Item 9A. Controls and Procedures
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, 2022 based on the 2013 framework in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring
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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, 2022.
During 2022, the Company completed the acquisition of Fori. Fori’s assets are included in the Company’s Consolidated Balance Sheet from the date of the acquisition and constituted approximately 14.6% of total assets as of December 31, 2022. As permitted by guidance issued by the Securities and Exchange Commission, the Company has elected to exclude Fori from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 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.
Changes in Internal Control Over Financial Reporting
In December 2022, the Company acquired Fori. The acquired business operated under its own set of systems and internal controls and the Company is currently maintaining those systems and much of that control environment until it is able to incorporate its processes into the Company’s own systems and control environment. The Company expects to complete the incorporation of the acquired business’ operations into the Company’s systems and control environment in 2023.
Except for changes in connection with the Company’s acquisition of Fori business noted above, there have been no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company is expected to file its 2023 proxy statement pursuant to Regulation 14A of the Exchange Act within 120 days after December 31, 2022.
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 2023 proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the 2023 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 2023 proxy statement.
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For further information on the Company’s equity compensation plans, see Note 1 and Note 10 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 2023 proxy statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from the 2023 proxy statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following reports and 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 (PCAOB ID 42 )
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Consolidated Statements of Income – Years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Comprehensive Income – Years ended December 31, 2022, 2021 and 2020
Consolidated Balance Sheets – December 31, 2022 and 2021
Consolidated Statements of Equity – Years ended December 31, 2022, 2021 and 2020
Consolidated Statements of Cash Flows – Years ended December 31, 2022, 2021 and 2020
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.
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(a)(3) Exhibits
Exhibit No.
Description
3.1
Amended and Restated Articles of Incorporation of Lincoln Electric Holdings, Inc., as amended on October 19, 2021 (filed as Exhibit 3.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on October 22, 2021, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
3.2
Amended and Restated Code of Regulations of Lincoln Electric Holdings, Inc., as amended on February 15, 2023 (filed as Exhibit 3.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on February 17, 2023, SEC File No.-0-1402, and incorporated herein by reference and made a part hereof).
4.1
Description of Securities Registered Under Section 12 of the Securities Exchange Act of 1934 (filed as Exhibit 4.1 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2019, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.1
Second Amended and Restated Credit Agreement, dated as of April 23, 2021, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Electric Automation, Inc., Lincoln Global, Inc., the Lenders and KeyBank National Association (filed as Exhibit 10.4 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended March 31, 2021, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.2
Credit Agreement, dated as of November 29, 2022, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Electric Automation, Inc., Lincoln Global, Inc., the Lenders and PNC Bank, National Association (filed as Exhibit 10.1 to form 8-K of Lincoln Electric Holdings, Inc. filed on December 1, 2022, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
10.3
Note Purchase Agreement, dated as of April 1, 2015, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc. and the purchasers party thereto (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on April 2, 2015, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.4
Amendment No. 1 to Note Purchase Agreement, dated as of April 1, 2015, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc. and the purchasers party thereto, dated July 30, 2019 (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended September 30, 2019, SEC File No. 0- 1402, and incorporated herein by reference and made a part hereof).
10.5
Note Purchase Agreement, dated as of October 20, 2016, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Techalloy, Inc. and Wayne Trail Technologies, Inc. and the purchaser party thereto (filed as Exhibit 10.4 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2016, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.6
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., MetLife Investment Advisors, LLC and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.7
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., Voya Retirement Insurance and Annuity Company and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.2 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
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10.8
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., State Farm Life Insurance Company and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.3 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.9
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., AIG Asset Management (U.S.), LLC and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.4 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.10
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., John Hancock Life Insurance Company (U.S.A.) and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.5 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.11
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., Thrivent Financial for Lutherans and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.6 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.12
Uncommitted Master Note Facility, dated as of November 27, 2018, by and among Lincoln Electric Holdings, Inc., The Lincoln Electric Company, Lincoln Electric International Holding Company, J.W. Harris Co., Inc., Lincoln Global, Inc., Techalloy, Inc., Wayne Trail Technologies, Inc., Allianz Life Insurance Company of North America and/or one or more of its affiliates or related funds, as purchasers thereunder (filed as Exhibit 10.7 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 29, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.13*
Supplemental Executive Retirement Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on January 7, 2009, SEC File No. 0-1402, and incorporated herein by reference and made part hereof).
10.14*
Amendment No. 1 to Supplemental Executive Retirement Plan (As Amended and Restated as of December 31, 2008) (filed as Exhibit 10.6 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2016, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.15*
Amendment No. 2 to Supplemental Executive Retirement Plan (As Amended and Restated as of December 31, 2008) (filed as Exhibit 10.4 to Form10-Q of Lincoln Electric Holdings, Inc. for the quarter ended September 30, 2020, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.16*
Deferred Compensation Plan for Certain Retention Agreements and Other Contractual Arrangements (Amended and Restated as of January 1, 2004) (filed as Exhibit 10(i) to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2003, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.17*
Non-Employee Directors’ Deferred Compensation Plan (Amended and Restated as of January 1, 2021) (filed as Exhibit 10.18 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2020, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.18*
2005 Deferred Compensation Plan for Executives (Amended and Restated as of January 1, 2021) (filed as Exhibit 10.21 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2020, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
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10.19*
The Lincoln Electric Company Restoration Plan (filed as Exhibit 4.3 to Form S-8 of Lincoln Electric Holdings, Inc. filed on December 19, 2016, SEC File No. 333-215168, and incorporated herein by reference and made a part hereof).
10.20*
Amendment No. 1 to The Lincoln Electric Company Restoration Plan (filed as Exhibit 10.3 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended September 30, 2020, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.21*
The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 15, 2021 (filed as Exhibit 10.20 to Form 10 K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2021, SEC File No. 0 1402, and incorporated herein by reference and made a part hereof).
10.22*
Amendment No. 1 to The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 15, 2021 (filed as Exhibit 10.21 to Form 10 K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2021, SEC File No. 0 1402, and incorporated herein by reference and made a part hereof).
10.23*
Amendment No. 2 to The Lincoln Electric Company Employee Savings Plan As Amended and Restated Effective January 15, 2021 (filed as Exhibit 10.22 to Form 10 K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2021, SEC File No. 0 1402, and incorporated herein by reference and made a part hereof).
10.24*
Form of Change in Control Severance Agreement (as entered into by the Company and its executive officers) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on November 21, 2017, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.25*
Amendment No. 1 to Form of Change in Control Severance Agreement (as entered into by the Company and its executive officers) (filed as Exhibit 10.5 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended September 30, 2020, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.26*
2006 Equity and Performance Incentive Plan (Restated as of March 3, 2011) (filed as Annex A to Lincoln Electric Holdings, Inc. proxy statement filed on March 18, 2011, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof).
10.27*
2015 Equity and Incentive Compensation Plan (filed as Appendix B to Lincoln Electric Holdings, Inc. definitive proxy statement filed on March 18, 2015, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof) .
10.28*
2015 Stock Plan for Non-Employee Directors (filed as Appendix C to Lincoln Electric Holdings, Inc. definitive proxy statement filed on March 18, 2015, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.29*
Amendment No. 1 to the 2015 Stock Plan for Non-Employee Directors (filed as Appendix C to Lincoln Electric Holdings, Inc. proxy statement dated March 20, 2017, SEC File No. 0-1402, and incorporated by reference and made a part hereof).
