G L O B A L. Leadership A N N U A L R E P O R T

Transcription

1 L I N CO L N E L E C T R I C H O L D I N G S, I N C. G L O B A L Leadership A N N U A L R E P O R T

2 Lincoln s Global Strategy Through a combination of internal growth and investment, joint ventures and acquisitions, Lincoln Electric continued to increase its leadership in global markets in Despite soft economic conditions in North America, the Company maintained its long-standing reputation for outstanding performance. It also strengthened its competitive position, increased efficiency, expanded product lines and pursued strategic growth opportunities worldwide. These results confirm the success of Lincoln Electric s global strategy for continued growth and increased shareholder value. Recognizing the sacrifice and bravery of those who serve DEFENDING FREEDOM This annual report is dedicated to the many Lincoln Electric employees and their family members who have been called to defend freedom around the world. We are proud of Sergeant Javier Zapata, left son of Alvaro Zapata, specialty products manager for Lincoln Electric Latin America along with everyone else who is serving so valiantly at great personal sacrifice. C O N T E N T S Financial Highlights 1 Letter to Shareholders 2 Global Expansion 6 Shaping the Future 8 Focusing on Customers 10 Board of Directors 12 Form 10-K Officers and Corporate Information inside back cover

3 N E T SA L E S Dollars in millions 1, , ,040.5 In dollars D I LU T E D E A R N I NG S P E R S H A R E* excludes asset impairments and severance excludes asset impairments and voluntary retirements in the U.S excludes a net gain related to the sale of property partially offset by severance and redundancy charges in Europe excludes non-recurring charges principally related to the lapsed Charter offer and a gain from insurance proceeds. S H A R E H O L D E R S E Q U I T Y Dollars in millions D I V I D E N D D O L L A R S PA I D Dollars in millions excludes the charge related to the disposal of the motor business Financial Highlights Y E A R E N D E D D E C E M B E R (Dollars in millions, except per share data) Net Sales $ 1,041 $ 994 $ 979 Net Income Net Income excluding non-recurring items (A) ^ 82 Basic Earnings Per Share Basic Earnings Per Share excluding non-recurring items (A) ^ 1.94 Diluted Earnings Per Share Diluted Earnings Per Share excluding non-recurring items (A) ^ 1.93 Cash Dividends Paid Per Share of Common Stock Working Capital $ 342 $ 332 $ 180 Current Ratio Total Assets $ 929 $ 901 $ 781 Total Shareholders Equity Cash Provided by Operations $ 96 $ 104 $ 120 Return on Average Shareholders Equity 12.0% 6.3% 17.7% Return on Average Shareholders Equity excluding non-recurring items 12.3% 15.9% ^ 17.4% (A) Basic and diluted earnings per share without rationalization charges are presented as management believes this financial measure is important to investors to evaluate and compare the Company s financial performance from period to period. Management uses this information in assessing and evaluating the Company s underlying operating performance excludes rationalization charges of $1.7 ($1.3 after-tax, or $0.03 per diluted share) related to asset impairments and severance. ^ 2002 excludes rationalization charges of $10.5 ($7.0 after-tax, or $0.17 per diluted share) and $38.3 ($37.6 after-tax, or $0.88 per diluted share) related to the impairment of goodwill, as a result of a change in accounting principle. The rationalization charges were primarily related to a voluntary retirement program affecting approximately 3% of the Company s U.S. workforce and asset impairment charges excludes a net gain of $1.9 ($1.2 after-tax, or $0.03 per diluted share) related to the sale of property partially offset by severance and redundancy charges in Europe. * Earnings per share as reported: 2003 $1.32; 2002 $0.69; 2001 $1.97; 2000 $1.83; 1999 $ Lincoln Electric Annual Report

4 C H A I R M A N S L E T T E R A n t h o n y A. M a s s a ro Chairman, President and Chief Executive Officer Global Strategy C R E A T E S O P P O R T U N I T I E S To Our Shareholders: Our carefully planned, ongoing strategy to expand Lincoln Electric s global footprint while growing market share, improving profitability, maximizing cash flow and enhancing shareholder value continued on course in As the clear worldwide leader in the arc welding industry, our Company is truly in the strongest position of its long and successful history. Despite overcapacity in our industry and tough competition as companies fought for a shrinking volume of orders, we were able to persevere in 2003 and take advantage of opportunities in the global markets. 2

