Company Quick10K Filing
Quick10K
Lincoln Electric Holdings
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$83.93 63 $5,270
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-01 Other Events, Exhibits
8-K 2019-05-15 Other Events
8-K 2019-04-24 Officers, Shareholder Vote
8-K 2019-04-22
8-K 2019-02-18 Amend Bylaw, Exhibits
8-K 2019-02-14
8-K 2019-01-02 Other Events, Exhibits
8-K 2018-12-11 Other Events, Exhibits
8-K 2018-12-03 Other Events, Exhibits
8-K 2018-11-27 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-25
8-K 2018-07-23
8-K 2018-07-19 Officers, Exhibits
8-K 2018-04-19 Shareholder Vote
8-K 2018-02-21 Officers, Exhibits
8-K 2018-02-14
BUD Anheuser-Busch Inbev 164,230
PQG PQ Group Holdings 2,120
KN Knowles 1,660
SWM Schweitzer Mauduit 982
PLUG Plug Power 530
GSS Golden Star Resources 429
CPHC Canterbury Park Holding 65
DXYN Dixie Group 11
EMES Emerge Energy Services 8
HBKA Highlands Bankshares 0
LECO 2019-03-31
Part I. Financial Information
Item 1. Financial Statements
Note 1 - Significant Accounting Policies
Note 2 - Revenue Recognition
Note 3 - Earnings per Share
Note 4 - Acquisitions
Note 5 - Segment Information
Note 6 - Rationalization and Asset Impairments
Note 7 - Accumulated Other Comprehensive Income (Loss) ("Aoci")
Note 8 - Common Stock Repurchase Program
Note 9 - Inventories
Note 10 - Leases
Note 11 - Product Warranty Costs
Note 12 - Debt
Note 13 - Retirement and Postretirement Benefit Plans
Note 14 - Other Income (Expense)
Note 15 - Income Taxes
Note 16 - Derivatives
Note 17 - Fair Value
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in Thousands, Except per Share Amounts)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
EX-31.1 exhibit311q12019.htm
EX-31.2 exhibit312q12019.htm
EX-32.1 exhibit321q12019.htm

Lincoln Electric Holdings Earnings 2019-03-31

LECO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 leco-20190331x10q.htm 10-Q Document

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 March 31, 2019
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
g198901ba01i001q32015a04.jpg 
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 every Interactive Data File required to be submitted 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 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 
 
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 March 31, 2019 was 62,799,738.

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 INCOME
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net sales (Note 2)
$
759,174

 
$
757,696

Cost of goods sold
500,753

 
501,142

Gross profit
258,421

 
256,554

Selling, general & administrative expenses
160,408

 
161,191

Rationalization and asset impairment charges (Note 6)
3,535

 
10,175

Operating income
94,478

 
85,188

Interest expense, net
5,323

 
4,441

Other income (expense) (Note 14)
3,763

 
3,451

Income before income taxes
92,918

 
84,198

Income taxes (Note 15)
21,452

 
23,378

Net income including non-controlling interests
71,466

 
60,820

Non-controlling interests in subsidiaries’ earnings (loss)
(14
)
 
(4
)
Net income
$
71,480

 
$
60,824

 
 
 
 
Basic earnings per share (Note 3)
$
1.13

 
$
0.93

Diluted earnings per share (Note 3)
$
1.12

 
$
0.92

Cash dividends declared per share
$
0.47

 
$
0.39

 
See notes to these consolidated financial statements.

3


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
 
 
Three Months Ended March 31,
 
2019
 
2018
Net income including non-controlling interests
$
71,466

 
$
60,820

Other comprehensive income, net of tax:
 
 
 

Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax of $122 and $334 in the three months ended March 31, 2019 and 2018
329

 
855

Defined benefit pension plan activity, net of tax of $227 and $431 in the three months ended March 31, 2019 and 2018
787

 
1,287

Currency translation adjustment
5,136

 
19,387

Other comprehensive income:
6,252

 
21,529

Comprehensive income
77,718

 
82,349

Comprehensive income attributable to non-controlling interests
23

 
55

Comprehensive income attributable to shareholders
$
77,695

 
$
82,294

 
See notes to these consolidated financial statements.

4


LINCOLN ELECTRIC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
March 31, 2019
 
December 31, 2018
 
(UNAUDITED)
 
(NOTE 1)
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
267,134

 
$
358,849

Accounts receivable (less allowance for doubtful accounts of $13,501 in 2019; $12,827 in 2018)
423,187

 
396,885

Inventories (Note 9)
375,737

 
361,829

Other current assets
127,112

 
120,236

Total Current Assets
1,193,170

 
1,237,799

Property, plant and equipment (less accumulated depreciation of $792,447 in 2019; $778,817 in 2018)
476,876

 
478,801

Goodwill
282,512

 
281,294

Other assets
402,293

 
351,931

TOTAL ASSETS
$
2,354,851

 
$
2,349,825

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Short-term debt (Note 12)
$
110

 
$
111

Trade accounts payable
252,840

 
268,600

Accrued employee compensation and benefits
87,126

 
94,202

Other current liabilities
185,451

 
175,269

Total Current Liabilities
525,527

 
538,182

Long-term debt, less current portion (Note 12)
705,725

 
702,549

Other liabilities
258,934

 
221,502

Total Liabilities
1,490,186

 
1,462,233

Shareholders’ Equity
 

 
 

Common shares
9,858

 
9,858

Additional paid-in capital
364,418

 
360,308

Retained earnings
2,605,265

 
2,564,440

Accumulated other comprehensive loss
(287,524
)
 
(293,739
)
Treasury shares
(1,828,025
)
 
(1,753,925
)
Total Shareholders’ Equity
863,992

 
886,942

Non-controlling interests
673

 
650

Total Equity
864,665

 
887,592

TOTAL LIABILITIES AND TOTAL EQUITY
$
2,354,851

 
$
2,349,825


See notes to these consolidated financial statements.