10.30*
Form of Restricted Stock Unit Agreement for Non-Employee Directors (filed as Exhibit 10.30 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2021, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.31*
Form of Restricted Stock Unit Agreement for Non-Employee Directors (filed herewith).
10.32*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.4 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended September 30, 2010, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.33*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.37 to Form 10-K of the Lincoln Electric Holdings, Inc. for the year ended December 31, 2010, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.34*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.27 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2017, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
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10.35*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.28 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2017, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.36*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.37 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.37*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.38 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2019, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.38*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended March 31, 2021, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.39*
Form of Stock Option Agreement for Executive Officers (filed as Exhibit 10.1 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended March 31, 2022, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.40*
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.33 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2013, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.41*
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.21 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2015, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.42*
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.41 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.43*
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.43 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2019, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.44*
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.2 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended March 31, 2021, SEC File No.-0-1402, and incorporated herein by reference and made a part hereof).
10.45*
Form of Restricted Stock Unit Agreement for Executive Officers (filed as Exhibit 10.2 to Form 10-Q of Lincoln Electric Holdings, Inc. for the quarter ended March 31, 2022, SEC File No.-0-1402, and incorporated herein by reference and made a part hereof).
10.46*
Form of Performance Share Award Agreement for Executive Officers (filed as Exhibit 10.44 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2018, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.47*
Form of Performance Share Award Agreement for Executive Officers (filed as Exhibit 10.47 to Form 10-K of Lincoln Electric Holdings, Inc. for the year ended December 31, 2019, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.48*
Form of Performance Share Award Agreement for Executive Officers (filed as Exhibit 10.3 to Form 10-Q of Lincoln Electric Holdings, Inc., for the quarter ended March 31, 2021, SEC File No.-0-1402, and incorporated herein by reference and made a part hereof).
10.49*
Form of Performance Share Award Agreement for Executive Officers (filed as Exhibit 10.3 to Form 10-Q of Lincoln Electric Holdings, Inc., for the quarter ended March 31, 2022, SEC File No.-0-1402, and incorporated herein by reference and made a part hereof).
10.50*
Form of Officer Indemnification Agreement (effective February 23, 2012) (filed as Exhibit 10.1 to Form 8-K of Lincoln Electric Holdings, Inc. filed on February 29, 2012, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof).
10.51*
Form of Director Indemnification Agreement (effective February 23, 2012) (filed as Exhibit 10.2 to Form 8-K of Lincoln Electric Holdings, Inc. filed on February 29, 2012, SEC File No. 0-1402, and incorporated herein by reference and made a part hereof) .
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21
Subsidiaries of the Registrant (filed herewith).
23
Consent of Independent Registered Public Accounting Firm (filed herewith).
24
Powers of Attorney (filed herewith) .
31.1
Certification by the Chairman, President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2
Certification by the Executive Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover page Interactive Data File (embedded within the Inline XBRL document)
*
Reflects management contract or other compensatory arrangement required to be filed as an exhibit pursuant to Item 15(b) of this report.
ITEM 16. FORM 10-K SUMMARY
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LINCOLN ELECTRIC HOLDINGS, INC.
By:
/s/ Gabriel Bruno
Gabriel Bruno
Executive Vice President, Chief Financial Officer and Treasurer
(principal financial and accounting officer)
February 21, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Christopher L. Mapes
/s/ Gabriel Bruno
Christopher L. Mapes,
Gabriel Bruno,
Chairman, President and Chief Executive Officer
Executive Vice President, Chief Financial Officer and
(principal executive officer)
Treasurer
February 21, 2023
(principal financial and accounting officer)
February 21, 2023
/s/ Gabriel Bruno
/s/ Gabriel Bruno
Gabriel Bruno as
Gabriel Bruno as
Attorney-in-Fact for
Attorney-in-Fact for
Brian D. Chambers, Director
Curtis E. Espeland, Director
February 21, 2023
February 21, 2023
/s/ Gabriel Bruno
/s/ Gabriel Bruno
Gabriel Bruno as
Gabriel Bruno as
Attorney-in-Fact for
Attorney-in-Fact for
Patrick P. Goris, Director
Michael F. Hilton, Director
February 21, 2023
February 21, 2023
/s/ Gabriel Bruno
/s/ Gabriel Bruno
Gabriel Bruno as
Gabriel Bruno as
Attorney-in-Fact for
Attorney-in-Fact for
Kathryn Jo Lincoln, Director
Phillip J. Mason, Director
February 21, 2023
February 21, 2023
/s/ Gabriel Bruno
/s/ Gabriel Bruno
Gabriel Bruno as
Gabriel Bruno as
Attorney-in-Fact for
Attorney-in-Fact for
Ben P. Patel, Director
Hellene S. Runtagh, Director
February 21, 2023
February 21, 2023
/s/ Gabriel Bruno
Gabriel Bruno as
Attorney-in-Fact for
Kellye L. Walker, Director
February 21, 2023
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Lincoln Electric Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lincoln Electric Holdings, Inc. (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 21, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
F-1
Table of Contents
Goodwill impairment evaluation – Reporting Unit within International Welding Segment
Description of the Matter
As disclosed in Note 5 to the consolidated financial statements, at December 31, 2022, the Company’s total goodwill was $665.3 million, of that, $129.9 million relates to the International Welding segment. As disclosed in Note 1 to the consolidated financial statements, goodwill is tested for impairment in the fourth quarter using the same date each year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment. The Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount and whether it is necessary to perform a quantitative goodwill impairment test. The Company may perform a quantitative test in instances where the more-likely-than-not threshold has not been met, including when general macroeconomic conditions or changes to the reporting unit warrant a refresh of the baseline used in a qualitative test. The Company performed a quantitative assessment for a reporting unit within the International Welding segment and determined that the fair value of the reporting unit was in excess of the carrying value.
Auditing the annual goodwill impairment test for the aforementioned reporting unit under the quantitative assessment was complex and judgmental due to the significant estimation required in determining the fair value of the reporting unit. In particular, the fair value estimate using the income approach was sensitive to significant assumptions such as the weighted average cost of capital and the terminal period revenue growth rate. Elements of these significant assumptions are forward-looking and could be affected by future economic conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment evaluation, including controls over the significant assumptions mentioned above.
To test the estimated fair value used in the Company’s annual goodwill impairment test for the reporting unit within the International Welding segment, our audit procedures included, among others, assessing the valuation methodology, testing the significant assumptions discussed above, and testing the completeness and accuracy of the underlying data used by the Company in its analysis. As it pertains to the terminal period revenue growth rate, we compared the significant assumptions used by management to third party industry data and economic trends, changes to the Company’s business model, customer base or product mix, as applicable. We involved valuation specialists to assist with our evaluation of the methodology applied and the reasonableness of certain assumptions selected by management, including, the weighted average cost of capital. Specifically, we evaluated the components of the weighted average cost of capital assumptions used by performing an independent corroborative analysis with involvement of valuation specialists. We performed sensitivity analyses of assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the significant assumptions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since at least 1923, but we are unable to determine the specific year.
