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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
 
Commission file number 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Ohio
 
34-1860551
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
22801 St. Clair Avenue, Cleveland, Ohio
 
44117
(Address of principal executive offices)
 
(Zip Code)
(216) 481-8100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, without par value
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x    No ¨
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 ¨    No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's 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 x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x

 
Accelerated filer o
 
Non-accelerated filer   o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
 
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No x
The aggregate market value of the common shares held by non-affiliates as of June 30, 2017 was $5,917,150,492 (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 registrant's common shares as of January 31, 2018 was 65,644,512.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement with respect to the registrant's 2018 Annual Meeting of Shareholders.
 




PART I
ITEM 1. BUSINESS
General
As used in this Annual Report on Form 10-K, the term "Company," except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc. and 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 one of only a few worldwide broad-line manufacturers of welding, cutting and brazing products. Welding products include arc welding power sources, plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes and welding accessories and specialty welding consumables and fabrication. The Company's product offering also includes computer numeric controlled ("CNC") plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. 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 volume 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, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, China, Colombia, Egypt, France, Germany, India, Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Spain, Turkey, the United Kingdom and Venezuela.
The Company's business units are aligned into three operating segments. The operating segments consist of Americas Welding, International Welding and The Harris Products Group. The Americas Welding segment includes welding operations in North and South America. The International Welding segment includes welding operations in Europe, Africa, Asia and Australia. The Harris Products Group includes the Company's global cutting, soldering and brazing businesses as well as the retail business in the United States. Refer to Note 5 to the consolidated financial statements for segment and geographic area information, which is incorporated herein by reference.
Customers
The Company's products are sold in both domestic and international markets. In the Americas, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of the Americas, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors and product users.
The Company's major end-user markets include:
general fabrication,
energy and process industries,
heavy industries (heavy fabrication, ship building and maintenance and repair),
automotive and transportation, and
construction and infrastructure.
The Company is not dependent on a single customer or a few customers and no individual customer currently accounts for more than ten percent of total Net sales. However, the loss of a large customer could have an adverse effect on the Company's business. The Company's operating results are sensitive to changes in general economic conditions. The arc welding and cutting industry is generally a mature industry in developed markets such as North America and Western Europe and is cyclical in nature. Overall demand for arc welding and cutting products is largely determined by economic cycles and the level of capital spending in manufacturing and other industrial sectors. The Company experiences some variability in reported period-to-period results as demand for the Company's products are mildly seasonal with generally higher demand in the second and third quarters. See "Item 1A. Risk Factors" for further discussion regarding risks associated with customers, general economic conditions and demand.

1



Competition
Conditions in the arc welding and cutting industry are highly competitive. The Company believes it is the world's largest manufacturer of consumables and equipment with relatively few major broad-line competitors worldwide, but numerous smaller competitors in specific geographic markets. The Company continues to pursue 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 based on brand preference, product quality, price, performance, warranty, delivery, service and technical support. The Company believes its performance against these factors has contributed to the Company's position as the leader in the industry.
Most of the Company's 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 to assist customers in optimizing their welding applications. This allows the Company to introduce its products to new users and to establish and maintain close relationships with its customers. This close relationship between the technical sales force and the direct customers, together with its supportive relationship with its distributors, who are particularly interested in handling the broad range of the Company's products, is an important element of the Company's market success and a valuable asset of the Company.
Raw Materials
The principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys, robotic components and various chemicals 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 actively protects its innovations 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 Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material adverse effect on the Company's earnings. The Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is progressing towards certification at its remaining facilities worldwide. In addition, the Company is ISO 9001 certified at 48 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.
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 1 to the consolidated financial statements with respect to total costs of research and development, which is incorporated herein by reference.
Employees
The number of persons employed by the Company worldwide at December 31, 2017 was approximately 11,000. See "Part I, Item 1C" for information regarding the Company's executive officers, which is incorporated herein by reference.

2



Website Access
The Company's website, www.lincolnelectric.com, is used as a channel for routine dissemination of important information, including news releases and financial information. The Company posts its filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K; proxy statements; and any amendments to those reports or statements. The Company also posts its Code of Corporate Conduct and Ethics on its website. All such postings and filings are available on the Company's website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when news releases and financial information is posted on the website. The SEC also maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.

ITEM 1A. RISK FACTORS
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 generally can be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "forecast," "guidance" or words of similar meaning. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the Company's operating results. 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 risks described below. Forward-looking statements made in this report 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.
In the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have a material impact on our business, financial condition, operating results and cash flows. Our Enterprise Risk Management ("ERM") process seeks to identify and address significant risks. Our ERM process is a company-wide initiative that is designed with the intent of prioritizing risks and allocating appropriate resources to address such risks. We use the integrated risk framework of the Committee of Sponsoring Organizations to assess, manage and monitor risks.
Management has identified and prioritized critical risks based on the severity and likelihood of each risk and assigned an executive to address each major identified risk area and lead action plans to monitor and mitigate risks, where possible. Our Board of Directors provides oversight of the ERM process and systematically reviews identified critical risks. The Audit Committee also reviews major financial risk exposures and the steps management has taken to monitor and control them.
Our goal is to pro-actively manage risks in a structured approach and in conjunction with the strategic planning process, with the intent to preserve and enhance shareholder value. However, these and other risks and uncertainties could cause our results to vary materially from recent results or from our anticipated future results. The risk factors and uncertainties described below, together with information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K, should be carefully considered. Additional risks and uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect our business.
General economic and market conditions may adversely affect our financial condition, results of operations and access to capital markets.
Our operating results are sensitive to changes in general economic conditions. Recessionary economic cycles, higher interest rates, inflation, higher labor costs, trade barriers in the world markets, financial turmoil related to sovereign debt and changes in tax laws or trade laws or other economic factors affecting the countries and industries in which we do business could adversely affect demand for our products. An adverse change in demand could impact our results of operations, collection of accounts receivable and our expected cash flow generation from current and acquired businesses, which may adversely impact our financial condition and access to capital markets.

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Economic and supply disruptions associated with events beyond our control, such as war, acts of terror, political unrest, pandemic, labor disputes or natural disasters could adversely affect our supply chain and distribution channels or result in loss of sales and customers.
Our facilities and operations, and the facilities and operations of our suppliers and customers, could be disrupted by events beyond our control, such as war, political unrest, pandemic, labor disputes or natural disasters. Any such disruption could cause delays in the production and distribution of our products and the loss of sales and customers. Insurance proceeds may not adequately compensate the Company for the losses.
Availability of and volatility in energy costs or raw material prices may adversely affect our performance.
In the normal course of business, we are exposed to market risks related to the availability of and price fluctuations in the purchase of energy and commodities used in the manufacture of our products (primarily steel, brass, copper, silver, aluminum alloys, electronic components, electricity and natural gas). The availability and prices for energy costs and raw materials, including steel, nonferrous metals and chemicals, 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, anticipated or perceived shortages, government trade practices and regulations and other factors.
Increases in the cost of raw materials and components may adversely affect our profitability if we are unable to pass along to our customers these cost increases in the form of price increases or otherwise reduce our cost of goods sold. Although most of the raw materials and components used in our products are commercially available from a number of sources and in adequate supply, any disruption in the availability of such raw materials and components, our inability to timely or otherwise obtain substitutes for such items, or any deterioration in our relationships with or the financial viability of our suppliers could adversely affect our business.
We are a co-defendant in litigation alleging asbestos induced illness. Liabilities relating to such litigation could reduce our profitability and impair our financial condition.
As of December 31, 2017, we were a co-defendant in cases alleging asbestos induced illness involving claims by approximately 3,613 plaintiffs. In each instance, we are one of a large number of defendants. The asbestos 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 asbestos cases that have been resolved as follows: 54,732 of those claims were dismissed, 23 were tried to defense verdicts, 7 were tried to plaintiff verdicts (one of which was appealed by defendants and was remanded to the trial court for a new trial), 1 was resolved by agreement for an immaterial amount and 776 were decided in favor of the Company following summary judgment motions.
The long-term impact of the asbestos loss contingency, in the aggregate, on operating results, operating cash flows and access to 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 believe we have applicable insurance relating to these claims, there are several risks and uncertainties that may affect our liability for personal injury claims relating to exposure to asbestos, including the future impact of changing cost sharing arrangements or a change in our overall trial experience.
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 business exposes us to potential product liability risks that are inherent in the design, manufacture, sale and application of our products and the products of third-party suppliers that we utilize or resell. 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 products are designed for use in specific applications, and if a product is used inappropriately, personal injury or property damage may result. In certain cases, we design automated welding systems for use in a customer’s production facilities (including automotive production facilities), which could expose us to financial losses or professional liability.

4



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 product liability insurance will continue to be available on terms acceptable to us. Even if we are successful defending such claims or product liability coverage is adequate, claims of this nature could cause customers to lose confidence in our products and our company. Warranty claims are not generally covered by insurance and we may incur significant warranty costs in the future for which we would not be reimbursed.
The cyclical nature and maturity of the arc welding and cutting industry in developed markets may adversely affect our performance.
The arc welding and cutting industry is generally a mature industry in developed markets such as North America and Western Europe and is cyclical in nature. 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.
We may not be able to complete our acquisition or divestiture strategies, successfully integrate acquired businesses and in certain cases we may be required to retain liabilities for certain matters.
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 expose us to unexpected liabilities and involve the expenditure of significant funds and management time. Further, we may not be able to successfully integrate an acquired business with our existing businesses or recognize the expected benefits from any completed acquisition. Integration efforts may include significant rationalization activities that could be disruptive to the business. Our current operational cash flow is sufficient to fund our acquisition plans, but a significant acquisition could require access to the capital markets.
Additionally, from time to time we may identify assets for strategic divestitures that would increase capital resources available for other activities and create organizational and operational efficiencies. Various factors could materially affect our ability to dispose of such assets or complete announced divestitures, including the receipt of approvals of governmental agencies or third parties and the availability of purchasers willing to acquire the interests or purchase the assets on terms and at prices acceptable to us.
Sellers typically retain certain liabilities or indemnify buyers for certain matters. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction and ultimately may be material. Also, as is typical in divestitures, third parties may be unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations.
If we cannot continue to develop, manufacture and market products that meet customer demands, continue to enforce the intellectual property rights on which our business depends or if third parties assert that we violate their intellectual property rights, our revenues, gross margins and results of operations may suffer.
Our continued success depends, in part, on our ability to continue to meet our customers' needs for welding and cutting 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. 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.
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.

