SEC Filings

10-Q
LINCOLN ELECTRIC HOLDINGS INC filed this Form 10-Q on 10/30/2017
Entire Document
 
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number:  0-1402
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=11859655&doc=12 
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)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
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 o

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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “small 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 o  No x
 
The number of shares outstanding of the registrant’s common shares as of September 30, 2017 was 65,755,702.

1



TABLE OF CONTENTS
 
 
 

 
 
 
 
EX-101
Instance Document
 
EX-101
Schema Document
 
EX-101
Calculation Linkbase Document
 
EX-101
Label Linkbase Document
 
EX-101
Presentation Linkbase Document
 
EX-101
Definition Linkbase Document
 

2


PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net sales
$
669,491

 
$
567,646

 
$
1,877,246

 
$
1,710,786

Cost of goods sold
449,975

 
367,834

 
1,236,386

 
1,118,945

Gross profit
219,516

 
199,812

 
640,860

 
591,841

Selling, general & administrative expenses
132,748

 
117,983

 
384,964

 
352,290

Pension settlement charges (Note 11)
5,283

 

 
5,283

 

Loss on deconsolidation of Venezuelan subsidiary (Note 1)

 

 

 
34,348

Bargain purchase gain (Note 3)
(51,585
)
 

 
(51,585
)
 

Operating income
133,070

 
81,829

 
302,198

 
205,203

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Interest income
1,327

 
360

 
3,349

 
1,225

Equity earnings in affiliates
766

 
619

 
2,001

 
2,084

Other income
1,401

 
1,303

 
3,293

 
2,552

Interest expense
(5,922
)
 
(3,815
)
 
(18,333
)
 
(11,828
)
Total other income (expense)
(2,428
)
 
(1,533
)
 
(9,690
)
 
(5,967
)
Income before income taxes
130,642

 
80,296

 
292,508

 
199,236

Income taxes (Note 12)
24,531

 
20,257

 
69,218

 
54,264

Net income including non-controlling interests
106,111

 
60,039

 
223,290

 
144,972

Non-controlling interests in subsidiaries’ loss
(15
)
 
(10
)
 
(32
)
 
(32
)
Net income
$
106,126

 
$
60,049

 
$
223,322

 
$
145,004

 
 
 
 
 
 
 
 
Basic earnings per share (Note 2)
$
1.61

 
$
0.90

 
$
3.40

 
$
2.13

Diluted earnings per share (Note 2)
$
1.59

 
$
0.89

 
$
3.35

 
$
2.11

Cash dividends declared per share
$
0.35

 
$
0.32

 
$
1.05

 
$
0.96

 
See notes to these consolidated financial statements.

3


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income including non-controlling interests
$
106,111

 
$
60,039

 
$
223,290

 
$
144,972

Other comprehensive income (loss), net of tax:
 
 
 

 
 

 
 

Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges, net of tax of $239 and $(95) in the three and nine months ended September 30, 2017; $50 and $54 in the three and nine months ended September 30, 2016
(684
)
 
(175
)
 
563

 
16

Defined benefit pension plan activity, net of tax of $2,170 and $2,532 in the three and nine months ended September 30, 2017; $778 and $2,821 in the three and nine months ended September 30, 2016
3,958

 
1,313

 
5,384

 
5,548

Currency translation adjustment
18,931

 
(3,030
)
 
72,820

 
2,222

Other comprehensive income (loss):
22,205

 
(1,892
)
 
78,767

 
7,786

Comprehensive income
128,316

 
58,147

 
302,057

 
152,758

Comprehensive income (loss) attributable to non-controlling interests
16

 
(16
)
 
47

 
(73
)
Comprehensive income attributable to shareholders
$
128,300

 
$
58,163

 
$
302,010

 
$
152,831

 
See notes to these consolidated financial statements.

4


LINCOLN ELECTRIC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
September 30, 2017
 
December 31, 2016
 
(UNAUDITED)
 
(NOTE 1)
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
299,453

 
$
379,179

Accounts receivable (less allowance for doubtful accounts of $16,427 in 2017; $7,768 in 2016)
401,231

 
273,993

Inventories (Note 6)
389,722

 
255,406

Marketable securities (Note 14)
179,284

 
38,922

Other current assets
108,991

 
96,213

Total Current Assets
1,378,681

 
1,043,713

Property, plant and equipment (less accumulated depreciation of $772,366 in 2017; $716,665 in 2016)
475,071

 
372,377

Goodwill
235,899

 
231,919

Other assets
321,452

 
295,428

TOTAL ASSETS
$
2,411,103

 
$
1,943,437

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Short-term debt (Note 10)
$
2,135

 
$
1,889

Trade accounts payable
242,253

 
176,757

Other current liabilities
295,468

 
209,461

Total Current Liabilities
539,856

 
388,107

Long-term debt, less current portion (Note 10)
704,804

 
703,704

Other liabilities
220,515

 
139,420

Total Liabilities
1,465,175

 
1,231,231

Shareholders’ Equity
 

 
 

Common shares
9,858

 
9,858

Additional paid-in capital
330,522

 
309,417

Retained earnings
2,389,771

 
2,236,071

Accumulated other comprehensive loss
(250,349
)
 
(329,037
)
Treasury shares
(1,534,650
)
 
(1,514,832
)
Total Shareholders’ Equity
945,152

 
711,477

Non-controlling interests
776

 
729

Total Equity (Note 5)
945,928

 
712,206

TOTAL LIABILITIES AND EQUITY
$
2,411,103

 
$
1,943,437


See notes to these consolidated financial statements.

