LINCOLN ELECTRIC HOLDINGS INC - Quarter Report: 2019 June (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 June 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)

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 ☐

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 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 June 30, 2019 was 61,779,153.

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		34
Item 4. Controls and Procedures		34

PART II. OTHER INFORMATION		35
Item 1. Legal Proceedings		35
Item 1A. Risk Factors		35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 4. Mine Safety Disclosures		36
Item 6. Exhibits		36
Signatures		37
EX-10.1	Amendment No. 1 to The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 1, 2019, effective July 1, 2019 (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

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share amounts)



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net sales (Note 2)	$	777,008		$	790,052		$	1,536,182		$	1,547,748
Cost of goods sold	507,127			519,936			1,007,880			1,021,078
Gross profit	269,881			270,116			528,302			526,670
Selling, general & administrative expenses	163,388			163,940			323,796			325,131
Rationalization and asset impairment charges (Note 6)	1,307			11,542			4,842			21,717
Operating income	105,186			94,634			199,664			179,822
Interest expense, net	5,898			4,812			11,221			9,253
Other income (expense) (Note 14)	4,196			4,441			7,959			7,892
Income before income taxes	103,484			94,263			196,402			178,461
Income taxes (Note 15)	18,040			25,404			39,492			48,782
Net income including non-controlling interests	85,444			68,859			156,910			129,679
Non-controlling interests in subsidiaries’ earnings (loss)	(8		)	(5		)	(22		)	(9		)
Net income	$	85,452		$	68,864		$	156,932		$	129,688

Basic earnings per share (Note 3)	$	1.37		$	1.05		$	2.50		$	1.98
Diluted earnings per share (Note 3)	$	1.36		$	1.04		$	2.47		$	1.96
Cash dividends declared per share	$	0.47		$	0.39		$	0.94		$	0.78

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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net income including non-controlling interests	$	85,444		$	68,859		$	156,910		$	129,679
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges, net of tax of $(117) and $(60) in the three and six months ended June 30, 2019; $(309) and $25 in the three and six months ended June 30, 2018.	(301		)	(1,232		)	28			(377		)
Defined benefit pension plan activity, net of tax of $(90) and $137 in the three and six months ended June 30, 2019; $218 and $649 in the three and six months ended June 30, 2018.	1,091			721			1,878			2,008
Currency translation adjustment	4,849			(50,342		)	9,985			(30,955		)
Other comprehensive income (loss):	5,639			(50,853		)	11,891			(29,324		)
Comprehensive income	91,083			18,006			168,801			100,355
Comprehensive income (loss) attributable to non-controlling interests	(43		)	(95		)	(20		)	(40		)
Comprehensive income attributable to shareholders	$	91,126		$	18,101		$	168,821		$	100,395

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



	June 30, 2019			December 31, 2018
	(UNAUDITED)			(NOTE 1)
ASSETS
Current Assets
Cash and cash equivalents	$	189,861		$	358,849
Accounts receivable (less allowance for doubtful accounts of $12,678 in 2019; $12,827 in 2018)	428,353			396,885
Inventories (Note 9)	397,752			361,829
Other current assets	111,897			120,236
Total Current Assets	1,127,863			1,237,799
Property, plant and equipment (less accumulated depreciation of $800,287 in 2019; $778,817 in 2018)	512,364			478,801
Goodwill	323,016			281,294
Other assets	431,090			351,931
TOTAL ASSETS	$	2,394,333		$	2,349,825

LIABILITIES AND EQUITY
Current Liabilities
Short-term debt (Note 12)	$	30,110		$	111
Trade accounts payable	254,814			268,600
Accrued employee compensation and benefits	115,891			94,202
Other current liabilities	170,196			175,269
Total Current Liabilities	571,011			538,182
Long-term debt, less current portion (Note 12)	710,458			702,549
Other liabilities	266,806			221,502
Total Liabilities	1,548,275			1,462,233
Shareholders’ Equity
Common shares	9,858			9,858
Additional paid-in capital	368,919			360,308
Retained earnings	2,661,720			2,564,440
Accumulated other comprehensive loss	(281,850		)	(293,739		)
Treasury shares	(1,913,219		)	(1,753,925		)
Total Shareholders’ Equity	845,428			886,942
Non-controlling interests	630			650
Total Equity	846,058			887,592
TOTAL LIABILITIES AND TOTAL EQUITY	$	2,394,333		$	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

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

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



	Six Months Ended June 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	156,932		$	129,688
Non-controlling interests in subsidiaries’ loss	(22		)	(9		)
Net income including non-controlling interests	156,910			129,679
Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities:
Rationalization and asset impairment net charges (Note 6)	1,069			626
Depreciation and amortization	39,252			36,323
Equity earnings in affiliates, net	(1,217		)	(1,377		)
Deferred income taxes	2,674			4,969
Stock-based compensation	8,745			9,821
Other, net	(5,700		)	(8,142		)
Changes in operating assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable	(21,271		)	(39,907		)
Increase in inventories	(27,767		)	(27,899		)
Decrease (increase) in other current assets	11,135			(13,839		)
(Decrease) increase in trade accounts payable	(15,469		)	4,861
Increase in other current liabilities	2,812			26,223
Net change in other assets and liabilities	812			2,220
NET CASH PROVIDED BY OPERATING ACTIVITIES	151,985			123,558

