10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
 
Commission file number 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Ohio
 
34-1860551
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
22801 St. Clair Avenue, Cleveland, Ohio
 
44117
(Address of principal executive offices)
 
(Zip Code)
(216) 481-8100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, without par value
 
The NASDAQ Stock Market LLC
(Title of each class)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ    No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨    No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
þ Large accelerated filer
 
¨ Accelerated filer
 
¨ Non-accelerated filer
 (Do not check if a smaller reporting company)
 
¨ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No þ
The aggregate market value of the common shares held by non-affiliates as of June 30, 2015 was $4,448,640,206 (affiliates, for this purpose, have been deemed to be Directors and Executive Officers of the Company and certain significant shareholders).
The number of shares outstanding of the registrant's common shares as of December 31, 2015 was 70,693,389.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement with respect to the registrant's 2016 Annual Meeting of Shareholders.
 




PART I
ITEM 1. BUSINESS
General
As used in this Annual Report on Form 10-K, the term "Company," except as otherwise indicated by the context, means Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest. The Lincoln Electric Company began operations in 1895 and was incorporated under the laws of the State of Ohio in 1906. During 1998, The Lincoln Electric Company reorganized into a holding company structure, and Lincoln Electric Holdings, Inc. became the publicly-held parent of Lincoln Electric subsidiaries worldwide, including The Lincoln Electric Company.
The Company is one of only a few worldwide broad-line manufacturers 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. The Company's product offering also includes computer numeric controlled ("CNC") plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. In addition, the Company has a leading global position in the brazing and soldering alloys market.
The arc welding power sources and wire feeding systems manufactured by the Company range in technology from basic units used for light manufacturing and maintenance to highly sophisticated robotic applications for high volume production welding and fabrication. Three primary types of arc welding electrodes are produced: (1) coated manual or stick electrodes; (2) solid electrodes produced in coil, reel or drum forms for continuous feeding in mechanized welding; and (3) cored electrodes produced in coil form for continuous feeding in mechanized welding.
The Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, China, Colombia, France, Germany, India, Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Russia, Turkey, the United Kingdom and Venezuela.
As of December 31, 2015, the Company's business units were aligned into five operating segments. The operating segments consist of North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group. The North America Welding segment primarily includes welding operations in the United States, Canada and Mexico. The Europe Welding segment includes welding operations in Europe, Russia, Africa and the Middle East. The Asia Pacific Welding segment primarily includes welding operations in China and Australia. The South America Welding segment primarily includes welding operations in Brazil, Colombia and Venezuela. The Harris Products Group includes the Company's global cutting, soldering and brazing businesses as well as the retail business in the United States. See Note 5 to the Company's consolidated financial statements for segment and geographic area information, which is incorporated herein by reference.
During the first quarter of 2016, the Company realigned its organizational and leadership structure. The new structure will allow for further integration of operational and product development processes across regions and support growth strategies. In accordance with this organizational change, beginning with quarterly reporting for the three months ended March 31, 2016, the Company will report three operating segments as follows: Americas Welding, International Welding, and The Harris Products Group.
Customers
The Company's products are sold in both domestic and international markets. In North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors and product users.
The Company's major end-user markets include:
general metal fabrication,
power generation and process industry,
structural steel construction (buildings and bridges),
heavy equipment fabrication (farming, mining and rail),
shipbuilding,
automotive,
pipe mills and pipelines, and
offshore oil and gas exploration and extraction.

1



The Company is not dependent on a single customer or a few customers and no individual customer currently accounts for more than ten percent of total Net sales. However, the loss of a large customer could have an adverse effect on the Company's business. The Company's operating results are sensitive to changes in general economic conditions. The arc welding and cutting industry is generally a mature industry in developed markets such as North America and Western Europe and is cyclical in nature. Overall demand for arc welding and cutting products is largely determined by economic cycles and the level of capital spending in manufacturing and other industrial sectors. The Company experiences some variability in reported period-to-period results as demand for the Company's products are mildly seasonal with generally higher demand in the second and third quarters. See "Item 1A. Risk Factors" for further discussion regarding risks associated with customers, general economic conditions and demand.
Competition
Conditions in the arc welding and cutting industry are highly competitive. The Company believes it is the world's largest manufacturer of consumables and equipment with relatively few major broad-line competitors worldwide, but numerous smaller competitors in specific geographic markets. The Company continues to pursue strategies to heighten its competitiveness in domestic and international markets, which includes positioning low cost manufacturing facilities in most geographical markets. Competition in the arc welding and cutting industry is based on brand preference, product quality, price, performance, warranty, delivery, service and technical support. The Company believes its performance against these factors has contributed to the Company's position as the leader in the industry.
Most of the Company's products may be classified as standard commercial articles and are manufactured for stock. The Company believes it has a competitive advantage in the marketplace because of its highly trained technical sales force and the support of its welding research and development staff to assist customers in optimizing their welding applications. This allows the Company to introduce its products to new users and to establish and maintain close relationships with its customers. This close relationship between the technical sales force and the direct customers, together with its supportive relationship with its distributors, who are particularly interested in handling the broad range of the Company's products, is an important element of the Company's market success and a valuable asset of the Company.
Raw Materials
The principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys and various chemicals, all of which are normally available for purchase in the open market.
Patents and Trademarks
The Company holds many valuable patents, primarily in arc welding, and has increased the application process as research and development has progressed in both the United States and major international jurisdictions. The Company believes its trademarks are an important asset and aggressively pursues brand management.
Environmental Regulations
The Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material adverse effect on the Company's earnings. The Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is progressing towards certification at its remaining facilities worldwide. In addition, the Company is ISO 9001 certified at 38 facilities worldwide.
International Operations
The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States. As a result, the Company is subject to business risks inherent to non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations.
Research and Development
Research activities, which the Company believes provide a competitive advantage, relate to the development of new products and the improvement of existing products. Research activities are Company-sponsored. Refer to Note 1 to the Company's consolidated financial statements with respect to total costs of research and development, which is incorporated herein by reference.
Employees
The number of persons employed by the Company worldwide at December 31, 2015 was approximately 10,000. See "Part I, Item 1C" for information regarding the Company's executive officers, which is incorporated herein by reference.

2



Website Access
The Company's website, www.lincolnelectric.com, is used as a channel for routine distribution of important information, including news releases and financial information. The Company posts its filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC, including annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K; proxy statements; and any amendments to those reports or statements. The Company also posts its Code of Corporate Conduct and Ethics on its website. All such postings and filings are available on the Company's website free of charge. In addition, this website allows investors and other interested persons to sign up to automatically receive e-mail alerts when news releases and financial information is posted on the website. The SEC also maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this Annual Report unless expressly noted.

ITEM 1A. RISK FACTORS
From time to time, information we provide, statements by our employees or information included in our filings with the SEC may contain forward-looking statements that are not historical facts. Those statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "forecast," "guidance" or words of similar meaning. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the Company's operating results. Forward-looking statements, and our future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including those risks described below. Any forward-looking statements made in this report or otherwise speak only as of the date of the statement, and, except as required by law, we undertake no obligation to update those statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
In the ordinary course of our business, we face various strategic, operating, compliance and financial risks. These risks could have a material impact on our business, financial condition, operating results and cash flows.
Our Enterprise Risk Management ("ERM") process seeks to identify and address significant risks. Our ERM process is a company-wide initiative that is designed with the intent of prioritizing risks and allocating appropriate resources to address such risks. We use the integrated risk framework of the Committee of Sponsoring Organizations to assess, manage and monitor risks.
Management has identified and prioritized critical risks based on the severity and likelihood of each risk and assigned an executive to address each major identified risk area and lead action plans to monitor and mitigate risks, where possible. Our Board of Directors provides oversight of the ERM process and systematically reviews identified critical risks. The Audit Committee also reviews major financial risk exposures and the steps management has taken to monitor and control them.
Our goal is to pro-actively manage risks in a structured approach and in conjunction with the strategic planning process, with the intent to preserve and enhance shareholder value. However, these and other risks and uncertainties could cause our results to vary materially from recent results or from our anticipated future results. The risk factors and uncertainties described below, together with information incorporated by reference or otherwise included elsewhere in this Annual Report on Form 10-K, should be carefully considered. Additional risks and uncertainties of which we are currently unaware or that we currently believe to be immaterial may also adversely affect our business.
General economic and market conditions may adversely affect our financial condition, results of operations and access to capital markets.
Our operating results are sensitive to changes in general economic conditions. Further recessionary economic cycles, higher interest rates, inflation, higher labor costs, trade barriers in the world markets, financial turmoil related to sovereign debt and changes in tax laws or other economic factors affecting the countries and industries in which we do business could adversely affect demand for our products. An adverse change in demand could impact our results of operations, collection of accounts receivable and our expected cash flow generation from current and acquired businesses, which may adversely impact our financial condition and access to capital markets.

3



Economic and supply disruptions associated with events beyond our control, such as war, acts of terror, political unrest, pandemic, labor disputes or natural disasters could adversely affect our supply chain and distribution channels or result in loss of sales and customers.
Our facilities and operations, and the facilities and operations of our suppliers and customers, could be disrupted by events beyond our control, such as war, political unrest, pandemic, labor disputes or natural disasters. Any such disruption could cause delays in the production and distribution of our products and the loss of sales and customers. Insurance proceeds may not adequately compensate the Company for the losses.
Availability of and volatility in energy costs or raw material prices may adversely affect our performance.
In the normal course of business, we are exposed to market risks related to the availability of and price fluctuations in the purchase of energy and commodities used in the manufacture of our products (primarily steel, brass, copper, silver, aluminum alloys, electronic components, electricity and natural gas). The availability and prices for energy costs and raw materials, including steel, nonferrous metals and chemicals, are subject to volatility and are influenced by worldwide economic conditions, speculative action, world supply and demand balances, inventory levels, availability of substitute materials, currency exchange rates, our competitors' production costs, anticipated or perceived shortages and other factors.
Increases in the cost of raw materials and components may adversely affect our profitability if we are unable to pass along to our customers these cost increases in the form of price increases or otherwise reduce our cost of goods sold. Although most of the raw materials and components used in our products are commercially available from a number of sources and in adequate supply, any disruption in the availability of such raw materials and components, our inability to timely or otherwise obtain substitutes for such items, or any deterioration in our relationships with or the financial viability of our suppliers could adversely affect our business.
We are a co-defendant in litigation alleging asbestos induced illness. Liabilities relating to such litigation could reduce our profitability and impair our financial condition.
As of December 31, 2015, we were a co-defendant in cases alleging asbestos induced illness involving claims by approximately 8,415 plaintiffs. In each instance, we are one of a large number of defendants. The asbestos claimants allege that exposure to asbestos contained in welding consumables caused the plaintiffs to develop adverse pulmonary diseases, including mesothelioma and other lung cancers.
Since January 1, 1995, we have been a co-defendant in asbestos cases that have been resolved as follows: 49,677 of those claims were dismissed, 22 were tried to defense verdicts, seven were tried to plaintiff verdicts (one of which was vacated on appeal), one was resolved by agreement for an immaterial amount and 748 were decided in favor of the Company following summary judgment motions.
The long-term impact of the asbestos loss contingency, in the aggregate, on operating results, operating cash flows and access to capital markets is difficult to assess, particularly since claims are in many different stages of development and we benefit significantly from cost-sharing with co-defendants and insurance carriers. While we intend to contest these lawsuits vigorously, and believe we have applicable insurance relating to these claims, there are several risks and uncertainties that may affect our liability for personal injury claims relating to exposure to asbestos, including the future impact of changing cost sharing arrangements or a change in our overall trial experience.
Asbestos use in welding consumables in the U.S. ceased in 1981.
We may incur material losses and costs as a result of product liability claims that may be brought against us.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture, sale and application of our products and the products of third-party suppliers that we utilize or resell. Our products are used in a variety of applications, including infrastructure projects such as oil and gas pipelines and platforms, buildings, bridges and power generation facilities, the manufacture of transportation and heavy equipment and machinery and various other construction projects. We face risk of exposure to product liability claims in the event that accidents or failures on these projects result, or are alleged to result, in bodily injury or property damage. Further, our products are designed for use in specific applications, and if a product is used inappropriately, personal injury or property damage may result.