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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 settlements or license agreements, pay costly damage awards or face a temporary or permanent injunction prohibiting us from manufacturing, marketing or selling certain of our products.
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. We have previously initiated, and may in the future initiate significant rationalization activities to align our business to market conditions and improve our overall competitiveness, including with respect to the integration of acquired businesses. Such rationalization activities could fail to deliver the desired competitive cost structure and could result in disruptions in customer service. If our products, services, support and cost structure do not enable us to compete successfully based on any of the criteria listed above, our operations, results and prospects could suffer.
Further, in the past decade, the arc welding industry in the United States and other developed countries has been subject to increased levels of foreign competition as low cost imports have become more readily available. Our competitive position could 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 and robotic arm manufacturers compete in the automated welding and cutting space. In addition, in certain markets of the world, distributors manufacture and sell arc welding products. Our sales and results of operations, as well as our plans to expand in some foreign countries, could be adversely affected by this practice.
We conduct our sales and distribution operations on a worldwide basis and maintain manufacturing facilities in a number of foreign countries, which subjects us to risks associated with doing business outside the United States.
As a growing global enterprise, the share of sales and profits we derive from our international operations and exports from the United States is significant. This trend increases our exposure to the performance of many developing economies in addition to the developed economies outside of the United States. If international economies were to experience significant slowdowns, it could adversely affect our financial condition, results of operations and cash flows. There are a number of risks in doing business internationally, which may impede our ability to achieve our strategic objectives relating to our foreign operations, including:
Political and economic uncertainty and social turmoil;
Corporate governance and management challenges in consideration of the numerous U.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, repatriation of earnings and funds, exchange controls, labor regulations, nationalization, tariffs, anti-boycott provisions and anti-bribery laws (such as the Foreign Corrupt Practices Act and the Organization for Economic Cooperation and Development Convention);
International terrorism and hostilities;
Changes in the global regulatory environment, including revised or newly created laws, regulations or standards relating to the Company, our products or the markets in which we operate; and
Significant fluctuations in relative currency values; in particular, an increase in the value of the U.S. dollar against foreign currencies could have an adverse effect on our profitability and financial condition, as well as the imposition of exchange controls, currency devaluations and hyperinflation.
Our operations depend on maintaining a skilled workforce, and any interruption in our workforce could negatively impact our results of operations and financial condition.
Our success depends in part on the efforts and abilities of our management team and key employees. Their skills, experience and industry knowledge significantly benefit our operations and performance. Our future success will also depend on our ability to identify, attract and retain highly qualified managerial and technical (including research and development) personnel. Competition for these individuals is intense, and we may not succeed in identifying, attracting or retaining qualified personnel. With our strategy to expand internationally into developing markets, we may incur additional risks as some developing economies lack a sufficiently trained labor pool.
Any interruption of our workforce, including rationalization efforts related to the integration of acquired businesses, interruptions due to unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could impact our results of operations and financial condition.

6



Our defined benefit pension plans are subject to financial market trends, such as changes in discount rates and actual investment return on pension assets, which could adversely affect our results of operations and cash flows.
The performance of the financial markets and interest rates impact our funding obligations under our defined benefit pension plans. Significant changes in discount rates, decreases in the fair value of plan assets and investment losses on plan assets may increase our benefit obligations and adversely impact our results of operations, shareholders' equity and cash flows through our annual measurement of plan assets and liabilities. During the fourth quarter 2016, the Company made amendments to freeze all benefit accruals under the Lincoln Electric Retirement Annuity Program and the domestic Supplemental Executive Retirement Plan, effective December 31, 2016 and November 30, 2016, respectively. For further details on the plan freeze and a discussion regarding how the financial statements have been affected, refer to Note 11 to the Company's consolidated financial statements.
Changes in tax rates or exposure to additional income tax liabilities could affect profitability.
Our business is subject to income taxes in the United States and various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowances of deferred tax assets or changes in tax laws.
The amount of income taxes paid is subject to ongoing audits by United States federal, state and local tax authorities and by foreign tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments which could have a material adverse effect on our results of operations.
We are subject to risks relating to our information technology systems.
The conduct and management of our business relies extensively on information technology systems, which contain confidential information related to our customers, suppliers and employees and other proprietary business information. We maintain some of these systems and are also dependent on a number of critical corporate infrastructure services provided by third parties relating to, among other things, human resources, electronic communication services and finance functions. If these systems are damaged, cease to function properly or are subject to a significant cyber security breach, we may suffer an interruption in our ability to manage and operate the business and our results of operations and financial condition could be adversely affected. Furthermore, a security breach could result in financial loss, unfavorable publicity, damage to our reputation, loss of our trade secrets and other competitive information, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and fines and other sanctions resulting from any related breaches of data privacy regulations. Any of these could have an adverse effect on our results of operations and financial condition.
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, waste management and climate change. Some environmental laws impose strict, retroactive and joint and several liability for the remediation of the release of hazardous substances, even for conduct that was lawful at the time it occurred, or for the conduct of or conditions caused by prior operators, predecessors or third parties. Failure to comply with environmental laws could expose us to penalties or clean-up costs, civil or criminal liability and sanctions on certain of our activities, as well as damage to property or natural resources. These liabilities, sanctions, damages and remediation efforts related to any non-compliance with such laws and regulations could negatively impact our ability to conduct our operations and our financial condition and results of operations. In addition, there can be no assurances that we will not be adversely affected by costs, liabilities or claims with respect to existing or subsequently acquired operations or under present laws and regulations or those that may be adopted or imposed in the future.
Changes in environmental laws or regulations could result in higher expenses and payments, and uncertainty relating to environmental laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw material costs. If environmental laws or regulations are either changed or adopted and impose significant operational restrictions and compliance requirements upon us or our products, they could negatively impact our business, capital expenditures, results of operations, financial condition and competitive position.
It is our policy to apply strict standards for environmental protection to all of our operations inside and outside of 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 prohibited from entering certain jurisdictions, if we were to violate or become liable under environmental laws, if our products become non-compliant with environmental laws or if we were to undertake environmental protection actions voluntarily.

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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 products that are sold worldwide in multiple jurisdictions. The ultimate costs under environmental laws and the timing of these costs are difficult to predict.
We may incur additional restructuring charges as we continue to contemplate rationalization actions in an effort to optimize our cost structure and may not achieve the anticipated savings and benefits of these actions.
We may take additional actions in the future to further optimize our cost structure and improve the efficiency of our operations, which will reduce our profitability in the periods incurred. As a result of these actions, we will likely continue to incur charges, which may include but are not be limited to asset impairments, employee severance costs, charges for pension and other postretirement contractual benefits and pension settlements, any of which could be significant, and could adversely affect our financial condition and results of operations. In addition, we may not realize anticipated savings or benefits from past or future rationalization plans in full or in part or within the time periods we expect. Failure to realize anticipated savings or benefits from our cost reduction actions could have a material adverse effect on our business, financial condition, liquidity, results of operations and cash flows. For more information regarding rationalization plans, refer to the rationalization and asset impairment related disclosure under Note 6 to the Company's consolidated financial statements.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 1C. EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
Name
 
Age
 
Position
Christopher L. Mapes
 
56

 
Chairman of the Board effective December 21, 2013. President and Chief Executive Officer effective December 31, 2012; Chief Operating Officer from September 1, 2011 to December 31, 2012; Director since February 2010. Prior to his service with the Company, Mr. Mapes was an Executive Vice President of A.O. Smith Corporation (a global manufacturer with a water heating and water treatment technologies business), a position he held from 2004 through August 2011, and the President of its former Electrical Products unit, a position he held from September 2004 through August 2011.
Vincent K. Petrella
 
57

 
Executive Vice President, Chief Financial Officer and Treasurer since February 19, 2014; Senior Vice President, Chief Financial Officer and Treasurer from October 7, 2005 to February 19, 2014; Vice President, Chief Financial Officer and Treasurer from February 4, 2004 to October 7, 2005.
Jennifer I. Ansberry
 
44

 
Executive Vice President, General Counsel and Secretary since April 20, 2017; Vice President, Deputy General Counsel from 2004 until April 20, 2017.
George D. Blankenship
 
55

 
Executive Vice President, President, Americas Welding since February 18, 2016; Executive Vice President, President, Lincoln Electric North America from February 19, 2014 to February 18, 2016; Senior Vice President; President, Lincoln Electric North America from July 30, 2009 to February 19, 2014; Senior Vice President, Global Engineering from October 7, 2005 to July 30, 2009; Senior Vice President; President, Lincoln Cleveland of The Lincoln Electric Company from January 8, 2008 to July 30, 2009; Senior Vice President, U.S. Operations of The Lincoln Electric Company from October 7, 2005 to January 8, 2008.
Gabriel Bruno
 
50

 
Executive Vice President, Chief Human Resources Officer since July 1, 2016; Executive Vice President, Chief Human Resources Officer and Chief Information Officer from February 18, 2016 to July 1, 2016; Executive Vice President, Chief Information Officer and Interim Chief Human Resources Officer from March 7, 2015 to February 18, 2016; Executive Vice President, Chief Information Officer from February 19, 2014 to March 7, 2015; Vice President, Chief Information Officer from May 1, 2012 to February 19, 2014; Vice President, Corporate Controller from 2005 to May 1, 2012.
Steven B. Hedlund
 
51

 
Executive Vice President and President, International Welding since June 1, 2017; Senior Vice President and President, Global Automation from January 22, 2015 to June 1, 2017; Senior Vice President, Strategy & Business Development from February 19, 2014 to January 22, 2015; Vice President, Strategy and Business Development from September 15, 2008 to February 19, 2014. Prior to his service with the Company, Mr. Hedlund was the Vice President, Growth and Innovations with Master Lock, LLC (a security products company) from June 1, 2005 to July 1, 2008.
Michele R. Kuhrt
 
51

 
Executive Vice President, Chief Information Officer since July 1, 2016; Senior Vice President, Tax from 2006 to July 1, 2016.
Geoffrey P. Allman

 
47

 
Senior Vice President, Corporate Controller since January 14, 2014; Corporate Controller from July 1, 2012 to January 14, 2014; Director, Regional Finance North America from October 1, 2009 to June 30, 2012.
Thomas A. Flohn
 
57

 
Senior Vice President, President, Asia Pacific Region since February 19, 2014; Vice President, Regional President, Lincoln Electric Asia Pacific Region from November 4, 2013 to January 14, 2014. Vice President; President, Lincoln Electric Europe, Middle East & Africa (EMEA) from July 1, 2010 to November 4, 2013; Vice President; President, Lincoln Asia Pacific from January 1, 2005 to June 30, 2010.
David J. Nangle
 
61

 
Senior Vice President, President, Harris Products Group since February 19, 2014; Vice President, Group President of Brazing, Cutting and Retail Subsidiaries from January 12, 2006 to February 19, 2014.
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 or she was elected as an officer. The executive officers are elected by the Board of Directors normally for a term of one year and/or until the election of their successors.

