. Based on criteria established under the Plan, $7,000 of compensation expense was accrued in 1990, of which $6,219 was reversed into income in 1991.
The Lincoln Electric Company Employee Stock Ownership Plan (the "ESOP") is a non-contributory profit-sharing plan established to provide deferred compensation benefits for all eligible employees. The cost of the plan is borne by the Company through contributions to an employee stock ownership trust. In May 1989, shareholders authorized 2,000,000 shares of new Class A Common Stock ("Class A Common Stock"), without par value. The Company's Common Capital Stock and Class A Common Stock are identical in all respects, except that holders of Class A Common Stock are subject to certain transfer restrictions and the Class A Common Stock is only issued to the ESOP. In 1993, the Company issued 49,220 shares (92,680 shares in 1992) of Class A Common Stock to the ESOP which were allocated to all eligible employees. The estimated fair value of the contributed shares, $916, was recorded as compensation expense ($2,060 in 1992 and $2,003 in 1991). The difference between the total stated capital amount of $.20 per share and the estimated fair value totaled $906 ($2,058 in 1992 and $2,001 in 1991) was recorded as additional paid-in-capital. At December 31, 1993, 1,500,160 authorized but unissued shares (1,549,380 shares at December 31, 1992) are available for issuance to the ESOP.
NOTE C--RESTRUCTURING CHARGES
The Company has substantially completed its plan to downsize and streamline certain foreign operations (principally in Europe) and close certain manufacturing facilities (principally in Europe and South America). Closings of the manufacturing facilities have been announced and the closings and redundancies will be completed in 1994. These decisions resulted in a restructuring charge of $70,100 ($40,900 after tax, or $3.77 per share) in 1993, which was comprised of (1) asset write-downs to net realizable value in the amount of $45,900 including goodwill of $8,900; (2) the recording of severance and other redundancy costs of $27,500; and (3) the recording of additional net settlement assets and liabilities of $3,300 including estimated losses through the final closing date. The cash outlays required to fund the restructuring will be substantially incurred in 1994, and will be funded by the liquidation of the affected companies' receivables, inventory and real estate and by the Company's other operations and outside sources of funding. Proceeds from the sale of certain of the property, plant and equipment with a net carrying value of approximately $11,000 is not expected to be realized until after 1994.
In 1992, the Company recorded a restructuring charge of $23,900 (without tax benefit, or $2.21 per share) as a result of decisions that were made at that time to downsize and streamline certain foreign operations (principally in Europe). The 1992 restructuring charge was principally for severance pay, redundancies and other liabilities relating to the reorganization of the sales and distribution operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
In March 1993, the Company entered into a $230,000 three-year, unsecured, multi-currency Credit Agreement with ten banks. The Credit Agreement, which expires January 1, 1996, replaced the Company's previous $75,000 revolving line of credit, and amounts outstanding at December 31, 1992 under the previous revolving line of credit ($30,000), certain notes payable to foreign banks ($25,000), various short-term borrowings of subsidiaries ($39,100), and various other long-term borrowings ($17,300). Borrowings outstanding at December 31, 1992 that were repaid from the proceeds of the Credit Agreement were classified in the consolidated balance sheet to reflect the terms of the Credit Agreement. Under the terms of the Credit Agreement, several pricing options are available and the interest rate on outstanding borrowings is determined based upon defined leverage rates for the pricing option selected. The interest rate can range from the LIBOR plus 1% to LIBOR plus 2% depending upon the defined leverage rate. The agreement also provides for commitment fees ranging from .375% to .5% per annum on the unused credit lines.
Simultaneously, with the signing of the Credit Agreement, the interest rate on the $75,000 8.73% Senior Note due in 2003 was increased to 8.98% and the Senior Note Agreement was amended to change the financial covenants to conform to the covenants of the Credit Agreement, which requires a 1.6 to 1 consolidated current ratio at all times and the maintenance of consolidated tangible net worth of $125,000, plus 50% of net income, subsequent to January 1, 1993. In addition, there are requirements with respect to interest coverage and debt to tangible net worth ratios, and limitations on capital expenditures. Purchases of unrestricted stock and the payment of dividends are limited to 50% of cumulative net income from January 1, 1993, plus $25,000. At December 31, 1993, $17,200 was available for dividends and purchases of unrestricted stock, providing the Company complies with the other financial covenants of the agreements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
NOTE D--SHORT-TERM AND LONG-TERM DEBT--(Continued)
In November 1993, a number of the financial covenants contained in the Credit Agreement and in the Senior Note Agreement, were amended to allow for the costs of restructuring certain of the Company's foreign operations. The covenant related to consolidated tangible net worth was amended to require a minimum of $110,000 prior to June 30, 1994; $115,000 prior to September 30, 1994; $120,000 prior to December 31, 1994; and $125,000 plus 50% of net income subsequent to January 1, 1995, and the covenant related to the ratio of consolidated debt to consolidated tangible net worth was amended to require a ratio of 2.45 to 1 at December 31, 1993, reducing to 1.85 to 1 at July 1, 1994 and 1.35 to 1 at July 1, 1995 and thereafter.