5


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
223,322

 
$
145,004

Non-controlling interests in subsidiaries’ loss
(32
)
 
(32
)
Net income including non-controlling interests
223,290

 
144,972

Adjustments to reconcile Net income including non-controlling interests to Net cash
   provided by operating activities:
 

 
 

Loss on deconsolidation of Venezuelan subsidiary (Note 1)

 
34,348

Bargain purchase gain (Note 3)
(51,585
)
 

Depreciation and amortization
50,457

 
48,495

Equity earnings in affiliates, net
(216
)
 
(64
)
Deferred income taxes
3,129

 
(12,813
)
Stock-based compensation
9,966

 
7,516

Pension expense and settlement charges (Note 11)
816

 
12,472

Pension contributions and payments
(2,724
)
 
(22,159
)
Other, net
2,394

 
(1,840
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 

 
 

Increase in accounts receivable
(24,300
)
 
(11,956
)
Increase in inventories
(22,526
)
 
(7,673
)
Decrease in other current assets
515

 
2,481

(Decrease) increase in trade accounts payable
(8,932
)
 
13,922

Increase in other current liabilities
61,332

 
31,357

Net change in other assets and liabilities
3,738

 
1,122

NET CASH PROVIDED BY OPERATING ACTIVITIES
245,354

 
240,180

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(38,959
)
 
(39,377
)
Acquisition of businesses, net of cash acquired (Note 3)
(72,468
)
 
(71,567
)
Proceeds from sale of property, plant and equipment
1,994

 
936

Purchase of marketable securities
(145,553
)
 

Proceeds from marketable securities
5,190

 

Other investing activities

 
(283
)
NET CASH USED BY INVESTING ACTIVITIES
(249,796
)
 
(110,291
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from short-term borrowings

 
1,892

Payments on short-term borrowings

 
(1,822
)
Amounts due banks, net
(602
)
 
183,395

Proceeds from long-term borrowings
34

 
261

Payments on long-term borrowings
(37
)
 
(467
)
Proceeds from exercise of stock options
14,333

 
10,418

Purchase of shares for treasury (Note 5)
(23,012
)
 
(288,594
)
Cash dividends paid to shareholders
(69,083
)
 
(66,180
)
Other financing activities
(15,561
)
 
(18,244
)
NET CASH USED BY FINANCING ACTIVITIES
(93,928
)
 
(179,341
)
 
 
 
 
Effect of exchange rate changes on Cash and cash equivalents
18,644

 
2,197

DECREASE IN CASH AND CASH EQUIVALENTS
(79,726
)
 
(47,255
)
 
 
 
 
Cash and cash equivalents at beginning of period
379,179

 
304,183

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
299,453

 
$
256,928

See notes to these consolidated financial statements.

6

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Dollars in thousands, except per share amounts


NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
As used in this report, 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 consolidated financial statements include the accounts of all legal entities in which the Company holds a controlling interest. The Company is also considered to have a controlling interest in a variable interest entity (“VIE”) if the Company determines it is the primary beneficiary of the VIE. Investments in legal entities in which the Company does not own a majority interest but has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements.  However, in the opinion of management, these unaudited consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods.  Operating results for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017.
The accompanying Consolidated Balance Sheet at December 31, 2016 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements.  For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Certain reclassifications have been made to the prior year financial statements to conform to current year classifications.
Effective June 30, 2016, the Company concluded that it no longer met the accounting criteria for control over its Venezuelan subsidiary based on deteriorating conditions in Venezuela; therefore, the Company deconsolidated the financial statements of the Venezuelan subsidiary and began reporting the results under the cost method of accounting. As a result, beginning July 1, 2016, the Company no longer includes the results of the Venezuelan subsidiary in its consolidated financial statements. Under the cost method of accounting, if cash were to be received from the Venezuela entity in future periods from the sale of inventory, dividends or royalties, income would be recognized. The Company does not anticipate dividend or royalty payments being made in the foreseeable future and has no outstanding receivables or payables with the Venezuelan entity. The factors that led to the Company’s conclusion to deconsolidate at June 30, 2016 continued to exist through September 30, 2017.  The Company expects these conditions to continue for the foreseeable future. Additionally, the Company has no remaining financial commitments to the Venezuelan subsidiary and therefore believes the exposure to future losses is not material.
The following section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
New Accounting Pronouncements Adopted:
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 amends several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted ASU 2016-09 effective January 1, 2017.
ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies resulting from stock-based compensation award vesting and exercises as a discrete income tax adjustment in the income statement. Previously, these amounts were recognized in Additional paid-in capital. Net excess tax benefits of $305 and $4,452 for the three and nine months ended September 30, 2017, respectively, were recognized as a reduction of income tax expense. Earnings per share increased by $0.01 and $0.07 per share for the three and nine months ended September 30, 2017, respectively, as a result of this change. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares. This change results in an insignificant increase in diluted weighted average shares outstanding for the three and nine months ended September 30, 2017.