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(36,513		)	(31,383		)
Acquisition of businesses, net of cash acquired	(107,843		)	6,591
Proceeds from sale of property, plant and equipment	8,712			227
Purchase of marketable securities	—			(218,667		)
Proceeds from marketable securities	—			258,733
Other investing activities	2,000			—
NET CASH (USED BY) PROVIDED BY INVESTING ACTIVITIES	(133,644		)	15,501

CASH FLOWS FROM FINANCING ACTIVITIES
Amounts due banks, net	29,982			216
Payments on long-term borrowings	(5		)	(6		)
Proceeds from exercise of stock options	960			2,599
Purchase of shares for treasury (Note 8)	(160,914		)	(50,232		)
Cash dividends paid to shareholders	(60,101		)	(51,250		)
NET CASH USED BY FINANCING ACTIVITIES	(190,078		)	(98,673		)

Effect of exchange rate changes on Cash and cash equivalents	2,749			(9,993		)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(168,988		)	30,393

Cash and cash equivalents at beginning of period	358,849			326,701
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	189,861		$	357,094

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 six months ended June 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 requires that an entity measure impairment of certain financial instruments, including 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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Consumables	$	444,850	$	461,040	$	887,808	$	902,931
Equipment	332,158		329,012		648,374		644,817
Net sales	$	777,008	$	790,052	$	1,536,182	$	1,547,748

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 June 30, 2019, the Company recorded $20,730 related to advance customer payments and $8,752 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 June 30, 2019 and December 31, 2018, $32,705 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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Numerator:
Net income	$	85,452	$	68,864	$	156,932	$	129,688
Denominator (shares in 000's):
Basic weighted average shares outstanding	62,305		65,337		62,733		65,458
Effect of dilutive securities - Stock options and awards	665		784		686		799
Diluted weighted average shares outstanding	62,970		66,121		63,419		66,257
Basic earnings per share	$	1.37	$	1.05	$	2.50	$	1.98
Diluted earnings per share	$	1.36	$	1.04	$	2.47	$	1.96

For the three months ended June 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 six months ended June 30, 2019 and 2018, common shares subject to equity-based awards of 346,168 and 303,207, 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 is a supplier and manufacturer of welding consumables, arc welding equipment, including plasma and oxy-fuel cutting equipment, and robotic welding systems located in Turkey. 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, broadens The Harris Products Group’s portfolio of industry-leading consumables with the addition of premium solders and fluxes.

Also during December 2018, the Company acquired Coldwater Machine Company (“Coldwater”) and Pro Systems. Coldwater, based in Coldwater, Ohio, is a flexible automation integrator and precision machining and assembly manufacturer serving diverse end markets. Pro Systems, based in Churubusco, Indiana, is an automation systems designer and integrator serving automotive, industrial, electrical and medical applications. The acquisitions accelerate growth and expand the Company’s industry-leading portfolio of automated cutting and joining solutions.

Also during December 2018, the Company acquired Inovatech Engineering Corporation (“Inovatech”). Inovatech, based in Ontario, Canada, is a manufacturer of advanced robotic plasma cutting solutions for structural steel applications. The acquisition scales the Company's automated cutting solutions and application expertise and supports long-term growth in that market.

Pro forma information related to the acquisitions discussed above has not been presented because the impact on the Company’s Consolidated Statements of Income is not material. Acquired companies are included in the Company's consolidated financial statements as of the date of acquisition.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 June 30, 2019
Net sales	$	476,607	$	212,306		$	88,095	$	—		$	777,008
Inter-segment sales	34,811		4,188			2,113		(41,112		)	—
Total	$	511,418	$	216,494		$	90,208	$	(41,112	)	$	777,008

Adjusted EBIT	$	84,851	$	15,178		$	13,488	$	(3,969	)	$	109,548
Special items charge (gain) ⁽¹⁾	1,779		(2,627		)	—		1,014			166
EBIT	$	83,072	$	17,805		$	13,488	$	(4,983	)	$	109,382
Interest income											592
Interest expense											(6,490		)
Income before income taxes											$	103,484
Three Months Ended June 30, 2018
Net sales	$	462,515	$	243,373		$	84,164	$	—		$	790,052
Inter-segment sales	31,240		5,497			2,003		(38,740		)	—
Total	$	493,755	$	248,870		$	86,167	$	(38,740	)	$	790,052

Adjusted EBIT	$	88,158	$	16,276		$	10,157	$	(3,186	)	$	111,405
Special items charge (gain) ⁽²⁾	—		11,542			—		788			12,330
EBIT	$	88,158	$	4,734		$	10,157	$	(3,974	)	$	99,075
Interest income											1,808
Interest expense											(6,620		)
Income before income taxes											$	94,263
Six Months Ended June 30, 2019
Net sales	$	934,326	$	430,392		$	171,464	$	—		$	1,536,182
Inter-segment sales	64,199		8,397			3,980		(76,576		)	—
Total	$	998,525	$	438,789		$	175,444	$	(76,576	)	$	1,536,182

Adjusted EBIT	$	166,603	$	28,515		$	24,007	$	(7,011	)	$	212,114
Special items charge (gain) ⁽¹⁾	3,115		(428		)	—		1,804			4,491
EBIT	$	163,488	$	28,943		$	24,007	$	(8,815	)	$	207,623
Interest income											1,556
Interest expense											(12,777		)
Income before income taxes											$	196,402
Six Months Ended June 30, 2018
Net sales	$	897,287	$	490,693		$	159,768	$	—		$	1,547,748
Inter-segment sales	57,826		10,006			3,910		(71,742		)	—
Total	$	955,113	$	500,699		$	163,678	$	(71,742	)	$	1,547,748

