NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest (the "Company") after elimination of all inter-company accounts, transactions and profits.
General Information
The Company is a manufacturer of welding, cutting and brazing products. Welding products include arc welding power sources, plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes and welding accessories and specialty welding consumables and fabrication. The Company's product offering also includes computer numeric controlled ("CNC") plasma and oxy-fuel cutting systems, regulators and torches used in oxy-fuel welding, cutting and brazing and consumables used in the brazing and soldering alloys market.
Translation of Foreign Currencies
Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the dates of the Consolidated Balance Sheets; revenue and expense accounts are translated at average monthly exchange rates. Translation adjustments are reflected as a component of Total equity. For subsidiaries operating in highly inflationary economies, both historical and current exchange rates are used in translating balance sheet accounts and translation adjustments are included in Net income.
The translation of assets and liabilities originally denominated in foreign currencies into U.S. dollars is for consolidation purposes, and does not necessarily indicate that the Company could realize or settle the reported value of those assets and liabilities in U.S. dollars. Additionally, such a translation does not necessarily indicate that the Company could return or distribute the reported U.S. dollar value of the net equity of its foreign operations to shareholders.
Foreign currency transaction gains and losses are included in Selling, general & administrative expenses and were gains of
$3,741
in
2016
and losses of
$6,023
and
$22,351
in
2015
and
2014
, respectively.
Venezuela – Deconsolidation
Effective June 30, 2016, the Company determined that deteriorating conditions in Venezuela had led the Company to no longer meet the accounting criteria for control over its Venezuelan subsidiary. The restrictive exchange controls in Venezuela and the lack of access to U.S. dollars through official currency exchange mechanisms resulted in an other-than-temporary lack of exchangeability between the Venezuela bolivar and the U.S. dollar, and restricted the Venezuela operations ability to pay dividends and satisfy other obligations denominated in U.S. dollars. Additionally, other operating restrictions including government controls on pricing, profits, imports and restrictive labor laws significantly impacted the Company’s ability to make key operational decisions, including the ability to manage its capital structure, purchasing, product pricing and labor relations. Therefore, as of June 30, 2016, the Company deconsolidated the financial statements of its subsidiary in Venezuela and began reporting the results under the cost method of accounting.
As a result of the deconsolidation, the Company recorded a pretax charge of
$34,348
(
$33,251
after-tax) in the second quarter of 2016. The pretax charge includes the write-off of the Company’s investment in Venezuela, including all inter-company balances and
$283
of Cash and cash equivalents. Additionally, the charge includes foreign currency translation losses and pension losses previously included in Accumulated other comprehensive loss.
Beginning July 1, 2016, the Company no longer includes the results of the Venezuelan subsidiary in its consolidated financial statements. Under the cost method of accounting, if cash were to be received from the Venezuela entity in future periods from the sale of inventory, dividends or royalties, income would be recognized. The Company does not anticipate dividend or royalty payments being made in the foreseeable future and has no outstanding receivables or payables with the Venezuelan entity. The factors that led to the Company’s conclusion to deconsolidate at June 30, 2016 continued to exist through December 31, 2016. The Company expects these conditions to continue for the foreseeable future.
Subsequent to the deconsolidation under the voting interest consolidation model, the Company determined that the Venezuelan subsidiary is considered to be a variable interest entity ("VIE"). As the Company does not have the power to direct the activities that most significantly affect the Venezuela subsidiary's economic performance, the Company is not the primary beneficiary of the VIE and therefore would not consolidate the entity under the VIE consolidation model. Due to the lack of ability to settle U.S. dollar obligations, the Company does not intend to sell into nor purchase inventory from the Venezuela
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
entity at this time. Additionally, the Company has no remaining financial commitments to the Venezuelan subsidiary and therefore believes the exposure to future losses are not material.
Prior to deconsolidation, the financial statements of the Company’s Venezuelan operation had been reported under highly inflationary accounting rules since January 1, 2010. Under highly inflationary accounting, the financial statements of the Company’s Venezuelan operation had been remeasured into the Company’s reporting currency and exchange gains and losses from the remeasurement of monetary assets and liabilities were reflected in current earnings.
In February 2015, the Venezuelan government announced a new exchange market called the Marginal Currency System (“SIMADI”), which allowed for trading based on supply and demand. At September 30, 2015, the Company determined that the rate used in remeasuring the Venezuelan operation's financial statements into U.S. dollars would change to the SIMADI rate (now known as "DICOM"), as the SIMADI rate most appropriately approximated the rates used to transact business in its Venezuelan operations. At September 30, 2015, the SIMADI rate was
199.4
bolivars to the U.S. dollar, resulting in a remeasurement charge on the bolivar-denominated monetary net asset position of
$4,334
. This foreign exchange loss was recorded in Selling, general & administrative expenses during the three months ended September 30, 2015. Additionally, the Company recorded a lower of cost or net realizable value inventory adjustments of
$22,880
within Cost of goods sold, related to the adoption of the SIMADI rate.
In January 2014, the exchange rate applicable to the settlement of certain transactions, including payments of dividends and royalties, changed to utilize the Complementary System of Foreign Currency Administration ("SICAD") auction-based exchange rate (the "SICAD rate"). As of March 31, 2014, the Company determined that the rate used in remeasuring the Venezuelan operation's financial statements into U.S. dollars would change to the SICAD rate as future remittances for dividend payments could be transacted at the SICAD rate. As of March 31, 2014, the SICAD rate was
10.7
bolivars to the U.S. dollar, which resulted in a remeasurement loss on the bolivar-denominated monetary net asset position of
$17,665
which was recorded in Selling, general & administrative expenses in the three months ended March 31, 2014. Additionally, the Company incurred higher Cost of goods sold of
$3,468
during the second quarter of 2014 related to the adoption of the SICAD rate.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for products delivered. The Company estimates this allowance based on the age of the related receivable, knowledge of the financial condition of customers, review of historical receivables and reserve trends and other pertinent information. If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required. Historically, the Company's reserves have approximated actual experience.
Inventories
Inventories are valued at the lower of cost or net realizable value. Fixed manufacturing overhead costs are allocated to inventory based on normal production capacity and abnormal manufacturing costs are recognized as period costs. Cost for a substantial portion of U.S. inventories is determined on a last-in, first-out (“ LIFO”) basis. LIFO was used for 40% of total inventories at both December 31, 2016 and 2015. Cost of other inventories is determined by costing methods that approximate a first-in, first-out (“FIFO”) basis. Refer to Note 15 for additional details.
Reserves are maintained for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. The reserve for excess and obsolete inventory was
$19,252
and
$19,198
at December 31, 2016 and 2015, respectively.
Marketable Securities
The Company's marketable securities consist of short-term highly liquid investments classified as available-for-sale and recorded at fair value using quoted market prices for similar assets at the end of the reporting period. The marketable securities are included in Other current assets in the accompanying Consolidated Balance Sheets. Refer to Note 14 for fair value information.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Prepaid Expenses
Prepaid expenses include prepaid insurance, prepaid rent, prepaid service contracts and other prepaid items. Prepaid expenses are included in Other current assets in the accompanying Consolidated Balance Sheets and amounted to
$12,139
at December 31, 2016 and
$11,624
at December 31, 2015.
Equity Investments
Investments in businesses in which the Company does not have a controlling interest and holds between a
20%
and
50%
ownership interest are accounted for using the equity method of accounting. The Company's
50%
ownership interest in equity investments includes investments in Turkey and Chile. The amount of retained earnings that represents undistributed earnings of
50%
or less owned equity investments was
$19,333
at
December 31, 2016
and
$19,072
at
December 31, 2015
.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include improvements which significantly increase capacities or extend the useful lives of existing plant and equipment. Depreciation and amortization are computed using a straight-line method over useful lives ranging from
three
to
20
years for machinery, tools and equipment, and up to
40
years for buildings. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur.
Routine maintenance, repairs and replacements are expensed as incurred. The Company capitalizes interest costs associated with long-term construction in progress.
Property, plant and equipment, net in the Consolidated Balance Sheet is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Land
|
$
|
46,219
|
|
|
$
|
45,775
|
|
Buildings
|
335,885
|
|
|
362,325
|
|
Machinery and equipment
|
706,938
|
|
|
696,849
|
|
|
1,089,042
|
|
|
1,104,949
|
|
Less accumulated depreciation
|
716,665
|
|
|
693,626
|
|
Total
|
$
|
372,377
|
|
|
$
|
411,323
|
|
Goodwill and Intangibles
Goodwill is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. Intangible assets other than goodwill are recorded at fair value at the time acquired or at cost, if applicable. Intangible assets that do not have indefinite lives are amortized in line with the pattern in which the economic benefits of the intangible asset are consumed. If the pattern of economic benefit cannot be reliably determined, the intangible assets are amortized on a straight-line basis over the shorter of the legal or estimated life. Goodwill and indefinite-lived intangibles assets are not amortized, but are tested for impairment in the fourth quarter using the same dates each year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment.
The fair value of each indefinite-lived intangible asset is compared to its carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. For goodwill, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test. The quantitative test is required only if the Company concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount. The quantitative goodwill impairment analysis is a two-step process. Goodwill is tested by first comparing the fair value of each reporting unit with its carrying value. If the carrying value of the reporting unit exceeds its fair value, the implied value of goodwill is compared to its carrying value and impairment is recognized to the extent that the carrying value exceeds the implied fair value.
Fair values are determined using established business valuation techniques and models developed by the Company, estimates of market participant assumptions of future cash flows, future growth rates and the applicable discount rates to value estimated cash flows. Changes in economic and operating conditions impacting these assumptions could result in asset impairments in future periods. Refer to Note 4 for additional details.
Long-Lived Assets
The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable long-lived assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, a loss is recognized to the extent that carrying value exceeds fair value. Fair value is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including the discounted value of estimated future cash flows. Refer to Notes 4 and 6 for additional details.
Fair Value Measurements
Financial assets and liabilities, such as the Company's defined benefit pension plan assets and derivative contracts, are valued at fair value using the market and income valuation approaches. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company uses the market approach to value similar assets and liabilities in active markets and the income approach that consists of discounted cash flow models that take into account the present value of future cash flows under the terms of the contracts using current market information as of the reporting date. The following hierarchy is used to classify the inputs used to measure fair value:
|
|
|
|
Level 1
|
|
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
|
Level 2
|
|
Inputs to the valuation methodology include:
|
|
|
• Quoted prices for similar assets or liabilities in active markets;
|
|
|
• Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
|
• Inputs other than quoted prices that are observable for the asset or liability; and
|
|
|
• Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
If the asset or liability has a specific (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3
|
|
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Refer to Notes 11 and 14 for additional details.
Product Warranties
The Company accrues for product warranty claims based on historical experience and the expected material and labor costs to provide warranty service. Warranty services are generally provided for periods up to
three
years from the date of sale. The accrual for product warranty claims is included in Other current liabilities. Refer to Note 18.
Revenue Recognition
Substantially all of the Company's revenues are recognized when the risks and rewards of ownership and title to the product have transferred to the customer, which generally occurs at point of shipment. The Company recognizes any discounts, credits, returns, rebates and incentive programs based on reasonable estimates as a reduction of sales to arrive at Net sales at the same time the related revenue is recorded.
For contracts accounted for under the percentage of completion method, revenue recognition is 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.