Cleveland, OH
February 21, 2023
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Lincoln Electric Holdings, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Lincoln Electric Holdings, Inc.’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Lincoln Electric Holdings, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Fori Automation, LLC (Fori), which is included in the 2022 consolidated financial statements of the Company and constituted 14.6% of total assets as of December 31, 2022. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Fori.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2022 consolidated financial statements of the Company and our report dated February 21, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 21, 2023
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year Ended December 31,
2022
2021
2020
Net sales (Note 2)
$
3,761,211
$
3,234,180
$
2,655,400
Cost of goods sold
2,480,451
2,165,575
1,784,059
Gross profit
1,280,760
1,068,605
871,341
Selling, general & administrative expenses
656,636
597,109
543,802
Rationalization and asset impairment charges (Note 7)
11,788
9,827
45,468
Operating income
612,336
461,669
282,071
Interest expense, net
29,500
22,214
21,973
Other income (expense) (Note 12)
9,991
( 114,457 )
3,942
Income before income taxes
592,827
324,998
264,040
Income taxes (Note 13)
120,603
48,418
57,896
Net income including non-controlling interests
472,224
276,580
206,144
Non-controlling interests in subsidiaries’ income
—
114
29
Net income
$
472,224
$
276,466
$
206,115
Basic earnings per share (Note 3)
$
8.14
$
4.66
$
3.46
Diluted earnings per share (Note 3)
$
8.04
$
4.60
$
3.42
Cash dividends declared per share
$
2.32
$
2.09
$
1.98
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended December 31,
2022
2021
2020
Net income including non-controlling interests
$
472,224
$
276,580
$
206,144
Other comprehensive income (loss), net of tax:
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax of $ 3,099 in 2022; $ 1,523 in 2021; $ 605 in 2020
5,815
5,607
861
Defined pension plan activity, net of tax of $ 964 in 2022; $ 33,214 in 2021; $( 10,622 ) in 2020
11,450
88,539
( 31,224 )
Currency translation adjustment
( 35,084 )
( 49,745 )
4,068
Other comprehensive (loss) income:
( 17,819 )
44,401
( 26,295 )
Comprehensive income
454,405
320,981
179,849
Comprehensive income (loss) attributable to non-controlling interests
94
( 289 )
74
Comprehensive income attributable to shareholders
$
454,311
$
321,270
$
179,775
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
2022
2021
ASSETS
Current Assets
Cash and cash equivalents
$
197,150
$
192,958
Accounts receivable (less allowance for doubtful accounts of $ 12,556 in 2022; $ 11,105 in 2021)
541,529
429,074
Inventories (Note 16)
665,451
539,919
Other current assets
153,660
127,642
Total Current Assets
1,557,790
1,289,593
Property, plant and equipment, net (Note 1)
544,871
511,744
Intangibles, net (Note 5)
202,706
149,393
Goodwill (Note 5)
665,257
430,162
Deferred income taxes (Note 13)
22,811
18,318
Other assets
187,111
193,097
TOTAL ASSETS
$
3,180,546
$
2,592,307
LIABILITIES AND EQUITY
Current Liabilities
Amounts due banks (Note 9)
$
82,444
$
51,964
Trade accounts payable
352,079
330,230
Accrued employee compensation and benefits
109,369
108,562
Dividends payable
36,879
32,921
Other current liabilities
261,087
231,462
Current portion of long-term debt (Note 9)
11,039
766
Total Current Liabilities
852,897
755,905
Long-term debt, less current portion (Note 9)
1,110,396
717,089
Deferred income taxes (Note 13)
17,022
56,718
Other liabilities
166,190
198,686
Total Liabilities
2,146,505
1,728,398
Shareholders' Equity
Preferred shares, without par value - at stated capital amount; authorized - 5,000,000 shares; issued and outstanding - none
—
—
Common shares, without par value - at stated capital amount; authorized - 240,000,000 shares; issued - 98,581,434 shares in 2022 and 2021; outstanding - 57,623,539 shares in 2022 and 58,786,776 shares in 2021
9,858
9,858
Additional paid-in capital
481,857
451,268
Retained earnings
3,306,500
2,970,303
Accumulated other comprehensive loss (Note 8)
( 275,299 )
( 257,386 )
Treasury shares, at cost - 40,957,895 shares in 2022 and 39,794,658 shares in 2021
( 2,488,776 )
( 2,309,941 )
Total Shareholders' Equity
1,034,140
864,102
Non-controlling interests
( 99 )
( 193 )
Total Equity
1,034,041
863,909
TOTAL LIABILITIES AND TOTAL EQUITY
$
3,180,546
$
2,592,307
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
Accumulated
Common
Additional
Other
Non-
Shares
Common
Paid-In
Retained
Comprehensive
Treasury
Controlling
Outstanding
Shares
Capital
Earnings
Income (Loss)
Shares
Interests
Total
Balance at December 31, 2019
60,592
$
9,858
$
389,446
$
2,736,481
$
( 275,850 )
$
( 2,041,763 )
$
905
$
819,077
Net income
206,115
29
206,144
Unrecognized amounts from defined benefit pension plans, net of tax
( 31,224 )
( 31,224 )
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
861
861
Currency translation adjustment
4,023
45
4,068
Cash dividends declared – $ 1.98 per share
( 118,423 )
( 118,423 )
Stock-based compensation activity
457
27,076
5,504
32,580
Purchase of shares for treasury
( 1,408 )
( 113,455 )
( 113,455 )
Other
( 6,564 )
( 2,814 )
( 9,378 )
Balance at December 31, 2020
59,641
9,858
409,958
2,821,359
( 302,190 )
( 2,149,714 )
979
790,250
Net income
276,466
114
276,580
Unrecognized amounts from defined benefit pension plans, net of tax
88,539
88,539
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
5,607
5,607
Currency translation adjustment
( 49,342 )
( 403 )
( 49,745 )
Cash dividends declared – $ 2.09 per share
( 124,669 )
( 124,669 )
Stock-based compensation activity
393
38,720
4,299
43,019
Purchase of shares for treasury
( 1,247 )
( 164,526 )
( 164,526 )
Other
2,590
( 2,853 )
( 883 )
( 1,146 )
Balance at December 31, 2021
58,787
9,858
451,268
2,970,303
( 257,386 )
( 2,309,941 )
( 193 )
863,909
Net income
472,224
472,224
Unrecognized amounts from defined benefit pension plans, net of tax
11,450
11,450
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
5,815
5,815
Currency translation adjustment
( 35,178 )
94
( 35,084 )
Cash dividends declared – $ 2.32 per share
( 134,931 )
( 134,931 )
Stock-based compensation activity
211
29,194
2,458
31,652
Purchase of shares for treasury
( 1,374 )
( 181,293 )
( 181,293 )
Other
1,395
( 1,096 )
299
Balance at December 31, 2022
57,624
$
9,858
$
481,857
$
3,306,500
$
( 275,299 )
$
( 2,488,776 )
$
( 99 )
$
1,034,041
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2022
2021
2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
472,224
$
276,466
$
206,115
Non-controlling interests in subsidiaries' income (loss)
—
114
29
Net income including non-controlling interests
472,224
276,580
206,144
Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities:
Rationalization and asset impairment net charges (gains) (Note 7)
8,100
( 1,054 )
21,835
Depreciation and amortization
78,059
81,146
80,492
Equity earnings in affiliates, net
80
( 499 )
( 408 )
Deferred income taxes (Note 13)
( 48,207 )
( 28,556 )
( 2,948 )
Stock-based compensation
25,267
23,787
15,388
Pension settlement charges
—
126,502
8,119
Other, net
11,902
( 16,975 )
( 18,115 )
Changes in operating assets and liabilities, net of effects from acquisitions:
(Increase) decrease in accounts receivable
( 65,010 )
( 65,844 )
3,582
(Increase) decrease in inventories
( 81,188 )
( 154,347 )
22,751
(Increase) decrease in other current assets
( 18,297 )
( 23,913 )
14,711
Increase (decrease) in trade accounts payable
16,852
82,394
( 17,919 )
(Decrease) increase in other current liabilities
( 8,199 )
68,292
22,310