4



The occurrence of defects in or failures of our products, or the misuse of our products in specific applications, could cause termination of customer contracts, increased costs and losses to us, our customers and other end users. We cannot be assured that we will not experience any material product liability losses in the future or that we will not incur significant costs to defend those claims. Further, we cannot be assured that our product liability insurance coverage will be adequate for any liabilities that we may ultimately incur or that product liability insurance will continue to be available on terms acceptable to us. Even if we are successful defending such claims or product liability coverage is adequate, claims of this nature could cause customers to lose confidence in our products and our company. Warranty claims are not generally covered by insurance and we may incur significant warranty costs in the future for which we would not be reimbursed.
The cyclical nature and maturity of the arc welding and cutting industry in developed markets may adversely affect our performance.
The arc welding and cutting industry is generally a mature industry in developed markets such as North America and Western Europe and is cyclical in nature. Overall demand for arc welding and cutting products is largely determined by the level of capital spending in manufacturing and other industrial sectors, and the welding industry has historically experienced contraction during periods of slowing industrial activity. If economic, business and industry conditions deteriorate, capital spending in those sectors may be substantially decreased, which could reduce demand for our products, our revenues and our results of operations.
We may not be able to complete our acquisition or divestiture strategies, successfully integrate acquired businesses and in certain cases we may be required to retain liabilities for certain matters.
Part of our business strategy is to pursue targeted business acquisition opportunities, including foreign investment opportunities. For example, we have completed and continue to pursue acquisitions in emerging markets in order to strategically position resources to increase our presence in growing markets. We cannot be certain that we will be successful in pursuing potential acquisition candidates or that the consequences of any acquisition would be beneficial to us. Future acquisitions may expose us to unexpected liabilities and involve the expenditure of significant funds and management time. Further, we may not be able to successfully integrate any acquired business with our existing businesses or recognize the expected benefits from any completed acquisition.
Depending on the nature, size and timing of future acquisitions, we may be required to raise additional financing, which may not be available to us on acceptable terms. Our current operational cash flow is sufficient to fund our current acquisition plans, but a significant acquisition could require access to the capital markets.
Additionally, from time to time we may identify assets for strategic divestitures that would increase capital resources available for other activities and create organizational and operational efficiencies. Various factors could materially affect our ability to dispose of such assets or complete announced divestitures, including the receipt of approvals of governmental agencies or third parties and the availability of purchasers willing to acquire the interests or purchase the assets on terms and at prices acceptable to us.
Sellers typically retain certain liabilities or indemnify buyers for certain matters. The magnitude of any such retained liability or indemnification obligation may be difficult to quantify at the time of the transaction and ultimately may be material. Also, as is typical in divestitures, third parties may be unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations.
If we cannot continue to develop, manufacture and market products that meet customer demands, continue to enforce the intellectual property rights on which our business depends or if third parties assert that we violate their intellectual property rights, our revenues, gross margins and results of operations may suffer.
Our continued success depends, in part, on our ability to continue to meet our customers' needs for welding and cutting products through the introduction of innovative new products and the enhancement of existing product design and performance characteristics. We must remain committed to product research and development and customer service in order to remain competitive. We cannot be assured that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to our operating results, or that we will be able to continue our product development efforts at a pace to sustain future growth. Further, we may lose customers to our competitors if they demonstrate product design, development or manufacturing capabilities superior to ours.

5



We rely upon patent, trademark, copyright and trade secret laws in the United States and similar laws in foreign countries, as well as agreements with our employees, customers, suppliers and other third parties, to establish and maintain our intellectual property rights. However, any of our intellectual property rights could be challenged, invalidated or circumvented, or our intellectual property rights may not be sufficient to provide a competitive advantage. Further, the laws and their application in certain foreign countries do not protect our proprietary rights to the same extent as U.S. laws. Accordingly, in certain countries, we may be unable to protect our proprietary rights against unauthorized third-party copying or use, which could impact our competitive position.
Further, third parties may claim that we or our customers are infringing upon their intellectual property rights. Even if we believe that those claims are without merit, defending those claims and contesting the validity of patents can be time consuming and costly. Claims of intellectual property infringement also might require us to redesign affected products, enter into costly settlements or license agreements, pay costly damage awards or face a temporary or permanent injunction prohibiting us from manufacturing, marketing or selling certain of our products.
The competitive pressures we face could harm our revenue, gross margins and prospects.
We operate in a highly competitive global environment and compete in each of our businesses with other broad-line manufacturers and numerous smaller competitors specializing in particular products. We compete primarily on the basis of brand, product quality, price, performance, warranty, delivery, service and technical support. We have previously initiated, and may in the future initiate significant rationalization activities to align our business to market conditions and improve our overall competitiveness. Such rationalization activities could fail to deliver the desired competitive cost structure and could result in disruptions in customer service. If our products, services, support and cost structure do not enable us to compete successfully based on any of the criteria listed above, our operations, results and prospects could suffer.
Further, in the past decade, the arc welding industry in the United States and other developed countries has been subject to increased levels of foreign competition as low cost imports have become more readily available. Our competitive position could also be harmed if new or emerging competitors become more active in the arc welding business. For example, while steel manufacturers traditionally have not been significant competitors in the domestic arc welding industry, some foreign integrated steel producers manufacture selected consumable arc welding products. In addition, in certain markets of the world, distributors manufacture and sell arc welding products. Our sales and results of operations, as well as our plans to expand in some foreign countries, could be adversely affected by this practice.
We conduct our sales and distribution operations on a worldwide basis and maintain manufacturing facilities in a number of foreign countries, which subjects us to risks associated with doing business outside the United States.
Our long-term strategy is to continue to increase our market share in growing international markets. The share of sales and profits we derive from our international operations and exports from the United States is significant. This trend increases our exposure to the performance of many developing economies in addition to the developed economies outside of the United States. If international economies were to experience significant slowdowns, it could adversely affect our financial condition, results of operations and cash flows.
There are a number of risks in doing business internationally, which may impede our ability to achieve our strategic objectives relating to our foreign operations. Many developing countries have a significant degree of political and economic uncertainty and social turmoil that may impede our ability to implement and achieve our international growth objectives. Conducting business internationally subjects us to corporate governance and management challenges in consideration of the numerous U.S. and foreign laws and regulations, including regulations relating to import-export control, technology transfer restrictions, repatriation of earnings and funds, exchange controls, labor regulations, nationalization, anti-boycott provisions and anti-bribery laws (such as the Foreign Corrupt Practices Act and the Organization for Economic Cooperation and Development Convention). Failure by the Company or its sales representatives, agents or distributors to comply with these laws and regulations could result in administrative, civil or criminal liabilities, all or any of which could negatively impact our business and reputation. Our foreign operations also subject us to the risks of international terrorism and hostilities.
In particular, the economic and political environment in Venezuela exposes us to various risks. Currency exchange restrictions limit our ability to convert bolivars to U.S. dollars, which impacts our ability to repatriate earnings and to purchase goods and services necessary to operate our Venezuelan business. The restrictions could cause a slowdown, temporary shutdown or complete shutdown of operations at our Venezuelan subsidiary, which could negatively affect our earnings and cash flows.

6



In the future, the Company may need to deconsolidate its Venezuelan operations as a result of an inability to exchange bolivar-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. The Company monitors factors such as its ability to access various exchange mechanisms; the impact of government regulations on the Company’s ability to manage its Venezuelan operation’s capital structure, purchasing, product pricing, and labor relations; and the current political and economic situation within Venezuela. Based upon such factors as of December 31, 2015, the Company continues to consolidate its Venezuelan subsidiary. As of December 31, 2015, the Company's total investment in Venezuela was approximately $35,000, which includes intercompany payables.
Our operations depend on maintaining a skilled workforce, and any interruption in our workforce could negatively impact our results of operations and financial condition.
Our success depends in part on the efforts and abilities of our management team and key employees. Their skills, experience and industry knowledge significantly benefit our operations and performance. Our future success will also depend on our ability to identify, attract and retain highly qualified managerial and technical (including research and development) personnel. Competition for these individuals is intense, and we may not succeed in identifying, attracting or retaining qualified personnel. With our strategy to expand internationally into developing markets, we may incur additional risks as some developing economies lack a sufficiently trained labor pool.
Any interruption of our workforce, including interruptions due to unionization efforts, changes in labor relations or shortages of appropriately skilled individuals could impact our results of operations and financial condition.
Our defined benefit pension plans are subject to financial market trends, such as changes in discount rates and actual investment return on pension assets, which could adversely affect our results of operations and cash flows.
The performance of the financial markets and interest rates impact our funding obligations under our defined benefit pension plans. Significant changes in discount rates, decreases in the fair value of plan assets and investment losses on plan assets may increase our benefit obligations and adversely impact our results of operations, shareholders' equity and cash flows through our annual measurement of plan assets and liabilities. For a discussion regarding how the financial statements have been affected by significant changes in 2015, refer to the pension related disclosure under "Part II, Item 7 – Critical Accounting Policies" and Note 11 to the Company's consolidated financial statements.
We are subject to changes in the global regulatory environment, which could adversely affect our results of operations, cash flows and financial condition.
Our businesses, results of operations or financial condition could be adversely affected if laws, regulations or standards relating to us, our products or the markets in which we operate are newly implemented or changed. New or revised laws, regulations or standards could increase our cost of doing business or restrict our ability to operate our business and execute our strategies.
A significant fluctuation between the U.S. dollar and other currencies could adversely impact our operating income.
Although our financial results are reported in U.S. dollars, a significant portion of our sales and operating costs are realized in other currencies. Our profitability is affected by movements of the U.S. dollar against other foreign currencies in which we generate revenues and incur expenses. Significant fluctuations in relative currency values, in particular an increase in the value of the U.S. dollar against foreign currencies, could have an adverse effect on our profitability and financial condition.
We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert currencies into U.S. dollars or to remit dividend and other payments by our foreign subsidiaries within a country imposing controls. Currency devaluations result in diminished value of funds denominated in the currency of the country instituting the devaluation.
Changes in tax rates or exposure to additional income tax liabilities could affect profitability.
Our business is subject to income taxes in the United States and various foreign jurisdictions. Domestic and international tax liabilities are subject to the allocation of income among various tax jurisdictions. Our effective tax rate could be adversely affected by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowances of deferred tax assets or changes in tax laws.
The amount of income taxes paid is subject to ongoing audits by United States federal, state and local tax authorities and by foreign tax authorities. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable adjustments which could have a material adverse effect on our results of operations.

7



We are subject to risks relating to our information technology systems.
The conduct and management of our business relies extensively on information technology systems, which contain confidential information related to our customers, suppliers and employees and other proprietary business information. We maintain some of these systems and are also dependent on a number of critical corporate infrastructure services provided by third parties relating to, among other things, human resources, electronic communication services and finance functions. If these systems are damaged, cease to function properly or are subject to a significant cyber security breach, we may suffer an interruption in our ability to manage and operate the business and our results of operations and financial condition could be adversely affected. Furthermore, a security breach could result in unfavorable publicity, damage to our reputation, loss of our trade secrets and other competitive information, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and fines and other sanctions resulting from any related breaches of data privacy regulations. Any of these could have an adverse effect on our results of operations and financial condition.
Our global operations are subject to increasingly complex environmental regulatory requirements.
We are subject to increasingly complex environmental regulations affecting international manufacturers, including those related to air and water emissions, waste management and climate change. Some environmental laws impose strict, retroactive and joint and several liability for the remediation of the release of hazardous substances, even for conduct that was lawful at the time it occurred, or for the conduct of or conditions caused by prior operators, predecessors or third parties. Failure to comply with environmental laws could expose us to penalties or clean-up costs, civil or criminal liability and sanctions on certain of our activities, as well as damage to property or natural resources. These liabilities, sanctions, damages and remediation efforts related to any non-compliance with such laws and regulations could negatively impact our ability to conduct our operations and our financial condition and results of operations. In addition, there can be no assurances that we will not be adversely affected by costs, liabilities or claims with respect to existing or subsequently acquired operations or under present laws and regulations or those that may be adopted or imposed in the future.
Changes in environmental laws or regulations could result in higher expenses and payments, and uncertainty relating to environmental laws or regulations may also affect how we conduct our operations and structure our investments and could limit our ability to enforce our rights. Changes in environmental and climate change laws or regulations, including laws relating to greenhouse gas emissions, could subject us to additional costs and restrictions, including increased energy and raw material costs. If environmental laws or regulations are either changed or adopted and impose significant operational restrictions and compliance requirements upon us or our products, they could negatively impact our business, capital expenditures, results of operations, financial condition and competitive position.
It is our policy to apply strict standards for environmental protection to all of our operations inside and outside of the United States, even when we are not subject to local government regulations. We may incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, liabilities resulting from third-party property damage or personal injury claims, or our products could be enjoined from entering certain jurisdictions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws.
We also face increasing complexity in our products design and procurement operations as we adjust to new and future requirements relating to the design, production and labeling of our products that are sold worldwide in multiple jurisdictions. The ultimate costs under environmental laws and the timing of these costs are difficult to predict.
We may incur additional restructuring charges as we continue to contemplate rationalization actions in an effort to optimize our cost structure and may not achieve the anticipated savings and benefits of these actions.
Throughout 2015, we implemented rationalization plans and incurred employee severance and other related costs totaling $13,719. For more information regarding our rationalization plans, refer to the rationalization and asset impairment related disclosure under Note 6 to the Company's consolidated financial statements. We may take additional actions in the future to further optimize our cost structure and improve the efficiency of our operations, which will reduce our profitability in the periods incurred. As a result of these actions, we will likely continue to incur charges, which may include but are not be limited to asset impairments, employee severance costs, charges for pension and other postretirement contractual benefits and pension settlements, any of which could be significant, and could adversely affect our financial condition and results of operations. In addition, we may not realize anticipated savings or benefits from past or future rationalization plans in full or in part or within the time periods we expect. Failure to realize anticipated savings or benefits from our cost reduction actions could have a material adverse effect on our business, financial condition, liquidity, results of operations and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