5 Net income for 2003 was $54.5 million, or $1.31 per diluted share. Net sales were $1.04 billion. Cash flow from operations in 2003 was a very strong $95.7 million and was significantly affected by voluntary funding of $40 million to the Company s U.S. pension plans. This was $20 million more funding than in Without the incremental pension funding, cash flow was $115.7 million. Both our sales and our profitability in 2003 were approximately split between our U.S. and non-u.s. businesses, excluding our non-consolidated joint ventures in Turkey and China. GLOBAL, OPERATIONAL AND FINANCIAL STRENGTH While market and economic conditions continued to pose significant challenges, we were able to strengthen Lincoln Electric globally, operationally and financially to further position the Company as the leader in our industry. We continue to make strategic investments in our business units to improve quality, productivity, working conditions and profitability. In Asia, our expanding operations in China will be enhanced by our recently announced acquisition of controlling interests in three welding businesses in mainland China, including Lincoln owning 85 percent of a new welding equipment company to be built in Shanghai High-quality welding products for worldwide markets Lincoln Electric is the world s largest designer and manufacturer of arc welding and cutting products. Growing global demand from the energy and construction sectors is fueling growth in pipeline and other infrastructure projects that require welding products. The Company s major end markets include metal forming and fabrication; pipeline, building, bridge and power facility construction; transportation and defense industries; equipment manufacturers in construction, farming and mining; retail resellers; and the rental market. fueling growth Among the bright spots in our global markets were the Asia Pacific region, where our sales and profitability increased significantly, and Eastern Europe, which experienced double-digit growth in both sales and profitability. In Western Europe, markets generally were stagnant and the strength of the euro negatively affected Lincoln s exports from the region. In North America, rising pension-related, raw material and energy costs and product mix affected our operating profit. However, we saw consistent improvement in operating profit from quarter to quarter as the year progressed, as a result of our operational improvement and cost reduction initiatives. Furthermore, orders in the United States increased significantly during the last four months of the year, a positive sign for the coming year. This upward trend in orders is the first we have seen in the United States in more than three years. to serve the Chinese market. These will be the most important acquisitions we have made as a Company, and they will put us in a clear lead position in China, the world s fastest-growing and largest market for arc welding products. China clearly represents a major growth opportunity for Lincoln as the country continues to increase its investments in infrastructure. The need for welding products in the building of the country s gas pipelines and in the construction industry, for example, has generated substantial revenue for our Company. India, the second-largest market in Asia, also presents opportunity for growth, especially in sales to pipe mills and pipeline projects such as the Gas Authority of India Limited (known as the GAIL pipeline project) and general construction activity. Last year, our revenues doubled in this important growth market. 3 Lincoln Electric Annual Report

6 C H A I R M A N S L E T T E R (continued) We continue to make progress in Eastern Europe through our Bester operation, which has experienced significant growth since we acquired the business in Our strategy includes bringing more Lincoln-branded products into this region through existing Bester distribution networks, upgrading capacity and continuing to introduce Bester products to our other market regions such as Asia, Latin America, North America, Russia, Africa and the Middle East. We successfully gained share in a number of Latin American markets, most notably Venezuela, Mexico and Brazil. In Brazil, we are adding capacity to reflect our increased share. In Mexico, we successfully transferred assembly of several of our high-volume welding gun products to our plant in Torreon, and we are in the process of building a new facility as part of our expansion. In line with our global strategy to grow through acquisitions and joint ventures, we acquired Clore Automotive s welding products and battery charger businesses, bringing the Century and Marquette welding and Century battery charger brands to our line of retail products. We expect to grow this product line significantly under our management. We also made numerous operational improvements during the year to reduce costs and increase efficiency, including streamlining production across our North American business and rationalizing warehousing and overhead. During a nationally televised visit to our Cleveland plant this past January, Commerce Secretary Donald Evans cited Lincoln Electric as a model of a company transforming itself to become more productive and globally competitive. Of primary importance to all of us, we continue to have an extremely strong balance sheet. This strength enables us to make further strategic acquisitions, reinvest in our existing businesses, buy back outstanding shares at opportune times and pay a growing dividend to our shareholders. It also allows us to manage our way successfully through tough economic times like the past few years. During 2003, the Company repurchased 1,917,022 shares of its stock, at a cost of $41.9 million, under our share repurchase programs authorized by the Board of Directors of the Company. Total shares purchased through the share repurchase programs were 9,657,811 shares, at a cost of $199.1 million, through December 31, Our stock has outperformed every major index over the past five years. An investment in Lincoln stock five years ago was worth 26.4 percent more at the end of BOARD ADDITIONS AND SUCCESSION We added two outstanding new members to our Board of Directors in 2003 Robert Knoll, former partner of Deloitte & Touche and national director of the firm s Accounting and Auditing Professional Practice, and George H. Walls, Jr., chief deputy in charge of operations for the North Carolina State Auditor s Office. Mr. Walls is also a retired Brigadier General of the U.S. Marine Corps. Both are valuable contributors to our Board and are enhancing its independent perspective and oversight. 4