7

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

ASU 2016-09 requires that excess tax benefits from stock-based compensation awards be reported as operating activities in the Consolidated Statements of Cash Flows. Previously, this activity was included in financing activities in the Consolidated Statements of Cash Flows. The Company has elected to apply this change on a retrospective basis. As a result, excess tax benefits of $305 and $4,452 are reported as Net cash provided by operating activities for the three and nine months ended September 30, 2017, respectively, and $1,892 and $3,414 of excess tax benefits were reclassified from Net cash used by financing activities to Net cash provided by operating activities for the three and nine months ended September 30, 2016, respectively.
ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the Consolidated Statements of Cash Flows on a retrospective basis. Previously, this activity was included in operating activities. The impact of this change was immaterial to the Consolidated Statements of Cash Flows.
The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
New Accounting Pronouncements to be adopted:
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also specifies the accounting of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. An entity can either adopt this amendment retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. To evaluate the impact of adopting this new guidance on the consolidated financial statements, the Company completed a scoping analysis of revenue streams against the requirements of the standard. In addition, the Company completed a review of customer contracts and is in the process of identifying and implementing changes to processes and controls to meet the standard’s reporting and disclosure requirements, in accordance with the Company's implementation plan. ASU 2014-09 may accelerate the timing of when certain transactions are recognized as revenue upon adoption of the guidance’s control model. The Company intends to adopt ASU 2014-09 as of January 1, 2018, using the modified retrospective transition method applied to those contracts that were not completed as of that date. Upon adoption, the Company will recognize the cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial statements and disclosures.
The Company is currently evaluating the impact on its financial statements of the following ASUs:
Standard
Description
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, issued August 2017.
ASU 2017-12 provides updated guidance to more closely align hedge accounting with a company's risk management strategy, to simplify the application of hedge accounting and to better portray the economic results of hedging instruments in the financial statements. The ASU is effective January 1, 2019 and early adoption is permitted. On the date of adoption, the ASU applies to all existing hedging relationships and should be reflected as of the beginning of the respective fiscal year.
ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, issued May 2017.
ASU 2017-09 provides updated guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Under this ASU, an entity should account for the effects of an award modification unless the fair value, vesting conditions and equity or liability classification of the modified award are the same as the original award. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied prospectively.

8

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Period Pension Cost and Net Periodic Postretirement Benefit Cost, issued March 2017.
ASU 2017-07 requires an entity to report the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs. The other components of the net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside of any subtotal of operating income. Additionally, only the service cost component will be eligible for capitalization in assets. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost in the income statement and prospectively for the capitalization of the service cost component. The Company estimates the adoption of the ASU in 2018 will reduce Operating income by $9 million for the twelve months ended December 31, 2017. Income before income taxes and Net income will not be affected by the adoption of the ASU.
ASU No. 2017-04, Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, issued January 2017.
ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.  Under this ASU, an entity should perform the Step 1 annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  If the carrying amount exceeds the fair value, an entity should recognize an impairment charge 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.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective January 1, 2020, early adoption is permitted and the ASU should be applied prospectively.
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, issued January 2017.
ASU 2017-01 provides updated guidance for evaluating whether certain transactions should be accounted for as an acquisition (or disposal) of an asset or a business. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied prospectively.
ASU No. 2016-18, Statement of Cash Flows(Topic 230): Restricted Cash, issued November 2016.
ASU 2016-18 requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied retrospectively.
ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, issued October 2016.
ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied using a modified retrospective approach, through a cumulative-effect adjustment directly to retained earnings, as of the beginning of the period of adoption.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, issued August 2016.
ASU 2016-15 reduces existing diversity in practice by addressing eight specific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied retrospectively (or prospectively as of earliest date practicable).
ASU No. 2016-02, Leases (Topic 842), issued February 2016.
ASU 2016-02 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing agreements. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The ASU is effective January 1, 2019, early adoption is permitted and the ASU should be applied using either a modified retrospective or modified retrospective with practical expedients approach.

9

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

NOTE 2 — EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 

 
 

 
 

 
 

Net income
$
106,126

 
$
60,049

 
$
223,322

 
$
145,004

Denominator (shares in 000's):
 

 
 

 
 

 
 

Basic weighted average shares outstanding
65,806

 
66,477

 
65,769

 
68,081

Effect of dilutive securities - Stock options and awards
896

 
705

 
910

 
703

Diluted weighted average shares outstanding
66,702

 
67,182

 
66,679

 
68,784

Basic earnings per share
$
1.61

 
$
0.90

 
$
3.40

 
$
2.13

Diluted earnings per share
$
1.59

 
$
0.89

 
$
3.35

 
$
2.11

For the three months ended September 30, 2017 and 2016, common shares subject to equity-based awards of 182,615 and 803,741, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended September 30, 2017 and 2016, common shares subject to equity-based awards of 149,888 and 807,763, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

NOTE 3 — 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 complex 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.
2017 Acquisitions
On July 31, 2017, the Company completed its acquisition of Air Liquide Welding, a subsidiary of Air Liquide. The agreed upon purchase price was $135,123, which was adjusted for certain debt like obligations, for a net purchase price of $72,468, net of cash acquired. The primary debt like obligation was a pension liability. The acquisition was accounted for as a business combination. The funding of the cash portion of the purchase price and acquisition costs was provided for with available cash.
The complementary business will enhance the Company’s global specialty consumables portfolio and extend its channel reach for equipment systems and cutting, soldering and brazing solutions in Europe. The acquisition will also offer European customers more comprehensive welding solutions, greater technical application expertise and improved service levels.
The preliminary fair value of the net assets acquired exceeded the purchase consideration by $51,585, resulting in a bargain purchase gain at acquisition, which is included in Bargain purchase gain in the Company’s Consolidated Statements of Operations. The Company believes that the bargain purchase gain was primarily the result of the divestiture by Air Liquide of the welding business, which was outside Air Liquide’s core business, as part of an overall repositioning of its core business. The Company anticipates future integration initiatives are necessary in order to achieve commercial and operational synergies. The Company is in the process of reassessing the recognition and measurement of identifiable assets and liabilities acquired, including further redefining the values of certain identifiable assets and liabilities, deferred income taxes and contractual arrangements. As the Company finalizes the fair value of assets acquired, liabilities assumed and purchase price, additional purchase price adjustments may be recorded during the measurement period. This may also result in a corresponding change in the amount of the bargain purchase gain recorded in the Company’s Consolidated Statements of Operations.

