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EX-32.1 - EXHIBIT 32.1 - LINCOLN ELECTRIC HOLDINGS INCexhibit321q22015.htm
EX-31.2 - EXHIBIT 31.2 - LINCOLN ELECTRIC HOLDINGS INCexhibit312q22015.htm
EX-31.1 - EXHIBIT 31.1 - LINCOLN ELECTRIC HOLDINGS INCexhibit311q22015.htm

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 June 30, 2015
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
 
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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting 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
 
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 June 30, 2015 was 74,808,048.

1



TABLE OF CONTENTS
 
 
 
EX-31.1
Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
EX-31.2
Certification of the Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
EX-32.1
Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) and Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
664,740

 
$
728,531

 
$
1,322,640

 
$
1,413,593

Cost of goods sold
438,959

 
478,264

 
876,469

 
936,990

Gross profit
225,781

 
250,267

 
446,171

 
476,603

Selling, general & administrative expenses
127,755

 
137,156

 
257,646

 
283,071

Rationalization and asset impairment charges
1,239

 
836

 
1,239

 
819

Operating income
96,787

 
112,275

 
187,286

 
192,713

 
 
 
 
 
 
 
 
Other income (expense):
 

 
 

 
 

 
 

Interest income
738

 
924

 
1,331

 
1,838

Equity earnings in affiliates
979

 
1,575

 
1,828

 
3,136

Other income
317

 
1,078

 
2,927

 
2,161

Interest expense
(4,387
)
 
(986
)
 
(6,231
)
 
(2,556
)
Total other income (expense)
(2,353
)
 
2,591

 
(145
)
 
4,579

Income before income taxes
94,434

 
114,866

 
187,141

 
197,292

Income taxes
23,558

 
37,577

 
47,947

 
63,579

Net income including non-controlling interests
70,876

 
77,289

 
139,194

 
133,713

Non-controlling interests in subsidiaries’ loss
(22
)
 
(43
)
 
(58
)
 
(72
)
Net income
$
70,898

 
$
77,332

 
$
139,252

 
$
133,785

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.95

 
$
0.97

 
$
1.84

 
$
1.67

Diluted earnings per share
$
0.94

 
$
0.96

 
$
1.82

 
$
1.65

Cash dividends declared per share
$
0.29

 
$
0.23

 
$
0.58

 
$
0.46

 
See notes to these consolidated financial statements.

3


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income including non-controlling interests
$
70,876

 
$
77,289

 
$
139,194

 
$
133,713

Other comprehensive income (loss), net of tax:
 
 
 

 
 

 
 

Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges, net of tax of $160 and $218 in the three and six months ended June 30, 2015; $90 and $184 in the three and six months ended June 30, 2014
(579
)
 
(176
)
 
521

 
(597
)
Defined benefit pension plan activity, net of tax of $1,975 and $4,370 in the three and six months ended June 30, 2015; $1,423 and $3,261 in the three and six months ended June 30, 2014

3,571

 
2,536

 
7,109

 
5,080

Currency translation adjustment
15,150

 
12,130

 
(41,402
)
 
(228
)
Other comprehensive income (loss):
18,142

 
14,490

 
(33,772
)
 
4,255

Comprehensive income
89,018

 
91,779

 
105,422

 
137,968

Comprehensive income (loss) attributable to non-controlling interests
5

 
(19
)
 
(572
)
 
633

Comprehensive income attributable to shareholders
$
89,013

 
$
91,798

 
$
105,994

 
$
137,335

 
See notes to these consolidated financial statements.

4


LINCOLN ELECTRIC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
June 30, 2015
 
December 31, 2014
 
(UNAUDITED)
 
(NOTE 1)
ASSETS
 

 
 

Current Assets
 

 
 

Cash and cash equivalents
$
312,737

 
$
278,379

Accounts receivable (less allowance for doubtful accounts of $7,317 in 2015; $7,734 in 2014)
329,223

 
321,862

Inventories:
 

 
 

Raw materials
102,339

 
109,210

Work-in-process
42,309

 
40,927

Finished goods
177,075

 
180,703

Total inventory
321,723

 
330,840

Other current assets
125,553

 
167,596

Total Current Assets
1,089,236

 
1,098,677

 
 
 
 
Property, Plant and Equipment
 

 
 

Land
45,494

 
46,553

Buildings
361,811

 
361,846

Machinery and equipment
693,768

 
694,203

Property, plant and equipment
1,101,073

 
1,102,602

Less accumulated depreciation
671,744

 
665,393

Property, Plant and Equipment, Net
429,329

 
437,209

Non-current assets
431,601

 
403,329

TOTAL ASSETS
$
1,950,166

 
$
1,939,215

 
 
 
 
LIABILITIES AND EQUITY
 

 
 

Current Liabilities
 

 
 

Short-term debt
$
62,595

 
$
68,166

Trade accounts payable
172,114

 
202,482

Other current liabilities
235,847

 
221,771

Total Current Liabilities
470,556

 
492,419

 
 
 
 
Long-Term Liabilities
 

 
 