7 I would like to thank Henry L. Meyer III, chairman, president and chief executive officer of KeyCorp; David C. Lincoln, chairman of Lincoln Laser Co. and son of our founder; and Ed Hood, former vice chairman of the General Electric Company, for their many years of service. These former directors retired from our Board this past year. They have all been outstanding directors and made a huge impact in helping to strengthen our Company. In addition, I would like to thank Jay Elliot, our retired CFO, for his contributions to the Company over the past 10 years. With Lincoln Electric in a clear position of strength, I decided to announce in October 2003 that I intend to retire by May Succession planning is one of the most important duties of executive management and the Board of Directors, and I will work closely with the Board to ensure a seamless and successful transition over the next year. OUTLOOK Despite early signs of recovery, the U.S. economy still remains tentative as this letter is written. Capital spending remains slow, and uncertainties about Iraq, Afghanistan and the presidential election continue to have a negative impact on U.S. and international markets and economies. However, we are cautiously optimistic about the overall economic outlook. Our intent is to grow internally as well as through joint ventures and acquisitions. Our growth strategy remains effective, and our acquisition track record is remarkably solid. At Lincoln Electric, our corporate vision is to continue to be the undisputed world leader in sales, technology, profitability and enhanced shareholder value in the arc welding industry. Today, Lincoln is the largest, strongest and most profitable company in our worldwide industry. I thank our outstanding employees for their continued hard work, our customers and our distributors, and you, our shareholders, for your continued support. Together we will continue the Lincoln tradition of excellence. Lastly, I would like to honor our employees and their family members who have been called to defend freedom around the world. The personal sacrifice and bravery these men and women are demonstrating is indicative of the greatness of our people. We dedicate this annual report to them. They are true patriots. Anthony A. Massaro Chairman, President and Chief Executive Officer March 2004 At Lincoln Electric, our corporate vision is to continue to be the undisputed world leader in sales, technology, profitability and enhanced shareholder value in the arc welding industry. 5 Lincoln Electric Annual Report

8 Taking our expertise on the road in China The truck above serves as a traveling showcase and training center in China for Lincoln Electric technology, helping to penetrate this promising market. On the opposite page, Chairman Tai Long Chou, left, Lincoln s partner in the Kuang Tai Group, and Anthony A. Massaro are shown at the signing of an agreement for Lincoln to acquire controlling interests in three welding businesses in China. 6

9 Expanding O U R G L O B A L B U S I N E S S E S Lincoln Electric continues to strengthen its global position through joint ventures, acquisitions, expansion of its distributor and distribution base and product introductions. Lincoln s Bester operation, based in Poland, continued to drive the Company s growth in Eastern Europe. It opens new avenues for high-quality Bester products through the worldwide Lincoln distribution system, brings products of Lincoln and its affiliates into Eastern Europe through Bester s established networks and provides a low-cost manufacturing base for equipment the Company previously purchased from outside suppliers. The photo at the left shows a product coming off the line at Bester. Elsewhere on the continent, Lincoln is seeing OUR MOST PROMISING OPPORTUNITY IS CHINA, where positive results from cost reductions and productivity the market for welding products is forecast to grow 8 to 10 improvements in Europe, and pipe mills are driving percent annually for the next 15 to 20 years, driven by increased demand for our Uhrhan & Schwill unit in major investments in manufacturing, shipbuilding, pipelines and other infrastructure projects. Our announced consumables in Russia, and business activity in the Germany. Orders continue to grow for equipment and acquisition of a majority position in three Chinese Middle East remains steady as a result of oil- and gasrelated projects. welding businesses will give Lincoln a clear leadership position in this market. This includes an equipment In the Western Hemisphere, signs of improvement manufacturing facility that we are planning for Shanghai are beginning to emerge. Petroleum and other infrastructure projects are getting under way as national to further strengthen our position in this market. Other acquisitions and joint ventures are economies gain strength in Latin America. The integration performing well throughout the world. In Turkey, Lincoln of Lincoln Soldaduras de Venezuela, the market leader owns 50 percent of the industry leader, AS Kaynak, in welding consumables in that country, has enabled the which provides expanded access to growing markets Company to better serve its customers, reduce costs and in Central Asia, Eastern Europe and the Middle East. increase sales in the region. It also provides a solid strategic platform for serving reconstruction projects in this area. 7 Lincoln Electric Annual Report