Adjusted EBIT	$	165,597	$	31,249		$	19,382	$	(3,344	)	$	212,884
Special items charge (gain) ⁽²⁾	758		21,717			—		2,695			25,170
EBIT	$	164,839	$	9,532		$	19,382	$	(6,039	)	$	187,714
Interest income											3,280
Interest expense											(12,533		)
Income before income taxes											$	178,461


(1)	In the three months ended June 30, 2019, special items reflect Rationalization and asset impairment charges of $380 in Americas Welding and $927 in International Welding, amortization of step up in value of acquired inventories of $1,399

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in Americas Welding, gains on disposal of assets of $3,554 in International Welding and transaction and integration costs of $1,014 in Corporate / Eliminations related to the Air Liquide Welding acquisition. In the six months ended June 30, 2019, special items reflect Rationalization and asset impairment charges of $1,716 in Americas Welding and $3,126 in International Welding, amortization of step up in value of acquired inventories of $1,399 in Americas Welding, gains on disposals of assets of $3,554 in International Welding and transaction and integration costs of $1,804 in Corporate / Eliminations related to the Air Liquide Welding acquisition.

(2)

In the three months ended June 30, 2018, special items reflect rationalization and asset impairment charges of $11,542 in International Welding and transaction and integration costs of $788 in Corporate / Eliminations related to the Air Liquide Welding acquisition. In the six months ended June 30, 2018, special items reflect pension settlement charges of $758 in Americas Welding, Rationalization and asset impairment charges of $21,717 in International Welding and transaction and integration costs of $2,695 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 $4,842 in the six months ended June 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 June 30, 2019, liabilities of $1,583 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 June 30, 2019, liabilities of $1,553 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:



	Six Months Ended June 30, 2019
Balance, December 31, 2018	$	11,192
Payments and other adjustments	(10,769		)
Charged to expense	3,773
Balance, June 30, 2019	$	4,196

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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 June 30, 2019 and 2018:



	Three Months Ended June 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 March 31, 2019	$	2,023			$	(81,262	)		$	(208,285	)		$	(287,524	)
Other comprehensive income (loss) before reclassification	107				—				4,884			³	4,991
Amounts reclassified from AOCI	(408		)	¹	1,091			²	—				683
Net current-period other comprehensive income (loss)	(301		)		1,091				4,884				5,674
Balance at June 30, 2019	$	1,722			$	(80,171	)		$	(203,401	)		$	(281,850	)

	Three Months Ended June 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 March 31, 2018	$	1,730			$	(83,990	)		$	(143,456	)		$	(225,716	)
Other comprehensive income (loss) before reclassification	(1,241		)		—				(50,252		)	³	(51,493		)
Amounts reclassified from AOCI	9			¹	721			²	—				730
Net current-period other comprehensive income (loss)	(1,232		)		721				(50,252		)		(50,763		)
Balance at June 30, 2018	$	498			$	(83,269	)		$	(193,708	)		$	(276,479	)


(1)	During the 2019 period, this AOCI reclassification is a component of Net sales of $286 (net of tax of $101) and Cost of goods sold of $(122) (net of tax of $(30)); during the 2018 period, the reclassification is a component of Net sales of $(23) (net of tax of $(14)) and Cost of goods sold of $(14) (net of tax of $(6)). 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 $(90) and $218 during the three months ended June 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 $(35) and $(90) attributable to Non-controlling interests in the three months ended June 30, 2019 and 2018, respectively.

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The following tables set forth the total changes in accumulated other comprehensive income (loss) ("AOCI") by component, net of taxes, for the six months ended June 30, 2019 and 2018:



	Six Months Ended June 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	789				—				9,983			³	10,772
Amounts reclassified from AOCI	(761		)	¹	1,878			²	—				1,117
Net current-period other comprehensive income (loss)	28				1,878				9,983				11,889
Balance at June 30, 2019	$	1,722			$	(80,171	)		$	(203,401	)		$	(281,850	)

	Six Months Ended June 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	(231		)		—				(30,924		)	³	(31,155		)
Amounts reclassified from AOCI	(146		)	¹	2,008			²	—				1,862
Net current-period other comprehensive income (loss)	(377		)		2,008				(30,924		)		(29,293		)
Balance at June 30, 2018	$	498			$	(83,269	)		$	(193,708	)		$	(276,479	)


(1)	During the 2019 period, this AOCI reclassification is a component of Net sales of $572 (net of tax of $203) and Cost of goods sold of $(189) (net of tax of $(60)); during the 2018 period, the reclassification is a component of Net sales of $112 (net of tax of $(6)) and Cost of goods sold of $(34) (net of tax of $(19)). 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 $137 and $649 during the six months ended June 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 $2 and $(31) attributable to Non-controlling interests in the six months ended June 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 June 30, 2019, the Company purchased a total of 1.0 million shares at an average cost per share of $82.51. During the six months ended June 30, 2019, the Company purchased a total of 1.9 million shares at an average cost per share of $83.33. As of June 30, 2019, there remained 4.3 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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NOTE 9 — INVENTORIES

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



	June 30, 2019		December 31, 2018
Raw materials	$	99,219	$	103,820
Work-in-process	70,066		53,950
Finished goods	228,467		204,059
Total	$	397,752	$	361,829

At June 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 $78,760 and $79,626 at June 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	June 30, 2019
Right-of-use assets	Other assets	$	58,363

Current liabilities	Other current liabilities	$	14,362
Noncurrent liabilities	Other liabilities	44,326
Total lease liabilities		$	58,688

Topic 842 did not materially impact our consolidated net earnings, cash flows or debt covenants.