Net change in other assets and liabilities
( 8,197 )
( 2,450 )
( 4,580 )
NET CASH PROVIDED BY OPERATING ACTIVITIES
383,386
365,063
351,362
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
( 71,883 )
( 62,531 )
( 59,201 )
Acquisition of businesses, net of cash acquired (Note 4)
( 436,298 )
( 156,106 )
—
Proceeds from sale of property, plant and equipment
3,331
6,781
7,667
Other investing activities
159
6,500
2,321
NET CASH USED BY INVESTING ACTIVITIES
( 504,691 )
( 205,356 )
( 49,213 )
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments on) short-term borrowings
34,351
46,476
( 31,760 )
Proceeds from (payments on) long-term borrowings
405,444
( 508 )
—
Proceeds from exercise of stock options
6,385
19,232
17,192
Purchase of shares for treasury
( 181,293 )
( 164,526 )
( 113,455 )
Cash dividends paid to shareholders
( 130,724 )
( 121,851 )
( 118,118 )
Other financing activities
( 438 )
( 763 )
—
NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES
133,725
( 221,940 )
( 246,141 )
Effect of exchange rate changes on Cash and cash equivalents
( 8,228 )
( 2,088 )
1,708
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
4,192
( 64,321 )
57,716
Cash and cash equivalents at beginning of period
192,958
257,279
199,563
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
197,150
$
192,958
$
257,279
See notes to these consolidated financial statements.
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LINCOLN ELECTRIC HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest (the "Company") after elimination of all inter-company accounts, transactions and profits.
General Information
The Company is the world leader in the design, development and manufacture of arc welding products, automated joining, assembly and cutting systems, plasma and oxy-fuel cutting equipment. The Company also has a leading global position in brazing and soldering alloys.
The Company’s products include arc welding, brazing and soldering filler metals (consumables), arc welding equipment, plasma and oxyfuel cutting systems, wire feeding systems, fume control equipment, welding accessories, specialty gas regulators, and education solutions; as well as a comprehensive portfolio of automated solutions for joining, cutting, material handling, module assembly, and end of line testing.
In March 2022, in response to Russia’s invasion of Ukraine, the Company announced it was ceasing operations in Russia and implementing plans to support its Russian employees. Although the Company’s Net sales and Total assets in Russia are less than 1 % of consolidated Net sales and Total assets as of December 31, 2022, the Russia-Ukraine conflict and sanctions imposed globally may result in economic and supply chain disruptions, the ultimate financial impact of which cannot be reasonably estimated at this time. The Company continues to monitor the Russia-Ukraine conflict and its potential impacts.
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. An economy is considered highly inflationary under GAAP if the cumulative inflation rate for a three-year period meets or exceeds 100 percent. The Turkish economy exceeded the three-year cumulative inflation rate of 100 percent during the second quarter of 2022. As a result, the financial statements of the Company’s Turkish operation are reported under highly inflationary accounting rules as of April 1, 2022. Under highly inflationary accounting, the financial statements of the Company’s Turkish operation have been remeasured into the Company’s reporting currency (U.S. dollar). Beginning April 1, 2022, the exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than “Accumulated other comprehensive loss” on the balance sheet. For the year ended December 31, 2022, this impact was not significant to the Company’s results.
The translation of assets and liabilities originally denominated in foreign currencies into U.S. dollars is for consolidation purposes, and does not necessarily indicate that the Company could realize or settle the reported value of those assets and liabilities in U.S. dollars. Additionally, such a translation does not necessarily indicate that the Company could return or distribute the reported U.S. dollar value of the net equity of its foreign operations to shareholders.
Foreign currency transaction gains and losses are included in Selling, general & administrative expenses and were gains of $ 3,633 , $ 1,332 and $ 4,229 in 2022, 2021 and 2020, respectively.
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Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or net realizable value. Fixed manufacturing overhead costs are allocated to inventory based on normal production capacity and abnormal manufacturing costs are recognized as period costs. Cost for a substantial portion of U.S. inventories is determined on a last-in, first-out (“LIFO”) basis. At December 31, 2022 and 2021, approximately 38 % and 36 % of total inventories, respectively, were valued using the LIFO method. Cost of other inventories is determined by costing methods that approximate a first-in, first-out (“FIFO”) basis. Refer to Note 16 to the consolidated financial statements for additional details.
Reserves are maintained for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. The reserve for excess and obsolete inventory was $ 30,164 and $ 23,087 at December 31, 2022 and 2021, respectively.
Long-lived Assets
Property, Plant and Equipment
Property, plant and equipment are stated at cost and include improvements which significantly increase capacities or extend the useful lives of existing plant and equipment. Depreciation and amortization are computed using a straight-line method over useful lives ranging from 3 years to 20 years for machinery, tools and equipment, and up to 40 years for buildings. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur.
Routine maintenance, repairs and replacements are expensed as incurred. The Company capitalizes interest costs associated with long-term construction in progress.
Property, plant and equipment, net in the Consolidated Balance Sheet is comprised of the following components:
December 31,
2022
2021
Land
$
71,446
$
67,897
Buildings
447,098
426,165
Machinery and equipment
916,870
885,718
1,435,414
1,379,780
Less accumulated depreciation
890,543
868,036
Total
$
544,871
$
511,744
Leases
The Company determines if an agreement is a lease at inception. The Company records a right-of-use asset on its Consolidated Balance Sheets to represent its right to use an underlying asset for the lease term. The Company records a lease liability on its Consolidated Balance Sheets to represent its obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at commencement date to present value the lease payments.
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The Company has operating leases for sales offices, manufacturing facilities, warehouses and distribution centers, transportation equipment, office equipment and information technology equipment. Some of these leases are noncancelable. Variable or short-term lease costs contained within the Company’s operating leases are not material. Most leases include one or more options to renew , which can extend the lease term from 1 to 11 years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases also include options to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the Company’s Consolidated Balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable long-lived assets, including right-of-use assets and finite-lived intangible 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. Refer to Notes 5, 7 and 17 to the consolidated financial statements for additional details.