10 Shaping T H E F U T U R E O F W E L D I N G Innovation and initiative, not just size, are the marks of a true leader. Known as The Welding Experts, Lincoln s employees lead customers into a brighter future through product innovation and dedication to operational excellence. IN THE WELDING INDUSTRY, LINCOLN HAS INTRODUCED the benefits of digital communications with its NEXTWELD technologies. Historically, welding system performance has been limited by the analog circuitry that controlled it. NEXTWELD s Waveform Control Technology significantly reduces costs and improves quality, control and productivity in welding operations. It does this by allowing real-time information to be communicated digitally via computer. This enables modifications to be made either remotely or on-site. Engineering changes are simplified through software upgrades rather than module replacements. The Company s research and development program focuses on aggressive product development and improved solutions for customers welding needs. Approximately half of its U.S. arc welding equipment sales come from products that were developed in the past five years. It is common for Lincoln products to earn awards, such as the Plant Engineering magazine Product of the Year Award given to Lincoln s Invertec V205-T AC/DC welder and the selection of the Ranger 305G and D engine welders as one of the Top 100 Products of the year by the editors of Construction Equipment magazine. Despite slow overall demand in many markets, Lincoln s products are growing in sales and market share due to their high quality and popularity with customers. Examples include the Pipeliner family of products, which were developed specifically to meet the rigorous demands of the global pipe welding industry. Sales of Ranger engine drives and our new line of TIG welding equipment and cored wire products are also growing rapidly. Operationally, we have a world-class manufacturing focus. Lincoln facilities around the world have attained ISO certifications, including ISO certification, the environmental standard achieved at all of the Company s plants in Northeast Ohio, an arc welding industry first. In addition, an aggressive Six Sigma program has produced millions of dollars in savings to date. In Cleveland, the Company was recognized with its second evolution in Manufacturing award from Smart Business magazine for the successful integration of business systems into our manufacturing operations. 8

11 Lincoln innovation helps manufacturers stay competitive through automation Automated welding cells, such as the one shown above for the Ford GT, enable customers to improve the quality and efficiency of their welding processes. Opposite page, top: A computer display of a digitally monitored welding system. Opposite page, bottom: The Ford GT. 9 Lincoln Electric Annual Report

12 The growing retail market and strong relationships with its industrial distributors offer significant opportunities for Lincoln Electric s welding products. Below: A display of products at Greco Gas, an industrial distributor of welding products in the Pittsburgh area. Opposite page, left: The Spanish version of Lincoln s Web site. Opposite page, right: Lincoln s award-winning Invertec V205-T AC/DC welder. Lincoln offers a full line of welding products 10

13 Focusing O N A B R O A D R A N G E O F C U S T O M E R S Lincoln Electric customers around the globe expect world-class service, and we work hard to deliver and exceed that expectation. OUR RELATIONSHIPS WITH THE INDUSTRIAL CHANNEL through distributors are extremely strong. These distributors seek partners to help them grow their businesses profitably over the long term, and Lincoln focuses on areas that bring value to its distributor partners through technology, processes, product support and service in the field. Lincoln continues to increase its broad range of customers by expanding into new markets. One of its fastest-growing business segments is the retail consumer market. The Company has developed strong relationships with large retail chains to make the Lincoln brand of welding products the preferred choice of do-it-yourselfers. To better serve this retail market, Lincoln created Welding, Cutting, Tools and Accessories Inc. (WCTA) in 2003, consolidating all of its retail and professional channel business into a single dedicated unit. WCTA expanded in October 2003 when Lincoln acquired Clore Automotive s welding products and battery charger businesses. This acquisition broadened Lincoln s retail customer base by bringing the Century and Marquette lines of welding products and Century battery chargers into the Lincoln family of products. 11 Lincoln Electric Annual Report

