LINCOLN ELECTRIC HOLDINGS INC - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐ 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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of exchange on which registered
Common Shares, without par value	LECO	The NASDAQ Stock Market LLC

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 ý No ☐

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 ý No ☐

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	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

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.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ý

The number of shares outstanding of the registrant’s common shares as of September 30, 2019 was 61,148,658.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)		3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)		4
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)		5
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)		6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)		8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		35
Item 4. Controls and Procedures		35

PART II. OTHER INFORMATION		36
Item 1. Legal Proceedings		36
Item 1A. Risk Factors		36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 4. Mine Safety Disclosures		37
Item 6. Exhibits		37
Signatures		38
EX-10.1	First Amendment, dated as of July 30, 2019, to the Note Purchase Agreement dated as of April 1, 2015, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc. and the purchasers party thereto (filed herewith).
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

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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 September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net sales (Note 2)	$	730,783		$	737,099		$	2,266,965		$	2,284,847
Cost of goods sold	492,432			485,547			1,500,312			1,506,625
Gross profit	238,351			251,552			766,653			778,222
Selling, general & administrative expenses	148,312			148,129			472,108			473,260
Rationalization and asset impairment charges (Note 6)	1,495			2,636			6,337			24,353
Operating income	88,544			100,787			288,208			280,609
Interest expense, net	6,400			3,969			17,621			13,222
Other income (expense) (Note 14)	9,653			(1,074		)	17,612			6,818
Income before income taxes	91,797			95,744			288,199			274,205
Income taxes (Note 15)	19,340			25,209			58,832			73,991
Net income including non-controlling interests	72,457			70,535			229,367			200,214
Non-controlling interests in subsidiaries’ earnings (loss)	(4		)	(4		)	(26		)	(13		)
Net income	$	72,461		$	70,539		$	229,393		$	200,227

Basic earnings per share (Note 3)	$	1.18		$	1.09		$	3.68		$	3.07
Diluted earnings per share (Note 3)	$	1.17		$	1.07		$	3.64		$	3.03
Cash dividends declared per share	$	0.47		$	0.39		$	1.41		$	1.17

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income including non-controlling interests	$	72,457		$	70,535		$	229,367		$	200,214
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges, net of tax of ($66) and ($121) in the three and nine months ended September 30, 2019; $390 and $415 in the three and nine months ended September 30, 2018.	(348		)	1,416			(320		)	1,039
Defined benefit pension plan activity, net of tax of $536 and $673 in the three and nine months ended September 30, 2019; $1,278 and $1,927 in the three and nine months ended September 30, 2018.	613			3,855			2,491			5,863
Currency translation adjustment	(24,025		)	(467		)	(14,040		)	(31,422		)
Other comprehensive income (loss):	(23,760		)	4,804			(11,869		)	(24,520		)
Comprehensive income	48,697			75,339			217,498			175,694
Comprehensive income (loss) attributable to non-controlling interests	254			(65		)	234			(105		)
Comprehensive income attributable to shareholders	$	48,443		$	75,404		$	217,264		$	175,799

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



	September 30, 2019			December 31, 2018
	(UNAUDITED)			(NOTE 1)
ASSETS
Current Assets
Cash and cash equivalents	$	156,612		$	358,849
Accounts receivable (less allowance for doubtful accounts of $16,893 in 2019; $12,827 in 2018)	395,355			396,885
Inventories (Note 9)	411,120			361,829
Other current assets	119,347			120,236
Total Current Assets	1,082,434			1,237,799
Property, plant and equipment (less accumulated depreciation of $803,332 in 2019; $778,817 in 2018)	523,229			478,801
Goodwill	331,311			281,294
Other assets	424,186			351,931
TOTAL ASSETS	$	2,361,160		$	2,349,825

LIABILITIES AND EQUITY
Current Liabilities
Short-term debt (Note 12)	$	13,293		$	111
Trade accounts payable	243,837			268,600
Accrued employee compensation and benefits	133,361			94,202
Other current liabilities	181,946			175,269
Total Current Liabilities	572,437			538,182
Long-term debt, less current portion (Note 12)	713,884			702,549
Other liabilities	261,031			221,502
Total Liabilities	1,547,352			1,462,233
Shareholders’ Equity
Common shares	9,858			9,858
Additional paid-in capital	377,584			360,308
Retained earnings	2,704,486			2,564,440
Accumulated other comprehensive loss	(305,868		)	(293,739		)
Treasury shares	(1,973,136		)	(1,753,925		)
Total Shareholders’ Equity	812,924			886,942
Non-controlling interests	884			650
Total Equity	813,808			887,592
TOTAL LIABILITIES AND TOTAL EQUITY	$	2,361,160		$	2,349,825

See notes to these consolidated financial statements.

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
Net income								85,452									(8		)	85,444
Unrecognized amounts from defined benefit pension plans, net of tax											1,091									1,091
Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax											(301		)							(301		)
Currency translation adjustment											4,884						(35		)	4,849
Cash dividends declared – $0.47 per share								(29,279		)										(29,279		)
Stock-based compensation activity	13				4,783									136						4,919
Purchase of shares for treasury	(1,034	)												(85,330		)				(85,330		)
Other					(282		)	282												—
Balance at June 30, 2019	61,779		$	9,858	$	368,919		$	2,661,720		$	(281,850	)	$	(1,913,219	)	$	630		$	846,058
Net income								72,461									(4		)	72,457
Unrecognized amounts from defined benefit pension plans, net of tax											613									613
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax											(348		)							(348		)
Currency translation adjustment											(24,283		)				258			(24,025		)
Cash dividends declared – $0.47 per share								(28,931		)										(28,931		)
Stock-based compensation activity	107				7,996									1,111						9,107
Purchase of shares for treasury	(737	)												(61,028		)				(61,028		)
Other					669			(764		)										(95		)
Balance at September 30, 2019	61,149		$	9,858	$	377,584		$	2,704,486		$	(305,868	)	$	(1,973,136	)	$	884		$	813,808

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, 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
Net income								68,864									(5		)	68,859
Unrecognized amounts from defined benefit pension plans, net of tax											721									721
Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax											(1,232		)							(1,232		)
Currency translation adjustment											(50,252		)				(90		)	(50,342		)
Cash dividends declared – $0.39 per share								(25,701		)										(25,701		)
Stock-based compensation activity	15				6,215									(176		)				6,039
Purchase of shares for treasury	(402	)												(35,508		)				(35,508		)
Other					(194		)	194												—
Balance at June 30, 2018	65,172		$	9,858	$	351,632		$	2,461,130		$	(276,479	)	$	(1,603,409	)	$	776		$	943,508
Net income								70,539									(4		)	70,535
Unrecognized amounts from defined benefit pension plans, net of tax											3,855									3,855
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax											1,416									1,416
Currency translation adjustment											(406		)				(61		)	(467		)
Cash dividends declared – $0.39 per share								(25,346		)										(25,346		)
Stock-based compensation activity	41				5,190									422						5,612
Purchase of shares for treasury	(767	)												(71,245		)				(71,245		)
Other					927			(927		)										—
Balance at September 30, 2018	64,446		$	9,858	$	357,749		$	2,505,396		$	(271,614	)	$	(1,674,232	)	$	711		$	927,868