10

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The following table summarizes the preliminary purchase price allocation for the Air Liquide Welding acquisition:
Assets acquired and liabilities assumed
 
As of July 31, 2017
Accounts receivable
 
$
89,710

Inventory (1)
 
98,529

Property, plant and equipment (2)
 
79,619

Intangible assets (3)
 
11,715

Accounts payable
 
(66,959
)
Pension liability
 
(67,563
)
Bargain purchase gain
 
(51,585
)
Net other assets and liabilities (4)
 
(20,998
)
Total purchase price, net of cash acquired
 
$
72,468

(1)
A portion of inventories acquired were sold in the third quarter of 2017 resulting in a $2,314 increase in cost of sales for the amortization of step up in the value of acquired inventories. 
(2)
Property, plant and equipment acquired includes a number of manufacturing and distribution sites, including the related facilities, land and leased sites, and machinery and equipment for use in manufacturing operations.
(3)
$7,099 of the intangible asset balance was assigned to a trade name expected to have an indefinite life. Of the remaining amount, $1,183 was assigned to a finite-lived trade name (10 year weighted average useful life) and $3,433 was assigned to other intangible assets (9 year weighted average life).     
(4)
Consists primarily of other accrued liabilities.
In 2017, the Company recognized $11,386 in acquisition transaction and integration costs related to the acquisition of Air Liquide Welding. Such costs were expensed as incurred and are included in the "Selling, general and administrative expenses" line item in the Consolidated Statements of Operations.
In 2016, the Air Liquide Welding businesses generated sales of approximately $400 million. Beginning August 1, 2017, the Company's Consolidated Statements of Operations include the results of the Air Liquide Welding businesses, including sales revenue of $63 million through September 30, 2017. The impact on net income in the third quarter of 2017 from Air Liquide Welding businesses was immaterial. Pro forma information related to this acquisition has not been presented because the impact on the Company’s Consolidated Statements of Operations is not material.
2016 Acquisitions
During May 2016, the Company acquired Vizient Manufacturing Solutions ("Vizient"). Vizient, based in Bettendorf, Iowa, is a robotic integrator specializing in custom engineered tooling and automated arc welding systems for general and heavy fabrication applications. The acquisition assisted in diversifying end-market exposure and broadening global growth opportunities. Pro forma information related to this acquisition has not been presented because the impact on the Company’s Consolidated Statements of Income is not material.  Vizient is included in the Company’s consolidated financial statements as of the date of acquisition.

NOTE 4 — SEGMENT INFORMATION
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 its retail business in the United States.
Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being adjusted earnings before interest and income taxes (“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.

11

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

Financial information for the reportable segments follows:
 
Americas Welding (1)
 
International Welding (1)
 
The Harris
Products Group
 
Corporate /
Eliminations (1)
 
Consolidated
Three Months Ended September 30, 2017
 

 
 

 
 

 
 

 
 

Net sales
$
398,289

 
$
197,617

 
$
73,585

 
$

 
$
669,491

Inter-segment sales
25,546

 
5,451

 
2,064

 
(33,061
)
 

Total
$
423,835

 
$
203,068

 
$
75,649

 
$
(33,061
)
 
$
669,491

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
74,096

 
$
10,612

 
$
9,244

 
$
570

 
$
94,522

Special items charge (gain)
5,283

 
2,314

 

 
(48,312
)
 
(40,715
)
EBIT
$
68,813

 
$
8,298

 
$
9,244

 
$
48,882

 
$
135,237

Interest income
 

 
 

 
 

 
 

 
1,327

Interest expense
 

 
 

 
 

 
 

 
(5,922
)
Income before income taxes
 

 
 

 
 

 
 

 
$
130,642

Three Months Ended September 30, 2016
 

 
 

 
 

 
 

 
 

Net sales
$
377,520

 
$
119,564

 
$
70,562

 
$

 
$
567,646

Inter-segment sales
22,386

 
3,688

 
1,856

 
(27,930
)
 

Total
$
399,906

 
$
123,252

 
$
72,418

 
$
(27,930
)
 
$
567,646

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
68,285

 
$
5,796

 
$
8,757

 
$
913

 
$
83,751

Special items charge (gain)

 

 

 

 

EBIT
$
68,285

 
$
5,796

 
$
8,757

 
$
913

 
$
83,751

Interest income
 

 
 

 
 

 
 

 
360

Interest expense
 

 
 

 
 

 
 

 
(3,815
)
Income before income taxes
 

 
 

 
 

 
 

 
$
80,296

Nine Months Ended September 30, 2017
 

 
 

 
 

 
 

 
 

Net sales
$
1,186,760

 
$
468,003

 
$
222,483

 
$

 
$
1,877,246

Inter-segment sales
75,380

 
15,214

 
6,763

 
(97,357
)
 

Total
$
1,262,140

 
$
483,217

 
$
229,246

 
$
(97,357
)
 
$
1,877,246

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
217,317

 
$
29,713

 
$
27,491

 
$
369

 
$
274,890

Special items charge (gain)
5,283

 
2,314

 

 
(40,199
)
 
(32,602
)
EBIT
$
212,034

 
$
27,399

 
$
27,491

 
$
40,568

 
$
307,492

Interest income
 

 
 

 
 

 
 

 
3,349

Interest expense
 

 
 

 
 

 
 
 
(18,333
)
Income before income taxes
 

 
 

 
 

 
 

 
$
292,508

Nine Months Ended September 30, 2016
 

 
 

 
 

 
 

 
 

Net sales
$
1,124,900

 
$
376,684

 
$
209,202

 
$

 
$
1,710,786

Inter-segment sales
69,673

 
11,955

 
6,983

 
(88,611
)
 

Total
$
1,194,573

 
$
388,639

 
$
216,185

 
$
(88,611
)
 
$
1,710,786

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
194,924

 
$
21,699

 
$
25,752

 
$
1,812

 
$
244,187

Special items charge (gain)

 

 

 
34,348

 
34,348

EBIT
$
194,924

 
$
21,699

 
$
25,752

 
$
(32,536
)
 
$
209,839

Interest income
 

 
 