8



ITEM 1C. EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT
Name
 
Age
 
Position
Christopher L. Mapes
 
54

 
Chairman of the Board effective December 21, 2013. President and Chief Executive Officer effective December 31, 2012; Chief Operating Officer from September 1, 2011 to December 31, 2012; Director since February 2010. Prior to his service with the Company, Mr. Mapes was an Executive Vice President of A.O. Smith Corporation (a global manufacturer with a water heating and water treatment technologies business), a position he held from 2004 through August 2011, and the President of its former Electrical Products unit, a position he held from September 2004 through August 2011.
Vincent K. Petrella
 
55

 
Executive Vice President, Chief Financial Officer and Treasurer since February 19, 2014; Senior Vice President, Chief Financial Officer and Treasurer from October 7, 2005 to February 19, 2014.
Frederick G. Stueber
 
62

 
Executive Vice President, General Counsel and Secretary since February 19, 2014; Senior Vice President, General Counsel and Secretary from 1996 to February 19, 2014.
George D. Blankenship
 
53

 
Executive Vice President, President, Americas Welding since February 18, 2016; Executive Vice President, President, Lincoln Electric North America from February 19, 2014 to February 18, 2016; Senior Vice President; President, Lincoln Electric North America from July 30, 2009 to February 19, 2014; Senior Vice President, Global Engineering from October 7, 2005 to July 30, 2009; Senior Vice President; President, Lincoln Cleveland of The Lincoln Electric Company from January 8, 2008 to July 30, 2009; Senior Vice President, U.S. Operations of The Lincoln Electric Company from October 7, 2005 to January 8, 2008.
Gabriel Bruno
 
48

 
Executive Vice President, Chief Human Resources Officer & Interim Chief Information Officer since February 18, 2016; Executive Vice President, Chief Information Officer & Interim Chief Human Resources Officer from March 7, 2015 to February 18, 2016; Executive Vice President, Chief Information Officer since February 19, 2014; Vice President, Chief Information Officer from May 1, 2012 to February 19, 2014; Vice President, Corporate Controller from 2005 to May 1, 2012.

Geoffrey P. Allman

 
45

 
Senior Vice President, Corporate Controller since January 14, 2014; Corporate Controller from July 1, 2012 to January 14, 2014; Director, Regional Finance North America from October 1, 2009 to June 30, 2012.
Thomas A. Flohn
 
55

 
Senior Vice President, President, Asia Pacific Region since February 19, 2014; Vice President, Regional President, Lincoln Electric Asia Pacific Region from November 4, 2013 to January 14, 2014. Vice President; President, Lincoln Electric Europe, Middle East & Africa (EMEA) from July 1, 2010 to November 4, 2013; Vice President; President, Lincoln Asia Pacific from January 1, 2005 to June 30, 2010.
Mathias Hallmann
 
53

 
Senior Vice President, President, International Welding since February 9, 2016; Senior Vice President, President, LE Europe from February 19, 2014 to February 9, 2016; Vice President; President, Lincoln Electric Europe from November 4, 2013 to February 19, 2014. Prior to his service with the Company, Mr. Hallmann was Chief Executive Officer of Bohler Welding Holding GmbH (a leading manufacturer and provider of auxiliary materials and consumables for industrial welding and soldering applications) from December 2008 to March 2012, and its Chief Operating Officer from April 2008 to November 2008.
Steven B. Hedlund
 
49

 
Senior Vice President and President, Global Automation since January 22, 2015; Senior Vice President, Strategy & Business Development from February 19, 2014 to January 22, 2015; Vice President, Strategy and Business Development from September 15, 2008 to February 19, 2014. Prior to his service with the Company, Mr. Hedlund was the Vice President, Growth and Innovations with Master Lock, LLC (a security products company) from June 1, 2005 to July 1, 2008.
David J. Nangle
 
59

 
Senior Vice President, President, Harris Products Group since February 19, 2014; Vice President, Group President of Brazing, Cutting and Retail Subsidiaries from January 12, 2006 to February 19, 2014.
The Company has been advised that there is no arrangement or understanding among any one of the officers listed and any other persons pursuant to which he or she was elected as an officer. The executive officers are elected by the Board of Directors normally for a term of one year and/or until the election of their successors.


9



ITEM 2. PROPERTIES
The Company's corporate headquarters and principal United States manufacturing facilities are located in the Cleveland, Ohio area. Total Cleveland area property consists of 233 acres, of which present manufacturing facilities comprise an area of approximately 2,940,000 square feet.
The Company has 48 manufacturing facilities, including operations and joint ventures in 19 countries, the significant locations (grouped by operating segment) of which are as follows:
North America Welding:
 
 
United States
 
Cleveland and Fort Loramie, Ohio; San Diego and Anaheim, California; Reno, Nevada; Ladson, South Carolina; Chattanooga, Tennessee; Detroit, Michigan; Fort Collins, Colorado.
Canada
 
Toronto; Mississauga; Hamilton.
Mexico
 
Mexico City; Torreon.
Europe Welding:
 
 
France
 
Grand-Quevilly.
Germany
 
Essen.
Italy
 
Corsalone.
Netherlands
 
Nijmegen.
Poland
 
Bielawa; Dzierzoniow.
Portugal
 
Lisbon.
Russia
 
Mtsensk.
Turkey
 
Istanbul.
United Kingdom
 
Sheffield and Chertsey, England.
Asia Pacific Welding:
 
 
China
 
Shanghai; Jinzhou; Nanjing; Zhengzhou; Luan County.
India
 
Chennai.
Indonesia
 
Cikarang.
South America Welding:
 
 
Brazil
 
Guarulhos.
Colombia
 
Bogota.
Venezuela
 
Maracay.
The Harris Products Group:
 
 
United States
 
Mason, Ohio; Gainesville, Georgia; Santa Fe Springs, California.
Brazil
 
Sao Paulo.
Mexico
 
Tijuana.
Poland
 
Dzierzoniow.
All properties relating to the Company's Cleveland, Ohio headquarters and manufacturing facilities are owned by the Company. Most of the Company's foreign subsidiaries own manufacturing facilities in the country where they are located. The Company believes that its existing properties are in good condition and are suitable for the conduct of its business.
In addition, the Company maintains operating leases for some manufacturing facilities, distribution centers and sales offices throughout the world. See Note 16 to the Company's consolidated financial statements for information regarding the Company's lease commitments.


10



ITEM 3. LEGAL PROCEEDINGS
The Company is subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, product liability claims, regulatory claims and health, safety and environmental claims. Among such proceedings are the cases described below.
As of December 31, 2015, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 8,415 plaintiffs, which is a net decrease of 486 claims from those previously reported. In each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. Since January 1, 1995, the Company has been a co-defendant in other similar cases that have been resolved as follows: 49,677 of those claims were dismissed, 22 were tried to defense verdicts, seven were tried to plaintiff verdicts (one of which was vacated on appeal), one was resolved by agreement for an immaterial amount and 748 were decided in favor of the Company following summary judgment motions.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.


11



PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common shares are traded on The NASDAQ Global Select Market under the symbol "LECO." The number of record holders of common shares at December 31, 2015 was 1,741.
The total amount of dividends paid in 2015 was $87.0 million. During 2015, dividends were paid on January 15, April 15, July 15 and October 15.
Quarterly high and low stock prices and dividends declared per share for the last two years were:
 
 
2015
 
2014
 
 
Stock Price
 
Dividends
Declared
 
Stock Price
 
Dividends
Declared
 
 
High
 
Low
 
 
High
 
Low
 
First quarter
 
$
72.50

 
$
63.90

 
$
0.29

 
$
76.26

 
$
66.68

 
$
0.23

Second quarter
 
71.15

 
60.85

 
0.29

 
72.88

 
63.23

 
0.23

Third quarter
 
62.94

 
51.74

 
0.29

 
73.75

 
65.44

 
0.23

Fourth quarter
 
62.95

 
49.71

 
0.32

 
75.49

 
61.12

 
0.29

Issuer purchases of equity securities for the fourth quarter 2015 were:
Period
 
Total Number of
Shares Repurchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Repurchased
as Part of Publicly
Announced Plans or
Programs
 
Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (2)
October 1-31, 2015
 
821,060

(1) 
$
55.30

 
820,904

 
5,769,776

November 1-30, 2015
 
414,672

 
57.00

 
414,672

 
5,355,104

December 1-31, 2015
 
608,088

(1) 
53.70

 
607,183

 
4,747,921

Total
 
1,843,820

 
55.15

 
1,842,759

 
 
(1)
The above share repurchases include the surrender of 156 and 905 shares in October and December, respectively, of the Company's common shares in connection with the vesting of restricted awards.
(2)
In 2013, the Company's Board of Directors authorized a new share repurchase program, which increased the total number of the Company’s common shares authorized to be repurchased to 45 million shares. Total shares purchased through the share repurchase program were 40,252,079 shares at a cost of $1.3 billion for a weighted average cost of $32.24 per share through December 31, 2015.

12



The following line graph compares the yearly percentage change in the cumulative total shareholder return on the Company's common stock against the cumulative total return of the S&P Composite 500 Stock Index ("S&P 500") and the S&P 400 MidCap Index ("S&P 400") for the five-year calendar period commencing January 1, 2011 and ending December 31, 2015. This graph assumes that $100 was invested on December 31, 2010 in each of the Company's common shares, the S&P 500 and the S&P 400. A peer-group index for the welding industry, in general, is not readily available because the industry is comprised of a large number of privately held competitors and competitors that are smaller parts of large publicly traded companies.