The Company determines if an agreement is a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses a discount rate based on information available at commencement date to present value the lease payments.

The Company has operating leases for sales offices, manufacturing facilities, warehouses and distribution centers, transportation equipment, office equipment and information technology equipment. Some of these leases are noncancelable. 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 $6,546 and $12,435 in the three and six months ended June 30, 2019, respectively. Cash paid for amounts included in the measurement of lease liabilities for the three and six months ended June 30, 2019 respectively was $4,549 and $9,233 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 six months ended June 30, 2019 were $9,717 and $14,673, respectively.

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



	June 30, 2019
2019	$	8,330
2020	14,777
2021	11,441
2022	8,760
2023	7,128
After 2023	16,632
Total lease payments	$	67,068
Less: Imputed interest	(8,380		)
Operating lease liabilities	$	58,688

As of June 30, 2019, the weighted average remaining lease term is 6.4 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:



	Six Months Ended June 30,
	2019			2018
Balance at beginning of year	$	19,778		$	22,029
Accruals for warranties	5,121			4,818
Settlements	(5,720		)	(5,127		)
Foreign currency translation and other adjustments	33			(169		)
Balance at June 30	$	19,212		$	21,551

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 June 30, 2019, the Company was in compliance with all of its covenants and had $30,000 of 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 June 30, 2019, the Company was in compliance with all of its debt covenants relating to the Notes.

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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 June 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 June 30,												Six Months Ended June 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		$	701		$	35		$	832		$	70		$	1,429		$	70		$	1,683
Interest cost	4,653			922			4,493			937			9,306			1,858			8,987			1,907
Expected return on plan assets	(6,245		)	(1,106		)	(6,915		)	(1,266		)	(12,490		)	(2,230		)	(13,831		)	(2,540		)
Amortization of prior service cost	—			15			—			—			—			31			—			1
Amortization of net loss	414			572			384			555			827			1,157			768			1,130
Settlement charges ⁽¹⁾	—			—			—			—			—			—			758			—
Defined benefit plans	(1,143		)	1,104			(2,003		)	1,058			(2,287		)	2,245			(3,248		)	2,181
Multi-employer plans	—			243			—			234			—			490			—			461
Defined contribution plans	5,791			424			5,610			1,036			11,699			923			11,504			1,865
Total pension cost	$	4,648		$	1,771		$	3,607		$	2,328		$	9,412		$	3,658		$	8,256		$	4,507

(1) Pension settlement charges resulting from lump sum pension payments in the six months ended June 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 June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Equity earnings in affiliates	$	1,790	$	1,559	$	2,796	$	2,759
Other components of net periodic pension (cost) income ⁽¹⁾	775		1,812		1,541		2,820
Other income	1,631		1,070		3,622		2,313
Total Other income (expense)	$	4,196	$	4,441	$	7,959	$	7,892

(1) Includes pension settlement charges in the six months ended June 30, 2018 of $758. Refer to Note 13 to the consolidated financial statements for details.

NOTE 15 — INCOME TAXES

The Company recognized $39,492 of tax expense on pretax income of $196,402, resulting in an effective income tax rate of 20.1% for the six months ended June 30, 2019. The effective income tax rate was 27.3% for the six months ended June 30, 2018.

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The decrease in the effective tax rate for the six months ended June 30, 2019, as compared with the same period in 2018, was primarily due to income tax benefits for the settlement of a tax item 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 June 30, 2019, the Company had $26,157 of unrecognized tax benefits. If recognized, approximately $22,597 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 $5,379 in previously unrecognized tax benefits by the end of the second 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 six months ended June 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 June 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 $66,873 at June 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 June 30, 2019, the Company had interest rate swap agreements outstanding that effectively convert notional amounts of $125,000 of debt from a fixed interest rate to a variable interest rate based on three-month LIBOR plus a spread of between 0.5% and 1.8%. The variable rates reset every three months, at which time payment or receipt of interest will be settled.

Net Investment Hedges

From time to time, the Company executes foreign currency forward contracts that qualify and are designated as net investment hedges. No such contracts were outstanding at June 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 $335,048 and $328,534 at June 30, 2019 and December 31, 2018, respectively.

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Fair values of derivative instruments in the Company’s Condensed Consolidated Balance Sheets follow:



	June 30, 2019								December 31, 2018
Derivatives by hedge designation	Other Current Assets		Other Current Liabilities		Other Assets		Other Liabilities		Other Current Assets		Other Current Liabilities		Other Assets		Other Liabilities
Designated as hedging instruments:
Foreign exchange contracts	$	676	$	514	$	—	$	—	$	647	$	404	$	—	$	—
Interest rate swap agreements	—		—		2,682		1,584		—		—		302		7,033
Not designated as hedging instruments:
Foreign exchange contracts	5,471		558		—		—		6,375		829		—		—
Total derivatives	$	6,147	$	1,072	$	2,682	$	1,584	$	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 June 30,					Six Months Ended June 30,
Derivatives by hedge designation	Classification of gain (loss)	2019		2018			2019		2018
Not designated as hedges:
Foreign exchange contracts	Selling, general & administrative expenses	$	1,010	$	(4,406	)	$	6,417	$	4,249

The effects of designated hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:



Total gain (loss) recognized in AOCI, net of tax	June 30, 2019		December 31, 2018
Foreign exchange contracts	$	201	$	173
Net investment contracts	1,521		1,521

The Company expects a gain of $201 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized.