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	229,393		$	200,227
Non-controlling interests in subsidiaries’ loss	(26		)	(13		)
Net income including non-controlling interests	229,367			200,214
Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities:
Rationalization and asset impairment net charges (gains) (Note 6)	1,069			(1,408		)
Depreciation and amortization	60,400			53,946
Equity earnings in affiliates, net	(1,266		)	(1,427		)
Deferred income taxes	4,045			4,444
Stock-based compensation	12,602			13,583
Gain on change in control	(7,601		)	—
Other, net	(7,362		)	(5,945		)
Changes in operating assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable	24,103			(25,492		)
Increase in inventories	(36,476		)	(41,533		)
Decrease (increase) in other current assets	3,227			(12,081		)
Decrease in trade accounts payable	(34,202		)	(17,523		)
Increase in other current liabilities	31,113			58,397
Net change in other assets and liabilities	1,647			4,602
NET CASH PROVIDED BY OPERATING ACTIVITIES	280,666			229,777

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(53,551		)	(48,746		)
Acquisition of businesses, net of cash acquired	(136,735		)	6,591
Proceeds from sale of property, plant and equipment	9,491			10,585
Purchase of marketable securities	—			(268,335		)
Proceeds from marketable securities	—			348,178
Other investing activities	2,000			—
NET CASH (USED BY) PROVIDED BY INVESTING ACTIVITIES	(178,795		)	48,273

CASH FLOWS FROM FINANCING ACTIVITIES
Amounts due banks, net	2,439			(639		)
Payments on long-term borrowings	(6		)	(7		)
Proceeds from exercise of stock options	6,210			4,448
Purchase of shares for treasury (Note 8)	(221,942		)	(121,477		)
Cash dividends paid to shareholders	(89,162		)	(76,674		)
Other financing activities	—			(2,170		)
NET CASH USED BY FINANCING ACTIVITIES	(302,461		)	(196,519		)

Effect of exchange rate changes on Cash and cash equivalents	(1,647		)	(10,032		)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(202,237		)	71,499

Cash and cash equivalents at beginning of period	358,849			326,701
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	156,612		$	398,200

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Dollars in thousands, except per share amounts

NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

As used in this report, the term “Company,” except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest.

The consolidated financial statements include the accounts of all legal entities in which the Company holds a controlling interest. The Company is also considered to have a controlling interest in a variable interest entity (“VIE”) if the Company determines it is the primary beneficiary of the VIE. Investments in legal entities in which the Company does not own a majority interest but has the ability to exercise significant influence over operating and financial policies are accounted for using the equity method.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. However, in the opinion of management, these unaudited consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods. Operating results for the nine months ended September 30, 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.

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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.
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), issued June 2016.	ASU 2016-13 modifies disclosure and measurement requirements related to credit losses. The ASU impacts various financial instruments, including but not limited to, trade receivables. Topic 326 requires that an entity estimate impairment of trade receivables based on expected losses rather than incurred losses. 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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Consumables	$	420,980	$	426,837	$	1,308,788	$	1,329,768
Equipment	309,803		310,262		958,177		955,079
Net sales	$	730,783	$	737,099	$	2,266,965	$	2,284,847

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 September 30, 2019, the Company recorded $21,544 related to advance customer payments and $12,854 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 September 30, 2019 and December 31, 2018, $36,568 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.

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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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Numerator:
Net income	$	72,461	$	70,539	$	229,393	$	200,227
Denominator (shares in 000's):
Basic weighted average shares outstanding	61,380		64,821		62,282		65,245
Effect of dilutive securities - Stock options and awards	681		831		690		810
Diluted weighted average shares outstanding	62,061		65,652		62,972		66,055
Basic earnings per share	$	1.18	$	1.09	$	3.68	$	3.07
Diluted earnings per share	$	1.17	$	1.07	$	3.64	$	3.03

For the three months ended September 30, 2019 and 2018, common shares subject to equity-based awards of 548,049 and 346,168, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended September 30, 2019 and 2018, common shares subject to equity-based awards of 514,402 and 317,528, 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 July 2019, the Company acquired the controlling stake of Kaynak Tekniği Sanayi ve Ticaret A.Ş. (“Askaynak”). Askaynak, based in Turkey, is a supplier and manufacturer of welding consumables, arc welding equipment, including plasma and oxy-fuel cutting equipment and robotic welding systems. The acquisition advances the Company's regional growth strategy in Europe, the Middle East and Africa.

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 compliments 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, broadened 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 accelerated 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 scaled 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.

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Dollars in thousands, except per share amounts

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.

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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 September 30, 2019
Net sales	$	443,521	$	205,378		$	81,884	$	—		$	730,783
Inter-segment sales	31,101		4,441			1,857		(37,399		)	—
Total	$	474,622	$	209,819		$	83,741	$	(37,399	)	$	730,783

Adjusted EBIT	$	74,110	$	10,184		$	11,038	$	(1,632	)	$	93,700
Special items charge (gain) ⁽¹⁾	—		(4,497		)	—		—			(4,497		)
EBIT	$	74,110	$	14,681		$	11,038	$	(1,632	)	$	98,197
Interest income											491
Interest expense											(6,891		)
Income before income taxes											$	91,797
Three Months Ended September 30, 2018
Net sales	$	454,010	$	209,622		$	73,467	$	—		$	737,099
Inter-segment sales	31,845		3,663			1,537		(37,045		)	—
Total	$	485,855	$	213,285		$	75,004	$	(37,045	)	$	737,099

Adjusted EBIT	$	89,253	$	10,721		$	8,676	$	(1,099	)	$	107,551
Special items charge (gain) ⁽²⁾	4,232		2,636			—		970			7,838
EBIT	$	85,021	$	8,085		$	8,676	$	(2,069	)	$	99,713
Interest income											1,993
Interest expense											(5,962		)
Income before income taxes											$	95,744
Nine Months Ended September 30, 2019
Net sales	$	1,377,847	$	635,770		$	253,348	$	—		$	2,266,965
Inter-segment sales	95,300		12,838			5,837		(113,975		)	—
Total	$	1,473,147	$	648,608		$	259,185	$	(113,975	)	$	2,266,965

Adjusted EBIT	$	240,713	$	38,699		$	35,045	$	(8,643	)	$	305,814
Special items charge (gain) ⁽¹⁾	3,115		(4,925		)	—		1,804			(6		)
EBIT	$	237,598	$	43,624		$	35,045	$	(10,447	)	$	305,820
Interest income											2,047
Interest expense											(19,668		)
Income before income taxes											$	288,199
Nine Months Ended September 30, 2018
Net sales	$	1,351,297	$	700,315		$	233,235	$	—		$	2,284,847
Inter-segment sales	89,671		13,669			5,447		(108,787		)	—
Total	$	1,440,968	$	713,984		$	238,682	$	(108,787	)	$	2,284,847

Adjusted EBIT	$	254,850	$	41,970		$	28,058	$	(4,443	)	$	320,435
Special items charge (gain) ⁽²⁾	4,990		24,353			—		3,665			33,008
EBIT	$	249,860	$	17,617		$	28,058	$	(8,108	)	$	287,427
Interest income											5,273
Interest expense											(18,495		)
Income before income taxes											$	274,205


(1)	In the three months ended September 30, 2019, special items reflect Rationalization and asset impairment charges of $1,495, amortization of step up in value of acquired inventories of $1,609 related to the acquisition of Askaynak and

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Dollars in thousands, except per share amounts

gain on change in control of $7,601 related to the acquisition of Askaynak in International Welding. In the nine months ended September 30, 2019, special items reflect Rationalization and asset impairment charges of $1,716 in Americas Welding and $4,621 in International Welding, amortization of step up in value of acquired inventories of $1,399 related to the acquisition of Baker Industries in Americas Welding and $1,609 related to the acquisition of Askaynak in International Welding, gains on disposals of assets of $3,554 in International Welding and acquisition transaction and integration costs of $1,804 in Corporate / Eliminations related to the Air Liquide Welding acquisition and a gain on change in control of $7,601 related to the acquisition of Askaynak.