 
 

 
 

 
1,225

Interest expense
 

 
 

 
 

 
 

 
(11,828
)
Income before income taxes
 

 
 

 
 

 
 

 
$
199,236




12

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

(1) In the three and nine months ended September 30, 2017, special items reflect pension settlement charges in Americas Welding, amortization of step up in value of acquired inventories in International Welding and transaction and integration costs offset by a bargain purchase gain in Corporate / Eliminations related to the Air Liquide Welding acquisition as discussed in Note 3. In the nine months ended September 30, 2016, special items in Corporate / Eliminations reflect a loss on the deconsolidation of the Venezuelan subsidiary.
NOTE 5 — EQUITY
Changes in equity for the nine months ended September 30, 2017 are as follows:
 
Shareholders’
Equity
 
Non-controlling
Interests
 
Total Equity
Balance at December 31, 2016
$
711,477

 
$
729

 
$
712,206

Comprehensive income (loss):
 

 
 

 
 

Net income
223,322

 
(32
)
 
223,290

Other comprehensive income (loss)
78,688

 
79

 
78,767

Total comprehensive income (loss)
302,010

 
47

 
302,057

 
 
 
 
 
 
Cash dividends declared - $1.05 per share
(69,622
)
 

 
(69,622
)
Issuance of shares under benefit plans
24,299

 

 
24,299

Purchase of shares for treasury
(23,012
)
 

 
(23,012
)
Balance at September 30, 2017
$
945,152

 
$
776

 
$
945,928

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.  At management’s discretion, the Company repurchases its common shares from time to time in the open market, depending on market conditions, stock price and other factors. As of September 30, 2017, there remained 8.6 million common shares available for repurchase under this program.  The repurchased common shares remain in treasury and have not been retired. 

13

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The following tables set forth the total changes in accumulated other comprehensive income (loss) ("AOCI") by component, net of taxes, for the three months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30, 2017
 
 
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at June 30, 2017
 
$
1,834

 
$
(94,513
)
 
$
(179,844
)
 
$
(272,523
)
Other comprehensive income (loss)
before reclassification
 
(1,814
)
 

 
18,900

3 

17,086

Amounts reclassified from AOCI
 
1,130

1 

3,958

2 


 
5,088

Net current-period other
comprehensive income (loss)
 
(684
)
 
3,958

 
18,900

 
22,174

Balance at September 30, 2017
 
$
1,150

 
$
(90,555
)
 
$
(160,944
)
 
$
(250,349
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2016
 
 
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at June 30, 2016
 
$
739

 
$
(95,541
)
 
$
(191,752
)
 
$
(286,554
)
Other comprehensive income (loss)
before reclassification
 
170

 

 
(3,024
)
3 

(2,854
)
Amounts reclassified from AOCI
 
(345
)
1 

1,313

2 


 
968

Net current-period other
comprehensive income (loss)
 
(175
)
 
1,313

 
(3,024
)
 
(1,886
)
Balance at September 30, 2016
 
$
564

 
$
(94,228
)
 
$
(194,776
)
 
$
(288,440
)
 
 
 
 
 
 
 
 
 
(1)
During the 2017 period, this AOCI reclassification is a component of Net sales of $968 (net of tax of $398) and Cost of goods sold of $162 (net of tax of $25); during the 2016 period, the reclassification is a component of Net sales of $(174) (net of tax of $(71)) and Cost of goods sold of $(171) (net of tax of $(46)). See Note 13 to the consolidated financial statements for additional details.
(2)
This AOCI component is included in the computation of net periodic pension costs (net of tax of $2,170 and $778 during the three months ended September 30, 2017 and 2016, respectively). See Note 11 to the consolidated financial statements for additional details.
(3)
The Other comprehensive income (loss) before reclassifications excludes $31 and $(6) attributable to Non-controlling interests in the three months ended September 30, 2017 and 2016, respectively.




14

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The following tables set forth the total changes in AOCI by component, net of taxes, for the nine months ended September 30, 2017 and 2016:
 
 
Nine Months Ended September 30, 2017
 
 
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at December 31, 2016
 
$
587

 
$
(95,939
)
 
$
(233,685
)
 
$
(329,037
)
Other comprehensive income (loss)
before reclassification
 
(1,547
)
 

 
72,741

3 

71,194

Amounts reclassified from AOCI
 
2,110

1 

5,384

2 


 
7,494

Net current-period other
comprehensive income (loss)
 
563

 
5,384

 
72,741

 
78,688

Balance at September 30, 2017
 
$
1,150

 
$
(90,555
)
 
$
(160,944
)
 
$
(250,349
)
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at December 31, 2015
 
$
548

 
$
(99,776
)
 
$
(197,039
)
 
$
(296,267
)
Other comprehensive income (loss)
before reclassification
 
1,530

 
(15
)
 
(580
)
3 

935

Amounts reclassified from AOCI
 
(1,514
)
1 

5,563

2 

2,843

4 

6,892

Net current-period other
comprehensive income (loss)
 
16

 
5,548

 
2,263

 
7,827

Balance at September 30, 2016
 
$
564

 
$
(94,228
)
 
$
(194,776
)
 
$
(288,440
)
 
 
 
 
 
 
 
 
 

(1)
During the 2017 period, the AOCI reclassification is a component of Net sales of $1,580 (net of tax of $602) and Cost of goods sold of $530 (net of tax of $214); during the 2016 period, the AOCI reclassification is a component of Net sales of $(1,113) (net of tax of $(418)) and Cost of goods sold of $(401) (net of tax of $(41)). See Note 13 to the consolidated financial statements for additional details.
(2)
The AOCI component is included in the computation of net periodic pension costs (net of tax of $2,532 and $2,821 during the nine months ended September 30, 2017 and 2016, respectively). See Note 11 to the consolidated financial statements for additional details.
(3)
The Other comprehensive income (loss) before reclassifications excludes $79 and $(41) attributable to Non-controlling interests in the nine months ended September 30, 2017 and 2016, respectively.
(4)
The reclassification from AOCI reflects foreign currency translation losses recognized due to the Company's deconsolidation of its Venezuelan subsidiary. See Note 1 to the consolidated financial statements for additional details.