Goodwill and Intangibles
Goodwill is recorded when the cost of acquired businesses exceeds the fair value of the identifiable net assets acquired. Intangible assets other than goodwill are recorded at fair value at the time acquired or at cost, if applicable. Intangible assets that do not have indefinite lives are amortized in line with the pattern in which the economic benefits of the intangible asset are consumed. If the pattern of economic benefit cannot be reliably determined, the intangible assets are amortized on a straight-line basis over the shorter of the legal or estimated life. These types of assets are assessed for impairment in a manner consistent with long-lived assets described above. Goodwill and indefinite-lived intangible assets are not amortized, but are tested for impairment in the fourth quarter using the same date each year or more frequently if changes in circumstances or the occurrence of events indicate potential impairment.
In performing the annual impairment test, the fair value of each indefinite-lived intangible asset is compared to its carrying value and an impairment charge is recorded if the carrying value exceeds the fair value. For goodwill, the Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test. The quantitative test is only required if the Company concludes that it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. The Company may also perform a quantitative test in instances where the more-likely-than-not threshold has not been met, including when general macroeconomic conditions or changes to the reporting unit warrant a refresh of the baseline used in a qualitative test. For quantitative testing, the Company compares the fair value of each reporting unit with its carrying amount. If the carrying amount exceeds the fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Fair values are determined using established business valuation techniques and models developed by the Company, estimates of market participant assumptions of future cash flows, future growth rates and discount rates to value estimated cash flows. Changes in economic and operating conditions, actual growth below the assumed market participant assumptions or an increase in the discount rate could result in an impairment charge in a future period. Refer to Note 5 to the consolidated financial statements for additional details.
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Fair Value Measurements
Financial assets and liabilities, such as the Company’s defined benefit pension plan assets and derivative contracts, are valued at fair value using the market and income valuation approaches. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The following hierarchy is used to classify the inputs that measure fair value:
Level 1
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2
Inputs to the valuation methodology include:
· Quoted prices for similar assets or liabilities in active markets;
· Quoted prices for identical or similar assets or liabilities in inactive markets;
· Inputs other than quoted prices that are observable for the asset or liability; and
· Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
If the asset or liability has a specific (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Refer to Notes 11 and 15 to the consolidated financial statements for additional details.
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract are satisfied and control is transferred to the customer. Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for goods or services. Substantially all of the Company’s sales arrangements are short-term in nature involving a single performance obligation. The Company recognizes revenue when the performance obligation is satisfied and control of the product is transferred to the customer generally based upon shipping terms. In addition, certain customized automation performance obligations are accounted for over time. Under this method, revenue recognition is primarily based upon the ratio of costs incurred to date compared with estimated total costs to complete. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses. Less than 10 % of the Company’s Net sales are recognized over time.
The Company recognizes any discounts, credits, returns, rebates and incentive programs based on reasonable estimates as a reduction of sales to arrive at Net sales at the same time the related revenue is recorded. Taxes collected by the Company, including sales tax and value added tax, are excluded from Net sales. The Company recognizes freight billed as a component of Net sales and shipping costs as a component of Cost of goods sold when control transfers to the customer. Sales commissions are expensed when incurred because the amortization period is generally one year or less. These costs are recorded within Selling, general and administrative expenses in the Company’s Consolidated Statements of Income.
The Company’s payment terms vary by the type and location of the customer and the products or services offered. The Company does not offer any payment terms that would meet the requirements for consideration as a financing component under Topic 606.
Refer to Note 2 to the consolidated financial statements for additional details.
Distribution Costs
Distribution costs, including warehousing and freight related to product shipments, are included in Cost of goods sold.
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Stock-Based Compensation
Expense is recognized for all awards of stock-based compensation by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any stock options, restricted or deferred shares or restricted stock units ultimately forfeited because the recipients fail to meet vesting requirements.
Common stock issuable upon the exercise of employee stock options is excluded from the calculation of diluted earnings per share when the calculation of option equivalent shares is anti-dilutive. Refer to Note 10 to the consolidated financial statements for additional details.
Financial Instruments
The Company uses derivative instruments to manage exposures to interest rates, commodity prices and currency exchange rate fluctuations on certain purchase and sales transactions, balance sheet and net investment exposures. Derivative contracts to hedge currency and commodity exposures are generally written on a short-term basis, but may cover exposures for up to 3 years while interest rate contracts may cover longer periods consistent with the terms of the underlying debt. The Company does not enter into derivatives for trading or speculative purposes.
All derivatives are recognized at fair value on the Company’s Consolidated Balance Sheets. The accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. The Company formally documents the relationship of the hedge with the hedged item as well as the risk-management strategy for all designated hedges. Both at inception and on an ongoing basis, the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, hedge accounting is discontinued. The cash flows from settled derivative contracts are recognized in Net cash provided by operating activities in the Company’s Consolidated Statements of Cash Flows.
The Company is subject to the credit risk of the counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. The Company manages individual counterparty exposure by monitoring the credit rating of the counterparty and the size of financial commitments and exposures between the Company and the counterparty.
Cash flow hedges
Certain foreign currency forward contracts and commodity contracts are qualified and designated as cash flow hedges. The effective portion of the fair value unrealized gain or loss on cash flow hedges are reported as a component of Accumulated other comprehensive income ("AOCI") with offsetting amounts recorded as Other current assets, Other assets, Other current liabilities or Other liabilities depending on the position and the duration of the contract. At settlement, the realized gain or loss is recorded in Cost of goods sold or Net sales for hedges of purchases and sales, respectively, in the same period or periods during which the hedged transaction affects earnings. The ineffective portion on cash flow hedges is recognized in current earnings.
In anticipation of future debt issuance associated with the Notes referenced in Note 9, the Company has interest rate forward starting swap agreements to hedge the variability of future changes in interest rates. The forward starting swap agreements were qualified and designated as a cash flow hedge. The changes in fair value are recorded as part of AOCI, and upon completion of debt issuance and termination of the swaps, are amortized to interest expense over the life of the underlying debt.
Fair value hedges
Certain interest rate swap agreements were qualified and designated as fair value hedges. The interest rate swap agreements designated as fair value hedges meet the shortcut method requirements under accounting standards for derivatives and hedging. Accordingly, changes in the fair value of these agreements are considered to exactly offset
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changes in the fair value of the underlying long-term debt. Changes in fair value are recorded in Other assets or Other liabilities with offsetting amounts recorded as a fair value adjustment to the carrying value of Long-term debt, less current portion.
Net investment hedges
For derivative instruments that qualify as a net investment hedge, the effective portion of the fair value gains or losses are recognized in AOCI with offsetting amounts recorded as Other current assets, Other assets, Other current liabilities or Other liabilities depending on the position and the duration of the contract. The gains or losses are subsequently reclassified to Selling, general and administrative expenses, as the underlying hedged investment is liquidated.
Derivatives not designated as hedging instruments
The Company has certain foreign exchange forward contracts which are not designated as hedges. These derivatives are held as hedges of certain balance sheet exposures. The gains or losses on t hese contracts are recognized in Selling, general and administrative expenses, offsetting the losses or gains on the exposures being hedged.
Refer to Note 14 to the consolidated financial statements for additional details.
Research and Development
Research and development costs are charged to Selling, general & administrative expenses as incurred and totaled $ 63,207 , $ 55,969 and $ 51,414 in 2022, 2021 and 2020, respectively.
Bonus
The Company’s discretionary employee bonus programs, which for certain U.S.-based employees are net of medical costs, are included in Selling, general & administrative expenses. Bonus costs were $ 159,281 , $ 120,686 and $ 87,407 in 2022, 2021 and 2020, respectively.