13



ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
 
 
Year Ended December 31,
 
 
2015 (1)
 
2014 (2)
 
2013 (3)
 
2012 (4)
 
2011 (5)
Net sales
 
$
2,535,791

 
$
2,813,324

 
$
2,852,671

 
$
2,853,367

 
$
2,694,609

Net income
 
127,478

 
254,686

 
293,780

 
257,411

 
217,186

Basic earnings per share
 
1.72

 
3.22

 
3.58

 
3.10

 
2.60

Diluted earnings per share
 
1.70

 
3.18

 
3.54

 
3.06

 
2.56

Cash dividends declared per share
 
1.190

 
0.980

 
0.830

 
0.710

 
0.635

Total assets
 
1,784,171

 
1,939,215

 
2,151,867

 
2,089,863

 
1,976,776

Long-term debt
 
350,347

 
2,488

 
3,791

 
1,599

 
1,960

(1)
Results for 2015 include $13,719 ($11,943 after-tax) of rationalization charges and non-cash net impairment charges of $6,239 ($6,239 after-tax). Results also include pension settlement charges of $142,738 ($87,310 after-tax) and charges of $27,214 ($27,214 after-tax) related to Venezuelan remeasurement losses. Long-term debt in 2015 includes the issuance of Senior Unsecured Notes in the aggregate principal amount of $350,000 through a private placement.
(2)
Results for 2014 include $32,742 ($32,706 after-tax) of non-cash asset impairment charges partially offset by gains of $3,930 ($2,754 after-tax) related to the sale of assets. Associated with the impairment of long-lived assets is an offsetting special item of $805 representing portions attributable to non-controlling interests. Results also include charges of $21,133 ($21,133 after-tax) related to Venezuelan remeasurement losses.
(3)
Results for 2013 include $3,658 ($2,965 after-tax) of rationalization charges and impairment charges net of gains on disposals of $4,805 ($4,608 after-tax). Results also include a charge of $12,198 ($12,198 after-tax) related to the devaluation of the Venezuelan currency and a loss of $705 ($705 after-tax) related to the sale of land. Associated with the impairment of long-lived assets and loss on the sale of land is an offsetting special item of $1,068 representing portions attributable to non-controlling interests.
(4)
Results for 2012 include $7,512 ($6,153 after-tax) of rationalization charges and asset disposal and impairment charges of $1,842 ($1,289 after-tax). Results also include a charge of $1,381 ($906 after-tax) related to a change in Venezuelan labor law, which provides for increased employee severance obligations.
(5)
Results for 2011 include net rationalization and asset impairment charges of $282 ($237 after-tax) resulting from rationalization activities primarily initiated in 2009 and a gain of $4,844 related to a favorable adjustment for tax audit settlements.



14



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with "Selected Financial Data," the Company's consolidated financial statements and other financial information included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. See "Item 1A. Risk Factors" for more information regarding forward-looking statements.
General
The Company is the world's largest designer and manufacturer of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products.
The Company is one of only a few worldwide broad-line manufacturers 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. The Company's product offering also includes CNC plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. In addition, the Company has a leading global position in the brazing and soldering alloys market.
The Company invests in the research and development of arc welding products in order to continue its market leading product offering. The Company continues to invest in technologies that improve the quality and productivity of welding products. In addition, the Company continues to actively increase its patent application process in order to secure its technology advantage in the United States and other major international jurisdictions. The Company believes its significant investment in research and development and its highly trained technical sales force coupled with its extensive distributor network provide a competitive advantage in the marketplace.
The Company's products are sold in both domestic and international markets. In North America, products are sold principally through industrial distributors, retailers and also directly to users of welding products. Outside of North America, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors and product users.
The Company's major end-user markets include:
general metal fabrication,
power generation and process industry,
structural steel construction (buildings and bridges),
heavy equipment fabrication (farming, mining and rail),
shipbuilding,
automotive,
pipe mills and pipelines, and
offshore oil and gas exploration and extraction.
The Company has, through wholly-owned subsidiaries or joint ventures, manufacturing facilities located in the United States, Australia, Brazil, Canada, China, Colombia, France, Germany, India, Indonesia, Italy, Mexico, the Netherlands, Poland, Portugal, Russia, Turkey, the United Kingdom and Venezuela.
As of December 31, 2015, the Company's business units were aligned into five operating segments. The operating segments consist of North America Welding, Europe Welding, Asia Pacific Welding, South America Welding and The Harris Products Group. The North America Welding segment primarily includes welding operations in the United States, Canada and Mexico. The Europe Welding segment includes welding operations in Europe, Russia, Africa and the Middle East. The Asia Pacific Welding segment primarily includes welding operations in China and Australia. The South America Welding segment primarily includes welding operations in Brazil, Colombia and Venezuela. The Harris Products Group includes the Company's global cutting, soldering and brazing businesses as well as the retail business in the United States. See Note 5 to the Company's consolidated financial statements for segment and geographic area information.
During the first quarter of 2016, the Company realigned its organizational and leadership structure. The new structure will allow for further integration of operational and product development processes across regions and support growth strategies. In accordance with this organizational change, beginning with quarterly reporting for the three months ended March 31, 2016, the Company will report three operating segments as follows: Americas Welding, International Welding, and The Harris Products Group.

15



The principal raw materials essential to the Company's business are steel, electronic components, engines, brass, copper, silver, aluminum alloys and various chemicals, all of which are normally available for purchase in the open market.
The Company's facilities are subject to environmental regulations. To date, compliance with these environmental regulations has not had a material adverse effect on the Company's earnings. The Company is ISO 14001 certified at most significant manufacturing facilities in North America and Europe and is progressing towards certification at its remaining facilities worldwide. In addition, the Company is ISO 9001 certified at 38 facilities worldwide.
Key Indicators
Key economic measures relevant to the Company include industrial production trends, steel consumption, purchasing manager indices, capacity utilization within durable goods manufacturers and consumer confidence indicators. Key industries which provide a relative indication of demand drivers to the Company include steel, farm machinery and equipment, construction and transportation, fabricated metals, electrical equipment, ship and boat building, defense, truck manufacturing, energy and railroad equipment. Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company's welding products.
Key operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates, all of which provide key indicators of business trends. These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.
Key financial measures utilized by the Company's executive management and operating units in order to evaluate the results of its business and in understanding key variables impacting the current and future results of the Company include: sales; gross profit; selling, general and administrative expenses; operating income; earnings before interest and taxes; earnings before interest, taxes and bonus; net income; adjusted operating income; adjusted earnings before interest and income taxes, adjusted net income; adjusted diluted earnings per share; operating cash flows; and capital expenditures, including applicable ratios such as return on invested capital and average operating working capital to sales. These measures are reviewed at monthly, quarterly and annual intervals and compared with historical periods, as well as objectives established by the Board of Directors of the Company.
Results of Operations
The following table shows the Company's results of operations:
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
 
 
Amount
 
% of Sales
 
Amount
 
% of Sales
 
Amount
 
% of Sales
Net sales
 
$
2,535,791

 
100.0
%
 
$
2,813,324

 
100.0
%
 
$
2,852,671

 
100.0
%
Cost of goods sold
 
1,694,647

 
66.8
%
 
1,864,027

 
66.3
%
 
1,910,017

 
67.0
%
Gross profit
 
841,144

 
33.2
%
 
949,297

 
33.7
%
 
942,654

 
33.0
%
Selling, general & administrative
   expenses
 
496,748

 
19.6
%
 
545,497

 
19.4
%
 
527,206

 
18.5
%
Rationalization and asset impairment
   charges
 
19,958

 
0.8
%
 
30,053

 
1.1
%
 
8,463

 
0.3
%
Pension settlement charges
 
142,738

 
5.6
%
 

 

 

 

Operating income
 
181,700

 
7.2
%
 
373,747

 
13.3
%
 
406,985

 
14.3
%
Interest income
 
2,714

 
0.1
%
 
3,093

 
0.1
%
 
3,320

 
0.1
%
Equity earnings in affiliates
 
3,015

 
0.1
%
 
5,412

 
0.2
%
 
4,806

 
0.2
%
Other income
 
4,182

 
0.2
%
 
3,995

 
0.1
%
 
4,194

 
0.1
%
Interest expense
 
(21,824
)
 
(0.9
%)
 
(10,434
)
 
(0.4
%)
 
(2,864
)
 
(0.1
%)
Income before income taxes
 
169,787

 
6.7
%
 
375,813

 
13.4
%
 
416,441

 
14.6
%
Income taxes
 
42,375

 
1.7
%
 
121,933

 
4.3
%
 
124,754

 
4.4
%
Net income including non-controlling
   interests
 
127,412

 
5.0
%
 
253,880

 
9.0
%
 
291,687

 
10.2
%
Non-controlling interests in
   subsidiaries' loss
 
(66
)
 

 
(806
)
 

 
(2,093
)
 
(0.1
%)
Net income
 
$
127,478

 
5.0
%
 
$
254,686

 
9.1
%
 
$
293,780

 
10.3
%

16



2015 Compared with 2014
Net Sales: Net sales for 2015 decreased 9.9% from 2014. The sales decrease reflects volume decreases of 8.0%, price increases of 4.0%, increases from acquisitions of 2.2% and unfavorable impacts from foreign exchange of 8.1%. Sales volumes decreased as a result of softer demand associated with the current economic environment and weakness in oil & gas and U.S. export markets. Product pricing increased from prior year levels, reflecting the highly inflationary environment in Venezuela partially offset by pricing declines in The Harris Products Group due to decreases in the costs of silver and copper. Net sales for 2015 include $84,662 in sales from the Company's Venezuelan operations compared with $71,793 in sales from the Company's Venezuelan operations in 2014.
Gross Profit:  Gross profit decreased 11.4% to $841,144 during 2015 compared with $949,297 in 2014. As a percentage of Net sales, Gross profit decreased to 33.2% in 2015 compared with 33.7% in 2014. The year ended December 31, 2015 includes $22,880, or 0.9% of sales, of inventory charges reflecting remeasurement losses in Venezuela related to the adoption of a new foreign exchange mechanism and higher warranty costs of $5,934. The year ended December 31, 2015 also includes a LIFO credit of $11,545 compared with a charge of $429 in the prior year period. The prior year period also includes a gain of $3,946 from an insurance settlement. Foreign currency exchange rates had a $62,330 unfavorable translation impact in 2015.
Selling, General & Administrative ("SG&A") Expenses:  SG&A expenses decreased 8.9% to $496,748 during 2015 compared with $545,497 in 2014. The decrease was primarily due to lower bonus expense of $28,705 and lower foreign exchange transaction losses of $17,030, partially offset by higher general and administrative spending of $24,720 and incremental SG&A expenses from acquisitions of $8,780. Foreign exchange transaction losses in 2015 include a charge of $4,334, compared with a charge of $17,665 in 2014, relating to Venezuelan foreign exchange remeasurement losses as a result of the adoption of a new foreign exchange mechanism. Foreign currency exchange rates had a $33,229 favorable translation impact on SG&A expenses in 2015.
Rationalization and Asset Impairment Charges:  In 2015, the Company recorded $19,958 in charges primarily related to employee severance and other related costs and non-cash goodwill and asset impairment charges. See "Rationalization and Asset Impairments" for additional information.
Pension Settlement Charges: In 2015, the Company recorded non-cash pension settlement charges of $142,738, $87,310 after-tax, primarily related to the purchase of a group annuity contract. See Note 11, "Retirement Annuity and Guaranteed Continuous Employment Plans" for additional information.
Equity Earnings in Affiliates:  Equity earnings in affiliates were $3,015 in 2015 compared with earnings of $5,412 in 2014. The decrease was primarily due to a decrease in earnings in Turkey.
Interest Expense:  Interest expense increased to $21,824 in 2015 from $10,434 in 2014. The increase was due to an adjustment to the consideration expected to be paid to acquire additional ownership interests of a majority-owned subsidiary and interest accrued on higher borrowings.
Income Taxes:  The Company recorded $42,375 of tax expense on pre-tax income of $169,787, resulting in an effective tax rate of 25.0% for 2015 compared with an effective income tax rate of 32.4% for 2014. The effective income tax rate is lower in 2015 as compared to 2014 primarily due to higher U.S. tax credits in 2015 and changes in the mix of earnings between tax rate jurisdictions.
Net Income:  Net income for 2015 was $127,478 compared with $254,686 in the prior year. Diluted earnings per share for 2015 were $1.70 compared with diluted earnings of $3.18 per share in 2014. Net income for 2015 includes non-cash pension settlement charges of $87,310, non-cash Venezuelan remeasurement losses of $27,214 related to the adoption of a new foreign exchange mechanism and net rationalization and asset impairment charges of $18,182. Foreign currency exchange rate movements had an unfavorable translation effect of $11,390 on Net income for 2015.