Distribution Costs
Distribution costs, including warehousing and freight related to product shipments, are included in Cost of goods sold.
Stock-Based Compensation
Expense is recognized for all awards of stock-based compensation by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any stock options, restricted or deferred shares or restricted stock units ultimately forfeited because the recipients fail to meet vesting requirements.
Common stock issuable upon the exercise of employee stock options is excluded from the calculation of diluted earnings per share when the calculation of option equivalent shares is anti-dilutive. Refer to Note 9 for additional details.
Financial Instruments
The Company uses derivative instruments to manage exposures to interest rates, commodity prices and currency exchange rate fluctuations on certain purchase and sales transactions, balance sheet and net investment exposures. Derivative contracts to
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
hedge currency and commodity exposures are generally written on a short-term basis but may cover exposures for up to
two
years while interest rate contracts may cover longer periods consistent with the terms of the underlying debt. The Company does not enter into derivatives for trading or speculative purposes.
All derivatives are recognized at fair value on the Company's Consolidated Balance Sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. The Company formally documents the relationship of the hedge with the hedged item as well as the risk-management strategy for all designated hedges. Both at inception and on an ongoing basis, the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued. The cash flows from settled derivative contracts are recognized in operating activities in the Company's Consolidated Statements of Cash Flows.
The Company is subject to the credit risk of the counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. The Company manages individual counterparty exposure by monitoring the credit rating of the counterparty and the size of financial commitments and exposures between the Company and the counterparty.
Cash flow hedges
Certain foreign currency forward contracts are qualified and designated as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows). The effective portion of the fair value unrealized gain or loss on cash flow hedges are reported as a component of Accumulated other comprehensive income ("AOCI") with offsetting amounts recorded as Other current assets, Other assets, Other current liabilities or Other liabilities depending on the position and the duration of the contract. At settlement, the realized gain or loss is recorded in Cost of goods sold or sales for hedges of purchases and sales, respectively, in the same period or periods during which the hedged transaction affects earnings. The ineffective portion on cash flow hedges is recognized in current earnings.
Fair value hedges
Certain interest rate swap agreements were qualified and designated as fair value hedges. The interest rate swap agreements designated as fair value hedges meet the shortcut method requirements under accounting standards for derivatives and hedging. Accordingly, changes in the fair value of these agreements are considered to exactly offset changes in the fair value of the underlying long-term debt. The effective portion of the changes in fair value are recorded in Other assets or Other liabilities with offsetting amounts recorded as a fair value adjustment to the carrying value of Long-term debt, less current portion.
Net investment hedges
For derivative instruments that qualify as a net investment hedge (i.e., hedging the foreign currency exposure of a net investment in a foreign operation), the effective portion of the fair value gains or losses are recognized in AOCI with offsetting amounts recorded as Other current assets, Other assets, Other current liabilities or Other liabilities depending on the position and the duration of the contract. The gains or losses are subsequently reclassified to Selling, general and administrative expenses, as the underlying hedged investment is liquidated.
Derivatives not designated as hedging instruments
The Company has certain derivative instruments which are not designated as hedging instruments including foreign exchange forward contracts and commodity price contracts. Foreign exchange forward contracts are held as economic hedges of certain balance sheet exposures and qualify as fair value hedges (i.e., hedging the exposure to changes in the fair value of an asset or a liability). The gains or losses on
t
hese contracts are recognized in Selling, general and administrative expenses, offsetting the losses or gains on the exposures being hedged. Short-term commodity price contracts are not designated as hedges. Realized and unrealized gains and losses on these contracts are recognized in Costs of goods sold.
Refer to Note 13 for additional details.
Research and Development
Research and development costs are charged to Selling, general & administrative expenses as incurred and totaled
$44,720
,
$47,182
and
$43,256
in
2016
,
2015
and
2014
, respectively.
Bonus
Included in Selling, general & administrative expenses are the costs related to the Company's discretionary employee bonus programs, which for certain U.S.-based employees are net of hospitalization costs. Bonus costs were
$83,620
in
2016
,
$98,651
in
2015
and
$128,478
in
2014
.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Income Taxes
Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the GAAP and income tax basis of assets and liabilities and operating loss and tax credit carry-forwards. In assessing the realizability of deferred tax assets, the Company assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. Refer to Note 12 for additional details.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates.
Reclassification
Certain reclassifications have been made to prior year financial statements to conform to current year classifications.
New Accounting Pronouncements
The following section provides a description of new accounting pronouncements ("Accounting Standard Update" or "ASU") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
New Accounting Pronouncements Adopted:
The following ASUs were adopted as of January 1, 2016 and did not have a significant financial impact on the Company's financial statements:
|
|
|
Standard
|
Description
|
Accounting Standard Update ("ASU") No. 2015-16,
Business Combinations (Topic 805):
Simplifying the Accounting for Measurement-Period Adjustments
, issued September 2015
|
ASU 2015-16 requires an acquiring entity to: recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined; record the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts; present separately on the face of the statement of operations or disclose in the notes the portion of the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment had been recognized as of the acquisition date.
|
ASU No. 2015-07,
Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share
, issued May 2015
|
ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient and removes the requirement to make certain disclosures for these investments.
|
ASU No. 2015-02,
Consolidation (Topic 810):
Amendments to the Consolidation Analysis
, issued February 2015
|
ASU 2015-02 modifies the evaluation of whether limited partnership and similar legal entities are VIEs or voting interest entities, affects the consolidation analysis of reporting entities that are involved with VIEs and provides scope exceptions.
|
New Accounting Pronouncements to be Adopted:
In March 2016, the FASB issued ASU No. 2016-09,
"Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting."
ASU 2016-09 amends several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted ASU 2016-09 effective January 1, 2017.
ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies resulting from stock-based compensation awards vesting and exercises be recognized as a discrete income tax adjustment in the income statement. Previously, these amounts were recognized in Additional paid-in capital. The impact of the tax adjustment will vary depending on the amount and timing of stock options. In addition, ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from the assumed future proceeds in the calculation of diluted shares. The Company expects this change to increase the number of diluted shares in subsequent periods, but not have a material impact on diluted earnings per share.
ASU 2016-09 requires that excess tax benefits from share based compensation awards be reported as operating activities in the Consolidated Statements of Cash Flows. Previously, this activity was included in financing activities on the Consolidated Statement of Cash Flows. The Company has elected to apply this change on a retrospective basis. As a result, in subsequent periods, the Company expects 2016 and 2015 Net cash provided by operating activities and Net cash used by financing
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
activities to increase by the amount reported as Excess tax benefits from stock-based compensation on the Consolidated Statements of Cash Flows.
ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the Consolidated Statements of Cash Flows on a retrospective basis. Previously, this activity was included in operating activities. The Company expects the impact of this change to be immaterial to the Consolidated Statements of Cash Flows.
The Company has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
In May 2014, the FASB issued ASU No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)."
ASU 2014-09 requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment also specifies the accounting of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers. In August 2015, the FASB issued ASU 2015-14, "
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
," which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016. An entity can either adopt this amendment retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. To evaluate the impact of adopting this new guidance on the consolidated financial statements, the Company completed a scoping analysis of revenue streams against the requirements of the standard. In addition, the Company is in the process of reviewing customer contracts, as well as identifying and implementing changes to processes and controls to meet the standard’s reporting and disclosure requirements. ASU 2014-09 will accelerate the timing of when certain transactions are recognized as revenue upon adoption of the guidance’s control model. The Company is currently evaluating the impact of the adoption of ASU 2014-09.
The Company is currently evaluating the impact on its financial statements of the following ASUs:
|
|
|
Standard
|
Description
|
ASU No. 2017-04,
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, issued January 2017.
|
ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this ASU, an entity should perform the Step 1 annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount exceeds the fair value, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The ASU is effective January 1, 2020, early adoption is permitted and the ASU should be applied prospectively.
|
ASU No. 2016-18,
Statement of Cash Flows(Topic 230): Restricted Cash,
issued November 2016.
|
ASU 2016-18 requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied retrospectively.
|
ASU No. 2016-16
, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,
issued October 2016.
|
ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied using a modified retrospective approach, through a cumulative-effect adjustment directly to retained earnings, as of the beginning of the period of adoption.
|
ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
issued August 2016.
|
ASU 2016-15 reduces existing diversity in practice by addressing eight specific cash flow issues related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective January 1, 2018, early adoption is permitted and the ASU should be applied retrospectively (or prospectively as of earliest date practicable).
|
ASU No. 2016-02,
Leases (Topic 842)
, issued February 2016.
|
ASU 2016-02 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing agreements. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The ASU is effective January 1, 2019, early adoption is permitted and the ASU should be applied using either a modified retrospective or modified retrospective with practical expedients approach.
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
Net income
|
$
|
198,399
|
|
|
$
|
127,478
|
|
|
$
|
254,686
|
|
Denominator:
|
|
|
|
|
|
Basic weighted average shares outstanding
|
67,462
|
|
|
74,111
|
|
|
79,185
|
|
Effect of dilutive securities - Stock options and awards
|
694
|
|
|
743
|
|
|
911
|
|
Diluted weighted average shares outstanding
|
68,156
|
|
|
74,854
|
|
|
80,096
|
|
Basic earnings per share
|
$
|
2.94
|
|
|
$
|
1.72
|
|
|
$
|
3.22
|
|
Diluted earnings per share
|
$
|
2.91
|
|
|
$
|
1.70
|
|
|
$
|
3.18
|
|
For the years ended
December 31, 2016
,
2015
and
2014
, common shares subject to equity-based awards of
774,502
,
522,471
and
260,090
, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
NOTE 3 – ACQUISITIONS
During May 2016, the Company acquired Vizient Manufacturing Solutions ("Vizient"). Vizient, based in Bettendorf, Iowa, is a robotic integrator specializing in custom engineered tooling and automated arc welding systems for general and heavy fabrication applications. The acquisition assisted in diversifying end-market exposure and broadening global growth opportunities.
During August 2015, the Company acquired Specialised Welding Products ("SWP"). SWP, based in Melbourne, Australia, is a provider of specialty welding consumables and fabrication, maintenance and repair services for alloy and wear resistant products commonly used in mining and energy sector applications. The acquisition broadened the Company's presence and specialty alloy offering in Australia and New Zealand.
Also in August 2015, the Company acquired Rimrock Holdings Corporation ("Rimrock"). Rimrock is a manufacturer of industrial automation products and robotic systems with two divisions, Wolf Robotics LLC, based in Fort Collins, Colorado, and Rimrock Corporation, based in Columbus, Ohio. Wolf Robotics integrates robotic welding and cutting systems predominantly for heavy fabrication and transportation OEMs and suppliers. The acquisition advanced the Company's leadership position in automated welding and cutting solutions. Rimrock Corporation designs and manufactures automated spray systems and turnkey robotic systems for the die casting, foundry and forging markets.
During October 2014, the Company acquired substantially all of the assets of Easom Automation Systems, Inc. ("Easom"). Easom, based in Detroit, Michigan, is an integrator and manufacturer of automation and positioning solutions, serving heavy fabrication, aerospace and automotive OEMs and suppliers. The acquisition advanced the Company's leadership position in automated welding and cutting solutions. In addition, during 2014, the Company acquired the remaining interest in its majority-owned joint venture, Harris Soldas Especiais S.A.
