Lincoln Electric Holdings, Inc. 10-K
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2007 Commission
file number 0-1402
LINCOLN ELECTRIC HOLDINGS,
INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Ohio
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34-1860551
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification
No.)
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22801 St. Clair Avenue, Cleveland, Ohio
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44117
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(Address of Principal Executive
Offices)
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(Zip Code)
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(216) 481-8100
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(g) of the
Act: None
Securities registered pursuant to Section 12(b) of the
Act:
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Common Shares, without par value
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The NASDAQ Stock Market LLC
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(Title of Each Class)
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(Name of Each Exchange on Which
Registered)
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
o
No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
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No
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The aggregate market value of the common shares held by
non-affiliates as of June 30, 2007 was $3,002,327,219
(affiliates, for this purpose, have been deemed to be Directors
and Executive Officers of the Company and certain significant
shareholders).
The number of shares outstanding of the registrants common
shares as of December 31, 2007 was 42,961,679.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III of this Annual Report on
Form 10-K
incorporates by reference certain information from the
registrants definitive proxy statement to be filed on or
about March 30, 2008 with respect to the registrants
2008 Annual Meeting of Shareholders.
TABLE OF CONTENTS
PART I
General
As used in this report, the term Company, except as
otherwise indicated by the context, means Lincoln Electric
Holdings, Inc., its wholly-owned and majority-owned subsidiaries
for which it has a controlling interest. The Lincoln Electric
Company began operations in 1895 and was incorporated under the
laws of the State of Ohio in 1906. During 1998, The Lincoln
Electric Company reorganized into a holding company structure,
and Lincoln Electric Holdings, Inc. became the publicly-held
parent of Lincoln Electric subsidiaries worldwide, including The
Lincoln Electric Company.
The Company is a full-line manufacturer and reseller of welding
and cutting products. Welding products include arc welding power
sources, wire feeding systems, robotic welding packages, fume
extraction equipment, consumable electrodes and fluxes. The
Companys welding product offering also includes regulators
and torches used in oxy-fuel welding and cutting. In addition,
the Company has a leading global position in the brazing and
soldering alloys market.
The arc welding power sources and wire feeding systems
manufactured by the Company range in technology from basic units
used for light manufacturing and maintenance to highly
sophisticated robotic applications for 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 reel or drum forms
for continuous feeding in mechanized welding, and (3) cored
electrodes produced in coil form for continuous feeding in
mechanized welding.
The Company has wholly-owned subsidiaries or joint venture
manufacturing facilities located in the United States,
Australia, Brazil, Canada, Colombia, United Kingdom, France,
Germany, Indonesia, Italy, Mexico, the Netherlands,
Peoples Republic of China, Poland, Spain, Taiwan, Turkey,
Venezuela and Vietnam. The Company manages its operations by
geographic location and has two reportable segments, North
America and Europe, and combines all other operating segments as
Other Countries. Other Countries includes results of operations
for the Companys businesses in Argentina, Australia,
Brazil, Colombia, Indonesia, Mexico, Peoples Republic of
China, Taiwan and Venezuela. See Note J to the
Company Consolidated Financial Statements with respect to
segment and geographic area information. Nearly all of the above
facilities are ISO 9001 certified.
Customers
The Companys products are sold in both domestic and
international markets. In North America, products are sold
principally through industrial distributors, retailers and also
directly to users of welding products. Outside of North America,
the Company has an international sales organization comprised of
Company employees and agents who sell products from the
Companys various manufacturing sites to distributors and
product users.
The Companys major end user markets include:
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general metal fabrication,
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infrastructure including oil and gas pipelines and platforms,
buildings, bridges and power generation,
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transportation and defense industries (automotive, trucks, rail,
ships and aerospace),
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equipment manufacturers in construction, farming and mining,
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retail resellers, and
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rental market.
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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 Companys
business is not seasonal.
2
Competition
Conditions in the arc welding and cutting industry are highly
competitive. The Company believes it is the worlds largest
manufacturer of consumables and equipment in a field of three or
four major competitors and numerous smaller competitors. The
Company continues to pursue appropriate strategies to heighten
its competitiveness in domestic and international markets, which
includes positioning low cost manufacturing facilities in most
geographical markets. Competition in the arc welding and cutting
industry is on the basis of brand preference, product quality,
price, performance, warranty, delivery, service and technical
support. The Company believes its performance against these
factors has contributed to the Companys position as the
leader in the industry.
Virtually all of the Companys products may be classified
as standard commercial articles and are manufactured for stock.
The Company believes it has a competitive advantage in the
marketplace because of its highly trained technical sales force
and the support of its welding research and development staff,
which allow it to assist the consumers of its products in
optimizing their welding applications. The Company utilizes this
technical expertise to present its Guaranteed Cost Reduction
Program to end users through which the Company guarantees that
the user will achieve cost savings in its manufacturing process
when it utilizes the Companys products. This allows the
Company to introduce its products to new users and to establish
and maintain close relationships with its consumers. This close
relationship between the technical sales force and the direct
consumers, together with its supportive relationship with its
distributors, who are particularly interested in handling the
broad range of the Companys products, is an important
element of the Companys market success and a valuable
asset of the Company.
Raw
Materials
The principal raw materials essential to the Companys
business are various chemicals, electronics, steel, engines,
brass, copper and aluminum alloys, all of which are normally
available for purchase in the open market.
Patents
and Trademarks
The Company holds many valuable patents, primarily in arc
welding, and has increased the application process as research
and development has progressed in both the United States and
major international jurisdictions. The Company believes its
trademarks are an important asset, and aggressively pursues
brand management.
Environmental
Regulations
The Companys facilities are subject to environmental
regulations. To date, compliance with these environmental
regulations has not had a material effect on the Companys
earnings. The Company is ISO 9001 certified at nearly all
facilities worldwide. In addition, the Company is ISO 14001
certified at most significant manufacturing facilities in the
United States and is working to gain certification at its
remaining United States facilities, as well as the remainder of
its facilities worldwide.
International
Operations
The Company conducts a significant amount of its business and
has a number of operating facilities in countries outside the
United States. As a result, the Company is subject to business
risks inherent to
non-U.S. activities,
including political uncertainty, import and export limitations,
exchange controls and currency fluctuations. The Company
believes risks related to its foreign operations are mitigated
due to the political and economic stability of the countries in
which its largest foreign operations are located.
Research
and Development
Research activities, which the Company believes provide a
competitive advantage, relate to the development of new products
and the improvement of existing products. Research activities
are Company-sponsored. Refer to Note A to the consolidated
financial statements with respect to total costs of research and
development.
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Employees
The number of persons employed by the Company worldwide at
December 31, 2007 was 8,992. See Item 10 of
Part III for information regarding the Companys
executive officers, which is incorporated herein by reference.
Website
Access
The Companys internet address is www.lincolnelectric.com.
The Company makes available free of charge on its website at
www.lincolnelectric.com its annual, quarterly and current
reports, as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the
SEC. The Company also posts its Code of Corporate Conduct and
Ethics on its website. However, the information found on the
Companys website is not part of this or any other report.
From time to time, information we provide, statements by our
employees or information included in our filings with the SEC
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. Forward-looking statements, and our future performance,
operating results, financial position and liquidity, are subject
to a variety of factors that could materially affect results,
including those described below. Any forward-looking statements
made in this report or otherwise speak only as of the date of
the statement, and, except as required by law, we undertake no
obligation to update those statements. Comparisons of results
for current and any prior periods are not intended to express
any future trends or indications of future performance, unless
expressed as such, and should only be viewed as historical data.
The risks and uncertainties described below and all of the other
information in this report should be carefully considered. These
risks and uncertainties are not the only ones we face.
Additional risks and uncertainties of which we are currently
unaware or that we currently believe to be immaterial may also
adversely affect our business.
If energy
costs or the prices of our raw materials increase, our operating
expenses could increase significantly.
In the normal course of business, we are exposed to market risk
and price fluctuations related to the purchase of energy and
commodities used in the manufacture of our products (primarily
steel, brass, copper and aluminum alloys). The availability and
prices for raw materials are subject to volatility and are
influenced by worldwide economic conditions, speculative action,
world supply and demand balances, inventory levels, availability
of substitute materials, currency exchange rates, our
competitors production costs, anticipated or perceived
shortages and other factors. The price of the type of steel used
to manufacture our products has continued to increase
significantly and has been subject to periodic shortages due to
global economic factors, including increased demand for
construction materials in developing nations such as China and
India. We have also experienced substantial inflation in prices
for other raw materials, including metals, chemicals and energy
costs. Energy costs could continue to rise, which would result
in higher transportation, freight and other operating costs. Our
future operating expenses and margins will be dependent on our
ability to manage the impact of cost increases. Our results of
operations may be harmed by shortages of supply and by increases
in prices to the extent those increases can not be passed on to
customers.
We are a
co-defendant in litigation alleging manganese induced illness
and litigation alleging asbestos induced illness. Liabilities
relating to such litigation could reduce our profitability and
impair our financial condition.
At December 31, 2007, we were a co-defendant in cases
alleging manganese induced illness involving claims by
approximately 3,197 plaintiffs and a co-defendant in cases
alleging asbestos induced illness involving claims by
approximately 28,362 plaintiffs. In each instance, we are one of
a large number of defendants. In the manganese cases, 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. In the asbestos cases, the
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claimants allege that exposure to asbestos contained in welding
consumables caused the plaintiffs to develop adverse pulmonary
diseases, including mesothelioma and other lung cancers.
Since January 1, 1995, we have been a co-defendant in
manganese cases that have been resolved as follows: 11,935 of
those claims were dismissed, 14 were tried to defense verdicts
in favor of us and two were tried to plaintiff verdicts. In
addition, 12 claims were resolved by agreement for immaterial
amounts and one was decided in favor of us following a motion
for summary judgment. Since January 1, 1995, we have been a
co-defendant in asbestos cases that have been resolved as
follows: 26,875 of those claims were dismissed, ten were tried
to defense verdicts, four were tried to plaintiff verdicts, one
was resolved by agreement for an immaterial amount and 513 were
decided in favor of us following summary judgment motions.
Defense costs remain significant. The long-term impact of the
manganese and asbestos loss contingencies, in each case in the
aggregate, on operating cash flows and capital markets is
difficult to assess, particularly since claims are in many
different stages of development and we benefit significantly
from cost-sharing with co-defendants and insurance carriers.
While we intend to contest these lawsuits vigorously, and have
applicable insurance relating to these claims, there are several
risks and uncertainties that may affect our liability for
personal claims relating to exposure to manganese and asbestos,
including the future impact of changing cost sharing
arrangements or a change in our overall trial experience.
Manganese is an essential element of steel and cannot be
eliminated from welding consumables. Asbestos use in welding
consumables in the U.S. ceased in 1981.
We may
incur material losses and costs as a result of product liability
claims that may be brought against us.
Our products are used in a variety of applications, including
infrastructure projects such as oil and gas pipelines and
platforms, buildings, bridges and power generation facilities,
the manufacture of transportation and heavy equipment and
machinery, and various other construction projects. We face risk
of exposure to product liability claims in the event that
accidents or failures on these projects result, or are alleged
to result, in bodily injury or property damage. Further, our
welding products are designed for use in specific applications,
and if a product is used inappropriately, personal injury or
property damage may result. For example, in the period between
1994 and 2000, we were a defendant or co-defendant in 21
lawsuits filed by building owners or insurers in Los Angeles
County, California. The plaintiffs in those cases alleged that
certain buildings affected by the 1994 Northridge earthquake
sustained property damage in part because a particular electrode
used in the construction of those buildings was unsuitable for
that use. In the Northridge cases, one case was tried to a
defense verdict in favor of us, 12 were voluntarily dismissed,
seven were settled and we received summary judgment in our favor
in another.
The occurrence of defects in or failures of our products, or the
misuse of our products in specific applications, could cause
termination of customer contracts, increased costs and losses to
us, our customers and other end users. We cannot be assured that
we will not experience any material product liability losses in
the future or that we will not incur significant costs to defend
those claims. Further, we cannot be assured that our product
liability insurance coverage will be adequate for any
liabilities that we may ultimately incur or that it will
continue to be available on terms acceptable to us.
The
cyclicality and maturity of the United States arc welding and
cutting industry may adversely affect our performance.
The United States arc welding and cutting industry is a mature
industry that is cyclical in nature. The growth of the domestic
arc welding and cutting industry has been and continues to be
constrained by factors such as the increased cost of steel and
increased offshore production of fabricated steel structures.
Overall demand for arc welding and cutting products is largely
determined by the level of capital spending in manufacturing and
other industrial sectors, and the welding industry has
historically experienced contraction during periods of slowing
industrial activity. If economic, business and industry
conditions deteriorate, capital spending in those sectors may be
substantially decreased, which could reduce demand for our
products, our revenues and our results of operations.
5
We may
not be able to complete our acquisition strategy or successfully
integrate acquired businesses.
Part of our business strategy is to pursue targeted business
acquisition opportunities, including foreign investment
opportunities. For example, the Company has completed and
continues to pursue acquisitions or joint ventures in the
Peoples Republic of China in order to strategically
position resources to increase our presence in this rapidly
growing market. We cannot be certain that we will be successful
in pursuing potential acquisition candidates or that the
consequences of any acquisition would be beneficial to us.
Future acquisitions may involve the expenditure of significant
funds and management time. Depending on the nature, size and
timing of future acquisitions, we may be required to raise
additional financing, which may not be available to us on
acceptable terms. Our current operational cash flow is
sufficient to fund our current acquisition plans, but a
significant acquisition would require access to the capital
markets. Further, we may not be able to successfully integrate
any acquired business with our existing businesses or recognize
expected benefits from any completed acquisition.
If we
cannot continue to develop, manufacture and market products that
meet customer demands, our revenues and gross margins may
suffer.
Our continued success depends, in part, on our ability to
continue to meet our customers needs for welding products
through the introduction of innovative new products and the
enhancement of existing product design and performance
characteristics. We must remain committed to product research
and development and customer service in order to remain
competitive. Accordingly, we may spend a proportionately greater
amount on research and development than some of our competitors.
We cannot be assured that new products or product improvements,
once developed, will meet with customer acceptance and
contribute positively to our operating results, or that we will
be able to continue our product development efforts at a pace to
sustain future growth. Further, we may lose customers to our
competitors if they demonstrate product design, development or
manufacturing capabilities superior to ours.
The
competitive pressures we face could harm our revenue, gross
margins and prospects.
We operate in a highly competitive global environment and
compete in each of our businesses with other broad line
manufacturers and numerous smaller competitors specializing in
particular products. We compete primarily on the basis of brand,
product quality, price, performance, warranty, delivery, service
and technical support. If our products, services, support and
cost structure do not enable us to compete successfully based on
any of those criteria, our operations, results and prospects
could suffer.
Further, in the past decade, the United States arc welding
industry has been subject to increased levels of foreign
competition as low cost imports have become more readily
available. Our competitive position could also be harmed if new
or emerging competitors become more active in the arc welding
business. For example, while steel manufacturers traditionally
have not been significant competitors in the domestic arc
welding industry, some foreign integrated steel producers
manufacture selected consumable arc welding products. Our sales
and results of operations, as well as our plans to expand in
some foreign countries, could be harmed by this practice.
We
conduct our sales and distribution operations on a worldwide
basis and are subject to the risks associated with doing
business outside the United States.
Our long-term strategy is to continue to increase our share in
growing international markets, particularly Asia (with emphasis
in China and India), Latin America, Eastern Europe and other
developing markets. There are a number of risks in doing
business abroad, which may impede our ability to achieve our
strategic objectives relating to our foreign operations. Many
developing countries, like Venezuela, have a significant degree
of political and economic uncertainty that may impede our
ability to implement and achieve our foreign growth objectives.
In addition, compliance with multiple and potentially
conflicting foreign laws and regulations, import and export
limitations and exchange controls is burdensome and expensive.
Moreover, social unrest, the absence of trained labor pools and
the uncertainties associated with entering into joint ventures
or similar arrangements in foreign countries have slowed our
business expansion into some developing economies. Our presence
in China has been facilitated largely through joint venture
agreements with local organizations. While this strategy has
allowed us to gain a footprint in China while leveraging the
experience of local organizations, it also presents corporate
governance and management challenges.
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Our foreign operations also subject us to the risks of
international terrorism and hostilities and to foreign currency
risks, including exchange rate fluctuations and limits on the
repatriation of funds.
The share of sales and profits we derive from our international
operations and exports from the United States is significant and
growing. This trend increases our exposure to the performance of
many developing economies in addition to the developed economies
outside of the United States.
Our
operations depend on maintaining a skilled workforce, and any
interruption in our workforce could negatively impact our
results of operations and financial condition.
We are dependent on our highly trained technical sales force and
the support of our welding research and development staff. Any
interruption of our workforce, including interruptions due to
unionization efforts, changes in labor relations or shortages of
appropriately skilled individuals for our research, production
and sales forces could impact our results of operations and
financial condition.
Our
revenues and results of operations may suffer if we cannot
continue to enforce the intellectual property rights on which
our business depends or if third parties assert that we violate
their intellectual property rights.
We rely upon patent, trademark, copyright and trade secret laws
in the United States and similar laws in foreign countries, as
well as agreements with our employees, customers, suppliers and
other third parties, to establish and maintain our intellectual
property rights. However, any of our intellectual property
rights could be challenged, invalidated or circumvented, or our
intellectual property rights may not be sufficient to provide a
competitive advantage. Further, the laws and their application
in certain foreign countries do not protect our proprietary
rights to the same extent as U.S. laws. Accordingly, in
certain countries, we may be unable to protect our proprietary
rights against unauthorized third-party copying or use, which
could impact our competitive position.
Further, third parties may claim that we or our customers are
infringing upon their intellectual property rights. Even if we
believe that those claims are without merit, defending those
claims and contesting the validity of patents can be
time-consuming and costly. Claims of intellectual property
infringement also might require us to redesign affected
products, enter into costly settlement or license agreements or
pay costly damage awards, or face a temporary or permanent
injunction prohibiting us from manufacturing, marketing or
selling certain of our products.
Our
global operations are subject to increasingly complex
environmental regulatory requirements.
We are subject to increasingly complex environmental regulations
affecting international manufacturers, including those related
to air and water emissions and waste management. Further, it is
our policy to apply strict standards for environmental
protection to sites inside and outside the United States, even
when we are not subject to local government regulations. We may
incur substantial costs, including cleanup costs, fines and
civil or criminal sanctions, liabilities resulting from
third-party property damage or personal injury claims, or our
products could be enjoined from entering certain jurisdictions,
if we were to violate or become liable under environmental laws
or if our products become non-compliant with environmental laws.
We also face increasing complexity in our products design and
procurement operations as we adjust to new and future
requirements relating to the design, production and labeling of
our electrical equipment products that are sold in the European
Union. The ultimate costs under environmental laws and the
timing of these costs are difficult to predict, and liability
under some environmental laws relating to contaminated sites can
be imposed retroactively and on a joint and several basis.
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Item 1B.
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Unresolved
Staff Comments
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None.
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The Companys corporate headquarters and principal United
States manufacturing facilities are located in the Cleveland,
Ohio area. Total Cleveland area property consists of
233 acres, of which present manufacturing facilities
comprise an area of approximately 2,806,000 square feet.
In addition to the principal facilities in the Cleveland, Ohio
area, the Company operates five other manufacturing locations in
the United States and 29 manufacturing locations (including
joint ventures) in 18 foreign countries, the locations of which
are as follows:
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United States:
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Mason, Ohio; Cranston, Rhode Island; Gainesville, Georgia; Santa
Fe Springs, California; Oceanside, California.
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Australia:
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Sydney.
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Brazil:
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Sao Paulo.
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Canada:
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Toronto; Mississauga.
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Colombia:
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Bogota.
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United Kingdom:
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Sheffield; Chertsey.
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France:
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Grand-Quevilly.
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Germany:
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Essen.
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Indonesia:
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Cikarang.
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Italy:
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Bologna; Genoa; Corsalone.
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Mexico:
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Mexico City; Torreon; Tijuana.
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Netherlands:
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Nijmegen.
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Peoples Republic of China:
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Shanghai; Jining, Inner Mongolia; Jinzhou; Nanjing.
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Poland:
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Bielawa; Swietochlowice; Dzierzoniow.
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Spain:
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Barcelona.
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Taiwan:
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Tainan.
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Turkey:
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Istanbul.
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Venezuela:
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Maracay.
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Vietnam:
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Ho Chi Minh City.
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All properties relating to the Companys Cleveland, Ohio
headquarters and manufacturing facilities are owned by the
Company. In addition, the Company maintains operating leases for
its distribution centers and many sales offices throughout the
world. See Note M to the Companys Consolidated
Financial Statements with respect to lease commitments. Most of
the Companys foreign subsidiaries own manufacturing
facilities in the foreign country where they are located. At
December 31, 2007, $3.2 million of indebtedness was
secured by property, plant and equipment with a book value of
$5.0 million.
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Item 3.
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Legal
Proceedings
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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 December 31, 2007, the Company was a co-defendant in
cases alleging asbestos induced illness involving claims by
approximately 28,362 plaintiffs, which is a net decrease of
2,697 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: 26,875 of those claims were dismissed, ten
were tried to
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defense verdicts, four were tried to plaintiff verdicts, one was
resolved by agreement for an immaterial amount and 513 were
decided in favor of the Company following summary judgment
motions.
At December 31, 2007, the Company was a co-defendant in
cases alleging manganese induced illness involving claims by
approximately 3,197 plaintiffs, which is a net decrease of 565
claims 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
punitive damages, in most cases for unspecified sums. The
claimants allege that exposure to manganese contained in welding
consumables caused the plaintiffs to develop adverse
neurological conditions, including a condition known as
manganism. At December 31, 2007, cases involving 1,261
claimants were filed in or transferred to federal court where
the Judicial Panel on MultiDistrict Litigation has consolidated
these cases for pretrial proceedings in the Northern District of
Ohio (the MDL Court). Plaintiffs have also filed
eight class actions seeking medical monitoring in state courts,
six of which have been removed and transferred to the MDL Court.
In addition, plaintiffs filed a class action complaint seeking
medical monitoring on behalf of current and former welders in
eight states, including three states covered by the single-state
class actions, in the United States District Court for the
Northern District of California. This case was also transferred
to the MDL Court. A motion to certify a medical monitoring class
related to this case was denied on September 14, 2007.
Since January 1, 1995, the Company has been a co-defendant
in similar cases that have been resolved as follows: 11,935 of
those claims were dismissed, 14 were tried to defense verdicts
in favor of the Company and two were tried to plaintiff
verdicts. In addition, 12 claims were resolved by agreement for
immaterial amounts and one claim was decided in favor of the
Company following a summary judgment motion. On December 5,
2007, a jury returned a verdict in one such case against the
Company and four co-defendants for an aggregate amount of
$20.5 million in damages (one of the two plaintiff verdicts
referenced above). Post trial motions are pending. The Company
intends to appeal any final judgment. Based on cost sharing
between co-defendants and applicable insurance, the Company
believes resolution of this claim will not have a material
impact on the Companys consolidated financial statements.
For further information, see Note N to the Companys
Consolidated Financial Statements and the Product
Liability Expense section in Managements Discussion
and Analysis of Financial Condition and Results of Operations of
this Annual Report on
Form 10-K.