17



Segment Results
Net Sales:  The table below summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2015:
 
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2014
 
Volume
 
Acquisitions
 
Price
 
Foreign Exchange
 
Net Sales
2015
Operating Segments
 
 

 
 

 
 

 
 

 
 

 
 

North America Welding
 
$
1,700,924

 
$
(129,921
)
 
$
57,333

 
$
14,944

 
$
(32,923
)
 
$
1,610,357

Europe Welding
 
425,775

 
(18,179
)
 

 
(2,285
)
 
(68,487
)
 
336,824

Asia Pacific Welding
 
243,800

 
(49,501
)
 
5,295

 
(2,511
)
 
(10,468
)
 
186,615

South America Welding
 
148,595

 
(24,240
)
 

 
116,765

 
(103,106
)
 
138,014

The Harris Products Group
 
294,230

 
(2,168
)
 

 
(15,746
)
 
(12,335
)
 
263,981

Consolidated
 
$
2,813,324

 
$
(224,009
)
 
$
62,628

 
$
111,167

 
$
(227,319
)
 
$
2,535,791

 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated (excluding Venezuela)
 
$
2,741,531

 
$
(211,098
)
 
$
62,628

 
$
(2,598
)
 
$
(139,334
)
 
$
2,451,129

 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 

 
 

 
 

 
 

 
 

 
 

North America Welding
 
 

 
(7.6
%)
 
3.4
%
 
0.9
%
 
(1.9
%)
 
(5.3
%)
Europe Welding
 
 

 
(4.3
%)
 

 
(0.5
%)
 
(16.1
%)
 
(20.9
%)
Asia Pacific Welding
 
 

 
(20.3
%)
 
2.2
%
 
(1.0
%)
 
(4.3
%)
 
(23.5
%)
South America Welding
 
 

 
(16.3
%)
 

 
78.6
%
 
(69.4
%)
 
(7.1
%)
The Harris Products Group
 
 

 
(0.7
%)
 

 
(5.4
%)
 
(4.2
%)
 
(10.3
%)
Consolidated
 
 

 
(8.0
%)
 
2.2
%
 
4.0
%
 
(8.1
%)
 
(9.9
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated (excluding Venezuela)
 
 
 
(7.7
%)
 
2.3
%
 
(0.1
%)
 
(5.1
%)
 
(10.6
%)
Net sales volumes for 2015 decreased for all operating segments due to softer demand associated with the current economic environment and weakness in oil & gas and U.S. export markets. The decrease in net sales volumes in Asia Pacific Welding is also due to continued strategic repositioning in the market. Product pricing in South America Welding reflects a highly inflationary environment, particularly in Venezuela.  Product pricing decreased for The Harris Products Group because of decreases in the costs of silver and copper as compared to the prior year period.  The increase in Net sales from acquisitions was due to the acquisition of Rimrock Holdings Corporation and Easom Automation Systems, Inc. ("Easom") within North America Welding (see Note 3 to the consolidated financial statements for a discussion of the Company's recent acquisitions). With respect to changes in Net sales due to foreign exchange, all segments decreased due to a stronger U.S. dollar.


18



Earnings Before Interest and Income Taxes (“EBIT”), as Adjusted: Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being EBIT, as adjusted. The following table presents EBIT, as adjusted for 2015 by segment compared with 2014:
 
 
Twelve Months Ended
 
 
 
 
 
 
December 31,
 
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
North America Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
1,610,357

 
$
1,700,924

 
(90,567
)
 
(5.3
%)
Inter-segment sales
 
100,770

 
124,732

 
(23,962
)
 
(19.2
%)
Total Sales
 
$
1,711,127

 
$
1,825,656

 
(114,529
)
 
(6.3
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
306,746

 
$
335,465

 
(28,719
)
 
(8.6
%)
As a percent of total sales
 
17.9
%
 
18.4
%
 
 
 
(0.5
%)
 
 
 
 
 
 
 
 
 
Europe Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
336,824

 
$
425,775

 
(88,951
)
 
(20.9
%)
Inter-segment sales
 
15,922

 
19,586

 
(3,664
)
 
(18.7
%)
Total Sales
 
$
352,746

 
$
445,361

 
(92,615
)
 
(20.8
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
31,317

 
$
48,822

 
(17,505
)
 
(35.9
%)
As a percent of total sales
 
8.9
%
 
11.0
%
 
 
 
(2.1
%)
 
 
 
 
 
 
 
 
 
Asia Pacific Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
186,615

 
$
243,800

 
(57,185
)
 
(23.5
%)
Inter-segment sales
 
10,510

 
14,820

 
(4,310
)
 
(29.1
%)
Total Sales
 
$
197,125

 
$
258,620

 
(61,495
)
 
(23.8
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
7,392

 
$
1,321

 
6,071

 
459.6
%
As a percent of total sales
 
3.7
%
 
0.5
%
 
 
 
3.2
%
 
 
 
 
 
 
 
 
 
South America Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
138,014

 
$
148,595

 
(10,581
)
 
(7.1
%)
Inter-segment sales
 
174

 
144

 
30

 
20.8
%
Total Sales
 
$
138,188

 
$
148,739

 
(10,551
)
 
(7.1
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
5,569

 
$
15,953

 
(10,384
)
 
(65.1
%)
As a percent of total sales
 
4.0
%
 
10.7
%
 
 
 
(6.7
%)
 
 
 
 
 
 
 
 
 
The Harris Products Group:
 
 
 
 
 
 
 
 
Net sales
 
$
263,981

 
$
294,230

 
(30,249
)
 
(10.3
%)
Inter-segment sales
 
9,312

 
8,210

 
1,102

 
13.4
%
Total Sales
 
$
273,293

 
$
302,440

 
(29,147
)
 
(9.6
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
27,882

 
$
28,563

 
(681
)
 
(2.4
%)
As a percent of total sales
 
10.2
%
 
9.4
%
 
 
 
0.8
%
EBIT, as adjusted as a percent of total sales decreased for North America Welding in 2015 as compared with 2014 due to volume decreases. The decrease in Europe Welding is primarily due to unfavorable foreign exchange translation. The Asia Pacific Welding increase was due to lower raw material costs and operational efficiencies partially offset by volume decreases. The South America Welding decrease was a result of lower margins in Venezuela, as well as lower volumes and unfavorable foreign exchange translation in the segment.



19



In 2015, EBIT, as adjusted, excluded net charges of $3,298 and $1,507 in North America Welding and Europe Welding, respectively, primarily related to employee severance and other related costs. North America Welding special items also include non-cash charges of $6,315 related to the impairment of goodwill and non-cash charges of $3,417 related to the impairment of long-lived assets. Asia Pacific Welding special items reflect net charges of $5,432 primarily related to employee severance and other costs and adjustments to reclassify a potential divestiture that was previously held-for-sale. South America Welding special items reflect Venezuelan foreign exchange remeasurement losses of $27,214 related to the adoption of a new foreign exchange mechanism. In addition to special items listed above, 2015 EBIT, as adjusted excludes non-cash pension settlement charges of $142,738 primarily related to the purchase of a group annuity contract.
In 2014, EBIT, as adjusted, excluded net charges primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. Asia Pacific Welding EBIT, as adjusted, also excluded charges of $32,742 related to impairment of long-lived assets and a gain of $3,930 related to the sale of assets. South America Welding EBIT, as adjusted, excluded special item charges of $21,133, related to the adoption of a new foreign exchange mechanism.
2014 Compared with 2013
Net Sales:  Net sales for 2014 decreased 1.4% from 2013. The sales decrease reflects volume decreases of 2.0%, price increases of 1.8%, increases from acquisitions of 1.5% and unfavorable impacts from foreign exchange of 2.6%. Sales volumes decreased primarily as a result of softer volumes in South America Welding. Product pricing increased from prior year levels, reflecting the highly inflationary environment in Venezuela partially offset by pricing declines in The Harris Products Group due to decreases in the costs of silver and copper. Net sales for 2014 include $71,793 in sales from the Company's Venezuelan operations compared with $109,139 in sales from the Company's Venezuelan operations in 2013.
Gross Profit:  Gross profit increased 0.7% to $949,297 during 2014 compared with $942,654 in 2013. As a percentage of Net sales, Gross profit increased to 33.7% in 2014 compared with 33.0% in 2013. The increase was the result of geographic mix and operations improvements. Foreign currency exchange rates had a $28,377 unfavorable translation impact in 2014, which includes $3,468 related to the liquidation of Venezuelan inventory valued at a historical exchange rate.
SG&A Expenses:  SG&A expenses increased 3.5% to $545,497 during 2014 compared with $527,206 in 2013. The increase was primarily due to higher foreign exchange transaction losses of $16,472, incremental SG&A expenses from acquisition of $8,051 and higher bonus expense of $5,511. Foreign exchange transaction losses in 2014 include a charge of $17,665 relating to a Venezuelan remeasurement loss compared with a charge of $8,081 in 2013 due to a devaluation of the Venezuelan currency. Foreign currency exchange rates had a $14,627 favorable translation impact on SG&A expenses in 2014.
Rationalization and Asset Impairment Charges:  In 2014, the Company recorded $30,053 in charges primarily related to non-cash long-lived asset impairment charges partially offset by gains on the sales of assets. See "Rationalization and Asset Impairments" for additional information.
Equity Earnings in Affiliates:  Equity earnings in affiliates were $5,412 in 2014 compared with earnings of $4,806 in 2013. The increase was primarily due to an increase in earnings in Turkey.
Interest Expense:  Interest expense increased to $10,434 in 2014 from $2,864 in 2013. The increase was due to an adjustment to the consideration expected to be paid to acquire additional ownership interests of a majority-owned subsidiary.
Income Taxes:  The Company recorded $121,933 of tax expense on pre-tax income of $375,813, resulting in an effective tax rate of 32.4% for 2014 compared with an effective tax rate of 30.0% for 2013. The effective income tax rate is lower in 2013 as compared with 2014 primarily due to income earned in lower tax rate jurisdictions.
Net Income:  Net income for 2014 was $254,686 compared with $293,780 in the prior year. Diluted earnings per share for 2014 were $3.18 compared with diluted earnings of $3.54 per share in 2013. Net income for 2014 included a loss of $8,238, or $0.10 per diluted share, from the Company's Venezuelan operations compared with Net income of $25,614, or $0.31 per diluted share, from the Company's Venezuelan operations in 2013. Foreign currency exchange rate movements had an unfavorable translation effect of $8,258 for 2014.

20



Segment Results
Net Sales:  The table below summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2014:
 
 
 
 
Change in Net Sales due to:
 
 
 
 
Net Sales
2013
 
Volume
 
Acquisitions
 
Price
 
Foreign
Exchange
 
Net Sales
2014
Operating Segments
 
 
 
 
 
 
 
 
 
 
 
 
North America Welding
 
$
1,652,769

 
$
4,335

 
$
42,184

 
$
13,247

 
$
(11,611
)
 
$
1,700,924

Europe Welding
 
429,548

 
8,107

 

 
(3,722
)
 
(8,158
)
 
425,775

Asia Pacific Welding
 
266,282

 
(17,516
)
 

 
1,351

 
(6,317
)
 
243,800

South America Welding
 
195,895

 
(59,554
)
 

 
57,461

 
(45,207
)
 
148,595

The Harris Products Group
 
308,177

 
6,722

 

 
(18,411
)
 
(2,258
)
 
294,230

Consolidated
 
$
2,852,671

 
$
(57,906
)
 
$
42,184

 
$
49,926

 
$
(73,551
)
 
$
2,813,324

 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated (excluding Venezuela)
 
$
2,743,532

 
$
(3,840
)
 
$
42,184

 
$
(3,997
)
 
$
(36,348
)
 
$
2,741,531

 
 
 
 
 
 
 
 
 
 
 
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
North America Welding
 
 

 
0.3
%
 
2.6
%
 
0.8
%
 
(0.7
%)
 
2.9
%
Europe Welding
 
 

 
1.9
%
 

 
(0.9
%)
 
(1.9
%)
 
(0.9
%)
Asia Pacific Welding
 
 

 
(6.6
%)
 

 
0.5
%
 
(2.4
%)
 
(8.4
%)
South America Welding
 
 

 
(30.4
%)
 

 
29.3
%
 
(23.1
%)
 
(24.1
%)
The Harris Products Group
 
 

 
2.2
%
 

 
(6.0
%)
 
(0.7
%)
 
(4.5
%)
Consolidated
 
 

 
(2.0
%)
 
1.5
%
 
1.8
%
 
(2.6
%)
 
(1.4
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated (excluding Venezuela)
 
 
 
(0.1
%)
 
1.5
%
 
(0.1
%)
 
(1.3
%)
 
(0.1
%)
Net sales volumes for 2014 decreased for South America Welding due to the lack of available raw materials in Venezuela and Asia Pacific Welding due to lower demand and strategic repositioning in the market. North America Welding, Europe Welding and The Harris Products Group increased as a result of stronger end market demand in those geographies. Product pricing in South America Welding reflects a highly inflationary environment, particularly in Venezuela. Product pricing decreased for The Harris Products Group because of decreases in the costs of silver and copper. The increase in Net sales from acquisitions was due to the acquisitions of Easom, Robolution GmbH ("Robolution") and Burlington Automation Corporation ("Burlington") within North America Welding (see Note 3 to the consolidated financial statements for additional information regarding the acquisitions). With respect to changes in Net sales due to foreign exchange, all segments decreased due to a stronger U.S. dollar.