9



ITEM 2. PROPERTIES
The Company's corporate headquarters and principal United States manufacturing facilities are located in the Cleveland, Ohio area. Total Cleveland area property consists of 244 acres, of which present manufacturing facilities comprise an area of approximately 3,017,090 square feet.
The Company has 63 manufacturing facilities, including operations and joint ventures in 23 countries, the significant locations (grouped by operating segment) of which are as follows:
Americas Welding:
 
 
United States
 
Cleveland and Fort Loramie, Ohio; San Diego and Anaheim, California; Reno, Nevada; Ladson, South Carolina; Chattanooga, Tennessee; Detroit, Michigan; Fort Collins, Colorado; Bettendorf, Iowa.
Brazil
 
Guarulhos; Indaiatuba.
Canada
 
Toronto; Mississauga; Hamilton; Montreal; Hawkesbury.
Colombia
 
Bogota.
Mexico
 
Mexico City; Torreon.
Venezuela
 
Maracay.
International Welding:
 
 
Australia
 
Newcastle.
China
 
Shanghai; Nanjing; Zhengzhou; Luan County; Hangzhou.
Egypt
 
Cairo.
France
 
Grand-Quevilly; Partheny.
Germany
 
Essen; Brielow; Wiesenberg; Eisenberg.
India
 
Chennai.
Indonesia
 
Cikarang.
Italy
 
Corsalone; Due Carrere; Ardenno; Verona; Storo.
Netherlands
 
Nijmegen.
Poland
 
Bielawa; Dzierzoniow.
Portugal
 
Lisbon.
Romania
 
Buzau.
Russia
 
Mtsensk.
Slovakia
 
Nitra.
Spain
 
Zaragoza.
Turkey
 
Istanbul.
United Kingdom
 
Sheffield and Chertsey, England; Port Talbot, Wales.
The Harris Products Group:
 
 
United States
 
Mason, Ohio; Gainesville, Georgia.
Brazil
 
Sao Paulo.
Poland
 
Dzierzoniow.
All properties relating to the Company's Cleveland, Ohio headquarters and manufacturing facilities are owned by the Company. Most of the Company's foreign subsidiaries own manufacturing facilities in the country where they are located. The Company believes that its existing properties are in good condition and are suitable for the conduct of its business.
In addition, the Company maintains operating leases for some manufacturing facilities, distribution centers and sales offices throughout the world. Refer to Note 16 to the consolidated financial statements for information regarding the Company's lease commitments.


10



ITEM 3. LEGAL PROCEEDINGS
The Company is subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, product liability claims, regulatory claims and health, safety and environmental claims. Among such proceedings are the cases described below.
As of December 31, 2017, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 3,613 plaintiffs, which is a net decrease of 138 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: 54,732 of those claims were dismissed, 23 were tried to defense verdicts, 7 were tried to plaintiff verdicts (1 of which was appealed by defendants and was remanded to the trial court for a new trial), 1 was resolved by agreement for an immaterial amount and 776 were decided in favor of the Company following summary judgment motions.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


11



PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are traded on The NASDAQ Global Select Market under the symbol "LECO." The number of record holders of common shares at December 31, 2017 was 1,651.
The total amount of dividends paid in 2017 was $92.5 million. During 2017, dividends were paid on January 13, April 14, July 14 and October 13.
Quarterly high and low stock prices and dividends declared per share for the last two years were:
 
 
2017
 
2016
 
 
Stock Price
 
Dividends
Declared
 
Stock Price
 
Dividends
Declared
 
 
High
 
Low
 
 
High
 
Low
 
First quarter
 
$
88.73

 
$
75.86

 
$
0.35

 
$
60.24

 
$
45.54

 
$
0.32

Second quarter
 
97.97

 
81.85

 
0.35

 
64.79

 
56.02

 
0.32

Third quarter
 
94.97

 
84.41

 
0.35

 
65.33

 
57.40

 
0.32

Fourth quarter
 
99.59

 
85.24

 
0.39

 
80.57

 
61.04

 
0.35

Issuer purchases of equity securities for the fourth quarter 2017 were:
Period
 
Total Number of
Shares Repurchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Repurchased
as Part of Publicly
Announced Plans or
Programs
 
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (2)
October 1-31, 2017
 
70,058

(1) 
$
94.63

 
69,581

 
8,559,294

November 1-30, 2017
 
90,999

 
87.97

 
90,999

 
8,468,295

December 1-31, 2017
 
60,616

(1) 
91.02

 
39,721

 
8,428,574

Total
 
221,673

 
90.91

 
200,301

 
 
(1)
The above share repurchases include the surrender of the Company's common shares in connection with the vesting of restricted awards.
(2)
On April 20, 2016, the Company announced that the Board of Directors authorized a new share repurchase program, which increased the total number of the Company’s common shares authorized to be repurchased to 55 million shares. Total shares purchased through the share repurchase program were 47 million shares at a cost of $1.7 billion for a weighted average cost of $36.09 per share through December 31, 2017.

12



The following line graph compares the yearly percentage change in the cumulative total shareholder return on the Company's common stock against the cumulative total return of the S&P Composite 500 Stock Index ("S&P 500") and the S&P 400 MidCap Index ("S&P 400") for the five-year calendar period commencing January 1, 2013 and ending December 31, 2017. This graph assumes that $100 was invested on December 31, 2012 in each of the Company's common shares, the S&P 500 and the S&P 400. A peer-group index for the welding industry, in general, is not readily available because the industry is comprised of a large number of privately held competitors and competitors that are smaller parts of large publicly traded companies.
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12088608&doc=21



13



ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
 
 
Year Ended December 31,
 
 
2017 (1)
 
2016 (2)
 
2015 (3)
 
2014 (4)
 
2013 (5)
Net sales
 
$
2,624,431

 
$
2,274,614

 
$
2,535,791

 
$
2,813,324

 
$
2,852,671

Net income
 
247,503

 
198,399

 
127,478

 
254,686

 
293,780

Basic earnings per share
 
3.76

 
2.94

 
1.72

 
3.22

 
3.58

Diluted earnings per share
 
3.71

 
2.91

 
1.70

 
3.18

 
3.54

Cash dividends declared per share
 
1.44

 
1.31

 
1.19

 
0.98

 
0.83

Total assets
 
2,406,547

 
1,943,437

 
1,784,171

 
1,939,215

 
2,151,867

Long-term debt, less current portion
 
704,136

 
703,704

 
350,347

 
2,488

 
3,791

(1)
Results for 2017 include charges related to the acquisition of Air Liquide Welding, including $15,002, $11,559 after-tax, of transaction and integration costs, $4,578, $3,453 after-tax, in amortization of step up in value of acquired inventories and a $49,650 bargain purchase gain. Results also include $8,150, $5,030 after-tax, in pension settlement charges, $6,590, $6,198 after-tax, in rationalization and asset impairment charges and charges of $28,616 related to the net impact of the U.S. Tax Act (as defined below).
(2)
Results for 2016 include a loss of $34,348, $33,251 after-tax, on the deconsolidation of the Company's Venezuelan subsidiary, partially offset by a $7,196 income tax valuation allowance reversal related to a legal entity change to realign the Company’s tax structure. Long-term debt includes the issuance in 2016 of additional Senior Unsecured Notes in the aggregate principal amount of $350,000 through a private placement.
(3)
Results for 2015 include $13,719, $11,943 after-tax, of rationalization charges and non-cash net impairment charges of $6,239. Results also include pension settlement charges of $142,738, $87,310 after-tax, and charges of $27,214 related to Venezuelan remeasurement losses. Long-term debt includes the issuance of Senior Unsecured Notes in 2015 in the aggregate principal amount of $350,000 through a private placement.
(4)
Results for 2014 include $32,742, $32,706 after-tax, of non-cash asset impairment charges partially offset by gains of $3,930, $2,754 after-tax, related to the sale of assets. Associated with the impairment of long-lived assets is an offsetting special item of $805 representing portions attributable to non-controlling interests. Results also include charges of $21,133 related to Venezuelan remeasurement losses.
(5)
Results for 2013 include $3,658, $2,965 after-tax, of rationalization charges and impairment charges net of gains on disposals of $4,805, $4,608 after-tax. Results also include a charge of $12,198 related to the devaluation of the Venezuelan currency and a loss of $705 related to the sale of land. Associated with the impairment of long-lived assets and loss on the sale of land is an offsetting special item of $1,068 representing portions attributable to non-controlling interests.



14



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with "Selected Financial Data," the Company's consolidated financial statements and other financial information included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. See "Item 1A. Risk Factors" for more information regarding forward-looking statements.
General
The Company is the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a broad 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 welding, cutting and brazing products. Welding products include arc welding power sources, plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes and welding accessories and specialty welding consumables and fabrication. The Company's product offering also includes CNC plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. 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 products in order to continue its market leading product offering. The Company continues to invest in technologies that improve the quality and productivity of welding products. In addition, the Company actively protects its innovations as research and development has progressed in both 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 coupled with its extensive distributor network provide a competitive advantage in the marketplace.
The Company's products are sold in both domestic and international markets. In the Americas, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of the Americas, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors and product users.
The Company's major end-user markets include:
general fabrication,
energy and process industries,
heavy industries (heavy fabrication, ship building and maintenance and repair),
automotive and transportation, and
construction and infrastructure.
The Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, China, Colombia, Egypt, France, Germany, India, Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Spain, Turkey, the United Kingdom and Venezuela.
The U.S. Tax Cuts and Jobs Act (the "U.S. Tax Act") was enacted on December 22, 2017. The U.S. Tax Act represents major tax reform legislation that, among other provisions, reduces the U.S. corporate tax rate. The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides for a one-year measurement period and provides guidance for the application of ASC Topic 740, Income Taxes. In accordance with SAB 118, the Company recognized the income tax effects of U.S. Tax Act to the extent applicable for the year of enactment. The expense primarily relates to taxes on the Company's unremitted foreign earnings and profits, partially offset by the re-measurement of deferred tax assets and liabilities. The Company's financial results reflect provisional amounts for the impact of the U.S. Tax Act for which accounting analysis under ASC 740 is ongoing. Refer to Note 12 to the consolidated financial statements for further information on the financial statement impact of the U.S. Tax Act.
During the first quarter of 2016, the Company realigned its organizational and leadership structure. The new structure allowed for further integration of operational and product development processes across regions and supported growth strategies. In accordance with this organizational change, beginning with quarterly reporting for the three months ended March 31, 2016, the Company reported three operating segments as follows: Americas Welding, International Welding and The Harris Products Group. The 2015 results reflect the realigned segment structure. Refer to Note 5 to the consolidated financial statements for segment and geographic area information.
As further described in Note 1 to the consolidated financial statements, effective June 30, 2016, the Company determined that it

15



no longer had control of its subsidiary in Venezuela as a result of restrictive exchange controls and Venezuelan operating
restrictions that have significantly impacted the ability to make key operational decisions. As a result, the Company deconsolidated its subsidiary in Venezuela effective June 30, 2016 and began reporting the results under the cost method of accounting. Beginning July 1, 2016, the Company no longer includes the results of the Venezuelan subsidiary in its consolidated financial statements.
The principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys, robotic components and various chemicals, all of which are normally available for purchase in the open market.
The Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material adverse effect on the Company's earnings. The Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is progressing towards certification at its remaining facilities worldwide. In addition, the Company is ISO 9001 certified at 48 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 steel, farm machinery and equipment, construction and transportation, fabricated metals, electrical equipment, ship and boat building, defense, truck manufacturing, energy and railroad equipment. Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company's welding products.
Key operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates, 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 Company's executive management and operating units in order to evaluate the results of its business and in understanding key variables impacting the current and future results of the Company include: sales; gross profit; selling, general and administrative expenses; operating income; earnings before interest and taxes; earnings before interest, taxes and bonus; net income; adjusted operating income; adjusted earnings before interest and income taxes; adjusted earnings before interest, taxes and bonus; adjusted net income; adjusted diluted earnings per share; operating cash flows; and capital expenditures, as well as applicable ratios such as return on invested capital 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.