5


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
(In thousands, except per share amounts)
 
 
Common
Shares
Outstanding
 
Common
Shares
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Shares
 
Non-controlling
Interests
 
Total
Balance at December 31, 2018
 
63,546

 
$
9,858

 
$
360,308

 
$
2,564,440

 
$
(293,739
)
 
$
(1,753,925
)
 
$
650

 
$
887,592

Net income
 
 
 
 
 
 
 
71,480

 
 
 
 
 
(14
)
 
71,466

Unrecognized amounts from defined benefit pension plans, net of tax
 
 
 
 
 
 
 
 
 
787

 
 
 
 
 
787

Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
 
 
 
 
 
 
 
 
 
329

 
 
 
 
 
329

Currency translation adjustment
 
 
 
 
 
 
 
 
 
5,099

 
 
 
37

 
5,136

Cash dividends declared – $0.47 per share
 
 
 
 
 
 
 
(29,847
)
 
 
 
 
 
 
 
(29,847
)
Stock-based compensation activity
 
148

 
 
 
3,302

 
 
 
 
 
1,484

 
 
 
4,786

Purchase of shares for treasury
 
(894
)
 
 
 
 
 
 
 
 
 
(75,584
)
 
 
 
(75,584
)
Other
 
 
 
 
 
808

 
(808
)
 
 
 
 
 
 
 

Balance at March 31, 2019
 
62,800

 
$
9,858

 
$
364,418

 
$
2,605,265

 
$
(287,524
)
 
$
(1,828,025
)
 
$
673

 
$
864,665


 
 
Common
Shares
Outstanding
 
Common
Shares
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Shares
 
Non-controlling
Interests
 
Total
Balance at December 31, 2017
 
65,663

 
$
9,858

 
$
334,309

 
$
2,388,219

 
$
(247,186
)
 
$
(1,553,563
)
 
$
816

 
$
932,453

Net income
 
 
 
 
 
 
 
60,824

 


 
 
 
(4
)
 
60,820

Unrecognized amounts from defined benefit pension plans, net of tax
 
 
 
 
 
 
 
 
 
1,287

 
 
 
 
 
1,287

Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
 
 
 
 
 
 
 
 
 
855

 
 
 
 
 
855

Currency translation adjustment
 
 
 
 
 
 
 
 
 
19,328

 
 
 
59

 
19,387

Cash dividends declared – $0.39 per share
 
 
 
 
 
 
 
(25,787
)
 
 
 
 
 
 
 
(25,787
)
Stock-based compensation activity
 
55

 
 
 
5,819

 
 
 
 
 
562

 
 
 
6,381

Purchase of shares for treasury
 
(159
)
 
 
 
 
 
 
 
 
 
(14,724
)
 
 
 
(14,724
)
Other
 
 
 
 
 
5,483

 
(5,483
)
 
 
 


 
 
 

Balance at March 31, 2018
 
65,559

 
$
9,858

 
$
345,611

 
$
2,417,773

 
$
(225,716
)
 
$
(1,567,725
)
 
$
871

 
$
980,672






6


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Three Months Ended March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
71,480

 
$
60,824

Non-controlling interests in subsidiaries’ loss
(14
)
 
(4
)
Net income including non-controlling interests
71,466

 
60,820

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

 
 

Rationalization and asset impairment net charges (Note 6)
1,424

 
676

Depreciation and amortization
18,901

 
18,134

Equity earnings in affiliates, net
(448
)
 
(538
)
Deferred income taxes
1,317

 
7,955

Stock-based compensation
4,149

 
4,419

Other, net
(1,072
)
 
(5,072
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 

 
 

Increase in accounts receivable
(26,900
)
 
(40,468
)
Increase in inventories
(14,638
)
 
(28,052
)
Increase in other current assets
(8,701
)
 
(1,458
)
(Decrease) increase in trade accounts payable
(15,107
)
 
3,191

(Decrease) increase in other current liabilities
(5,947
)
 
22,966

Net change in other assets and liabilities
1,434

 
1,204

NET CASH PROVIDED BY OPERATING ACTIVITIES
25,878

 
43,777

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(16,251
)
 
(14,657
)
Acquisition of businesses, net of cash acquired

 
6,235

Proceeds from sale of property, plant and equipment
302

 
118

Purchase of marketable securities

 
(89,545
)
Proceeds from marketable securities

 
131,966

Other investing activities
2,000

 

NET CASH (USED BY) PROVIDED BY INVESTING ACTIVITIES
(13,949
)
 
34,117

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Amounts due banks, net

 
(60
)
Payments on long-term borrowings
(3
)
 
(3
)
Proceeds from exercise of stock options
637

 
1,962

Purchase of shares for treasury (Note 8)
(75,584
)
 
(14,724
)
Cash dividends paid to shareholders
(30,560
)
 
(25,661
)
NET CASH USED BY FINANCING ACTIVITIES
(105,510
)
 
(38,486
)
 
 
 
 
Effect of exchange rate changes on Cash and cash equivalents
1,866

 
2,947

 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(91,715
)
 
42,355

 
 
 
 
Cash and cash equivalents at beginning of period
358,849

 
326,701

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
267,134

 
$
369,056

See notes to these consolidated financial statements.