		Three Months Ended June 30,					Six Months Ended June 30,
Derivative type	Gain (loss) recognized in the Consolidated Statements of Income:	2019		2018			2019		2018
Foreign exchange contracts	Sales	$	387	$	(37	)	$	775	$	106
	Cost of goods sold	152		20			249		53

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Dollars in thousands, except per share amounts

NOTE 17 - FAIR VALUE

The following table provides a summary of assets and liabilities as of June 30, 2019, measured at fair value on a recurring basis:



Description	Balance as of June 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	$	6,147	$	—	$	6,147	$	—
Interest rate swap agreements	2,682		—		2,682		—
Total assets	$	8,829	$	—	$	8,829	$	—

Liabilities:
Foreign exchange contracts	1,072		—		1,072		—
Interest rate swap agreements	1,584		—		1,584		—
Contingent consideration	850		—		—		850
Deferred compensation	28,272		—		28,272		—
Total liabilities	$	31,778	$	—	$	30,928	$	850

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 six months ended June 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 June 30,

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

2019 and December 31, 2018. The fair value of long-term debt at June 30, 2019 and December 31, 2018, including the current portion, was approximately $704,319 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 $710,568 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 June 30,
	2019					2018					Favorable (Unfavorable) 2019 vs. 2018
	Amount			% of Sales		Amount			% of Sales		$			%
Net sales	$	777,008				$	790,052				$	(13,044	)	(1.7	%)
Cost of goods sold	507,127					519,936					12,809			2.5	%
Gross profit	269,881			34.7	%	270,116			34.2	%	(235		)	(0.1	%)
Selling, general & administrative expenses	163,388			21.0	%	163,940			20.8	%	552			0.3	%
Rationalization and asset impairment charges	1,307			0.2	%	11,542			1.5	%	10,235			88.7	%
Operating income	105,186			13.5	%	94,634			12.0	%	10,552			11.2	%
Interest expense, net	5,898					4,812					(1,086		)	(22.6	%)
Other income (expense)	4,196					4,441					(245		)	(5.5	%)
Income before income taxes	103,484			13.3	%	94,263			11.9	%	9,221			9.8	%
Income taxes	18,040					25,404					7,364			29.0	%
Effective tax rate	17.4		%			27.0		%			9.6		%
Net income including non-controlling interests	85,444					68,859					16,585			24.1	%
Non-controlling interests in subsidiaries’ loss	(8		)			(5		)			(3		)	(60.0	%)
Net income	$	85,452		11.0	%	$	68,864		8.7	%	$	16,588		24.1	%
Diluted earnings per share	$	1.36				$	1.04				$	0.32		30.8	%

	Six Months Ended June 30,
	2019					2018					Favorable (Unfavorable) 2019 vs. 2018
	Amount			% of Sales		Amount			% of Sales		$			%
Net sales	$	1,536,182				$	1,547,748				$	(11,566	)	(0.7	%)
Cost of goods sold	1,007,880					1,021,078					13,198			1.3	%
Gross profit	528,302			34.4	%	526,670			34.0	%	1,632			0.3	%
Selling, general & administrative expenses	323,796			21.1	%	325,131			21.0	%	1,335			0.4	%
Rationalization and asset impairment charges	4,842			0.3	%	21,717			1.4	%	16,875			77.7	%
Operating income	199,664			13.0	%	179,822			11.6	%	19,842			11.0	%
Interest expense, net	11,221					9,253					(1,968		)	(21.3	%)
Other income (expense)	7,959					7,892					67			0.8	%
Income before income taxes	196,402			12.8	%	178,461			11.5	%	17,941			10.1	%
Income taxes	39,492					48,782					9,290			19.0	%
Effective tax rate	20.1		%			27.3		%			7.2		%
Net income including non-controlling interests	156,910					129,679					27,231			21.0	%
Non-controlling interests in subsidiaries’ loss	(22		)			(9		)			(13		)	(144.4	%)
Net income	$	156,932		10.2	%	$	129,688		8.4	%	$	27,244		21.0	%
Diluted earnings per share	$	2.47				$	1.96				$	0.51		26.0	%

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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 six months ended June 30, 2019 on a consolidated basis:



Three Months Ended June 30,			Change in Net Sales due to:
	Net Sales 2018		Volume			Acquisitions			Price			Foreign Exchange			Net Sales 2019
Lincoln Electric Holdings, Inc.	$	790,052	$	(40,723	)	$	27,168		$	13,801		$	(13,290	)	$	777,008
% Change
Lincoln Electric Holdings, Inc.			(5.2		%)	3.4		%	1.7		%	(1.7		%)	(1.7		%)



Six Months Ended June 30,			Change in Net Sales due to:
	Net Sales 2018		Volume			Acquisitions			Price			Foreign Exchange			Net Sales 2019
Lincoln Electric Holdings, Inc.	$	1,547,748	$	(68,074	)	$	45,662		$	48,154		$	(37,308	)	$	1,536,182
% Change
Lincoln Electric Holdings, Inc.			(4.4		%)	3.0		%	3.1		%	(2.4		%)	(0.7		%)

Net sales were flat in the three and six months ended June 30, 2019 primarily as a result of acquisitions, offset by lower organic sales and unfavorable foreign exchange. The increase in Net sales from acquisitions was driven by the acquisitions of Coldwater, Pro Systems, Inovatech and Baker within Americas Welding and Worthington within The Harris Products Group.