16



Results of Operations
The following table shows the Company's results of operations:
 
Year Ended December 31,
 
 
 
 
 
2017
 
2016
 
2015
 
Increase (Decrease)
Actual vs. Prior Year
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
2017 vs. 2016
 
2016 vs. 2015
Net sales
$
2,624,431

 

 
$
2,274,614

 

 
$
2,535,791

 

 
15.4
%
 
(10.3
%)
Cost of goods sold
1,744,105

 


 
1,485,316

 


 
1,694,647

 


 
17.4
%
 
(12.4
%)
Gross profit
880,326

 
33.5
%
 
789,298

 
34.7
%
 
841,144

 
33.2
%
 
11.5
%
 
(6.2
%)
Selling, general & administrative expenses
537,525

 
20.5
%
 
466,676

 
20.5
%
 
496,748

 
19.6
%
 
15.2
%
 
(6.1
%)
Rationalization and asset impairment charges
6,590

 


 

 


 
19,958

 


 
100.0
%
 
(100.0
%)
Pension settlement charges
8,150

 


 

 


 
142,738

 


 
100.0
%
 
(100.0
%)
Loss on deconsolidation of Venezuelan subsidiary

 


 
34,348

 


 

 


 
(100.0
%)
 
100.0
%
Bargain purchase gain
(49,650
)
 
 
 

 
 
 

 
 
 
100.0
%
 

Operating income
377,711

 
14.4
%
 
288,274

 
12.7
%
 
181,700

 
7.2
%
 
31.0
%
 
58.7
%
Interest income
4,788

 


 
2,092

 


 
2,714

 


 
128.9
%
 
(22.9
%)
Equity earnings in affiliates
2,742

 


 
2,928

 


 
3,015

 


 
(6.4
%)
 
(2.9
%)
Other income
5,215

 


 
3,173

 


 
4,182

 


 
64.4
%
 
(24.1
%)
Interest expense
(24,220
)
 


 
(19,079
)
 


 
(21,824
)
 


 
26.9
%
 
(12.6
%)
Income before income taxes
366,236

 
14.0
%
 
277,388

 
12.2
%
 
169,787

 
6.7
%
 
32.0
%
 
63.4
%
Income taxes
118,761

 


 
79,015

 


 
42,375

 


 
50.3
%
 
86.5
%
Effective tax rate
32.4
%
 
 
 
28.5
%
 
 
 
25.0
%
 
 
 
 
 
 
Net income including non-controlling interests
247,475

 


 
198,373

 


 
127,412

 


 
24.8
%
 
55.7
%
Non-controlling interests in subsidiaries' loss
(28
)
 


 
(26
)
 


 
(66
)
 


 
7.7
%
 
(60.6
%)
Net income
$
247,503

 
9.4
%
 
$
198,399

 
8.7
%
 
$
127,478

 
5.0
%
 
24.8
%
 
55.6
%
Diluted earnings per share
$
3.71

 
 
 
$
2.91

 
 
 
$
1.70

 
 
 
 
 
 
Net Sales:
The following table summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2017 on a consolidated basis:
 
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2016
 
Volume
 
Acquisitions
 
Price
 
Foreign Exchange
 
Net Sales
2017
Lincoln Electric Holdings, Inc.
 
$
2,274,614

 
$
95,171

 
$
181,900

 
$
55,078

 
$
17,668

 
$
2,624,431

 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 

 
 

 
 

 
 

 
 

 
 

Lincoln Electric Holdings, Inc.
 
 

 
4.2
%
 
8.0
%
 
2.4
%
 
0.8
%
 
15.4
%
Net sales increased primarily as a result of acquisitions, improved volume due to higher demand and increased product pricing. Net sales for 2016 include $10,813 in sales from the Company's Venezuelan operations. The increase in net sales from acquisitions for 2017 was driven by acquired companies within Americas Welding and International Welding.


17



The following table summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2016 on a consolidated basis:
 
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2015
 
Volume
 
Acquisitions
 
Price
 
Foreign Exchange
 
Net Sales
2016
Lincoln Electric Holdings, Inc.
 
$
2,535,791

 
$
(247,661
)
 
$
51,454

 
$
259,692

 
$
(324,662
)
 
$
2,274,614

Lincoln Electric Holdings, Inc. (excluding Venezuela)
 
2,451,129

 
(189,983
)
 
51,454

 
(16,386
)
 
(32,413
)
 
2,263,801

 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 

 
 

 
 

 
 

 
 

 
 

Lincoln Electric Holdings, Inc.
 
 

 
(9.8
%)
 
2.0
%
 
10.2
%
 
(12.8
%)
 
(10.3
%)
Lincoln Electric Holdings, Inc.
(excluding Venezuela)
 
 
 
(7.8
%)
 
2.1
%
 
(0.7
%)
 
(1.3
%)
 
(7.6
%)
Net sales volumes decreased as a result of softer demand associated with the economic environment and weakness in oil & gas and U.S. export markets. Product pricing increased from prior year levels, reflecting the highly inflationary environment in Venezuela impacting results in the first six months of 2016. Net sales for 2016 include $10,813 in sales from the Company's Venezuelan operations compared with $84,662 in sales from the Company's Venezuelan operations in 2015. The increase in net sales from acquisitions was driven primarily by acquired companies within Americas Welding. The decrease in foreign exchange was due to a stronger U.S. dollar, as well as the highly inflationary environment in Venezuela impacting the first six months of 2016.
Gross Profit:
Gross profit for 2017 decreased, as a percent of sales, compared to the prior year due to the acquisition of Air Liquide Welding and rising input costs. The year ended December 31, 2017 includes a last-in, first-out ("LIFO") charge of $7,312, as compared with a LIFO charge of $1,564 in the prior year.
Gross profit for 2016 increased, as a percent of sales, compared to the prior year due to lower material costs, cost control efforts and strong price management. The year ended December 31, 2016 includes a LIFO charge of $1,564 compared with a credit of $11,545 in the prior year.
Selling, General & Administrative ("SG&A") Expenses:
The increase in SG&A expense in 2017 as compared to 2016 was due to SG&A from acquisitions, higher compensation costs and acquisition transaction and integration costs, partially offset by lower legal professional fees.
The decrease in SG&A expense in 2016 as compared to 2015 was due to lower bonus expense and lower foreign exchange transaction losses, partially offset by higher legal fees and SG&A from acquisitions.
Rationalization and Asset Impairment Charges:
In 2017, the Company recorded $6,590, $6,198 after-tax, in charges primarily related to employee severance and asset impairment charges.
In 2015, the Company recorded $19,958, $18,182 after-tax, in charges primarily related to non-cash goodwill and asset impairment charges, as well as severance and other related costs.
Refer to Note 6 to the consolidated financial statements for additional details.
Pension Settlement Charges:
In 2017, the Company recorded non-cash pension settlement charges of $8,150, $5,030 after-tax, related to lump sum pension payments.
In 2015, the Company recorded non-cash pension settlement charges of $142,738, $87,310 after-tax, primarily related to the purchase of a group annuity contract.
Refer to Note 11 to the consolidated financial statements for additional details.
Loss on Deconsolidation of Venezuela:
In 2016, the Company recorded a loss of $34,348, $33,251 after-tax, related to the deconsolidation of its Venezuelan subsidiary. Refer to Note 1 to the consolidated financial statements for additional details.


18



Bargain Purchase Gain:
In 2017, the Company recorded a bargain purchase gain of $49,650, which had no tax impact, related to the Air Liquide Welding acquisition. Refer to Note 3 to the consolidated financial statements for additional details.
Equity Earnings in Affiliates:
Equity earnings in affiliates has remained relatively flat in the comparable periods.
Interest Expense:
The increase in 2017 as compared to 2016 was due to higher interest expense on higher borrowings in 2017.
The decrease in 2016 as compared to 2015 was due to prior year charges related to an adjustment to the consideration expected to be paid to acquire additional ownership interests of a majority-owned subsidiary, offset by interest accrued on higher borrowings in 2016.
Income Taxes:
The effective income tax rate is higher in 2017 as compared to 2016 primarily due to the net impact of the U.S. Tax Act. The effective tax rate increase was partially offset by the nontaxable bargain purchase gain recorded in connection with the Air Liquide Welding acquisition and the change in the reporting of excess tax benefits from the exercise of stock based compensation awards. Beginning in 2018, the Company expects the effective tax rate to be in the low- to mid-20% range due to the U.S. Tax Act.

The effective income tax rate was higher in 2016 as compared to 2015 primarily due to higher U.S. tax credits in 2015 and changes in the mix of earnings between tax rate jurisdictions, partially offset by the reversal of an income tax valuation allowance as a result of a legal entity change.
Net Income:
As compared to the prior year, reported Net income for 2017 increased primarily due to higher volumes and the bargain purchase gain related to the Air Liquide Welding acquisition, offset by the net impact of the U.S. Tax Act, rising input costs, higher SG&A costs, pension settlement charges and higher interest expense.
As compared to the prior year, reported Net income for 2016 included a loss related to the deconsolidation of the Company's Venezuelan subsidiary, partially offset by reduced income taxes due to a benefit related to the reversal of an income tax valuation allowance as a result of a legal entity change.









19



Segment Results
Net Sales:
The table below summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2017:
 
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2016
 
Volume (1)
 
Acquisitions (2)
 
Price (3)
 
Foreign Exchange (4)
 
Net Sales
2017
Operating Segments
 
 

 
 

 
 

 
 

 
 

 
 

Americas Welding
 
$
1,494,982

 
$
67,306

 
$
8,470

 
$
36,009

 
$
3,012

 
$
1,609,779

International Welding
 
507,289

 
12,503

 
173,430

 
18,327

 
12,475

 
724,024

The Harris Products Group
 
272,343

 
15,362

 

 
742

 
2,181

 
290,628

 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 

 
 

 
 

 
 

 
 

 
 

Americas Welding
 
 

 
4.5
%
 
0.6
%
 
2.4
%
 
0.2
%
 
7.7
%
International Welding
 
 

 
2.5
%
 
34.2
%
 
3.6
%
 
2.5
%
 
42.7
%
The Harris Products Group
 
 

 
5.6
%
 

 
0.3
%
 
0.8
%
 
6.7
%
(1) Increase for Americas and International Welding due to improving demand in a broad range of end markets. Increase for The Harris Products Group due to higher volumes.
(2) Increase primarily due to the acquisition of Air Liquide Welding within Americas Welding and International Welding. Refer to Note 3 to the consolidated financial statements for a discussion of the Company's recent acquisitions.
(3) Increase in all segments due to increased product pricing as a result of higher input costs.
(4) Increase in the International segment due to a weaker U.S. dollar.
The table below summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2016:
 
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2015
 
Volume (1)
 
Acquisitions (2)
 
Price (3)
 
Foreign
Exchange (4)
 
Net Sales
2016
Operating Segments
 
 
 
 
 
 
 
 
 
 
 
 
Americas Welding
 
$
1,741,350

 
$
(248,715
)
 
$
42,832

 
$
268,205

 
$
(308,690
)
 
$
1,494,982

International Welding
 
530,460

 
(8,629
)
 
8,622

 
(8,428
)
 
(14,736
)
 
507,289

The Harris Products Group
 
263,981

 
9,683

 

 
(85
)
 
(1,236
)
 
272,343

 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
Americas Welding
 
 

 
(14.3
%)
 
2.5
%
 
15.4
%
 
(17.7
%)
 
(14.1
%)
International Welding
 
 

 
(1.6
%)
 
1.6
%
 
(1.6
%)
 
(2.8
%)
 
(4.4
%)
The Harris Products Group
 
 

 
3.7
%
 

 

 
(0.5
%)
 
3.2
%
(1) Decrease for Americas Welding and International Welding due to softer demand associated with the current economic environment, weakness in oil & gas and U.S. export markets. The increase for The Harris Products Group was driven by the retail market.
(2) Increase primarily due to the acquisition of Vizient Manufacturing Solutions and Rimrock Holdings Corporation within Americas Welding. Refer to Note 3 to the consolidated financial statements for a discussion of the Company's recent acquisitions.
(3) Increase driven by Americas Welding, which reflects the highly inflationary environment in Venezuela impacting results in the first six months of 2016.
(4) Decrease in all segments due to a stronger U.S. dollar. Additionally, Americas Welding reflects the highly inflationary environment in Venezuela impacting the first six months of 2016.