Long-term debt, less current portion
151,563

 
2,488

Accrued pensions
24,032

 
32,803

Other long-term liabilities
107,357

 
125,724

Total Long-Term Liabilities
282,952

 
161,015

 
 
 
 
Shareholders’ Equity
 

 
 

Common shares
9,858

 
9,858

Additional paid-in capital
266,576

 
258,816

Retained earnings
2,181,813

 
2,086,174

Accumulated other comprehensive loss
(321,880
)
 
(288,622
)
Treasury shares
(940,687
)
 
(783,677
)
Total Shareholders’ Equity
1,195,680

 
1,282,549

Non-controlling interests
978

 
3,232

Total Equity
1,196,658

 
1,285,781

 
 
 
 
TOTAL LIABILITIES AND EQUITY
$
1,950,166

 
$
1,939,215


See notes to these consolidated financial statements.

5


LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Six Months Ended June 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

Net income
$
139,252

 
$
133,785

Non-controlling interests in subsidiaries’ loss
(58
)
 
(72
)
Net income including non-controlling interests
139,194

 
133,713

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

 
 

Rationalization and asset impairment charges
30

 
859

Depreciation and amortization
31,718

 
35,900

Equity earnings in affiliates, net
(488
)
 
(1,497
)
Deferred income taxes
(6,337
)
 
(326
)
Stock-based compensation
3,889

 
4,585

Pension expense
10,604

 
5,476

Pension contributions and payments
(47,705
)
 
(24,164
)
Foreign exchange (gain) loss
(9,182
)
 
21,157

Other, net
5,840

 
(4,757
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 

 
 

Increase in accounts receivable
(13,682
)
 
(43,341
)
Decrease (increase) in inventories
1,540

 
(17,455
)
Decrease (increase) in other current assets
30,632

 
(15,847
)
Decrease in trade accounts payable
(31,217
)
 
(15,449
)
Increase in other current liabilities
13,203

 
43,227

Net change in other long-term assets and liabilities
2,031

 
(3,476
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
130,070

 
118,605

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(29,217
)
 
(39,947
)
Acquisition of businesses, net of cash acquired

 
(892
)
Proceeds from sale of property, plant and equipment
1,421

 
5,509

Other investing activities
2,024

 
778

NET CASH USED BY INVESTING ACTIVITIES
(25,772
)
 
(34,552
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Proceeds from short-term borrowings
1,729

 
1,151

Payments on short-term borrowings
(6,968
)
 
(9,914
)
Amounts due banks, net
2,451

 
71

Proceeds from long-term borrowings
152,500

 
57

Payments on long-term borrowings
(5,662
)
 
(1,508
)
Proceeds from exercise of stock options
4,036

 
4,010

Excess tax benefits from stock-based compensation
1,293

 
2,478

Purchase of shares for treasury
(158,468
)
 
(119,333
)
Cash dividends paid to shareholders
(44,248
)
 
(37,119
)
Other financing activities
(7,996
)
 
(2,330
)
NET CASH USED BY FINANCING ACTIVITIES
(61,333
)
 
(162,437
)
 
 
 
 
Effect of exchange rate changes on Cash and cash equivalents
(8,607
)
 
(17,156
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
34,358

 
(95,540
)
 
 
 
 
Cash and cash equivalents at beginning of period
278,379

 
299,825

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
312,737

 
$
204,285


6

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


NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES
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 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 six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015.
The accompanying Consolidated Balance Sheet at December 31, 2014 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, 2014.
Venezuela — Highly Inflationary Economy
Venezuela is a highly inflationary economy under GAAP.  As a result, the financial statements of the Company’s Venezuelan operation are reported under highly inflationary accounting rules as of January 1, 2010.  Under highly inflationary accounting, the financial statements of the Company’s Venezuelan operation have been remeasured into the Company’s reporting currency and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings. 
In January 2014, the Venezuelan government announced the formation of the National Center of Foreign Trade (“CENCOEX”) to replace the Commission for the Administration of Currency Exchange (“CADIVI”). Effective January 24, 2014, the exchange rate applicable to the settlement of certain transactions through CENCOEX, including payments of dividends and royalties, changed to utilize the Complementary System of Foreign Currency Administration ("SICAD") auction-based exchange rate (the "SICAD rate") as opposed to the official rate. In February 2014, the government announced a new market based foreign exchange system, the SICAD II. The exchange rate established through SICAD II fluctuated daily and was significantly higher than both the official rate and the SICAD rate.
At March 31, 2014, the Company determined that the rate used in remeasuring the Venezuelan operation's financial statements into U.S. dollars would change to the SICAD rate as future remittances for dividend payments could be transacted at the SICAD rate. At March 31, 2014, the SICAD rate was 10.7 bolivars to the U.S. dollar, which resulted in a remeasurement loss on the bolivar-denominated monetary net asset position of $17,665 which was recorded in Selling, general & administrative expenses in the three months ended March 31, 2014. Additionally, the Company incurred higher Cost of goods sold of $3,468 during the second quarter of 2014, related to the adoption of the SICAD rate. The SICAD rate is determined by periodic auctions which may result in additional losses or gains on a remeasurement of the bolivar-denominated monetary net asset position.
In February 2015, the Venezuelan government eliminated the SICAD II rate and announced a new exchange market called the Marginal Currency System ("SIMADI"), which allows for trading based on supply and demand. While there remains considerable uncertainty as to the nature and volume of transactions that will flow through the various currency exchange mechanisms, the Company has determined that the SICAD rate remains the most appropriate exchange rate for the Company to utilize in remeasuring the Venezuelan operation's financial statements into U.S. dollars. As of June 30, 2015, the SICAD rate was 12.8 bolivars to the U.S dollar. If in the future the Company were to convert bolivars at a rate other than the SICAD rate, the Company may realize additional losses or gains to earnings.
Future impacts to earnings of applying highly inflationary accounting for Venezuela on the Company’s consolidated financial statements will be dependent upon the applied currency exchange mechanisms, the movements in the applicable exchange rates between the bolivar and the U.S. dollar and the amount of monetary assets and liabilities included in the Company’s Venezuelan operation’s balance sheet.  The bolivar-denominated monetary net asset position was $3,911 at June 30, 2015, including $4,714 of cash and cash equivalents and the bolivar-denominated monetary net liability position was $1,264 at December 31, 2014, including $2,124 of cash and cash equivalents.  