14 B OA R D O F D I R E C TO R S Harold L. Adams Harry Carlson Ranko Cucuz David H. Gunning Robert J. Knoll Paul E. Lego G. Russell Lincoln Kathryn Jo Lincoln Hellene S. Runtagh Frank L. Steingass George H. Walls, Jr. Anthony A. Massaro John M. Stropki, Jr. Harold L. Adams *2002 Chairman Emeritus and Former President and Chief Executive Officer of RTKL Associates Inc. Harry Carlson *1973 Former Vice Chairman of the Company Ranko Cucuz *2001 Former Chairman, President and Chief Executive Officer of Hayes Lemmerz International, Inc. David H. Gunning *1987 Vice Chairman of Cleveland-Cliffs Inc Robert J. Knoll *2003 Former Partner, Deloitte & Touche LLP Paul E. Lego *1993 President of Intelligent Enterprises, Inc. Chairman of Commonwealth Industries, Inc. Former Chairman and Chief Executive Officer of Westinghouse Electric Corporation G. Russell Lincoln *1989 President of N.A.S.T. Inc. Kathryn Jo Lincoln *1995 Chairman of The Lincoln Institute of Land Policy and President of The Lincoln Foundation, Inc. Anthony A. Massaro *1996 Chairman, President and Chief Executive Officer of the Company Hellene S. Runtagh *2001 Former President and Chief Executive Officer of Berwind Group Frank L. Steingass *1971 Former President of Buehler/Steingass, Inc. John M Stropki, Jr. *1998 Executive Vice President and Chief Operating Officer of the Company Gen. George H. Walls, Jr. (USMC Ret.) *2003 Chief Deputy Auditor, State of North Carolina * Year elected as a Director 12

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75 CO M PA N Y O F F I C E R S ^ George D. Blankenship *1985 Vice President, Engineering and Quality Assurance Joseph G. Doria *1972 Vice President President, Lincoln Electric Canada ^ Gretchen A. Farrell *1997 Vice President, Human Resources Ralph C. Fernandez *1995 Vice President President, Lincoln Electric Europe Michael J.F. Gillespie *1995 Vice President President, Lincoln Electric Asia Vinod K. Kapoor *2000 Vice President, Cleveland Operations David M. LeBlanc *1986 Vice President President, Lincoln Electric Latin America ^ Anthony A. Massaro *1993 Chairman, President and Chief Executive Officer Ronald A. Nelson *1972 Vice President, Machine Division ^ Vincent K. Petrella *1995 Vice President, Chief Financial Officer and Treasurer ^ James E. Schilling *1998 Senior Vice President, Corporate Development Richard J. Seif *1971 Vice President, Sales and Marketing for Lincoln U.S. ^ John M. Stropki, Jr. *1972 Executive Vice President and Chief Operating Officer ^ Frederick G. Stueber *1995 Senior Vice President, General Counsel and Secretary ^ Raymond S. Vogt *1996 Senior Vice President and Special Assistant to the Chief Executive Officer * Year joined the Company ^ Member, Management Committee CO R P O RAT E I N F O R M AT I O N Additional copies of Lincoln Electric s 2003 Annual Report and Form 10-K may be obtained by contacting Corporate Relations at (216) , sending a fax to (216) or visiting our Web site: This Annual Report may also be obtained by calling Inquiries about dividends, shareholder records, share transfers, changes in ownership and address changes should be directed to the Transfer Agent and Registrar: National City Bank Dept Corporate Trust Operations P.O. Box Cleveland, Ohio Attn: Shareholder Services (800) The Annual Meeting of Lincoln Electric Shareholders is scheduled to be held on Thursday, April 29, 2004, at 10:30 a.m., at Wellington Center, 777 Alpha Drive, Highland Heights, Ohio The Company s Common Shares are traded on the Nasdaq Stock Market under the stock symbol LECO. The number of record holders of Common Shares at December 31, 2003, was 2,255. For additional Company information, contact: Corporate Relations Lincoln Electric Holdings, Inc St. Clair Avenue Cleveland, Ohio USA Phone: (216) Fax: (216)

76 L I N CO L N E L E C T R I C H O L D I N G S, I N C St. Clair Avenue Cleveland, Ohio USA