20



Adjusted Earnings Before Interest and Income Taxes (“Adjusted EBIT”):
Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being Adjusted EBIT. EBIT is defined as Operating income plus Equity earnings in affiliates and Other income. EBIT is adjusted for special items as determined by management such as the impact of rationalization activities, certain asset impairment charges and gains or losses on disposals of assets.
The following table presents Adjusted EBIT by segment:
 
December 31,
 
Increase (Decrease)
2017 vs. 2016
 
Increase (Decrease)
2016 vs. 2015
 
 
 
 
2017
 
2016
 
2015
 
$
 
%
 
$
 
%
Americas Welding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
1,609,779

 
$
1,494,982

 
$
1,741,350

 
114,797

 
7.7
%
 
(246,368
)
 
(14.1
%)
Inter-segment sales
97,382

 
93,612

 
92,538

 
3,770

 
4.0
%
 
1,074

 
1.2
%
Total Sales
$
1,707,161

 
$
1,588,594

 
$
1,833,888

 
118,567

 
7.5
%
 
(245,294
)
 
(13.4
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBIT (4)
$
291,866

 
$
266,633

 
$
316,689

 
25,233

 
9.5
%
 
(50,056
)
 
(15.8
%)
As a percent of total sales (1)
17.1
%
 
16.8
%
 
17.3
%
 
 
 
0.3
%
 
 
 
(0.5
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International Welding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
724,024

 
$
507,289

 
$
530,460

 
216,735

 
42.7
%
 
(23,171
)
 
(4.4
%)
Inter-segment sales
18,860

 
15,975

 
18,747

 
2,885

 
18.1
%
 
(2,772
)
 
(14.8
%)
Total Sales
$
742,884

 
$
523,264

 
$
549,207

 
219,620

 
42.0
%
 
(25,943
)
 
(4.7
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBIT (5)
$
41,721

 
$
29,146

 
$
34,511

 
12,575

 
43.1
%
 
(5,365
)
 
(15.5
%)
As a percent of total sales (2)
5.6
%
 
5.6
%
 
6.3
%
 
 
 
%
 
 
 
(0.7
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Harris Products Group:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
290,628

 
$
272,343

 
$
263,981

 
18,285

 
6.7
%
 
8,362

 
3.2
%
Inter-segment sales
8,190

 
8,709

 
9,312

 
(519
)
 
(6.0
%)
 
(603
)
 
(6.5
%)
Total Sales
$
298,818

 
$
281,052

 
$
273,293

 
17,766

 
6.3
%
 
7,759

 
2.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
36,442

 
$
32,380

 
$
27,882

 
4,062

 
12.5
%
 
4,498

 
16.1
%
As a percent of total sales (3)
12.2
%
 
11.5
%
 
10.2
%
 
 
 
0.7
%
 
 
 
1.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate / Eliminations:
 
 
 
 
 
 
 
 
 
 
 
 
 
Inter-segment sales
$
(124,432
)
 
$
(118,296
)
 
$
(120,597
)
 
6,136

 
5.2
%
 
(2,301
)
 
(1.9
%)
Adjusted EBIT (6)
309

 
564

 
(275
)
 
(255
)
 
(45.2
%)
 
839

 
305.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
2,624,431

 
$
2,274,614

 
$
2,535,791

 
349,817

 
15.4
%
 
(261,177
)
 
(10.3
%)
Adjusted EBIT
$
370,338

 
$
328,723

 
$
378,807

 
41,615

 
12.7
%
 
(50,084
)
 
(13.2
%)
As a percent of total sales
14.1
%
 
14.5
%
 
14.9
%
 
 
 
(0.4
%)
 
 
 
(0.4
%)
(1)
2017 increase as compared to 2016 driven by higher Net sales volumes, partially offset by rising input costs.
2016 decrease as compared to 2015 driven by sales volume declines and higher SG&A costs as a percent of sales, partially offset by improved margins on lower input costs.
(2)
2017 remained flat as compared to 2016 driven by higher Net sales volumes, offset by higher costs related to acquisitions.
2016 decrease as compared to 2015 driven by Net sales volume declines and higher SG&A costs as a percent of sales.
(3)
2017 increase as compared to 2016 driven by higher Net sales volume.
2016 increase as compared to 2015 due to favorable sales mix associated with Net sales volume increases in the retail market. 

21



(4)
2017 excludes non-cash pension settlement charges of $8,150 related to lump sum pension payments, as well as non-cash charges of $1,091 related to the impairment of goodwill.
2015 excludes net charges of $3,287 related to employee severance and other related costs, Venezuelan foreign exchange remeasurement losses of $27,214 related to the adoption of a new foreign exchange mechanism and $142,728 of non-cash pension settlement charges related to the purchase of a group annuity contract.
(5)
2017 excludes amortization of step up in value of acquired inventories of $4,578 related to the Air Liquide Welding acquisition as discussed in Note 3 to the consolidated financial statements, as well as non-cash charges of $5,499 related to employee severance, asset impairments and other related costs.
2015 excludes net charges of $6,939 related to employee severance and other costs and adjustments to reclassify a potential divestiture that was previously held-for-sale, as well as non-cash charges of $6,315 related to the impairment of goodwill and $3,417 related to the impairment of long-lived assets.
(6)
2017 excludes a bargain purchase gain of $49,650 and acquisition transaction and integration costs of $15,002 related to the Air Liquide Welding acquisition as discussed in Note 3 to the consolidated financial statements.
2016 excludes a loss of $34,348 related to the deconsolidation of the Company's Venezuelan subsidiary.
Non-GAAP Financial Measures
The Company reviews Adjusted operating income, Adjusted net income, Adjusted diluted earnings per share and Return on invested capital, all non-GAAP financial measures, in assessing and evaluating the Company's underlying operating performance. These non-GAAP financial measures exclude the impact of special items on the Company's reported financial results. Non-GAAP financial measures should be read in conjunction with the generally accepted accounting principles in the United States ("GAAP") financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures. From time to time management evaluates and discloses to investors the non-GAAP measure Free cash flow ("FCF").  FCF is defined as Net cash provided by operating activities less Capital expenditures. The Company considers FCF to be a liquidity measure that provides useful information to management and investors about how the amount of cash generated by our business, after the purchase of property and equipment, can be used for debt service, acquisitions, paying dividends and repurchasing our common shares.
The following table presents a reconciliation of Operating income as reported to Adjusted operating income:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Operating income as reported
 
$
377,711

 
$
288,274

 
$
181,700

Special items (pre-tax):
 
 
 
 
 
 
Rationalization and asset impairment charges (1)
 
6,590

 

 
19,958

Loss on deconsolidation of Venezuelan subsidiary (2)
 

 
34,348

 

Venezuela remeasurement losses (3)
 

 

 
27,214

Pension settlement charges (4)
 
8,150

 

 
142,738

Acquisition transaction and integration costs (5)
 
15,002

 

 

Amortization of step up in value of acquired inventories (5)
 
4,578

 

 

Bargain purchase gain (5)
 
(49,650
)
 

 

Adjusted operating income
 
$
362,381

 
$
322,622

 
$
371,610

(1) Charges in 2017 and 2015 consist of employee severance and other related costs, non-cash goodwill impairment charges and net non-cash asset impairment charges.
(2) Loss on deconsolidation of the Venezuelan subsidiary as of June 30, 2016.
(3) Charges related to the adoption of a new foreign exchange mechanism in the period.
(4) Charges consist of the following:
In 2017, charges related to lump sum pension payments.
In 2015, charges related to the purchase of a group annuity contract that settled a portion of the Company's pension obligation in 2015.

22



(5) Acquisition-related costs and a bargain purchase gain related to the Air Liquide Welding acquisition as discussed in Note 3 to the consolidated financial statements.

The following table presents reconciliations of Net income and Diluted earnings per share as reported to Adjusted net income and Adjusted diluted earnings per share:
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Net income as reported
 
$
247,503

 
$
198,399

 
$
127,478

Special items (after-tax):
 
 
 
 
 
 
Rationalization and asset impairment charges (1)
 
6,198

 

 
18,182

Loss on deconsolidation of Venezuelan subsidiary (2)
 

 
33,251

 

Venezuela remeasurement losses (3)
 

 

 
27,214

Pension settlement charges (4)
 
5,030

 

 
87,310

Acquisition transaction and integration costs (5)
 
11,559

 

 

Amortization of step up in value of acquired inventories (5)
 
3,453

 

 

Bargain purchase gain (5)
 
(49,650
)
 

 

Income tax valuation reversal (6)
 

 
(7,196
)
 

Net impact of U.S. Tax Act (7)
 
28,616

 

 

Adjusted net income
 
$
252,709

 
$
224,454

 
$
260,184

Diluted earnings per share as reported
 
$
3.71

 
$
2.91

 
$
1.70

Special items per share
 
0.08

 
0.38

 
1.78

Adjusted diluted earnings per share
 
$
3.79

 
$
3.29

 
$
3.48

(1) Charges in 2017 and 2015 consist of employee severance and other related costs, non-cash goodwill impairment charges and net non-cash asset impairment charges.
(2) Loss on deconsolidation of the Venezuelan subsidiary as of June 30, 2016.
(3) Charges related to the adoption of a new foreign exchange mechanism in the period.
(4) Charges consist of the following:
In 2017, charges related to lump sum pension payments.
In 2015, charges related to the purchase of a group annuity contract that settled a portion of the Company's pension obligation in 2015.
(5) Acquisition-related costs and a bargain purchase gain related to the Air Liquide Welding acquisition as discussed in Note 3 to the consolidated financial statements.
(6) Tax benefit related to the reversal of an income tax valuation allowance as a result of a legal entity change.
(7)
Charges related to the net impact of the U.S. Tax Act and foreign withholding taxes.