Income Taxes
Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the GAAP and income tax basis of assets and liabilities and operating loss and tax credit carry-forwards. In assessing the realizability of deferred tax assets, the Company assesses whether it is more-likely-than-not that a portion or all of the deferred tax assets will not be realized.
The Company maintains liabilities for unrecognized tax benefits related to uncertain income tax positions in various jurisdictions. The Company uses judgment in determining whether the technical merits of tax positions are more-likely-than-not to be sustained. Judgment is also used in measuring the related amount of tax benefit that qualifies for recognition, including the interpretation of applicable tax law, regulations and tax rulings.
The Company elects to treat any Global Intangible Low Taxed Income inclusion as a period expense in the year incurred.
Refer to Note 13 to the consolidated financial statements for additional details.
Acquisitions
Upon acquisition of a business, the Company uses the income, market or cost approach (or a combination thereof) for the valuation as appropriate. The valuation inputs in these models and analyses are based on market participant
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assumptions. Market participants are considered to be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability.
Fair value estimates are based on a series of judgments about future events and uncertainties and rely on estimates and assumptions. Management values property, plant and equipment using the cost approach supported where available by observable market data, which includes consideration of obsolescence. Management values acquired intangible assets using the relief from royalty method or excess earnings method, forms of the income approach supported by observable market data for peer companies. The significant assumptions used to estimate the value of the acquired intangible assets include discount rates and certain assumptions that form the basis of future cash flows (such as revenue growth rates, customer attrition rates, and royalty rates). Acquired inventories are marked to fair value. For certain items, the pre-acquisition carrying value is determined to be a reasonable approximation of fair value based on information available to the Company. Refer to Note 4 to the consolidated financial statements for additional details.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates.
New Accounting Pronouncements
The following section provides a description of new Accounting Standards Updates (“ASU”) issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company.
The following ASUs were adopted as of January 1, 2022 and did not have a significant financial impact on the Company’s consolidated financial statements unless otherwise described within the table below:
Standard
Description
ASU No. 2022-06, Reference Rate Reform (Topic 848) , issued December 2022.
The U.S. dollar LIBOR rates will no longer be published and regulators have identified alternative reference rates that are more observable or transparent-based and less susceptible to manipulation. This ASU provides optional relief in accounting for the impact of reference rate reform by deferring the sunset date of Topic 848 from December 31, 2022 to December 31, 2024.
The Company is currently evaluating the impact on its financial statements of the following ASUs:
Standard
Description
ASU No. 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50) , issued September 2022.
Requires disclosure about a company’s supplier finance program, including key terms, amount outstanding, assets pledged as applicable, presentation on the balance sheet and a period-over-period balance roll forward. Except for the roll forward requirement, the ASU is effective for interim and annual periods beginning January 1, 2023 and should be applied retrospectively. The roll forward requirement is effective January 1, 2024 and should be applied prospectively. Early adoption of the roll forward requirement is permitted.
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NOTE 2 — REVENUE RECOGNITION
The following table presents the Company’s Net sales disaggregated by product line:
Year Ended December 31,
2022
2021
2020
Consumables
$
2,183,019
$
1,856,880
$
1,509,509
Equipment
1,578,192
1,377,300
1,145,891
Net sales
$
3,761,211
$
3,234,180
$
2,655,400
Consumable sales consist of brazing and soldering filler metals. Equipment sales consist of arc welding, welding accessories, arc welding equipment, wire feeding systems, fume control equipment, plasma and oxy-fuel cutting systems, specialty gas regulators, and education solutions; as well as a comprehensive portfolio of automated solutions for joining, cutting, material handling, module assembly, and end of line testing. Consumable and Equipment products are sold within each of the Company’s operating segments.
Within the Equipment product line, there are certain customer contracts related to automation products that may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines the standalone selling price based on the prices charged to customers or using expected cost plus margin.
At December 31, 2022, the Company recorded $ 78,756 related to advance customer payments and $ 34,771 related to billings in excess of revenue recognized. These contract liabilities are included in Other current liabilities in the Consolidated Balance Sheets. At December 31, 2021, the balances related to advance customer payments and billings in excess of revenue recognized were $ 72,047 and $ 40,450 , respectively. Substantially all of the Company’s contract liabilities are recognized within twelve months based on contract duration. The Company records an asset for contracts where it has recognized revenue, but has not yet invoiced the customer for goods or services. At December 31, 2022 and 2021, $ 35,252 and $ 25,300 , respectively, related to these future customer receivables was included in Other current assets in the Consolidated Balance Sheets. Contract asset amounts are expected to be billed within the next twelve months.
NOTE 3 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31,
2022
2021
2020
Numerator:
Net income
$
472,224
$
276,466
$
206,115
Denominator (shares in 000's):
Basic weighted average shares outstanding
58,030
59,309
59,633
Effect of dilutive securities - Stock options and awards
719
753
615
Diluted weighted average shares outstanding
58,749
60,062
60,248
Basic earnings per share
$
8.14
$
4.66
$
3.46
Diluted earnings per share
$
8.04
$
4.60
$
3.42
For the years ended December 31, 2022, 2021 and 2020, common shares subject to equity-based awards of 127,358 , 2,949 and 615,302 , respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
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NOTE 4 – ACQUISITIONS
On December 1, 2022, the Company acquired 100 % ownership of Fori Automation, LLC (“Fori”) for an agreed upon purchase price of $ 427,000 , which was adjusted for certain debt like obligations, for total purchase price consideration of $ 465,598 or $ 413,268 net of cash acquired. Fori is a leading designer and manufacturer of complex, multi-armed automated welding systems, with an extensive range of automated assembly systems, automated material handling solutions, automated large-scale, industrial guidance vehicles, and end of line testing systems. The acquisition of Fori will extend the Company’s market presence within the automotive sector as well as its automation footprint in the International Welding segment. In 2022, Fori generated sales of approximately $ 200,000 (unaudited).
The acquisition of Fori has been accounted for as a business combination which requires the assets and liabilities assumed be recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date. These preliminary estimates are based on available information and may be revised during the measurement period, not to exceed 12 months from the acquisition date, as third-party valuations are finalized, further information becomes available and additional analyses are performed. The Company does not expect any such revisions to have a material impact on the Company's preliminary purchase price allocation. The preliminary purchase price allocation is expected to be finalized within the allowable measurement period.
Assets Acquired and Liabilities Assumed
Preliminary Purchase Price Allocation
Cash and cash equivalents
$
52,330
Accounts receivable
64,654
Inventory
63,304
Property, plant and equipment (1)
36,863
Intangible assets (2)
69,850
Accounts payable
17,996
Net other assets and liabilities (3)
196,593
Total purchase price consideration
$
465,598
(1)
Property, plant and equipment acquired includes a number of manufacturing and distribution sites, including the related facilities, land and leased sites, and machinery and equipment for use in manufacturing operations.
(2)
Intangible asset balances of $ 22,000 and $ 18,700 , respectively, were assigned to trade names and customer relationships ( 15 year weighted average useful life). Of the remaining amount, $ 24,900 was assigned to technology know-how ( 10 year weighted average useful life) and $ 4,250 was assigned to restrictive covenants ( 4 year weighted average life).
(3)
Consists primarily of goodwill of $ 237,445 .