7

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 three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
The accompanying Consolidated Balance Sheet at December 31, 2018 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, 2018.
New Accounting Pronouncements:
This 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.
The following ASUs were adopted as of January 1, 2019:
Standard
Description
ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220), issued February 2018.
ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the "U.S. Tax Act"). The ASU only applies to the income tax effects of the U.S. Tax Act; all other existing guidance remains the same. The Company has elected not to reclassify the income tax effects of the U.S. Tax Act from Accumulated other comprehensive loss to Retained earnings.
ASU No. 2016-02, Leases (Topic 842), issued February 2016

ASU 2016-02 ("Topic 842") aims to increase transparency and comparability among organizations by recognizing a right of use asset and lease liability on the balance sheet for all leases with a lease term greater than twelve months. Topic 842 also requires the disclosure of key information about leasing agreements. The Company adopted Topic 842 using the modified retrospective transition option of applying the new standard at the adoption date. The Company also elected the package of practical expedients, which among other things, allows it to not reassess the identification, classification and initial direct costs of leases commencing before the effective date of Topic 842. Refer to Note 10 to the consolidated financial statements for further details.


8

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


The Company is currently evaluating the impact on its financial statements of the following ASUs:
Standard
Description
ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), issued August 2018.
ASU 2018-14 modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The ASU also requires an entity to disclose the weighted-average interest crediting rates for cash balance plans and to explain the reasons for significant gains and losses related to changes in the benefit obligation. The ASU is effective January 1, 2020 and early adoption is permitted.
ASU No. 2018-13, Fair Value Measurement (Topic 944), issued August 2018.
ASU 2018-13 eliminates, amends and adds disclosure requirements related to fair value measurements. The ASU impacts various elements of fair value disclosure, including but not limited to, changes in unrealized gains or losses, significant unobservable inputs and measurement uncertainty. The ASU is effective January 1, 2020 and early adoption is permitted.

NOTE 2 — REVENUE RECOGNITION
The following table presents the Company's Net sales disaggregated by product line:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Consumables
 
$
442,958

 
$
441,891

Equipment
 
316,216

 
315,805

Net sales
 
$
759,174

 
$
757,696

Consumable sales consist of electrodes, fluxes, specialty welding consumables and brazing and soldering alloys. Equipment sales consist of arc welding power sources, welding accessories, fabrication, plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, automation components, fume extraction equipment, CNC plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. Consumable and Equipment products are sold within each of the Company’s operating segments.
Substantially all of the Company's sales arrangements are short-term in nature involving a single performance obligation. The Company recognizes revenue when the performance obligation is satisfied and control of the product is transferred to the customer based upon shipping terms.
Within the Equipment product line, there are certain customer contracts related to automation products that may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines the standalone selling price based on the prices charged to customers or using expected cost plus margin. In addition, certain customized automation performance obligations within the Equipment product line, are accounted for over time. Under this method, revenue recognition is primarily 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. Less than 10% of the Company's Net sales are recognized over time.
At March 31, 2019, the Company recorded $15,929 related to advance customer payments and $12,244 related to billings in excess of revenue recognized. These contract liabilities are included in Other current liabilities in the Condensed Consolidated Balance Sheets. At December 31, 2018, the balances related to advance customer payments and billings in excess of revenue recognized were $17,023 and $17,013, respectively. Substantially all of the Company’s contract liabilities are recognized within twelve months based on contract duration. The Company records an asset for contracts where it has recognized revenue, but has not yet invoiced the customer for goods or services. At March 31, 2019 and December 31, 2018, $35,378 and $25,032, respectively, related to these future customer receivables was included in Other current assets in the Condensed Consolidated Balance Sheets. Contract asset amounts are expected to be billed within the next twelve months.

9

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


NOTE 3 — EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended March 31,
 
2019
 
2018
Numerator:
 

 
 

Net income
$
71,480

 
$
60,824

Denominator (shares in 000's):
 

 
 

Basic weighted average shares outstanding
63,160

 
65,579

Effect of dilutive securities - Stock options and awards
739

 
864

Diluted weighted average shares outstanding
63,899

 
66,443

Basic earnings per share
$
1.13

 
$
0.93

Diluted earnings per share
$
1.12

 
$
0.92

For the three months ended March 31, 2019 and 2018, common shares subject to equity-based awards of 498,694 and 174,325, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