(2)

In the three months ended September 30, 2018, special items reflect pension settlement charges of $4,232 in Americas Welding, rationalization and asset impairment charges of $2,636 in International Welding and transaction and integration costs of $970 in Corporate / Eliminations related to the Air Liquide Welding acquisition. In the nine months ended September 30, 2018, special items reflect pension settlement charges of $4,990 in Americas Welding, Rationalization and asset impairment charges of $24,353 in International Welding and acquisition transaction and integration costs of $3,665 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 $6,337 in the nine months ended September 30, 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 September 30, 2019, liabilities of $1,903 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 September 30, 2019, liabilities of $528 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.

The following table summarizes the activity related to rationalization liabilities:



	Nine Months Ended September 30, 2019
Balance, December 31, 2018	$	11,192
Payments and other adjustments	(14,029		)
Charged to expense	5,268
Balance, September 30, 2019	$	2,431

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Dollars in thousands, except per share amounts

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 September 30, 2019 and 2018:



	Three Months Ended September 30, 2019
	Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges				Defined benefit pension plan activity				Currency translation adjustment				Total
Balance at June 30, 2019	$	1,722			$	(80,171	)		$	(203,401	)		$	(281,850	)
Other comprehensive income (loss) before reclassification	(268		)		—				(24,283		)	³	(24,551		)
Amounts reclassified from AOCI	(80		)	¹	613			²	—				533
Net current-period other comprehensive income (loss)	(348		)		613				(24,283		)		(24,018		)
Balance at September 30, 2019	$	1,374			$	(79,558	)		$	(227,684	)		$	(305,868	)

	Three Months Ended September 30, 2018
	Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges				Defined benefit pension plan activity				Currency translation adjustment				Total
Balance at June 30, 2018	$	498			$	(83,269	)		$	(193,708	)		$	(276,479	)
Other comprehensive income (loss) before reclassification	1,218				—				(406		)	³	812
Amounts reclassified from AOCI	198			¹	3,855			²	—				4,053
Net current-period other comprehensive income (loss)	1,416				3,855				(406		)		4,865
Balance at September 30, 2018	$	1,914			$	(79,414	)		$	(194,114	)		$	(271,614	)


(1)	During the 2019 period, this AOCI reclassification is a component of Net sales of $(15) and Cost of goods sold of $(95) (net of tax of $(22)); during the 2018 period, the reclassification is a component of Net sales of $(124) (net of tax of $(19)) and Cost of goods sold of $74 (net of tax of $(5)). 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 $536 and $1,278 during the three months ended September 30, 2019 and 2018, respectively). See Note 13 to the consolidated financial statements for additional details.


(3)	The Other comprehensive income (loss) before reclassifications excludes $258 and $(61) attributable to Non-controlling interests in the three months ended September 30, 2019 and 2018, respectively.

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Dollars in thousands, except per share amounts

The following tables set forth the total changes in AOCI by component, net of taxes, for the nine months ended September 30, 2019 and 2018:



	Nine Months Ended September 30, 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	521				—				(14,300		)	³	(13,779		)
Amounts reclassified from AOCI	(841		)	¹	2,491			²	—				1,650
Net current-period other comprehensive income (loss)	(320		)		2,491				(14,300		)		(12,129		)
Balance at September 30, 2019	$	1,374			$	(79,558	)		$	(227,684	)		$	(305,868	)

	Nine Months Ended September 30, 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	987				—				(31,330		)	³	(30,343		)
Amounts reclassified from AOCI	52			¹	5,863			²	—				5,915
Net current-period other comprehensive income (loss)	1,039				5,863				(31,330		)		(24,428		)
Balance at September 30, 2018	$	1,914			$	(79,414	)		$	(194,114	)		$	(271,614	)


(1)	During the 2019 period, this AOCI reclassification is a component of Net sales of $557 (net of tax of $203) and Cost of goods sold of $(284) (net of tax of $(82)); during the 2018 period, the reclassification is a component of Net sales of $(12) (net of tax of $(25)) and Cost of goods sold of $40 (net of tax of $(24)). 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 $673 and $1,927 during the nine months ended September 30, 2019 and 2018, respectively). See Note 13 to the consolidated financial statements for additional details.


(3)	The Other comprehensive income (loss) before reclassifications excludes $260 and $(92) attributable to Non-controlling interests in the nine months ended September 30, 2019 and 2018, respectively.

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 three months ended September 30, 2019, the Company purchased a total of 0.7 million shares at an average cost per share of $82.80. During the nine months ended September 30, 2019, the Company purchased a total of 2.6 million shares at an average cost per share of $83.18. As of September 30, 2019, there remained 3.6 million common shares available for repurchase under this program. The repurchased common shares remain in treasury and have not been retired.

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Dollars in thousands, except per share amounts

NOTE 9 — INVENTORIES

Inventories in the Condensed Consolidated Balance Sheets are comprised of the following components:



	September 30, 2019		December 31, 2018
Raw materials	$	107,278	$	103,820
Work-in-process	69,671		53,950
Finished goods	234,171		204,059
Total	$	411,120	$	361,829

At September 30, 2019 and December 31, 2018, approximately 36% 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 $77,112 and $79,626 at September 30, 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. The table below summarizes the right-of-use assets and lease liabilities in the Company's Condensed Consolidated Balance sheets:



Operating Leases	Balance Sheet Classification	September 30, 2019
Right-of-use assets	Other assets	$	53,732

Current liabilities	Other current liabilities	$	13,958
Noncurrent liabilities	Other liabilities	40,285
Total lease liabilities		$	54,243

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 its incremental borrowing 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. Variable or short-term lease costs contained within the Company’s operating leases are not material. Most leases include one or more options to renew, which can extend the lease term from 1 year to 11 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 $6,290 and $18,725 in the three and nine months ended September 30, 2019, respectively. Cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2019 respectively was $4,528 and $13,761 and is included in Net cash provided by operating activities in the Company's Consolidated Statements of Cash Flows. Right-of-use assets obtained in exchange for operating lease liabilities during the three and nine months ended September 30, 2019 were $1,550 and $16,223, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

The total future minimum lease payments for noncancelable operating leases were as follows:



	September 30, 2019
2019	$	4,014
2020	14,680
2021	11,169
2022	8,473
2023	6,902
After 2023	16,016
Total lease payments	$	61,254
Less: Imputed interest	(7,011		)
Operating lease liabilities	$	54,243

As of September 30, 2019, the weighted average remaining lease term is 6.3 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:



	Nine Months Ended September 30,
	2019			2018
Balance at beginning of year	$	19,778		$	22,029
Accruals for warranties	12,494			6,855
Settlements	(11,787		)	(8,064		)
Foreign currency translation and other adjustments	(125		)	349
Balance at September 30	$	20,360		$	21,169

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 term of 5 years and may be increased, subject to certain conditions, by an additional amount up to $100,000. The interest rate on borrowings is based on either the London Inter-Bank Offered Rate ("LIBOR") or the prime rate, plus a spread based on the Company’s leverage ratio, at the Company’s election. The Company amended and restated the Credit Agreement on June 30, 2017, extending the maturity of the line of credit to June 30, 2022. The Credit Agreement contains customary affirmative, negative and financial covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets, transactions with affiliates and a fixed charges coverage ratio and total leverage ratio. As of September 30, 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. The Notes contain certain affirmative and negative covenants. As of September 30, 2019, the Company was in compliance with all of its debt covenants relating to the Notes.

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Dollars in thousands, except per share amounts

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 term of 5 years 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 September 30, 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 September 30,												Nine Months Ended September 30,
	2019						2018						2019						2018
	U.S. pension plans			Non-U.S. pension plans			U.S. pension plans			Non-U.S. pension plans			U.S. pension plans			Non-U.S. pension plans			U.S. pension plans			Non-U.S. pension plans
Service cost	$	35		$	697		$	35		$	796		$	105		$	2,126		$	105		$	2,479
Interest cost	4,652			903			4,574			867			13,958			2,761			13,561			2,774
Expected return on plan assets	(6,245		)	(1,087		)	(6,450		)	(1,174		)	(18,735		)	(3,317		)	(20,281		)	(3,714		)
Amortization of prior service cost	—			16			—			—			—			47			—			1
Amortization of net loss	413			720			355			546			1,240			1,877			1,123			1,676
Settlement charges ⁽¹⁾	—			—			4,232			—			—			—			4,990			—
Defined benefit plans	(1,145		)	1,249			2,746			1,035			(3,432		)	3,494			(502		)	3,216
Multi-employer plans	—			227			—			226			—			717			—			687
Defined contribution plans	5,506			692			5,712			813			17,205			1,615			17,216			2,678
Total pension cost	$	4,361		$	2,168		$	8,458		$	2,074		$	13,773		$	5,826		$	16,714		$	6,581

(1) Pension settlement charges resulting from lump sum pension payments in the three and nine months ended September 30, 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 September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
Equity earnings in affiliates	$	206	$	542		$	3,002	$	3,301
Other components of net periodic pension (cost) income ⁽¹⁾	628		(2,950		)	2,169		(130		)
Other income ⁽²⁾	8,819		1,334			12,441		3,647
Total Other income (expense)	$	9,653	$	(1,074	)	$	17,612	$	6,818

(1) Includes pension settlement charges in the three and nine months ended September 30, 2018 of $4,232 and $4,990. Refer to Note 13 to the consolidated financial statements for details.


(2)	Includes a gain on change in control related to the acquisition of Askaynak in the three and nine months ended September 30, 2019 of $7,601. Refer to Note 4 to the consolidated financial statements for details.

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NOTE 15 — INCOME TAXES

The Company recognized $58,832 of tax expense on pretax income of $288,199, resulting in an effective income tax rate of 20.4% for the nine months ended September 30, 2019. The effective income tax rate was 27.0% for the nine months ended September 30, 2018.

The decrease in the effective tax rate for the nine months ended September 30, 2019, as compared with the same period in 2018, was primarily due to income tax benefits for the settlement of tax items as well as tax deductions associated with an investment in a subsidiary 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 September 30, 2019, the Company had $22,083 of unrecognized tax benefits. If recognized, approximately $18,590 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 $1,470 in previously unrecognized tax benefits by the end of the third 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 nine months ended September 30, 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 September 30, 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 $64,675 at September 30, 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 September 30, 2019, the Company had interest rate swap agreements outstanding that effectively convert notional amounts of $50,000 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 0.6%. The variable rates reset every three months, at which time payment or receipt of interest will be settled. The Company terminated $75,000 of interest rate swaps in the three months ended September 30, 2019.

Net Investment Hedges

From time to time, the Company executes foreign currency forward contracts that qualify and are designated as net investment hedges. No such contracts were outstanding at September 30, 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 $378,147 and $328,534 at September 30, 2019 and December 31, 2018, respectively.

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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:



	September 30, 2019						December 31, 2018
Derivatives by hedge designation	Other Current Assets		Other Current Liabilities		Other Assets		Other Current Assets		Other Current Liabilities		Other Assets		Other Liabilities
Designated as hedging instruments:
Foreign exchange contracts	$	641	$	863	$	—	$	647	$	404	$	—	$	—
Interest rate swap agreements	—		—		4,493		—		—		302		7,033
Not designated as hedging instruments:
Foreign exchange contracts	8,287		2,417		—		6,375		829		—		—
Total derivatives	$	8,928	$	3,280	$	4,493	$	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 September 30,					Nine Months Ended September 30,
Derivatives by hedge designation	Classification of gain (loss)	2019			2018		2019		2018
Not designated as hedges:
Foreign exchange contracts	Selling, general & administrative expenses	$	(710	)	$	4,894	$	5,707	$	9,143

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	September 30, 2019			December 31, 2018
Foreign exchange contracts	$	(147	)	$	173
Net investment contracts	1,521			1,521

The Company expects a loss of $147 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized.



		Three Months Ended September 30,						Nine Months Ended September 30,
Derivative type	Gain (loss) recognized in the Consolidated Statements of Income:	2019			2018			2019		2018
Foreign exchange contracts	Sales	$	(15	)	$	(143	)	$	760	$	(37	)
	Cost of goods sold	117			(69		)	366		(16		)

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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 September 30, 2019, measured at fair value on a recurring basis:



Description	Balance as of September 30, 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	$	8,928	$	—	$	8,928	$	—
Interest rate swap agreements	4,493		—		4,493		—
Total assets	$	13,421	$	—	$	13,421	$	—

Liabilities:
Foreign exchange contracts	3,280		—		3,280		—
Contingent consideration	470		—		—		470
Deferred compensation	28,616		—		28,616		—
Total liabilities	$	32,366	$	—	$	31,896	$	470

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 nine months ended September 30, 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 September 30, 2019 and December 31, 2018. The fair value of long-term debt at September 30, 2019 and December 31, 2018,

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

including the current portion, was approximately $732,531 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 $713,994 and $702,660, respectively. Since 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.

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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, 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.