15

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

NOTE 6 — INVENTORY
Inventories in the Consolidated Balance Sheet is comprised of the following components:
 
September 30, 2017
 
December 31, 2016
Raw materials
$
104,713

 
$
76,811

Work-in-process
62,901

 
40,556

Finished goods
222,108

 
138,039

Total
$
389,722

 
$
255,406

The valuation of last-in, first-out ("LIFO") method 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 costs and inventory levels may differ from interim LIFO inventory valuations.  The excess of current cost over LIFO cost was $67,185 at September 30, 2017 and $61,329 at December 31, 2016. The increase in total Inventories was primarily the result of the Air Liquide Welding acquisition as discussed in Note 3 to the consolidated financial statements.

NOTE 7 — ACCRUED EMPLOYEE BONUS
Other current liabilities at September 30, 2017 and 2016 include accruals for year-end bonuses and related payroll taxes of $74,816 and $69,433, respectively, related to the Company’s employees worldwide.  The payment of bonuses is discretionary and subject to approval by the Board of Directors.  A majority of annual bonuses are paid in December, resulting in an increasing bonus accrual during the Company’s fiscal year.   

NOTE 8 — 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, regulatory claims and health, safety and environmental claims, some of which relate to cases alleging asbestos induced illnesses.  The claimants in the asbestos cases seek compensatory and punitive damages, in most cases for unspecified amounts.  The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously.
The Company accrues its best estimate of the probable costs, after a review of the facts with management and counsel and taking into account past experience. If an unfavorable outcome is determined to be reasonably possible but not probable and the amount of loss can be reasonably estimated, or if an unfavorable outcome is determined to be probable and 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.
Based on the Company's historical experience in litigating product liability claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, as well as the Company's current assessment of the underlying merits of the claims and applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material effect on the Company's consolidated financial statements.


16

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

NOTE 9 — PRODUCT WARRANTY COSTS
The changes in the carrying amount of product warranty accruals are as follows:
 
Nine Months Ended September 30,
 
2017
 
2016
Balance at beginning of year
$
21,053

 
$
19,469

Accruals for warranties
8,118

 
9,222

Settlements
(8,672
)
 
(8,529
)
Foreign currency translation and other adjustments (1)
2,368

 
111

Balance at September 30
$
22,867

 
$
20,273

(1)  At September 30, 2017, Foreign currency translation and other adjustments includes $2,114 in an acquired liability related to the Air Liquide Welding acquisition as discussed in Note 3 to the consolidated financial statements.

NOTE 10 DEBT
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 and a fixed charges coverage ratio and total leverage ratio.  As of September 30, 2017, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Credit Agreement. 
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, as shown in the table below, 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 September 30, 2017, the Company was in compliance with all of its debt covenants relating to the 2015 Notes.
The maturity and interest rates of the 2015 Notes are as follows:
 
Amount
 
Maturity Date
 
Interest Rate
Series A
$
100,000

 
August 20, 2025
 
3.15
%
Series B
100,000

 
August 20, 2030
 
3.35
%
Series C
50,000

 
April 1, 2035
 
3.61
%
Series D
100,000

 
April 1, 2045
 
4.02
%
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, as shown in the table below, 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 September 30, 2017, the Company was in compliance with all of its debt covenants relating to the 2016 Notes.

17

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The maturity and interest rates of the 2016 Notes are as follows:
 
Amount
 
Maturity Date
 
Interest Rate
Series A
$
100,000

 
October 20, 2028
 
2.75
%
Series B
100,000

 
October 20, 2033
 
3.03
%
Series C
100,000

 
October 20, 2037
 
3.27
%
Series D
50,000

 
October 20, 2041
 
3.52
%
The Company's total weighted average effective interest rate and weighted average initial tenure, inclusive of the 2015 Notes and 2016 Notes, is 3.3% and 18 years, respectively.

NOTE 11 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The components of total pension cost were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
925

 
$
4,116

 
$
2,394

 
$
12,985

Interest cost
5,769

 
5,906

 
16,843

 
17,935

Expected return on plan assets
(9,469
)
 
(8,850
)
 
(26,710
)
 
(26,608
)
Amortization of prior service cost
4

 
(98
)
 
12

 
(296
)
Amortization of net loss (1)
983

 
2,142

 
2,994

 
8,456

Settlement charges (2)
5,283

 

 
5,283

 

Defined benefit plans
3,495

 
3,216

 
816

 
12,472

Multi-employer plans
217

 
192

 
634

 
587

Defined contribution plans
6,179

 
2,244

 
18,748

 
6,405

Total pension cost (3)
$
9,891

 
$
5,652

 
$
20,198

 
$
19,464


(1) The amortization of net loss during the nine months ended September 30, 2016 includes a $959 charge resulting from the deconsolidation of the Venezuelan subsidiary.
(2)
Pension settlement charges resulting from lump sum pension payments in the three and nine months ended September 30, 2017.
(3) The increase for the three and nine months ended September 30, 2017 as compared to the prior year periods reflect pension settlement charges and higher defined contribution plan expense related to the Company's amended U.S. defined contribution plan that was effective January 1, 2017, partially offset by lower service cost and lower amortization of net losses related to the defined benefit plan freeze effective December 31, 2016.