On December 13, 2006, the Company filed a complaint in
U.S. District Court (Northern District of Ohio) against
Illinois Tool Works, Inc. seeking a declaratory judgment that
eight patents owned by the defendant relating to certain
inverter power sources have not and are not being infringed and
that the subject patents are invalid. Illinois Tool Works filed
a motion to dismiss this action, which the Court denied on
June 21, 2007. On September 7, 2007, the Court stayed
the litigation, referencing pending reexaminations before the
U.S. Patent and Trademark Office.
|
|
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, 2007.
PART II
|
|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
The Companys common shares are traded on The NASDAQ Stock
Market under the symbol LECO. The number of record
holders of common shares at December 31, 2007 was 1,892.
The total amount of dividends paid in 2007 was $37,744,123. For
2007, dividends were paid quarterly on January 15,
April 13, July 13 and October 15.
9
Quarterly high and low stock prices and dividends declared for
the last two years were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Stock Price
|
|
|
Dividends
|
|
|
Stock Price
|
|
|
Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
First quarter
|
|
$
|
70.19
|
|
|
$
|
58.99
|
|
|
$
|
0.22
|
|
|
$
|
54.66
|
|
|
$
|
38.20
|
|
|
$
|
0.19
|
|
Second quarter
|
|
|
75.75
|
|
|
|
58.88
|
|
|
|
0.22
|
|
|
|
62.65
|
|
|
|
48.76
|
|
|
|
0.19
|
|
Third quarter
|
|
|
78.09
|
|
|
|
64.54
|
|
|
|
0.22
|
|
|
|
62.68
|
|
|
|
53.95
|
|
|
|
0.19
|
|
Fourth quarter
|
|
|
86.20
|
|
|
|
65.23
|
|
|
|
0.25
|
|
|
|
62.91
|
|
|
|
52.64
|
|
|
|
0.22
|
|
Source: The NASDAQ Stock Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Repurchased
|
|
|
of Shares that May
|
|
|
|
|
|
|
|
|
|
as Part of Publicly
|
|
|
Yet be Purchased
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
under the Plans
|
|
Period
|
|
Shares Repurchased
|
|
|
Paid Per Share
|
|
|
Programs
|
|
|
or Programs
|
|
|
November 1-30, 2007
|
|
|
187,426
|
|
|
$
|
69.69
|
|
|
|
187,426
|
|
|
|
4,568,586
|
|
December 1-31, 2007
|
|
|
35,000
|
|
|
|
68.52
|
|
|
|
35,000
|
|
|
|
4,533,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
222,426
|
|
|
$
|
69.50
|
|
|
|
222,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note C to the Companys Consolidated Financial
Statements.
10
The following line graph compares the yearly percentage change
in the cumulative total shareholder return on Lincoln Electric
Holdings, Inc. (Lincoln) common shares against the
cumulative total return of the S&P Composite 500 Stock
Index (S&P 500), S&P 400 MidCap Index
(S&P 400) and the Russell 2000 Stock Index
(Russell 2000) for the five-year calendar period
commencing January 1, 2003 and ending December 31,
2007. This graph assumes that $100 was invested on
December 31, 2002 in each of Lincoln common, the S&P
500 companies, the S&P 400 companies and the
Russell 2000 Stock Index. A compatible peer-group index for the
welding industry, in general, was not readily available because
the industry is comprised of a relatively small number of
competitors, many of whom either are relatively small pieces of
large publicly traded companies or are privately held. The
Russell 2000, published by the Frank Russell Company, represents
a developed index based on a concentration of companies having
relatively small market capitalization, similar to the Company.
Five Year
Performance Comparison
Lincoln Common, S&P 500, S&P 400 and Russell 2000
Composite Indices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
Lincoln
|
|
|
|
100
|
|
|
|
|
110
|
|
|
|
|
156
|
|
|
|
|
183
|
|
|
|
|
282
|
|
|
|
|
336
|
|
S&P 500
|
|
|
|
100
|
|
|
|
|
128
|
|
|
|
|
142
|
|
|
|
|
149
|
|
|
|
|
172
|
|
|
|
|
182
|
|
S&P 400
|
|
|
|
100
|
|
|
|
|
135
|
|
|
|
|
157
|
|
|
|
|
177
|
|
|
|
|
195
|
|
|
|
|
211
|
|
Russell 2000
|
|
|
|
100
|
|
|
|
|
147
|
|
|
|
|
174
|
|
|
|
|
182
|
|
|
|
|
215
|
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
2,280,784
|
|
|
$
|
1,971,915
|
|
|
$
|
1,601,190
|
|
|
$
|
1,333,675
|
|
|
$
|
1,040,589
|
|
Net income
|
|
|
202,736
|
|
|
|
175,008
|
|
|
|
122,306
|
|
|
|
80,596
|
|
|
|
54,542
|
|
Basic earnings per share
|
|
$
|
4.73
|
|
|
$
|
4.11
|
|
|
$
|
2.93
|
|
|
$
|
1.96
|
|
|
$
|
1.32
|
|
Diluted earnings per share
|
|
|
4.67
|
|
|
|
4.07
|
|
|
|
2.90
|
|
|
|
1.94
|
|
|
|
1.31
|
|
Cash dividends declared
|
|
|
0.91
|
|
|
|
0.79
|
|
|
|
0.73
|
|
|
|
0.69
|
|
|
|
0.64
|
|
Total assets
|
|
$
|
1,645,296
|
|
|
$
|
1,394,579
|
|
|
$
|
1,161,161
|
|
|
$
|
1,059,164
|
|
|
$
|
928,866
|
|
Long-term debt
|
|
|
117,329
|
|
|
|
113,965
|
|
|
|
157,853
|
|
|
|
163,931
|
|
|
|
169,030
|
|
In 2007, the Company recorded a net gain of $188 ($107
after-tax) relating to the Companys rationalization
programs in Europe. See Note F to the Companys
Consolidated Financial Statements for further discussion. The
net gain recorded in 2007 was due to a gain of $816 ($735
after-tax) related to the liquidation of the Harris Ireland
Pension Plan offsetting other charges.
Results for 2006 include a pre-tax charge of $3,478 ($3,478
after-tax) relating to the Companys rationalization
programs in Europe and a pre-tax gain of $9,006 ($7,204
after-tax) on the sale of a facility in Ireland. See Note F
to the Companys Consolidated Financial Statements for
further discussion.
Results for 2005 include a pre-tax charge of $1,761 ($1,303
after-tax) relating to the Companys rationalization
programs in Europe (See Note F to the Companys
Consolidated Financial Statements), a one-time state income tax
benefit of $1,807 (net of federal benefit) relating to changes
in Ohio tax laws, a favorable adjustment of $8,711 related to
the resolution of prior years tax liabilities, a net
favorable tax benefit of $1,146 associated with the repatriation
of foreign earnings and a pre-tax gain of $1,418 ($876
after-tax) on the settlement of legal disputes.
Results for 2004 include a pre-tax charge of $2,440 ($2,061
after-tax) relating to the Companys rationalization
programs in Europe (See Note F to the Companys
Consolidated Financial Statements), and $4,525 ($2,828
after-tax) in pension settlement provisions, accrued base pay,
bonus, and stock compensation related to the retirement of the
Companys past Chairman and CEO.
Results for 2003 include a pre-tax charge of $1,743 ($1,367
after-tax) relating to a Company rationalization program.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
(In thousands, except share and per share data)
|
The following discussions of financial condition and results of
operations should be read together with Selected Financial
Data, the Companys Consolidated Financial Statements
and other financial information included elsewhere in this
report. This report contains forward-looking statements that
involve risks and uncertainties. Actual results may differ
materially from those indicated in the forward-looking
statements. See Risk Factors in Item 1A for more
information regarding forward-looking statements.
GENERAL
The Company is the worlds largest designer and
manufacturer of arc welding and cutting products, manufacturing
a full line of arc welding equipment, consumable welding
products and other welding and cutting products.
The Company is one of only a few worldwide broad line
manufacturers of both arc welding equipment and consumable
products. Welding products include arc welding power sources,
wire feeding systems, robotic welding packages, fume extraction
equipment, consumable electrodes and fluxes. The Companys
welding product offering also includes regulators and torches
used in oxy-fuel welding and cutting. In addition, the Company
has a leading global position in the brazing and soldering
alloys market.
The Company invests in the research and development of arc
welding equipment and consumable products in order to continue
its market leading product offering. The Company continues to
invest in technologies that improve the
12
quality and productivity of welding products. In addition, the
Company continues to actively increase its patent application
process in order to secure its technology advantage in the
United States and other major international jurisdictions. The
Company believes its significant investment in research and
development and its highly trained technical sales force
provides a competitive advantage in the marketplace.
The Companys products are sold in both domestic and
international markets. In North America, products are sold
principally through industrial distributors, retailers and also
directly to users of welding products. Outside of North America,
the Company has an international sales organization comprised of
Company employees and agents who sell products from the
Companys various manufacturing sites to distributors and
product users.
The Companys major end user markets include:
|
|
|
general metal fabrication,
|
|
|
infrastructure including oil and gas pipelines and platforms,
buildings, bridges and power generation,
|
|
|
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, through wholly-owned subsidiaries or joint
ventures, manufacturing facilities located in the United States,
Australia, Brazil, Canada, Colombia, United Kingdom, France,
Germany, Indonesia, Italy, Mexico, the Netherlands,
Peoples Republic of China, Poland, Spain, Taiwan, Turkey,
Venezuela and Vietnam.
The Companys sales and distribution network, coupled with
its manufacturing facilities are reported as two separate
reportable segments, North America and Europe, and combines all
other operating segments as Other Countries.
The principal raw materials essential to the Companys
business are various chemicals, electronics, steel, engines,
brass, copper and aluminum alloys, all of which are normally
available for purchase in the open market.
The Companys facilities are subject to environmental
regulations. To date, compliance with these environmental
regulations has not had a material effect on the Companys
earnings. The Company is ISO 9001 certified at nearly all
facilities worldwide. In addition, the Company is ISO 14001
certified at most significant manufacturing facilities in the
United States and is working to gain certification at its
remaining United States facilities, as well as the remainder of
its facilities worldwide.
Key
Indicators
Key economic measures relevant to the Company include industrial
production trends, steel consumption, purchasing manager
indices, capacity utilization within durable goods
manufacturers, and consumer confidence indicators. Key
industries which provide a relative indication of demand drivers
to the Company include farm machinery and equipment,
construction and transportation, fabricated metals, electrical
equipment, ship and boat building, defense, truck manufacturing
and railroad equipment. Although these measures provide key
information on trends relevant to the Company, the Company does
not have available a more direct correlation of leading
indicators which can provide a forward-looking view of demand
levels in the markets which ultimately use the Companys
welding products.
Key operating measures utilized by the operating units to manage
the Company include orders, sales, inventory and fill-rates, all
of which provide key indicators of business trends. These
measures are reported on various cycles including daily, weekly
and monthly depending on the needs established by operating
management.
Key financial measures utilized by the Companys executive
management and operating units in order to evaluate the results
of its business and in understanding key variables impacting the
current and future results of the Company include: sales, gross
profit, selling, general and administrative expenses, earnings
before interest, taxes and bonus, operating cash flows and
capital expenditures, including applicable ratios such as return
on investment
13
and average operating working capital to sales. 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 shows the Companys results of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Amount
|
|
|
% of Sales
|
|
|
Net sales
|
|
$
|
2,280,784
|
|
|
|
100.0
|
%
|
|
$
|
1,971,915
|
|
|
|
100.0
|
%
|
|
$
|
1,601,190
|
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
1,633,218
|
|
|
|
71.6
|
%
|
|
|
1,419,638
|
|
|
|
72.0
|
%
|
|
|
1,164,275
|
|
|
|
72.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
647,566
|
|
|
|
28.4
|
%
|
|
|
552,277
|
|
|
|
28.0
|
%
|
|
|
436,915
|
|
|
|
27.3
|
%
|
Selling, general & administrative expenses
|
|
|
370,122
|
|
|
|
16.2
|
%
|
|
|
315,829
|
|
|
|
16.0
|
%
|
|
|
285,309
|
|
|
|
17.8
|
%
|
Rationalization (gain) charges
|
|
|
(188
|
)
|
|
|
0.0
|
%
|
|
|
3,478
|
|
|
|
0.2
|
%
|
|
|
1,761
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
277,632
|
|
|
|
12.2
|
%
|
|
|
232,970
|
|
|
|
11.8
|
%
|
|
|
149,845
|
|
|
|
9.4
|
%
|
Interest income
|
|
|
8,294
|
|
|
|
0.4
|
%
|
|
|
5,876
|
|
|
|
0.3
|
%
|
|
|
4,000
|
|
|
|
0.2
|
%
|
Equity earnings in affiliates
|
|
|
9,838
|
|
|
|
0.4
|
%
|
|
|
7,640
|
|
|
|
0.4
|
%
|
|
|
3,312
|
|
|
|
0.2
|
%
|
Other income
|
|
|
2,823
|
|
|
|
0.1
|
%
|
|
|
1,839
|
|
|
|
0.1
|
%
|
|
|
4,689
|
|
|
|
0.3
|
%
|
Interest expense
|
|
|
(11,430
|
)
|
|
|
(0.5
|
)%
|
|
|
(10,153
|
)
|
|
|
(0.5
|
)%
|
|
|
(7,947
|
)
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
287,157
|
|
|
|
12.6
|
%
|
|
|
238,172
|
|
|
|
12.1
|
%
|
|
|
153,899
|
|
|
|
9.6
|
%
|
Income taxes
|
|
|
84,421
|
|
|
|
3.7
|
%
|
|
|
63,164
|
|
|
|
3.2
|
%
|
|
|
31,593
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
202,736
|
|
|
|
8.9
|
%
|
|
$
|
175,008
|
|
|
|
8.9
|
%
|
|
$
|
122,306
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
COMPARED TO 2006
Net Sales. Net sales for 2007 increased 15.7%
to $2,280,784 from $1,971,915 in 2006. The increase in Net sales
reflects a $134,000 (6.8%) increase due to volume, a $73,469
(3.8%) increase due to price, a $37,950 (1.9%) increase from
acquisitions and a $63,450 (3.2%) favorable impact as a result
of changes in foreign currency exchange rates. Net sales for the
North American operations increased 7.3% to $1,401,393 in 2007
compared to $1,305,472 in 2006. This increase reflects an
increase of $35,894 (2.7%) due to volume and $52,309 (4.0%)
increase due to price. Net sales for the European operations
increased 37.1% to $510,514 in 2007 compared to $372,308 in
2006. This increase reflects an increase of $57,070 (15.3%) due
to volume, an $8,226 (2.2%) increase due to price, a $31,990
(8.6%) increase from acquisitions and a $40,920 (11.0%)
favorable impact as a result of changes in foreign currency
exchange rates. Net sales for Other Countries increased 25.4% to
$368,877 in 2007 compared to $294,135 in the 2006. This increase
reflects an increase of $41,036 (14.0%) due to volume, a $12,934
(4.4%) increase due to price, a $14,896 (5.0%) favorable impact
as a result of changes in foreign currency exchange rates and a
$5,876 (2.0%) increase from acquisitions.
Gross Profit. Gross profit increased 17.3% to
$647,566 during 2007 compared to $552,277 in 2006. As a
percentage of net sales, Gross profit increased to 28.4% in 2007
from 28.0% in 2006. This increase was primarily a result of
favorable leverage on increased volumes in North America and
Europe, a reduction in product liability costs of $9,528 and a
reduction in retirement benefit costs in the U.S. of
$5,484. This increase was partially offset by the continuing
shift in sales mix to traditionally lower margin geographies and
businesses. Lower margin geographies were impacted by pricing
pressures associated with market share growth, cost increases
and start-up
costs associated with continued capacity expansion. Foreign
currency exchange rates had a $13,613 favorable impact in 2007.
14
The Company continues to experience increases in raw material
prices, including metals and chemicals. In addition, energy
costs trended higher resulting in higher operating costs
including transportation and freight. As worldwide demand
remains high, the Company expects these costs to remain at
relatively elevated levels. Although the Company believes a
number of factors, including price increases, product mix,
overhead absorption, and its continuing cost reduction efforts
will offset increased costs, future margin levels will be
dependent on the Companys ability to manage these cost
increases.
Selling, General & Administrative (SG&A)
Expenses. SG&A expenses increased $54,293
(17.2%) in 2007 compared to 2006. The increase was primarily due
to an increase of $13,393 in general and administrative expense
compared to 2006 which included the gain of $9,006 on the sale
of the facility in Ireland. In addition, the increase included
higher bonus expense of $11,606, higher selling expenses of
$8,181 resulting from increased sales activity and higher
incremental selling, general and administrative expenses from
acquisitions totaling $6,216. Foreign currency exchange rates
had an $8,786 unfavorable impact.
Rationalization (Gain) Charges. In 2007 and
2006, the Company recorded a net gain of $188 ($107 after-tax)
and a charge of $3,478 ($3,478 after-tax) to rationalization
charges, respectively. Charges in both years were primarily
related to severance costs covering 66 employees at the
Companys facility in Ireland. The net gain recorded in
2007 was due to a gain of $816 ($735 after-tax) related to the
liquidation of the Harris Ireland Pension Plan offsetting other
charges.
Interest Income. Interest income increased to
$8,294 in 2007 from $5,876 in 2006. The increase was a result of
increases in cash balances and interest rates in 2007 when
compared to 2006.
Equity Earnings in Affiliates. Equity earnings
in affiliates increased to $9,838 in 2007 from $7,640 in 2006 as
a result of increased earnings at the Companys joint
venture investments in Turkey and Taiwan.
Other Income. Other income increased $984 to
$2,823 in 2007 from $1,839 in 2006.
Interest Expense. Interest expense increased
to $11,430 in 2007 from $10,153 in 2006 as a result of higher
interest rates and a lower level of amortization of the gain
associated with previously terminated interest rate swap
agreements partially offset by lower debt levels in 2007. See
Note G to the Companys Consolidated Financial
Statements for further discussion.
Income Taxes. Income taxes for 2007 were
$84,421 on income before income taxes of $287,157, an effective
rate of 29.4%, compared with income taxes of $63,164 on income
before income taxes of $238,172, or an effective rate of 26.5%
for 2006. The increase in the effective tax rate for 2007 from
2006 is a result of an increase in income before taxes in higher
tax jurisdictions as well as a lower level of foreign tax
credits utilized in 2007 when compared with 2006. The effective
rate for 2007 and 2006 was lower than the Companys
statutory rate primarily because of the utilization of foreign
tax credits, lower taxes on
non-U.S. earnings
and the utilization of foreign tax loss carryforwards, for which
valuation allowances have been previously provided.
Net Income. Net income for 2007 was $202,736
compared to $175,008 last year. Diluted earnings per share for
2007 were $4.67 compared to $4.07 per share in 2006. Foreign
currency exchange rate movements had a $3,419 and a $1,783
favorable effect on net income for 2007 and 2006, respectively.
2006
COMPARED TO 2005
Net Sales. Net sales increased 23.2% to
$1,971,915 in 2006 from $1,601,190 in 2005. The increase in Net
sales reflects a $248,048 (15.5%) increase due to volume, a
$54,496 (3.4%) increase from acquisitions, a $46,868 (2.9%)
increase due to price and a $21,313 (1.3%) favorable impact as a
result of changes in foreign currency exchange rates. Net sales
for the North American operations increased 23.6% to $1,305,472
in 2006 compared to $1,056,134 in 2005. This increase reflects
an increase of $161,038 (15.2%) due to volume, an increase of
$46,784 (4.4%) from the acquisition of J.W. Harris, Inc.
(J.W. Harris), an increase of $33,714 (3.2%) due to
price and a $7,802 (0.7%) favorable impact as a result of
changes in foreign currency exchange rates. Net sales for the
European operations increased 21.7% to $372,308 in 2006 compared
to $305,846 in 2005. This increase reflects an increase of
$48,607 (15.9%) due to volume, a $7,690 (2.5%) increase relating
to the acquisitions of Metrode Products Limited
(Metrode) and J.W. Harris, and an $11,101 (3.6%)
favorable impact as a result of changes in foreign currency
15
exchange rates. Net sales for Other Countries increased 23.0% to
$294,135 in 2006 compared to $239,210 in 2005. This increase
reflects an increase of $38,403 (16.1%) due to volume, a $14,090
(5.9%) increase due to price and a $2,410 (1.0%) favorable
impact as a result of changes in foreign currency exchange rates.
Gross Profit. Gross profit increased 26.4% to
$552,277 in 2006 compared to $436,915 in 2005. As a percentage
of net sales, Gross profit increased to 28.0% in 2006 from 27.3%
in 2005. This increase was primarily a result of favorable
leverage on increased volumes. In addition, foreign currency
exchange rates had a $3,968 favorable impact in 2006. This
increase was partially offset by a shift in sales mix to
traditionally lower margin geographies and businesses, including
the effects of acquisitions, as well as an increase in product
liability defense costs of $7,585.
Selling, General & Administrative (SG&A)
Expenses. SG&A expenses increased $30,520
(10.7%) in 2006 compared with 2005. The increase was primarily
due to higher bonus expense of $18,010, incremental selling,
general and administrative expenses from acquisitions totaling
$4,224 and higher selling expenses of $6,821 resulting from
increased sales activity. Foreign currency exchange rates had a
$1,783 unfavorable impact. SG&A expenses include a gain of
$9,006 ($7,204 after-tax) on sale of the Companys facility
in Ireland.
Rationalization Charges. In 2006, the Company
recorded rationalization charges of $3,478 ($3,478 after-tax)
primarily related to severance costs covering 66 employees
at the Companys facility in Ireland. During 2005, the
Company recorded rationalization charges of $1,761 ($1,303
after-tax) primarily for employee severance costs related to
rationalization efforts in France and Ireland.
Interest Income. Interest income increased to
$5,876 in 2006 from $4,000 in 2005. The increase was a result of
increases in interest rates and higher cash balances in 2006
compared to 2005.
Equity Earnings in Affiliates. Equity earnings
in affiliates increased to $7,640 in 2006 from $3,312 in 2005
primarily a result of increased earnings at the Companys
joint venture investments in Turkey and Taiwan.
Other Income. Other income decreased $2,850 to
$1,839 in 2006 from $4,689 in 2005. The decrease was primarily
due to the favorable settlement of legal disputes in 2005
totaling $1,418.
Interest Expense. Interest expense increased
to $10,153 in 2006 from $7,947 in 2005 as a result of higher
interest rates.
Income Taxes. Income taxes for 2006 were
$63,164 on income before income taxes of $238,172, an effective
rate of 26.5%, compared with income taxes of $31,593 on income
before income taxes of $153,899, or an effective rate of 20.5%
for 2005. The effective rate for 2006 was lower than the
Companys statutory rate primarily because of the
utilization of foreign tax credits, lower taxes on
non-U.S. earnings
and the utilization of foreign tax loss carryforwards, for which
valuation allowances have been previously provided. 2005
included favorable tax benefits of $9,857 related to the
resolution of prior years tax liabilities and the
repatriation of foreign earnings and an adjustment to state
deferred income taxes totaling $1,807. The deferred tax
adjustment reflected the impact of a one-time state income tax
benefit related to changes in Ohio tax laws, including the
effect of lower tax rates. The decrease in the effective tax
rate from 2005, excluding these items, reflects an increase in
earnings in lower tax rate jurisdictions, including the gain on
the sale of the Companys facility in Ireland.
Net Income. Net income for 2006 was $175,008
compared to $122,306 last year. Diluted earnings per share for
2006 were $4.07 compared to $2.90 per share in 2005. Foreign
currency exchange rate movements had a $1,783 favorable effect
on net income for 2006 and an immaterial impact in 2005.