Pro forma information related to these acquisitions has not been presented because the impact on the Company's Consolidated Statements of Income is not material. Acquired companies are included in the Company's consolidated financial statements as of the date of acquisition.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 4 – GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill by reportable segments for the years ended December 31,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
Welding
|
|
International
Welding
|
|
The Harris
Products
Group
|
|
Consolidated
|
Balance as of December 31, 2014
|
|
$
|
138,192
|
|
|
$
|
28,850
|
|
|
$
|
13,085
|
|
|
$
|
180,127
|
|
Additions and adjustments
|
|
19,700
|
|
3,846
|
|
|
(301
|
)
|
|
23,245
|
|
Impairment charges
|
|
—
|
|
|
(6,315
|
)
|
|
—
|
|
|
(6,315
|
)
|
Foreign currency translation
|
|
(5,557)
|
|
(3,036
|
)
|
|
(960
|
)
|
|
(9,553
|
)
|
Balance as of December 31, 2015
|
|
152,335
|
|
|
23,345
|
|
|
11,824
|
|
|
187,504
|
|
Additions and adjustments
|
|
43,217
|
|
(30
|
)
|
|
(301
|
)
|
|
42,886
|
|
Foreign currency translation
|
|
826
|
|
349
|
|
|
354
|
|
|
1,529
|
|
Balance as of December 31, 2016
|
|
$
|
196,378
|
|
|
$
|
23,664
|
|
|
$
|
11,877
|
|
|
$
|
231,919
|
|
Additions to goodwill primarily reflect goodwill recognized in the acquisition of Vizient in 2016 and the acquisitions of Rimrock and SWP in 2015 (see Note 3 for additional details). During 2015, the Company determined that for certain long-lived assets of a business unit, the carrying value of the assets exceeded the fair value resulting in impairment (see Note 6 for additional details). This result was considered a possible indication of goodwill impairment, therefore, the Company performed an interim goodwill impairment test, using a combination of income and market valuation approaches resulting in a
$6,315
non-cash impairment charge to the carrying value of goodwill. The adjustments to goodwill include the tax benefit attributable to the amortization of tax deductible goodwill in excess of goodwill recorded for financial reporting purposes.
Gross carrying values and accumulated amortization of intangible assets other than goodwill by asset class as of December 31,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
$
|
17,113
|
|
|
|
|
$
|
15,919
|
|
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
Trademarks and trade names
|
|
$
|
44,372
|
|
|
$
|
20,648
|
|
|
$
|
36,754
|
|
|
$
|
18,243
|
|
Customer relationships
|
|
85,816
|
|
|
39,033
|
|
|
77,590
|
|
|
33,932
|
|
Patents
|
|
28,073
|
|
|
11,467
|
|
|
24,208
|
|
|
6,884
|
|
Other
|
|
52,071
|
|
|
26,209
|
|
|
54,586
|
|
|
29,279
|
|
Total intangible assets subject to amortization
|
|
$
|
210,332
|
|
|
$
|
97,357
|
|
|
$
|
193,138
|
|
|
$
|
88,338
|
|
Increases in gross intangible assets primarily reflect the acquisition of Vizient in 2016 and the acquisitions of Rimrock and SWP in 2015. During 2015, the Company recognized non-cash impairment charges of
$3,417
related to trademarks and trade names, customer relationships and other definite lived intangible assets (see Note 6 for additional details). All impairment charges have been recorded within Rationalization and asset impairment charges.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
During 2016, the Company acquired intangible assets, either individually or as part of a group of assets, with an initial purchase price allocation and weighted-average lives as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Purchase Price Allocation
|
|
Weighted
Average Life
|
Acquired intangible assets not subject to amortization
|
|
|
|
|
Trademarks and trade names
|
|
$
|
989
|
|
|
|
Acquired intangible assets subject to amortization
|
|
|
|
|
Trademarks and trade names
|
|
2,400
|
|
|
15
|
Customer relationships
|
|
14,500
|
|
|
10
|
Patents
|
|
1,458
|
|
|
20
|
Other
|
|
5,920
|
|
|
11
|
Total acquired intangible assets subject to amortization
|
|
$
|
24,278
|
|
|
|
Aggregate amortization expense was
$14,525
,
$13,296
and
$13,869
for
2016
,
2015
and
2014
, respectively. Estimated annual amortization expense for intangible assets for each of the next five years is
$14,647
in
2017
,
$14,129
in
2018
,
$12,861
in
2019
,
$12,588
in
2020
and
$11,678
in
2021
.
NOTE 5 – SEGMENT INFORMATION
The Company's primary business is the design and manufacture of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products. Welding products include arc welding power sources, CNC and plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes and welding accessories and specialty welding consumables and fabrication. The Company's product offering also includes oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. In addition, the Company has a leading global position in the brazing and soldering alloys market.
During the first quarter of 2016, the Company realigned its organizational and leadership structure into
three
operating segments to support growth strategies and enhance the utilization of the Company's worldwide resources and global sourcing initiatives. 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 primarily 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. All prior period results have been revised to reflect the realigned segment structure.
Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being adjusted earnings before interest and income taxes ("Adjusted EBIT"). EBIT is defined as Operating income plus Equity earnings in affiliates and Other income. Segment EBIT is adjusted for special items as determined by management such as the impact of rationalization activities, certain asset impairment charges and gains or losses on disposals of assets. The accounting principles applied at the operating segment level are generally the same as those applied at the consolidated financial statement level with the exception of LIFO. Segment assets include inventories measured on a FIFO basis while consolidated inventories include inventories reported on a LIFO basis. Segment and consolidated income before interest and income taxes include the effect of inventories reported on a LIFO basis. At December 31,
2016
,
2015
and
2014
, approximately
40%
of total inventories were valued using the LIFO method. LIFO is used for a substantial portion of U.S. inventories included in Americas Welding. Inter-segment sales are recorded at agreed upon prices that approximate arm's length prices and are eliminated in consolidation. Corporate-level expenses are allocated to the operating segments.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Financial information for the reportable segments follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Welding
|
|
International Welding
|
|
The Harris
Products
Group
|
|
Corporate /
Eliminations
|
|
Consolidated
|
For the Year Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,494,982
|
|
|
$
|
507,289
|
|
|
$
|
272,343
|
|
|
$
|
—
|
|
|
$
|
2,274,614
|
|
Inter-segment sales
|
93,612
|
|
|
15,975
|
|
|
8,709
|
|
|
(118,296
|
)
|
|
$
|
—
|
|
Total
|
$
|
1,588,594
|
|
|
$
|
523,264
|
|
|
$
|
281,052
|
|
|
$
|
(118,296
|
)
|
|
$
|
2,274,614
|
|
Adjusted EBIT
|
$
|
266,633
|
|
|
$
|
29,146
|
|
|
$
|
32,380
|
|
|
$
|
564
|
|
|
$
|
328,723
|
|
Special items charge
|
—
|
|
|
—
|
|
|
—
|
|
|
34,348
|
|
|
$
|
34,348
|
|
EBIT
|
$
|
266,633
|
|
|
$
|
29,146
|
|
|
$
|
32,380
|
|
|
$
|
(33,784
|
)
|
|
$
|
294,375
|
|
Interest income
|
|
|
|
|
|
|
|
|
2,092
|
|
Interest expense
|
|
|
|
|
|
|
|
|
(19,079
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
277,388
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,278,417
|
|
|
$
|
529,223
|
|
|
$
|
161,391
|
|
|
$
|
(25,594
|
)
|
|
$
|
1,943,437
|
|
Equity investments in affiliates
|
3,946
|
|
|
23,355
|
|
|
—
|
|
|
—
|
|
|
$
|
27,301
|
|
Capital expenditures
|
35,314
|
|
|
12,354
|
|
|
2,209
|
|
|
—
|
|
|
$
|
49,877
|
|
Depreciation and amortization
|
47,359
|
|
|
15,063
|
|
|
2,860
|
|
|
(209
|
)
|
|
$
|
65,073
|
|
For the Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,741,350
|
|
|
$
|
530,460
|
|
|
$
|
263,981
|
|
|
$
|
—
|
|
|
$
|
2,535,791
|
|
Inter-segment sales
|
92,538
|
|
|
18,747
|
|
|
9,312
|
|
|
(120,597
|
)
|
|
$
|
—
|
|
Total
|
$
|
1,833,888
|
|
|
$
|
549,207
|
|
|
$
|
273,293
|
|
|
$
|
(120,597
|
)
|
|
$
|
2,535,791
|
|
Adjusted EBIT
|
$
|
316,689
|
|
|
$
|
34,511
|
|
|
$
|
27,882
|
|
|
$
|
(275
|
)
|
|
$
|
378,807
|
|
Special items charge
|
173,239
|
|
|
16,671
|
|
|
—
|
|
|
—
|
|
|
$
|
189,910
|
|
EBIT
|
$
|
143,450
|
|
|
$
|
17,840
|
|
|
$
|
27,882
|
|
|
$
|
(275
|
)
|
|
$
|
188,897
|
|
Interest income
|
|
|
|
|
|
|
|
|
2,714
|
|
Interest expense
|
|
|
|
|
|
|
|
|
(21,824
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
169,787
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,165,817
|
|
|
$
|
543,254
|
|
|
$
|
143,905
|
|
|
$
|
(68,805
|
)
|
|
$
|
1,784,171
|
|
Equity investments in affiliates
|
3,791
|
|
|
23,450
|
|
|
—
|
|
|
—
|
|
|
$
|
27,241
|
|
Capital expenditures
|
35,721
|
|
|
12,059
|
|
|
2,727
|
|
|
—
|
|
|
$
|
50,507
|
|
Depreciation and amortization
|
45,447
|
|
|
15,776
|
|
|
2,978
|
|
|
(194
|
)
|
|
$
|
64,007
|
|
For the Year Ended
December 31, 2014
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,837,670
|
|
|
$
|
681,424
|
|
|
$
|
294,230
|
|
|
$
|
—
|
|
|
$
|
2,813,324
|
|
Inter-segment sales
|
110,524
|
|
|
21,608
|
|
|
8,210
|
|
|
(140,342
|
)
|
|
$
|
—
|
|
Total
|
$
|
1,948,194
|
|
|
$
|
703,032
|
|
|
$
|
302,440
|
|
|
$
|
(140,342
|
)
|
|
$
|
2,813,324
|
|
Adjusted EBIT
|
$
|
353,255
|
|
|
$
|
48,720
|
|
|
$
|
28,563
|
|
|
$
|
3,802
|
|
|
$
|
434,340
|
|
Special items charge
|
21,647
|
|
|
29,539
|
|
|
—
|
|
|
—
|
|
|
$
|
51,186
|
|
EBIT
|
$
|
331,608
|
|
|
$
|
19,181
|
|
|
$
|
28,563
|
|
|
$
|
3,802
|
|
|
$
|
383,154
|
|
Interest income
|
|
|
|
|
|
|
|
|
3,093
|
|
Interest expense
|
|
|
|
|
|
|
|
|
(10,434
|
)
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
375,813
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
1,214,988
|
|
|
$
|
663,164
|
|
|
$
|
147,990
|
|
|
$
|
(86,927
|
)
|
|
$
|
1,939,215
|
|
Equity investments in affiliates
|
3,579
|
|
|
23,902
|
|
|
—
|
|
|
—
|
|
|
$
|
27,481
|
|
Capital expenditures
|
62,066
|
|
|
10,099
|
|
|
825
|
|
|
—
|
|
|
$
|
72,990
|
|
Depreciation and amortization
|
44,710
|
|
|
21,624
|
|
|
3,512
|
|
|
(239
|
)
|
|
$
|
69,607
|
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
In 2016, special items within Corporate /Eliminations reflect a loss on the deconsolidation of the Venezuelan subsidiary.