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Results of Operations

The following table shows the Company's results of operations:



	Three Months Ended September 30,
	2019					2018					Favorable (Unfavorable) 2019 vs. 2018
	Amount			% of Sales		Amount			% of Sales		$			%
Net sales	$	730,783				$	737,099				$	(6,316	)	(0.9	%)
Cost of goods sold	492,432					485,547					(6,885		)	(1.4	%)
Gross profit	238,351			32.6	%	251,552			34.1	%	(13,201		)	(5.2	%)
Selling, general & administrative expenses	148,312			20.3	%	148,129			20.1	%	(183		)	(0.1	%)
Rationalization and asset impairment charges	1,495			0.2	%	2,636			0.4	%	1,141			43.3	%
Operating income	88,544			12.1	%	100,787			13.7	%	(12,243		)	(12.1	%)
Interest expense, net	6,400					3,969					(2,431		)	(61.2	%)
Other income (expense)	9,653					(1,074		)			10,727			998.8	%
Income before income taxes	91,797			12.6	%	95,744			13.0	%	(3,947		)	(4.1	%)
Income taxes	19,340					25,209					5,869			23.3	%
Effective tax rate	21.1		%			26.3		%			5.2		%
Net income including non-controlling interests	72,457					70,535					1,922			2.7	%
Non-controlling interests in subsidiaries’ loss	(4		)			(4		)			—			—
Net income	$	72,461		9.9	%	$	70,539		9.6	%	$	1,922		2.7	%
Diluted earnings per share	$	1.17				$	1.07				$	0.10		9.3	%

	Nine Months Ended September 30,
	2019					2018					Favorable (Unfavorable) 2019 vs. 2018
	Amount			% of Sales		Amount			% of Sales		$			%
Net sales	$	2,266,965				$	2,284,847				$	(17,882	)	(0.8	%)
Cost of goods sold	1,500,312					1,506,625					6,313			0.4	%
Gross profit	766,653			33.8	%	778,222			34.1	%	(11,569		)	(1.5	%)
Selling, general & administrative expenses	472,108			20.8	%	473,260			20.7	%	1,152			0.2	%
Rationalization and asset impairment charges	6,337			0.3	%	24,353			1.1	%	18,016			74.0	%
Operating income	288,208			12.7	%	280,609			12.3	%	7,599			2.7	%
Interest expense, net	17,621					13,222					(4,399		)	(33.3	%)
Other income (expense)	17,612					6,818					10,794			158.3	%
Income before income taxes	288,199			12.7	%	274,205			12.0	%	13,994			5.1	%
Income taxes	58,832					73,991					15,159			20.5	%
Effective tax rate	20.4		%			27.0		%			6.6		%
Net income including non-controlling interests	229,367					200,214					29,153			14.6	%
Non-controlling interests in subsidiaries’ loss	(26		)			(13		)			(13		)	(100.0	%)
Net income	$	229,393		10.1	%	$	200,227		8.8	%	$	29,166		14.6	%
Diluted earnings per share	$	3.64				$	3.03				$	0.61		20.1	%

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Net Sales:

The following table summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales for the three and nine months ended September 30, 2019 on a consolidated basis:



Three Months Ended September 30,			Change in Net Sales due to:
	Net Sales 2018		Volume			Acquisitions			Price			Foreign Exchange			Net Sales 2019
Lincoln Electric Holdings, Inc.	$	737,099	$	(30,142	)	$	39,559		$	(4,235	)	$	(11,498	)	$	730,783
% Change
Lincoln Electric Holdings, Inc.			(4.1		%)	5.4		%	(0.6		%)	(1.6		%)	(0.9		%)



Nine Months Ended September 30,			Change in Net Sales due to:
	Net Sales 2018		Volume			Acquisitions			Price			Foreign Exchange			Net Sales 2019
Lincoln Electric Holdings, Inc.	$	2,284,847	$	(98,216	)	$	85,221		$	43,919		$	(48,806	)	$	2,266,965
% Change
Lincoln Electric Holdings, Inc.			(4.3		%)	3.7		%	1.9		%	(2.1		%)	(0.8		%)

Net sales decreased in the three and nine months ended September 30, 2019 primarily as a result of lower organic sales and unfavorable foreign exchange, offset by acquisitions. The increase in Net sales from acquisitions was driven by the acquisitions of Coldwater, Pro Systems, Inovatech and Baker within Americas Welding, Worthington within The Harris Products Group and Askaynak within International Welding. Refer to Note 4 to the consolidated financial statements for details.

Gross Profit:

Gross profit for the three and nine months ended September 30, 2019 decreased, as a percent of sales, compared to the prior year due to product mix, lower volumes and acquisitions. The three and nine months ended September 30, 2019 includes a last-in, first-out ("LIFO") credit of $1,649 and $2,514, respectively, as compared to a LIFO charge of $3,498 and $9,671, respectively, in the three and nine months ended September 30, 2018.

Selling, General & Administrative ("SG&A") Expenses:

SG&A expenses were flat for the three and nine months ended September 30, 2019 as compared to September 30, 2018 due to higher expense from acquisitions, offset by lower compensation costs and favorable foreign exchange.

Rationalization and Asset Impairment Charges:

The Company recorded net charges of $1,495, $1,240 after-tax, and $6,337, $4,991 after-tax, in the three and nine months ended September 30, 2019, respectively, primarily related to severance, asset impairments and gains or losses on the disposal of assets. The Company recorded net charges of $2,636, $2,575 after-tax, and $24,353, $20,807 after-tax, in the three and nine months ended September 30, 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 and nine months ended September 30, 2019 as compared to September 30, 2018 was due to lower interest income on marketable securities.

Other Income (Expense):

The increase in Other income (expense) for the three and nine months ended September 30, 2019 as compared to September 30, 2018 was primarily due to the gain on change in control of $7,601 related to the acquisition of Askaynak and lower net periodic pension cost.

Income Taxes:

The effective tax rate was lower for the three months ended September 30, 2019 as compared to September 30, 2018 primarily due to higher favorable discrete tax adjustments 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").

The effective tax rate was lower for the nine months ended September 30, 2019 as compared to September 30, 2018 primarily due to income tax benefits for the settlement of tax items as well as tax deductions associated with an investment in a

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subsidiary 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.

Net Income:

The increase in Net income for the three and nine months ended September 30, 2019 as compared to September 30, 2018 was primarily due to a lower effective tax rate, lower rationalization and asset impairment charges and a gain on change in control related to the acquisition of Askaynak.

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 and nine months ended September 30, 2019:



Three Months Ended September 30,			Change in Net Sales due to:
	Net Sales 2018		Volume ⁽¹⁾			Acquisitions ⁽²⁾			Price ⁽³⁾			Foreign Exchange			Net Sales 2019
Operating Segments
Americas Welding	$	454,010	$	(20,605	)	$	17,380		$	(5,603	)	$	(1,661	)	$	443,521
International Welding	209,622		(12,966		)	17,413			607			(9,298		)	205,378
The Harris Products Group	73,467		3,429			4,766			761			(539		)	81,884
% Change
Americas Welding			(4.5		%)	3.8		%	(1.2		%)	(0.4		%)	(2.3		%)
International Welding			(6.2		%)	8.3		%	0.3		%	(4.4		%)	(2.0		%)
The Harris Products Group			4.7		%	6.5		%	1.0		%	(0.7		%)	11.5		%

(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 and Asian markets. Increase for The Harris Products Group driven primarily by higher consumables volumes.