LIQUIDITY
AND CAPITAL RESOURCES
The Companys cash flow from operations, while cyclical,
has been reliable and consistent. The Company has relatively
unrestricted access to capital markets. Operational cash flow is
a key driver of liquidity, providing cash and access to capital
markets. In assessing liquidity, the Company reviews working
capital measurements to define areas of improvement. Management
anticipates the Company will be able to satisfy cash
requirements for its ongoing businesses for the foreseeable
future primarily with cash generated by operations, existing
cash balances and, if necessary, borrowings under its existing
credit facilities.
16
The following table reflects changes in key cash flow measures:
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Year Ended December 31,
|
|
|
Change
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
Cash provided by operating activities:
|
|
$
|
249,832
|
|
|
$
|
118,680
|
|
|
$
|
117,024
|
|
|
$
|
131,152
|
|
|
$
|
1,656
|
|
Cash used by investing activities:
|
|
|
(79,705
|
)
|
|
|
(89,715
|
)
|
|
|
(69,473
|
)
|
|
|
10,010
|
|
|
|
(20,242
|
)
|
Capital expenditures
|
|
|
(61,633
|
)
|
|
|
(76,002
|
)
|
|
|
(50,415
|
)
|
|
|
14,369
|
|
|
|
(25,587
|
)
|
Acquisitions of businesses, net of cash acquired
|
|
|
(18,773
|
)
|
|
|
(25,504
|
)
|
|
|
(78,174
|
)
|
|
|
6,731
|
|
|
|
52,670
|
|
Cash used by financing activities:
|
|
|
(77,586
|
)
|
|
|
(17,729
|
)
|
|
|
(31,992
|
)
|
|
|
(59,857
|
)
|
|
|
14,263
|
|
Amounts due banks, net
|
|
|
(2,720
|
)
|
|
|
115
|
|
|
|
4,448
|
|
|
|
(2,835
|
)
|
|
|
(4,333
|
)
|
Payments on long-term borrowings
|
|
|
(40,142
|
)
|
|
|
(3,147
|
)
|
|
|
(15,471
|
)
|
|
|
(36,995
|
)
|
|
|
12,324
|
|
Proceeds from exercise of stock options
|
|
|
8,644
|
|
|
|
13,618
|
|
|
|
21,230
|
|
|
|
(4,974
|
)
|
|
|
(7,612
|
)
|
Tax benefit from exercise of stock options
|
|
|
4,289
|
|
|
|
5,243
|
|
|
|
|
|
|
|
(954
|
)
|
|
|
5,243
|
|
Purchase of shares for treasury
|
|
|
(15,459
|
)
|
|
|
(126
|
)
|
|
|
(12,803
|
)
|
|
|
(15,333
|
)
|
|
|
12,677
|
|
Cash dividends paid to shareholders
|
|
|
(37,744
|
)
|
|
|
(32,275
|
)
|
|
|
(30,037
|
)
|
|
|
(5,469
|
)
|
|
|
(2,238
|
)
|
Increase in Cash and cash equivalents
|
|
|
97,170
|
|
|
|
12,205
|
|
|
|
15,188
|
|
|
|
84,965
|
|
|
|
(2,983
|
)
|
Cash and cash equivalents increased 80.8%, or $97,170, to
$217,382 as of December 31, 2007, from $120,212 as of
December 31, 2006. This compares to a $12,205 increase in
cash and cash equivalents during 2006.
Cash provided by operating activities for 2007 increased
$131,152 from 2006. The increase was primarily related to an
increase in net income and an improved inventory position when
compared to 2006. Average operating working capital to sales was
23.5% at December 31, 2007 compared to 25.8% at
December 31, 2006. Days sales in inventory decreased to
101.2 days at December 31, 2007 from 117.3 days
at December 31, 2006. Accounts receivable days decreased to
56.9 days at December 31, 2007 from 57.7 days at
December 31, 2006. Average days in accounts payable
decreased to 36.2 days at December 31, 2007 from
38.9 days at December 31, 2006.
Cash used by investing activities decreased by $10,010 for 2007
compared to 2006. Proceeds from the sale of the facility in
Ireland of $9,006 reduced net cash used by investing activities
in 2006. Capital expenditures during 2007 were $61,633, a
$14,369 decrease from 2006. Cash used in the acquisition of
businesses in 2007 decreased $6,731 from 2006. The Company
anticipates capital expenditures in 2008 in the range of
$60,000 $70,000. Anticipated capital expenditures
reflect plans to expand the Companys manufacturing
capacity due to an increase in customer demand and the
Companys continuing international expansion. Management
critically evaluates all proposed capital expenditures and
requires each project to increase efficiency, reduce costs,
promote business growth, or to improve the overall safety and
environmental conditions of the Companys facilities.
Management does not currently anticipate any unusual future cash
outlays relating to capital expenditures.
Cash used by financing activities for 2007 increased $59,857
from 2006. The increase was primarily due to the $40,000
repayment of the Companys Series A Senior Unsecured
Notes and purchases of the Companys common stock of
$15,459 in 2007.
The Companys debt levels decreased from $161,099 at
December 31, 2006, to $129,815 at December 31, 2007.
Debt to total capitalization decreased to 10.7% at
December 31, 2007 from 15.9% at December 31, 2006.
The Companys Board of Directors authorized share
repurchase programs for up to 15 million shares of the
Companys common stock. During 2007, the Company purchased
222,426 shares of its common stock on the open market at a
cost of $15,459 for a weighted average cost of $69.50 per share.
Total shares purchased through the share repurchase programs
were 10,466,414 shares at a cost of $231,851 for a weighted
average cost of $22.15 per share through December 31, 2007.
17
A total of $37,744 in dividends was paid during 2007. In January
2008, the Company paid a quarterly cash dividend of 25 cents per
share, or $10,720 to shareholders of record on December 31,
2007.
Rationalization
In 2005, the Company committed to a plan to rationalize
manufacturing operations (the Ireland
Rationalization) at Harris Calorific Limited (Harris
Ireland). In connection with the Ireland Rationalization,
the Company transferred all manufacturing from Harris Ireland to
a lower cost facility in Eastern Europe and in 2006 sold the
facility in Ireland for a pre-tax gain of $9,006 which is
reflected in Selling, general and administrative expenses. A
total of 66 employees were impacted by the Ireland
Rationalization.
The Company has incurred a total of $3,920 (pre-tax) in charges
related to this plan of which a gain of $188 (pre-tax) was
recorded in 2007 and charges of $3,597 (pre-tax) and $511
(pre-tax) were recorded in 2006 and 2005, respectively. Charges
incurred relate to employee severance costs, equipment
relocation, employee retention and professional services. As of
December 31, 2007, all rationalization activities have
essentially been completed. The Company expects to receive
approximately $2,129 in cash receipts during 2008 upon
completion of the liquidation of the Harris Ireland Pension Plan.
In 2004, the Company committed to a plan to rationalize machine
manufacturing (the French Rationalization) at
Lincoln Electric France, S.A.S. (LE France). In
connection with the French Rationalization, the Company
transferred machine manufacturing performed at LE France to
other facilities. The Company committed to the French
Rationalization as a result of the regions decreased
demand for locally-manufactured machines. In connection with the
French Rationalization, the Company incurred a charge of $2,292
(pre-tax), of which $1,188 (pre-tax) was incurred in 2005 and
$1,104 (pre-tax) in 2004. Employee severance costs associated
with the termination of approximately 40 of LE Frances
179 employees were $2,123 (pre-tax). Costs not relating to
employee severance primarily included warehouse relocation costs
and professional fees.
Acquisitions
On November 30, 2007, the Company acquired the assets and
business of Vernon Tool Company, Ltd. (Vernon Tool),
a privately-held manufacturer of computer-controlled pipe
cutting equipment used for precision fabrication purposes
headquartered near San Diego, California, for approximately
$12,434 in cash. The Company began consolidating the results of
Vernon Tool in the Companys consolidated financial
statements in December 2007. The Company has not yet completed
the evaluation and allocation of the purchase price. The final
purchase price allocations for this transaction will be
completed in 2008. This acquisition adds to the Companys
ability to support its customers in the growing market for
infrastructure development. Annual sales are approximately
$9,000.
On November 29, 2007, the Company announced that it had
entered into a majority-owned joint venture with Zhengzhou Heli
Welding Materials Co., Ltd., a privately-held manufacturer of
subarc flux based in Zhengzhou, China. The joint venture, formed
in February 2008, will manufacture subarc flux and subarc wire
in Zhengzhou. Annual sales for Zhengzhou Heli are approximately
$8,000.
On July 20, 2007, the Company acquired Nanjing Kuang Tai
Welding Company, Ltd. (Nanjing), a manufacturer of
stick electrode products based in Nanjing, China, for
approximately $4,245 in cash and assumed debt. The Company began
consolidating the results of Nanjing in the Companys
consolidated financial statements in July 2007. The Company
previously owned 35% of Nanjing indirectly through its
investment in Kuang Tai Metal Industrial Company, Ltd.
Nanjings annual sales are approximately $10,000.
On March 30, 2007, the Company acquired all of the
outstanding stock of Spawmet Sp. z.o.o. (Spawmet), a
privately held manufacturer of welding consumables headquartered
near Katowice, Poland, for approximately $5,000 in cash. The
Company began consolidating the results of Spawmet in the
Companys consolidated financial statements in April 2007.
This acquisition provides the Company with a portfolio of stick
electrode products and the Company expects this acquisition to
enhance its market position by broadening its distributor
network in Poland and Eastern Europe. Annual sales are
approximately $5,000.
On October 31, 2006, the Company acquired all of the
outstanding stock of Metrode, a privately held manufacturer of
specialty welding consumables headquartered near London,
England, for approximately $25,000 in cash. The
18
Company began consolidating the results of Metrode in the
Companys consolidated financial statements in November
2006. The purchase price allocation for this investment resulted
in goodwill of approximately $4,000. The Company expects this
acquisition to provide high quality, innovative solutions for
many high-end specialty applications, including the rapidly
growing power generation and petrochemical industries. Annual
sales are approximately $25,000.
On April 29, 2005, the Company acquired all of the
outstanding stock of J.W. Harris, a privately held brazing and
soldering alloys manufacturer headquartered in Mason, Ohio for
approximately $71,000 in cash and $15,000 of assumed debt. The
Company began consolidating the results of J.W. Harris
operations in the Companys consolidated financial
statements in May 2005. The purchase price allocation for this
investment resulted in goodwill of $13,263. This acquisition has
provided the Company with a strong complementary metals-joining
technology and a leading position in the brazing and soldering
alloys market. J.W. Harris has manufacturing plants in Ohio and
Rhode Island and an international distribution center located in
Spain.
The Company continues to expand globally and periodically looks
at transactions that would involve significant investments. The
Company can fund its global expansion plans with operational
cash flow, but a significant acquisition may require access to
capital markets, in particular, the public
and/or
private bond market, as well as the syndicated bank loan market.
The Companys financing strategy is to fund itself at the
lowest after-tax cost of funding. Where possible, the Company
utilizes operational cash flows and raises capital in the most
efficient market, usually the U.S., and then lends funds to the
specific subsidiary that requires funding. If additional
acquisitions providing appropriate financial benefits become
available, additional expenditures may be made.
Debt
During March 2002, the Company issued Senior Unsecured Notes
(the Notes) totaling $150,000 through a private
placement. The Notes have original maturities ranging from five
to ten years with a weighted average interest rate of 6.1% and
an average tenure of eight years. Interest is payable
semi-annually in March and September. The proceeds are being
used for general corporate purposes, including acquisitions. The
proceeds are generally invested in short-term, highly liquid
investments. The Notes contain certain affirmative and negative
covenants, including restrictions on asset dispositions and
financial covenants (interest coverage and funded
debt-to-EBITDA, as defined in the Notes Agreement, ratios). As
of December 31, 2007, the Company was in compliance with
all of its debt covenants. During March 2007, the Company repaid
the $40,000 Series A Notes which had matured reducing the
total balance outstanding of the Notes to $110,000.
The maturity and interest rates of the Notes follow (in
thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Due
|
|
|
Matures
|
|
|
Interest Rate
|
|
|
Series B
|
|
$
|
30,000
|
|
|
|
March 2009
|
|
|
|
5.89
|
%
|
Series C
|
|
$
|
80,000
|
|
|
|
March 2012
|
|
|
|
6.36
|
%
|
During March 2002, the Company entered into floating rate
interest rate swap agreements totaling $80,000, to convert a
portion of the Notes outstanding 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 were recognized in
earnings. Net payments or receipts under these agreements were
recognized as adjustments to interest expense. In May 2003,
these swap agreements were terminated. The gain on the
termination of these swaps was $10,613, and has been deferred
and is being amortized as an offset to interest expense over the
remaining life of the Notes. The amortization of this gain
reduced interest expense by $1,121 in 2007 and $2,117 in 2006
and 2005, and is expected to reduce annual interest expense by
$958 in 2008. At December 31, 2007, $1,713 remains to be
amortized which is recorded in Long-term debt, less
current portion.
During July 2003 and April 2004, the Company entered into
various floating rate interest rate swap agreements totaling
$110,000, to convert a portion of the Notes outstanding from
fixed to floating rates based on the London Inter-Bank Offered
Rate (LIBOR), plus a spread of between 179.75 and
226.50 basis points. The variable rates are 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
19
the hedged item are recognized in earnings. Net payments or
receipts under these agreements are recognized as adjustments to
interest expense.
The fair value of the swaps is recorded as a long-term asset or
liability with a corresponding offset to Long-term
debt. The fair value of these swaps at December 31,
2007 and 2006 was an asset of $762 and a liability of $3,428,
respectively. Swaps have increased the value of the
Series B Notes from $30,000 to $30,700 and the
Series C Notes from $80,000 to $81,776 as of
December 31, 2007. The weighted average effective rate on
the Notes, net of the impact of swaps, was 6.4% for 2007.
Revolving
Credit Agreement
In 2004, the Company entered into a new $175,000, five-year
revolving Credit Agreement. The Credit Agreement may be used for
general corporate purposes and may be increased, subject to
certain conditions, by an additional amount up to $75,000. The
interest rate on borrowings under the Credit Agreement is based
on either LIBOR plus a spread based on the Companys
leverage ratio or the prime rate, at the Companys
election. A quarterly facility fee is payable based upon the
daily aggregate amount of commitments and the Companys
leverage ratio. The Credit Agreement contains customary
affirmative and negative covenants for credit facilities of this
type, including limitations on the Company with respect to
indebtedness, liens, investments, distributions, mergers and
acquisitions, dispositions of assets, subordinated debt and
transactions with affiliates. As of December 31, 2007,
there are no borrowings under the Credit Agreement.
Short-term
Borrowings
The Companys short-term borrowings included in Amounts due
banks were $11,581 and $6,214 at December 31, 2007 and
2006, respectively, and represent the borrowings of foreign
subsidiaries at weighted average interest rates of 14.00% and
6.57%, respectively.
Contractual
Obligations and Commercial Commitments
The Companys contractual obligations and commercial
commitments (as defined by Section 13(j) of the Securities
Exchange Act of 1934) as of December 31, 2007 are as
follows (in thousands):
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|
|
|
Payments Due By Period
|
|
|
|
|
|
|
|
|
|
2009 to
|
|
|
2011 to
|
|
|
2013 and
|
|
|
|
Total
|
|
|
2008
|
|
|
2010
|
|
|
2012
|
|
|
Beyond
|
|
|
Long-term debt
|
|
$
|
112,554
|
|
|
$
|
300
|
|
|
$
|
30,399
|
|
|
$
|
80,466
|
|
|
$
|
1,389
|
|
Interest on long-term debt
|
|
|
24,964
|
|
|
|
7,069
|
|
|
|
10,191
|
|
|
|
7,517
|
|
|
|
187
|
|
Capital lease obligations
|
|
|
3,205
|
|
|
|
605
|
|
|
|
1,283
|
|
|
|
1,317
|
|
|
|
|
|
Short-term debt
|
|
|
11,581
|
|
|
|
11,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on short-term debt
|
|
|
828
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
29,170
|
|
|
|
9,914
|
|
|
|
10,350
|
|
|
|
4,864
|
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
182,302
|
|
|
$
|
30,297
|
|
|
$
|
52,223
|
|
|
$
|
94,164
|
|
|
$
|
5,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 1, 2007, the Company adopted the provisions of
FIN 48. For further discussion, see Note A and
Note H to the Companys Consolidated Financial
Statements. As of December 31, 2007, there were $29,215 of
tax liabilities, including interest and penalties, related to
unrecognized tax benefits. Because of the high degree of
uncertainty regarding the timing of future cash outflows
associated with these liabilities, the Company is unable to
estimate the years in which settlement will occur with the
respective taxing authorities.
The Company has provided a guarantee on loans for an
unconsolidated joint venture of approximately $8,176 at
December 31, 2007. The guarantee is provided on four
separate loan agreements. Two loans are for $2,000 each, one
which matures in June 2008 and the other maturing in May 2009.
Two loans mature in July 2010, one for $2,709 and the other for
$1,467. The loans were undertaken to fund the joint
ventures working capital and capital improvement needs.
The Company would become liable for any unpaid principal and
accrued interest if the joint
20
venture were to default on payment at the respective maturity
dates. The Company believes the likelihood is remote that
material payment will be required under these arrangements
because of the current financial condition of the joint venture.
Stock-Based
Compensation
On April 28, 2006, the shareholders of the Company approved
the 2006 Equity and Performance Incentive Plan, as amended
(EPI Plan), which replaces the 1998 Stock Plan, as
amended and restated in May 2003. The EPI Plan provides for the
granting of options, appreciation rights, restricted shares,
restricted stock units and performance-based awards up to an
additional 3,000,000 of the Companys common shares. In
addition, on April 28, 2006, the shareholders of the
Company approved the 2006 Stock Plan for Non-Employee Directors,
as amended (Director Plan), which replaces the Stock
Option Plan for Non-Employee Directors adopted in 2000. The
Director Plan provides for the granting of options, restricted
shares and restricted stock units up to an additional 300,000 of
the Companys common shares.
There were 268,854 and 241,818 options and restricted shares
granted during 2007 and 2006, respectively. The Company issued
348,450 and 561,218 shares of common stock from treasury
upon exercise of employee stock options during 2007 and 2006,
respectively. The Company issued 8,411 shares of common
stock from authorized but unissued shares upon vesting of
deferred shares during 2006.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. (SFAS) 123 (Revised 2004), Share-Based
Payment, which is a revision of SFAS 123,
Accounting for Stock-Based Compensation.
SFAS 123(R) supersedes Accounting Principles Board
Opinion No. (APB) 25, Accounting for Stock Issued to
Employees. Generally, the approach in SFAS 123(R)
is similar to the approach described in SFAS 123.
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. The Company
adopted SFAS 123(R) on January 1, 2006 using the
modified-prospective method.
Expense is recognized for all awards of stock-based compensation
by allocating the aggregate grant date fair value over the
vesting period. No expense is recognized for any stock options,
restricted or deferred shares ultimately forfeited because
recipients fail to meet vesting requirements. Total stock-based
compensation expense recognized in the consolidated statements
of income for 2007, 2006 and 2005 was $4,679, $4,217 and $3,527,
respectively. The related tax benefit for 2007, 2006 and 2005
was $1,789, $1,612 and $1,348, respectively.
As of December 31, 2007, total unrecognized stock-based
compensation expense related to nonvested stock options and
restricted shares was $8,799, which is expected to be recognized
over a weighted average period of approximately 34 months.
The aggregate intrinsic value of options outstanding at
December 31, 2007, based on the Companys closing
stock price of $71.18 as of the last business day of the period
ended December 31, 2007, which would have been received by
the optionees had all options been exercised on that date was
$49,164. The aggregate intrinsic value of options exercisable at
December 31, 2007, based on the Companys closing
stock price of $71.18 as of the last business day of the period
ended December 31, 2007, which would have been received by
the optionees had all options been exercised on that date was
$43,482. The total intrinsic value of stock options exercised
during 2007 and 2006 was $15,413 and $15,899, respectively.
Intrinsic value is the amount by which the fair value of the
underlying stock exceeds the exercise price of the options.
Product
Liability Expense
Product liability expenses have been significant, particularly
with respect to welding fume claims. Costs incurred are volatile
and are largely related to trial activity. The costs associated
with these claims are predominantly defense costs, which are
recognized in the periods incurred. These expenditures decreased
$9,528 in 2007 compared to 2006. See Note N to the
Companys Consolidated Financial Statements for further
discussion.
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
21
Company benefits significantly from cost sharing with
co-defendants and insurance carriers. Moreover, the Company has
been largely successful to date in its defense of these claims
and indemnity payments have been immaterial. If cost sharing
dissipates for some currently unforeseen reason, or the
Companys trial experience changes overall, it is possible
on a longer term basis that the cost of resolving this loss
contingency could materially reduce the Companys operating
results and cash flow and restrict capital market access.
OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS
The Company utilizes letters of credit to back certain payment
and performance obligations. Letters of credit are subject to
limits based on amounts outstanding under the Companys
Credit Agreement. The Company has also provided a guarantee on
loans for an unconsolidated joint venture of approximately
$8,176 at December 31, 2007. The Company believes the
likelihood is remote that material payment will be required
under this arrangement because of the current financial
condition of the joint venture.
NEW
ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial
Statements, which is an amendment of Accounting Research
Bulletin No. (ARB) 51. SFAS 160 clarifies
that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160
changes the way the consolidated income statement is presented,
thus requiring consolidated net income to be reported at amounts
that include the amounts attributable to both parent and the
noncontrolling interest. SFAS 160 is effective for the
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does
not expect the adoption of SFAS 160 to have a significant
impact on its financial statements.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations. SFAS 141(R) replaces
SFAS 141, Business Combinations.
SFAS 141(R) retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which
SFAS 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for
each business combination. SFAS 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in
the business combination and establishes the acquisition date as
the date that the acquirer achieves control. SFAS 141(R)
requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in the
statement. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS 115, which permits entities to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
Unrealized gains and losses arising subsequent to adoption are
reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company does
not expect that adoption of SFAS 159 will have a material
impact on its financial statements.
In September 2006, the FASB issued SFAS 157 Fair
Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 does not require any new
fair value measurements, rather it applies under existing
accounting pronouncements that require or permit fair value
measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company will adopt
SFAS 157 as required. The Company does not expect that
adoption of SFAS 157 will have a material impact on its
financial statements.
In July 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies the recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. In
addition, FIN 48 requires the cumulative effect of adoption
to be recorded as an adjustment to the opening balance of
retained earnings. FIN 48 is effective for fiscal years
beginning
22
after December 15, 2006. The Company adopted FIN 48 as
of January 1, 2007. See Note I to the Companys
Consolidated Financial Statements for further discussion.
CRITICAL
ACCOUNTING POLICIES
The Companys consolidated financial statements are based
on the selection and application of significant accounting
policies, which require management to make estimates and
assumptions. These estimates and assumptions are reviewed
periodically by management and compared to historical trends to
determine the accuracy of estimates and assumptions used. If
warranted, these estimates and assumptions may be changed as
current trends are assessed and updated. Historically, the
Companys estimates have been determined to be reasonable.
No material changes to the Companys accounting policies
were made during 2007. 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 differing
procedural stages and information on the circumstances of each
claimant, which forms the basis for judgments as to the validity
or ultimate disposition of such actions, will vary greatly.