NOTE 4 — ACQUISITIONS
During April 2019, the Company acquired Baker Industries, Inc. ("Baker"). Baker, based in Detroit, Michigan, is a provider of custom tooling, parts and fixtures primarily serving automotive and aerospace markets. The acquisition will complement the Company's automation portfolio and its metal additive manufacturing service business.
During December 2018, the Company acquired the soldering business of Worthington Industries (“Worthington”). The Worthington business, based in Winston Salem, North Carolina, broadens The Harris Products Group’s portfolio of industry-leading consumables with the addition of premium solders and fluxes.
Also during December 2018, the Company acquired Coldwater Machine Company (“Coldwater”) and Pro Systems. Coldwater, based in Coldwater, Ohio, is a flexible automation integrator and precision machining and assembly manufacturer serving diverse end markets. Pro Systems, based in Churubusco, Indiana, is an automation systems designer and integrator serving automotive, industrial, electrical and medical applications. The acquisitions accelerate growth and expand the Company’s industry-leading portfolio of automated cutting and joining solutions.
Also during December 2018, the Company acquired Inovatech Engineering Corporation (“Inovatech”). Inovatech, based in Ontario, Canada, is a manufacturer of advanced robotic plasma cutting solutions for structural steel applications. The acquisition scales the Company's automated cutting solutions and application expertise and supports long-term growth in that market.
Pro forma information related to the acquisitions discussed above has not been presented because the impact on the Company’s Consolidated Statements of Income is not material. Acquired companies are included in the Company's consolidated financial statements as of the date of acquisition.

NOTE 5 — 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 measure being the adjusted earnings before interest and income taxes (“Adjusted EBIT”) profit measure.  EBIT is defined as Operating income plus Other income (expense). 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.

10

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


The following table presents Adjusted EBIT by segment:
 
Americas Welding
 
International Welding
 
The Harris
Products Group
 
Corporate /
Eliminations
 
Consolidated
Three Months Ended March 31, 2019
 

 
 

 
 

 
 

 
 

Net sales
$
457,719

 
$
218,086

 
$
83,369

 
$

 
$
759,174

Inter-segment sales
29,388

 
4,209

 
1,867

 
(35,464
)
 

Total
$
487,107

 
$
222,295

 
$
85,236

 
$
(35,464
)
 
$
759,174

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
81,752

 
$
13,337

 
$
10,519

 
$
(3,042
)
 
$
102,566

Special items charge (1)
1,336

 
2,199

 

 
790

 
4,325

EBIT
$
80,416

 
$
11,138

 
$
10,519

 
$
(3,832
)
 
$
98,241

Interest income
 

 
 

 
 

 
 

 
964

Interest expense
 

 
 

 
 

 
 
 
(6,287
)
Income before income taxes
 

 
 

 
 

 
 

 
$
92,918

Three Months Ended March 31, 2018
 

 
 

 
 

 
 

 
 

Net sales
$
434,772

 
$
247,320

 
$
75,604

 
$

 
$
757,696

Inter-segment sales
26,586

 
4,509

 
1,907

 
(33,002
)
 

Total
$
461,358

 
$
251,829

 
$
77,511

 
$
(33,002
)
 
$
757,696

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
$
77,439

 
$
14,973

 
$
9,225

 
$
(158
)
 
$
101,479

Special items charge (2)
758

 
10,175

 

 
1,907

 
12,840

EBIT
$
76,681

 
$
4,798

 
$
9,225

 
$
(2,065
)
 
$
88,639

Interest income
 

 
 

 
 

 
 

 
1,472

Interest expense
 

 
 

 
 

 
 

 
(5,913
)
Income before income taxes
 

 
 

 
 

 
 

 
$
84,198


(1)
In the three months ended March 31, 2019, special items reflect Rationalization and asset impairment charges of $1,336 in Americas Welding and $2,199 in International Welding and transaction and integration costs of $790 in Corporate / Eliminations related to the Air Liquide Welding acquisition.
(2)
In the three months ended March 31, 2018, special items reflect pension settlement charges of $758 in Americas Welding, Rationalization and asset impairment charges of $10,175 in International Welding and transaction and integration costs of $1,907 in Corporate / Eliminations related to the Air Liquide Welding acquisition.

NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS
The Company recorded rationalization and asset impairment net charges of $3,535 in the three months ended March 31, 2019. The 2019 charges are primarily related to employee severance, asset impairments and gains or losses on the disposal of assets.
During 2019, the Company initiated rationalization plans within International Welding. The plans include headcount restructuring and the consolidation of manufacturing operations to better align the cost structure with economic conditions and operating needs. At March 31, 2019, liabilities of $927 were recognized in Other current liabilities in the Company's Condensed Consolidated Balance Sheet.
During 2018, the Company initiated rationalization plans within International Welding. The plans include headcount restructuring and the consolidation of manufacturing operations to better align the cost structure with economic conditions and operating needs. At March 31, 2019, liabilities of $4,802 were recognized in Other current liabilities in the Company's Condensed Consolidated Balance Sheet.
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. The Company continues to evaluate its cost structure and additional rationalization actions may result in charges in future periods.

11

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


The following table summarizes the activity related to rationalization liabilities:
 
Three Months Ended March 31, 2019
Balance at December 31, 2018
$
11,192

Payments and other adjustments
(6,769
)
Charged to expense
2,111

Balance at March 31, 2019
$
6,534


NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI")
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 March 31, 2019 and 2018:
 
 
Three Months Ended March 31, 2019
 
 
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, 2018
 
$
1,694

 
$
(82,049
)
 
$
(213,384
)
 
$
(293,739
)
Other comprehensive income (loss)
before reclassification
 
682

 

 
5,099

3 
5,781

Amounts reclassified from AOCI
 
(353
)
1 
787

2 

 
434

Net current-period other
comprehensive income (loss)
 
329

 
787

 
5,099

 
6,215

Balance at March 31, 2019
 
$
2,023

 
$
(81,262
)
 
$
(208,285
)
 