NOTE 12 — INCOME TAXES
The Company recognized $69,218 of tax expense on pretax income of $292,508, resulting in an effective income tax rate of 23.7% for the nine months ended September 30, 2017.  The effective income tax rate was 27.2% for the nine months ended September 30, 2016. The 2017 effective tax rate was lower than the Company's statutory rate primarily due to the nontaxable bargain purchase gain recorded during the current period in connection with the acquisition of Air Liquide Welding, excess tax benefits resulting from exercising of stock-based compensation awards and income earned in lower tax rate jurisdictions. The 2016 effective tax rate was lower than the Company's statutory rate primarily due to the utilization of U.S. tax credits, income earned in lower tax rate jurisdictions, the reversal of an income tax valuation allowance as a result of a legal entity change and an income tax benefit related to a worthless stock deduction of a foreign subsidiary.
As of September 30, 2017, the Company had $16,006 of unrecognized tax benefits.  If recognized, approximately $11,876 would be reflected as a component of income tax expense.

18

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The Company files income tax returns in the U.S. and various state, local and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2013.  The Company is currently subject to U.S., various state and non-U.S. income tax audits. 
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations.  Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits.  It is reasonably possible there could be a reduction of $1,379 in previously unrecognized tax benefits by the end of the third quarter 2018.

NOTE 13 — DERIVATIVES
The Company uses derivative instruments to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business.  Both at inception and on an ongoing basis, the derivative instruments that qualify for hedge accounting are assessed as to their effectiveness, when applicable. Hedge ineffectiveness was immaterial in the nine months ended September 30, 2017 and 2016.
The Company is subject to the credit risk of the counterparties to derivative instruments.  Counterparties include a number of major banks and financial institutions.  None of the concentrations of risk with any individual counterparty was considered significant at September 30, 2017.  The Company does not expect any counterparties to fail to meet their obligations.
Cash Flow Hedges
Certain foreign currency forward contracts were qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of these short-term contracts was $43,998 at September 30, 2017 and $36,385 at December 31, 2016.
Fair Value Hedges
Certain interest rate swap agreements were qualified and designated as fair value hedges. At September 30, 2017, the Company had interest rate swap agreements outstanding that effectively convert notional amounts of $100,000 of debt from a fixed interest rate to a variable interest rate based on three-month LIBOR plus a spread of between 0.6% and 1.8%. The variable rates reset every three months, at which time payment or receipt of interest will be settled.
Net Investment Hedges
From time to time, the Company executes foreign currency forward contracts that qualify and are designated as net investment hedges. No such contracts were outstanding at September 30, 2017 and December 31, 2016.
Derivatives Not Designated as Hedging Instruments
The Company has certain foreign exchange forward contracts that are not designated as hedges.  These derivatives are held as economic hedges of certain balance sheet exposures.  The dollar equivalent gross notional amount of these contracts was $381,921 at September 30, 2017 and $261,168 at December 31, 2016
Fair values of derivative instruments in the Company’s Condensed Consolidated Balance Sheets follow:
 
 
September 30, 2017
 
December 31, 2016
Derivatives by hedge designation 
 
Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
 
Other Current Assets
 
Other Current Liabilities
 
Other Liabilities
Designated as hedging instruments:
 
 

 
 

 
 
 
 

 
 

 
 
Foreign exchange contracts
 
$
598

 
$
323

 
$

 
$
439

 
$
923

 
$

Interest rate swap agreements
 

 

 
4,476

 

 

 
5,439

Not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
702

 
2,573

 

 
746

 
1,529

 

Total derivatives
 
$
1,300

 
$
2,896

 
$
4,476

 
$
1,185

 
$
2,452

 
$
5,439


19

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 consisted of the following:
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivatives by hedge designation
 
Classification of gain (loss)
 
2017
 
2016
 
2017
 
2016
Not designated as hedges:
 
 
 
 

 
 

 
 
 
 
Foreign exchange contracts
 
Selling, general & administrative expenses
 
$
1,788

 
$
(2,952
)
 
$
23,031

 
$
(9,862
)
Commodity contracts
 
Cost of goods sold
 

 

 

 
(742
)
The effects of designated hedges on AOCI and the Company’s Consolidated Statements of Operations consisted of the following:
Total gain (loss) recognized in AOCI, net of tax
 
September 30, 2017
 
December 31, 2016
Foreign exchange contracts
 
$
51

 
$
(512
)
Net investment contracts
 
1,099

 
1,099

The Company expects a gain of $51 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized. 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivative type
 
Gain (loss) reclassified from AOCI to:
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
Sales
 
$
968

 
$
(174
)
 
$
1,580

 
$
(1,113
)
 
 
Cost of goods sold
 
162

 
(171
)
 
530

 
(401
)

NOTE 14 - FAIR VALUE
The following table provides a summary of assets and liabilities as of September 30, 2017, measured at fair value on a recurring basis:
Description
 
Balance as of
September 30, 2017
 
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
1,300

 
$

 
$
1,300

 
$

Marketable securities
 
179,284

 

 
179,284

 

Total assets
 
$
180,584

 
$

 
$
180,584

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
2,896

 
$

 
$
2,896

 
$

Interest rate swap agreements
 
4,476

 

 
4,476

 

Contingent considerations
 
7,067

 

 

 
7,067

Deferred compensation
 
28,227

 

 
28,227

 

Total liabilities
 
$
42,666

 
$

 
$
35,599

 
$
7,067


20

LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dollars in thousands, except per share amounts

The following table provides a summary of assets and liabilities as of December 31, 2016, measured at fair value on a recurring basis:
Description
 
Balance as of December 31, 2016
 
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
1,185

 
$

 
$
1,185

 
$

Marketable securities
 
38,922

 

 
38,922

 

Total assets
 
$
40,107

 
$

 
$
40,107

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
2,452

 
$

 
$
2,452

 
$

Interest rate swap agreements
 
5,439

 