21



EBIT, as Adjusted: Segment performance is measured and resources are allocated based on a number of factors, the primary profit measure being EBIT, as adjusted. The following table presents EBIT, as adjusted for 2014 by segment compared with 2013:
 
 
Twelve Months Ended
 
 
 
 
 
 
December 31,
 
 
 
 
 
 
2014
 
2013
 
$ Change
 
% Change
North America Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
1,700,924

 
$
1,652,769

 
48,155

 
2.9
%
Inter-segment sales
 
124,732

 
127,254

 
(2,522
)
 
(2.0
%)
Total Sales
 
$
1,825,656

 
$
1,780,023

 
45,633

 
2.6
%
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
335,465

 
$
318,507

 
16,958

 
5.3
%
As a percent of total sales
 
18.4
%
 
17.9
%
 
 
 
0.5
%
 
 
 
 
 
 
 
 
 
Europe Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
425,775

 
$
429,548

 
(3,773
)
 
(0.9
%)
Inter-segment sales
 
19,586

 
19,911

 
(325
)
 
(1.6
%)
Total Sales
 
$
445,361

 
$
449,459

 
(4,098
)
 
(0.9
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
48,822

 
$
36,247

 
12,575

 
34.7
%
As a percent of total sales
 
11.0
%
 
8.1
%
 
 
 
2.9
%
 
 
 
 
 
 
 
 
 
Asia Pacific Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
243,800

 
$
266,282

 
(22,482
)
 
(8.4
%)
Inter-segment sales
 
14,820

 
14,906

 
(86
)
 
(0.6
%)
Total Sales
 
$
258,620

 
$
281,188

 
(22,568
)
 
(8.0
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
1,321

 
$
1,815

 
(494
)
 
(27.2
%)
As a percent of total sales
 
0.5
%
 
0.6
%
 
 
 
(0.1
%)
 
 
 
 
 
 
 
 
 
South America Welding:
 
 
 
 
 
 
 
 
Net sales
 
$
148,595

 
$
195,895

 
(47,300
)
 
(24.1
%)
Inter-segment sales
 
144

 
233

 
(89
)
 
(38.2
%)
Total Sales
 
$
148,739

 
$
196,128

 
(47,389
)
 
(24.2
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
15,953

 
$
57,306

 
(41,353
)
 
(72.2
%)
As a percent of total sales
 
10.7
%
 
29.2
%
 
 
 
(18.5
%)
 
 
 
 
 
 
 
 
 
The Harris Products Group:
 
 
 
 
 
 
 
 
Net sales
 
$
294,230

 
$
308,177

 
(13,947
)
 
(4.5
%)
Inter-segment sales
 
8,210

 
9,605

 
(1,395
)
 
(14.5
%)
Total Sales
 
$
302,440

 
$
317,782

 
(15,342
)
 
(4.8
%)
 
 
 
 
 
 
 
 
 
EBIT, as adjusted
 
$
28,563

 
$
27,826

 
737

 
2.6
%
As a percent of total sales
 
9.4
%
 
8.8
%
 
 
 
0.6
%
EBIT, as adjusted as a percent of total sales increased for North America Welding in 2014 as compared with 2013 due to operational improvements and lower pension expense, partially offset by higher SG&A expenses. The increase for Europe Welding is primarily due to volume increases, lower manufacturing costs and improved product mix, partially offset by higher SG&A expenses. The South America Welding decrease was a result of lower volumes related to disruptions of manufacturing operations due to the lack of available raw materials in Venezuela and higher SG&A expenses due to foreign exchange losses in Venezuela. The South America Welding 2013 results include the effect of the highly inflationary environment in Venezuela.

22



In 2014, EBIT, as adjusted, excluded net charges primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. Asia Pacific Welding EBIT, as adjusted, also excluded charges of $32,742 related to impairment of long-lived assets and a gain of $3,930 related to the sale of assets. South America Welding EBIT, as adjusted, excluded special item charges of $21,133 related to the adoption of a new foreign exchange mechanism.
In 2013, EBIT, as adjusted, excluded special items charges primarily related to employee severance and other costs associated with the consolidation of manufacturing operations. Asia Pacific Welding EBIT, as adjusted, also excluded charges of $4,444 related to impairment of long-lived assets and a charge of $705 related to a loss on the sale of land. South America Welding EBIT, as adjusted, excluded special item charges of $12,198 related to the devaluation of the Venezuelan currency.
Non-GAAP Financial Measures
The Company reviews Adjusted operating income, Adjusted net income, Adjusted diluted earnings per share and Return on invested capital, all non-GAAP financial measures, in assessing and evaluating the Company's underlying operating performance. These non-GAAP financial measures exclude the impact of special items on the Company's reported financial results. Non-GAAP financial measures should be read in conjunction with the generally accepted accounting principles in the United States ("GAAP") financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures. From time to time management evaluates and discloses to investors the non-GAAP measure Free cash flow ("FCF").  FCF is defined as Net cash provided by operating activities less Capital expenditures.
The following table presents a reconciliation of Operating income as reported to Adjusted operating income:
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Operating income as reported
 
$
181,700

 
$
373,747

 
$
406,985

Special items (pre-tax):
 
 
 
 
 
 
Rationalization and asset impairment charges
 
19,958

 
30,053

 
8,463

Venezuela remeasurement losses
 
27,214

 
21,133

 
12,198

Pension settlement charges
 
142,738

 

 

Loss on the sale of land
 

 

 
705

Adjusted operating income
 
$
371,610

 
$
424,933

 
$
427,646

Special items included in Operating income during 2015 include net rationalization and asset impairment charges which primarily consist of employee severance and other related costs of $13,719, a non-cash goodwill impairment charge of $6,315 and net non-cash asset impairment charges. Special items for 2015 also include pension settlement charges and Venezuelan foreign exchange remeasurement losses related to the adoption of a new foreign exchange mechanism.
Special items included in Operating income during 2014 include net rationalization and asset impairment charges primarily consisting of non-cash asset impairment charges of $32,742 offset by gains of $3,930 related to the sale of assets. Special items for 2014 also include Venezuelan remeasurement losses related to the adoption of a new foreign exchange mechanism.
Special items included in Operating income during 2013 include net rationalization and asset impairment charges primarily related to employee severance and other costs associated with the consolidation of manufacturing operations and impairment of long-lived assets. Special items for 2013 also include charges related to the devaluation of the Venezuelan currency and a loss on the sale of land.

23



The following table presents reconciliations of Net income and Diluted earnings per share as reported to Adjusted net income and Adjusted diluted earnings per share:
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
Net income as reported
 
$
127,478

 
$
254,686

 
$
293,780

Special items (after-tax):
 
 
 
 
 
 
Rationalization and asset impairment charges
 
18,182

 
30,914

 
7,573

Venezuela remeasurement losses
 
27,214

 
21,133

 
12,198

Pension settlement charges
 
87,310

 

 

Loss on the sale of land
 

 

 
705

Special items attributable to non-controlling interests
 

 
(805
)
 
(1,068
)
Adjusted net income
 
$
260,184

 
$
305,928

 
$
313,188

Diluted earnings per share as reported
 
$
1.70

 
$
3.18

 
$
3.54

Special items per share
 
1.78

 
0.64

 
0.23

Adjusted diluted earnings per share
 
$
3.48

 
$
3.82

 
$
3.77

Net income for 2015 includes net rationalization and asset impairment which primarily consist of employee severance and other related costs of $11,943, a non-cash goodwill impairment charge of $6,315 and net non-cash asset impairment charges. Special items for 2015 also include pension settlement charges and Venezuelan remeasurement losses related to the adoption of a new foreign exchange mechanism. Adjusted net income for 2015 includes $3,209, or $0.05 per diluted share, from the Company's Venezuelan operations.
Net income for 2014 includes net rationalization and asset impairment charges primarily consisting of non-cash asset impairment charges of $32,706 partially offset by gains of $2,754 related to the sale of assets. Associated with the impairment of long-lived assets is an offsetting special item of $805 attributable to non-controlling interests. Special items for 2014 also include Venezuelan remeasurement losses related to the adoption of a new foreign exchange mechanism. Adjusted net income for 2014 includes $13,279, or $0.17 per diluted share, from the Company's Venezuelan operations.
Net income for 2013 includes net rationalization and asset impairment charges primarily related to employee severance and other costs associated with the consolidation of manufacturing operations and impairment of long-lived assets and a loss on the sale of land. Associated with the impairment of long-lived assets and loss on the sale of land is an offsetting special item of $1,068 attributable to non-controlling interests. Special items for 2013 also include charges related to the devaluation of the Venezuelan currency. Adjusted net income for 2013 includes $37,812, or $0.46 per diluted share, from the Company's Venezuelan operations.
Liquidity and Capital Resources
The Company's cash flow from operations can be cyclical. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets. In assessing liquidity, the Company reviews working capital measurements to define areas for improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations, existing cash balances, borrowings under its existing credit facilities and raising debt in capital markets.
The Company continues to expand globally and periodically looks at transactions that would involve significant investments. The Company can fund its global expansion plans with operational cash flow, but a significant acquisition may require access to capital markets, in particular, the long-term debt market, as well as the syndicated bank loan market. The Company’s financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the United States, and then lends funds to the specific subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made.


24



The following table reflects changes in key cash flow measures:
 
 
Year Ended December 31,
 
$ Change
 
 
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Cash provided by operating activities
 
$
310,858

 
$
401,702

 
$
338,894

 
$
(90,844
)
 
$
62,808

Cash used by investing activities:
 
(85,352
)
 
(78,985
)
 
(129,500
)
 
(6,367
)
 
50,515

Capital expenditures
 
(50,507
)
 
(72,990
)
 
(76,015
)
 
22,483

 
3,025

Acquisition of businesses, net of cash acquired
 
(37,076
)
 
(24,230
)
 
(53,161
)
 
(12,846
)
 
28,931

Cash used by financing activities:
 
(169,908
)
 
(314,355
)
 
(194,184
)
 
144,447

 
(120,171
)
Proceeds from (payments on) short-term borrowings, net
 
(34,229
)
 
47,876

 
(1,451
)
 
(82,105
)
 
49,327

Proceeds from (payments on) long-term borrowings, net
 
350,835

 
5,455

 
(389
)
 
345,380

 
5,844

Proceeds from exercise of stock options
 
5,996

 
9,116

 
20,297

 
(3,120
)
 
(11,181
)
Excess tax benefit from stock-based compensation
 
1,974

 
5,967

 
10,602

 
(3,993
)
 
(4,635
)
Purchase of shares for treasury
 
(399,494
)
 
(307,178
)
 
(167,879
)
 
(92,316
)
 
(139,299
)
Cash dividends paid to shareholders
 
(86,968
)
 
(73,261
)
 
(49,277
)
 
(13,707
)
 
(23,984
)
Increase (decrease) in Cash and cash equivalents
 
25,804

 
(21,446
)
 
13,361

 
 

 
 