7

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

New Accounting Pronouncements:
In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share." ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and removes the requirement to make certain disclosures for these investments. The amendment should be applied retrospectively and is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-07 on the Company's financial statement disclosures.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30)." ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the new amendment. The new guidance will be applied on a retrospective basis to each prior reporting period presented. Upon transition, the Company is required to comply with applicable disclosures for a change in accounting principle. The amendment is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2015-03 on the Company's financial statements.
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. To achieve that core principle, the amendment provides five steps that an entity should apply when recognizing revenue. The amendment 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. 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. The FASB recently announced that the ASU 2014-09 will be effective for 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. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on the Company's financial statements.

NOTE 2 — EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 

 
 

 
 

 
 

Net income
$
70,898

 
$
77,332

 
$
139,252

 
$
133,785

Denominator:
 

 
 

 
 

 
 

Basic weighted average shares outstanding
75,000

 
79,873

 
75,621

 
80,260

Effect of dilutive securities - Stock options and awards
773

 
900

 
795

 
934

Diluted weighted average shares outstanding
75,773

 
80,773

 
76,416

 
81,194

Basic earnings per share
$
0.95

 
$
0.97

 
$
1.84

 
$
1.67

Diluted earnings per share
$
0.94

 
$
0.96

 
$
1.82

 
$
1.65

For the three months ended June 30, 2015 and 2014, common shares subject to equity-based awards of 556,371 and 261,725, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the six months ended June 30, 2015 and 2014, common shares subject to equity-based awards of 481,831 and 263,363, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.


8

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

NOTE 3 — ACQUISITIONS
During October 2014, the Company acquired substantially all of the assets of Easom Automation Systems, Inc. ("Easom"). Easom, based in Detroit, Michigan, is an integrator and manufacturer of automation and positioning solutions, serving heavy fabrication, aerospace and automotive OEMs and suppliers. The acquisition advances the Company's leadership position in automated welding and cutting solutions. Easom has annual sales of approximately $30,000. In addition, during 2014, the Company acquired the remaining interest in its majority-owned joint venture, Harris Soldas Especiais S.A.
Pro forma information related to these acquisitions 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 4 — SEGMENT INFORMATION
The Company’s primary business is the design and manufacture of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products.  The Company also has a leading global position in the brazing and soldering alloys market.  The Company has aligned its business units into five operating segments to enhance the utilization of the Company’s worldwide resources and global end user and sourcing initiatives. The operating segments consist of North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group.  The North America Welding segment primarily includes welding operations in the United States, Canada and Mexico.  The Europe Welding segment includes welding operations in Europe, Russia, Africa and the Middle East.  The Asia Pacific Welding segment primarily includes welding operations in China and Australia. The South America Welding segment primarily includes welding operations in Brazil, Colombia and Venezuela. The Harris Products Group, includes the Company’s global cutting, soldering and brazing businesses as well as the 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 earnings before interest and income taxes (“EBIT”), as adjusted.  Segment 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.

9

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:
 
North
America
Welding
 
Europe
Welding
 
Asia
Pacific
Welding
 
South
America
Welding
 
The Harris
Products
Group
 
Corporate /
Eliminations
 
Consolidated
Three Months Ended June 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Net sales
$
415,075

 
$
90,903

 
$
49,043

 
$
37,907

 
$
71,812

 
$

 
$
664,740

Inter-segment sales
25,613

 
4,463

 
2,964

 
118

 
2,716

 
(35,874
)
 

Total
$
440,688

 
$
95,366

 
$
52,007

 
$
38,025

 
$
74,528

 
$
(35,874
)
 
$
664,740

 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
$
77,494

 
$
9,481

 
$
2,244

 
$
1,378

 
$
8,250

 
$
475

 
$
99,322

Special items charge (gain)

 
1,239

 

 

 

 

 
1,239

EBIT
$
77,494

 
$
8,242

 
$
2,244

 
$
1,378

 
$
8,250

 
$
475

 
$
98,083

Interest income
 

 
 