Therefore, in many situations a range of possible losses cannot
be made. 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 N to the
Companys Consolidated Financial Statements and the Legal
Proceedings section of this Annual Report on
Form 10-K
for further discussion of legal contingencies.
The Company is subject to taxation from U.S. federal,
state, municipal and international jurisdictions. The
calculation of current income tax expense is based on the best
information available and involves significant management
judgment. The actual income tax liability for each jurisdiction
in any year can in some instances be ultimately determined
several years after the financial statements are published.
The Company maintains reserves for estimated income tax
exposures for many jurisdictions. Exposures are settled
primarily through the completion of audits within each
individual tax jurisdiction or the closing of a statute of
limitation. Exposures can also be affected by changes in
applicable tax law or other factors, which may cause management
to believe a revision of past estimates is appropriate.
Management believes that an appropriate liability has been
established for income tax exposures; however, actual results
may materially differ from these estimates.
Deferred
Income Taxes
Deferred income taxes are recognized at currently enacted tax
rates for temporary differences between the financial reporting
and income tax bases of assets and liabilities and operating
loss and tax credit carryforwards. The Company does not provide
deferred income taxes on unremitted earnings of certain
non-U.S. subsidiaries
which are deemed permanently reinvested. It is not practicable
to calculate the deferred taxes associated with the remittance
of these earnings. Deferred income taxes of $215 have been
provided on earnings of $1.6 million that are not expected
to be permanently reinvested. At December 31, 2007, the
Company had approximately $68,512 of gross deferred
23
tax assets related to deductible temporary differences and tax
loss and credit carryforwards which may 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 December 31,
2007, a valuation allowance of $21,421 had been recorded against
these deferred tax assets based on this assessment. The Company
believes it is more likely than not that the tax benefit of the
remaining net deferred tax assets will be realized. The amount
of net deferred tax assets considered realizable could be
increased or reduced in the future if the Companys
assessment of future taxable income or tax planning strategies
changes.
Pensions
The Company maintains a number of defined benefit and defined
contribution plans to provide retirement benefits for employees
in the U.S., as well as employees outside the U.S. These
plans are maintained and contributions are made in accordance
with the Employee Retirement Income Security Act of 1974
(ERISA), local statutory law or as determined by the
Board of Directors. The plans generally provide benefits based
upon years of service and compensation. Pension plans are funded
except for a domestic non-qualified pension plan for certain key
employees and certain foreign plans.
In September 2006, the FASB issued SFAS 158
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS 158
requires companies to recognize the funded status of a
benefit plan as the difference between plan assets at fair value
and the projected benefit obligation. Unrecognized gains or
losses and prior service costs, as well as the transition asset
or obligation remaining from the initial application of
Statements 87 and 106 will be recognized in the balance sheet,
net of tax, as a component of Accumulated other comprehensive
loss and will subsequently be recognized as components of net
periodic benefit cost pursuant to the recognition and
amortization provisions of those Statements. In addition,
SFAS 158 requires additional disclosures about the future
effects on net periodic benefit cost that arise from the delayed
recognition of gains or losses, prior service costs or credits,
and transition asset or obligation. SFAS 158 also requires
that defined benefit plan assets and obligations be measured as
of the date of the employers fiscal year-end balance
sheet. The recognition and disclosure provisions of
SFAS 158 are effective for fiscal years ending after
December 15, 2006. The requirement to measure plan assets
and benefit obligations as of the date of the employers
fiscal year-end balance sheet is effective for fiscal years
ending after December 15, 2008. The Company adopted
SFAS 158 as of December 31, 2006. The adoption of
SFAS 158 had no impact on the measurement date as the
Company has historically measured the plan assets and benefit
obligations of its pension and other postretirement plans as of
December 31. See Note I to the Companys
Consolidated Financial Statements for further discussion.
As of December 31, 2006, the Company adopted the
recognition and disclosure provisions of SFAS 158. As a
result of adopting SFAS 158, the Company recorded
liabilities equal to the underfunded status of defined benefit
plans and assets equal to the overfunded status of certain
defined benefit plans measured as the difference between the
fair value of plan assets and the projected benefit obligation.
As of December 31, 2007 and December 31, 2006, the
Company recognized liabilities of $32,954 and $34,900, prepaids
of $48,897 and $16,773 and also recognized Accumulated other
comprehensive loss of $52,274 and $69,978 (after-tax),
respectively, for its defined benefit pension plans.
A substantial portion of the Companys pension amounts
relate to its defined benefit plan in the United States. The
market-related value of plan assets is determined by fair values
at December 31.
A significant element in determining the Companys pension
expense is the expected return on plan assets. At the end of
each year, the expected return on plan assets is determined
based on the weighted average expected return of the various
asset classes in the plans portfolio and the targeted
allocation of plan assets. The asset class return is developed
using historical asset return performance, as well as current
market conditions such as inflation, interest rates and equity
market performance. The Company determined this rate to be 8.25%
and 8.50% for its U.S. plans at December 31, 2007 and
2006, respectively. 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
24
between this expected return and the actual return on plan
assets is deferred and amortized over the average remaining
service period of active employees expected to receive benefits
under the plan. The amortization of the net deferral of past
losses will increase future pension expense. During 2007,
investment returns in the Companys U.S. pension plans
were approximately 8.4% compared to 13.7% in 2006. A
25 basis point change in the expected return on plan assets
would increase or decrease pension expense by approximately
$1,400.
Another significant element in determining the Companys
pension expense is the discount rate for plan liabilities. To
develop the discount rate assumption to be used, the Company
refers to the yield derived from matching projected pension
payments with maturities of a portfolio of available
non-callable bonds rated Aa- or better. The Company also refers
to investment yields available at year-end on long-term bonds
rated Aa- or better. The Company determined this rate to be
6.35% for its U.S. plans at December 31, 2007. A
25 basis point change in the discount rate would increase
or decrease pension expense by approximately $2,000.
The Company made voluntary contributions to its
U.S. defined benefit plans of $10,000, $17,500 and $31,500
in 2007, 2006 and 2005, respectively. The Company expects to
voluntarily contribute $10,000 to its U.S. plans in 2008.
Based on current pension funding rules, the Company does not
anticipate that contributions to the plans would be required in
2008.
Pension expense relating to the Companys defined benefit
plans was $6,260, $17,926 and $21,328 in 2007, 2006 and 2005,
respectively. The Company expects 2008 pension expense to be
essentially flat with 2007.
In the first quarter 2006, the Company modified its retirement
benefit programs whereby employees of its largest
U.S. company hired on or after January 1, 2006 will be
covered under a newly enhanced 401(k) defined contribution plan.
In the second quarter of 2006, current employees of the
U.S. company made an election to either remain in the
existing retirement programs or switch to new programs offering
enhanced defined contribution benefits, improved vacation and a
reduced defined benefit.
Inventories
and Reserves
Inventories are valued at the lower of cost or market. For most
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 $72,088 at December 31, 2007 and $68,985 at
December 31, 2006. The Company reviews the net realizable
value of inventory in detail on an on-going basis, with
consideration given to deterioration, obsolescence and other
factors. If actual market conditions differ from those projected
by management, and the Companys estimates prove to be
inaccurate, write-downs of inventory values and adjustments to
cost of sales may be required. Historically, the Companys
reserves have approximated actual experience.
Accounts
Receivable and Allowances
The Company maintains an allowance for doubtful accounts for
estimated losses from the failure of its customers to make
required payments for products delivered. The Company estimates
this allowance based on the age of the related receivable,
knowledge of the financial condition of customers, review of
historical receivables and reserve trends and other pertinent
information. If the financial condition of customers
deteriorates or an unfavorable trend in receivable collections
is experienced in the future, additional allowances may be
required. Historically, the Companys reserves have
approximated actual experience.
Impairment
of Long-Lived Assets
In accordance with SFAS 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 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
25
available, the estimate of fair value is based on various
valuation techniques, including the discounted value of
estimated future cash flows and established business valuation
multiples.
The estimates of future cash flows, based on reasonable and
supportable assumptions and projections, require
managements judgment. Any changes in key assumptions about
the Companys businesses and their prospects, or changes in
market conditions, could result in an impairment charge.
Impairment
of Goodwill and Intangibles
The Company performs an annual impairment test of goodwill in
the fourth quarter using the same dates year over year. In
addition, goodwill is tested as necessary if changes in
circumstances or the occurrence of events indicate potential
impairment. The Company evaluates the recoverability of goodwill
and intangible assets not subject to amortization as required
under SFAS 142 Goodwill and Other Intangible
Assets by comparing the fair value of each reporting
unit with its carrying value. The fair values of reporting units
is determined using models developed by the Company which
incorporate estimates of future cash flows, allocations of
certain assets and cash flows among reporting units, future
growth rates, established business valuation multiples, and
management judgments regarding the applicable discount rates to
value those estimated cash flows
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The Companys primary financial market risks include
fluctuations in currency exchange rates, commodity prices and
interest rates. The Company manages these risks by using
derivative financial instruments in accordance with established
policies and procedures. The Company does not enter into
derivatives or other financial instruments for trading or
speculative purposes.
Included below is a sensitivity analysis based upon a
hypothetical 10% weakening or strengthening in the
U.S. dollar compared to the December 31, 2007 foreign
currency rates, a 10% change in commodity prices, and a
100 basis point increase in effective interest rates under
the Companys current borrowing arrangements. The
contractual derivative and borrowing arrangements in effect at
December 31, 2007 were compared to the hypothetical foreign
exchange, commodity price, or interest rates in the sensitivity
analysis to determine the effect on Income before taxes,
Interest expense, or Accumulated other comprehensive loss. The
analysis takes into consideration any offset that would result
from changes in the value of the hedged asset or liability.
Foreign
Currency Exchange Risk
The Company enters into forward foreign exchange contracts
principally to hedge the currency fluctuations in transactions
denominated in foreign currencies, thereby limiting the
Companys risk that would otherwise result from changes in
exchange rates. At December 31, 2007, the Company hedged
third party and intercompany purchases and sales. At
December 31, 2007, the Company had foreign exchange
contracts with a notional value of approximately $47,225. At
December 31, 2007, a hypothetical 10% weakening of the
U.S. dollar would not materially affect the Companys
financial statements.
At December 31, 2007, the Company also had foreign exchange
contracts with a notional value of approximately $17,021 which
hedged intercompany loans. Any loss resulting from a
hypothetical 10% weakening of the U.S. dollar would be
offset by the associated gain on the underlying intercompany
loan receivable and would not materially affect the
Companys financial statements.
Commodity
Price Risk
From time to time, the Company uses various hedging arrangements
to manage exposures to price risk from commodity purchases.
These hedging arrangements have the effect of locking in for
specified periods the prices the Company will pay for the volume
to which the hedge relates. A hypothetical 10% adverse change in
commodity prices on the Companys open commodity futures at
December 31, 2007 would not materially affect the
Companys financial statements.
26
Interest
Rate Risk
At December 31, 2007, the Company had various floating
interest rate swaps used to convert its outstanding $110,000
fixed-rate, long-term borrowings into short-term variable
interest rates. An increase in interest expense resulting from a
hypothetical increase of 100 basis points in the
December 31, 2007 floating rate would not materially affect
the Companys financial statements. See discussion in
Item 7, Liquidity Long-term debt.
The fair value of the Companys cash and cash equivalents
and marketable securities at December 31, 2007,
approximated carrying value due to their short-term duration.
These financial instruments are also subject to concentrations
of credit risk. The Company has minimized this risk by entering
into investments with major banks and financial institutions and
investing in high-quality instruments. The Company does not
expect any counterparties to fail to meet their obligations.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The response to this item is submitted in a separate section of
this report following the signature page.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of disclosure
controls and procedures, as such term is defined in
Rule 13a-15(e)
of the Exchange Act. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective
as of the end of the period covered by this annual report.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of the
Companys management, including the Chief Executive Officer
and Chief Financial Officer, the Company conducted an evaluation
of the effectiveness of internal control over financial
reporting as of December 31, 2007 based on the framework in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on the Companys evaluation
under such framework, management concluded that the
Companys internal control over financial reporting was
effective as of December 31, 2007.
The effectiveness of the Companys internal control over
financial reporting as of December 31, 2007 has been
audited by Ernst & Young LLP, an independent
registered public accounting firm, as stated in their report,
which is included herein.
Changes
in Internal Control Over Financial Reporting
There have been no changes in the Companys internal
controls over financial reporting that occurred during the
fourth quarter of 2007 that materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
27
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The Company will file its 2008 proxy statement pursuant to
Regulation 14A of the Exchange Act prior to April 30,
2008.
Except for the information set forth below concerning our
Executive Officers, the information required by this item is
incorporated by reference from the 2008 proxy statement.
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
John M. Stropki, Jr.
|
|
|
57
|
|
|
Chairman of the Board since October 13, 2004; director since
1998; Chief Executive Officer and President since June 3, 2004;
Chief Operating Officer from May 1, 2003 to June 3, 2004;
Executive Vice President from 1995-June 3, 2004; President North
America 1996-2003.
|
Vincent K. Petrella
|
|
|
47
|
|
|
Senior Vice President, Chief Financial Officer and Treasurer
since October 7, 2005; Vice President, Chief Financial Officer
and Treasurer from February 4, 2004 to October 7, 2005 and Vice
President, Corporate Controller 2001-2003.
|
Frederick G. Stueber
|
|
|
54
|
|
|
Senior Vice President, General Counsel and Secretary since 1996.
|
George D. Blankenship
|
|
|
45
|
|
|
Senior Vice President, Global Engineering since October 7, 2005;
Vice President, Global Engineering from May 5, 2005 to October
7, 2005; Senior Vice President; President, Lincoln Cleveland of
The Lincoln Electric Company since January 1, 2008; Senior Vice
President, U.S. Operations of The Lincoln Electric Company since
October 7, 2005; Vice President, Cleveland Operations of The
Lincoln Electric Company from June 6, 2005 to October 7, 2005;
Vice President, Engineering and Quality Assurance of The Lincoln
Electric Company from 2000 to June 6, 2005.
|
Gretchen A. Farrell
|
|
|
45
|
|
|
Vice President, Human Resources since May 5, 2005; Vice
President, Human Resources of The Lincoln Electric Company since
March 1, 2003; Director, Compensation and Benefits of The
Lincoln Electric Company 1997-2003.
|
Thomas A. Flohn
|
|
|
47
|
|
|
Vice President; President, Lincoln Asia Pacific since January 1,
2005; Vice President of Sales and Marketing, Lincoln Electric
Asia Pacific from May 1, 1999 to December 31, 2004.
|
David M. LeBlanc
|
|
|
43
|
|
|
Vice President; President, Lincoln Electric Europe and Russia
since September 1, 2005; Vice President; President, Lincoln
Electric Latin America from January 1, 2002 to August 31, 2005.
|
Robert K. Gudbranson
|
|
|
44
|
|
|
Vice President, Strategic Planning and Acquisitions since July
27, 2006; Director, Strategic Planning and Acquisitions from
September 30, 2005 to July 26, 2006. Prior to joining the
Company, Mr. Gudbranson was the Director of Business Development
and Investor Relations at Invacare Corporation (manufacturer of
wheelchairs and other home medical equipment) from 2002 to 2005.
|
The Company has been advised that there is no arrangement or
understanding among any one of the officers listed and any other
persons pursuant to which he was elected as an officer. The
executive officers serve at the pleasure of the Board of
Directors.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item is incorporated by
reference from the 2008 proxy statement.
28
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Except for the information set forth below regarding our equity
plans, the information required by this item is incorporated by
reference from the 2008 proxy statement.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities
|
|
|
|
|
|
Equity Compensation
|
|
|
|
to be Issued
|
|
|
Weighted Average
|
|
|
Plans (Excluding
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Securities Reflected
|
|
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved by security holders
|
|
|
1,663,704
|
|
|
$
|
41.63
|
|
|
|
3,919,828
|
|
Not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,663,704
|
|
|
$
|
41.63
|
|
|
|
3,919,828
|
|
For further information on the Companys equity
compensation plans see Note A Significant
Accounting Policies and Note E
Stock Plans to the Companys consolidated financial
statements included in Item 8.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is incorporated by
reference from the 2008 proxy statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from the 2008 proxy statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(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 and certifications:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
Consolidated Balance Sheets December 31, 2007
and 2006
Consolidated Statements of Income Years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Shareholders Equity
Years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows Years ended
December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
The following consolidated financial statement schedule of the
Company is included in a separate section of this report
following the signature page:
Schedule II Valuation and Qualifying Accounts
29
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable, and therefore, have been omitted.
(a) (3) Exhibits
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
3.1
|
|
|
Restated Articles of Incorporation of Lincoln Electric Holdings,
Inc. (filed as Annex B to Form S-4 of Lincoln Electric Holdings,
Inc., Registration No. 333-50435, filed on April 17, 1998, and
incorporated herein by reference and made a part hereof).
|
|
3.2
|
|
|
Amended Code of Regulations of Lincoln Electric Holdings, Inc.
(filed as Exhibit 3(b) to Form 10-Q of Lincoln Electric
Holdings, Inc. for the three months ended March 31, 2000, SEC
File No. 0-1402 and incorporated herein by reference and made a
part hereof).
|
|
10.1
|
|
|
Credit Agreement dated December 17, 2004 among Lincoln Electric
Holdings, Inc., The Lincoln Electric Company, Lincoln Electric
International Holding Company, Harris Calorific, Inc., Lincoln
Global, Inc., the financial institutions listed in Annex A
thereof, and KeyBank National Association, as Letter of Credit
Issuer and Administrative Agent (filed as Exhibit 10.1 to Form
8-K of Lincoln Electric Holdings, Inc. filed on December 22,
2004, SEC File No. 0-1402 and incorporated herein by reference
and made a part hereof).
|
|
10.2
|
|
|
Note Purchase Agreement dated March 12, 2002 between Lincoln
Electric Holdings, Inc. and The Lincoln Electric Company and the
Purchasers listed in Schedule A thereof (filed as Exhibit 10(q)
to Form 10-Q of Lincoln Electric Holdings, Inc. for the three
months ended March 31, 2002, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
|
10.3
|
|
|
Amended and Restated Note Purchase and Private Shelf Agreement
between Lincoln Electric Holdings, Inc., The Lincoln Electric
Company and The Prudential Insurance Company of America dated as
of April 30, 2002 (filed as Exhibit 10(v) to Form 10-Q of
Lincoln Electric Holdings, Inc. for the three months ended June
30, 2002, SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof).
|
|
10.4
|
|
|
Amendment No. 1 to the Amended and Restated Note Purchase and
Private Shelf Agreement dated as of December 14, 2006 (filed as
Exhibit 10(d) to Form 10-K of Lincoln Electric Holdings, Inc.
for the year ended December 31, 2006, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
|
10.5*
|
|
|
Lincoln Electric Holdings, Inc. 1998 Stock Plan (as amended,
restated and renamed as of May 1, 2003) (filed as Appendix B to
the Lincoln Electric Holdings, Inc. Proxy Statement dated March
31, 2003, SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof).
|
|
10.6*
|
|
|
Amendment No. 1 to the Lincoln Electric Holdings, Inc. 1998
Stock Plan (as amended, restated and renamed effective May 1,
2003) dated October 20, 2006 (filed herewith).
|
|
10.7*
|
|
|
The Lincoln Electric Company 1988 Incentive Equity Plan (filed
as Exhibit 28 to the Form S-8 Registration Statement of The
Lincoln Electric Company, SEC File No. 33-25209 and incorporated
herein by reference and made a part hereof) as adopted and
amended by Lincoln Electric Holdings, Inc. pursuant to an
Instrument of Adoption and Amendment dated December 29, 1998
(filed as Exhibit 10(d) to Form 10-K of Lincoln Electric
Holdings, Inc. for the year ended December 31, 1998, SEC File
No. 0-1402 and incorporated herein by reference and made a part
hereof).
|
|
10.8*
|
|
|
Amendment No. 2 to the Lincoln Electric Holdings, Inc. 1988
Incentive Equity Plan dated October 20, 2006 (filed herewith).
|
|
10.9*
|
|
|
Form of Indemnification Agreement (filed as Exhibit A to The
Lincoln Electric Company 1987 Proxy Statement, SEC File No.
0-1402, and incorporated herein by reference and made a part
hereof).
|
|
10.10*
|
|
|
Lincoln Electric Holdings, Inc. Supplemental Executive
Retirement Plan (Amended and Restated as of March 1, 2002),
including Amendment Nos. 1 and 2 (filed as Exhibit 10(g) to Form
10-K of Lincoln Electric Holdings, Inc. for the year ended
December 31, 2003, SEC File No. 0-1402 and incorporated herein
by reference and made a part hereof).
|
30
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10.11*
|
|
|
Amendment No. 3 to the Lincoln Electric Holdings, Inc.
Supplemental Executive Retirement Plan (Amended and Restated as
of March 1, 2002) (filed as Exhibit 10.1 to Form 8-K of Lincoln
Electric Holdings, Inc. filed on February 1, 2005, SEC File No.
0-1402 and incorporated herein by reference and made a part
hereof).
|
|
10.12*
|
|
|
Amendment No. 4 to the Lincoln Electric Holdings, Inc.
Supplemental Executive Retirement Plan (Amended and Restated as
of March 1, 2002) (filed as Exhibit 10.1 to Form 8-K of Lincoln
Electric Holdings, Inc. filed on February 18, 2005, SEC File No.
0-1402 and incorporated by reference and made a part hereof).
|
|
10.13*
|
|
|
Lincoln Electric Holdings, Inc. Deferred Compensation Plan for
Executives (Amended and Restated as of January 1, 2004) (filed
as Exhibit 10(h) to Form 10-K of Lincoln Electric Holdings, Inc.
for the year ended December 31, 2003, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
|
10.14*
|
|
|
Amendment No. 1 to the Lincoln Electric Holdings, Inc. Deferred
Compensation Plan for Executives (Amended and Restated as of
January 1, 2004) (filed as Exhibit 10.2 to Form 8-K of Lincoln
Electric Holdings, Inc. filed on February 1, 2005, SEC File No.
0-1402 and incorporated herein by reference and made a part
hereof).
|
|
10.15*
|
|
|
Instrument of Termination of the Lincoln Electric Holdings, Inc.
Deferred Compensation Plan for Executives (filed as Exhibit 10.2
to Form 8-K of Lincoln Electric Holdings, Inc. filed on January
4, 2006, SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof).
|
|
10.16*
|
|
|
Lincoln Electric Holdings, Inc. Deferred Compensation Plan for
Certain Retention Agreements and Other Contractual Arrangements
(Amended and Restated as of January 1, 2004) (filed as Exhibit
10(i) to Form 10-K of Lincoln Electric Holdings, Inc. for the
year ended December 31, 2003, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
|
10.17*
|
|
|
Lincoln Electric Holdings, Inc. Non-Employee Directors
Deferred Compensation Plan (Amended and Restated as of January
1, 2004) filed as Exhibit 10(m) to Form 10-K of Lincoln Electric
Holdings, Inc. for the year ended December 31, 2004, SEC File
No. 0-1402 and incorporated herein by reference and made a part
hereof).
|
|
10.18*
|
|
|
Amendment No. 1 to the Lincoln Electric Holdings, Inc.
Non-Employee Directors Deferred Compensation Plan (Amended
and Restated as of January 1, 2004) (filed as Exhibit 10.3 to
Form 8-K of Lincoln Electric Holdings, Inc. filed on February 1,
2005, SEC File No. 0-1402 and incorporated herein by reference
and made a part hereof).
|
|
10.19*
|
|
|
Amendment No. 2 to the Lincoln Electric Holdings Inc.