$
(287,524
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
 
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, 2017
 
$
875

 
$
(85,277
)
 
$
(162,784
)
 
$
(247,186
)
Other comprehensive income (loss)
before reclassification
 
1,010

 

 
19,328

3 
20,338

Amounts reclassified from AOCI
 
(155
)
1 
1,287

2 

 
1,132

Net current-period other
comprehensive income (loss)
 
855

 
1,287

 
19,328

 
21,470

Balance at March 31, 2018
 
$
1,730

 
$
(83,990
)
 
$
(143,456
)
 
$
(225,716
)
(1)
During the 2019 period, this AOCI reclassification is a component of Net sales of $286 (net of tax of $102) and Cost of goods sold of $(67) (net of tax of $(30)); during the 2018 period, the reclassification is a component of Net sales of $135 (net of tax of $8) and Cost of goods sold of $(20) (net of tax of $(13)). See Note 16 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 $227 and $431 during the three months ended March 31, 2019 and 2018, respectively). See Note 13 to the consolidated financial statements for additional details.
(3)
The Other comprehensive income (loss) before reclassifications excludes $37 and $59 attributable to Non-controlling interests in the three months ended March 31, 2019 and 2018, respectively.


12

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


NOTE 8 — COMMON STOCK REPURCHASE PROGRAM
The Company has a share repurchase program for up 55 million shares of the Company's common shares. From time to time at management's discretion, the Company repurchases its common shares in the open market, depending on market conditions, stock price and other factors.  During the quarter ended March 31, 2019, the Company purchased a total of 0.8 million shares at an average cost per share of $84.34. As of March 31, 2019, there remained 5.3 million common shares available for repurchase under this program.  The repurchased common shares remain in treasury and have not been retired.

NOTE 9 — INVENTORIES
Inventories in the Condensed Consolidated Balance Sheets are comprised of the following components:
 
March 31, 2019
 
December 31, 2018
Raw materials
$
100,283

 
$
103,820

Work-in-process
59,108

 
53,950

Finished goods
216,346

 
204,059

Total
$
375,737

 
$
361,829

At March 31, 2019 and December 31, 2018, approximately 38% and 37%, respectively, of total inventories were valued using the last-in, first out ("LIFO") method. The excess of current cost over LIFO cost was $79,647 and $79,626 at March 31, 2019 and December 31, 2018, respectively.

NOTE 10 — LEASES
On January 1, 2019, the Company adopted Topic 842 using the modified retrospective transition option. The adoption of Topic 842 resulted in the recording of right-of-use assets and lease liabilities for the Company's operating leases as detailed below:
Operating Leases
Balance Sheet Classification
March 31, 2019
Right-of-use assets
Other assets
$
53,159

 
 
 
Current liabilities
Other current liabilities
$
14,410

Noncurrent liabilities
Other liabilities
39,187

    Total lease liabilities
 
$
53,597

Topic 842 did not materially impact our consolidated net earnings, cash flows or debt covenants.
The Company determines if an agreement is a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses a discount rate based on information available at commencement date to present value the lease payments.
The Company has operating leases for sales offices, manufacturing facilities, warehouses and distribution centers, transportation equipment, office equipment and information technology equipment. Some of these leases are noncancelable. Most leases include one or more options to renew, which can extend the lease term from one to 15 years or more. The exercise of lease renewal options is at the Company's sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the Company's Condensed Consolidated Balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Total lease expense, which is included in Cost of goods sold and Selling, general and administrative expenses in the Company's Consolidated Statements of Income, was $5,888 in the three months ended March 31, 2019. Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 31, 2019 was $4,684 and is included in Net cash

13

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


provided by operating activities in the Company's Consolidated Statements of Cash Flows. Right-of-use assets obtained in exchange for operating lease liabilities for the three months ended March 31, 2019 was $4,956.
The total future minimum lease payments for noncancelable operating leases were as follows:
 
March 31, 2019
2019
$
13,770

2020
12,578

2021
9,105

2022
6,669

2023
5,153

After 2023
14,766

Total lease payments
$
62,041

Less: Imputed interest
(8,444
)
Operating lease liabilities
$
53,597

As of March 31, 2019, the weighted average remaining lease term is 6.6 years and the weighted average discount rate used to determine the operating lease liability is 3.6%.

NOTE 11 — PRODUCT WARRANTY COSTS
The changes in the carrying amount of product warranty accruals are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Balance at beginning of year
$
19,778

 
$
22,029

Accruals for warranties
2,847

 
1,111

Settlements
(2,663
)
 
(2,301
)
Foreign currency translation and other adjustments
(19
)
 
110

Balance at March 31
$
19,943

 
$
20,949


NOTE 12 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 March 31, 2019, 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 and October 20, 2016, the Company entered into separate Note Purchase Agreements pursuant to which it issued senior unsecured notes (the "Notes") through a private placement. The 2015 Notes and 2016 Notes each have an aggregate principal amount of $350,000, comprised of four different series ranging from $50,000 to $100,000, with maturity dates ranging from August 20, 2025 through April 1, 2045, and interest rates ranging from 2.75% and 4.02%. Interest on the Notes is paid semi-annually. The Company's total weighted average effective interest rate and remaining weighted average tenure of the Notes is 3.3% and 15 years, respectively. The proceeds of the Notes were used for general corporate purposes.