Cash and cash equivalents increased 9.3%, or $25,804, to $304,183 during the twelve months ended December 31, 2015, from $278,379 as of December 31, 2014. This increase was predominantly due to the cash provided from operating activities and proceeds from the issuance of Senior Unsecured Notes (the "Notes") of $350,000 (see the "Debt" section below for additional information) partially offset by purchases of common shares for treasury of $399,494. At December 31, 2015, $223,567 of Cash and cash equivalents was held by international subsidiaries and may be subject to U.S. income taxes and foreign withholding taxes if repatriated to the U.S.
Cash provided by operating activities decreased $90,844 for the twelve months ended December 31, 2015 compared with the twelve months ended December 31, 2014. The decrease was predominantly due to higher contributions to U.S. pension plans of $25,949, lower cash refunds from a Canadian tax deposit of $25,306 and lower earnings offset by less investment in net operating working capital of $63,604. Net operating working capital is defined as the sum of Accounts receivable and Total inventory less Trade accounts payable. Net operating working capital to sales, defined as net operating working capital divided by annualized rolling three months of Net sales, remained consistent at 17.1% at December 31, 2015 compared with 17.1% at December 31, 2014. Days sales in inventory decreased to 89.2 days at December 31, 2015 from 94.7 days at December 31, 2014. Accounts receivable days decreased to 46.9 days at December 31, 2015 from 47.8 days at December 31, 2014. Average days in accounts payable decreased to 38.7 days at December 31, 2015 from 46.6 days at December 31, 2014.
Cash used by investing activities increased by $6,367 in the twelve months ended December 31, 2015 compared with the twelve months ended December 31, 2014. The increase was predominantly due to an increase in the acquisition of businesses of $12,846 and a decrease in proceeds from the sale of property, plant and equipment of $15,147 offset by a decrease in capital expenditures of $22,483. The Company anticipates capital expenditures of $65,000 to $75,000 in 2016. Anticipated capital expenditures reflect investments for capital maintenance to improve operational effectiveness and the Company's continuing international expansion. Management critically evaluates all proposed capital expenditures and requires each project to increase efficiency, reduce costs, promote business growth, or to improve the overall safety and environmental conditions of the Company's facilities.
Cash used by financing activities decreased $144,447 in the twelve months ended December 31, 2015 compared with the twelve months ended December 31, 2014. The decrease was predominantly due to proceeds from the Notes of $350,000 offset by increased net payments of short-term borrowings of $82,105, higher purchases of common shares for treasury of $92,316 and higher cash dividends paid to shareholders of $13,707.
The Company's debt levels increased from $70,654 at December 31, 2014 to $354,625 at December 31, 2015 due to the issuance of the Notes. Debt to total invested capital increased to 27.6% at December 31, 2015 from 5.2% at December 31, 2014.
The Company paid $86,968 and $73,261 in cash dividends to its shareholders in the twelve months ended December 31, 2015 and 2014, respectively.

25



The Company has a share repurchase program for up to 45 million of the Company's common shares. At management's discretion, the Company repurchases its common shares from time to time in the open market, depending on market conditions, stock price and other factors. During the twelve months ended December 31, 2015, the Company purchased a total of 6.6 million shares at a cost of $399,494. As of December 31, 2015, 4.7 million shares remained available for repurchase under the stock repurchase program. The Company currently anticipates share repurchases of approximately $400,000 in 2016.
The Company made voluntary contributions to its U.S. defined benefit plans of $47,124, $21,175 and $75,216 in 2015, 2014 and 2013, respectively. The Company expects to voluntarily contribute $20,000 to U.S. plans in 2016. Based on current pension funding rules, the Company does not anticipate that contributions to the plans would be required in 2016.
Canada - Notice of Reassessment
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. As part of the appeals process to the Tax Court of Canada, the Company had elected to deposit the entire amount of the dispute in order to suspend continuing interest charges.
In September 2014, the Department of Justice Canada consented to a judgment, wholly in the Company's favor. In vacating the reassessment, this tax litigation is concluded. In December 2014, the Company received a partial refund of the cash deposit. In the first quarter of 2015, the Company received a refund of $24,976 which was substantially all of the remaining cash deposit. The Company also received interest on the deposit of $1,596.
Rationalization and Asset Impairments
In 2015, the Company recorded net rationalization and asset impairment charges of $19,958 resulting from rationalization activities. The 2015 net charges include $13,719 primarily related to employee severance and other related costs and $6,315 in an impairment charge to the carrying value of goodwill
In 2014, the Company recorded net rationalization and asset impairment charges of $30,053 resulting from rationalization activities. The 2014 net charges include $1,241 primarily related to employee severance and other related costs and $32,742 in asset impairment charges, partially offset by gains from sales of assets of $3,930.
In 2013, the Company recorded net rationalization and asset impairment charges of $8,463 resulting from rationalization activities. The 2013 net charges include $3,658 primarily related to employee severance and other related costs and $4,961 in asset impairment charges, partially offset by gains from sales of assets $156.
Fair values of impaired assets were determined using projected discounted cash flows.
Acquisitions
Refer to Note 3 to the consolidated financial statements for a discussion of the Company's recent acquisitions.
Debt
At December 31, 2015 and 2014, the fair value of long-term debt, including the current portion, was approximately $342,602 and $9,323, 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 agreed to issue the Notes in the aggregate principal amount of $350,000 through a private placement. At December 31, 2015, $349,147, net of debt issuance costs of $853, was outstanding and recorded in Long-term debt, less current portion. The proceeds are being used for general corporate purposes. The Notes have 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 average tenure of 19 years. Interest is payable semi-annually. The Notes contain certain affirmative and negative covenants. As of December 31, 2015, the Company was in compliance with all of its debt covenants.

26



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 and a fixed charges coverage ratio and total leverage ratio.  As of December 31, 2015, 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 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's short-term borrowings included in Amounts due banks were $2,822 and $61,155 at December 31, 2015 and 2014, respectively. Amounts due banks included the outstanding borrowings under the Credit Agreement and the borrowings of foreign subsidiaries at weighted average interest rates of 24.1% and 3.1% at December 31, 2015 and 2014, respectively.
Return on Invested Capital
The Company reviews return on invested capital ("ROIC") in assessing and evaluating the Company's underlying operating performance. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. ROIC is defined as rolling 12 months of Adjusted net income excluding tax-effected interest income and expense divided by invested capital. Invested capital is defined as total debt, which includes Amounts due banks, Current portion of long-term debt and Long-term debt, less current portions, plus Total equity.

ROIC for the years ended December 31, 2015, 2014 and 2013 were as follows:
Return on Invested Capital
 
2015
 
2014
 
2013
Adjusted net income (1)
 
$
260,184

 
$
305,928

 
$
313,188

   Plus: Interest expense (after-tax)
 
13,469

 
6,439

 
1,767

   Less: Interest income (after-tax)
 
1,675

 
1,909

 
2,049

Net operating profit after taxes
 
271,978

 
310,458

 
312,906

Invested capital
 
1,287,073

 
1,356,435

 
1,549,775

Return on invested capital
 
21.1
%
 
22.9
%
 
20.2
%
_______________________________________________________________________________
(1)
See “Non-GAAP Financial Measures” section for a tabular reconciliation of Net income to Adjusted net income.

Contractual Obligations and Commercial Commitments
The Company's contractual obligations and commercial commitments as of December 31, 2015 are as follows:
 
 
Payments Due By Period
 
 
Total
 
2016
 
2017 to
2018
 
2019 to
2020
 
2021 and
Beyond
Long-term debt, including current portion
 
$
352,545

 
$
1,400

 
$
630

 
$
200

 
$
350,315

Interest on long-term debt
 
235,968

 
12,649

 
24,733

 
24,679

 
173,907

Capital lease obligations
 
111

 
62

 
44

 
5

 

Short-term debt
 
2,822

 
2,822

 

 

 

Interest on short-term debt
 
341

 
341

 

 

 

Operating leases
 
41,683

 
12,160

 
15,357

 
8,582

 
5,584

Purchase commitments(1)
 
125,332

 
124,228

 
909

 
195

 

Total
 
$
758,802

 
$
153,662

 
$
41,673

 
$
33,661

 
$
529,806

_______________________________________________________________________________
(1)
Purchase commitments include contractual obligations for raw materials and services.

27



As of December 31, 2015, there was $14,332 of tax liabilities related to unrecognized tax benefits and a $23,201 liability for deferred compensation. Because of the high degree of uncertainty regarding the timing of future cash outflows associated with these liabilities, the Company is unable to estimate the years in which settlement will occur. See Note 12 and Note 14 to the Company's consolidated financial statements for further discussion. Additionally, in connection with prior acquisitions, there were liabilities with fair values as of December 31, 2015 of $9,184 for a contingent consideration arrangement and $26,484 for a forward contract to acquire an additional ownership interest in a majority owned subsidiary.  The amount of future cash flows associated with these liabilities will be contingent upon actual results of the acquired entities.  See Note 14 to the Company’s consolidated financial statements for further discussion.
The Company expects to voluntarily contribute $20,000 to the U.S. defined benefit plans in 2016.
Stock-Based Compensation
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, 2015, there were 5,600,763 common shares available for future grant under all plans.
Under these plans, options, restricted shares and restricted stock units granted were 411,406 in 2015, 22,909 in 2014 and 357,494 in 2013. The Company issued common shares from treasury upon all exercises of stock options and the granting of restricted stock awards in 2015, 2014 and 2013.
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 recipients fail to meet vesting requirements. Total stock-based compensation expense recognized in the Consolidated Statements of Income for 2015, 2014 and 2013 was $7,932, $8,416 and $9,734, respectively, with a related tax benefit of $3,037, $3,222 and $3,727, respectively. As of December 31, 2015, total unrecognized stock-based compensation expense related to non-vested stock options, restricted shares and restricted stock units was $15,371, which is expected to be recognized over a weighted average period of approximately 2.9 years.
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, 2015 was $30,121 and $30,121, respectively. The total intrinsic value of options exercised during 2015, 2014 and 2013 was $6,879, $14,647 and $26,288 respectively.
Product Liability Costs
Product liability costs incurred are volatile and are largely related to trial activity. The costs associated with these claims are predominantly defense costs which are recognized in the periods incurred.
The long-term impact of the asbestos loss contingency, in the aggregate, on operating results, operating cash flows and access to capital markets is difficult to assess, particularly since claims are in many different stages of development and the Company benefits significantly from cost sharing with co-defendants and insurance carriers. Moreover, the Company has been largely successful to date in its defense of these claims.
Off-Balance Sheet Arrangements
The Company utilizes letters of credit to back certain payment and performance obligations. Letters of credit are subject to limits based on amounts outstanding under the Company's Credit Agreement.
New Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements.

28



Critical Accounting Policies and Estimates
The Company's consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make estimates and assumptions. These estimates and assumptions are reviewed periodically by management and compared to historical trends to determine the accuracy of estimates and assumptions used. If warranted, these estimates and assumptions may be changed as current trends are assessed and updated. Historically, the Company's estimates have been determined to be reasonable. No material changes to the Company's accounting policies were made during 2015. The Company believes the following accounting policies are some of the more critical judgment areas affecting its financial condition and results of operations.
Legal and Tax 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 costs associated with these claims are predominantly defense costs, which are recognized in the periods incurred. Insurance reimbursements mitigate these costs and, where reimbursements are probable, they are recognized in the applicable period. With respect to costs other than defense costs (i.e., for liability and/or settlement or other resolution), reserves are recorded when it is probable that the contingencies will have an unfavorable outcome. 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.
The Company is subject to taxation from U.S. federal, state, municipal and international jurisdictions. The calculation of current income tax expense is based on the best information available and involves significant management judgment. The actual income tax liability for each jurisdiction in any year can in some instances be ultimately determined several years after the financial statements are published.
The Company maintains reserves for estimated income tax exposures for many jurisdictions. Exposures are settled primarily through the completion of audits within each individual tax jurisdiction or the closing of a statute of limitation. Exposures can also be affected by changes in applicable tax law or other factors, which may cause management to believe a revision of past estimates is appropriate. Management believes that an appropriate liability has been established for income tax exposures; however, actual results may materially differ from these estimates. See Note 12 to the Company's consolidated financial statements for further discussion of tax contingencies.
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 losses are included in Selling, general & administrative expenses and were $6,023, $22,351 and $7,759 in 2015, 2014 and 2013, respectively.