In 2015, special items in Americas Welding and International Welding include rationalization charges primarily related to employee severance and other related costs. Americas Welding special items also reflect Venezuelan foreign exchange remeasurement losses related to the adoption of a new foreign exchange mechanism, as well as pension settlement charges primarily related to the purchase of a group annuity contract. International Welding special items also include charges related to the impairment of long-lived assets and charges related to the impairment to the carrying value of goodwill.
In 2014, special items in Americas Welding and International Welding include net rationalization charges primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. Americas Welding special items also include Venezuelan foreign exchange remeasurement losses related to the adoption of a new foreign exchange mechanism. International Welding special items also include net charges related to the impairment of long-lived assets partially offset by gains related to the sale of assets.
Export sales (excluding inter-company sales) from the United States were
$134,216
in
2016
,
$175,049
in
2015
and
$210,325
in
2014
. No individual customer comprised more than
10%
of the Company's total revenues for any of the three years ended
December 31, 2016
.
The geographic split of the Company's Net sales, based on the location of the customer, and property, plant and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Net sales:
|
|
|
|
|
|
|
United States
|
|
$
|
1,308,635
|
|
|
$
|
1,387,882
|
|
|
$
|
1,417,750
|
|
Foreign countries
|
|
965,979
|
|
|
1,147,909
|
|
|
1,395,574
|
|
Total
|
|
$
|
2,274,614
|
|
|
$
|
2,535,791
|
|
|
$
|
2,813,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
United States
|
|
$
|
176,041
|
|
|
$
|
173,974
|
|
|
$
|
171,746
|
|
Foreign countries
|
|
196,679
|
|
|
237,718
|
|
|
267,423
|
|
Eliminations
|
|
(343
|
)
|
|
(369
|
)
|
|
(423
|
)
|
Total
|
|
$
|
372,377
|
|
|
$
|
411,323
|
|
|
$
|
438,746
|
|
NOTE 6 – RATIONALIZATION AND ASSET IMPAIRMENTS
In prior periods, the Company initiated various rationalization plans whose costs were substantially recognized in the prior year. As such, no charges were recorded in the twelve months ended December 31, 2016. The Company recorded rationalization net charges of
$19,958
and
$30,053
for the years ended December 31,
2015
and
2014
, respectively. A description of each restructuring plan and the related costs follows:
Americas Welding Plans:
During 2015, the Company initiated a rationalization plan within Americas Welding that included a voluntary separation incentive program covering certain U.S.-based employees. The plan was completed during 2016.
International Welding Plans:
During 2015, the Company initiated rationalization plans within International Welding. The plan included headcount restructuring to better align the cost structures with economic conditions and operating needs. The Company does not anticipate any additional charges related to the completion of these plans. At
December 31, 2016
, liabilities relating to the International Welding plans of
$5,190
, were recognized in Other current liabilities.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
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 the rationalization liabilities by segment for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Welding
|
|
International
Welding
|
|
Consolidated
|
Balance at December 31, 2014
|
|
$
|
—
|
|
|
$
|
305
|
|
|
$
|
305
|
|
Payments and other adjustments
|
|
(3,231
|
)
|
|
(3,128
|
)
|
|
(6,359
|
)
|
Charged (credited) to expense
|
|
3,298
|
|
|
10,421
|
|
|
13,719
|
|
Balance at December 31, 2015
|
|
$
|
67
|
|
|
$
|
7,598
|
|
|
$
|
7,665
|
|
Payments and other adjustments
|
|
(67
|
)
|
|
(2,408
|
)
|
|
(2,475
|
)
|
Balance at December 31, 2016
|
|
$
|
—
|
|
|
$
|
5,190
|
|
|
$
|
5,190
|
|
NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI")
The following tables set forth the total changes in AOCI by component, net of taxes, for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges
|
|
Defined benefit pension plan activity
|
|
Currency translation adjustment
|
|
Total
|
Balance at December 31, 2014
|
|
$
|
(9
|
)
|
|
$
|
(197,893
|
)
|
|
$
|
(90,720
|
)
|
|
$
|
(288,622
|
)
|
Other comprehensive income (loss) before reclassification
|
|
979
|
|
|
(1,632
|
)
|
(2)
|
(106,319
|
)
|
(3)
|
(106,972
|
)
|
Amounts reclassified from AOCI
|
|
(422
|
)
|
(1)
|
99,749
|
|
(2)
|
—
|
|
|
99,327
|
|
Net current-period other comprehensive income (loss)
|
|
557
|
|
|
98,117
|
|
|
(106,319
|
)
|
|
(7,645
|
)
|
Balance at December 31, 2015
|
|
$
|
548
|
|
|
$
|
(99,776
|
)
|
|
$
|
(197,039
|
)
|
|
$
|
(296,267
|
)
|
Other comprehensive income (loss) before reclassification
|
|
2,026
|
|
|
(1,268
|
)
|
(2)
|
(36,646
|
)
|
(3)
|
(35,888
|
)
|
Amounts reclassified from AOCI
|
|
(1,987
|
)
|
(1)
|
5,105
|
|
(2)
|
—
|
|
|
3,118
|
|
Net current-period other comprehensive income (loss)
|
|
39
|
|
|
3,837
|
|
|
(36,646
|
)
|
|
(32,770
|
)
|
Balance at December 31, 2016
|
|
$
|
587
|
|
|
$
|
(95,939
|
)
|
|
$
|
(233,685
|
)
|
|
$
|
(329,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
During
2016
, this AOCI reclassification is a component of Net sales of
$(1,580)
(net of tax of
$(577)
) and Cost of goods sold of
$(407)
(net of tax of
$(24)
); during
2015
, the reclassification is a component of Net sales of
$(1,191)
(net of tax of
$(547)
) and Cost of goods sold of
$771
(net of tax of
$549
). See Note 13 for additional details.
|
|
|
(2)
|
This AOCI component is included in the computation of net periodic pension costs (net of tax of
$4,297
and
$61,538
during the years ended December 31,
2016
and
2015
, respectively). See Note 11 for additional details.
|
|
|
(3)
|
The Other comprehensive income before reclassifications excludes
$(106)
and
$(623)
attributable to Non-controlling interests in the years ended December 31,
2016
and
2015
, respectively. The reclassified AOCI component is included in the computation of Non-controlling interests. See Consolidated Statements of Equity for additional details.
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 8 – DEBT
At December 31,
2016
and
2015
, debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Long-term debt
|
|
|
|
|
Senior Unsecured Notes due through 2045, interest at 2.8% to 4.0% (net of debt issuance costs of $1,586 and $853 at December 31, 2016 and 2015, respectively),
swapped $100,000 to variable interest rates of 1.5% to 2.7%
|
|
$
|
692,975
|
|
|
$
|
349,147
|
|
Other borrowings due through 2023, interest up to 8.0%
|
|
10,860
|
|
|
2,656
|
|
|
|
703,835
|
|
|
351,803
|
|
Less current portion
|
|
131
|
|
|
1,456
|
|
Long-term debt, less current portion
|
|
703,704
|
|
|
350,347
|
|
Short-term debt
|
|
|
|
|
Amounts due banks, interest at 29.0% (24.1% in 2015)
|
|
1,758
|
|
|
2,822
|
|
Current portion long-term debt
|
|
131
|
|
|
1,456
|
|
Total short-term debt
|
|
1,889
|
|
|
4,278
|
|
Total debt
|
|
$
|
705,593
|
|
|
$
|
354,625
|
|
At
December 31, 2016
and
2015
, the fair value of long-term debt, including the current portion, was approximately
$669,209
and
$342,602
, respectively, which was determined using available market information and methodologies requiring judgment. Since considerable judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount which could be realized in a current market exchange.
Senior Unsecured Notes
On
April 1, 2015
, the Company entered into a Note Purchase Agreement pursuant to which it issued senior unsecured notes (the "2015 Notes") in the aggregate principal amount of
$350,000
through a private placement. The proceeds were used for general corporate purposes. The 2015 Notes, as shown in the table below, have original maturities ranging from
10
to
30
years with a weighted average effective interest rate of
3.5%
, excluding accretion of original issuance costs, and an initial average tenure of
19
years. Interest is payable semi-annually. The 2015 Notes contain certain affirmative and negative covenants.
As of December 31, 2016, the Company was in compliance with all of its debt covenants
.
The maturity and interest rates of the 2015 Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Maturity Date
|
|
Interest Rate
|
Series A
|
$
|
100,000
|
|
|
August 20, 2025
|
|
3.15
|
%
|
Series B
|
100,000
|
|
|
August 20, 2030
|
|
3.35
|
%
|
Series C
|
50,000
|
|
|
April 1, 2035
|
|
3.61
|
%
|
Series D
|
100,000
|
|
|
April 1, 2045
|
|
4.02
|
%
|
On
October 20, 2016
the Company entered into a Note Purchase Agreement pursuant to which it issued senior unsecured notes (the "2016 Notes") in the aggregate principal amount of
$350,000
through a private placement. The proceeds are being used for general corporate purposes. The 2016 Notes, as shown in the table below, have original maturities ranging from
12
to
25
years with a weighted average effective interest rate of
3.1%
, excluding accretion of original issuance costs, and an initial average tenure of
18
years. Interest is payable semi-annually. The 2016 Notes contain certain affirmative and negative covenants.
As of December 31, 2016, the Company was in compliance with all of its debt covenants
.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
The maturity and interest rates of the 2016 Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Maturity Date
|
|
Interest Rate
|
Series A
|
$
|
100,000
|
|
|
October 20, 2028
|
|
2.75
|
%
|
Series B
|
100,000
|
|
|
October 20, 2033
|
|
3.03
|
%
|
Series C
|
100,000
|
|
|
October 20, 2037
|
|
3.27
|
%
|
Series D
|
50,000
|
|
|
October 20, 2041
|
|
3.52
|
%
|
The Company's total weighted average effective interest rate and weighted average term, inclusive of the 2015 Notes and 2016 Notes, is
3.3%
and
18
years, respectively.
Revolving Credit Agreement
The Company has a line of credit totaling
$400,000
through the Amended and Restated Credit Agreement (the “Credit Agreement”), which was entered into on
September 12, 2014
. The Credit Agreement contains customary affirmative, negative and financial covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets, transactions with affiliates, a fixed charges coverage ratio and total leverage ratio.
As of December 31, 2016, the Company was in compliance with all of its covenants
and had no outstanding borrowings under the Credit Agreement. The Credit Agreement has a
five
-year term and may be increased, subject to certain conditions, by an additional amount up to
$100,000
. The interest rate on borrowings is based on either the London Inter-Bank Offered Rate ("LIBOR") or the prime rate, plus a spread based on the Company’s leverage ratio, at the Company’s election.
Short-term Borrowings
The Company had short-term borrowings of
$1,758
included in Amounts due banks at December 31, 2016 and had a balance of
$2,822
at December 31, 2015. Amounts due banks included the borrowings of subsidiaries at weighted average interest rates of
29.0%
and
24.1%
at
December 31, 2016
and
2015
, respectively.