Liquidity and Capital Resources
The Company's cash flow from operations can be cyclical. 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 for 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, borrowings under its existing credit facilities and raising debt in capital markets.
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 long-term debt market, as well as the syndicated bank loan market. The Company’s financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the United States, and then lends funds to the specific

23



subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made.
The following table reflects changes in key cash flow measures:
 
 
Year Ended December 31,
 
$ Change
 
 
2017
 
2016
 
2015
 
2017 vs. 2016
 
2016 vs. 2015
Cash provided by operating activities(1)
 
$
334,845

 
$
312,557

 
$
312,832

 
$
22,288

 
$
(275
)
Cash used by investing activities(2)
 
(272,027
)
 
(159,946
)
 
(85,352
)
 
(112,081
)
 
(74,594
)
Capital expenditures
 
(61,656
)
 
(49,877
)
 
(50,507
)
 
(11,779
)
 
630

Acquisition of businesses, net of cash acquired
 
(72,468
)
 
(71,567
)
 
(37,076
)
 
(901
)
 
(34,491
)
Purchase of marketable securities
 
(205,584
)
 
(38,920
)
 

 
(166,664
)
 
(38,920
)
Cash used by financing activities(3)
 
(135,037
)
 
(72,008
)
 
(171,882
)
 
(63,029
)
 
99,874

(Payments on) proceeds from short-term borrowings, net
 
(491
)
 
1,539

 
(34,229
)
 
(2,030
)
 
35,768

(Payments on) proceeds from long-term borrowings, net
 
(5
)
 
349,780

 
350,835

 
(349,785
)
 
(1,055
)
Purchase of shares for treasury
 
(43,164
)
 
(342,003
)
 
(399,494
)
 
298,839

 
57,491

Cash dividends paid to shareholders
 
(92,452
)
 
(87,330
)
 
(86,968
)
 
(5,122
)
 
(362
)
(Decrease) increase in Cash and cash equivalents (4)
 
(52,478
)
 
74,996

 
25,804

 
 

 
 

(1) Cash provided by operating activities increased $22,288 for the twelve months ended December 31, 2017 compared with the twelve months ended December 31, 2016. This was primarily due to improved Company performance.
(2) Cash used by investing activities increased by $112,081 in the twelve months ended December 31, 2017 compared with the twelve months ended December 31, 2016 predominantly due to the purchase of marketable securities in 2017. Cash used by investing activities increased $74,594 in the twelve months ended December 31, 2016 compared with the twelve months ended December 31, 2015 predominantly due to an increase in cash paid for the acquisition of a business and the purchase of marketable securities. The Company anticipates capital expenditures of $60,000 to $70,000 in 2018. Anticipated capital expenditures reflect investments for capital maintenance to improve operational effectiveness. Management critically evaluates all proposed capital expenditures and expects each project to increase efficiency, reduce costs, promote business growth or improve the overall safety and environmental conditions of the Company's facilities.
(3) Cash used by financing activities increased $63,029 in the twelve months ended December 31, 2017 compared with the twelve months ended December 31, 2016. The increase was due to higher proceeds from long-term borrowings in 2016 partially offset by higher purchases of common shares for treasury in 2016. Cash used by financing activities decreased in the twelve months ended December 31, 2016 compared with the twelve months ended December 31, 2015 predominantly due to higher net borrowings in 2015 and lower purchases of common shares for treasury in 2016.
(4) Cash and cash equivalents decreased 13.8%, or $52,478, to $326,701 during the twelve months ended December 31, 2017, from $379,179 as of December 31, 2016. This decrease was predominantly due to the purchase of marketable securities. Cash and cash equivalents increased 24.7%, or $74,996, to $379,179 during the twelve months ended December 31, 2016, from $304,183 as of December 31, 2015. The increase was predominantly due to cash provided by operating activities and net proceeds from borrowings, offset by cash used in the acquisition of a business, purchase of common shares for treasury and cash dividends paid to shareholders. At December 31, 2017, $272,433 of Cash and cash equivalents was held by international subsidiaries and may be subject to U.S. income taxes, local country taxes and foreign withholding taxes if repatriated to the U.S.
The Company's debt levels remained consistent as compared to December 31, 2016. Total debt to total invested capital decreased to 43.1% at December 31, 2017 from 49.8% at December 31, 2016.
The Company paid $92,452 and $87,330 in cash dividends to its shareholders in the twelve months ended December 31, 2017 and 2016, respectively, reflecting a 11.4% increase in the dividend rate. In January 2018, the Company paid a cash dividend of $0.39 per share, or $25,608 to shareholders of record on December 31, 2017.

24



Working Capital Ratios
 
 
December 31,
 
 
2017
 
2016
 
2015
Average operating working capital to net sales (1)
 
15.9
%
 
15.6
%
 
17.1
%
Days sales in Inventories
 
89.2
 
92.1
 
89.2
Days sales in Accounts receivable
 
52.4
 
47.7
 
46.9
Average days in Trade accounts payable
 
54.7
 
48.9
 
38.7
(1) Average operating working capital to net sales is defined as the sum of Accounts receivable and Inventories less Trade accounts payable as of period end divided by annualized rolling three months of Net sales.
Rationalization and Asset Impairments
Refer to Note 6 to the consolidated financial statements for a discussion of the Company's rationalization plans. The Company believes the rationalization actions will positively impact future results of operations and will not have a material effect on liquidity and sources and uses of capital.
Acquisitions
Refer to Note 3 to the consolidated financial statements for a discussion of the Company's recent acquisitions.
Debt
At December 31, 2017 and 2016, the fair value of long-term debt, including the current portion, was approximately $687,428 and $669,209, respectively, which was determined using available market information and methodologies requiring judgment. Since judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount which could be realized in a current market exchange.
Senior Unsecured Notes
On April 1, 2015, the Company entered into a Note Purchase Agreement pursuant to which it issued senior unsecured notes (the "2015 Notes") in the aggregate principal amount of $350,000 through a private placement. The proceeds were used for general corporate purposes. The 2015 Notes have original maturities ranging from 10 to 30 years with a weighted average effective interest rate of 3.5%, excluding accretion of original issuance costs, and an initial average tenure of 19 years. Interest is payable semi-annually. The 2015 Notes contain certain affirmative and negative covenants. As of December 31, 2017, the Company was in compliance with all of its debt covenants.
On October 20, 2016 the Company entered into a Note Purchase Agreement pursuant to which it issued senior unsecured notes (the "2016 Notes") in the aggregate principal amount of $350,000 through a private placement. The proceeds are being used for general corporate purposes. The 2016 Notes have original maturities ranging from 12 to 25 years with a weighted average effective interest rate of 3.1%, excluding accretion of original issuance costs, and an initial average tenure of 18 years. Interest is payable semi-annually. The 2016 Notes contain certain affirmative and negative covenants. As of December 31, 2017, the Company was in compliance with all of its debt covenants.
The Company's total weighted average effective interest rate and weighted average term, inclusive of the 2015 Notes and 2016 Notes, is 3.3% and 18 years, respectively.
Revolving Credit Agreement
The Company has a line of credit totaling $400,000 through the Amended and Restated Credit Agreement (the “Credit Agreement”).  The Credit Agreement has a five-year term and may be increased, subject to certain conditions, by an additional amount up to $100,000. The interest rate on borrowings is based on either the London Inter-Bank Offered Rate ("LIBOR") or the prime rate, plus a spread based on the Company’s leverage ratio, at the Company’s election. The Company amended and restated the Credit Agreement on June 30, 2017, extending the maturity of the line of credit to June 30, 2022. The Credit Agreement contains customary affirmative, negative and financial covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets, transactions with affiliates, a fixed charges coverage ratio and total leverage ratio.  As of December 31, 2017, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Credit Agreement.

25



Short-term Borrowings
The Company had short-term borrowings included in Amounts due banks of $2,020 and $1,758 at December 31, 2017 and 2016, respectively. Amounts due banks included the borrowings of subsidiaries at weighted average interest rates of 31.8% and 29.0% at December 31, 2017 and 2016, respectively.
Return on Invested Capital
The Company reviews return on invested capital ("ROIC") in assessing and evaluating the Company's underlying operating performance. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. ROIC is defined as rolling 12 months of Adjusted net income excluding tax-effected interest income and expense divided by invested capital. Invested capital is defined as total debt, which includes Amounts due banks, Current portion of long-term debt and Long-term debt, less current portions, plus Total equity.

ROIC for the years ended December 31, 2017, 2016 and 2015 were as follows:
Return on Invested Capital
 
2017
 
2016
 
2015
Adjusted net income (1)
 
$
252,709

 
$
224,454

 
$
260,184

   Plus: Interest expense (after-tax)
 
14,947

 
11,775

 
13,469

   Less: Interest income (after-tax)
 
2,955

 
1,291

 
1,675

Net operating profit after taxes
 
264,701

 
234,938

 
271,978

Invested capital
 
1,638,720

 
1,417,799

 
1,287,073

Return on invested capital
 
16.2
%
 
16.6
%
 
21.1
%

(1)
See “Non-GAAP Financial Measures” section for a tabular reconciliation of Net income to Adjusted net income.
Contractual Obligations and Commercial Commitments
The Company's contractual obligations and commercial commitments as of December 31, 2017 are as follows:
 
 
Payments Due By Period
 
 
Total
 
2018
 
2019 to
2020
 
2021 to
2022
 
2023 and
Beyond
Long-term debt, including current portion
 
$
711,112

 
$
97

 
$
200

 
$
208

 
$
710,607

Interest on long-term debt
 
398,123

 
23,297

 
46,588

 
46,579

 
281,659

Capital lease obligations
 
44

 
16

 
19

 
9

 

Short-term debt
 
2,020

 
2,020

 

 

 

Interest on short-term debt
 
500

 
500

 

 

 

Operating leases
 
57,308

 
19,205

 
22,330

 
10,144

 
5,629

Purchase commitments(1)
 
204,568

 
204,039

 
495

 
34

 

Transition Tax(2)
 
34,653

 
5,544

 
5,545

 
7,970

 
15,594

Total
 
$
1,408,328

 
$
254,718

 
$
75,177

 
$
64,944

 
$
1,013,489

_
(1)
Purchase commitments include contractual obligations for raw materials and services.
(2)
Federal income taxes on the Company's unremitted foreign earnings and profits pursuant to the U.S. Tax Act is payable over eight years.
As of December 31, 2017, there were $16,134 of tax liabilities related to unrecognized tax benefits and a $25,397 liability for deferred compensation. 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. Additionally, in connection with prior acquisitions, there were liabilities with total fair values as of December 31, 2017 of $7,086 for contingent consideration arrangements. The amount of future cash flows associated with these liabilities will be contingent upon actual results of the acquired entities. Refer to Notes 12 and 14 to the consolidated financial statements for further discussion.