14

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


The Notes contain certain affirmative and negative covenants. As of March 31, 2019, the Company was in compliance with all of its debt covenants relating to the Notes.
Shelf Agreements
On November 27, 2018, the Company entered into seven uncommitted master note facilities (the "Shelf Agreements") that allow borrowings up to $700,000 in the aggregate. The Shelf Agreements have a five-year term and the average life of borrowings cannot exceed 15 years. The Company is required to comply with covenants similar to those contained in the Notes.  As of March 31, 2019, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements.

NOTE 13 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The components of total pension cost were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
U.S. pension plans
 
Non-U.S. pension plans
 
U.S. pension plans
 
Non-U.S. pension plans
Service cost
$
35

 
$
728

 
$
35

 
$
851

Interest cost
4,653

 
936

 
4,494

 
970

Expected return on plan assets
(6,245
)
 
(1,124
)
 
(6,916
)
 
(1,274
)
Amortization of prior service cost

 
16

 

 
1

Amortization of net loss
413

 
585

 
384

 
575

Settlement charges (1)

 

 
758

 

Defined benefit plans
(1,144
)
 
1,141

 
(1,245
)
 
1,123

Multi-employer plans

 
247

 

 
227

Defined contribution plans
5,908

 
499

 
5,894

 
829

Total pension cost
$
4,764

 
$
1,887

 
$
4,649

 
$
2,179


(1) Pension settlement charges resulting from lump sum pension payments in the three months ended March 31, 2018.
The defined benefit plan components of Total pension cost, other than service cost, are included in Other income (expense) in the Company's Consolidated Statements of Income.

NOTE 14 OTHER INCOME (EXPENSE)
The components of Other income (expense) were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Equity earnings in affiliates
$
1,006

 
$
1,200

Other components of net periodic pension (cost) income (1)
766

 
1,008

Other income
1,991

 
1,243

Total Other income (expense)
$
3,763

 
$
3,451

(1) Includes pension settlement charges in the three months ended March 31, 2018 of $758. Refer to Note 13 to the consolidated financial statements for details.

NOTE 15 — INCOME TAXES
The Company recognized $21,452 of tax expense on pretax income of $92,918, resulting in an effective income tax rate of 23.1% for the three months ended March 31, 2019.  The effective income tax rate was 27.8% for the three months ended March 31, 2018.

15

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


The decrease in the effective tax rate for the three months ended March 31, 2019, as compared with the same period in 2018, was primarily due to an increase in the tax benefit related to the vesting of stock based compensation in 2019, rationalization charges in regions with low or no tax benefit recorded in 2018 and adjustments and incremental tax expense recorded in 2018 related to the U.S. Tax Act.
As of March 31, 2019, the Company had $27,866 of unrecognized tax benefits.  If recognized, approximately $24,328 would be reflected as a component of income tax expense.
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 2014.  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 $1,753 in previously unrecognized tax benefits by the end of the first quarter 2020.

NOTE 16 — 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 three months ended March 31, 2019 and 2018.
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 March 31, 2019.  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 $57,049 at March 31, 2019 and $45,909 at December 31, 2018.
Fair Value Hedges
Certain interest rate swap agreements were qualified and designated as fair value hedges. At March 31, 2019, the Company had interest rate swap agreements outstanding that effectively convert notional amounts of $125,000 of debt from a fixed interest rate to a variable interest rate based on three-month LIBOR plus a spread of between 0.5% 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 March 31, 2019 and December 31, 2018.
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 $326,836 and $328,534 at March 31, 2019 and December 31, 2018, respectively.

16

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


Fair values of derivative instruments in the Company’s Condensed Consolidated Balance Sheets follow:
 
 
March 31, 2019
 
December 31, 2018
Derivatives by hedge designation 
 
Other Current Assets
 
Other Current Liabilities
 
Other Assets
 
Other Liabilities
 
Other Current Assets
 
Other Current Liabilities
 
Other Assets
 
Other Liabilities
Designated as hedging instruments:
 
 

 
 

 
 
 
 
 
 

 
 

 
 
 
 
Foreign exchange contracts
 
$
738

 
$
131

 
$

 
$

 
$
647

 
$
404

 
$

 
$

Interest rate swap agreements
 

 

 
1,063

 
4,657

 

 

 
302

 
7,033

Not designated as hedging instruments:
 
 
 
 
 


 
 
 
 
 
 
 


 
 
Foreign exchange contracts
 
5,546

 
1,931

 

 

 
6,375

 
829

 

 

Total derivatives
 
$
6,284

 
$
2,062

 
$
1,063

 
$
4,657

 
$
7,022

 
$
1,233

 
$
302

 
$
7,033

The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income consisted of the following:
 
 
 
 
Three Months Ended March 31,
Derivatives by hedge designation
 
Classification of gain (loss)
 
2019
 
2018
Not designated as hedges:
 
 
 
 
 
 
Foreign exchange contracts
 
Selling, general & administrative expenses
 
$
5,407

 
$
8,655

The effects of designated hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:
Total gain (loss) recognized in AOCI, net of tax
 
March 31, 2019
 
December 31, 2018
Foreign exchange contracts
 
$
502

 
$
173

Net investment contracts
 
1,521

 
1,521

The Company expects a gain of $502 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 March 31,
Derivative type
 
Gain (loss) recognized in the Consolidated Statements of Income:
 
2019
 
2018
Foreign exchange contracts
 
Sales
 
$
388

 
$
143

 
 