Non-Employee Directors Deferred Compensation Plan (Amended
and Restated as of January 1, 2004) (filed as Exhibit 10.1 to
Form 8-K of Lincoln Electric Holdings, Inc. filed on December 5,
2005, SEC File No. 0-1402 and incorporated herein by reference
and made a part hereof).
|
|
10.20*
|
|
|
Description of Management Incentive Plan (filed as Exhibit 10(e)
to Form 10-K of The Lincoln Electric Company for the year ended
December 31, 1995, SEC File No. 0-1402 and incorporated herein
by reference and made a part hereof).
|
|
10.21*
|
|
|
Description of Long-Term Performance Plan (filed as Exhibit
10(f) to Form 10-K of The Lincoln Electric Company for the year
ended December 31, 1997, SEC File No. 0-1402 and incorporated
herein by reference and made a part hereof).
|
|
10.22*
|
|
|
Summary of Employment Agreements (filed as Exhibit 10(l) to
Form 10-K of Lincoln Electric Holdings, Inc. for the year ended
December 31, 2003, SEC File No. 0-1402 and incorporated herein
by reference and made a part hereof).
|
|
10.23*
|
|
|
Form of Severance Agreement (as entered into by the Company and
the following executive officers: Mssrs. Stropki, Stueber and
Fernandez) (filed as Exhibit 10 to Form 10-Q of Lincoln Electric
Holdings, Inc. for the nine months ended December 31, 1998, SEC
File No. 0-1402 and incorporated herein by reference and made a
part hereof).
|
31
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10.24*
|
|
|
Form of Amendment 1 to Severance Agreement (as entered into by
the Company and the following executive officers: Messrs.
Stropki and Stueber) (filed as Exhibit 10(o) to Form 10-K of
Lincoln Electric Holdings, Inc. for the year ended December 31,
1999, SEC File No. 0-1402 and incorporated herein by reference
and made a part hereof).
|
|
10.25*
|
|
|
Stock Option Plan for Non-Employee Directors (filed as Exhibit
10(p) to Form 10-Q of Lincoln Electric Holdings, Inc. for the
three months ended March 31, 2000, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
|
10.26*
|
|
|
Amendment No. 1 to the Lincoln Electric Holdings, Inc. Stock
Option Plan for Non-Employee Directors dated October 20, 2006
(filed herewith).
|
|
10.27*
|
|
|
Summary of Cash Long-Term Incentive Plan, as amended (filed as
Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc.
filed on April 6, 2005, Securities and Exchange Commission File
No. 0-1402 and incorporated herein by reference and made a part
hereof).
|
|
10.28*
|
|
|
Letter Agreement between John M. Stropki, Jr. and Lincoln
Electric Holdings, Inc. dated October 12, 2004 (filed as
Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc.
filed on October 18, 2004, SEC File No. 0-1402 and incorporated
herein by reference and made a part hereof).
|
|
10.29*
|
|
|
2005 Deferred Compensation Plan for Executives dated December
30, 2004 (filed as Exhibit 10.4 to Form 8-K of Lincoln Electric
Holdings, Inc. filed on February 1, 2005, SEC File No. 0-1402
and incorporated herein by reference and made a part hereof).
|
|
10.30*
|
|
|
2006 Equity and Performance Incentive Plan (filed as Appendix B
to the Companys proxy statement filed on March 28, 2006,
SEC File No. 0-1402 and incorporated herein by reference and
made a part hereof).
|
|
10.31*
|
|
|
Amendment No. 1 to the 2006 Equity and Performance Incentive
Plan dated October 20, 2006 (filed as Exhibit 10.1 to Form 10-Q
of Lincoln Electric Holdings, Inc. for the three months ended
March 31, 2007, SEC File No. 0-1402 and incorporated herein by
reference and made a part hereof).
|
|
10.32*
|
|
|
2006 Stock Plan for Non-Employee Directors (filed as Appendix C
to the Companys proxy statement filed on March 28, 2006,
SEC File No. 0-1402 and incorporated herein by reference and
made a part hereof).
|
|
10.33*
|
|
|
Amendment No. 1 to the 2006 Stock Plan for Non-Employee
Directors dated October 20, 2006 (filed as Exhibit 10.2 to Form
10-Q of Lincoln Electric Holdings, Inc. for the three months
ended March 31, 2007, SEC file No. 0-1402 and incorporated
herein by reference and made a part hereof).
|
|
10.34*
|
|
|
Amendment No. 2 to the 2006 Stock Plan for Non-Employee
Directors dated July 26, 2007 (filed as Exhibit 10.1 to Form
10-Q of Lincoln Electric Holdings, Inc. for the three months
ended September 30, 2007, SEC file No. 0-1402 and incorporated
herein by reference and made a part hereof).
|
|
10.35*
|
|
|
Lincoln Electric Holdings, Inc. 2007 Management Incentive
Compensation Plan (filed as Appendix A to the Companys
Proxy Statement filed on March 29, 2007, SEC File No. 0-1402 and
incorporated herein by reference and made a part hereof).
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
23
|
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
24
|
|
|
Powers of Attorney.
|
|
31.1
|
|
|
Certification by the President and Chief Executive Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934.
|
|
31.2
|
|
|
Certification by the Senior Vice President, Chief Financial
Officer and Treasurer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
|
|
32.1
|
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
* |
|
Reflects management contract or other compensatory arrangement
required to be filed as an exhibit pursuant to Item 15(b)
of this report. |
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LINCOLN ELECTRIC HOLDINGS, INC.
|
|
|
|
By:
|
/s/ VINCENT
K. PETRELLA
|
Vincent K. Petrella, Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
February 25, 2008
33
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 and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ JOHN
M. STROPKI, JR.
John
M. Stropki, Jr., Chairman of the
Board, President and Chief Executive
Officer (principal executive officer)
February 25, 2008
|
|
/s/ VINCENT
K.
PETRELLA Vincent
K. Petrella,
Senior Vice President, Chief Financial Officer and
Treasurer (principal financial and accounting officer)
February 25, 2008
|
|
|
|
|
|
|
|
|
|
/s/ VINCENT
K. PETRELLA
Vincent
K. Petrella as
Attorney-in-Fact
for
Harold L. Adams, Director
February 25, 2008
|
|
/s/ VINCENT
K.
PETRELLA Vincent
K. Petrella as
Attorney-in-Fact for
David H. Gunning, Director
February 25, 2008
|
|
|
|
|
|
|
|
|
|
/s/ VINCENT
K. PETRELLA
Vincent
K. Petrella as
Attorney-in-Fact
for
Stephen G. Hanks, Director
February 25, 2008
|
|
/s/ VINCENT
K.
PETRELLA Vincent
K. Petrella as
Attorney-in-Fact for
Kathryn Jo Lincoln, Director
February 25, 2008
|
|
|
|
|
|
|
|
|
|
/s/ VINCENT
K. PETRELLA
VINCENT
K. PETRELLAVincent K. Petrella as
Attorney-in-Fact
for
Robert J. Knoll, Director
February 25, 2008
|
|
/s/ VINCENT
K.
PETRELLA Vincent
K. Petrella as
Attorney-in-Fact for
Hellene S. Runtagh, Director
February 25, 2008
|
|
|
|
|
|
|
|
|
|
/s/ VINCENT
K. PETRELLA
Vincent
K. Petrella as
Attorney-in-Fact
for
G. Russell Lincoln, Director
February 25, 2008
|
|
/s/ VINCENT
K.
PETRELLA Vincent
K. Petrella as
Attorney-in-Fact for
William E. MacDonald III, Director
February 25, 2008
|
|
|
|
|
|
|
|
|
|
/s/ VINCENT
K. PETRELLA
Vincent
K. Petrella as
Attorney-in-Fact
for
George H. Walls, Jr., Director
February 25, 2008
|
|
|
34
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Lincoln Electric
Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Lincoln Electric Holdings, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders equity, and cash flows
for each of the three years in the period ended
December 31, 2007. Our audits also included the financial
statement schedule listed in the Index as Item 15 (a) (2).
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lincoln Electric Holdings, Inc. and
subsidiaries at December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set
forth therein.
As discussed in Note A to the financial statements,
effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment. As discussed in Note I to the
financial statements, effective December 31, 2006, the
Company adopted Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit
Pensions and Other Postretirement Plans. As discussed in
Note H to the financial statements, effective
January 1, 2007, the Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Lincoln Electric Holdings, Inc. and subsidiaries internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 19,
2008 expressed an unqualified opinion thereon.
Cleveland, Ohio
February 19, 2008
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Lincoln Electric
Holdings, Inc.
We have audited Lincoln Electric Holdings, Inc. and
subsidiaries internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Lincoln Electric Holdings, Inc. and
subsidiaries management is responsible for maintaining
effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
Managements Report on Internal Control over Financial
Reporting in Item 9A. Our responsibility is to express an
opinion on the companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Lincoln Electric Holdings, Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on
the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Lincoln Electric Holdings, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income, shareholders
equity, and cash flows for each of the three years in the period
ended December 31, 2007 and our report dated
February 19, 2008 expressed an unqualified opinion thereon.
Cleveland, Ohio
February 19, 2008
F-2
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
217,382
|
|
|
$
|
120,212
|
|
Accounts receivable (less allowance for doubtful accounts of
$7,424 in 2007; $8,484 in 2006)
|
|
|
344,058
|
|
|
|
298,993
|
|
Inventories
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
92,557
|
|
|
|
106,725
|
|
Work-in-process
|
|
|
48,444
|
|
|
|
50,736
|
|
Finished goods
|
|
|
202,848
|
|
|
|
193,683
|
|
|
|
|
|
|
|
|
|
|
Total inventory
|
|
|
343,849
|
|
|
|
351,144
|
|
Deferred income taxes
|
|
|
10,286
|
|
|
|
5,534
|
|
Other current assets
|
|
|
54,073
|
|
|
|
53,527
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
969,648
|
|
|
|
829,410
|
|
PROPERTY, PLANT AND EQUIPMENT
|
|
|
|
|
|
|
|
|
Land
|
|
|
41,415
|
|
|
|
34,811
|
|
Buildings
|
|
|
255,318
|
|
|
|
230,390
|
|
Machinery and equipment
|
|
|
629,780
|
|
|
|
574,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
926,513
|
|
|
|
839,334
|
|
Less accumulated depreciation and amortization
|
|
|
496,569
|
|
|
|
449,816
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
429,944
|
|
|
|
389,518
|
|
OTHER ASSETS
|
|
|
|
|
|
|
|
|
Prepaid pension costs
|
|
|
48,897
|
|
|
|
16,773
|
|
Equity investments in affiliates
|
|
|
59,723
|
|
|
|
48,962
|
|
Intangibles, net
|
|
|
51,194
|
|
|
|
41,504
|
|
Goodwill
|
|
|
42,727
|
|
|
|
35,208
|
|
Long-term investments
|
|
|
30,170
|
|
|
|
28,886
|
|
Other
|
|
|
12,993
|
|
|
|
4,318
|
|
|
|
|
|
|
|
|
|
|
Total Other Assets
|
|
|
245,704
|
|
|
|
175,651
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,645,296
|
|
|
$
|
1,394,579
|
|
|
|
|
|
|
|
|
|
|
See notes to these consolidated financial statements.
F-3
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Amounts due banks
|
|
$
|
11,581
|
|
|
$
|
6,214
|
|
Trade accounts payable
|
|
|
152,301
|
|
|
|
142,264
|
|
Accrued employee compensation and benefits
|
|
|
48,486
|
|
|
|
45,059
|
|
Accrued expenses
|
|
|
25,407
|
|
|
|
24,652
|
|
Accrued taxes, including income taxes
|
|
|
13,130
|
|
|
|
35,500
|
|
Accrued pensions
|
|
|
3,790
|
|
|
|
1,483
|
|
Dividends payable
|
|
|
10,720
|
|
|
|
9,403
|
|
Other current liabilities
|
|
|
45,601
|
|
|
|
32,793
|
|
Current portion of long-term debt
|
|
|
905
|
|
|
|
40,920
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
311,921
|
|
|
|
338,288
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
|
117,329
|
|
|
|
113,965
|
|
Accrued pensions
|
|
|
29,164
|
|
|
|
33,417
|
|
Deferred income taxes
|
|
|
36,874
|
|
|
|
27,061
|
|
Accrued taxes, non-current
|
|
|
34,132
|
|
|
|
|
|
Other long-term liabilities
|
|
|
28,656
|
|
|
|
28,872
|
|
|
|
|
|
|
|
|
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
246,155
|
|
|
|
203,315
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred shares, without par value at stated
capital amount; authorized 5,000,000 shares;
issued and outstanding none
|
|
|
|
|
|
|
|
|
Common shares, without par value at stated capital
amount; authorized 120,000,000 shares;
issued 49,290,717 shares in 2007 and 2006;
outstanding 42,961,679 shares in 2007 and
42,806,429 shares in 2006
|
|
|
4,929
|
|
|
|
4,929
|
|
Additional paid-in capital
|
|
|
145,825
|
|
|
|
137,315
|
|
Retained earnings
|
|
|
1,068,100
|
|
|
|
906,074
|
|
Accumulated other comprehensive income (loss)
|
|
|
15,841
|
|
|
|
(54,653
|
)
|
Treasury shares, at cost 6,329,038 shares in
2007 and 6,484,288 shares in 2006
|
|
|
(147,475
|
)
|
|
|
(140,689
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
1,087,220
|
|
|
|
852,976
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
1,645,296
|
|
|
$
|
1,394,579
|
|
|
|
|
|
|
|
|
|
|
See notes to these consolidated financial statements.
F-4
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
2,280,784
|
|
|
$
|
1,971,915
|
|
|
$
|
1,601,190
|
|
Cost of goods sold
|
|
|
1,633,218
|
|
|
|
1,419,638
|
|
|
|
1,164,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
647,566
|
|
|
|
552,277
|
|
|
|
436,915
|
|
Selling, general & administrative expenses
|
|
|
370,122
|
|
|
|
315,829
|
|
|
|
285,309
|
|
Rationalization (gain) charges
|
|
|
(188
|
)
|
|
|
3,478
|
|
|
|
1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
277,632
|
|
|
|
232,970
|
|
|
|
149,845
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
8,294
|
|
|
|
5,876
|
|
|
|
4,000
|
|
Equity earnings in affiliates
|
|
|
9,838
|
|
|
|
7,640
|
|
|
|
3,312
|
|
Other income
|
|
|
2,823
|
|
|
|
1,839
|
|
|
|
4,689
|
|
Interest expense
|
|
|
(11,430
|
)
|
|
|
(10,153
|
)
|
|
|
(7,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
9,525
|
|
|
|
5,202
|
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
287,157
|
|
|
|
238,172
|
|
|
|
153,899
|
|
Income taxes
|
|
|
84,421
|
|
|
|
63,164
|
|
|
|
31,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
202,736
|
|
|
$
|
175,008
|
|
|
$
|
122,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.73
|
|
|
$
|
4.11
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.67
|
|
|
$
|
4.07
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.91
|
|
|
$
|
0.79
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to these consolidated financial statements.
F-5
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Shares
|
|
|
Total
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance January 1, 2005
|
|
|
41,647
|
|
|
$
|
4,928
|
|
|
$
|
117,593
|
|
|
$
|
673,010
|
|
|
$
|
(58,678
|
)
|
|
$
|
(159,576
|
)
|
|
$
|
577,277
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,306
|
|
|
|
|
|
|
|
|
|
|
|
122,306
|
|
Minimum pension liability adjustment, net of tax of $9,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,034
|
)
|
|
|
|
|
|
|
(15,034
|
)
|
Unrealized loss on derivatives designated and qualifying as cash
flow hedges, net of tax of $410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(605
|
)
|
|
|
|
|
|
|
(605
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,959
|
)
|
|
|
|
|
|
|
(16,959
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,708
|
|
Cash dividends declared $0.73 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,568
|
)
|
|
|
|
|
|
|
|
|
|
|
(30,568
|
)
|
Issuance of shares under benefit plans
|
|
|
964
|
|
|
|
|
|
|
|
8,332
|
|
|
|
|
|
|
|
|
|
|
|
20,348
|
|
|
|
28,680
|
|
Purchase of shares for treasury
|
|
|
(430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,803
|
)
|
|
|
(12,803
|
)
|
|
Balance December 31, 2005
|
|
|
42,181
|
|
|
|
4,928
|
|
|
|
125,925
|
|
|
|
764,748
|
|
|
|
(91,276
|
)
|
|
|
(152,031
|
)
|
|
|
652,294
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,008
|
|
|
|
|
|
|
|
|
|
|
|
175,008
|
|
Minimum pension liability adjustment, net of tax of $45,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,920
|
|
|
|
|
|
|
|
71,920
|
|
Unrealized gain on derivatives designated and qualifying as cash
flow hedges, net of tax of $637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
902
|
|
|
|
|
|
|
|
902
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,323
|
|
|
|
|
|
|
|
27,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,153
|
|
Cash dividends declared $0.79 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,682
|
)
|
|
|
|
|
|
|
|
|
|
|
(33,682
|
)
|
Issuance of shares under benefit plans
|
|
|
627
|
|
|
|
1
|
|
|
|
11,390
|
|
|
|
|
|
|
|
|
|
|
|
11,468
|
|
|
|
22,859
|
|
Purchase of shares for treasury
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126
|
)
|
|
|
(126
|
)
|
Adjustment to initially adopt SFAS 158, net of tax of
$39,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,522
|
)
|
|
|
|
|
|
|
(63,522
|
)
|
|
Balance December 31, 2006
|
|
|
42,806
|
|
|
|
4,929
|
|
|
|
137,315
|
|
|
|
906,074
|
|
|
|
(54,653
|
)
|
|
|
(140,689
|
)
|
|
|
852,976
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,736
|
|
|
|
|
|
|
|
|
|
|
|
202,736
|
|
Unrecognized amounts from defined benefit pension plans, net of
tax of $10,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,704
|
|
|
|
|
|
|
|
17,704
|
|
Unrealized loss on derivatives designated and qualifying as cash
flow hedges, net of tax of $1,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,989
|
)
|
|
|
|
|
|
|
(2,989
|
)
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,779
|
|
|
|
|
|
|
|
55,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273,230
|
|
Cash dividends declared $0.91 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,120
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,120
|
)
|
Issuance of shares under benefit plans
|
|
|
378
|
|
|
|
|
|
|
|
8,939
|
|
|
|
|
|
|
|
|
|
|
|
8,673
|
|
|
|
17,612
|
|
Purchase of shares for treasury
|
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,459
|
)
|
|
|
(15,459
|
)
|
Adjustment to initially adopt FIN 48
|
|
|
|
|
|
|
|
|
|
|
(429
|
)
|
|
|
(1,590
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,019
|
)
|
|
Balance December 31, 2007
|
|
|
42,962
|
|
|
$
|
4,929
|
|
|
$
|
145,825
|
|
|
$
|
1,068,100
|
|
|
$
|
15,841
|
|
|
$
|
(147,475
|
)
|
|
$
|
1,087,220
|
|
|
See notes to these consolidated financial statements.
F-6
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
202,736
|
|
|
$
|
175,008
|
|
|
$
|
122,306
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rationalization (gain) charges
|
|
|
(188
|
)
|
|
|
3,478
|
|
|
|
1,761
|
|
Depreciation and amortization
|
|
|
52,610
|
|
|
|
47,825
|
|
|
|
43,982
|
|
Equity earnings of affiliates, net
|
|
|
(7,208
|
)
|
|
|
(5,728
|
)
|
|
|
(3,312
|
)
|
Deferred income taxes
|
|
|
(3,711
|
)
|
|
|
4,349
|
|
|
|
(1,895
|
)
|
Stock-based compensation
|
|
|
4,679
|
|
|
|
4,217
|
|
|
|
3,527
|
|
Amortization of terminated interest rate swaps
|
|
|
(1,121
|
)
|
|
|
(2,117
|
)
|
|
|
(2,117
|
)
|
Loss (gain) on disposal of property, plant and equipment
|
|
|
627
|
|
|
|
(8,738
|
)
|
|
|
530
|
|
Other non-cash items, net
|
|
|
(1,083
|
)
|
|
|
1,332
|
|
|
|
1,463
|
|
Changes in operating assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
|
(20,723
|
)
|
|
|
(39,719
|
)
|
|
|
(17,274
|
)
|
Decrease (increase) in inventories
|
|
|
36,011
|
|
|
|
(57,299
|
)
|
|
|
(32,133
|
)
|
Decrease (increase) in other current assets
|
|
|
2,354
|
|
|
|
(10,656
|
)
|
|
|
(8,314
|
)
|
(Decrease) increase in accounts payable
|
|
|
(3,333
|
)
|
|
|
12,914
|
|
|
|
14,141
|
|
(Decrease) increase in other current liabilities
|
|
|
(1,798
|
)
|
|
|
(937
|
)
|
|
|
14,887
|
|
Contributions to pension plans
|
|
|
(13,031
|
)
|
|
|
(20,503
|
)
|
|
|
(34,330
|
)
|
Increase in accrued pensions
|
|
|
3,237
|
|
|
|
16,248
|
|
|
|
19,547
|
|
Net change in other long-term assets and liabilities
|
|
|
(226
|
)
|
|
|
(994
|
)
|
|
|
(5,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
249,832
|
|
|
|
118,680
|
|
|
|
117,024
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(61,633
|
)
|
|
|
(76,002
|
)
|
|
|
(50,415
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(18,773
|
)
|
|
|
(25,504
|
)
|
|
|
(78,174
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
701
|
|
|
|
11,791
|
|
|
|
3,675
|
|
Sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
70,441
|
|
Purchase of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY INVESTING ACTIVITIES
|
|
|
(79,705
|
)
|
|
|
(89,715
|
)
|
|
|
(69,473
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
6,550
|
|
|
|
2,035
|
|
|
|
903
|
|
Payments on short-term borrowings
|
|
|
(1,004
|
)
|
|
|
(3,192
|
)
|
|
|
(262
|
)
|
Amounts due banks, net
|
|
|
(2,720
|
)
|
|
|
115
|
|
|
|
4,448
|
|
Payments on long-term borrowings
|
|
|
(40,142
|
)
|
|
|
(3,147
|
)
|
|
|
(15,471
|
)
|
Proceeds from exercise of stock options
|
|
|
8,644
|
|
|
|
13,618
|
|
|
|
21,230
|
|
Tax benefit from exercise of stock options
|
|
|
4,289
|
|
|
|
5,243
|
|
|
|
|
|
Purchase of shares for treasury
|
|
|
(15,459
|
)
|
|
|
(126
|
)
|
|
|
(12,803
|
)
|
Cash dividends paid to shareholders
|
|
|
(37,744
|
)
|
|
|
(32,275
|
)
|
|
|
(30,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY FINANCING ACTIVITIES
|
|
|
(77,586
|
)
|
|
|
(17,729
|
)
|
|
|
(31,992
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
4,629
|
|
|
|
969
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
97,170
|
|
|
|
12,205
|
|
|
|
15,188
|
|
Cash and cash equivalents at beginning of year
|
|
|
120,212
|
|
|
|
108,007
|
|
|
|
92,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF YEAR
|
|
$
|
217,382
|
|
|
$
|
120,212
|
|
|
$
|
108,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to these consolidated financial statements.