Other
Maturities of long-term debt, including payments under capital leases and amounts due banks, for the five years succeeding
December 31, 2016
are
$1,889
in
2017
,
$104
in
2018
,
$103
in
2019
,
$101
in
2020
,
$103
in
2021
and
$710,712
thereafter. Total interest paid was
$15,332
in
2016
,
$5,631
in
2015
and
$2,190
in
2014
. The difference between interest paid and interest expense is due to the accrual of interest associated with the Senior Unsecured Notes and adjustments to the forward contract discussed in Note 14.
NOTE 9 – STOCK PLANS
On April 23, 2015, the shareholders of the Company approved the 2015 Equity and Incentive Compensation Plan ("Employee Plan"), which replaced the 2006 Equity and Performance Incentive Plan, as amended ("EPI Plan"). The Employee Plan provides for the granting of options, appreciation rights, restricted shares, restricted stock units and performance-based awards up to an additional
5,400,000
of the Company's common shares. In addition, on April 23, 2015, the shareholders of the Company approved the 2015 Stock Plan for Non-Employee Directors ("2015 Director Plan"), which replaced the 2006 Stock Plan for Non-Employee Directors ("2006 Director Plan"). The 2015 Director Plan provides for the granting of options, restricted shares and restricted stock units up to an additional
300,000
of the Company's common shares. At
December 31, 2016
, there were
4,862,288
common shares available for future grant under all plans.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Stock Options
The following table summarizes stock option activity for the year ended
December 31, 2016
under all Plans:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Balance at beginning of year
|
|
2,194,649
|
|
|
$
|
42.85
|
|
Options granted
|
|
247,310
|
|
|
58.14
|
|
Options exercised
|
|
(820,972
|
)
|
|
30.51
|
|
Options canceled
|
|
(11,285
|
)
|
|
66.48
|
|
Balance at end of year
|
|
1,609,702
|
|
|
51.32
|
|
Exercisable at end of year
|
|
1,151,320
|
|
|
46.56
|
|
Options granted under both the Employee Plan and its predecessor plans may be outstanding for a maximum of
10 years
from the date of grant. The majority of options granted vest ratably over a period of
three years
from the grant date. The exercise prices of all options were equal to the quoted market price of the Company's common shares at the date of grant. The Company issued shares of common stock from treasury upon all exercises of stock options in
2016
. In 2016, all options issued were under the Employee Plan.
The Company uses the Black-Scholes option pricing model for estimating fair values of options. In estimating the fair value of options granted, the expected option life is based on the Company's historical experience. The expected volatility is based on historical volatility. The weighted average assumptions for each of the three years ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Expected volatility
|
|
28.86
|
%
|
|
30.73
|
%
|
|
32.21
|
%
|
Dividend yield
|
|
1.70
|
%
|
|
1.48
|
%
|
|
1.41
|
%
|
Risk-free interest rate
|
|
1.27
|
%
|
|
1.32
|
%
|
|
1.61
|
%
|
Expected option life (years)
|
|
4.5
|
|
|
4.5
|
|
|
4.4
|
|
Weighted average fair value per option granted during the year
|
|
$
|
12.55
|
|
|
$
|
16.35
|
|
|
$
|
17.52
|
|
The following table summarizes non-vested stock options for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
Number of
Options
|
|
Weighted
Average Fair
Value at Grant
Date
|
Balance at beginning of year
|
|
387,222
|
|
|
$
|
16.66
|
|
Granted
|
|
247,310
|
|
|
12.55
|
|
Vested
|
|
(168,050
|
)
|
|
17.05
|
|
Forfeited
|
|
(8,100
|
)
|
|
15.43
|
|
Balance at end of year
|
|
458,382
|
|
|
14.32
|
|
The aggregate intrinsic value of options outstanding and exercisable which would have been received by the optionees had all awards been exercised at
December 31, 2016
was
$40,803
and
$34,666
, respectively. The total intrinsic value of awards exercised during
2016
,
2015
and
2014
was
$30,967
,
$6,879
and
$14,647
, respectively. The total fair value of options that vested during
2016
,
2015
and
2014
was
$2,865
,
$3,273
and
$5,104
, respectively.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
The following table summarizes information about awards outstanding as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
Exercise Price Range
|
|
Number of
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life (years)
|
|
Number of
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Life (years)
|
Under $49.99
|
|
823,040
|
|
|
$
|
37.00
|
|
|
4.5
|
|
823,040
|
|
|
$
|
37.00
|
|
|
4.5
|
$50.00 - $59.99
|
|
254,517
|
|
|
58.06
|
|
|
9.1
|
|
4,760
|
|
|
53.96
|
|
|
6.8
|
Over $60.00
|
|
532,145
|
|
|
70.25
|
|
|
7.6
|
|
323,520
|
|
|
70.76
|
|
|
7.3
|
|
|
1,609,702
|
|
|
|
|
|
6.3
|
|
1,151,320
|
|
|
|
|
|
5.3
|
Restricted Share Awards ("RSAs")
The following table summarizes restricted share award activity for the year ended
December 31, 2016
under all Plans:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
Balance at beginning of year
|
|
44,629
|
|
|
$
|
61.84
|
|
Shares granted
|
|
13,470
|
|
|
79.43
|
|
Shares vested
|
|
(11,940
|
)
|
|
70.80
|
|
Shares forfeited
|
|
—
|
|
|
—
|
|
Balance at end of year
|
|
46,159
|
|
|
64.65
|
|
RSAs are valued at the quoted market price on the grant date. The majority of RSAs vest over a period of
three
to
five
years. The Company issued common shares from treasury upon the granting of RSAs in
2016
. Restricted shares issued in
2016
were under the 2015 Director Plan. The remaining weighted average vesting period of all non-vested RSAs is
2.0
years as of December 31,
2016
.
Restricted Stock Units ("RSUs") and Performance Share Units ("PSUs")
The following table summarizes RSU and PSU activity for the year ended
December 31, 2016
under all Plans:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
|
Units
|
|
Weighted
Average
Grant Date
Fair Value
|
Balance at beginning of year
|
|
221,532
|
|
|
$
|
59.10
|
|
Units granted
|
|
188,635
|
|
|
58.33
|
|
Units vested
|
|
(25,891
|
)
|
|
43.83
|
|
Units forfeited
|
|
(7,492
|
)
|
|
60.28
|
|
Balance at end of year
|
|
376,784
|
|
|
59.75
|
|
RSUs are valued at the quoted market price on the grant date. The majority of RSUs vest over a period of
three
to
five
years. The Company issues shares of common stock from treasury upon the vesting of RSUs and any earned dividend equivalents. Conversion of
17,132
RSUs to common shares in
2016
were deferred as part of the 2005 Deferred Compensation Plan for Executives (the "2005 Plan"). As of
December 31, 2016
,
84,654
RSUs, including related dividend equivalents, have been deferred under the 2005 Plan. These units are reflected within dilutive shares in the calculation of earnings per share. In 2016,
142,165
RSUs were issued under the Employee Plan. The remaining weighted average vesting period of all non-vested RSUs is
2.3
years as of December 31,
2016
.
PSUs are valued at the quoted market price on the grant date. PSUs vest over a
three
-year period and are based on the Company's performance relative to pre-established performance goals. The Company issues common stock from treasury upon
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
the vesting of PSUs and any earned dividend equivalents. In 2016, the Company issued and has outstanding
46,470
PSUs under the Employee Plan at a weighted average fair value of
$58.14
per share. The remaining weighted average vesting period of all non-vested PSUs is
2.1
years as of December 31, 2016.
Stock-Based Compensation Expense
Expense is recognized for all awards of stock-based compensation by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any stock options, restricted or deferred shares, RSUs or PSUs ultimately forfeited because recipients fail to meet vesting requirements. Total stock-based compensation expense recognized in the Consolidated Statements of Income for
2016
,
2015
and
2014
was
$10,332
,
$7,932
and
$8,416
, respectively. The related tax benefit for
2016
,
2015
and
2014
was
$3,955
,
$3,037
and
$3,222
, respectively. As of December 31,
2016
, total unrecognized stock-based compensation expense related to non-vested stock options, RSAs, RSUs and PSUs was
$18,839
, which is expected to be recognized over a weighted average period of approximately
2.3 years
.
Lincoln Stock Purchase Plan
The 1995 Lincoln Stock Purchase Plan provides employees the ability to purchase open market shares on a commission-free basis up to a limit of
ten thousand
dollars annually. Under this plan,
800,000
shares have been authorized to be purchased. Shares purchased were
15,827
in
2016
,
16,012
in
2015
and
5,511
in
2014
.
NOTE 10 – COMMON STOCK REPURCHASE PROGRAM
The Company has a share repurchase program for up to
55 million
of the Company's common shares. At management's discretion, the Company repurchases its common shares from time to time in the open market, depending on market conditions, stock price and other factors. During the year ended December 31,
2016
, the Company purchased a total of
5.9 million
shares at an average cost per share of
$58.34
. As of December 31,
2016
,
8.9 million
shares remained available for repurchase under the stock repurchase program. The treasury shares have not been retired.
NOTE 11 – RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
The Company maintains a number of defined benefit and defined contribution plans to provide retirement benefits for employees. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA"), local statutory law or as determined by the Board of Directors. The plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for a domestic non-qualified pension plan for certain key employees and certain foreign plans. The Company uses a December 31 measurement date for its plans.
The Company does not have, and does not provide for, any postretirement or postemployment benefits other than pensions and certain non-U.S. statutory termination benefits.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Defined Benefit Plans
Contributions are made in amounts sufficient to fund current service costs on a current basis and to fund past service costs, if any, over various amortization periods.
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Change in benefit obligations
|
|
|
|
|
Benefit obligations at beginning of year
|
|
$
|
558,169
|
|
|
$
|
1,045,471
|
|
Service cost
|
|
17,689
|
|
|
19,933
|
|
Interest cost
|
|
23,578
|
|
|
36,002
|
|
Plan participants' contributions
|
|
148
|
|
|
185
|
|
Acquisitions
|
|
—
|
|
|
6,170
|
|
Actuarial loss (gain)
|
|
28,004
|
|
|
(42,640
|
)
|
Benefits paid
|
|
(31,308
|
)
|
|
(32,217
|
)
|
Settlements/curtailments
|
|
(24,068
|
)
|
|
(463,943
|
)
|
Currency translation
|
|
(7,482
|
)
|
|
(10,792
|
)
|
Benefit obligations at end of year
|
|
564,730
|
|
|
558,169
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
576,101
|
|
|
1,010,937
|
|
Actual return on plan assets
|
|
38,264
|
|
|
9,298
|
|
Employer contributions
|
|
21,373
|
|
|
50,468
|
|
Plan participants' contributions
|
|
148
|
|
|
185
|
|
Acquisitions
|
|
—
|
|
|
5,995
|
|
Benefits paid
|
|
(30,146
|
)
|
|
(30,358
|
)
|
Settlement
|
|
—
|
|
|
(462,601
|
)
|
Currency translation
|
|
(6,655
|
)
|
|
(7,823
|
)
|
Fair value of plan assets at end of year
|
|
599,085
|
|
|
576,101
|
|
|
|
|
|
|
Funded status at end of year
|
|
34,355
|
|
|
17,932
|
|
Unrecognized actuarial net loss
|
|
146,585
|
|
|
156,019
|
|
Unrecognized prior service cost
|
|
(18
|
)
|
|
(1,304
|
)
|
Unrecognized transition assets, net
|
|
37
|
|
|
41
|
|
Net amount recognized
|
|
$
|
180,959
|
|
|
$
|
172,688
|
|
In August 2015, The Lincoln Electric Company, plan sponsor of the Lincoln Electric Retirement Annuity Program ("RAP") and subsidiary of the Company, entered into an agreement to purchase a group annuity contract from The Principal Financial Group ("Principal"). Under the agreement, Principal assumed the obligation to pay future pension benefits for specified U.S. retirees and surviving beneficiaries who retired on or before June 1, 2015 and are currently receiving payments from the RAP. The transaction will not change the amount of the monthly pension benefit received by affected retirees and surviving beneficiaries. The purchase was funded by existing plan assets and required no additional cash contribution. The Company recorded pension settlement charges of
$142,738
for the year ended December 31, 2015, primarily related to the purchase of the group annuity contract.