Gross Profit:

Gross profit for the three and six months ended June 30, 2019 increased, as a percent of sales, compared to the prior year due to price management and segment mix. The three and six months ended June 30, 2019 includes a last-in, first-out ("LIFO") credit of $886 and $865, respectively, as compared to a LIFO charge of $5,261 and $6,173, respectively, in the three and six months ended June 30, 2018.

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

The decrease in SG&A expenses for the three and six months ended June 30, 2019 as compared to June 30, 2018 is due to favorable foreign exchange and lower compensation costs, partially offset by higher expense from acquisitions.

Rationalization and Asset Impairment Charges:

The Company recorded net charges of $1,307, $937 after-tax, and $4,842, $3,751 after-tax, in the three and six months ended June 30, 2019, respectively, primarily related to severance, asset impairments and gains or losses on the disposal of assets. The Company recorded net charges of $11,542, $10,362 after-tax, and $21,717, $18,232 after-tax, in the three and six months ended June 30, 2018, respectively, primarily related to employee severance and asset impairment charges.

Interest Expense, Net:

The increase in Interest expense, net for the three and six months ended June 30, 2019 as compared to June 30, 2018 was due to lower interest income on marketable securities.

Income Taxes:

The effective tax rate was lower for the three and six months ended June 30, 2019 as compared to June 30, 2018 primarily due to income tax benefits for the settlement of a tax item 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 Cuts and Job Act (the "U.S. Tax Act").

Net Income:

The increase in Net income for the three and six months ended June 30, 2019 as compared to June 30, 2018 was primarily due to a lower effective tax rate and lower rationalization and asset impairment charges.

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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 six months ended June 30, 2019:



Three Months Ended June 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	$	462,515	$	(16,756	)	$	21,512		$	11,599		$	(2,263	)	$	476,607
International Welding	243,373		(23,550		)	—			2,837			(10,354		)	212,306
The Harris Products Group	84,164		(417		)	5,656			(635		)	(673		)	88,095
% Change
Americas Welding			(3.6		%)	4.7		%	2.5		%	(0.5		%)	3.0		%
International Welding			(9.7		%)	—			1.2		%	(4.3		%)	(12.8		%)
The Harris Products Group			(0.5		%)	6.7		%	(0.8		%)	(0.8		%)	4.7		%

(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. Decrease for The Harris Products Group driven primarily by lower demand in the retail sector.

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

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



Six Months Ended June 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	$	897,287	$	(29,151	)	$	34,232		$	39,027		$	(7,069	)	$	934,326
International Welding	490,693		(41,467		)	—			9,312			(28,146		)	430,392
The Harris Products Group	159,768		2,544			11,430			(185		)	(2,093		)	171,464
% Change
Americas Welding			(3.2		%)	3.8		%	4.3		%	(0.8		%)	4.1		%
International Welding			(8.5		%)	—			1.9		%	(5.7		%)	(12.3		%)
The Harris Products Group			1.6		%	7.2		%	(0.1		%)	(1.3		%)	7.3		%

(1) Decrease for Americas Welding due to softer demand associated with the current economic environment. Decrease for International Welding due to integration activities and softer demand in the European and Asian markets. Increase for The Harris Products Group driven primarily by higher consumables volume.

(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 June 30,						Favorable (Unfavorable) 2019 vs. 2018
	2019			2018			$			%
Americas Welding:
Net sales	$	476,607		$	462,515		$	14,092		3.0	%
Inter-segment sales	34,811			31,240			3,571			11.4	%
Total Sales	$	511,418		$	493,755		17,663			3.6	%

Adjusted EBIT ⁽⁴⁾	$	84,851		$	88,158		(3,307		)	(3.8	%)
As a percent of total sales ⁽¹⁾	16.6		%	17.9		%				(1.3	%)
International Welding:
Net sales	$	212,306		$	243,373		(31,067		)	(12.8	%)
Inter-segment sales	4,188			5,497			(1,309		)	(23.8	%)
Total Sales	$	216,494		$	248,870		(32,376		)	(13.0	%)

Adjusted EBIT ⁽⁵⁾	$	15,178		$	16,276		(1,098		)	(6.7	%)
As a percent of total sales ⁽²⁾	7.0		%	6.5		%				0.5	%
The Harris Products Group:
Net sales	$	88,095		$	84,164		3,931			4.7	%
Inter-segment sales	2,113			2,003			110			5.5	%
Total Sales	$	90,208		$	86,167		4,041			4.7	%

Adjusted EBIT	$	13,488		$	10,157		3,331			32.8	%
As a percent of total sales ⁽³⁾	15.0		%	11.8		%				3.2	%
Corporate / Eliminations:
Inter-segment sales	$	(41,112	)	$	(38,740	)	2,372			6.1	%
Adjusted EBIT ⁽⁶⁾	(3,969		)	(3,186		)	783			24.6	%
Consolidated:
Net sales	$	777,008		$	790,052		(13,044		)	(1.7	%)
Net income	$	85,452		$	68,864		16,588			24.1	%
As a percent of total sales	11.0		%	8.7		%				2.3	%

Adjusted EBIT ⁽⁷⁾	$	109,548		$	111,405		(1,857		)	(1.7	%)
As a percent of sales	14.1		%	14.1		%				—


(1)	Decrease for the three months ended June 30, 2019 as compared to June 30, 2018 driven by acquisitions, lower Net sales volumes and higher compensation costs, partially offset by lower LIFO charges.