26



Stock-Based Compensation
On April 23, 2015, the shareholders of the Company approved the 2015 Equity and Incentive Compensation Plan ("Employee Plan"), which replaced the 2006 Equity and Performance Incentive Plan, as amended ("EPI Plan"). The Employee Plan provides for the granting of options, appreciation rights, restricted shares, restricted stock units and performance-based awards up to an additional 5,400,000 of the Company's common shares. In addition, on April 23, 2015, the shareholders of the Company approved the 2015 Stock Plan for Non-Employee Directors ("2015 Director Plan"), which replaced the 2006 Stock Plan for Non-Employee Directors ("2006 Director Plan"). The 2015 Director Plan provides for the granting of options, restricted shares and restricted stock units up to an additional 300,000 of the Company's common shares. At December 31, 2017, there were 4,324,951 common shares available for future grant under all plans.
Under these plans, options, restricted shares and restricted stock units granted were 341,770 in 2017, 449,415 in 2016 and 411,406 in 2015. The Company issued common shares from treasury upon all exercises of stock options, vesting of restricted stock units and the granting of restricted stock awards in 2017, 2016 and 2015.
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 or restricted stock units ultimately forfeited because recipients fail to meet vesting requirements. Total stock-based compensation expense recognized in the Consolidated Statements of Income for 2017, 2016 and 2015 was $12,698, $10,332 and $7,932, respectively, with a related tax benefit of $4,861, $3,955 and $3,037, respectively. As of December 31, 2017, total unrecognized stock-based compensation expense related to non-vested stock options, restricted shares and restricted stock units was $20,022, which is expected to be recognized over a weighted average period of approximately 1.9 years years.
The aggregate intrinsic value of options outstanding and exercisable which would have been received by the optionees had all awards been exercised at December 31, 2017 was $45,139 and $37,169, respectively. The total intrinsic value of awards exercised during 2017, 2016 and 2015 was $19,328, $30,967 and $6,879 respectively.
Product Liability Costs
Product liability costs incurred can be 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.
The long-term impact of product liability contingencies, in the aggregate, on operating results, operating cash flows and access to capital markets is difficult to assess, particularly since claims are in many different stages of development and the 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.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company's Credit Agreement.
New Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make estimates and assumptions. These estimates and assumptions are reviewed periodically by management and compared to historical trends to determine the accuracy of estimates and assumptions used. If warranted, these estimates and assumptions may be changed as current trends are assessed and updated. Historically, the Company's estimates have been determined to be reasonable. No material changes to the Company's accounting policies were made during 2017. The Company believes the following accounting policies are some of the more critical judgment areas affecting 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, administrative claims, regulatory claims and health, safety and environmental claims, some of which relate to cases alleging asbestos 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

27



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 would be 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, varies 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.
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. In accordance with SAB 118, the Company's financial results reflect provisional amounts for the impact of the U.S. Tax Act for which accounting analysis under ASC 740 is ongoing. The amounts recorded are based on reasonable estimates and may require further adjustments as additional guidance from the U.S. Department of Treasury is provided, the Company's assumptions change or as further information and interpretations become available.
The Company maintains liabilities for uncertain income tax positions for many jurisdictions. Liabilities are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Liabilities 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 uncertain income tax positions; however, actual results may materially differ from these estimates. Refer to Note 12 to the consolidated financial statements for further discussion of uncertain income tax positions.
Translation of Foreign Currencies
Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the dates of the Consolidated Balance Sheets; revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments are reflected as a component of Total 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.
The translation of assets and liabilities originally denominated in foreign currencies into U.S. dollars is for consolidation purposes, and does not necessarily indicate that the Company could realize or settle the reported value of those assets and liabilities in U.S. dollars. Additionally, such a translation does not necessarily indicate that the Company could return or distribute the reported U.S. dollar value of the net equity of its foreign operations to shareholders.
Foreign currency transaction gains and losses are included in Selling, general & administrative expenses and were gains of $5,654 and $3,741 in 2017 and 2016, respectively, and a loss of $6,023 in 2015.
Venezuela – Highly Inflationary Economy
The Company deconsolidated its subsidiary in Venezuela effective June 30, 2016 and began reporting the results under the cost method of accounting. Beginning July 1, 2016, the Company no longer includes the results of the Venezuelan subsidiary in its consolidated financial statements. Refer to Note 1 to the consolidated financial statements for additional information.
Deferred Income Taxes
Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the GAAP and income tax basis of assets and liabilities and operating loss and tax credit carry-forwards. During December 2017, the Company remeasured its deferred tax assets and liabilities as a result of passage of the U.S Tax Act. The provisional amount recorded for the remeasurement is a tax benefit of $14,532. The Company is still analyzing certain aspects of the U.S. Tax Act and refining calculations that could potentially affect the measurement of deferred income tax balances, including law changes surrounding deferred compensation.
The Company previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As a result of the U.S. Tax Act, the Company determined it will repatriate earnings for certain non-U.S. subsidiaries, which are subject to foreign withholding taxes. The Company has estimated the associated tax to be $6,667.  The Company considers remaining earnings in all other non-U.S. subsidiaries to be indefinitely reinvested and has not recorded any deferred taxes as such estimate is not practicable.
At December 31, 2017, the Company had approximately $118,412 of gross deferred tax assets related to deductible temporary differences and tax loss and credit carry-forwards 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, 2017, a valuation allowance of $68,694 was recorded against certain deferred tax assets based on this assessment. The Company believes it is more likely than not that the

28



tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company's assessment of future taxable income or tax planning strategies changes.
Pensions
The Company maintains a number of defined benefit ("Pension") and defined contribution plans to provide retirement benefits for employees. 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 October 2016, the Company amended the Lincoln Electric Retirement Annuity Program ("RAP") and the Supplemental Executive Retirement Plan ("SERP") to freeze all benefit accruals for participants under the plans effective as of December 31, 2016 and November 30, 2016, respectively. Refer to Note 11 to the consolidated financial statements for additional information.
A significant element in determining the Company's 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 plan's 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 5.8% and 6.1% at December 31, 2017 and 2016, 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 between this expected return and the actual return on plan assets is deferred and, for frozen plans, is amortized over the average remaining life expectancy of plan participants expected to receive benefits under the plan. During 2017, investment returns were 14.8% compared with a return of 6.6% in 2016. A 25 basis point change in the expected return on plan assets would increase or decrease pension expense by approximately $1,300.
Another significant element in determining the Company's pension expense is the discount rate for plan liabilities. To develop the discount rate assumption, 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 an equivalent quality. The Company determined this rate to be 4.1% at December 31, 2017 and 4.3% at December 31, 2016. A 10 basis point change in the discount rate would increase or decrease pension expense by approximately $100.
The Company's defined benefit plan expense was $2,517, $13,988 and $162,815 in 2017, 2016 and 2015, respectively. Pension expense includes $8,252 and $142,738 in settlement charges in 2017 and 2015, respectively. The Company's defined contribution plan expense was $25,285, $8,361 and $10,082 in 2017, 2016 and 2015, respectively. Excluding the pension settlement charges in 2017, the Company expects total 2018 expense related to retirement plans to increase by a range of approximately $2,000 to $3,000. The increase is the result of lower expected return on assets. Refer to Note 11 to the consolidated financial statements for additional information.
The Accumulated other comprehensive loss, excluding tax effects, recognized on the Consolidated Balance Sheet was $116,690 as of December 31, 2017 and $146,604 as of December 31, 2016. The increase is primarily the result of the amortization of net losses and settlements in 2017.
The Company made contributions to its defined benefit plans of $1,739, $21,373 and $50,468 in 2017, 2016 and 2015, respectively. The Company does not expect to make significant contributions to the defined benefit plans in 2018.
Inventories
Inventories are valued at the lower of cost or net realizable value. Fixed manufacturing overhead costs are allocated to inventory based on normal production capacity and abnormal manufacturing costs are recognized as period costs. Cost for a substantial portion of U.S. inventories is determined on a LIFO basis. LIFO was used for 32% and 40% of total inventories at December 31, 2017 and 2016, respectively. Cost of other inventories is determined by costing methods that approximate a first-in, first-out (“FIFO”) basis. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. Actual year-end inventory levels and costs may differ from interim LIFO inventory valuations. The excess of current cost over LIFO cost was $68,641 at December 31, 2017 and $61,329 at December 31, 2016.
The Company reviews the net realizable value of inventory on an on-going basis with consideration given to deterioration, obsolescence and other factors. If actual market conditions differ from those projected by management, and the Company's estimates prove to be inaccurate, write-downs of inventory values and adjustments to Cost of goods sold may be required. Historically, the Company's reserves have approximated actual experience.

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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 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 Company's reserves have approximated actual experience.
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, a loss is recognized to the extent that carrying value exceeds fair value. Fair value 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.
Goodwill and Intangibles
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets in the fourth quarter using the same dates each year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment.
The fair value of each indefinite-lived intangible asset is compared to its carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. For goodwill, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test. The quantitative test is required only if the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. For 2017, the Company early adopted Accounting Standard Update No. 2017-04, "Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.". As such, the quantitative goodwill impairment analysis is now a one-step process. The Company compared the fair value of each reporting unit with its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Fair values are determined using established business valuation techniques and models developed by the Company, estimates of market participant assumptions of future cash flows, future growth rates and the applicable discount rates to value estimated cash flows. Changes in economic and operating conditions impacting these assumptions could result in asset impairments in future periods.
As a result of 2017 testing, the Company recorded an impairment charge of $1,091 to the carrying value of goodwill for one reporting unit. The fair value of goodwill for all other reporting units exceeded its carrying value by at least 10%. Key assumptions in estimating the reporting unit's fair value include assumed market participant assumptions of revenue growth, operating margins and the rate used to discount future cash flows. Actual revenue growth and operating margins below the assumed market participant assumptions or an increase in the discount rate would have a negative impact on the fair value of the reporting unit that could result in a goodwill impairment charge in a future period.
Acquisitions
Upon acquisition of a business, the Company uses the income, market, or cost approach (or a combination thereof) for the valuation as appropriate. The valuation inputs in these models and analyses are based on market participant assumptions.  Market participants are considered to be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability.
Fair value estimates are based on a series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. Management values properties using the cost approach supported where available by observable market data, which includes consideration of obsolescence. Management values acquired intangible assets using the relief from royalty method, a form of the income approach supported by observable market data for peer companies. Acquired inventories are marked to fair value. For certain items, the carrying value is determined to be a reasonable approximation of fair value based on information available to the Company. Refer to Note 3 to the consolidated financial statements for additional details.