In October 2016, The Lincoln Electric Company amended the plan to freeze all benefit accruals for participants under the RAP effective as of December 31, 2016. The RAP includes approximately 1,500 domestic employees who will fully transition to The Lincoln Electric Company Employee Savings Plan (“Savings Plan”), a defined contribution retirement savings plan. The Company recorded pension curtailment gains of
$2,206
for the year ended December 31, 2016 related to the amendment. The Company does not expect to contribute to the defined benefit plans in the United States in 2017.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
The after-tax amounts of unrecognized actuarial net loss, prior service costs and transition assets included in Accumulated other comprehensive loss at
December 31, 2016
were
$95,927
,
$(21)
and
$33
, respectively. The actuarial loss represents changes in the estimated obligation not yet recognized in the Consolidated Income Statement. The pre-tax amounts of unrecognized actuarial net loss, prior service credits and transition obligations expected to be recognized as components of net periodic benefit cost during
2017
are
$3,928
,
$12
and
$2
, respectively.
Amounts Recognized in Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Prepaid pensions
(1)
|
|
$
|
64,397
|
|
|
$
|
38,201
|
|
Accrued pension liability, current
(2)
|
|
(5,347
|
)
|
|
(5,026
|
)
|
Accrued pension liability, long-term
(3)
|
|
(24,695
|
)
|
|
(15,243
|
)
|
Accumulated other comprehensive loss, excluding tax effects
|
|
146,604
|
|
|
154,756
|
|
Net amount recognized in the balance sheets
|
|
$
|
180,959
|
|
|
$
|
172,688
|
|
(1) I
ncluded in Other current assets.
(2)
I
ncluded in Other current liabilities.
(3)
I
ncluded in Other liabilities.
Components of Pension Cost for Defined Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
|
$
|
17,689
|
|
|
$
|
19,933
|
|
|
$
|
19,062
|
|
Interest cost
|
|
23,578
|
|
|
36,002
|
|
|
42,485
|
|
Expected return on plan assets
|
|
(35,716
|
)
|
|
(54,638
|
)
|
|
(67,953
|
)
|
Amortization of prior service cost
|
|
(394
|
)
|
|
(626
|
)
|
|
(616
|
)
|
Amortization of net loss
(1)
|
|
9,893
|
|
|
19,406
|
|
|
17,644
|
|
Settlement/curtailment (gain) loss
|
|
(1,062
|
)
|
|
142,738
|
|
|
1,773
|
|
Pension cost for defined benefit plans
|
|
$
|
13,988
|
|
|
$
|
162,815
|
|
|
$
|
12,395
|
|
(1)
The amortization of net loss includes a
$959
charge resulting from the deconsolidation of the Venezuelan subsidiary during the year ended December 31, 2016.
The decrease in the components of total pension cost for the defined benefit plans in 2016 was primarily due to the purchase of a group annuity contract in August 2015, which triggered a settlement loss in the period.
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
U.S. pension plans
|
|
|
|
|
Projected benefit obligation
|
|
$
|
25,731
|
|
|
$
|
16,822
|
|
Accumulated benefit obligation
|
|
25,460
|
|
|
15,223
|
|
Fair value of plan assets
|
|
5,548
|
|
|
—
|
|
Non-U.S. pension plans
|
|
|
|
|
Projected benefit obligation
|
|
$
|
47,776
|
|
|
$
|
3,393
|
|
Accumulated benefit obligation
|
|
45,128
|
|
|
2,831
|
|
Fair value of plan assets
|
|
38,200
|
|
|
—
|
|
The total accumulated benefit obligation for all plans was
$560,230
as of
December 31, 2016
and
$523,728
as of
December 31, 2015
.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Benefit Payments for Plans
Benefits expected to be paid for the U.S. plans are as follows:
|
|
|
|
|
Estimated Payments
|
|
2017
|
$
|
39,820
|
|
2018
|
29,803
|
|
2019
|
29,375
|
|
2020
|
27,869
|
|
2021
|
28,236
|
|
2022 through 2026
|
150,813
|
|
Assumptions
Weighted average assumptions used to measure the benefit obligation for the Company's significant defined benefit plans as of
December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Discount Rate
|
|
4.1
|
%
|
|
4.5
|
%
|
Rate of increase in compensation
|
|
2.6
|
%
|
|
2.7
|
%
|
Weighted average assumptions used to measure the net periodic benefit cost for the Company's significant defined benefit plans for each of the three years ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
|
4.5
|
%
|
|
4.0
|
%
|
|
4.7
|
%
|
Rate of increase in compensation
|
|
2.7
|
%
|
|
2.7
|
%
|
|
4.1
|
%
|
Expected return on plan assets
|
|
6.1
|
%
|
|
6.3
|
%
|
|
7.3
|
%
|
To develop the discount rate assumption to be used for U.S. plans, the Company refers to the yield derived from matching projected pension payments with maturities of bonds rated AA or an equivalent quality. The expected long-term rate of return assumption is based on the weighted average expected return of the various asset classes in the plans' portfolio and the targeted allocation of plan assets. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance. The rate of compensation increase is determined by the Company based upon annual reviews.
Pension Plans' Assets
The primary objective of the pension plans' investment policy is to ensure sufficient assets are available to provide benefit obligations when such obligations mature. Investment management practices must comply with ERISA or any other applicable regulations and rulings. The overall investment strategy for the defined benefit pension plans' assets is to achieve a rate of return over a normal business cycle relative to an acceptable level of risk that is consistent with the long-term objectives of the portfolio. The target allocation for plan assets is
35%
to
45%
equity securities and
55%
to
65%
debt securities.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
The following table sets forth, by level within the fair value hierarchy, the pension plans' assets as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans' Assets at Fair Value as of December 31, 2016
|
|
|
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Cash and cash equivalents
|
|
$
|
3,652
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,652
|
|
Equity securities
(1)
|
|
4,071
|
|
|
—
|
|
|
—
|
|
|
4,071
|
|
Fixed income securities
(2)
|
|
|
|
|
|
|
|
|
U.S. government bonds
|
|
20,036
|
|
|
—
|
|
|
—
|
|
|
20,036
|
|
Corporate debt and other obligations
|
|
—
|
|
|
134,051
|
|
|
—
|
|
|
134,051
|
|
Investments measured at NAV
(3)
|
|
|
|
|
|
|
|
|
Common trusts and 103-12 investments
(4)
|
|
|
|
|
|
|
|
397,924
|
|
Private equity funds
(5)
|
|
|
|
|
|
|
|
39,351
|
|
Total investments at fair value
|
|
$
|
27,759
|
|
|
$
|
134,051
|
|
|
$
|
—
|
|
|
$
|
599,085
|
|
The following table sets forth, by level within the fair value hierarchy, the pension plans' assets as of
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans' Assets at Fair Value as of December 31, 2015
|
|
|
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total
|
Cash and cash equivalents
|
|
$
|
5,740
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,740
|
|
Equity securities
(1)
|
|
3,569
|
|
|
—
|
|
|
—
|
|
|
3,569
|
|
Fixed income securities
(2)
|
|
|
|
|
|
|
|
|
U.S. government bonds
|
|
11,603
|
|
|
—
|
|
|
—
|
|
|
11,603
|
|
Corporate debt and other obligations
|
|
—
|
|
|
120,470
|
|
|
—
|
|
|
120,470
|
|
Investments measured at NAV
(3)
|
|
|
|
|
|
|
|
|
Common trusts and 103-12 investments
(4)
|
|
|
|
|
|
|
|
394,318
|
|
Private equity funds
(5)
|
|
|
|
|
|
|
|
40,401
|
|
Total investments at fair value
|
|
$
|
20,912
|
|
|
$
|
120,470
|
|
|
$
|
—
|
|
|
$
|
576,101
|
|
|
|
(1)
|
Equity securities are primarily comprised of corporate stock and mutual funds directly held by the plans. Equity securities are valued using the closing price reported on the active market on which the individual securities are traded.
|
|
|
(2)
|
Fixed income securities are primarily comprised of governmental and corporate bonds directly held by the plans. Governmental and corporate bonds are valued using both market observable inputs for similar assets that are traded on an active market and the closing price on the active market on which the individual securities are traded.
|
|
|
(3)
|
Certain assets that are measured at fair value using the net asset value ("NAV") practical expedient have not been classified in the fair value hierarchy.
|
|
|
(4)
|
Common trusts and 103-12 investments (collectively "Trusts") are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, equity and credit indexes, and money markets. Trusts are valued at the NAV as determined by their custodian. NAV represents the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates.
|
|
|
(5)
|
Private equity funds consist of four funds seeking capital appreciation by investing in private equity investment partnerships and venture capital companies. Private equity fund valuations are based on the NAV of the underlying assets. Funds are comprised of unrestricted and restricted publicly traded securities and privately held securities. Unrestricted securities are valued at the closing market price on the reporting date. Restricted securities may be valued at a discount from such closing public market price, depending on facts and circumstances. Privately held securities are valued at fair value as determined by the fund directors and general partners.
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Supplemental Executive Retirement Plan
The Company maintains a domestic unfunded Supplemental Executive Retirement Plan ("SERP") under which non-qualified supplemental pension benefits are paid to certain employees in addition to amounts received under the Company's qualified retirement plan which is subject to Internal Revenue Service ("IRS") limitations on covered compensation. The annual cost of this program has been included in the determination of total net pension costs shown above and was
$2,113
,
$1,703
and
$3,012
in
2016
,
2015
and
2014
, respectively. The projected benefit obligation associated with this plan is also included in the pension disclosure shown above and was
$16,738
,
$14,643
and
$17,953
at December 31,
2016
,
2015
and
2014
, respectively.
In October 2016, the Company announced an amendment to freeze and vest all benefit accruals under the SERP, effective November 30, 2016. The Company recorded a curtailment loss of
$1,144
for the year ended December 31, 2016 related to the amendment. The value of the frozen vested benefit was converted into an account balance and deferred. In addition, the Company created The Lincoln Electric Company Restoration Plan (“Restoration Plan”) that will be effective January 1, 2017. The Restoration Plan is a domestic unfunded plan maintained for the purpose of providing certain employees the ability to fully participate in standard employee retirement offerings, effective January 1, 2017, which are limited by IRS regulations on covered compensation.