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


(3)	Increase for the three months ended June 30, 2019 as compared to June 30, 2018 driven by favorable sales mix associated with consumables volume increases.


(4)	The three months ended June 30, 2019 exclude Rationalization and asset impairment charges of $380, 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.


(5)	The three months ended June 30, 2019 and 2018 exclude Rationalization and asset impairment charges of $927 and $11,542, 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 June 30, 2019 also exclude gains on disposal of assets of $3,554.

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(6)	The three months ended June 30, 2019 and 2018 exclude acquisition transaction and integration costs of $1,014 and $788, 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.

The following table presents Adjusted EBIT by segment:



	Six Months Ended June 30,						Favorable (Unfavorable) 2019 vs. 2018
	2019			2018			$			%
Americas Welding:
Net sales	$	934,326		$	897,287		$	37,039		4.1	%
Inter-segment sales	64,199			57,826			6,373			11.0	%
Total Sales	$	998,525		$	955,113		43,412			4.5	%

Adjusted EBIT ⁽⁴⁾	$	166,603		$	165,597		1,006			0.6	%
As a percent of total sales ⁽¹⁾	16.7		%	17.3		%				(0.6	%)
International Welding:
Net sales	$	430,392		$	490,693		(60,301		)	(12.3	%)
Inter-segment sales	8,397			10,006			(1,609		)	(16.1	%)
Total Sales	$	438,789		$	500,699		(61,910		)	(12.4	%)

Adjusted EBIT ⁽⁵⁾	$	28,515		$	31,249		(2,734		)	(8.7	%)
As a percent of total sales ⁽²⁾	6.5		%	6.2		%				0.3	%
The Harris Products Group:
Net sales	$	171,464		$	159,768		11,696			7.3	%
Inter-segment sales	3,980			3,910			70			1.8	%
Total Sales	$	175,444		$	163,678		11,766			7.2	%

Adjusted EBIT	$	24,007		$	19,382		4,625			23.9	%
As a percent of total sales ⁽³⁾	13.7		%	11.8		%				1.9	%
Corporate / Eliminations:
Inter-segment sales	$	(76,576	)	$	(71,742	)	4,834			6.7	%
Adjusted EBIT ⁽⁶⁾	(7,011		)	(3,344		)	3,667			109.7	%
Consolidated:
Net sales	$	1,536,182		$	1,547,748		(11,566		)	(0.7	%)
Net income	$	156,932		$	129,688		27,244			21.0	%
As a percent of total sales	10.2		%	8.4		%				1.8	%

Adjusted EBIT ⁽⁷⁾	$	212,114		$	212,884		(770		)	(0.4	%)
As a percent of sales	13.8		%	13.8		%				—


(1)	Decrease for the six months ended June 30, 2019 as compared to June 30, 2018 driven by acquisitions, lower Net sales volumes and higher compensation costs, partially offset by lower LIFO charges.


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


(3)	Increase for the six months ended June 30, 2019 as compared to June 30, 2018 driven by favorable sales mix associated with consumables volume increases.

(4)

The six months ended June 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 six months ended June 30, 2018 exclude pension settlement charges of $758 related to lump sum pension payments as discussed in Note 13 to the consolidated financial statements.


(5)	The six months ended June 30, 2019 and 2018 exclude Rationalization and asset impairment charges of $3,126 and $21,717, 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 June 30, 2019 also exclude gains on disposal of assets of $3,554.

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(6)	The six months ended June 30, 2019 and 2018 exclude acquisition transaction and integration costs of $1,804 and $2,695, 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.

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 June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Operating income as reported	$	105,186		$	94,634		$	199,664		$	179,822
Special items (pre-tax):
Rationalization and asset impairment charges ⁽¹⁾	1,307			11,542			4,842			21,717
Acquisition transaction and integration costs ⁽²⁾	1,014			788			1,804			2,695
Amortization of step up in value of acquired inventories ⁽³⁾	1,399			—			1,399			—
Gains on asset disposals ⁽⁴⁾	(3,045		)	—			(3,045		)	—
Adjusted operating income	$	105,861		$	106,964		$	204,664		$	204,234

Net income as reported	$	85,452		$	68,864		$	156,932		$	129,688
Special items:
Rationalization and asset impairment charges ⁽¹⁾	1,307			11,542			4,842			21,717
Acquisition transaction and integration costs ⁽²⁾	1,014			788			1,804			2,695
Pension settlement charges ⁽⁵⁾	—			—			—			758
Amortization of step up in value of acquired inventories ⁽³⁾	1,399			—			1,399			—
Gains on asset disposals ⁽⁴⁾	(3,554		)	—			(3,554		)	—
Tax effect of Special items ⁽⁶⁾	(4,751		)	(784		)	(5,564		)	(1,165		)
Adjusted net income	80,867			80,410			155,859			153,693
Non-controlling interests in subsidiaries’ earnings (loss)	(8		)	(5		)	(22		)	(9		)
Interest expense, net	5,898			4,812			11,221			9,253
Income taxes as reported	18,040			25,404			39,492			48,782
Tax effect of Special items ⁽⁶⁾	4,751			784			5,564			1,165
Adjusted EBIT	$	109,548		$	111,405		$	212,114		$	212,884
Effective tax rate as reported	17.4		%	27.0		%	20.1		%	27.3		%
Net special item tax impact	4.6		%	(2.4		%)	2.3		%	(2.8		%)
Adjusted effective tax rate	22.0		%	24.6		%	22.4		%	24.5		%

Diluted earnings per share as reported	$	1.36		$	1.04		$	2.47		$	1.96
Special items per share	(0.08		)	0.18			(0.01		)	0.36
Adjusted diluted earnings per share	$	1.28		$	1.22		$	2.46		$	2.32

(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.