(2) Increase due to the acquisition of Coldwater, Pro Systems, Inovatech and Baker within Americas Welding, Worthington within The Harris Products Group and Askaynak within International Welding. Refer to Note 4 to the consolidated financial statements for details.

(3) Decrease for Americas Welding due to decreased product pricing as a result of lower input costs.



Nine Months Ended September 30,			Change in Net Sales due to:
	Net Sales 2018		Volume ⁽¹⁾			Acquisitions ⁽²⁾			Price ⁽³⁾			Foreign Exchange			Net Sales 2019
Operating Segments
Americas Welding	$	1,351,297	$	(49,756	)	$	51,612		$	33,424		$	(8,730	)	$	1,377,847
International Welding	700,315		(54,433		)	17,413			9,919			(37,444		)	635,770
The Harris Products Group	233,235		5,973			16,196			576			(2,632		)	253,348
% Change
Americas Welding			(3.7		%)	3.8		%	2.5		%	(0.6		%)	2.0		%
International Welding			(7.8		%)	2.5		%	1.4		%	(5.3		%)	(9.2		%)
The Harris Products Group			2.6		%	6.9		%	0.2		%	(1.1		%)	8.6		%

(3) Increase for Americas Welding and International Welding segments due to increased product pricing as a result of higher input costs.

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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.



	Three Months Ended September 30,						Favorable (Unfavorable) 2019 vs. 2018
	2019			2018			$			%
Americas Welding:
Net sales	$	443,521		$	454,010		$	(10,489	)	(2.3	%)
Inter-segment sales	31,101			31,845			(744		)	(2.3	%)
Total Sales	$	474,622		$	485,855		(11,233		)	(2.3	%)

Adjusted EBIT ⁽⁴⁾	$	74,110		$	89,253		(15,143		)	(17.0	%)
As a percent of total sales ⁽¹⁾	15.6		%	18.4		%				(2.8	%)
International Welding:
Net sales	$	205,378		$	209,622		(4,244		)	(2.0	%)
Inter-segment sales	4,441			3,663			778			21.2	%
Total Sales	$	209,819		$	213,285		(3,466		)	(1.6	%)

Adjusted EBIT ⁽⁵⁾	$	10,184		$	10,721		(537		)	(5.0	%)
As a percent of total sales ⁽²⁾	4.9		%	5.0		%				(0.1	%)
The Harris Products Group:
Net sales	$	81,884		$	73,467		8,417			11.5	%
Inter-segment sales	1,857			1,537			320			20.8	%
Total Sales	$	83,741		$	75,004		8,737			11.6	%

Adjusted EBIT	$	11,038		$	8,676		2,362			27.2	%
As a percent of total sales ⁽³⁾	13.2		%	11.6		%				1.6	%
Corporate / Eliminations:
Inter-segment sales	$	(37,399	)	$	(37,045	)	354			1.0	%
Adjusted EBIT ⁽⁶⁾	(1,632		)	(1,099		)	533			48.5	%
Consolidated:
Net sales	$	730,783		$	737,099		(6,316		)	(0.9	%)
Net income	$	72,461		$	70,539		1,922			2.7	%
As a percent of total sales	9.9		%	9.6		%				0.3	%

Adjusted EBIT ⁽⁷⁾	$	93,700		$	107,551		(13,851		)	(12.9	%)
As a percent of sales	12.8		%	14.6		%				(1.8	%)


(1)	Decrease for the three months ended September 30, 2019 as compared to September 30, 2018 primarily driven by the dilutive impact of recent acquisitions and lower Net sales volumes.


(2)	Decrease for the three months ended September 30, 2019 as compared to September 30, 2018 driven by lower Net sales volumes and product mix.


(3)	Increase for the three months ended September 30, 2019 as compared to September 30, 2018 driven by consumables volume increases.


(4)	The three months ended September 30, 2018 exclude pension settlement charges of $4,232 related to lump sum pension payments as discussed in Note 13 to the consolidated financial statements.

(5)

The three months ended September 30, 2019 and 2018 exclude Rationalization and asset impairment charges of $1,495 and $2,636, respectively, related to severance, asset impairments and gains or losses on the disposal of assets as discussed in Note 6 to the consolidated financial statements. The three months ended September 30, 2019 also excludes the amortization of step up in value of acquired inventories of $1,609 and a gain on change in control of $7,601 related to the Askaynak acquisition.

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(6)	The three months ended September 30, 2018 exclude acquisition transaction and integration costs of $970 related to the Air Liquide Welding acquisition.


(7)	See non-GAAP Financial Measures for a reconciliation of Net income as reported and Adjusted EBIT.

The following table presents Adjusted EBIT by segment:



	Nine Months Ended September 30,						Favorable (Unfavorable) 2019 vs. 2018
	2019			2018			$			%
Americas Welding:
Net sales	$	1,377,847		$	1,351,297		$	26,550		2.0	%
Inter-segment sales	95,300			89,671			5,629			6.3	%
Total Sales	$	1,473,147		$	1,440,968		32,179			2.2	%

Adjusted EBIT ⁽⁴⁾	$	240,713		$	254,850		(14,137		)	(5.5	%)
As a percent of total sales ⁽¹⁾	16.3		%	17.7		%				(1.4	%)
International Welding:
Net sales	$	635,770		$	700,315		(64,545		)	(9.2	%)
Inter-segment sales	12,838			13,669			(831		)	(6.1	%)
Total Sales	$	648,608		$	713,984		(65,376		)	(9.2	%)

Adjusted EBIT ⁽⁵⁾	$	38,699		$	41,970		(3,271		)	(7.8	%)
As a percent of total sales ⁽²⁾	6.0		%	5.9		%				0.1	%
The Harris Products Group:
Net sales	$	253,348		$	233,235		20,113			8.6	%
Inter-segment sales	5,837			5,447			390			7.2	%
Total Sales	$	259,185		$	238,682		20,503			8.6	%

Adjusted EBIT	$	35,045		$	28,058		6,987			24.9	%
As a percent of total sales ⁽³⁾	13.5		%	11.8		%				1.7	%
Corporate / Eliminations:
Inter-segment sales	$	(113,975	)	$	(108,787	)	5,188			4.8	%
Adjusted EBIT ⁽⁶⁾	(8,643		)	(4,443		)	4,200			94.5	%
Consolidated:
Net sales	$	2,266,965		$	2,284,847		(17,882		)	(0.8	%)
Net income	$	229,393		$	200,227		29,166			14.6	%
As a percent of total sales	10.1		%	8.8		%				1.3	%

Adjusted EBIT ⁽⁷⁾	$	305,814		$	320,435		(14,621		)	(4.6	%)
As a percent of sales	13.5		%	14.0		%				(0.5	%)


(1)	Decrease for the nine months ended September 30, 2019 as compared to September 30, 2018 primarily driven by the dilutive impact of recent acquisitions and lower Net sales volumes.


(2)	Increase for the nine months ended September 30, 2019 as compared to September 30, 2018 driven by lower compensation costs, partially offset by lower Net sales volumes.


(3)	Increase for the nine months ended September 30, 2019 as compared to September 30, 2018 driven by consumables volume increases.