Defined Contribution Plans
Substantially all U.S. employees are covered under defined contribution plans. In October 2016, the Company announced a plan redesign of the Savings Plan that will be effective January 1, 2017. The Savings Plan will provide that eligible employees receive up to
6%
of employees' annual compensation in Company contributions through Company matching contributions of
100%
of the first
3%
of employee compensation contributed to the plan, and automatic Company contributions equal to
3%
of annual compensation. In addition, certain employees affected by the RAP freeze will also be eligible to receive employer contributions equal to
6%
of annual compensation for a minimum period of
five years
or to the end of the year in which they complete
thirty years
of service.
The annual costs recognized for defined contribution plans were
$8,361
,
$10,082
and
$11,088
in
2016
,
2015
and
2014
, respectively.
Other Benefits
The Cleveland, Ohio, area operations have a Guaranteed Continuous Employment Plan covering substantially all employees which, in general, provides that the Company will provide work for at least
75%
of every standard work week (presently
40
hours). This plan does not guarantee employment when the Company's ability to continue normal operations is seriously restricted by events beyond the control of the Company. The Company has reserved the right to terminate this plan effective at the end of a calendar year by giving notice of such termination not less than
six
months prior to the end of such year.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 12 – INCOME TAXES
The components of income before income taxes for the three years ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
U.S.
|
|
$
|
209,409
|
|
|
$
|
118,037
|
|
|
$
|
303,933
|
|
Non-U.S.
|
|
67,979
|
|
|
51,750
|
|
|
71,880
|
|
Total
|
|
$
|
277,388
|
|
|
$
|
169,787
|
|
|
$
|
375,813
|
|
The components of income tax expense (benefit) for the three years ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
57,090
|
|
|
$
|
60,500
|
|
|
$
|
71,601
|
|
Non-U.S.
|
|
23,344
|
|
|
28,046
|
|
|
24,210
|
|
State and local
|
|
8,386
|
|
|
9,557
|
|
|
8,235
|
|
|
|
88,820
|
|
|
98,103
|
|
|
104,046
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(1,716
|
)
|
|
(47,902
|
)
|
|
15,175
|
|
Non-U.S.
|
|
(8,261
|
)
|
|
(3,362
|
)
|
|
1,370
|
|
State and local
|
|
172
|
|
|
(4,464
|
)
|
|
1,342
|
|
|
|
(9,805
|
)
|
|
(55,728
|
)
|
|
17,887
|
|
Total
|
|
$
|
79,015
|
|
|
$
|
42,375
|
|
|
$
|
121,933
|
|
The differences between total income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes for the three years ended
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory rate of 35% applied to pre-tax income
|
|
$
|
97,086
|
|
|
$
|
59,426
|
|
|
$
|
131,534
|
|
Effect of state and local income taxes, net of federal tax benefit
|
|
5,554
|
|
|
1,868
|
|
|
6,694
|
|
Intangible and asset impairments/(write-off)
|
|
(4,438
|
)
|
|
2,184
|
|
|
11,674
|
|
Foreign rate variance
|
|
(8,128
|
)
|
|
(11,399
|
)
|
|
(22,495
|
)
|
Venezuela deconsolidation/devaluation
|
|
5,192
|
|
|
11,396
|
|
|
5,603
|
|
Increase/(decrease) of valuation allowances
|
|
(8,525
|
)
|
|
2,900
|
|
|
5,545
|
|
Manufacturing deduction
|
|
(5,190
|
)
|
|
(9,207
|
)
|
|
(7,316
|
)
|
U.S. tax cost (benefit) of foreign source income
|
|
(489
|
)
|
|
(8,754
|
)
|
|
(514
|
)
|
Other
|
|
(2,047
|
)
|
|
(6,039
|
)
|
|
(8,792
|
)
|
Total
|
|
$
|
79,015
|
|
|
$
|
42,375
|
|
|
$
|
121,933
|
|
Effective tax rate
|
|
28.5
|
%
|
|
25.0
|
%
|
|
32.4
|
%
|
The
2016
effective tax rate is impacted by the utilization of U.S. tax credits, income earned in lower tax rate jurisdictions, the reversal of an income tax valuation allowance as a result of a legal entity change and an income tax benefit related to a worthless stock deduction of a foreign subsidiary. Total income tax payments, net of refunds, were
$72,965
in
2016
,
$101,939
in
2015
and
$119,102
in
2014
.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Deferred Taxes
Significant components of deferred tax assets and liabilities at
December 31, 2016
and
2015
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Tax loss and credit carry-forwards
|
|
$
|
52,270
|
|
|
$
|
44,925
|
|
Inventory
|
|
2,080
|
|
|
1,607
|
|
Other accruals
|
|
18,186
|
|
|
17,874
|
|
Employee benefits
|
|
23,596
|
|
|
21,859
|
|
Pension obligations
|
|
2,503
|
|
|
2,477
|
|
Other
|
|
3,020
|
|
|
3,795
|
|
Deferred tax assets, gross
|
|
101,655
|
|
|
92,537
|
|
Valuation allowance
|
|
(47,849
|
)
|
|
(51,294
|
)
|
Deferred tax assets, net
|
|
53,806
|
|
|
41,243
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant and equipment
|
|
32,210
|
|
|
33,627
|
|
Intangible assets
|
|
17,506
|
|
|
16,105
|
|
Inventory
|
|
10,059
|
|
|
10,770
|
|
Pension obligations
|
|
17,915
|
|
|
9,897
|
|
Other
|
|
9,309
|
|
|
8,800
|
|
Deferred tax liabilities
|
|
86,999
|
|
|
79,199
|
|
Total deferred taxes
|
|
$
|
(33,193
|
)
|
|
$
|
(37,956
|
)
|
At
December 31, 2016
, certain subsidiaries had foreign tax credit carry-forwards of approximately
$3,186
that expire in 2026, tax loss carry-forwards of approximately
$87,519
that expire in various years from
2017
through
2032
, plus
$103,528
for which there is no expiration date.
In assessing the realizability of deferred tax assets, the Company assesses whether it is more likely than not that a portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. At
December 31, 2016
, a valuation allowance of
$47,849
was recorded against certain deferred tax assets based on this assessment. The Company believes it is more likely than not that the tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company's assessment of future taxable income or tax planning strategies changes.
The Company does not provide deferred income taxes on unremitted earnings of certain non-U.S. subsidiaries which are deemed indefinitely reinvested. It is not practicable to calculate the deferred taxes associated with the remittance of these earnings. Deferred income taxes associated with earnings that are not expected to be indefinitely reinvested were not significant.
Unrecognized Tax Benefits
Liabilities for unrecognized tax benefits are classified as Other liabilities unless expected to be paid in one year, with a portion recorded to Deferred income taxes to offset tax attributes. The Company recognizes interest and penalties related to unrecognized tax benefits in Income taxes. Current income tax expense included expense of
$597
for the year ended
December 31, 2016
and income of
$940
for the year ended
December 31, 2015
for interest and penalties. For those same years, the Company's accrual for interest and penalties related to unrecognized tax benefits totaled
$6,431
and
$6,080
, respectively.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
The following table summarizes the activity related to unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at beginning of year
|
|
$
|
14,332
|
|
|
$
|
18,389
|
|
Increase related to current year tax provisions
|
|
1,975
|
|
|
1,021
|
|
Increase (decrease) related to prior years' tax positions
|
|
5,188
|
|
|
317
|
|
Decrease related to settlements with taxing authorities
|
|
(265
|
)
|
|
(157
|
)
|
Resolution of and other decreases in prior years' tax liabilities
|
|
(1,982
|
)
|
|
(3,323
|
)
|
Other
|
|
(749
|
)
|
|
(1,915
|
)
|
Balance at end of year
|
|
$
|
18,499
|
|
|
$
|
14,332
|
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was
$9,813
at
December 31, 2016
and
$8,369
at
December 31, 2015
.
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 2012. The Company is currently subject to various U.S. state audits and non-U.S. income tax audits. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until after the close of an audit. The Company evaluates its tax positions and establishes liabilities for uncertain tax positions that may be challenged by local authorities and may not be fully sustained.
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 further reduction of
$2,058
in prior years' unrecognized tax benefits in
2017
.
In July 2012, the Company received a Notice of Reassessment (the "Reassessments") from the Canada Revenue Agency in respect to its 2004 to 2010 taxation years to disallow the deductibility of inter-company dividends. The Company appealed the Reassessments to the Tax Court of Canada. In September 2014, the Department of Justice Canada consented to a judgment, wholly in the Company's favor. In vacating the reassessment, this tax litigation is concluded. The Company received a partial refund of a cash deposit in December 2014, with substantially all of the remaining cash deposit received in the first quarter of 2015, including interest.
NOTE 13 – DERIVATIVES
The Company uses derivative instruments to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business. Both at inception and on an ongoing basis, the derivative instruments that qualify for hedge accounting are assessed as to their effectiveness, when applicable.
Hedge ineffectiveness was immaterial for each of the three years in the period ended December 31, 2016.
The Company is subject to the credit risk of the counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. None of the concentrations of risk with any individual counterparty was considered significant at December 31,
2016
. The Company does not expect any counterparties to fail to meet their obligations.
Cash flow hedges
Certain foreign currency forward contracts are qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of these short-term contracts was
$36,385
at December 31,
2016
and
$30,388
at December 31,
2015
.
Fair value hedges
Certain interest rate swap agreements were qualified and designated as fair value hedges. At December 31, 2016, the Company had interest rate swap agreements outstanding that effectively convert notional amounts of
$100,000
of debt from a fixed interest rate to a variable interest rate based on three-month LIBOR plus a spread of between
0.6%
and
1.8%
. The variable rates reset every three months, at which time payment or receipt of interest will be settled.
Net investment hedges
The Company had no foreign currency forward contracts that were qualified and designated as net investment hedges.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
Derivatives not designated as hedging instruments
The Company has certain foreign exchange forward contracts which are not designated as hedges. These derivatives are held as hedges of certain balance sheet exposures. The dollar equivalent gross notional amount of these contracts was
$261,168
at December 31,
2016
and
$267,626
at December 31,
2015
.
The Company had short-term silver forward contracts with notional amounts of
$2,804
at December 31, 2015.