 
 

 
 

 
 

 
 

 
738

Interest expense
 

 
 

 
 

 
 

 
 

 
 

 
(4,387
)
Income before income taxes
 

 
 

 
 

 
 

 
 

 
 

 
$
94,434

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Net sales
$
429,490

 
$
115,574

 
$
66,997

 
$
39,051

 
$
77,419

 
$

 
$
728,531

Inter-segment sales
33,360

 
5,494

 
3,600

 
35

 
2,262

 
(44,751
)
 

Total
$
462,850

 
$
121,068

 
$
70,597

 
$
39,086

 
$
79,681

 
$
(44,751
)
 
$
728,531

 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
$
91,195

 
$
14,899

 
$
365

 
$
4,995

 
$
7,178

 
$
600

 
$
119,232

Special items charge (gain)
(21
)
 
965

 
(108
)
 
3,468

 

 

 
4,304

EBIT
$
91,216

 
$
13,934

 
$
473

 
$
1,527

 
$
7,178

 
$
600

 
$
114,928

Interest income
 

 
 

 
 

 
 

 
 

 
 

 
924

Interest expense
 

 
 

 
 

 
 

 
 

 
 

 
(986
)
Income before income taxes
 

 
 

 
 

 
 

 
 

 
 

 
$
114,866

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

Net sales
$
828,063

 
$
179,319

 
$
98,293

 
$
75,337

 
$
141,628

 
$

 
$
1,322,640

Inter-segment sales
51,742

 
8,056

 
6,234

 
118

 
4,727

 
(70,877
)
 

Total
$
879,805

 
$
187,375

 
$
104,527

 
$
75,455

 
$
146,355

 
$
(70,877
)
 
$
1,322,640

 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
$
148,678

 
$
18,229

 
$
5,372

 
$
4,528

 
$
15,799

 
$
674

 
$
193,280

Special items charge (gain)

 
1,239

 

 

 

 

 
1,239

EBIT
$
148,678

 
$
16,990

 
$
5,372

 
$
4,528

 
$
15,799

 
$
674

 
$
192,041

Interest income
 

 
 

 
 

 
 

 
 

 
 

 
1,331

Interest expense
 

 
 

 
 

 
 

 
 

 
 
 
(6,231
)
Income before income taxes
 

 
 

 
 

 
 

 
 

 
 

 
$
187,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,143,024

 
$
355,965

 
$
270,560

 
$
132,849

 
$
149,983

 
$
(102,215
)
 
$
1,950,166

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

Net sales
$
831,396

 
$
220,980

 
$
128,283

 
$
83,044

 
$
149,890

 
$

 
$
1,413,593

Inter-segment sales
66,303

 
11,354

 
8,049

 
64

 
4,380

 
(90,150
)
 

Total
$
897,699

 
$
232,334

 
$
136,332

 
$
83,108

 
$
154,270

 
$
(90,150
)
 
$
1,413,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
$
162,559

 
$
24,191

 
$
(275
)
 
$
16,760

 
$
13,236

 
$
3,491

 
$
219,962

Special items charge (gain)
(68
)
 
1,004

 
(117
)
 
21,133

 

 

 
21,952

EBIT
$
162,627

 
$
23,187

 
$
(158
)
 
$
(4,373
)
 
$
13,236

 
$
3,491

 
$
198,010

Interest income
 

 
 

 
 

 
 

 
 

 
 

 
1,838

Interest expense
 

 
 

 
 

 
 

 
 

 
 

 
(2,556
)
Income before income taxes
 

 
 

 
 

 
 

 
 

 
 

 
$
197,292

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,150,833

 
$
418,283

 
$
319,965

 
$
149,430

 
$
172,781

 
$
(66,453
)
 
$
2,144,839


10

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

In the three and six months ended June 30, 2015, special items in Europe Welding reflect rationalization activity charges.
In the three and six months ended June 30, 2014, special items in North America Welding, Europe Welding and Asia Pacific Welding reflect rationalization activity charges and credits. South America Welding special items represent charges relating to a Venezuelan remeasurement loss.

NOTE 5 — RATIONALIZATION AND ASSET IMPAIRMENTS
The Company recorded rationalization charges of $1,239 for the six months ended June 30, 2015, primarily related to employee severance and other related costs. A description of each restructuring plan and the related costs follows:
Europe Welding Plans:
During 2015, the Company initiated a rationalization plan within Europe Welding. The plan includes headcount restructuring to better align the cost structures with economic conditions and operating needs. During the six months ended June 30, 2015, the Company recorded charges relating to the Europe Welding plans of $1,239, which represent employee severance and other related costs. The Company expects additional charges up to $400 related to the completion of these activities. At June 30, 2015, liabilities relating to the Europe Welding plans of $665 were recognized in Other current liabilities, which will be substantially paid during 2015.
Asia Pacific Welding Plans:
During the third quarter of 2014, the Company identified assets within the segment for planned divestiture. As of June 30, 2015, $22,842 and $5,887 of assets and liabilities identified for divestiture were classified as held for sale and were recorded in Other current assets and Other current liabilities, respectively.
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 evaluating its cost structure and additional rationalization actions may result in charges in future periods.