Maturities of long-term debt for the five years succeeding December 31, 1993 are $10,200 in 1994, $128,200 in 1995, $10,700 in 1996, $11,400 in 1997; $9,600 in 1998 and $57,000 thereafter.
At December 31, 1993, certain foreign loans were collateralized by property and equipment which have a carrying value of approximately $21,400.
In 1992, the Company terminated its interest rate swap agreement with a notational borrowing amount of $75,000 and received $2,586 which is being amortized over the original swap term (December 1994) as a yield adjustment to interest expense of the underlying $75,000 debt.
Interest expense capitalized to property, plant and equipment was $71 in 1993 and $320 in 1992. Total interest paid was $19,000 in 1993, $17,500 in 1992, and $15,700 in 1991.
In connection with the Company's expansion of its motor plant, which is expected to cost $19,800, the Company has received low interest rate loan commitments from certain governmental entities in the amount of $6,000, of which, $2,000 was received in March 1994. The Company has also applied for and expects to receive, $2,300 in governmental grants for the same project.
NOTE E--INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting For Income Taxes". As permitted under the new Statement, prior years' financial statements have not been restated. The cumulative effect of adopting this statement as of January 1, 1993 is reported separately in the Statement of Consolidated Operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
NOTE E--INCOME TAXES--(Continued)
Total income tax payments, net of refunds, were $19,387 in 1993, $16,542 in 1992 and $12,668 in 1991.
At December 31, 1993, the Company's foreign subsidiaries had net operating loss carryforwards of approximately $44,875. The loss carryforwards expire in various years from 1994 through 2002, except for certain loss carryforwards of $571 for which there are no expiration dates.
Income taxes currently payable amounted to approximately $8,698 at December 31, 1993. Income taxes currently refundable amounted to $1,400 at December 31, 1992.
The Company does not provide deferred income taxes on unremitted earnings of foreign subsidiaries as such funds are deemed permanently reinvested to finance foreign expansion and meet operational needs on an ongoing basis. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes subject to an adjustment for foreign tax credits and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its calculation; however, unrecognized foreign tax credits and foreign withholding taxes paid upon distribution would be available to reduce some portion of the U.S. liability.
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 their employees in the United States as well as their employees in foreign countries. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
The increase in the actuarial present value of accumulated benefit obligations ("ABO") for the domestic plans is largely due to the change in the discount rate from 8.0% to 7.5% as well as the normal one year's accrual of benefits. In addition the increase in the ABO for the foreign plans is also primarily due to the change in the discount rate from 8.9% to 7.5%.
Plan assets for the domestic plans consist principally of deposit administration contracts and an investment contract with an insurance company. Other assets held by the domestic plans not under insurance contracts are invested in equity and fixed income securities. Plan assets for the foreign plans are invested in foreign insurance contracts and foreign equity and fixed income securities.
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
NOTE F--RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS (Continued)
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.
In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which was effective in 1993 domestically and will be effective for non-U.S. plans in 1995. In November 1992, the Financial Accounting Standards Board issued Statement No. 112, "Employers' Accounting for Postemployment Benefits." The Company is not required to implement this Statement until the first quarter of 1994. These Statements have no impact on the consolidated financial position or results of operations as the Company does not provide for any postretirement or postemployment benefits other than pensions.
NOTE G--INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION
Intercompany sales between geographic regions are accounted for at prices comparable to normal, customer sales and are eliminated in consolidation.
NOTE H--ACQUISITIONS
In June 1993, the Company acquired the outstanding minority interest in its subsidiary in Spain for approximately $8,500. In January and May of 1992, respectively, the Company purchased the remaining 29 percent interest in Lincoln Norweld and a small Mexican company for an aggregate of $37,000. In April 1991, the Company purchased the material assets of the German arc welding business (except orbital welding) of Messer Griesheim GmbH. All the above transactions NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
December 31, 1993
NOTE H--ACQUISITIONS (Continued)
and increases in equity ownership were accounted for as purchases and their results of operations and the increased interest in their results of operations, were included in the consolidated statements of operations from their respective dates of acquisition.
NOTE I--FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company has various financial instruments, including cash and cash equivalents, forward exchange contracts for currencies, and short and long-term debt. The Company has determined the estimated fair value of these financial instruments by using available market information and appropriate valuation methodologies which require judgment. Accordingly, the use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. The Company believes the carrying values of their financial instruments approximate their fair value.
NOTE J--NOTES RECEIVABLE FROM EMPLOYEES
Notes receivable from employees, which currently bear interest at 9%, include $294 ($532 in 1992) from officers of the Company. Loans are limited to 65% of the aggregate value of the pledged stock determined by the current offering price of the stock under the Employees' Stock Purchase Plan.
NOTE K--0PERATING LEASES
The Company leases sales offices, warehouses, office equipment and data processing equipment. Such leases, some of which are noncancellable, and in many cases, include renewals, expire at various dates. The Company pays most maintenance, insurance and tax expenses relating to leased assets. Rental expense was $9,864 in 1993, $9,840 in 1992 and $6,444 in 1991.