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Fori. A portion of the goodwill is deductible for tax purposes. See Note 5 for additional information about goodwill and other intangible assets.
Acquisition-related transaction costs totaled $ 6,003 in 2022. These costs were expensed as incurred and are included in “Selling, general, and administrative expenses” in the Consolidated Statements of Income.
On March 1, 2022, the Company acquired 100 % ownership of Kestra Universal Soldas, Industria e Comercio, Imporacao e Exportacao Ltda. (“Kestra”), a privately held manufacturer headquartered in Atibaia, Sao Paulo State, Brazil. The net purchase price was $ 22,294 , net of cash acquired and accounted for as a business combination. In 2021, Kestra generated sales of approximately $ 15,000 (unaudited). Beginning March 1, 2022, the Company’s Consolidated Statements of Income include the results of Kestra, including Net sales of $ 17,602 through December 31, 2022 and the impact on net income for the year ended December 31, 2022 was not material. Kestra manufactures and provides
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specialty welding consumables, wear plates and maintenance and repair services for alloy and wear-resistant products commonly used in mining, steel, agricultural and industrial mill applications. The acquisition broadens the Company’s specialty alloys portfolio and services.
On July 28, 2021, the Company acquired 100 % ownership of Overstreet-Hughes Company, Inc. and Shoals Tubular, Inc. (“FTP”). The net purchase price was $ 71,716 , net of cash acquired and accounted for as a business combination. The Company recognized $ 346 in acquisition transaction costs in 2021 which were expensed as incurred and are included in “Selling, general, and administrative expenses” in the Consolidated Statements of Income. In 2020, FTP generated sales of approximately $ 50,000 (unaudited). Beginning July 28, 2021, the Company’s Consolidated Statements of Income include the results of FTP, including Net sales of $ 24,953 through December 31, 2021 and the impact on net income for the year ended December 31, 2021 was not material. FTP manufactures copper and aluminum headers, distributor assemblies and manifolds in the United States and Mexico for the heating, ventilation, and air conditioning sector (“HVAC”). The acquisition further differentiated The Harris Products Group’s competitive position serving HVAC original equipment manufacturers with a comprehensive portfolio of solutions for the fabrication of HVAC coils and accelerates growth in this market.
On April 1, 2021, the Company acquired 100 % ownership of Zeman Bauelemente Produktionsgesellschaft m.b.H. (“Zeman"), a division of the Zeman Group. The net purchase price was $ 84,390 , net of cash acquired and accounted for as a business combination. The Company recognized $ 1,577 in acquisition transaction costs in 2021, which were expensed as incurred and are included in “Selling, general, and administrative expenses” in the Consolidated Statements of Income. In 2020, Zeman generated sales of approximately $ 40,000 (unaudited). Beginning April 1, 2021, the Company’s Consolidated Statements of Income include the results of Zeman, including Net sales of $ 24,473 through December 31, 2021 and the impact on net income for the year ended December 31, 2021 was not material. Zeman, based in Vienna, Austria, is a leading designer and manufacturer of robotic assembly and arc welding systems that automate the tacking and welding of steel beams. The acquisition expanded the Company’s international automation capabilities to serve customers in the structural steel and infrastructure sectors.
The acquired companies discussed above are not material individually, or in the aggregate, to the actual or pro forma Consolidated Statements of Income or Consolidated Statements of Cash Flows; as such, pro forma information related to these acquisitions have not been presented.
NOTE 5 – GOODWILL AND INTANGIBLES
The changes in the carrying amount of goodwill by reportable segments for the years ended December 31, 2022 and 2021 were as follows:
The Harris
Americas
International
Products
Welding
Welding
Group
Consolidated
Balance as of December 31, 2020
$
279,810
$
39,060
$
16,723
$
335,593
Additions and adjustments (1)
—
77,317
26,519
103,836
Foreign currency translation
173
( 9,284 )
( 156 )
( 9,267 )
Balance as of December 31, 2021
279,983
107,093
43,086
430,162
Additions and adjustments (2)
215,617
31,288
( 159 )
246,746
Foreign currency translation
( 3,413 )
( 8,462 )
224
( 11,651 )
Balance as of December 31, 2022
$
492,187
$
129,919
$
43,151
$
665,257
(1) Additions to International Welding reflect goodwill recognized in the acquisition of Zeman in 2021. Additions to The Harris Products Group reflect goodwill recognized in the acquisition of FTP in 2021.
(2) Additions to Americas Welding reflect goodwill recognized in the acquisition of Fori and Kestra in 2022. International Welding reflect goodwill recognized in the acquisition of Fori in 2022.
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Gross carrying values and accumulated amortization of intangible assets other than goodwill by asset class were as follows:
December 31, 2022
December 31, 2021
Gross
Accumulated
Gross
Accumulated
Amount
Amortization
Amount
Amortization
Intangible assets not subject to amortization
Trademarks and trade names
$
15,963
$
15,828
Intangible assets subject to amortization
Trademarks and trade names
$
93,424
$
47,969
$
72,755
$
44,623
Customer relationships
170,231
95,385
154,634
92,404
Patents
23,603
15,113
24,734
15,058
Other
112,404
54,452
83,223
49,696
Total intangible assets subject to amortization
$
399,662
$
212,919
$
335,346
$
201,781
During 2022, the Company acquired intangible assets either individually or as part of a group of assets, with an initial purchase price allocation and weighted-average as follows:
Year Ended December 31, 2022
Purchase Price
Weighted
Allocation
Average Life
Acquired intangible assets subject to amortization
Trademarks and trade names
$
23,770
13
Customer relationships
24,243
13
Other
30,661
9
Total acquired intangible assets subject to amortization
$
78,674
Aggregate amortization expense was $ 21,908 , $ 21,155 and $ 20,363 for 2022, 2021 and 2020, respectively. During 2020 and 2022, the Company determined that for certain intangible assets, the carrying value of the assets exceeded the fair value resulting in an impairment. The Company recognized non-cash impairment charges of $ 1,018 and $ 45,468 in 2022 and 2020, respectively, which are recorded in Rationalization and asset impairment charges in the Company’s Consolidated Statements of Income. During 2022, the Company Estimated annual amortization expense for intangible assets for each of the next five years is $ 25,327 in 2023, $ 23,728 in 2024, $ 22,823 in 2025, $ 21,372 in 2026 and $ 19,302 in 2027.
NOTE 6 – SEGMENT INFORMATION
The Company’s primary business is the design, development and manufacture of arc welding products, automated joining, assembly and cutting systems, plasma and oxy-fuel cutting equipment. The Company also has a leading global position in brazing and soldering alloys.
The Company’s products include arc welding, brazing and soldering filler metals (consumables), arc welding equipment, plasma and oxyfuel cutting systems, wire feeding systems, fume control equipment, welding accessories, specialty gas regulators, and education solutions; as well as a comprehensive portfolio of automated solutions for joining, cutting, material handling, module assembly, and end of line testing.
The Company has aligned its organizational and leadership structure into three operating segments to support growth strategies and enhance the utilization of the Company’s worldwide resources and global sourcing initiatives. The operating segments consist of Americas Welding, International Welding and The Harris Products Group. The Americas Welding segment includes welding operations in North and South America. The International Welding segment includes welding operations in Europe, Africa, Asia and Australia. The Harris Products Group includes the Company’s global cutting, soldering and brazing businesses, specialty gas equipment, as well as its retail business in the United States.