NOTE 6 — COMMON SHARE REPURCHASE PROGRAM
The Company has a share repurchase program for up to 45 million of the Company’s common 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.  During the three and six month periods ended June 30, 2015, the Company purchased a total of 0.8 million and 2.3 million shares, respectively.  As of June 30, 2015, there remained 9.0 million common shares available for repurchase under this program.  The repurchased common shares remain in treasury and have not been retired.


11

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

NOTE 7 — EQUITY
Changes in equity for the six months ended June 30, 2015 are as follows:
 
Shareholders’
Equity
 
Non-controlling
Interests
 
Total Equity
Balance, December 31, 2014
$
1,282,549

 
$
3,232

 
$
1,285,781

Comprehensive income (loss):
 

 
 

 
 

Net income (loss)
139,252

 
(58
)
 
139,194

Other comprehensive income (loss)
(33,258
)
 
(514
)
 
(33,772
)
Total comprehensive income (loss)
105,994

 
(572
)
 
105,422

 
 
 
 
 
 
Cash dividends declared - $0.58 per share
(43,613
)
 

 
(43,613
)
Issuance of shares under benefit plans
9,218

 

 
9,218

Purchase of shares for treasury
(158,468
)
 

 
(158,468
)
Transactions with non-controlling interests

 
(1,682
)
 
(1,682
)
Balance, June 30, 2015
$
1,195,680

 
$
978

 
$
1,196,658

Changes in equity for the six months ended June 30, 2014 are as follows:
 
Shareholders’
Equity
 
Non-controlling
Interests
 
Total Equity
Balance, December 31, 2013
$
1,526,602

 
$
4,086

 
$
1,530,688

Comprehensive income (loss):
 

 
 

 
 

Net income (loss)
133,785

 
(72
)
 
133,713

Other comprehensive income (loss)
3,550

 
705

 
4,255

Total comprehensive income (loss)
137,335

 
633

 
137,968

 
 
 
 
 
 
Cash dividends declared - $0.46 per share
(36,779
)
 

 
(36,779
)
Issuance of shares under benefit plans
11,195

 

 
11,195

Purchase of shares for treasury
(119,333
)
 

 
(119,333
)
Transactions with non-controlling interests
(1,484
)
 
(782
)
 
(2,266
)
Balance, June 30, 2014
$
1,517,536

 
$
3,937

 
$
1,521,473

 

12

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 (loss) income ("AOCI") by component, net of taxes for the three months ended June 30, 2015 and 2014:
 
 
Three Months Ended June 30, 2015
 
 
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at March 31, 2015
 
$
1,091

 
$
(194,355
)
 
$
(146,731
)
 
$
(339,995
)
Other comprehensive income (loss)
before reclassification
 
(893
)
 

 
15,123

3 

14,230

Amounts reclassified from AOCI
 
314

1 

3,571

2 



3,885

Net current-period other
comprehensive income (loss)
 
(579
)
 
3,571

 
15,123

 
18,115

Balance at June 30, 2015
 
$
512

 
$
(190,784
)
 
$
(131,608
)
 
$
(321,880
)
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2014
 
 
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
 
Defined benefit pension plan activity
 
Currency translation adjustment
 
Total
Balance at March 31, 2014
 
$
(52
)
 
$
(158,149
)
 
$
(4,656
)
 
$
(162,857
)
Other comprehensive income (loss)
before reclassification
 
(173
)
 

 
12,106

3 

11,933

Amounts reclassified from AOCI
 
(3
)
1 

2,536

2 


 
2,533

Net current-period other
comprehensive income (loss)
 
(176
)
 
2,536

 
12,106

 
14,466

Balance at June 30, 2014
 
$
(228
)
 
$
(155,613
)
 
$
7,450

 
$
(148,391
)
 
 
 
 
 
 
 
 
 
1
During the 2015 period, this AOCI reclassification is a component of Net sales of $8 (net of tax of $(75)) and Cost of goods sold of $306 (net of tax of $205); during the 2014 period, the reclassification is a component of Net sales of $(82) (net of tax of $(10)) and Cost of goods sold of $79 (net of tax of $19). (See Note 15 - Derivatives for additional details.)
2
This AOCI component is included in the computation of net periodic pension costs (net of tax of $1,975 and $1,423 during the three months ended June 30, 2015 and 2014, respectively). (See Note 13 - Retirement and Postretirement Benefit Plans for additional details.)
3
The Other comprehensive income before reclassifications excludes $27 and $24 attributable to Non-controlling interests in the three months ended June 30, 2015 and 2014, respectively.