Cost of goods sold
 
97

 
33



17

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


NOTE 17 - FAIR VALUE
The following table provides a summary of assets and liabilities as of March 31, 2019, measured at fair value on a recurring basis:
Description
 
Balance as of
March 31, 2019
 
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
 
$
6,284

 
$

 
$
6,284

 
$

Interest rate swap agreements
 
1,063

 

 
1,063

 

Total assets
 
$
7,347

 
$

 
$
7,347

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
2,062

 
$

 
$
2,062

 
$

Interest rate swap agreements
 
4,657

 

 
4,657

 

Contingent consideration
 
1,000

 

 

 
1,000

Deferred compensation
 
28,174

 

 
28,174

 

Total liabilities
 
$
35,893

 
$

 
$
34,893

 
$
1,000

The following table provides a summary of assets and liabilities as of December 31, 2018, measured at fair value on a recurring basis:
Description
 
Balance as of December 31, 2018
 
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
 
$
7,022

 
$

 
$
7,022

 
$

Interest rate swap agreements
 
302

 

 
302

 

Total assets
 
$
7,324

 
$

 
$
7,324

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
1,233

 
$

 
$
1,233

 
$

Interest rate swap agreements
 
7,033

 

 
7,033

 

Contingent considerations
 
2,100

 

 

 
2,100

Deferred compensation
 
26,524

 

 
26,524

 

Total liabilities
 
$
36,890

 
$

 
$
34,790

 
$
2,100

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 three months ended March 31, 2019, there were no transfers between Levels 1, 2 or 3.
In connection with an acquisition, the Company recorded a contingent consideration liability, which will be paid based upon actual financial results of the acquired entity for a specified future period.  The fair value of the contingent consideration is a Level 3 valuation and fair valued using an option pricing model.
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 March 31,

18

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


2019 and December 31, 2018.  The fair value of long-term debt at March 31, 2019 and December 31, 2018, including the current portion, was approximately $688,190 and $649,714, respectively, which was determined using available market information and methodologies requiring judgment.  The carrying value of this debt at such dates was $705,835 and $702,660, 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.
The Company has various financial instruments, including cash and cash equivalents, short and long-term debt and forward contracts. While these financial instruments are subject to concentrations of credit risk, the Company has minimized this risk by entering into arrangements with a number of major banks and financial institutions and investing in several high-quality instruments. The Company does not expect any counterparties to fail to meet their obligations.

19


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, computer numerical control and plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, automation components, 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.



20


Results of Operations
The following table shows the Company's results of operations:
 
Three Months Ended March 31,
 
2019
 
2018
 
Favorable (Unfavorable)
2019 vs 2018
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
$
 
%
Net sales
$
759,174

 


 
$
757,696

 


 
$
1,478

 
0.2
%
Cost of goods sold
500,753

 


 
501,142

 


 
389

 
0.1
%
Gross profit
258,421

 
34.0
%
 
256,554

 
33.9
%
 
1,867

 
0.7
%
Selling, general & administrative expenses
160,408

 
21.1
%
 
161,191

 
21.3
%
 
783

 
0.5
%
Rationalization and asset impairment charges
3,535

 


 
10,175

 


 
6,640

 
65.3
%
Operating income
94,478

 
12.4
%
 
85,188

 
11.2
%
 
9,290

 
10.9
%
Interest expense, net
5,323

 


 
4,441

 


 
(882
)
 
(19.9
%)
Other income (expense)
3,763

 


 
3,451

 


 
312

 
9.0
%
Income before income taxes
92,918

 
12.2
%
 
84,198

 
11.1
%
 
8,720

 
10.4
%
Income taxes
21,452

 


 
23,378

 


 
1,926

 
8.2
%
Effective tax rate
23.1
%
 
 
 
27.8
%
 
 
 
4.7
%
 
 
Net income including non-controlling interests
71,466

 


 
60,820

 


 
10,646

 
17.5
%
Non-controlling interests in subsidiaries’ loss
(14
)
 


 
(4
)
 


 
(10
)
 
(250.0
%)
Net income
$
71,480

 
9.4
%
 
$
60,824

 
8.0
%
 
10,656

 
17.5
%
Diluted earnings per share
$
1.12

 
 
 
$
0.92

 
 
 
$
0.20

 
21.7
%
Net Sales:
The following table summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales for the three months ended March 31, 2019 on a consolidated basis:
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2018
 
Volume
 
Acquisitions
 
Price
 
Foreign Exchange
 
Net Sales
2019
Lincoln Electric Holdings, Inc.
 
$
757,696

 
$
(27,351
)
 
$
18,494

 
$
34,353

 
$
(24,018
)
 
$
759,174

% Change
 
 

 
 

 
 

 
 

 
 

 
 

Lincoln Electric Holdings, Inc.
 