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

(3) Charges related to the acquisition of Baker 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) 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 three and six months ended June 30, 2019.

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:



	Six Months Ended June 30,
	2019			2018			$ Change
Cash provided by operating activities ⁽¹⁾	$	151,985		$	123,558		$	28,427
Cash (used by) provided by investing activities ⁽²⁾	(133,644		)	15,501			(149,145		)
Capital expenditures	(36,513		)	(31,383		)	(5,130		)
Acquisition of businesses, net of cash acquired	(107,843		)	6,591			(114,434		)
Proceeds from marketable securities, net of purchases	—			40,066			(40,066		)
Cash used by financing activities ⁽³⁾	(190,078		)	(98,673		)	(91,405		)
Purchase of shares for treasury	(160,914		)	(50,232		)	(110,682		)
Cash dividends paid to shareholders	(60,101		)	(51,250		)	(8,851		)
(Decrease) increase in Cash and cash equivalents ⁽⁴⁾	(168,988		)	30,393

(1) Cash provided by operating activities increased for the six months ended June 30, 2019, compared with the six months ended June 30, 2018 primarily due to improved Company performance and cash flows from tax payments and receipts.

(2) Cash used by investing activities increased for the six months ended June 30, 2019, compared with the six months ended June 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 six months ended June 30, 2019, compared with the six months ended June 30, 2018 due to higher purchases of common shares for treasury.

(4) Cash and cash equivalents decreased 47.1%, or $168,988, to $189,861 during the six months ended June 30, 2019, from $358,849 as of December 31, 2018. This decrease was predominantly due to cash used in the acquisition of

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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 six months ended June 30, 2019 compares to an increase of 9.3% during the six months ended June 30, 2018. The increase in 2018 was primarily due to cash provided by operating activities and proceeds from marketable securities, partially offset by cash dividends paid to shareholders. At June 30, 2019, $173,350 of Cash and cash equivalents was held by international subsidiaries.

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 46.7% at June 30, 2019 from 44.2% at December 31, 2018.

In July 2019, the Company paid a cash dividend of $0.47 per share, or $29,036, to shareholders of record as of June 28, 2019.

Working Capital Ratios



	June 30, 2019		December 31, 2018		June 30, 2018
Average operating working capital to net sales ⁽¹⁾	18.4	%	16.5	%	16.5	%
Days sales in Inventories	98.4		95.1		91.0
Days sales in Accounts receivable	53.6		52.7		52.2
Average days in Trade accounts payable	50.6		55.5		53.4

(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 June 30, 2019 and 2018 were as follows:

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	Twelve Months Ended June 30,
	2019			2018
Net income	$	314,310		$	259,995
Rationalization and asset impairment charges	8,410			28,307
Pension settlement charges	5,928			8,908
Acquisition transaction and integration costs	3,607			9,584
Amortization of step up in value of acquired inventories	1,399			4,578
Gains on disposal of assets	(3,554		)	—
Bargain purchase gain	—			(49,650		)
Tax effect of Special items ⁽¹⁾	(11,295		)	21,256
Adjusted net income	$	318,805		$	282,978
Plus: Interest expense, net of tax of $6,178 and $6,077 in 2019 and 2018, respectively	18,569			18,265
Less: Interest income, net of tax of $1,302 and $1,509 in 2019 and 2018, respectively	3,912			4,537
Adjusted net income before tax effected interest	$	333,462		$	296,706

Invested Capital	June 30, 2019			June 30, 2018
Short-term debt	$	30,110		$	1,889
Long-term debt, less current portion	710,458			700,194
Total debt	740,568			702,083
Total equity	846,058			943,508
Invested capital	$	1,586,626		$	1,645,591
Return on invested capital	21.0		%	18.0		%


(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 months ended June 30, 2019 and net charges of $31,116 related to the U.S. Tax Act in the twelve months ended June 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

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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 Notes contain certain affirmative and negative covenants. As of June 30, 2019, the Company was in compliance with all of its debt covenants relating to the Notes.

Shelf Agreements

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 June 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 June 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 June 30, 2019, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 3,279 plaintiffs, which is a net decrease of 9 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: 55,047 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 894 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 second 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⁾
April 1 - 30, 2019	254,018	⁽¹⁾	$	87.82	252,870	5,078,360
May 1 - 31, 2019	433,048	⁽¹⁾	82.19		433,009	4,645,351
June 1 - 30, 2019	346,969	⁽¹⁾	79.06		346,461	4,298,890
Total	1,034,035				1,032,340


(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 50.7 million shares at a total cost of $2.0 billion for a weighted average cost of $40.18 per share through June 30, 2019.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 6. EXHIBITS

(a) Exhibits



10.1		Amendment No. 1 to The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 1, 2019, effective July 1, 2019 (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		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

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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)
		July 26, 2019