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 AOCI by component, net of taxes for the six months ended June 30, 2015 and 2014:
 
 
Six Months Ended June 30, 2015
 
 
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, 2014
 
$
(9
)
 
$
(197,893
)
 
$
(90,720
)
 
$
(288,622
)
Other comprehensive income (loss)
before reclassification
 
429

 

 
(40,888
)
3 

(40,459
)
Amounts reclassified from AOCI
 
92

1 

7,109

2 



7,201

Net current-period other
comprehensive income (loss)
 
521

 
7,109

 
(40,888
)
 
(33,258
)
Balance at June 30, 2015
 
$
512

 
$
(190,784
)
 
$
(131,608
)
 
$
(321,880
)
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2014
 
 
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, 2013
 
$
369

 
$
(160,693
)
 
$
8,383

 
$
(151,941
)
Other comprehensive income (loss)
before reclassification
 
(883
)
 

 
(933
)
3 

(1,816
)
Amounts reclassified from AOCI
 
286

1 

5,080

2 


 
5,366

Net current-period other
comprehensive income (loss)
 
(597
)
 
5,080

 
(933
)
 
3,550

Balance at June 30, 2014
 
$
(228
)
 
$
(155,613
)
 
$
7,450

 
$
(148,391
)
 
 
 
 
 
 
 
 
 
1
During the 2015 period, this AOCI reclassification is a component of Net sales of $(521) (net of tax of $(324)) and Cost of goods sold of $613 (net of tax of $407); during the 2014 period, the reclassification is a component of Net sales of $50 (net of tax of $10) and Cost of goods sold of $236 (net of tax of $105). (See Note 15 - Derivatives for additional details.)
2
This AOCI component is included in the computation of net periodic pension costs (net of tax of $4,370 and $3,261 during the six months ended June 30, 2015 and 2014, respectively). (See Note 13 - Retirement and Postretirement Benefit Plans for additional details.)
3
The Other comprehensive income before reclassifications excludes $(514) and $705 attributable to Non-controlling interests in the six months ended June 30, 2015 and 2014, respectively.

NOTE 8 — INVENTORY VALUATION
Inventories are valued at the lower of cost or market.  Fixed manufacturing overhead costs are allocated to inventory based on normal production capacity and abnormal manufacturing costs are recognized as period costs.  For most domestic inventories, cost is determined principally by the last-in, first-out (“LIFO”) method, and for non-U.S. inventories, cost is determined by the first-in, first-out method.  The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time.  Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs.  Actual year-end costs and inventory levels may differ from interim LIFO inventory valuations.  The excess of current cost over LIFO cost was $68,164 and $71,311 at June 30, 2015 and December 31, 2014, respectively.
 

14

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

NOTE 9 — ACCRUED EMPLOYEE BONUS
Other current liabilities at June 30, 2015 and 2014 include accruals for year-end bonuses and related payroll taxes of $59,402 and $69,615, 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 10 — 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, or if the amount of loss cannot be reasonably estimated, disclosure is 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.

NOTE 11 — PRODUCT WARRANTY COSTS
The changes in the carrying amount of product warranty accruals for the six months ended June 30, 2015 and 2014 are as follows:
 
Six Months Ended June 30
 
2015
 
2014
Balance at December 31
$
15,398

 
$
15,180

Accruals for warranties
7,328

 
6,200

Settlements
(6,755
)
 
(5,787
)
Foreign currency translation
(229
)
 
25

Balance at June 30
$
15,742

 
$
15,618

 

15

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

NOTE 12 DEBT
The Company has a line of credit totaling $400,000 through the Amended and Restated Credit Agreement (the “Credit Agreement”), which was amended on September 12, 2014.  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 June 30, 2015, the Company was in compliance with all of its covenants and had $40,000 in outstanding borrowings under the Credit Agreement which was recorded in Short-term debt.  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 LIBOR or the prime rate, at the Company’s election, plus a spread based on the Company’s leverage ratio.
On April 1, 2015, the Company issued Senior Unsecured Notes (the "Notes") in the aggregate principal amount of $350,000 through a private placement, of which $150,000 in proceeds are outstanding as of June 30, 2015 and recorded in Long-term debt, less current portion and $200,000 of which will be received in August 2015. The proceeds are being used for general corporate purposes. The Notes, as shown in the table below, have maturities ranging from 10 to 30 years with a weighted average effective interest rate of 3.5% and an average tenure of 19 years. Interest is payable semi-annually. The Notes contain certain affirmative and negative covenants. As of June 30, 2015, the Company was in compliance with all of its debt covenants.
The maturity and interest rates of the 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
%
 
NOTE 13 RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The components of total pension cost were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
5,038

 
$
5,081

 
$
10,460

 
$
10,144

Interest cost
10,413

 
10,615

 
20,744

 
21,277

Expected return on plan assets
(16,242
)
 
(17,048
)
 
(31,980
)
 
(34,069
)
Amortization of prior service cost
(156
)
 
(152
)
 
(312
)
 
(307
)
Amortization of net loss
5,872

 
4,209

 
11,692

 
8,431

Defined benefit plans
4,925

 
2,705

 
10,604

 
5,476

Multi-employer plans
211

 
267

 
428

 
531

Defined contribution plans
2,945

 
2,819

 
5,961

 
5,653

Total pension cost
$
8,081

 
$
5,791

 
$
16,993

 
$
11,660

The Company voluntarily contributed $45,000 to its defined benefit plans in the United States during the six months ended June 30, 2015. The expected return on plan assets decreased due to changes in the target allocation of plan assets and the amortization of net loss increased due to a lower discount rate and the adoption of new mortality tables for the Company's U.S. defined benefit plans.