 
5,439

 

Contingent considerations
 
8,154

 

 

 
8,154

Forward contract
 
15,272

 

 

 
15,272

Deferred compensation
 
25,244

 

 
25,244

 

Total liabilities
 
$
56,561

 
$

 
$
33,135

 
$
23,426

The Company’s derivative contracts are valued at fair value using the market approach.  The Company measures the fair value of foreign exchange contracts and interest rate swap agreements using Level 2 inputs based on observable spot and forward rates in active markets.  During the nine months ended September 30, 2017, there were no transfers between Levels 1, 2 or 3.
The Company measures the fair value of marketable securities using Level 2 inputs based on quoted market prices for similar assets in active markets.
In connection with acquisitions, the Company recorded contingent considerations fair valued at $7,067 as of September 30, 2017. Under the contingent consideration agreements, the amounts to be paid are based upon actual financial results of the acquired entity for specified future periods.  The fair value of the contingent considerations are a Level 3 valuation and fair valued using either a probability weighted discounted cash flow analysis or an option pricing model.
In connection with an acquisition, the Company obtained a controlling financial interest in the acquired entity and at the same time entered into a forward contract to obtain the remaining financial interest in the entity over a three-year period. The final payment associated with the forward contract was paid by the Company in the second quarter of 2017.
The deferred compensation liability is the Company’s obligation under its executive deferred compensation plan.  The Company measures the fair value of the liability using the market values of the participants’ underlying investment fund elections.
The fair value of Cash and cash equivalents, Accounts receivable, Short-term debt excluding the current portion of long-term debt and Trade accounts payable approximated book value due to the short-term nature of these instruments at both September 30, 2017 and December 31, 2016.  The fair value of long-term debt at September 30, 2017 and December 31, 2016, including the current portion, was approximately $676,997 and $669,209, respectively, which was determined using available market information and methodologies requiring judgment.  The carrying value of this debt at such dates was $704,913 and $703,835, respectively.  Since considerable judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount that could be realized in a current market exchange.

21


ITEM 2.  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 the Company’s unaudited consolidated financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q.
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.  Welding products include arc welding power sources, CNC and 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 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’s products are sold in both domestic and international markets.  In the Americas, products are sold principally through industrial distributors, retailers and 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 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 its retail business in the United States.
Effective June 30, 2016, the Company concluded that it no longer met the accounting criteria for control over its Venezuelan subsidiary based on deteriorating conditions in Venezuela; therefore, the Company deconsolidated the financial statements of the Venezuelan subsidiary and began reporting the results under the cost method of accounting. As a result, beginning July 1, 2016, the Company no longer includes the results of the Venezuelan subsidiary in its consolidated financial statements.

22


Results of Operations
The following table shows the Company's results of operations:
 
Three Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
2017 vs 2016
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
$
 
%
Net sales
$
669,491

 
 
 
$
567,646

 
 
 
101,845

 
17.9
%
Cost of goods sold
449,975

 
 
 
367,834

 
 
 
82,141

 
22.3
%
Gross profit
219,516

 
32.8
%
 
199,812

 
35.2
%
 
19,704

 
9.9
%
Selling, general & administrative expenses
132,748

 
19.8
%
 
117,983

 
20.8
%
 
14,765

 
12.5
%
Pension settlement charges
5,283

 
 
 

 
 
 
5,283

 
100.0
%
Bargain purchase gain
(51,585
)
 
 
 

 
 
 
51,585

 
100.0
%
Operating income
133,070

 
19.9
%
 
81,829

 
14.4
%
 
51,241

 
62.6
%
Interest income
1,327

 
 
 
360

 
 
 
967

 
268.6
%
Equity earnings in affiliates
766

 
 
 
619

 
 
 
147

 
23.7
%
Other income
1,401

 
 
 
1,303

 
 
 
98

 
7.5
%
Interest expense
(5,922
)
 
 
 
(3,815
)
 
 
 
2,107

 
55.2
%
Income before income taxes
130,642

 
19.5
%
 
80,296

 
14.1
%
 
50,346

 
62.7
%
Income taxes
24,531

 
 
 
20,257

 
 
 
4,274

 
21.1
%
Effective tax rate
18.8
%
 
 
 
25.2
%
 
 
 
 
 
 
Net income including non-controlling interests
106,111

 
 
 
60,039

 
 
 
46,072

 
76.7
%
Non-controlling interests in subsidiaries’ loss
(15
)
 
 
 
(10
)
 
 
 
5

 
50.0
%
Net income
$
106,126

 
15.9
%
 
$
60,049

 
10.6
%
 
46,077

 
76.7
%
Diluted earnings per share
$
1.59

 
 
 
$
0.89

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2017
 
2016
 
Increase (Decrease)
2017 vs 2016
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
$
 
%
Net sales
$
1,877,246

 


 
$
1,710,786

 


 
166,460

 
9.7
%
Cost of goods sold
1,236,386

 


 
1,118,945

 


 
117,441

 
10.5
%
Gross profit
640,860

 
34.1
%
 
591,841

 
34.6
%
 
49,019

 
8.3
%
Selling, general & administrative expenses
384,964

 
20.5
%
 
352,290

 
20.6
%
 
32,674

 
9.3
%
Pension settlement charges
5,283

 


 

 


 
5,283

 
100.0
%
Loss on deconsolidation of Venezuelan subsidiary

 


 
34,348

 


 
(34,348
)
 
(100.0
%)
Bargain purchase gain
(51,585
)
 
 
 

 
 
 
51,585

 
100.0
%
Operating income
302,198

 
16.1
%
 
205,203

 
12.0
%
 
96,995

 
47.3
%
Interest income
3,349

 


 
1,225

 


 
2,124

 
173.4
%
Equity earnings in affiliates