 

 
(3.6
%)
 
2.4
%
 
4.5
%
 
(3.2
%)
 
0.2
%
Net sales increased in the three months ended March 31, 2019 primarily as a result of acquisitions and stronger organic sales, partially offset by unfavorable foreign exchange. The increase in Net sales from acquisitions was driven by the acquisitions of Coldwater, Pro Systems and Inovatech within Americas Welding and Worthington within The Harris Products Group.
Gross Profit: 
Gross profit for the three months ended March 31, 2019 increased, as a percent of sales, compared to the prior year due to price management and segment mix.
Selling, General & Administrative ("SG&A") Expenses:
The decrease in SG&A expenses for the three months ended March 31, 2019 as compared to March 31, 2018 is due to favorable foreign exchange, partially offset by higher expense from acquisitions.
Rationalization and Asset Impairment Charges:
The Company recorded net charges of $3,535, $2,814 after-tax, and $10,175, $7,870 after-tax, in the three months ended March 31, 2019 and 2018, respectively, primarily related to severance, asset impairments and gains or losses on the disposal of assets.
Interest Expense, Net:
The increase in Interest expense, net for the three months ended March 31, 2019 as compared to March 31, 2018 was due to lower interest income on marketable securities.

21


Income Taxes:
The effective tax rate was lower for the three months ended March 31, 2019 as compared to March 31, 2018 primarily due to an increase in the tax benefit related to the vesting of stock based compensation in 2019, rationalization charges in regions with low or no tax benefit recorded in 2018 and adjustments and incremental tax expense recorded in 2018 related to the U.S. Tax Cuts and Job Act (the "U.S. Tax Act").
Net Income:
The increase in Net income for the three months ended March 31, 2019 as compared to March 31, 2018 was primarily due to higher Net sales, a lower effective tax rate and lower rationalization and asset impairment charges.
Segment Results
Net Sales:  The table below summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales for the three months ended March 31, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
Change in Net Sales due to:
 
 
 
Net Sales
2018
 
Volume (1)
 
Acquisitions (2)
 
Price (3)
 
Foreign
Exchange
 
Net Sales
2019
Operating Segments
 

 
 

 
 

 
 

 
 

 
 

Americas Welding
$
434,772

 
$
(12,395
)
 
$
12,720

 
$
27,428

 
$
(4,806
)
 
$
457,719

International Welding
247,320

 
(17,917
)
 

 
6,475

 
(17,792
)
 
218,086

The Harris Products Group
75,604

 
2,961

 
5,774

 
450

 
(1,420
)
 
83,369

 
 
 
 
 
 
 
 
 
 
 
 
% Change
 

 
 

 
 

 
 

 
 

 
 

Americas Welding
 

 
(2.9
%)
 
2.9
%
 
6.3
%
 
(1.1
%)
 
5.3
%
International Welding
 

 
(7.2
%)
 

 
2.6
%
 
(7.2
%)
 
(11.8
%)
The Harris Products Group
 

 
3.9
%
 
7.6
%
 
0.6
%
 
(1.9
%)
 
10.3
%
(1) Decrease for Americas Welding due to softer demand associated with the current economic environment. Decrease for International Welding due to integration activities and softer demand in the European market. Increase for The Harris Products Group driven primarily by higher consumables volume.
(2) Increase due to the acquisition of Coldwater, Pro Systems and Inovatech within Americas Welding and Worthington within The Harris Products Group. Refer to Note 4 to the consolidated financial statements for details.
(3) Increase for Americas Welding and International Welding segments due to increased product pricing as a result of higher input costs.

22


Adjusted Earnings Before Interest and Income Taxes: 
Segment performance is measured and resources are allocated based on a number of factors, the primary measure being the Adjusted EBIT profit measure. EBIT is defined as Operating income plus Other income (expense). 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:
 
Three Months Ended March 31,
 
Favorable (Unfavorable)
2019 vs. 2018
 
2019
 
2018
 
$
 
%
Americas Welding:
 

 
 

 
 

 
 

Net sales
$
457,719

 
$
434,772

 
$
22,947

 
5.3
%
Inter-segment sales
29,388

 
26,586

 
2,802

 
10.5
%
Total Sales
$
487,107

 
$
461,358

 
25,749

 
5.6
%
 
 
 
 
 
 
 
 
Adjusted EBIT (4)
$
81,752

 
$
77,439

 
4,313

 
5.6
%
As a percent of total sales (1)
16.8
%
 
16.8
%
 
 

 

International Welding:
 

 
 

 
 

 
 

Net sales
$
218,086

 
$
247,320

 
(29,234
)
 
(11.8
%)
Inter-segment sales
4,209

 
4,509

 
(300
)
 
(6.7
%)
Total Sales
$
222,295

 
$
251,829

 
(29,534
)
 
(11.7
%)
 
 
 
 
 
 
 
 
Adjusted EBIT (5)
$
13,337

 
$
14,973

 
(1,636
)
 
(10.9
%)
As a percent of total sales (2)
6.0
%
 
5.9
%
 
 

 
0.1
%
The Harris Products Group:
 

 
 

 
 

 
 

Net sales
$
83,369

 
$
75,604

 
7,765

 
10.3
%
Inter-segment sales
1,867

 
1,907

 
(40
)
 
(2.1
%)
Total Sales
$
85,236

 
$
77,511

 
7,725

 
10.0
%
 
 
 
 
 
 
 
 
Adjusted EBIT
$
10,519

 
$
9,225

 
1,294

 
14.0
%
As a percent of total sales (3)
12.3
%
 
11.9
%
 
 

 
0.4
%
Corporate / Eliminations:
 
 
 
 
 
 
 
Inter-segment sales
$
(35,464
)
 
$
(33,002
)
 
2,462

 
7.5
%
Adjusted EBIT (6)
(3,042
)
 
(158
)
 
(2,884
)
 
(1,825.3
%)
Consolidated: