| LINCOLN ELECTRIC HOLDINGS INC Item 1A Risk Factors From time to time, information we provide, statements by our employees or information included in our filings with the Securities and Exchange Commission 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 |
| You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this report |
| The risks and uncertainties we describe below 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 |
| For example, since 2003, the price of the type of steel used to manufacture our products has increased 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 |
| Since 2003, we have also experienced substantial inflation in prices for other raw materials, including metals and chemicals |
| In addition, we have experienced an increase in energy costs, and 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, 2005, we were a co-defendant in cases alleging manganese induced illness involving claims by approximately 8cmam724 plaintiffs and a co-defendant in cases alleging asbestos induced illness involving claims by approximately 34cmam667 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 4 _________________________________________________________________ the plaintiff to develop adverse neurological conditions, including a condition known as manganism |
| In the asbestos cases, the 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: 5cmam704 of those claims were dismissed, 8 were tried to defense verdicts in favor of us, 2 were tried to hung juries, 1 of which resulted in a plaintiff’s verdict upon retrial, and one of which resulted in a defense verdict and 12 were settled for immaterial amounts |
| Since January 1, 1995, we have been a co-defendant in asbestos cases that have been resolved as follows: 19cmam443 of those claims were dismissed, 9 were tried to defense verdicts, 4 were tried to plaintiff verdicts and 304 were decided in favor of us following summary judgment motions |
| Defense costs have been increasing |
| 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 access, 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 possibility that cost sharing dissipates for some currently unforeseen reason or that our trial experience changes overall |
| Manganese is an essential element of steel and cannot be eliminated from welding consumables |
| Asbestos use in welding consumables in the US 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 or 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, 7 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 |
| 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 and 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 |
| This foreign competition intensifies as the value of the US dollar falls in relation to other currencies |
| 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 have begun to 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 as well |
| 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 increase our share in growing international markets, particularly Asia (with emphasis in China), Latin America, Eastern Europe and other developing markets |
| In recent years, we have expanded our operations abroad by gaining a manufacturing presence in Poland, Venezuela, Colombia and China |
| 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 |
| 6 _________________________________________________________________ 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 |
| 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 |
| 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 of certain foreign countries do not protect our proprietary rights to the same extent as US 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 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 |