(4)

The nine months ended September 30, 2019 exclude Rationalization and asset impairment charges of $1,716, as discussed in Note 6 to the consolidated financial statements, and the amortization of step up in value of acquired inventories of $1,399 related to the Baker acquisition. The nine months ended September 30, 2018 exclude pension settlement charges of $4,990 related to lump sum pension payments as discussed in Note 13 to the consolidated financial statements.

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(5)

The nine months ended September 30, 2019 and 2018 exclude Rationalization and asset impairment charges of $4,621 and $24,353, respectively, related to severance, asset impairments and gains or losses on the disposal of assets as discussed in Note 6 to the consolidated financial statements, the amortization of step up in value of acquired inventories of $1,609 and a gain on change in control of $7,601 related to the Askaynak acquisition. The nine months ended September 30, 2019 also exclude gains on disposal of assets of $3,554.


(6)	The nine months ended September 30, 2019 and 2018 exclude acquisition transaction and integration costs of $1,804 and $3,665, respectively, related to the Air Liquide Welding acquisition.


(7)	See non-GAAP Financial Measures for a reconciliation of Net income as reported and Adjusted EBIT.

Non-GAAP Financial Measures

The Company reviews Adjusted operating income, Adjusted net income, Adjusted EBIT, Adjusted effective tax rate, Adjusted diluted earnings per share and Return on invested capital, all non-GAAP financial measures, in assessing and evaluating the Company's underlying operating performance. These non-GAAP financial measures exclude the impact of special items on the Company's reported financial results. Non-GAAP financial measures should be read in conjunction with the generally accepted accounting principles in the United States ("GAAP") financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures.

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The following table presents the reconciliations of Operating income as reported to Adjusted operating income, Net income as reported to Adjusted net income and Adjusted EBIT, Effective tax rate as reported to Adjusted effective tax rate and Diluted earnings per share as reported to Adjusted diluted earnings per share:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Operating income as reported	$	88,544		$	100,787		$	288,208		$	280,609
Special items (pre-tax):
Rationalization and asset impairment charges ⁽¹⁾	1,495			2,636			6,337			24,353
Acquisition transaction and integration costs ⁽²⁾	—			970			1,804			3,665
Amortization of step up in value of acquired inventories ⁽³⁾	1,609			—			3,008			—
Gains on asset disposals ⁽⁴⁾	—			—			(3,045		)	—
Adjusted operating income	$	91,648		$	104,393		$	296,312		$	308,627

Net income as reported	$	72,461		$	70,539		$	229,393		$	200,227
Special items:
Rationalization and asset impairment charges ⁽¹⁾	1,495			2,636			6,337			24,353
Acquisition transaction and integration costs ⁽²⁾	—			970			1,804			3,665
Pension settlement charges ⁽⁵⁾	—			4,232			—			4,990
Amortization of step up in value of acquired inventories ⁽³⁾	1,609			—			3,008			—
Gains on asset disposals ⁽⁴⁾	—			—			(3,554		)	—
Gain on change in control ⁽⁶⁾	(7,601		)	—			(7,601		)	—
Tax effect of Special items ⁽⁷⁾	(255		)	1,033			(5,819		)	(132		)
Adjusted net income	67,709			79,410			223,568			233,103
Non-controlling interests in subsidiaries’ earnings (loss)	(4		)	(4		)	(26		)	(13		)
Interest expense, net	6,400			3,969			17,621			13,222
Income taxes as reported	19,340			25,209			58,832			73,991
Tax effect of Special items ⁽⁷⁾	255			(1,033		)	5,819			132
Adjusted EBIT	$	93,700		$	107,551		$	305,814		$	320,435
Effective tax rate as reported	21.1		%	26.3		%	20.4		%	27.0		%
Net special item tax impact	1.3		%	(3.0		%)	2.0		%	(2.9		%)
Adjusted effective tax rate	22.4		%	23.3		%	22.4		%	24.1		%

Diluted earnings per share as reported	$	1.17		$	1.07		$	3.64		$	3.03
Special items per share	(0.08		)	0.14			(0.09		)	0.50
Adjusted diluted earnings per share	$	1.09		$	1.21		$	3.55		$	3.53

(1) Charges primarily related to severance, asset impairments and gains or losses on the disposal of assets as discussed in Note 6 to the consolidated financial statements.

(2) Costs related to the Air Liquide Welding acquisition and are included in Selling, general & administrative expenses.

(3) Charges related to the acquisitions of Baker and Askaynak and are included in Cost of goods sold.

(4) Gains primarily included in Cost of goods sold.

(5) Pension settlement charges related to lump sum pension payments as discussed in Note 13 to the consolidated financial statements and are included in Other income (expense).

(6) Gain on change in control related to the acquisition of Askaynak and is included in Other income (expense).

(7) Includes the net tax impact of Special items recorded during the respective periods, including tax benefits of $4,852 for the settlement of a tax item as well as tax deductions associated with an investment in a subsidiary in the nine months

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ended September 30, 2019. The prior year includes an adjustment to taxes on unremitted foreign earnings related to the U.S. Tax Act of $2,323 and $4,823 in the three and nine months ended September 30, 2018, respectively.

The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate. The applicable tax rates reflect the taxable jurisdiction and nature of each Special item.

Liquidity and Capital Resources

The Company’s cash flow from operations can be cyclical. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets. In assessing liquidity, the Company reviews working capital measurements to define areas for improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances, borrowings under its existing credit facilities and raising debt in capital markets.

The Company continues to expand globally and periodically looks at transactions that would involve significant investments. The Company can fund its global expansion plans with operational cash flow, but a significant acquisition may require access to capital markets, in particular, the long-term debt market, as well as the syndicated bank loan market. The Company’s financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the United States, and then lends funds to the specific subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made.

The following table reflects changes in key cash flow measures:



	Nine Months Ended September 30,
	2019			2018			$ Change
Cash provided by operating activities ⁽¹⁾	$	280,666		$	229,777		$	50,889
Cash (used by) provided by investing activities ⁽²⁾	(178,795		)	48,273			(227,068		)
Capital expenditures	(53,551		)	(48,746		)	(4,805		)
Acquisition of businesses, net of cash acquired	(136,735		)	6,591			(143,326		)
Proceeds from marketable securities, net of purchases	—			79,843			(79,843		)
Cash used by financing activities ⁽³⁾	(302,461		)	(196,519		)	(105,942		)
Purchase of shares for treasury	(221,942		)	(121,477		)	(100,465		)
Cash dividends paid to shareholders	(89,162		)	(76,674		)	(12,488		)
(Decrease) increase in Cash and cash equivalents ⁽⁴⁾	(202,237		)	71,499

(1) Cash provided by operating activities increased for the nine months ended September 30, 2019, compared with the nine months ended September 30, 2018 primarily due to favorable changes in working capital and cash flows from tax payments and receipts.

(2) Cash used by investing activities increased for the nine months ended September 30, 2019, compared with the nine months ended September 30, 2018 predominantly due to cash used in the acquisition of businesses in 2019 and net proceeds from marketable securities in 2018. The Company currently anticipates capital expenditures of $65,000 to $75,000 in 2019. Anticipated capital expenditures include investments for capital maintenance to improve operational effectiveness. Management critically evaluates all proposed capital expenditures and expects each project to increase efficiency, reduce costs, promote business growth or improve the overall safety and environmental conditions of the Company’s facilities.