F-7
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share and per share data)
December 31, 2007
|
|
NOTE A
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Principles of Consolidation: The consolidated
financial statements include the accounts of Lincoln Electric
Holdings, Inc., its wholly-owned and majority-owned subsidiaries
for which it has a controlling interest (the
Company) after elimination of all intercompany
accounts, transactions and profits. Minority ownership interest
in consolidated subsidiaries, which is not material, is recorded
in Other long-term liabilities.
Cash Equivalents: The Company considers all highly
liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Accounts Receivable: The Company maintains an
allowance for doubtful accounts for estimated losses from the
failure of its customers to make required payments for products
delivered. The Company estimates this allowance based on
knowledge of the financial condition of customers, review of
historical receivables and reserve trends and other pertinent
information. If the financial condition of customers
deteriorates or an unfavorable trend in receivable collections
is experienced in the future, additional allowances may be
required. Historically, the Companys reserves have
approximated actual experience.
Inventories: Inventories are valued at the lower of
cost or market. For domestic inventories, cost is determined
principally by the
last-in,
first-out (LIFO) method, and for
non-U.S. inventories,
cost is determined by the
first-in,
first-out (FIFO) method. At December 31, 2007 and 2006,
approximately 36% and 40%, respectively, of total inventories
were valued using the LIFO method. The excess of current cost
over LIFO cost amounted to $72,088 at December 31, 2007 and
$68,985 at December 31, 2006.
Reserves are maintained for estimated obsolescence or excess
inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about
future demand and market conditions. Historically, the
Companys reserves have approximated actual experience.
Equity Investments: Investments in businesses in
which the Company does not have a controlling interest and holds
between a 20% and 50% ownership interest are accounted for using
the equity method of accounting on a one month-lag basis. The
Companys 50% ownership interest in equity investments
includes investments in Turkey and Chile. In addition, the
Company holds a 35% interest in a Taiwanese joint venture and a
21% interest in an investment in the Peoples Republic of
China. The amount of retained earnings that represents
undistributed earnings of 50% or less owned equity investments
was $23,674 at December 31, 2007 and $16,454 at
December 31, 2006.
Property, Plant and Equipment: Property, plant and
equipment are stated at cost and include improvements which
significantly increase capacities or extend the useful lives of
existing plant and equipment. Depreciation and amortization are
computed by both accelerated and straight-line methods over
useful lives ranging from three to 20 years for machinery,
tools and equipment, and up to 50 years for buildings. Net
gains or losses related to asset dispositions are recognized in
earnings in the period in which dispositions occur. The
following table summarizes assets held under capital leases and
included in property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Buildings
|
|
$
|
6,323
|
|
|
$
|
5,681
|
|
Machinery and equipment
|
|
|
390
|
|
|
|
154
|
|
Less: Accumulated depreciation
|
|
|
(1,701
|
)
|
|
|
(1,170
|
)
|
|
|
|
|
|
|
|
|
|
Net capital leases
|
|
$
|
5,012
|
|
|
$
|
4,665
|
|
|
|
|
|
|
|
|
|
|
Routine maintenance, repairs and replacements are expensed as
incurred. The Company capitalizes interest cost associated with
construction in progress.
F-8
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE A
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
Goodwill and Intangibles: The Company performs an
annual impairment test of goodwill in the fourth quarter using
the same dates year over year. Goodwill is tested for impairment
using models developed by the Company which incorporate
estimates of future cash flows, allocations of certain assets
and cash flows among reporting units, future growth rates,
established business valuation multiples, and management
judgments regarding the applicable discount rates to value those
estimated cash flows. The Company performed its annual
impairment test in the fourth quarters of 2007, 2006 and 2005
and determined there was no impairment of goodwill. In addition,
goodwill is tested as necessary if changes in circumstances or
the occurrence of events indicate potential impairment.
The changes in the carrying amount of goodwill by reportable
segment for the years ended December 31, 2007 and 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Countries
|
|
|
Consolidated
|
|
|
Balance as of January 1, 2006
|
|
$
|
13,635
|
|
|
$
|
4,594
|
|
|
$
|
11,527
|
|
|
$
|
29,756
|
|
Additions and adjustments
|
|
|
(301
|
)
|
|
|
4,292
|
|
|
|
546
|
|
|
|
4,537
|
|
Foreign exchange effect
|
|
|
|
|
|
|
535
|
|
|
|
380
|
|
|
|
915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2007
|
|
|
13,334
|
|
|
|
9,421
|
|
|
|
12,453
|
|
|
|
35,208
|
|
Additions and adjustments
|
|
|
4,248
|
|
|
|
1,431
|
|
|
|
(379
|
)
|
|
|
5,300
|
|
Foreign exchange effect
|
|
|
249
|
|
|
|
1,119
|
|
|
|
851
|
|
|
|
2,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
17,831
|
|
|
$
|
11,971
|
|
|
$
|
12,925
|
|
|
$
|
42,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to goodwill for 2007 and 2006 primarily reflect
goodwill recorded in the acquisitions of Vernon Tool Company,
Ltd. (Vernon Tool) and Metrode Products Limited
(Metrode) (See Note K).
Gross intangible assets other than goodwill by asset class as of
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Trademarks and trade names
|
|
$
|
22,975
|
|
|
$
|
6,322
|
|
|
$
|
20,479
|
|
|
$
|
5,933
|
|
Customer relationships
|
|
|
19,512
|
|
|
|
1,424
|
|
|
|
12,430
|
|
|
|
725
|
|
Patents
|
|
|
11,176
|
|
|
|
1,713
|
|
|
|
9,052
|
|
|
|
807
|
|
Other
|
|
|
17,059
|
|
|
|
10,069
|
|
|
|
16,385
|
|
|
|
9,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,722
|
|
|
$
|
19,528
|
|
|
$
|
58,346
|
|
|
$
|
16,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets other than goodwill are recorded at cost or at
fair value at the time acquired, if applicable. Intangibles
other than goodwill that do not have indefinite lives are
amortized on a straight-line method over the shorter of the
legal or estimated life. Included in the above table are
intangible assets with indefinite lives totaling $14,436 and
$12,585 at December 31, 2007 and 2006, respectively.
Intangibles with indefinite lives are not amortized and are
tested annually for impairment.
The weighted average amortization period for trademarks and
trade names, customer relationships, patents and other
intangibles is 17, 22, 19 and 12 years, respectively.
Aggregate amortization expense was $2,349, $2,102 and $1,004 for
2007, 2006 and 2005, respectively. Estimated annual amortization
expense for intangible assets for each of the next five years is
$2,290 in 2008, $2,227 in 2009, $1,973 in 2010, $1,850 in 2011,
and $1,821 in 2012.
Long-lived Assets: In accordance with Statement of
Financial Accounting Standards No. (SFAS) 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
F-9
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE A
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
an impairment exists. If an asset is determined to be impaired,
the loss is measured based on quoted market prices in active
markets, if available. If quoted market prices are not
available, the estimate of fair value is based on various
valuation techniques, including the discounted value of
estimated future cash flows and established business valuation
multiples.
Product Warranties: The Company accrues for product
warranty claims based on historical experience and the expected
material and labor costs to provide warranty service. Warranty
services are provided for periods up to three years from the
date of sale. The accrual for product warranty claims is
included in Accrued expenses. 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 2007, 2006
and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance at beginning of year
|
|
$
|
9,373
|
|
|
$
|
7,728
|
|
|
$
|
6,800
|
|
Charged to costs and expenses
|
|
|
12,460
|
|
|
|
9,744
|
|
|
|
8,274
|
|
Deductions
|
|
|
(9,988
|
)
|
|
|
(8,335
|
)
|
|
|
(7,107
|
)
|
Foreign currency translation
|
|
|
463
|
|
|
|
236
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
12,308
|
|
|
$
|
9,373
|
|
|
$
|
7,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty expense was 0.5% of sales for 2007, 2006 and 2005.
Revenue Recognition: The Company recognizes revenue
when the risks and rewards of ownership and title to the product
have transferred to the customer. Revenue recognition generally
occurs at the point of shipment; however in certain instances as
shipping terms dictate, revenue is recognized when the product
reaches the point of destination.
Distribution Costs: Distribution costs, including
warehousing and freight related to product shipments, are
included in Cost of goods sold.
Stock-Based Compensation: In December 2004, the
Financial Accounting Standards Board (FASB) issued
SFAS 123 (Revised 2004), Share-Based
Payment, which is a revision of SFAS 123,
Accounting for Stock-Based Compensation.
SFAS 123(R) supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees. Generally, the approach in
SFAS 123(R) is similar to the approach described in
SFAS 123. SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative.
The Company adopted SFAS 123(R) on January 1, 2006
using the modified-prospective method. The adoption of this
standard did not have a material impact on the Companys
financial statements as the Company adopted fair value
accounting under SFAS 123 on January 1, 2003.
Expense is recognized for all awards of stock-based compensation
by allocating the aggregate grant date fair value over the
vesting period. No expense is recognized for any stock options,
restricted or deferred shares ultimately forfeited because the
recipients fail to meet vesting requirements. Total stock-based
compensation expense recognized in the consolidated statement of
income for 2007, 2006 and 2005 was $4,679, $4,217 and $3,527,
respectively. The related tax benefit for 2007, 2006 and 2005
was $1,789, $1,612, and $1,348, respectively.
F-10
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE A
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
The following table sets forth the pro forma disclosure of net
income and earnings per share as if compensation expense had
been recognized for the fair value of options granted prior to
January 1, 2003 (date of adoption of SFAS 123). All
stock options granted prior to January 1, 2003 were fully
vested as of December 31, 2005. Therefore, pro-forma
disclosure is not necessary for periods ending after
December 31, 2005. For purposes of this pro forma
disclosure, the estimated fair value of the options granted
prior to January 1, 2003 was determined using the
Black-Scholes option pricing model and is amortized ratably over
the vesting periods.
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net income, as reported
|
|
$
|
122,306
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
2,178
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards granted,
net of related tax effects
|
|
|
(3,000
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
121,484
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic, as reported
|
|
$
|
2.93
|
|
Basic, pro forma
|
|
$
|
2.91
|
|
Diluted, as reported
|
|
$
|
2.90
|
|
Diluted, pro forma
|
|
$
|
2.88
|
|
Weighted-average number of shares (in thousands):
|
|
|
|
|
Basic
|
|
|
41,813
|
|
Diluted
|
|
|
42,230
|
|
Translation of Foreign Currencies: Asset and
liability accounts are translated into U.S. dollars using
exchange rates in effect at the date of the consolidated balance
sheet; revenue and expense accounts are translated at monthly
exchange rates. Translation adjustments are reflected as a
component of Shareholders equity. For subsidiaries
operating in highly inflationary economies, both historical and
current exchange rates are used in translating balance sheet
accounts, and translation adjustments are included in net income.
Foreign currency transaction losses are included in Selling,
general & administrative expenses and were $6,102,
$1,696, $1,411 in 2007, 2006 and 2005, respectively.
Financial Instruments: The Company uses forward
contracts to hedge exposures to commodity prices and exchange
rate fluctuations on certain purchase and sales transactions,
other intercompany commitments and intercompany loans. Contracts
are written on a short-term basis and are not held for trading
or speculative purposes. The Company uses interest rate swaps to
hedge changes in the fair value of debt. The Company recognizes
derivative instruments as either assets or liabilities in the
balance sheets at fair value. The accounting for changes in the
fair value of derivative instruments depends on whether it has
been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship.
For derivative instruments that qualify as a fair value hedge
(i.e., hedging the exposure to changes in the fair value of an
asset or a liability), the gain or loss on the derivative
instrument, as well as the offsetting loss or gain on the hedged
item are recognized in earnings. For derivative instruments that
qualify as a cash flow hedge (i.e., hedging the exposure to
variability in expected future cash flows), the effective
portion of the unrealized gain or loss on the derivative
instrument is reported as a component of Accumulated other
comprehensive income with offsetting amounts recorded as Other
current assets or Other current liabilities. At settlement, the
realized gain or loss is reflected in earnings in the same
period or periods during which the hedged transaction affects
earnings. Any remaining gain or loss on the derivative
instrument is recognized in earnings. The Company does not hedge
its net investments in foreign subsidiaries. For derivative
instruments not designated as hedges, the gain or loss from
changes in their fair values is recognized in earnings.
F-11
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE A
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
Advertising Costs: Advertising costs are charged to
Selling, general & administrative expenses when
incurred and totaled $10,245, $8,887 and $9,791 in 2007, 2006
and 2005, respectively.
Research and Development: Research and development
costs are expensed as incurred and totaled $25,794, $24,055 and
$21,594 in 2007, 2006 and 2005, respectively.
Estimates: The preparation of financial statements
in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions
in certain circumstances that affect the amounts reported in the
accompanying consolidated financial statements and notes. Actual
results could differ from these estimates.
Reclassification: Certain reclassifications have
been made to prior year financial statements to conform to
current year classifications.
New Accounting Pronouncements: In December 2007, the
FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, which is an amendment
of Accounting Research Bulletin No. (ARB) 51.
SFAS 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. SFAS 160 changes the way the consolidated
income statement is presented, thus requiring consolidated net
income to be reported at amounts that include the amounts
attributable to both parent and the noncontrolling interest.
SFAS 160 is effective for the fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008. The Company does not expect the adoption
of SFAS 160 to have a significant impact on its financial
statements.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations. SFAS 141(R) replaces
SFAS 141, Business Combinations.
SFAS 141(R) retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which
SFAS 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for
each business combination. SFAS 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in
the business combination and establishes the acquisition date as
the date that the acquirer achieves control. SFAS 141(R)
requires an acquirer to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in the
statement. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008.
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an Amendment of
SFAS 115, which permits entities to choose to measure
many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value.
Unrealized gains and losses arising subsequent to adoption are
reported in earnings. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Company does
not expect that adoption of SFAS 159 will have a material
impact on its financial statements.
In September 2006, the FASB issued SFAS 157 Fair
Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 does not require any new
fair value measurements, rather it applies under existing
accounting pronouncements that require or permit fair value
measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. The Company will adopt
SFAS 157 as required. The Company does not expect that
adoption of SFAS 157 will have a material impact on its
financial statements.
In July 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies the recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties,
accounting in interim
F-12
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE A
|
SIGNIFICANT
ACCOUNTING POLICIES (continued)
|
periods, disclosure and transition. In addition, FIN 48
requires the cumulative effect of adoption to be recorded as an
adjustment to the opening balance of retained earnings.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of
January 1, 2007. See Note H to the Consolidated
Financial Statements for further discussion.
Bonus: Included in Selling, general &
administrative expenses are the costs related to the
Companys discretionary employee bonus, net of
hospitalization costs, of $93,958 in 2007, $81,498 in 2006 and
$62,899 in 2005.
|
|
NOTE B
|
EARNINGS
PER SHARE
|
The following table sets forth the computation of basic and
diluted earnings per share (dollars and shares in thousands,
except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
202,736
|
|
|
$
|
175,008
|
|
|
$
|
122,306
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
42,899
|
|
|
|
42,532
|
|
|
|
41,813
|
|
Effect of dilutive securities Stock options and
awards
|
|
|
493
|
|
|
|
500
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
43,392
|
|
|
|
43,032
|
|
|
|
42,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
4.73
|
|
|
$
|
4.11
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
4.67
|
|
|
$
|
4.07
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuable upon the exercise of employee stock
options is excluded from the calculation of diluted earnings per
share when the calculation of option equivalent shares is
anti-dilutive. The calculation of diluted earnings per share for
2007, 2006 and 2005 excludes 29,495, 27,465 and
572,749 shares, respectively, that were anti-dilutive.
|
|
NOTE C
|
SHAREHOLDERS
EQUITY
|
The Companys Board of Directors has authorized share
repurchase programs for up to 15 million shares of the
Companys common stock. During 2007, the Company purchased
222,426 shares of its common stock on the open market at an
average cost of $69.50 per share. Through December 31,
2007, 10,466,414 shares have been purchased under the share
repurchase program at an average cost of $22.15 per share.
F-13
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE D
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
|
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Designated and
|
|
|
Accumulated
|
|
|
|
Defined
|
|
|
Currency
|
|
|
Qualifying as Cash
|
|
|
Other
|
|
|
|
Benefit
|
|
|
Translation
|
|
|
Flow Hedges,
|
|
|
Comprehensive
|
|
|
|
Plans
|
|
|
Adjustment
|
|
|
net of tax
|
|
|
(Loss) Income
|
|
|
Balance January 1, 2005
|
|
$
|
(63,342
|
)
|
|
$
|
4,902
|
|
|
$
|
(238
|
)
|
|
$
|
(58,678
|
)
|
Other comprehensive loss
|
|
|
(15,034
|
)
|
|
|
(16,959
|
)
|
|
|
(605
|
)
|
|
|
(32,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
(78,376
|
)
|
|
|
(12,057
|
)
|
|
|
(843
|
)
|
|
|
(91,276
|
)
|
Other comprehensive income
|
|
|
71,920
|
|
|
|
27,323
|
|
|
|
902
|
|
|
|
100,145
|
|
Adjustment to initially adopt SFAS 158
|
|
|
(63,522
|
)
|
|
|
|
|
|
|
|
|
|
|
(63,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
(69,978
|
)
|
|
|
15,266
|
|
|
|
59
|
|
|
|
(54,653
|
)
|
Other comprehensive income (loss)
|
|
|
17,704
|
|
|
|
55,779
|
|
|
|
(2,989
|
)
|
|
|
70,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
(52,274
|
)
|
|
$
|
71,045
|
|
|
$
|
(2,930
|
)
|
|
$
|
15,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company adopted the
recognition and disclosure provisions of SFAS 158. As a
result of adopting SFAS 158, the Company recorded
liabilities equal to the underfunded status of defined benefit
plans, and assets equal to the overfunded status of certain
defined benefit plans measured as the difference between the
fair value of plan assets and the projected benefit obligation.
The Company recognized liabilities of $34,900 and prepaids of
$16,773 for its defined benefit pension plans and also
recognized in Accumulated other comprehensive loss actuarial
losses and prior service credits of $69,978 (after-tax).
On April 28, 2006, the shareholders of the Company approved
the 2006 Equity and Performance Incentive Plan, as amended
(EPI Plan), which replaces the 1998 Stock Plan, as
amended and restated in May 2003. The EPI Plan provides for the
granting of options, appreciation rights, restricted shares,
restricted stock units and performance-based awards up to an
additional 3,000,000 of the Companys common shares. In
addition, on April 28, 2006, the shareholders of the
Company approved the 2006 Stock Plan for Non-Employee Directors,
as amended (Director Plan), which replaces the Stock
Option Plan for Non-Employee Directors adopted in 2000. The
Director Plan provides for the granting of options, restricted
shares and restricted stock units up to an additional 300,000 of
the Companys common shares. At December 31, 2007,
there were 3,919,828 common shares available for future grant
under all plans.
F-14
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE E
|
STOCK
PLANS (continued)
|
The following table summarizes the activity for each of the
three years in the period ended December 31, 2007, under
all Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Balance at beginning of year
|
|
|
1,747,050
|
|
|
$
|
34.28
|
|
|
|
2,071,325
|
|
|
$
|
28.54
|
|
|
|
2,634,142
|
|
|
$
|
24.38
|
|
Options, tandem appreciation rights, and restricted shares
granted
|
|
|
268,854
|
|
|
$
|
68.48
|
|
|
|
241,818
|
|
|
$
|
60.42
|
|
|
|
414,855
|
|
|
$
|
39.65
|
|
Shares exercised
|
|
|
(348,450
|
)
|
|
$
|
25.30
|
|
|
|
(561,218
|
)
|
|
$
|
24.34
|
|
|
|
(964,254
|
)
|
|
$
|
21.99
|
|
Shares canceled
|
|
|
(3,750
|
)
|
|
$
|
60.72
|
|
|
|
(4,875
|
)
|
|
$
|
39.48
|
|
|
|
(13,418
|
)
|
|
$
|
32.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
1,663,704
|
|
|
$
|
41.63
|
|
|
|
1,747,050
|
|
|
$
|
34.28
|
|
|
|
2,071,325
|
|
|
$
|
28.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1,152,545
|
|
|
$
|
33.45
|
|
|
|
1,161,034
|
|
|
$
|
27.71
|
|
|
|
1,271,155
|
|
|
$
|
23.92
|
|
Options granted under both the EPI Plan and its predecessor
plans are outstanding for a term of ten years from the date of
grant. The majority of options granted vest ratably over a
period of three years from the grant date. The exercise prices
of all options were equal to the fair market value of the
Companys common shares at the date of grant. There were no
options granted under the Director Plan in 2007. Options granted
under the Director Plan and its predecessor plans were 6,000 in
2006 and 28,000 in 2005. The Company issued shares of common
stock from treasury upon all exercises of stock options in 2007,
2006 and 2005.
Restricted shares are valued at the quoted market price on the
grant date and vest ratably over a period of three to five
years. Under the EPI Plan the Company issued 25,690 restricted
shares at a market price of $68.51 per share in 2007 and 27,000
restricted shares at a market price of $60.51 per share in 2006.
The Company issued 7,102 restricted shares at a market price of
$68.21 per share and 6,568 restricted shares at a market price
of $60.85 per share under the Director Plan in 2007
and 2006, respectively. The Company issued 8,411 shares of
common stock from authorized but unissued shares upon vesting of
restricted shares during 2006.
In estimating the fair value of options granted, the expected
option life is based on the Companys historical
experience. The Company uses the Black-Scholes option pricing
model for estimating fair values of options. The weighted
average assumptions for each of the three years in the period
ended December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
23.05
|
%
|
|
|
24.78
|
%
|
|
|
25.75
|
%
|
Dividend yield
|
|
|
1.57
|
%
|
|
|
1.53
|
%
|
|
|
1.90
|
%
|
Risk-free interest rate
|
|
|
3.50
|
%
|
|
|
4.53
|
%
|
|
|
4.38
|
%
|
Expected option life
|
|
|
4.3
|
|
|
|
4.4
|
|
|
|
4.5
|
|
Weighted-average fair value of options granted during the year
|
|
$
|
14.33
|
|
|
$
|
14.72
|
|
|
$
|
9.57
|
|
As of December 31, 2007, total unrecognized stock-based
compensation expense related to nonvested stock options and
restricted shares was $8,799, which is expected to be recognized
over a weighted average period of approximately 34 months.
F-15
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE E
|
STOCK
PLANS (continued)
|
The following table summarizes nonvested stock options, tandem
appreciation rights (TARs) and restricted shares for
the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Number of Options,
|
|
|
Weighted Average
|
|
|
|
TARs, and
|
|
|
Fair Value at
|
|
|
|
Restricted Shares
|
|
|
Grant Date
|
|
|
Balance at beginning of year
|
|
|
539,733
|
|
|
$
|
15.80
|
|
Granted
|
|
|
268,854
|
|
|
$
|
20.93
|
|
Vested
|
|
|
(351,651
|
)
|
|
$
|
12.08
|
|
Forfeited
|
|
|
(3,750
|
)
|
|
$
|
14.67
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
453,186
|
|
|
$
|
21.71
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at
December 31, 2007, based on the Companys closing
stock price of $71.18 as of the last business day in the year
ended December 31, 2007, which would have been received by
the optionees had all options been exercised on that date was
$49,164. The aggregate intrinsic value of options exercisable at
December 31, 2007, based on the Companys closing
stock price of $71.18 as of the last business day in the year
ended December 31, 2007, which would have been received by
the optionees had all options been exercised on that date was
$43,482. The total intrinsic value of stock options exercised
during 2007 and 2006 was $15,413 and $15,899, respectively.
Intrinsic value is the amount by which the fair value of the
underlying stock exceeds the exercise price of the options.
Prior to the adoption of SFAS 123(R) the Company presented
all tax benefits resulting from the exercise of stock options as
operating cash inflows in the consolidated statements of cash
flows, in accordance with the provisions of the Emerging Issues
Task Force (EITF) Issue
No. 00-15,
Classification in the Statement of Cash Flows of the
Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option. SFAS 123(R)
requires the benefits of tax deductions in excess of the
compensation cost recognized for those options to be classified
as financing cash inflows rather than operating cash inflows, on
a prospective basis. This amount was $4,289 and $5,243 for 2007
and 2006, respectively, and is shown as Tax benefit from
the exercise of stock options in the consolidated
statement of cash flows. The amount reported as operating cash
inflows in 2005 was $3,898.
The following table summarizes information about stock options
outstanding as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
Exercise Price
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
Range
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
|
$13.00 - $34.99
|
|
|
482,194
|
|
|
$
|
22.87
|
|
|
|
482,194
|
|
|
$
|
22.87
|
|
|
|
4.6
|
|
$35.00 - $39.99
|
|
|
676,634
|
|
|
$
|
37.73
|
|
|
|
561,293
|
|
|
$
|
37.29
|
|
|
|
7.0
|
|
Over $40.00
|
|
|
504,876
|
|
|
$
|
64.77
|
|
|
|
109,058
|
|
|
$
|
60.50
|
|
|
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,663,704
|
|
|
|
|
|
|
|
1,152,545
|
|
|
|
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 1995 Lincoln Stock Purchase Plan provides employees the
ability to purchase open market shares on a commission-free
basis up to a limit of ten thousand dollars annually. Under this
plan, 400,000 shares have been authorized to be purchased.
There were 6,843, 1,726 and 2,256 shares purchased in 2007,
2006 and 2005, respectively under this plan.
F-16
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE F
|
RATIONALIZATION
CHARGES
|
In 2005, the Company committed to a plan to rationalize
manufacturing operations (the Ireland
Rationalization) at Harris Calorific Limited (Harris
Ireland). In connection with the Ireland Rationalization,
the Company transferred all manufacturing from Harris Ireland to
a lower cost facility in Eastern Europe and in 2006 sold the
facility in Ireland for a pre-tax gain of $9,006 which is
reflected in Selling, general and administrative expenses. A
total of 66 employees were impacted by the Ireland
Rationalization.
The Company has incurred a total of $3,920 (pre-tax) in charges
related to this plan of which a gain of $188 (pre-tax) was
recorded in 2007 and charges of $3,597 (pre-tax) and $511
(pre-tax) were recorded in 2006 and 2005, respectively. Charges
incurred relate to employee severance costs, equipment
relocation, employee retention and professional services. As of
December 31, 2007, all rationalization activities have
essentially been completed. The Company expects to receive
approximately $2,129 in cash receipts during 2008 upon
completion of the liquidation of the Harris Ireland Pension Plan.
In 2004, the Company committed to a plan to rationalize machine
manufacturing (the French Rationalization) at
Lincoln Electric France, S.A.S. (LE France). In
connection with the French Rationalization, the Company
transferred machine manufacturing performed at LE France to
other facilities. The Company committed to the French
Rationalization as a result of the regions decreased
demand for locally-manufactured machines. In connection with the
French Rationalization, the Company incurred a charge of $2,292
(pre-tax), of which $1,188 (pre-tax) was incurred in 2005 and
$1,104 (pre-tax) in 2004. Employee severance costs associated
with the termination of approximately 40 of LE Frances
179 employees were $2,123 (pre-tax). Costs not relating to
employee severance primarily included warehouse relocation costs
and professional fees.
At December 31, 2007 and 2006, debt consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Senior Unsecured Notes due 2007, interest at 5.58%
|
|
$
|
|
|
|
$
|
40,166
|
|
Senior Unsecured Notes due 2009, interest at 5.89%
|
|
|
30,700
|
|
|
|
30,676
|
|
Senior Unsecured Notes due 2012, interest at 6.36%
|
|
|
81,776
|
|
|
|
78,564
|
|
Capital leases due through 2015, interest at 2.7% to 17.50%
|
|
|
3,205
|
|
|
|
3,427
|
|
Other borrowings due through 2023, interest at 0.0% to 6.00%
|
|
|
2,553
|
|
|
|
2,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,234
|
|
|
|
154,885
|
|
Less current portion
|
|
|
905
|
|
|
|
40,920
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
117,329
|
|
|
$
|
113,965
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
Amounts due banks, interest at 14.00% (6.57% in 2006)
|
|
|
11,581
|
|
|
|
6,214
|
|
Current portion long-term debt
|
|
|
905
|
|
|
|
40,920
|
|
|
|
|
|
|
|
|
|
|
Total short-term debt
|
|
|
12,486
|
|
|
|
47,134
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
129,815
|
|
|
$
|
161,099
|
|
|
|
|
|
|
|
|
|
|
Senior
Unsecured Notes
During March 2002, the Company issued Senior Unsecured Notes
(the Notes) totaling $150,000 through a private
placement. The Notes have original maturities ranging from five
to ten years with a weighted-average interest rate of 6.1% and
an average tenure of eight years. Interest is payable
semi-annually in March and September. The proceeds are being
used for general corporate purposes, including acquisitions. The
proceeds are generally invested in short-term, highly liquid
investments. The Notes contain certain affirmative and negative
covenants, including restrictions on asset dispositions and
financial covenants (interest coverage and funded
debt-to-EBITDA, as defined
F-17
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE G
|
DEBT
(continued)
|
in the Notes Agreement, ratios). As of December 31, 2007,
the Company was in compliance with all of its debt covenants.
During March 2007, the Company repaid the $40,000 Series A
Notes which had matured, reducing the total balance outstanding
of the Notes to $110,000.
The maturity and interest rates of the Notes outstanding at
December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
Due
|
|
|
Matures
|
|
|
Interest Rate
|
|
|
Series B
|
|
$
|
30,000
|
|
|
|
March 2009
|
|
|
|
5.89
|
%
|
Series C
|
|
$
|
80,000
|
|
|
|
March 2012
|
|
|
|
6.36
|
%
|
During March 2002, the Company entered into floating rate
interest rate swap agreements totaling $80,000, to convert a
portion of the Notes outstanding from fixed to floating rates.
These swaps were designated as fair value hedges, and as such,
the gain or loss on the derivative instrument, as well as the
offsetting gain or loss on the hedged item attributable to the
hedged risk were recognized in earnings. Net payments or
receipts under these agreements were recognized as adjustments
to interest expense. In May 2003, these swap agreements were
terminated. The gain on the termination of these swaps was
$10,613, and has been deferred and is being amortized as an
offset to interest expense over the remaining life of the Notes.
The amortization of this gain reduced interest expense by $1,121
in 2007 and $2,117 in 2006 and 2005, and is expected to reduce
annual interest expense by $958 in 2008. At December 31,
2007, $1,713 remains to be amortized which is recorded in
Long-term debt, less current portion.
During July 2003 and April 2004, the Company entered into
various floating rate interest rate swap agreements totaling
$110,000, to convert a portion of the Notes outstanding from
fixed to floating rates based on the London Inter-Bank Offered
Rate (LIBOR), plus a spread of between 179.75 and
226.50 basis points. The variable rates are 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 are recognized in
earnings. Net payments or receipts under these agreements are
recognized as adjustments to interest expense.
The fair value of the swaps is recorded as a long-term asset or
liability with a corresponding offset to Long-term
debt. The fair value of these swaps at December 31,
2007 and 2006 was an asset of $762 and a liability of $3,428,
respectively. Swaps have increased the value of the
Series B Notes from $30,000 to $30,700 and the
Series C Notes from $80,000 to $81,776 as of
December 31, 2007. The weighted average effective rate on
the Notes, net of the impact of swaps, was 6.4% for 2007.
Revolving
Credit Agreement
In 2004, the Company entered into a new $175,000, five-year
revolving Credit Agreement. The Credit Agreement may be used for
general corporate purposes and may be increased, subject to
certain conditions, by an additional amount up to $75,000. The
interest rate on borrowings under the Credit Agreement is based
on either LIBOR plus a spread based on the Companys
leverage ratio or the prime rate, at the Companys
election. A quarterly facility fee is payable based upon the
daily aggregate amount of commitments and the Companys
leverage ratio. The Credit Agreement contains customary
affirmative and negative covenants for credit facilities of this
type, including limitations on the Company with respect to
indebtedness, liens, investments, distributions, mergers and
acquisitions, dispositions of assets, subordinated debt and
transactions with affiliates. As of December 31, 2007,
there are no borrowings under the Credit Agreement.
Capital
Leases
At December 31, 2007 and 2006, $3,205 and $3,427 of capital
lease indebtedness was secured by property, plant and equipment,
respectively.
F-18
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE G
|
DEBT
(continued)
|
Other
Maturities of long-term debt, including payments under capital
leases, for the five years succeeding December 31, 2007 are
$905 in 2008, $30,821 in 2009, $862 in 2010, $914 in 2011,
$80,869 in 2012 and $1,388 thereafter. Total interest paid was
$11,537 in 2007, $11,971 in 2006 and $11,221 in 2005. The
primary difference between interest expense and interest paid is
the amortization of the gain on settlement of interest rate
swaps realized in 2003.
Amounts reported as Amounts due banks represent short-term
borrowings of the Companys foreign subsidiaries.
The components of income before income taxes for the three years
ended December 31, 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S.
|
|
$
|
205,779
|
|
|
$
|
153,968
|
|
|
$
|
104,702
|
|
Non-U.S.
|
|
|
81,378
|
|
|
|
84,204
|
|
|
|
49,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
287,157
|
|
|
$
|
238,172
|
|
|
$
|
153,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of income tax expense (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
61,277
|
|
|
$
|
40,399
|
|
|
$
|
21,978
|
|
Non-U.S.
|
|
|
20,313
|
|
|
|
16,049
|
|
|
|
8,828
|
|
State and local
|
|
|
6,542
|
|
|
|
2,367
|
|
|
|
2,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,132
|
|
|
|
58,815
|
|
|
|
33,488
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(711
|
)
|
|
|
5,859
|
|
|
|
(708
|
)
|
Non-U.S.
|
|
|
(3,712
|
)
|
|
|
(2,253
|
)
|
|
|
(905
|
)
|
State and local
|
|
|
712
|
|
|
|
743
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,711
|
)
|
|
|
4,349
|
|
|
|
(1,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,421
|
|
|
$
|
63,164
|
|
|
$
|
31,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between total income tax expense and the amount
computed by applying the statutory Federal income tax rate to
income before income taxes for the three years ended
December 31, 2007, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory rate of 35% applied to pre-tax income
|
|
$
|
100,505
|
|
|
$
|
83,360
|
|
|
$
|
53,865
|
|
Effect of state and local income taxes, net of federal tax
benefit
|
|
|
4,964
|
|
|
|
2,282
|
|
|
|
1,461
|
|
Taxes (less than) the U.S. tax rate on
non-U.S.
earnings, including utilization of tax loss carryforwards,
losses with no benefit and changes in
non-U.S.
valuation allowance
|
|
|
(11,881
|
)
|
|
|
(15,676
|
)
|
|
|
(9,295
|
)
|
U.S. tax cost (benefit) of foreign source income
|
|
|
1,151
|
|
|
|
(3,064
|
)
|
|
|
(1,537
|
)
|
Resolution of prior years tax liabilities
|
|
|
(6,818
|
)
|
|
|
(2,421
|
)
|
|
|
(8,711
|
)
|
Other net
|
|
|
(3,500
|
)
|
|
|
(1,317
|
)
|
|
|
(4,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,421
|
|
|
$
|
63,164
|
|
|
$
|
31,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
29.40
|
%
|
|
|
26.52
|
%
|
|
|
20.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE H
|
INCOME
TAXES (continued)
|
Total income tax payments, net of refunds, were $83,950 in 2007,
$55,799 in 2006 and $27,179 in 2005.
Unrecognized
Tax Benefits
In July 2006, the FASB issued FIN 48 which clarifies the
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. In addition, FIN 48
requires the cumulative effect of adoption to be recorded as an
adjustment to the opening balance of retained earnings.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of
January 1, 2007.
The cumulative effects of applying this interpretation were
recorded as a decrease of $1,590 to retained earnings. The
Companys unrecognized tax benefits upon adoption were
$28,997, of which $21,602 would affect the effective tax rate,
if recognized.
In conjunction with the adoption of FIN 48, unrecognized
tax benefits were classified as Accrued taxes, non-current
unless expected to be paid in one year. The Company recognizes
interest and penalties related to unrecognized tax benefits in
income tax expense, consistent with the accounting method used
prior to adopting FIN 48. During 2007, current income tax
expense included $135 of interest and penalties related to
unrecognized tax benefits. At December 31, 2007 the
Companys accrual for interest and penalties totaled $4,917.
The following table summarizes the activity related to
unrecognized tax benefits:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
28,997
|
|
Increases related to current year tax provisions
|
|
|
5,755
|
|
Resolution of prior years tax liabilities
|
|
|
(5,916
|
)
|
Other
|
|
|
379
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
29,215
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $29,215 at
December 31, 2007 was $18,867 of tax benefits that, if
recognized, would reduce the annual effective tax rate.
The Company files income tax returns in the U.S. and
various state, local and foreign jurisdictions. With few
exceptions, the Company is no longer subject to
U.S. federal, state and local or
non-U.S. income
tax examinations by tax authorities for years before 2004. The
Company anticipates no significant changes to its total
unrecognized tax benefits through the end of 2008. The Company
is currently subject to an Internal Revenue Service
(IRS) audit for the 2005 and 2006 tax years. The
Company does not expect the results of this examination to have
a material effect on the financial statements.
F-20
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE H
|
INCOME
TAXES (continued)
|
Deferred
Taxes
Significant components of deferred tax assets and liabilities at
December 31, 2007 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax loss and credit carryforwards
|
|
$
|
19,743
|
|
|
$
|
18,137
|
|
Inventory
|
|
|
6,522
|
|
|
|
5,293
|
|
Other accruals
|
|
|
9,875
|
|
|
|
9,246
|
|
Employee benefits
|
|
|
13,856
|
|
|
|
11,833
|
|
Other
|
|
|
18,516
|
|
|
|
15,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,512
|
|
|
|
60,354
|
|
Valuation allowance
|
|
|
(21,421
|
)
|
|
|
(21,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
47,091
|
|
|
|
38,742
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(31,898
|
)
|
|
|
(30,452
|
)
|
Intangible assets
|
|
|
(6,794
|
)
|
|
|
(7,008
|
)
|
Inventory
|
|
|
(11,529
|
)
|
|
|
(9,411
|
)
|
Pension obligations
|
|
|
(14,458
|
)
|
|
|
(2,389
|
)
|
Other
|
|
|
(9,000
|
)
|
|
|
(11,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,679
|
)
|
|
|
(60,269
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(26,588
|
)
|
|
$
|
(21,527
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, certain subsidiaries had tax loss
carryforwards of approximately $57,033 that will expire in
various years from 2008 through 2024, except for $37,760 for
which there is no expiration date.
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 December 31,
2007, a valuation allowance of $21,421 had been recorded against
these deferred tax assets based on this assessment. The Company
believes it is more likely than not that the tax benefit of the
remaining net deferred tax assets will be realized. The amount
of net deferred tax assets considered realizable could be
increased or decreased in the future if the Companys
assessment of future taxable income or tax planning strategies
changes.
The Company does not provide deferred income taxes on unremitted
earnings of certain
non-U.S. subsidiaries
which are deemed permanently reinvested. It is not practicable
to calculate the deferred taxes associated with the remittance
of these earnings. Deferred income taxes of $215 have been
provided on earnings of $1,600 that are not expected to be
permanently reinvested.
NOTE I
RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT
PLANS
The Company maintains a number of defined benefit and defined
contribution plans to provide retirement benefits for employees
in the U.S., as well as employees outside the U.S. These
plans are maintained and contributions are made in accordance
with the Employee Retirement Income Security Act of 1974
(ERISA), local statutory law or as determined by the
Board of Directors. The plans generally provide benefits based
upon years of service and compensation. Pension plans are funded
except for a domestic non-qualified pension plan for certain key
employees and certain foreign plans. Substantially all
U.S. employees are covered under a 401(k) savings plan in
which they may invest 1% or more of eligible compensation,
limited to maximum amounts as determined by the Internal Revenue
Service. For most participants the plan provides for Company
matching contributions of 35% of the first 6% of employee
compensation contributed to the plan. The plan includes a
feature in which participants hired after November 1, 1997
will receive an annual Company contribution of 2% of their base
pay. The plan
F-21
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE I
RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
(continued)
allowed employees hired before November 1, 1997, at their
election, to receive this contribution in exchange for
forfeiting certain benefits under the pension plan. The Company
uses a December 31 measurement date for its plans.
In the first quarter of 2006, the Company modified its
retirement benefit programs whereby employees of its
U.S. Company hired on or after January 1, 2006 will be
covered under a newly enhanced 401(k) defined contribution plan.
In the second quarter of 2006, current employees of the
U.S. Company made an election to either remain in the
Companys existing retirement programs or switch to new
programs offering enhanced defined contribution benefits,
improved vacation and a reduced defined benefit. The Company did
not incur a significant change in retirement costs immediately
after the change, however, the Company does expect cost savings
in future years as a result of reduced benefits to be accrued
for employees hired on or after January 1, 2006.
In September 2006, the FASB issued SFAS 158 which requires
companies to recognize the funded status of a benefit plan as
the difference between plan assets at fair value and the
projected benefit obligation. Unrecognized gains or losses and
prior service costs, as well as the transition asset or
obligation remaining from the initial application of Statements
87 and 106 will be recognized in the balance sheet, net of tax,
as a component of Accumulated other comprehensive income and
will subsequently be recognized as components of net periodic
benefit cost pursuant to the recognition and amortization
provisions of those Statements. The Company adopted
SFAS 158 on December 31, 2006. The incremental effects
on the Companys balance sheet at December 31, 2006 of
adopting SFAS 158 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Prior to
|
|
|
Effect of
|
|
|
|
|
|
|
Application of
|
|
|
Adopting
|
|
|
|
|
|
|
SFAS No. 158
|
|
|
SFAS No. 158
|
|
|
As Reported
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension costs
|
|
$
|
112,248
|
|
|
$
|
(95,475
|
)
|
|
$
|
16,773
|
|
Intangibles, net
|
|
|
2,406
|
|
|
|
(2,406
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
2,872
|
|
|
|
39,380
|
|
|
|
42,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pensions, current
|
|
|
(10,061
|
)
|
|
|
8,578
|
|
|
|
(1,483
|
)
|
Accrued pensions, non-current
|
|
|
(15,871
|
)
|
|
|
(17,546
|
)
|
|
|
(33,417
|
)
|
Accumulated other comprehensive loss
|
|
|
6,456
|
|
|
|
63,522
|
|
|
|
69,978
|
|
The after-tax amount of unrecognized actuarial net loss, prior
service credits and transition obligations included in
Accumulated other comprehensive loss at December 31, 2007
was $52,666, $(503) and $111, respectively.
The pre-tax amount of unrecognized actuarial net loss, prior
service credits and transition obligations expected to be
recognized as components of net periodic benefit cost during
2008 is $1,441, $9 and $10, respectively.
F-22
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE I
RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
(continued)
The changes in the pension plans projected benefit
obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Obligation at January 1
|
|
$
|
696,952
|
|
|
$
|
690,669
|
|
Service cost
|
|
|
17,829
|
|
|
|
18,686
|
|
Interest cost
|
|
|
40,621
|
|
|
|
38,160
|
|
Participant contributions
|
|
|
476
|
|
|
|
503
|
|
Plan amendments
|
|
|
20
|
|
|
|
(5,313
|
)
|
Acquisitions
|
|
|
2,045
|
|
|
|
|
|
Actuarial gain
|
|
|
(27,751
|
)
|
|
|
(18,635
|
)
|
Benefit payments
|
|
|
(34,129
|
)
|
|
|
(32,583
|
)
|
Settlements
|
|
|
(2,539
|
)
|
|
|
|
|
Curtailments
|
|
|
(142
|
)
|
|
|
|
|
Currency translation
|
|
|
5,747
|
|
|
|
5,465
|
|
|
|
|
|
|
|
|
|
|
Obligation at December 31
|
|
$
|
699,129
|
|
|
$
|
696,952
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of the pension plans assets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Fair value of plan assets at January 1
|
|
$
|
678,826
|
|
|
$
|
604,983
|
|
Actual return on plan assets
|
|
|
51,856
|
|
|
|
79,366
|
|
Employer contributions
|
|
|
13,031
|
|
|
|
20,503
|
|
Participant contributions
|
|
|
476
|
|
|
|
503
|
|
Benefit payments
|
|
|
(31,782
|
)
|
|
|
(31,116
|
)
|
Settlements
|
|
|
(2,466
|
)
|
|
|
|
|
Currency translation
|
|
|
5,131
|
|
|
|
4,587
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
$
|
715,072
|
|
|
$
|
678,826
|
|
|
|
|
|
|
|
|
|
|
The funded status of the pension plans was as follows:
|
|
|
|
|
|
|
|
|
Funded status (plan assets greater than (less than) projected
benefit obligations)
|
|
$
|
15,943
|
|
|
$
|
(18,126
|
)
|
Unrecognized net loss
|
|
|
84,822
|
|
|
|
112,867
|
|
Unrecognized prior service cost
|
|
|
(820
|
)
|
|
|
(781
|
)
|
Unrecognized transition assets, net
|
|
|
154
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
100,099
|
|
|
$
|
94,104
|
|
|
|
|
|
|
|
|
|
|
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the
U.S. pension plans with accumulated benefit obligations in
excess of plan assets were $22,467, $19,050 and $0,
respectively, as of December 31, 2007 and $22,041, $18,798
and $0, respectively, as of December 31, 2006. The
projected benefit obligation, accumulated benefit obligation,
and fair value of plan assets for the
non-U.S. pension
plans with accumulated benefit obligations in excess of plan
assets were $52,976, $49,592 and $42,512, respectively, as of
December 31, 2007 and $49,822, $46,362 and $37,024,
respectively, as of December 31, 2006. The total
accumulated benefit obligation for all plans was $661,658 as of
December 31, 2007 and $657,930 as of December 31, 2006.
F-23
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE I
RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
(continued)
The components of total pension expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Service cost benefits earned during the year
|
|
$
|
17,829
|
|
|
$
|
18,686
|
|
|
$
|
17,710
|
|
Interest cost on projected benefit obligation
|
|
|
40,621
|
|
|
|
38,160
|
|
|
|
36,443
|
|
Expected return on plan assets
|
|
|
(55,943
|
)
|
|
|
(50,456
|
)
|
|
|
(47,155
|
)
|
Amortization of transition assets
|
|
|
10
|
|
|
|
10
|
|
|
|
16
|
|
Amortization of prior service cost
|
|
|
65
|
|
|
|
621
|
|
|
|
3,045
|
|
Amortization of net loss
|
|
|
4,615
|
|
|
|
11,056
|
|
|
|
8,955
|
|
Settlement/curtailment (gains) losses
|
|
|
(937
|
)
|
|
|
(151
|
)
|
|
|
2,138
|
|
Termination benefits
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension cost of defined benefit plans
|
|
|
6,260
|
|
|
|
17,926
|
|
|
|
21,328
|
|
Multi-employer plans
|
|
|
1,725
|
|
|
|
1,237
|
|
|
|
1,040
|
|
Defined contribution plans
|
|
|
8,590
|
|
|
|
6,130
|
|
|
|
4,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net pension expense
|
|
$
|
16,575
|
|
|
$
|
25,293
|
|
|
$
|
26,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2005, the Company terminated one of its European pension
plans and incurred a settlement loss of $2,138. The Company is
in the process of terminating a pension plan as part of the
Ireland Rationalization. For further discussion see Note F.
The Company expects to receive approximately $2,129 in 2008 upon
final settlement. A gain of $816 was recognized in 2007 related
to the curtailment and partial settlement of this plan.
The amounts recognized in the consolidated balance sheets were
composed of:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Prepaid pension costs
|
|
$
|
48,897
|
|
|
$
|
16,773
|
|
Accrued pension liability, current
|
|
|
(3,790
|
)
|
|
|
(1,483
|
)
|
Accrued pension liability, long-term
|
|
|
(29,164
|
)
|
|
|
(33,417
|
)
|
Accumulated other comprehensive loss, excluding tax effects
|
|
|
84,156
|
|
|
|
112,231
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in the balance sheets
|
|
$
|
100,099
|
|
|
$
|
94,104
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions used to measure the benefit
obligation for the Companys significant defined benefit
plans as of December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Discount rate
|
|
|
6.3
|
%
|
|
|
5.9
|
%
|
Rate of increase in compensation
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
F-24
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE I
RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
(continued)
Weighted average assumptions used to measure the net periodic
benefit cost for the Companys significant defined benefit
plans as of December 31, 2007, 2006 and 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
5.9
|
%
|
|
|
5.6
|
%
|
|
|
5.9
|
%
|
Rate of increase in compensation
|
|
|
4.1
|
%
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
Expected return on plan assets
|
|
|
8.4
|
%
|
|
|
8.3
|
%
|
|
|
8.4
|
%
|
To develop the discount rate assumption to be used for
U.S. plans, the Company refers to the yield derived from
matching projected pension payments with maturities of a
portfolio of available non-callable bonds rated Aa- or better.
The Company also refers to investment yields available at
year-end on long-term bonds rated Aa- or better. The expected
long-term rate of return assumption is based on the weighted
average expected return of the various asset classes in the
plans portfolio and the targeted allocation of plan
assets. The asset class return is developed using historical
asset return performance as well as current market conditions
such as inflation, interest rates and equity market performance.
The rate of compensation increase is determined by the Company
based upon annual reviews.
The primary objective of the pension plans investment
policy is to ensure sufficient assets are available to provide
benefit obligations when such obligations mature. Investment
management practices must comply with ERISA or any other
applicable regulations and rulings. The overall investment
strategy for the defined benefit pension plans assets is
to achieve a rate of return over a normal business cycle
relative to an acceptable level of risk that is consistent with
the long-term objectives of the portfolio. The assumptions used
to determine the expected return on assets for the U.S. plans at
December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Weighted Average
|
|
|
Target
|
|
Plan Assets at
|
|
|
Expected
|
|
|
Allocation
|
|
December 31,
|
|
|
Long-Term
|
Asset Category
|
|
2008
|
|
2007
|
|
|
2006
|
|
|
Rate of Return
|
|
Equity securities
|
|
60% - 70%
|
|
|
65
|
%
|
|
|
68
|
%
|
|
9.1% - 9.8%
|
Debt securities
|
|
30% - 40%
|
|
|
35
|
%
|
|
|
32
|
%
|
|
5.6% - 6.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
8.25%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual and expected employer contributions for the
U.S. plans are as follows:
|
|
|
|
|
2008 (expected)
|
|
$
|
10,000
|
|
2007
|
|
|
10,000
|
|
2006
|
|
|
17,500
|
|
The actual amounts to be contributed to the pension plans in
2008 will be determined at the Companys discretion.
Contributions by participants to certain
non-U.S. plans
were $476 and $503 for the years ended December 31, 2007
and 2006, respectively.
F-25
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NOTE I
RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
(continued)
Expected future benefit payments for the U.S. plans are as
follows:
|
|
|
|
|
2008
|
|
$
|
36,066
|
|
2009
|
|
|
35,438
|
|
2010
|
|
|
36,457
|
|
2011
|
|
|
38,273
|
|
2012
|
|
|
40,579
|
|
2013 through 2017
|
|
|
233,300
|
|
The Company maintains a domestic unfunded supplemental executive
retirement plan (SERP) under which non-qualified supplemental
pension benefits are paid to certain employees in addition to
amounts received under the Companys qualified retirement
plan which is subject to IRS limitations on covered
compensation. The annual cost of this program has been included
in the determination of total net pension expense shown above
and was $2,411, $2,329 and $2,318 in 2007, 2006 and 2005,
respectively. The projected benefit obligation associated with
this plan is also included in the pension disclosure shown above
and was $19,195, $18,644 and $18,254 at December 31, 2007,
2006 and 2005, respectively.
The Company participates in multi-employer plans for several of
its operations in Europe. Pension expense for these plans is
recognized as contributions are funded.
The Company does not have, and does not provide for, any
postretirement or postemployment benefits other than pensions.
The Cleveland, Ohio, area operations have a Guaranteed
Continuous Employment Plan covering substantially all employees
which, in general, provides that the Company will provide work
for at least 75% of every standard work week (presently
40 hours). This plan does not guarantee employment when the
Companys ability to continue normal operations is
seriously restricted by events beyond the control of the
Company. The Company has reserved the right to terminate this
plan effective at the end of a calendar year by giving notice of
such termination not less than six months prior to the end of
such year.
|
|
NOTE J
|
SEGMENT
INFORMATION
|
The Companys primary business is the design, manufacture
and sale, in the U.S. and international markets, of arc,
cutting and other welding, brazing and soldering products. The
Company manages its operations by geographic location and has
two reportable segments, North America and Europe, and combines
all other operating segments as Other Countries. Other Countries
includes results of operations for the Companys businesses
in Argentina, Australia, Brazil, Colombia, Indonesia, Mexico,
Peoples Republic of China, Taiwan and Venezuela. Each
operating segment is managed separately because each faces a
distinct economic environment, a different customer base and a
varying level of competition and market conditions. Segment
performance and resource allocation is measured based on income
before interest and income taxes. The accounting policies of the
reportable segments are
F-26
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE J
|
SEGMENT
INFORMATION (continued)
|
the same as those described in Note A
Significant Accounting Policies. Financial
information for the reportable segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
America
|
|
|
Europe
|
|
|
Countries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,401,393
|
|
|
$
|
510,514
|
|
|
$
|
368,877
|
|
|
$
|
|
|
|
$
|
2,280,784
|
|
Inter-segment sales
|
|
|
99,227
|
|
|
|
24,156
|
|
|
|
11,645
|
|
|
|
(135,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,500,620
|
|
|
$
|
534,670
|
|
|
$
|
380,522
|
|
|
$
|
(135,028
|
)
|
|
$
|
2,280,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes
|
|
$
|
211,092
|
|
|
$
|
63,170
|
|
|
$
|
18,578
|
|
|
$
|
(2,547
|
)
|
|
$
|
290,293
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,294
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
287,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
988,651
|
|
|
$
|
452,648
|
|
|
$
|
343,532
|
|
|
$
|
(139,535
|
)
|
|
$
|
1,645,296
|
|
Equity investments in affiliates
|
|
|
2,782
|
|
|
|
16,149
|
|
|
|
40,792
|
|
|
|
|
|
|
|
59,723
|
|
Capital expenditures
|
|
|
26,839
|
|
|
|
16,069
|
|
|
|
18,725
|
|
|
|
|
|
|
|
61,633
|
|
Depreciation and amortization
|
|
|
33,564
|
|
|
|
10,752
|
|
|
|
8,294
|
|
|
|
|
|
|
|
52,610
|
|
For the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,305,472
|
|
|
$
|
372,308
|
|
|
$
|
294,135
|
|
|
$
|
|
|
|
$
|
1,971,915
|
|
Inter-segment sales
|
|
|
91,770
|
|
|
|
23,787
|
|
|
|
16,326
|
|
|
|
(131,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,397,242
|
|
|
$
|
396,095
|
|
|
$
|
310,461
|
|
|
$
|
(131,883
|
)
|
|
$
|
1,971,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes
|
|
$
|
172,613
|
|
|
$
|
46,659
|
|
|
$
|
25,851
|
|
|
$
|
(2,674
|
)
|
|
$
|
242,449
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,876
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,153
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
238,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
872,864
|
|
|
$
|
390,733
|
|
|
$
|
273,781
|
|
|
$
|
(142,799
|
)
|
|
$
|
1,394,579
|
|
Equity investments in affiliates
|
|
|
2,374
|
|
|
|
12,834
|
|
|
|
33,754
|
|
|
|
|
|
|
|
48,962
|
|
Capital expenditures
|
|
|
37,269
|
|
|
|
19,777
|
|
|
|
18,956
|
|
|
|
|
|
|
|
76,002
|
|
Depreciation and amortization
|
|
|
33,135
|
|
|
|
7,993
|
|
|
|
6,697
|
|
|
|
|
|
|
|
47,825
|
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers
|
|
$
|
1,056,134
|
|
|
$
|
305,846
|
|
|
$
|
239,210
|
|
|
$
|
|
|
|
$
|
1,601,190
|
|
Inter-segment sales
|
|
|
54,579
|
|
|
|
24,434
|
|
|
|
13,015
|
|
|
|
(92,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,110,713
|
|
|
$
|
330,280
|
|
|
$
|
252,225
|
|
|
$
|
(92,028
|
)
|
|
$
|
1,601,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income taxes
|
|
$
|
117,224
|
|
|
$
|
23,506
|
|
|
$
|
16,964
|
|
|
$
|
152
|
|
|
$
|
157,846
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
153,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
784,713
|
|
|
$
|
254,644
|
|
|
$
|
220,507
|
|
|
$
|
(98,703
|
)
|
|
$
|
1,161,161
|
|
Equity investments in affiliates
|
|
|
|
|
|
|
10,229
|
|
|
|
29,444
|
|
|
|
|
|
|
|
39,673
|
|
Capital expenditures
|
|
|
23,704
|
|
|
|
12,136
|
|
|
|
14,575
|
|
|
|
|
|
|
|
50,415
|
|
Depreciation and amortization
|
|
|
30,326
|
|
|
|
8,360
|
|
|
|
5,296
|
|
|
|
|
|
|
|
43,982
|
|
F-27
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE J
|
SEGMENT
INFORMATION (continued)
|
In 2007, the Europe segment includes a credit to rationalization
charges of $188 (pre-tax). In 2006, the Europe segment includes
rationalization charges of $3,478 (pre-tax), and a gain of
$9,006 (pre-tax) on the sale of the facility in Ireland. In
addition, the Europe segment includes rationalization charges of
$1,761 (pre-tax) in 2005. See Note F.
Inter-segment sales between reportable segments are recorded at
cost plus an agreed upon intercompany profit, which approximates
an arms length price, and are eliminated in consolidation.
Export sales (excluding intercompany sales) from the United
States were $194,476 in 2007, $154,111 in 2006 and $98,463 in
2005. No individual customer comprised more than 10% of the
Companys total revenues for any of the three years ended
December 31, 2007.
The geographic split of the Companys net sales, based on
the location of the customer, and property, plant and equipment
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,064,113
|
|
|
$
|
1,004,786
|
|
|
$
|
839,038
|
|
Foreign countries
|
|
|
1,216,671
|
|
|
|
967,129
|
|
|
|
762,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,280,784
|
|
|
$
|
1,971,915
|
|
|
$
|
1,601,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
167,659
|
|
|
$
|
178,717
|
|
|
$
|
184,434
|
|
Foreign countries
|
|
|
263,738
|
|
|
|
212,429
|
|
|
|
158,271
|
|
Eliminations
|
|
|
(1,453
|
)
|
|
|
(1,628
|
)
|
|
|
(2,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
429,944
|
|
|
$
|
389,518
|
|
|
$
|
340,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales derived from customers and property, plant and
equipment in any individual foreign country were not material.
On November 30, 2007, the Company acquired the assets and
business of Vernon Tool, a privately-held manufacturer of
computer-controlled pipe cutting equipment used for precision
fabrication purposes headquartered near San Diego,
California, for approximately $12,434 in cash. The Company began
consolidating the results of Vernon Tool in the Companys
consolidated financial statements in December 2007. The Company
has not yet completed the evaluation and allocation of the
purchase price. The final purchase price allocations for this
transaction will be completed in 2008. This acquisition adds to
the Companys ability to support its customers in the
growing market for infrastructure development. Annual sales are
approximately $9,000.
On November 29, 2007, the Company announced that it had
entered into a majority-owned joint venture with Zhengzhou Heli
Welding Materials Co., Ltd., a privately-held manufacturer of
subarc flux based in Zhengzhou, China. The joint venture, formed
in February 2008, will manufacture subarc flux and subarc wire
in Zhengzhou. Annual sales for Zhengzhou Heli are approximately
$8,000.
On July 20, 2007, the Company acquired Nanjing Kuang Tai
Welding Company, Ltd. (Nanjing), a manufacturer of
stick electrode products based in Nanjing, China, for
approximately $4,245 in cash and assumed debt. The Company began
consolidating the results of Nanjing in the Companys
consolidated financial statements in July 2007. The Company
previously owned 35% of Nanjing indirectly through its
investment in Kuang Tai Metal Industrial Company, Ltd.
Nanjings annual sales are approximately $10,000.
F-28
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE K
|
ACQUISITIONS
(continued)
|
On March 30, 2007, the Company acquired all of the
outstanding stock of Spawmet Sp. z.o.o. (Spawmet), a
privately held manufacturer of welding consumables headquartered
near Katowice, Poland, for approximately $5,000 in cash. The
Company began consolidating the results of Spawmet in the
Companys consolidated financial statements in April 2007.
This acquisition provides the Company with a portfolio of stick
electrode products and the Company expects this acquisition to
enhance its market position by broadening its distributor
network in Poland and Eastern Europe. Annual sales are
approximately $5,000.
On October 31, 2006, the Company acquired all of the
outstanding stock of Metrode, a privately held manufacturer of
specialty welding consumables headquartered near London,
England, for approximately $25,000 in cash. The Company began
consolidating the results of Metrode in the Companys
consolidated financial statements in November 2006. The purchase
price allocation for this investment resulted in goodwill of
approximately $4,000. The Company expects this acquisition to
provide high quality, innovative solutions for many specialty
high-end applications, including the rapidly growing power
generation and petrochemical industries. Annual sales are
approximately $25,000.
On April 29, 2005, the Company acquired all of the
outstanding stock of J.W. Harris, Inc. (J.W.
Harris), a privately held brazing and soldering alloys
manufacturer headquartered in Mason, Ohio for approximately
$71,000 in cash and $15,000 of assumed debt. The Company began
consolidating the results of J.W. Harris operations in the
Companys consolidated financial statements in May 2005.
The purchase price allocation for this investment resulted in
goodwill of $13,263. This acquisition has provided the Company
with a strong complementary metals-joining technology and a
leading position in the brazing and soldering alloys market.
J.W. Harris has manufacturing plants in Ohio and Rhode Island
and an international distribution center located in Spain.
|
|
NOTE L
|
FAIR
VALUES OF FINANCIAL INSTRUMENTS
|
The Company has various financial instruments, including cash
and cash equivalents, short-and long-term debt and forward
contracts. While these financial instruments are subject to
concentrations of credit risk, the Company has minimized this
risk by entering into arrangements with major banks and
financial institutions and investing in several high-quality
instruments. The Company does not expect any counterparties to
fail to meet their obligations. The Company has determined the
estimated fair value of these financial instruments by using
available market information and appropriate valuation
methodologies requiring judgment.
The carrying amounts and estimated fair value of the
Companys significant financial instruments at
December 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amounts
|
|
|
Value
|
|
|
Amounts
|
|
|
Value
|
|
|
Cash and cash equivalents
|
|
$
|
217,382
|
|
|
$
|
217,382
|
|
|
$
|
120,212
|
|
|
$
|
120,212
|
|
Amounts due banks
|
|
|
11,581
|
|
|
|
11,581
|
|
|
|
6,214
|
|
|
|
6,214
|
|
Long-term debt (including current portion)
|
|
|
118,234
|
|
|
|
121,329
|
|
|
|
154,885
|
|
|
|
159,539
|
|
Foreign Exchange Contracts: The Company enters
into forward exchange contracts to hedge foreign currency
transactions on a continuing basis for periods consistent with
its exposures. This hedging minimizes the impact of foreign
exchange rate movements on the Companys operating results.
These derivative financial instruments qualify and are
designated as cash flow hedges. The notional amount of
outstanding foreign exchange contracts, translated at current
exchange rates, was $64,246 and $59,612 at December 31,
2007 and 2006, respectively. The Company would have paid $2,898
at December 31, 2007, and received $47 at December 31,
2006 to settle these contracts, representing the fair value of
the contracts.
F-29
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE L
|
FAIR
VALUES OF FINANCIAL INSTRUMENTS (continued)
|
Interest Rate Swap Agreements: At
December 31, 2007 and 2006, the Company had interest rate
swap agreements outstanding that effectively convert notional
amounts of $110,000 of debt from fixed to floating interest
rates. The Company would have received $762 and paid $3,428 at
December 31, 2007 and 2006, respectively, to settle these
interest rate swap agreements, which represents the fair value
of these agreements.
Commodity Forward Contracts: The Company may
enter into forward contracts to manage its exposure to commodity
price volatility. This hedging minimizes the impact of commodity
price movements on the Companys operating results. At
December 31, 2007, the Companys derivative contracts
consisted of aluminum, copper and nickel forward contracts with
notional amounts, in pounds, of 2,200, 1,200 and 216,
respectively. These derivative financial instruments qualify and
are designated as cash flow hedges. At December 31, 2007,
the fair value of these derivative contracts covering
transactions expected to occur in 2008 represented an unrealized
loss of $1,523. There were no commodity contracts outstanding at
December 31, 2006.
|
|
NOTE M
|
OPERATING
LEASES
|
The Company leases sales offices, warehouses and distribution
centers, office equipment and data processing equipment. Such
leases, some of which are noncancelable and, in many cases,
include renewals, expire at various dates. The Company pays most
maintenance, insurance and taxes relating to leased assets.
Rental expense was $13,883 in 2007, $11,613 in 2006 and $11,389
in 2005.
At December 31, 2007, total future minimum lease payments
for noncancelable operating leases were $9,914 in 2008, $6,631
in 2009, $3,719 in 2010, $2,805 in 2011, $2,059 in 2012 and
$4,042 thereafter.
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 claimants in the asbestos and manganese cases
seek compensatory and punitive damages, in most cases for
unspecified amounts. The Company believes it has meritorious
defenses to these claims and intends to contest such suits
vigorously. Although defense costs remain significant, all other
costs associated with these claims, including indemnity charges
and settlements, have been immaterial to the Companys
consolidated financial statements. Based on the Companys
historical experience in litigating these claims, including a
significant number of dismissals, summary judgments and defense
verdicts in many cases and immaterial settlement amounts, as
well as the Companys current assessment of the underlying
merits of the claims and applicable insurance, the Company
believes resolution of these claims and proceedings,
individually or in the aggregate (exclusive of defense costs),
will not have a material adverse impact upon the Companys
consolidated financial statements.
The Company has provided a guarantee on loans for an
unconsolidated joint venture of approximately $8,176 at
December 31, 2007. The guarantee is provided on four
separate loan agreements. Two loans are for $2,000 each, one
which matures in June 2008 and the other maturing in May 2009.
Two loans mature in July 2010, one for $2,709 and the other for
$1,467. The loans were undertaken to fund the joint
ventures working capital and capital improvement needs.
The Company would become liable for any unpaid principal and
accrued interest if the joint venture were to default on payment
at the respective maturity dates. The Company believes the
likelihood is remote that material payment will be required
under these arrangements because of the current financial
condition of the joint venture.
F-30
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE O
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
549,043
|
|
|
$
|
586,638
|
|
|
$
|
564,824
|
|
|
$
|
580,279
|
|
Gross profit
|
|
|
158,216
|
|
|
|
168,668
|
|
|
|
159,741
|
|
|
|
160,941
|
|
Income before income taxes
|
|
|
68,965
|
|
|
|
78,521
|
|
|
|
70,107
|
|
|
|
69,564
|
|
Net income
|
|
|
48,000
|
|
|
|
55,249
|
|
|
|
49,978
|
|
|
|
49,509
|
|
Basic earnings per share
|
|
$
|
1.12
|
|
|
$
|
1.29
|
|
|
$
|
1.16
|
|
|
$
|
1.15
|
|
Diluted earnings per share
|
|
$
|
1.11
|
|
|
$
|
1.27
|
|
|
$
|
1.15
|
|
|
$
|
1.14
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
468,394
|
|
|
$
|
502,510
|
|
|
$
|
495,137
|
|
|
$
|
505,874
|
|
Gross profit
|
|
|
130,066
|
|
|
|
146,467
|
|
|
|
141,337
|
|
|
|
134,407
|
|
Income before income taxes
|
|
|
51,876
|
|
|
|
63,037
|
|
|
|
61,642
|
|
|
|
61,617
|
|
Net income
|
|
|
36,749
|
|
|
|
42,619
|
|
|
|
43,855
|
|
|
|
51,785
|
|
Basic earnings per share
|
|
$
|
0.87
|
|
|
$
|
1.00
|
|
|
$
|
1.03
|
|
|
$
|
1.21
|
|
Diluted earnings per share
|
|
$
|
0.86
|
|
|
$
|
0.99
|
|
|
$
|
1.02
|
|
|
$
|
1.20
|
|
The quarter ending March 31, 2007 includes pre-tax charges
relating to the Companys European rationalization program
of $396 ($396 after-tax). The quarter ending December 31,
2007 includes a pre-tax gain of $584 ($503 after-tax) related to
such program. See Note F.
The quarters ending March 31, June 30, September 30
and December 31, 2006 include pre-tax charges relating to
the Companys European rationalization program of $1,049
($1,049 after-tax), $1,292 ($1,292 after-tax), $665 ($665
after-tax) and $472 ($472 after-tax), respectively (See
Note F). The quarter ended December 31, 2006 also
includes a pre-tax gain of $9,006 ($7,204 after tax) on the sale
of the Companys facility in Ireland. See Note F.
The quarterly earnings per share (EPS) amounts are each
calculated independently. Therefore, the sum of the quarterly
EPS amounts may not equal the annual totals.
F-31
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LINCOLN
ELECTRIC HOLDINGS, INC. AND SUBSIDIARIES
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
(2)
|
|
|
at End
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
of Period
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
8,484
|
|
|
$
|
3,115
|
|
|
$
|
630
|
|
|
$
|
4,805
|
|
|
$
|
7,424
|
|
Year ended December 31, 2006
|
|
$
|
7,583
|
|
|
$
|
3,255
|
|
|
$
|
325
|
|
|
$
|
2,679
|
|
|
$
|
8,484
|
|
Year ended December 31, 2005
|
|
$
|
9,295
|
|
|
$
|
3,019
|
|
|
$
|
(761
|
)
|
|
$
|
3,970
|
|
|
$
|
7,583
|
|
|
|
|
(1) |
|
Currency translation adjustment. |
|
(2) |
|
Uncollectible accounts written-off, net of
recoveries. |
F-32