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Revenue Recognition
Substantially all of the Company's revenues are recognized when the risks and rewards of ownership and title to the product have transferred to the customer, which generally occurs at point of shipment. The Company recognizes any discounts, credits, returns, rebates and incentive programs based on reasonable estimates as a reduction of sales to arrive at Net sales at the same time the related revenue is recorded.
For contracts accounted for under the percentage of completion method, revenue recognition is based upon the ratio of costs incurred to date compared with estimated total costs to complete. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.
Stock-Based Compensation
The Company uses the Black-Scholes option pricing model for estimating fair values of options. The Black-Scholes model requires assumptions regarding the volatility of the Company's common shares, the expected life of the stock award and the Company's dividend yield. The Company utilizes historical data in determining these assumptions. An increase or decrease in the assumptions or economic events outside of management's control could have an impact on the Black-Scholes model.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary financial market risks include fluctuations in currency exchange rates, commodity prices and interest rates. The Company manages these risks by using derivative financial instruments in accordance with established policies and procedures. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
Included below is a sensitivity analysis based upon a hypothetical 10% weakening or strengthening in the U.S. dollar compared to foreign currency exchange rates at December 31, 2017 and a 100 basis point increase in effective interest rates at December 31, 2017. The derivative, borrowing and investment arrangements in effect at December 31, 2017 were compared to the hypothetical foreign exchange or interest rates in the sensitivity analysis to determine the effect on the Company's current period consolidated financial statements.
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 Company's risk that would otherwise result from changes in exchange rates.
At December 31, 2017, the Company hedged certain third-party and intercompany purchases and sales. The gross notional amount of these foreign exchange contracts at December 31, 2017 was $35,489. At December 31, 2017, a hypothetical 10% strengthening or weakening in the U.S. dollar would have changed Accumulated other comprehensive income (loss) by $1,341.
In addition, the Company enters into forward foreign exchange contracts to hedge transaction exposures or significant cross-border intercompany loans by either purchasing or selling specified amounts of foreign currency at a specified date. The gross notional amount of these foreign exchange contracts at December 31, 2017 was $340,884. A hypothetical 10% change in the year-end exchange rates would have resulted in an increase or decrease to Income before income taxes of $9,983 related to these positions. However, any loss (or gain) resulting from a hypothetical 10% change would be offset by the associated gain (or loss) on the underlying balance sheet exposure and would ultimately not materially affect the Company’s 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 fixing for specified periods the prices the Company will pay for the volume to which the hedge relates. The Company had no commodity contracts outstanding during 2017 .
Interest Rate Risk
At December 31, 2017, the Company had various floating interest rate swaps used to convert $100,000 of its outstanding fixed-rate, long-term borrowings into short-term variable interest rates. The fixed-rate nature of the remaining long-term borrowings limits the Company's exposure to changes in near-term interest rates. An increase in interest expense resulting from a hypothetical increase of 100 basis points in the December 31, 2017 floating rate, would not materially affect the Company’s financial statements. A hypothetical 100 basis point increase to effective interest rates would also impact the fair value of interest rate swap. However, any loss resulting from this hypothetical scenario would be offset by the associated gain on the underlying debt and have no impact on the Company’s consolidated financial statements.

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The fair value of the Company's cash and cash equivalents at December 31, 2017 approximated cost due to the short-term duration. These financial instruments are subject to concentrations of credit risk. The Company has minimized this risk by entering into investments with a number of major banks and financial institutions and investing in high-quality instruments. The Company does not expect any counter-parties 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 Annual Report on Form 10-K following the signature page.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
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 Company's disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting
The Company's 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 Company's 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, 2017 based on the 2013 framework in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under such framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.
During 2017, the Company completed the acquisition of Air Liquide Welding. The results of operations are included in the Company's consolidated financial statements from the date of acquisition and constituted 14% of total assets as of December 31, 2017 and 7% of revenues for the year then ended. As permitted by guidance issued by the Securities and Exchange Commission, the Company has elected to exclude Air Liquide Welding from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included elsewhere in this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
In July 2017, the Company acquired Air Liquide Welding. The acquired business operated under its own set of systems and internal controls and the Company is currently maintaining those systems and much of that control environment until it is able to incorporate its processes into the Company's own systems and control environment. The Company expects to complete the incorporation of the acquired business' operations into the Company's systems and control environment in fiscal year 2018.
Except for changes in connection with the Company's acquisition of the Air Liquide Welding business noted above, there have been no changes in the Company's internal control over financial reporting that occurred during the fourth quarter of 2017 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
None.

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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company is expected to file its 2018 proxy statement pursuant to Regulation 14A of the Exchange Act within 120 days after December 31, 2017.
Except for the information set forth within Part I, Item 1C section of this Annual Report on Form 10-K concerning our Executive Officers, the information required by this item is incorporated by reference from the 2018 proxy statement.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the 2018 proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the 2018 proxy statement.
For further information on the Company's equity compensation plans, see Note 1 and Note 9 to the Company's consolidated financial statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the 2018 proxy statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the 2018 proxy statement.


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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 Statements of Income – Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income – Years ended December 31, 2017, 2016 and 2015
Consolidated Balance Sheets – December 31, 2017 and 2016
Consolidated Statements of Equity – Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows – Years ended December 31, 2017, 2016 and 2015
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
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
 
Amended and Restated Code of Regulations of Lincoln Electric Holdings, Inc. (filed as Exhibit 3.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on April 29, 2014, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Amended and Restated Articles of Incorporation of Lincoln Electric Holdings, Inc. (filed as Exhibit 3.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on September 27, 2011, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Amended and Restated Credit Agreement, dated as of June 30, 2017, by and among Lincoln Electric Holdings,
Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc.,
Techalloy, Inc., Wayne Trail Technologies, Inc., Lincoln Global, Inc., the Lenders and KeyBank National
Association (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on July 6, 2017 SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Note Purchase Agreement, dated as of April 1, 2015, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc. and the purchasers party thereto (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on April 2, 2015, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Note Purchase Agreement, dated as of October 20, 2016, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Techalloy, Inc. and Wayne Trail Technologies, Inc. and the purchaser party thereto (filed as Exhibit 10.4 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2016, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Supplemental Executive Retirement Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009, SEC File No. 0-1402 and incorporated herein by reference and made part hereof).
 
Amendment No. 1 to Supplemental Executive Retirement Plan (As Amended and Restated as of December 31, 2008) dated November 29, 2016 (filed as Exhibit 10.6 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2016, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
 
 

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Exhibit No.
 
Description
 
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).
 
Non-Employee Directors' Deferred Compensation Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.3 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
2005 Deferred Compensation Plan for Executives (Amended and Restated as of January 1, 2016) (filed as Exhibit 10.6 to Form 10-K of Lincoln Electrics Holdings, Inc. for the year ended December 31, 2015, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
2005 Deferred Compensation Plan for Executives (Amended and Restated as of January 1, 2018) (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended September 30, 2017, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
2005 Deferred Compensation Plan for Executives (Amended and Restated as of January 1, 2018) (filed herewith).
 
The Lincoln Electric Company Restoration Plan (filed as Exhibit 4.3 to Form S-8 of Lincoln Electric Holdings, Inc. filed on December 19, 2016, SEC File No. 333-215168, and incorporated herein by reference and made a part hereof).
 
The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 1, 2017 dated December 20, 2016 (filed as Exhibit 10.11 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2016, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Amendment No. 1 to The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 1, 2017 dated July 25, 2017 (filed herewith).
 
Form of Change in Control Severance Agreement (as entered into by the Company and its executive officers) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 21, 2017, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).

 
2006 Equity and Performance Incentive Plan (Restated as of March 3, 2011) (filed as Annex A to Lincoln Electric Holdings, Inc. proxy statement filed on March 18, 2011, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
2006 Stock Plan for Non-Employee Directors (filed as Appendix C to Lincoln Electric Holdings, Inc. proxy statement dated March 28, 2006, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
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).
 
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).
 
Amendment No. 3 to the 2006 Stock Plan for Non-Employee Directors dated December 15, 2014 (filed as Exhibit 10.20 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2014, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
 
2015 Equity and Incentive Compensation Plan (filed as Appendix B to Lincoln Electric Holdings, Inc. definitive proxy statement filed on March 18, 2015, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
 
2015 Stock Plan for Non-Employee Directors (filed as Appendix C to Lincoln Electric Holdings, Inc. definitive proxy statement filed on March 18, 2015, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
 
Amendment No. 1 to the 2015 Stock Plan for Non-Employee Directors (filed as Appendix C to Lincoln Electric Holdings, Inc. proxy statement dated March 20, 2017, SEC File No. 0-1402 and incorporated by reference and made a part hereof).
 
Form of Restricted Share Agreement for Non-Employee Directors (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on July 29, 2015, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Restricted Share Agreement for Non-Employee Directors (filed herewith).
 
 
 

35



Exhibit No.
 
Description
 
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.4 to Form 10-Q of Lincoln Electric Holdings, Inc. for the three months ended September 30, 2010, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.37 to Form 10-K of the Lincoln Electric Holdings, Inc. for the year ended December 31, 2010, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Stock Option Agreement for Executive Officers (filed herewith).
 
Form of Stock Option Agreement for Executive Officers (filed herewith).
 
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.33 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2013, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.21 to Form 10-K of Lincoln Electrics Holdings, Inc. for the year ended December 31, 2015, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Restricted Stock Unit Agreement for Executive Officers (filed herewith).
 
Form of Performance Share Award Agreement for Executive Officers (filed as Exhibit 10.22 to Form 10-K of Lincoln Electrics Holdings, Inc. for the year ended December 31, 2015, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Performance Share Award Agreement for Executive Officers (filed herewith).
 
Form of Officer Indemnification Agreement (effective February 23, 2012) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on February 29, 2012, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Form of Director Indemnification Agreement (effective February 23, 2012) (filed as Exhibit 10.2 to Form 8-K of Lincoln Electric Holdings, Inc. filed on February 29, 2012, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
 
Subsidiaries of the Registrant.
 
Consent of Independent Registered Public Accounting Firm.
 
Powers of Attorney.
 
Certification by the Chairman, President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
Certification by the Executive Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
*
Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.
 



36



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/ GEOFFREY P. ALLMAN
 
 
Geoffrey P. Allman
Senior Vice President, Corporate Controller
(principal accounting officer)
February 27, 2018

37



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/ CHRISTOPHER L. MAPES
 
/s/ VINCENT K. PETRELLA
Christopher L. Mapes,
Chairman, President and Chief Executive Officer
(principal executive officer)
February 27, 2018
 
Vincent K. Petrella,
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial officer)
February 27, 2018
 
 
 
/s/ GEOFFREY P. ALLMAN
 
/s/ GEOFFREY P. ALLMAN
Geoffrey P. Allman,
Senior Vice President, Corporate Controller
(principal accounting officer)
February 27, 2018
 
Geoffrey P. Allman as
Attorney-in-Fact for
Curtis E. Espeland, Director
February 27, 2018
 
 
 
/s/ GEOFFREY P. ALLMAN
 
/s/ GEOFFREY P. ALLMAN
Geoffrey P. Allman as
Attorney-in-Fact for
David H. Gunning, Director
February 27, 2018
 
Geoffrey P. Allman as
Attorney-in-Fact for
Stephen G. Hanks, Director
February 27, 2018
 
 
 
/s/ GEOFFREY P. ALLMAN
 
/s/ GEOFFREY P. ALLMAN
Geoffrey P. Allman as
Attorney-in-Fact for
Michael F. Hilton, Director
February 27, 2018
 
Geoffrey P. Allman as
Attorney-in-Fact for
G. Russell Lincoln, Director
February 27, 2018
 
 
 
/s/ GEOFFREY P. ALLMAN
 
/s/ GEOFFREY P. ALLMAN
Geoffrey P. Allman as
Attorney-in-Fact for
Kathryn Jo Lincoln, Director
February 27, 2018
 
Geoffrey P. Allman as
Attorney-in-Fact for
William E. MacDonald, III, Director
February 27, 2018
 
 
 
/s/ GEOFFREY P. ALLMAN