(3) Cash used by financing activities increased in the nine months ended September 30, 2019, compared with the nine months ended September 30, 2018 due to higher purchases of common shares for treasury.

(4) Cash and cash equivalents decreased 56.4%, or $202,237, to $156,612 during the nine months ended September 30, 2019, from $358,849 as of December 31, 2018. This decrease was predominantly due to cash used in the acquisition of businesses, purchases of common shares for treasury and cash dividends paid to shareholders, partially offset by cash provided by operating activities. The decrease in Cash and cash equivalents during the nine months ended September 30, 2019 compares to an increase of 21.9% during the nine months ended September 30, 2018. The increase in 2018 was primarily due to cash provided by operating activities and proceeds from marketable securities, partially offset by purchases of common shares for treasury and cash dividends paid to shareholders. At September 30, 2019, $144,324 of Cash and cash equivalents was held by international subsidiaries.

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The Company's total debt levels increased compared to December 31, 2018 predominately due to additional short-term borrowings. Total debt to total invested capital increased to 47.2% at September 30, 2019 from 44.2% at December 31, 2018.

In October 2019, the Company paid a cash dividend of $0.47 per share, or $28,740, to shareholders of record as of September 30, 2019.

Working Capital Ratios



	September 30, 2019		December 31, 2018		September 30, 2018
Average operating working capital to net sales ⁽¹⁾	19.2	%	16.5	%	18.3	%
Days sales in Inventories	106.2		95.1		100.8
Days sales in Accounts receivable	53.9		52.7		54.5
Average days in Trade accounts payable	51.1		55.5		52.3

(1) Average operating working capital to net sales is defined as the sum of Accounts receivable and Inventories less Trade accounts payable as of period end divided by annualized rolling three months of Net sales.

Return on Invested Capital

The Company reviews return on invested capital ("ROIC") in assessing and evaluating the Company's underlying operating performance. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. ROIC is defined as rolling 12 months of Adjusted net income excluding tax-effected interest income and expense divided by invested capital. Invested capital is defined as total debt, which includes Short-term debt and Long-term debt, less current portions, plus Total equity.

ROIC for the twelve months ended September 30, 2019 and 2018 were as follows:



	Twelve Months Ended September 30,
	2019			2018
Net income	$	316,232		$	224,408
Rationalization and asset impairment charges	7,269			30,943
Acquisition transaction and integration costs	2,637			7,281
Pension settlement charges	1,696			7,857
Amortization of step up in value of acquired inventories	3,008			2,264
Gains on disposal of assets	(3,554		)	—
Bargain purchase adjustment	—			1,935
Gain on change in control	(7,601		)	—
Tax effect of Special items ⁽¹⁾	(12,583		)	25,925
Adjusted net income	$	307,104		$	300,613
Plus: Interest expense, net of tax of $6,410 and $6,087 in 2019 and 2018, respectively	19,265			18,295
Less: Interest income, net of tax of $926 and $1,676 in 2019 and 2018, respectively	2,785			5,036
Adjusted net income before tax effected interest	$	323,584		$	313,872

Invested Capital	September 30, 2019			September 30, 2018
Short-term debt	$	13,293		$	794
Long-term debt, less current portion	713,884			698,468
Total debt	727,177			699,262
Total equity	813,808			927,868
Invested capital	$	1,540,985		$	1,627,130
Return on invested capital	21.0		%	19.3		%


(1)	Includes the net tax impact of Special items recorded during the respective periods, including tax benefits of $4,852 for the settlement of a tax item as well as tax deductions associated with an investment in a subsidiary in the twelve

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months ended September 30, 2019 and net charges of $33,439 related to the U.S. Tax Act in the twelve months ended September 30, 2018.

New Accounting Pronouncements

Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements.

Acquisitions

Refer to Note 4 to the consolidated financial statements for a discussion of the Company's recent acquisitions.

Debt

Revolving Credit Agreement

Senior Unsecured Notes

Shelf Agreements

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Forward-looking Statements

The Company’s expectations and beliefs concerning the future contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations and involve a number of risks and uncertainties. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “guidance” or words of similar meaning. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the Company’s operating results. The factors include, but are not limited to: general economic and market conditions; the effectiveness of operating initiatives; completion of planned divestitures; interest rates; disruptions, uncertainty or volatility in the credit markets that may limit our access to capital; currency exchange rates and devaluations; adverse outcome of pending or potential litigation; actual costs of the Company’s rationalization plans; possible acquisitions, including the Company’s ability to successfully integrate acquisitions; market risks and price fluctuations related to the purchase of commodities and energy; global regulatory complexity; the effects of changes in tax law; tariff rates in the countries where the Company conducts business; and the possible effects of events beyond our control, such as political unrest, acts of terror and natural disasters, on the Company or its customers, suppliers and the economy in general. For additional discussion, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company’s exposure to market risk since December 31, 2018. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.

Changes in Internal Control Over Financial Reporting

Beginning January 1, 2019, the Company implemented ASU 2016-02, Leases ("Topic 842"). The adoption of Topic 842 resulted in changes to processes and control activities related to lease accounting, including the implementation of a supporting information technology application.

There have been no other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, product liability claims, regulatory claims and health, safety and environmental claims. Among such proceedings are the cases described below.

As of September 30, 2019, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 3,283 plaintiffs, which is a net increase of 4 claims from those previously reported. In each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. Since January 1, 1995, the Company has been a co-defendant in other similar cases that have been resolved as follows: 55,061 of those claims were dismissed, 23 were tried to defense verdicts, 7 were tried to plaintiff verdicts (which were reversed or resolved after appeal), 1 was resolved by agreement for an immaterial amount and 896 were decided in favor of the Company following summary judgment motions.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, the reader should carefully consider the factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which could materially affect the Company’s business, financial condition or future results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer purchases of its common shares during the third quarter of 2019 were as follows:



Period	Total Number of Shares Repurchased		Average Price Paid Per Share		Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs ⁽²⁾
July 1 - 31, 2019	269,054	⁽¹⁾	$	83.17	267,872	4,031,018
August 1 - 31, 2019	355,236		82.47		355,236	3,675,782
September 1 - 30, 2019	112,756	⁽¹⁾	82.95		112,147	3,563,635
Total	737,046				735,255


(1)	The above share repurchases include the surrender of the Company's common shares in connection with the vesting of restricted awards.

(2)

On April 20, 2016, the Company announced that the Board of Directors authorized a new share repurchase program, which increased the total number of the Company's common shares authorized to be repurchased to 55 million shares. Total shares purchased through the share repurchase programs were 51.4 million shares at a total cost of $2.1 billion for a weighted average cost of $40.79 per share through September 30, 2019.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 6. EXHIBITS

(a) Exhibits



10.1		First Amendment, dated as of July 30, 2019, to the Note Purchase Agreement dated as of April 1, 2015, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc. and the purchasers party thereto (filed herewith).
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.
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.
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.

101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
104		Cover page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		LINCOLN ELECTRIC HOLDINGS, INC.

		/s/ Gabriel Bruno
		Gabriel Bruno
		Executive Vice President, Finance
		(principal accounting officer)
		October 30, 2019