16

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

NOTE 14 — INCOME TAXES
The Company recognized $47,947 of tax expense on pre-tax income of $187,141, resulting in an effective income tax rate of 25.6% for the six months ended June 30, 2015.  The effective income tax rate was 32.2% for the six months ended June 30, 2014. The 2015 effective income tax rate was lower than the Company’s statutory rate due to the utilization of U.S. tax credits, reversal of valuation allowance on deferred tax assets more-likely-than-not to be realized and refund interest recognized as a reduction in tax expense. Both the 2015 and 2014 effective income tax rates were lower than the Company’s statutory rate due to income earned in lower tax rate jurisdictions.
As of June 30, 2015, the Company had $15,533 of unrecognized tax benefits.  If recognized, approximately $8,328 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 2010.  The Company is currently subject to various U.S. 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 $3,138 in previously unrecognized tax benefits by the end of the second quarter 2016.
In July 2012, the Company received a Notice of Reassessment (the "Reassessment") from the Canada Revenue Agency in respect to its 2004 to 2010 taxation years to disallow the deductibility of inter-company dividends. The Company appealed the Reassessment to the Tax Court of Canada. As part of the appeals process to the Tax Court of Canada, the Company had elected to deposit the entire amount of the dispute in order to suspend continuing interest charges.
In September 2014, the Department of Justice Canada consented to a judgment, wholly in the Company's favor. In vacating the Reassessment, this tax litigation is concluded. In December 2014, the Company received a partial refund of the cash deposit. In the first quarter of 2015, the Company received a refund of $24,976 which was substantially all of the remaining cash deposit. The Company also received interest on the deposit of $1,596.

NOTE 15 — DERIVATIVES
The Company uses derivatives to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business.  Derivative contracts to hedge currency and commodity exposures are generally written on a short-term basis but may cover exposures for up to two years while interest rate contracts may cover longer periods consistent with the terms of the underlying debt.  The Company does not enter into derivatives for trading or speculative purposes.
All derivatives are recognized at fair value on the Company’s Consolidated Balance Sheets.  The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting.  The Company formally documents the relationship of the hedge with the hedged item as well as the risk-management strategy for all designated hedges.  Both at inception and on an ongoing basis, the hedging instrument is assessed as to its effectiveness, when applicable.  If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued.  The cash flows from settled derivative contracts are recognized in operating activities in the Company’s Consolidated Statements of Cash Flows.  Hedge ineffectiveness was immaterial in the six months ended June 30, 2015 and 2014.
The Company is subject to the credit risk of the counterparties to derivative instruments.  Counterparties include a number of major banks and financial institutions.  The Company manages individual counterparty exposure by monitoring the credit rating of the counterparty and the size of financial commitments and exposures between the Company and the counterparty.  None of the concentrations of risk with any individual counterparty was considered significant at June 30, 2015.  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 $35,740 at June 30, 2015 and $27,265 at December 31, 2014. The effective portions of the fair value gains or losses on these cash flow hedges are recognized in AOCI and subsequently reclassified to Cost of goods sold or Sales for hedges of purchases and sales, respectively, as the underlying hedged transactions affect earnings.

17

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

Net Investment Hedges
The Company has foreign currency forward contracts that qualify and are designated as net investment hedges.  The dollar equivalent gross notional amount of these short-term contracts was $7,468 at June 30, 2015 and $60,734 at December 31, 2014. The effective portions of the fair value gains or losses on these net investment hedges are recognized in AOCI and subsequently reclassified to Selling, general and administrative expenses, as the underlying hedged investment is liquidated.
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 $265,323 at June 30, 2015 and $280,949 at December 31, 2014. The fair value gains or losses from these contracts are recognized in Selling, general and administrative expenses, offsetting the losses or gains on the exposures being hedged.
The Company had short-term silver and copper forward contracts with notional amounts of $3,032 and $960, respectively, at June 30, 2015 and notional amounts of $4,467 and $1,066, respectively, at December 31, 2014.  Realized and unrealized gains and losses on these contracts are recognized in Costs of goods sold.
Fair values of derivative instruments in the Company’s Consolidated Balance Sheets follow:
 
 
June 30, 2015
 
December 31, 2014
Derivatives by hedge designation 
 
Other Current Assets
 
Other Current Liabilities
 
Other Current Assets
 
Other Current Liabilities
Designated as hedging instruments:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
195

 
$
424

 
$
461

 
$
935

Net investment contracts
 
64

 

 
1,091

 
469

Not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
612

 
1,420

 
482

 
3,638

Commodity contracts
 
63

 
24

 
47

 
69

Total derivatives
 
$
934

 
$
1,868

 
$
2,081

 
$
5,111

The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income for the three and six month periods ended June 30, 2015 and 2014 consisted of the following:
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivatives by hedge designation
 
Classification of gain (loss)
 
2015
 
2014
 
2015
 
2014
Not designated as hedges:
 
 
 
 

 
 

 
 
 
 