29



Venezuela – Highly Inflationary Economy
Venezuela is a highly inflationary economy under U.S. GAAP. As a result, the financial statements of the Company's Venezuelan operation are reported under highly inflationary accounting rules as of January 1, 2010. Under highly inflationary accounting, the financial statements of the Company's Venezuelan operation have been remeasured into the Company's reporting currency and exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings. On February 8, 2013, the Venezuelan government announced the devaluation of its currency relative to the U.S. dollar. Effective February 13, 2013 the official rate moved from 4.3 to 6.3 bolivars to the U.S. dollar. In 2013, the devaluation of the bolivar resulted in a foreign currency transaction loss of $8,081 in Selling, general & administrative expenses and higher Cost of goods sold of $4,117 due to the liquidation of inventory valued at the historical exchange rate.
In January 2014, the Venezuela government announced the formation of the National Center of Foreign Trade (“CENCOEX”) to replace the Commission for the Administration of Currency Exchange (“CADIVI”). Effective January 24, 2014, the exchange rate applicable to the settlement of certain transactions through CENCOEX, including payments of dividends and royalties, changed to utilize the Complementary System of Foreign Currency Administration ("SICAD") auction-based exchange rate (the "SICAD rate") as opposed to the official rate. Further, in January 2014, the Venezuelan government enacted the "Fair Prices Law" limiting prices and establishing a maximum profit margin on goods and services. In February 2014, the government announced a new market based foreign exchange system, the SICAD II. The exchange rate established through SICAD II fluctuated daily and was significantly higher than both the official rate and the SICAD rate.
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.
In February 2015, the Venezuelan government eliminated the SICAD II rate and announced a new exchange market called the Marginal Currency System ("SIMADI"), which allows for trading based on supply and demand. 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 as it most appropriately approximates 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 liability 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 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. As of December 31, 2015, the SIMADI rate was 198.7 bolivars to the U.S dollar. If the Company were to convert bolivars at a rate other than the SIMADI rate, the Company may realize additional losses or gains to earnings. 
At December 31, 2015, the amount of bolivar requests awaiting government approval to be paid in U.S. dollars at the SIMADI rate include $1,550 for dividend payments, of which $510 have been outstanding for more than a year, and $7,871 to be paid at the official rate, all of which have been outstanding for more than a year.
In 2015, the Company’s Venezuela operations contributed $84,662 to Net sales for the Company. Net income included a loss of $24,005, or $0.32 per diluted share from Venezuela. Adjusted net income for 2015 included $3,209, or $0.05 per diluted share, from Venezuela. In 2014, the Company’s Venezuela operations contributed $71,793 to Net sales for the Company. Net income included a loss of $8,238, or $0.10 per diluted share, from Venezuela. Adjusted net income for 2014 included $13,279, or $0.17 per diluted share, from Venezuela. Future impacts to earnings of applying highly inflationary accounting for Venezuela on the Company’s consolidated financial statements will be dependent upon the applied currency exchange mechanisms, the movements in the applicable exchange rates between the bolivar and the U.S. dollar and the amount of monetary assets and liabilities included in the Company’s Venezuelan operation’s balance sheet.  The bolivar-denominated monetary net asset position was $32 at December 31, 2015, which includes $642 of cash and cash equivalents and the bolivar-denominated monetary net liability position was $1,264 at December 31, 2014, which includes $2,124 of cash and cash equivalents.
The Company’s ability to effectively manage sales and profit levels in Venezuela will be impacted by several factors.  In addition to those factors previously mentioned, these include the Company’s ability to mitigate the effect of any potential future devaluation and Venezuelan government price or exchange controls.  The various restrictions on the distribution of foreign currency by the Venezuelan government could also affect the Company’s ability to pay obligations and maintain normal production levels in Venezuela.

30



In the future, the Company may need to deconsolidate its Venezuelan operations as a result of an inability to exchange bolivar-denominated cash coupled with an acute degradation in the ability to make key operational decisions due to government regulations in Venezuela. The Company monitors factors such as its ability to access various exchange mechanisms; the impact of government regulations on the Company’s ability to manage its Venezuelan operation’s capital structure, purchasing, product pricing and labor relations; and the current political and economic situation within Venezuela. Based upon such factors as of December 31, 2015, the Company continues to consolidate its Venezuelan subsidiary. As of December 31, 2015, the Company's total investment in Venezuela was approximately $35,000, which includes intercompany payables.
Deferred 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. The Company does not provide deferred income taxes on unremitted earnings of certain non-U.S. subsidiaries, which are deemed permanently 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 permanently reinvested were not significant. At December 31, 2015, the Company had approximately $92,537 of gross deferred tax assets related to deductible temporary differences and tax loss and credit carry-forwards which may reduce taxable income in future years.
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, 2015, a valuation allowance of $51,294 was recorded against these 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.
Pensions
The Company maintains a number of defined benefit ("Pension") 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.
A substantial portion of the Company's pension amounts relate to its defined benefit plan in the United States. The fair value of plan assets is determined at December 31 of each year.
A significant element in determining the Company's pension expense is the expected return on plan assets. At the end of each year, the expected return on plan assets is determined based on the weighted average expected return of the various asset classes in the plan's 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 Company determined this rate to be 6.3% and 7.3% at December 31, 2015 and 2014, respectively. The assumed long-term rate of return on assets is applied to the market value of plan assets. This produces the expected return on plan assets included in pension expense. The difference between this expected return and the actual return on plan assets is deferred and amortized over the average remaining service period of active employees expected to receive benefits under the plan. The amortization of the net deferral of past losses will increase future pension expense. During 2015, investment returns were 0.9% compared with a return of 11.5% in 2014. A 25 basis point change in the expected return on plan assets would increase or decrease pension expense by approximately $2,000.
Another significant element in determining the Company's pension expense is the discount rate for plan liabilities. To develop the discount rate assumption, the Company refers to the yield derived from matching projected pension payments with maturities of a portfolio of available non-callable bonds rated AA or an equivalent quality. The Company determined this rate to be 4.5% at December 31, 2015 and 4.1% at December 31, 2014. A 10 basis point change in the discount rate would increase or decrease pension expense by approximately $1,500.
Pension expense relating to the Company's defined benefit plans was $162,815, $12,395 and $29,908 in 2015, 2014 and 2013, respectively. Pension expense in 2015 includes $142,738 in settlement charges. The Company expects 2016 defined benefit pension expense, excluding the effect of settlements, to decrease by a range of approximately $1,000 to $3,000.
The Accumulated other comprehensive loss, excluding tax effects, recognized on the Consolidated Balance Sheet was $154,756 as of December 31, 2015 and $314,411 as of December 31, 2014. The decrease is primarily the result of pension settlement charges recorded in 2015 related to the purchase of a group annuity contract. Refer to Note 11 to the Consolidated Financial Statements for additional information.

31



The Company made voluntary contributions to its U.S. defined benefit plans of $47,124, $21,175 and $75,216 in 2015, 2014 and 2013, respectively. The Company expects to voluntarily contribute $20,000 to the U.S. plans in 2016. Based on current pension funding rules, the Company does not anticipate that contributions to the plans would be required in 2016.
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. For most domestic inventories, cost is determined principally by the last-in, first-out ("LIFO") method, and for non-U.S. inventories, cost is determined by the first-in, first-out ("FIFO") method. The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management's estimates of expected year-end inventory levels and costs. Actual year-end costs and inventory levels may differ from interim LIFO inventory valuations. The excess of current cost over LIFO cost was $59,765 at December 31, 2015 and $71,311 at December 31, 2014.
The Company reviews the net realizable value of inventory on an on-going basis, with consideration given to deterioration, obsolescence and other factors. If actual market conditions differ from those projected by management, and the Company's estimates prove to be inaccurate, write-downs of inventory values and adjustments to Cost of goods sold may be required. Historically, the Company's reserves have approximated actual experience.
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.
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 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.
Due to the presence of impairment indicators during the third quarter of 2015, the Company performed an impairment test of certain long-lived assets of a business unit. The Company determined that for certain long-lived assets the carrying value of the assets exceeded the fair value, resulting in a $3,417 non-cash impairment charge.  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.
Goodwill and Intangibles
The Company performs an annual impairment test of goodwill and indefinite-lived intangible assets 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. Goodwill is tested by 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 that incorporate allocations of certain assets and cash flows among reporting units, 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.
The fair value of goodwill for all of the Company's reporting units exceeded its carrying value by at least 20% as of the testing date during the fourth quarter of 2015. Key assumptions in estimating the reporting unit's fair value include assumed market participant assumptions of revenue growth, operating margins and the rate used to discount future cash flows. Actual revenue growth and operating margins below the assumed market participant assumptions or an increase in the discount rate would have a negative impact on the fair value of the reporting unit that could result in a goodwill impairment charge in a future period.

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Stock-Based Compensation
The Company uses the Black-Scholes option pricing model for estimating fair values of options. The Black-Scholes model requires assumptions regarding the volatility of the Company's common shares, the expected life of the stock award and the Company's dividend yield. The Company utilizes historical data in determining these assumptions. An increase or decrease in the assumptions or economic events outside of management's control could have an impact on the Black-Scholes model.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary financial market risks include fluctuations in currency exchange rates, commodity prices and interest rates. The Company manages these risks by using derivative financial instruments in accordance with established policies and procedures. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.
Included below is a sensitivity analysis based upon a hypothetical 10% weakening or strengthening in the U.S. dollar compared to foreign currency exchange rates at December 31, 2015, a 10% change in commodity prices, and a 100 basis point increase in effective interest rates. The contractual derivative, borrowing and investment arrangements in effect at December 31, 2015 were compared to the hypothetical foreign exchange, commodity price, or interest rates in the sensitivity analysis to determine the effect on income before taxes, interest expense, or accumulated other comprehensive loss. The analysis takes into consideration any offset that would result from changes in the value of the hedged asset or liability.
Foreign Currency Exchange Risk
The Company enters into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. At December 31, 2015, the Company hedged certain third-party and inter-company purchases and sales. At December 31, 2015, the Company had foreign exchange contracts with a notional value of approximately $30,388. At December 31, 2015, a hypothetical 10% weakening of the U.S. dollar would not materially affect the Company's financial statements.
Commodity Price Risk
From time to time, the Company uses various hedging arrangements to manage exposures to price risk from commodity purchases. These hedging arrangements have the effect of fixing for specified periods the prices the Company will pay for the volume to which the hedge relates. A hypothetical 10% adverse change in commodity prices on the Company's open commodity futures at December 31, 2015 would not materially affect the Company's financial statements.
Interest Rate Risk
The Company's debt portfolio contains variable rate debt, inherently exposing the Company to interest rate risk. A hypothetical 1.0% increase in interest rates would not materially affect the Company's financial statements. The Company uses interest rate derivatives to manage interest rate risk. The Company had no interest rate derivatives outstanding during 2015 or 2014.
The Company's return on cash and cash equivalents are also subject to interest rate risk. As of December 31, 2015, the Company had $304,183 in cash and cash equivalents. A hypothetical change of 1.0% in interest rates would not materially affect the Company's financial statements. The fair value of the Company's Cash and cash equivalents at December 31, 2015 approximated carrying value. The Company's financial instruments are subject to concentrations of credit risk. The Company has minimized this risk by entering into investments with a number of major banks and financial institutions and investing in high-quality instruments. The Company does not expect any counter-parties to fail to meet their obligations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this Annual Report on Form 10-K following the signature page.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.


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ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2015 based on the 2013 framework in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the Company's evaluation under such framework, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2015.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2015 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included elsewhere in this Annual Report on Form 10-K and is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting that occurred during the fourth quarter of 2015 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION
None.

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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company is expected to file its 2016 proxy statement pursuant to Regulation 14A of the Exchange Act prior to April 29, 2016.
Except for the information set forth within Part I, Item 1C section of this Annual Report on Form 10-K concerning our Executive Officers, the information required by this item is incorporated by reference from the 2016 proxy statement.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the 2016 proxy statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the 2016 proxy statement.
For further information on the Company's equity compensation plans, see Note 1 and Note 9 to the Company's consolidated financial statements.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from the 2016 proxy statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the 2016 proxy statement.


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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following consolidated financial statements of the Company are included in a separate section of this report following the signature page and certifications:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Balance Sheets – December 31, 2015 and 2014
Consolidated Statements of Income – Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income – Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Equity – Years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows – Years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
The following consolidated financial statement schedule of the Company is included in a separate section of this report
following the signature page:
Schedule II – Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.
(a)(3) Exhibits
Exhibit No.
 
Description
3.1
 
Amended and Restated Code of Regulations of Lincoln Electric Holdings, Inc. (filed as Exhibit 3.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on April 29, 2014, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
3.2
 
Amended and Restated Articles of Incorporation of Lincoln Electric Holdings, Inc. (filed as Exhibit 3.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on September 27, 2011, SEC file No. 0-1402 and incorporated herein by reference and made a part hereof).
10.1