Fair values of derivative instruments in the Company's Consolidated Balance Sheets follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
Derivatives by hedge designation
|
|
Other
Current
Assets
|
|
Other
Current
Liabilities
|
|
Other Liabilities
|
|
Other
Current
Assets
|
|
Other
Current
Liabilities
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
439
|
|
|
$
|
923
|
|
|
$
|
—
|
|
|
$
|
178
|
|
|
$
|
731
|
|
Interest rate swap agreements
|
|
—
|
|
|
—
|
|
|
5,439
|
|
|
—
|
|
|
—
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
746
|
|
|
1,529
|
|
|
—
|
|
|
625
|
|
|
2,303
|
|
Commodity contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40
|
|
|
8
|
|
Total derivatives
|
|
$
|
1,185
|
|
|
$
|
2,452
|
|
|
$
|
5,439
|
|
|
$
|
843
|
|
|
$
|
3,042
|
|
The effects of undesignated derivative instruments on the Company's Consolidated Statements of Income for the years ended December 31,
2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Derivatives by hedge designation
|
|
Classification of gains (losses)
|
|
2016
|
|
2015
|
Not designated as hedges:
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Selling, general & administrative expenses
|
|
$
|
(21,096
|
)
|
|
$
|
(18,875
|
)
|
Commodity contracts
|
|
Cost of goods sold
|
|
(742
|
)
|
|
440
|
|
The effects of designated cash flow hedges on AOCI and the Company's Consolidated Statements of Income for the years ended December 31,
2016
and
2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Total gain (loss) recognized in AOCI, net of tax
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
|
$
|
(512
|
)
|
|
$
|
(551
|
)
|
Net investment contracts
|
|
1,099
|
|
|
1,099
|
|
The Company expects a loss of
$512
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Derivative type
|
|
Gain (loss) reclassified from AOCI to:
|
|
2016
|
|
2015
|
Foreign exchange contracts
|
|
Sales
|
|
$
|
(1,580
|
)
|
|
$
|
(1,191
|
)
|
|
|
Cost of goods sold
|
|
(407
|
)
|
|
771
|
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 14 – FAIR VALUE
The following table provides a summary of fair value assets and liabilities as of
December 31, 2016
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of December 31, 2016
|
|
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
1,185
|
|
|
$
|
—
|
|
|
$
|
1,185
|
|
|
$
|
—
|
|
Marketable securities
|
|
38,920
|
|
|
—
|
|
|
38,920
|
|
|
—
|
|
Total assets
|
|
$
|
40,105
|
|
|
$
|
—
|
|
|
$
|
40,105
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
2,452
|
|
|
$
|
—
|
|
|
$
|
2,452
|
|
|
$
|
—
|
|
Interest rate swap agreements
|
|
5,439
|
|
|
—
|
|
|
5,439
|
|
|
—
|
|
Contingent considerations
|
|
8,154
|
|
|
—
|
|
|
—
|
|
|
8,154
|
|
Forward contract
|
|
15,272
|
|
|
—
|
|
|
—
|
|
|
15,272
|
|
Deferred compensation
|
|
25,244
|
|
|
—
|
|
|
25,244
|
|
|
—
|
|
Total liabilities
|
|
$
|
56,561
|
|
|
$
|
—
|
|
|
$
|
33,135
|
|
|
$
|
23,426
|
|
The following table provides a summary of fair value assets and liabilities as of
December 31, 2015
measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance as of December 31, 2015
|
|
Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
Assets:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
803
|
|
|
$
|
—
|
|
|
$
|
803
|
|
|
$
|
—
|
|
Commodity contracts
|
|
40
|
|
|
—
|
|
|
40
|
|
|
—
|
|
Total assets
|
|
$
|
843
|
|
|
$
|
—
|
|
|
$
|
843
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
3,034
|
|
|
$
|
—
|
|
|
$
|
3,034
|
|
|
$
|
—
|
|
Commodity contracts
|
|
8
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Contingent consideration
|
|
9,184
|
|
|
—
|
|
|
—
|
|
|
9,184
|
|
Forward contract
|
|
26,484
|
|
|
—
|
|
|
—
|
|
|
26,484
|
|
Deferred compensation
|
|
23,201
|
|
|
—
|
|
|
23,201
|
|
|
—
|
|
Total liabilities
|
|
$
|
61,911
|
|
|
$
|
—
|
|
|
$
|
26,243
|
|
|
$
|
35,668
|
|
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. The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions. During the year ended
December 31, 2016
, there were no transfers between Levels 1, 2 or 3.
The Company measures the fair value of marketable securities using Level 2 inputs based on quoted market prices for similar assets in active markets.
In connection with acquisitions, the Company recorded contingent considerations fair valued at
$8,154
as of
December 31, 2016
. Under the contingent consideration agreements the amounts to be paid are based upon actual financial results of the acquired entity for specified future periods. The fair value of the contingent considerations are a Level 3 valuation and fair valued using either a probability weighted discounted cash flow analysis or an option pricing model.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
In connection with an acquisition, the Company obtained a controlling financial interest in the acquired entity and at the same time entered into a contract to obtain the remaining financial interest in the entity over a
three
-year period. The amount to be paid to obtain the remaining financial interest will be based upon actual financial results of the entity through 2016. A liability was recorded for the forward contract at a fair value of
$15,272
as of
December 31, 2016
. The change in the liability from December 31, 2015 was primarily the result of a
$14,438
payment to acquire an additional financial interest in the entity offset by foreign exchange translation and additional accruals of
$1,383
for the twelve months ended
December 31, 2016
. The payment was included in Other financing activities in the accompanying Consolidated Statements of Cash Flows. The fair value of the contract is a Level 3 valuation and is based on the present value of the expected future payments. The expected future payments is based on a multiple of earnings and cash flows over the three-year period ending December 31, 2016, present valued utilizing a risk based discount rates of
3.5%
reflective of the Company's cost of debt.
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 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. The fair value of Cash and cash equivalents, Accounts receivable, Amounts due banks and Trade accounts payable approximated book value due to the short-term nature of these instruments at both
December 31, 2016
and
December 31, 2015
. See Note 8 for the fair value estimate of debt.
NOTE 15 – INVENTORY
Inventories in the Consolidated Balance Sheet is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
Raw materials
|
$
|
76,811
|
|
|
$
|
87,919
|
|
Work-in-process
|
40,556
|
|
|
39,555
|
|
Finished goods
|
138,039
|
|
|
148,456
|
|
Total
|
$
|
255,406
|
|
|
$
|
275,930
|
|
The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Actual year-end inventory levels and costs may differ from interim LIFO inventory valuations. At December 31,
2016
and
2015
, approximately
40%
of total inventories were valued using the LIFO method. The excess of current cost over LIFO cost was
$61,329
at
December 31, 2016
and
$59,765
at
December 31, 2015
.
NOTE 16 – LEASES
The Company leases sales offices, manufacturing facilities, warehouses and distribution centers, transportation equipment, office equipment and information technology equipment. Such leases, some of which are noncancelable and, in many cases, include renewals, expire at various dates. The Company pays most insurance, maintenance and taxes relating to leased assets. Rental expense was
$16,897
in
2016
,
$16,703
in
2015
and
$18,103
in
2014
.
At
December 31, 2016
, total future minimum lease payments for noncancelable operating leases were
$12,267
in
2017
,
$9,824
in
2018
,
$7,670
in
2019
,
$5,220
in
2020
,
$3,816
in
2021
and
$4,888
thereafter. Assets held under capital leases are included in property, plant and equipment and are immaterial.
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 17 – CONTINGENCIES
The Company, like other manufacturers, is subject from time to time to a variety of civil and administrative proceedings arising in the ordinary course of business. Such claims and litigation include, without limitation, product liability claims, regulatory claims and health, safety and environmental claims, some of which relate to cases alleging asbestos induced illnesses. The claimants in the asbestos cases seek compensatory and punitive damages, in most cases for unspecified amounts. The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously.
The Company accrues its best estimate of the probable costs, after a review of the facts with management and counsel and taking into account past experience. If an unfavorable outcome is determined to be reasonably possible but not probable, or if the amount of loss cannot be reasonably estimated, disclosure would be provided for material claims or litigation. Many of the current cases are in differing procedural stages and information on the circumstances of each claimant, which forms the basis for judgments as to the validity or ultimate disposition of such actions, varies greatly. Therefore, in many situations a range of possible losses cannot be made. Reserves are adjusted as facts and circumstances change and related management assessments of the underlying merits and the likelihood of outcomes change. Moreover, reserves only cover identified and/or asserted claims. Future claims could, therefore, give rise to increases to such reserves.
Based on the Company's historical experience in litigating product liability claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, as well as the Company's current assessment of the underlying merits of the claims and applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material effect on the Company's consolidated financial statements.
NOTE 18 – PRODUCT WARRANTY COSTS
The changes in product warranty accruals for
2016
,
2015
and
2014
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
|
$
|
19,469
|
|
|
$
|
15,579
|
|
|
$
|
15,180
|
|
Accruals for warranties
|
|
13,058
|
|
|
19,824
|
|
|
12,368
|
|
Settlements
|
|
(11,434
|
)
|
|
(15,458
|
)
|
|
(11,495
|
)
|
Foreign currency translation
|
|
(40
|
)
|
|
(476
|
)
|
|
(474
|
)
|
Balance at end of year
|
|
$
|
21,053
|
|
|
$
|
19,469
|
|
|
$
|
15,579
|
|
LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in thousands, except share and per share amounts)
NOTE 19 – QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
550,722
|
|
|
$
|
592,418
|
|
|
$
|
567,646
|
|
|
$
|
563,828
|
|
Gross profit
|
|
189,102
|
|
|
202,927
|
|
|
199,812
|
|
|
197,457
|
|
Income before income taxes
|
|
73,182
|
|
|
45,758
|
|
|
80,296
|
|
|
78,152
|
|
Net income
|
|
53,638
|
|
|
31,317
|
|
|
60,049
|
|
|
53,395
|
|
Basic earnings per share
|
|
$
|
0.77
|
|
|
$
|
0.46
|
|
|
$
|
0.90
|
|
|
$
|
0.81
|
|
Diluted earnings per share
|
|
$
|
0.76
|
|
|
$
|
0.45
|
|
|
$
|
0.89
|
|
|
$
|
0.81
|
|
2015
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
657,900
|
|
|
$
|
664,740
|
|
|
$
|
645,166
|
|
|
$
|
567,985
|
|
Gross profit
|
|
220,390
|
|
|
225,781
|
|
|
198,894
|
|
|
196,079
|
|
Income (loss) before income taxes
|
|
92,707
|
|
|
94,434
|
|
|
(88,526
|
)
|
|
71,172
|
|
Net income (loss)
|
|
68,354
|
|
|
70,898
|
|
|
(60,466
|
)
|
|
48,692
|
|
Basic earnings (loss) per share
|
|
$
|
0.90
|
|
|
$
|
0.95
|
|
|
$
|
(0.82
|
)
|
|
$
|
0.68
|
|
Diluted earnings (loss) per share
|
|
$
|
0.89
|
|
|
$
|
0.94
|
|
|
$
|
(0.82
|
)
|
|
$
|
0.68
|
|
The quarter ended June 30, 2016 includes special items charges of
$34,348
(
$33,251
after-tax) primarily related to the loss on deconsolidation of Venezuelan subsidiary and a tax benefit of
$7,196
related to the reversal of an income tax valuation allowance as a result of a legal entity change to realign the Company's tax structure.
The quarter ended December 31, 2015 includes net rationalization charges of
$434
(
$450
after-tax) primarily related to employee severance and other related costs. Special items also include pension settlement charges of
$6,407
(
$3,969
after-tax) and Venezuelan foreign exchange remeasurement losses of
$708
related to the adoption of a new foreign exchange mechanism.
The quarter ended September 30, 2015 includes net rationalization and asset impairment charges of
$18,285
(
$16,832
after-tax) primarily related to employee severance and other costs. Impairment charges include a non-cash charge to the carrying value of goodwill of
$6,315
and non-cash long-lived asset impairment charges of
$3,417
. Special items also include pension settlement charges of
$136,331
(
$83,341
after-tax) primarily related to the purchase of a group annuity contract and Venezuelan foreign exchange remeasurement losses of
$26,506
related to the adoption of a new foreign exchange mechanism.
The quarter ended June 30, 2015 includes net rationalization charges of
$1,239
(
$900
after-tax) primarily related to employee severance and other costs.
The quarterly earnings per share ("EPS") amounts are each calculated independently. Therefore, the sum of the quarterly EPS amounts may not equal the annual totals.