Foreign exchange contracts
 
Selling, general & administrative expenses
 
$
2,512

 
$
1,259

 
$
(7,092
)
 
$
1,298

Commodity contracts
 
Cost of goods sold
 
194

 
(505
)
 
50

 
(501
)
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
 
June 30, 2015
 
December 31, 2014
Foreign exchange contracts
 
$
(221
)
 
$
(9
)
Net investment contracts
 
733

 

The Company expects a loss of $221 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 June 30,
 
Six Months Ended June 30,
Derivative type
 
Gain (loss) reclassified from AOCI to:
 
2015
 
2014
 
2015
 
2014
Foreign exchange contracts
 
Sales
 
$
8

 
$
(82
)
 
$
(521
)
 
$
50

 
 
Cost of goods sold
 
306

 
79

 
613

 
236


18

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

NOTE 16 - FAIR VALUE
The following table provides a summary of assets and liabilities as of June 30, 2015, measured at fair value on a recurring basis:
Description
 
Balance as of
June 30, 2015
 
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
 
$
807

 
$

 
$
807

 
$

Commodity contracts
 
63

 

 
63

 

Net investment contracts
 
64

 

 
64

 

Total assets
 
$
934

 
$

 
$
934

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
1,844

 
$

 
$
1,844

 
$

Commodity contracts
 
24

 

 
24

 

Contingent consideration
 
7,507

 

 

 
7,507

Forward contract
 
19,194

 

 

 
19,194

Deferred compensation
 
22,990

 

 
22,990

 

Total liabilities
 
$
51,559

 
$

 
$
24,858

 
$
26,701

The following table provides a summary of assets and liabilities as of December 31, 2014, measured at fair value on a recurring basis:
Description
 
Balance as of December 31, 2014
 
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
 
$
943

 
$

 
$
943

 
$

Commodity contracts
 
47

 

 
47

 

Net investment contracts
 
1,091

 

 
1,091

 

Total assets
 
$
2,081

 
$

 
$
2,081

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Foreign exchange contracts
 
$
4,573

 
$

 
$
4,573

 
$

Commodity contracts
 
69

 

 
69

 

Net investment contracts
 
469

 

 
469

 

Contingent consideration
 
6,912

 

 

 
6,912

Forward contract
 
25,268

 

 

 
25,268

Deferred compensation
 
21,839

 

 
21,839

 

Total liabilities
 
$
59,130

 
$

 
$
26,950

 
$
32,180

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 net investment contracts using Level 2 inputs based on observable spot and forward rates in active markets.  The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions.  During the six months ended June 30, 2015, there were no transfers between Levels 1, 2 or 3.

19

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

In connection with an acquisition, the Company recorded a contingent consideration fair valued at $7,507 as of June 30, 2015, which reflects a $595 increase in the liability from December 31, 2014.  The contingent consideration is based upon estimated sales for the five-year period ending December 31, 2015 and will be paid in 2016 based on actual sales during the period.  The fair value of the contingent consideration is a Level 3 valuation and fair valued using a probability weighted discounted cash flow analysis. 
In connection with an acquisition, the Company obtained a controlling financial interest in the acquired entity and at the same time entered into a contract to obtain the remaining financial interest in the entity over a three-year period. The amount to be paid to obtain the remaining financial interest will be based upon actual financial results of the entity. A liability was recorded for the Canadian dollar denominated forward contract at a fair value of $19,194 as of June 30, 2015. The change in liability from December 31, 2014 was primarily the result of a $7,140 payment to acquire an additional financial interest in the entity offset by additional accruals of $2,798 for the six months ended June 30, 2015. The fair value of the contract is a Level 3 valuation and is based on the present value of the expected future payments. The expected future payments are based on a multiple of forecast earnings and cash flows over the three-year period ending December 31, 2016, present valued utilizing a risk based discount rates of 3.5% reflective of the Company's cost of debt and 13.9% as a risk adjusted cost of capital and annual earnings before interest and taxes with growth rates ranging from 5.2% to 32.6%.
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.
During the third quarter of 2014, the Company identified assets within Asia Pacific Welding for planned divestiture. As of June 30, 2015, the assets identified for divestiture were classified as held for sale and recorded at their fair value as determined using a Level 3 discounted cash flow valuation model. As of June 30, 2015, $22,842 and $5,887 of assets and liabilities held for sale were recorded in Other current assets and Other current liabilities, respectively.
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 June 30, 2015 and December 31, 2014.  The fair value of long-term debt at June 30, 2015 and December 31, 2014, including the current portion, was approximately $96,472 and $9,323, respectively, which was determined using available market information and methodologies requiring judgment.  The carrying value of this debt at such dates was $157,074 and $9,499, 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.

20


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, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes.  The Company’s product offering also includes computer numeric controlled plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing.  In addition, the Company has a leading global position in the brazing and soldering alloys market.
The Company’s products are sold in both domestic and international markets.  In North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products.  Outside of North America, 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. 
Results of Operations
Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014
 
Three Months Ended June 30,
 
2015
 
2014
 
Change
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
Amount
 
%
Net sales
$
664,740

 
100.0
%
 
$
728,531

 
100.0