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Segment performance is measured and resources are allocated based on a number of factors, the primary measure being the adjusted earnings before interest and income taxes ("Adjusted EBIT") profit measure. EBIT is defined as Operating income plus Equity earnings in affiliates and Other income. Segment EBIT is adjusted for special items as determined by management such as the impact of rationalization activities, certain asset impairment charges and gains or losses on disposals of assets. The accounting principles applied at the operating segment level are generally the same as those applied at the consolidated financial statement level with the exception of LIFO. Segment assets include inventories measured on a FIFO basis while consolidated inventories include inventories reported on a LIFO basis. Segment and consolidated income before interest and income taxes include the effect of inventories reported on a LIFO basis. At December 31, 2022, 2021 and 2020 approximately 38 %, 36 % and 35 %, respectively, of total inventories were valued using the LIFO method. LIFO is used for a substantial portion of U.S. inventories included in Americas Welding. Inter-segment sales are recorded at agreed upon prices that approximate arm’s length prices and are eliminated in consolidation. Corporate-level expenses are allocated to the operating segments.
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Financial information for the reportable segments follows:
The Harris
Americas
International
Products
Corporate /
Welding (1)
Welding (2)
Group (3)
Eliminations (4)
Consolidated
For the Year Ended December 31, 2022
Net sales
$
2,288,934
$
954,281
$
517,996
$
—
$
3,761,211
Inter-segment sales
122,019
31,503
11,040
( 164,562 )
—
Total
$
2,410,953
$
985,784
$
529,036
$
( 164,562 )
$
3,761,211
Adjusted EBIT
$
462,819
$
120,157
$
64,008
$
( 10,033 )
$
636,951
Special items charge (gain)
( 3,060 )
11,681
—
6,003
14,624
EBIT
$
465,879
$
108,476
$
64,008
$
( 16,036 )
$
622,327
Interest income
1,607
Interest expense
( 31,107 )
Income before income taxes
$
592,827
Total assets
$
2,122,729
$
994,905
$
361,989
$
( 299,077 )
$
3,180,546
Equity investments in affiliates
5,101
—
—
—
5,101
Capital expenditures
43,003
17,955
10,925
—
71,883
Depreciation and amortization
47,291
20,949
9,819
—
78,059
For the Year Ended December 31, 2021
Net sales
$
1,824,481
$
948,125
$
461,574
$
—
$
3,234,180
Inter-segment sales
140,650
26,331
8,096
( 175,077 )
—
Total
$
1,965,131
$
974,456
$
469,670
$
( 175,077 )
$
3,234,180
Adjusted EBIT
$
329,016
$
106,208
$
68,447
$
( 12,403 )
$
491,268
Special items charge (gain)
123,114
15,234
3,785
1,923
144,056
EBIT
$
205,902
$
90,974
$
64,662
$
( 14,326 )
$
347,212
Interest income
1,567
Interest expense
( 23,781 )
Income before income taxes
$
324,998
Total assets
$
1,521,083
$
938,061
$
330,678
$
( 197,515 )
$
2,592,307
Equity investments in affiliates
5,181
—
—
—
5,181
Capital expenditures
37,717
16,916
7,898
—
62,531
Depreciation and amortization
49,510
24,998
6,795
( 157 )
81,146
For the Year Ended December 31, 2020
Net sales
$
1,509,870
$
786,809
$
358,721
$
—
$
2,655,400
Inter-segment sales
109,378
18,494
7,034
( 134,906 )
—
Total
$
1,619,248
$
805,303
$
365,755
$
( 134,906 )
$
2,655,400
Adjusted EBIT
$
245,728
$
44,979
$
55,154
$
( 5,455 )
$
340,406
Special items charge
34,989
19,404
—
—
54,393
EBIT
$
210,739
$
25,575
$
55,154
$
( 5,455 )
$
286,013
Interest income
1,986
Interest expense
( 23,959 )
Income before income taxes
$
264,040
Total assets
$
1,423,393
$
807,407
$
225,959
$
( 142,306 )
$
2,314,453
Equity investments in affiliates
4,682
—
—
—
4,682
Capital expenditures
30,811
21,819
6,571
—
59,201
Depreciation and amortization
51,744
23,859
4,982
( 93 )
80,492
(1) 2022 special items reflect Rationalization and asset impairment gains of $ 431 , final settlement gains related to the termination of a pension plan of $ 3,735 and amortization of step up in value of acquired inventories of $ 1,106 .
2021 special items reflect pension settlement charges of $ 123,091 .
2020 special items reflect Rationalization and asset impairment charges of $ 26,870 and pension settlement charges of $ 8,119
(2) 2022 special items reflect Rationalization and asset impairment charges of $ 11,681 .
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2021 special items reflect Rationalization and asset impairment charges of $ 9,804 , pension settlement charges of $ 446 and amortization of step up in value of acquired inventories of $ 4,984 .
2020 special items reflect Rationalization and asset impairment charges of $ 18,598 and amortization of step up in value of acquired inventories of $ 806 .
(3) 2021 special items reflect pension settlement charges of $ 2,965 and amortization of step up in value of acquired inventories of $ 820 .
(4) 2022 special items reflect acquisition transaction and integration costs of $ 6,003 related acquisitions as discussed in Note 4 to the consolidated financial statements.
2021 special items reflect acquisition transaction and integration costs of $ 1,923 related acquisitions as discussed in Note 4 to the consolidated financial statements.
Export sales (excluding inter-company sales) from the United States were $ 173,033 in 2022, $ 149,110 in 2021 and $ 132,637 in 2020. No individual customer comprised more than 10% of the Company’s total revenues for any of the three years ended December 31, 2022.
The geographic split of the Company’s Net sales, based on the location of the customer, and property, plant and equipment were as follows:
Year Ended December 31,
2022
2021
2020
Net sales:
United States
$
2,128,457
$
1,726,498
$
1,431,859
Foreign countries
1,632,754
1,507,682
1,223,541
Total
$
3,761,211
$
3,234,180
$
2,655,400
December 31,
2022
2021
2020
Property, plant and equipment, net:
United States
$
267,654
$
262,247
$
247,931
Foreign countries
277,217
249,497
274,214
Eliminations
—
—
( 53 )
Total
$
544,871
$
511,744
$
522,092
NOTE 7 – RATIONALIZATION AND ASSET IMPAIRMENTS
During 2020 and 2021, the Company initiated rationalization plans within the Americas Welding and International Welding segments. The plans include headcount restructuring and the consolidation of manufacturing facilities to better align the cost structure with economic conditions and operating needs. At December 31, 2022, liabilities of $ 2,207 for International Welding were recognized in Other current liabilities in the Company's Consolidated Balance Sheet. The Company does not anticipate significant additional charges related to the completion of these plans.
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The Company recorded rationalization and asset impairment net charges of $ 11,788 , $ 9,827 and $ 45,468 for the years ended December 31, 2022, 2021 and 2020, respectively, related to these plans. The charges are primarily related to employee severance, asset impairments and gains or losses on the disposal of assets.
The Company believes the rationalization actions will positively impact future results of operations and will not have a material effect on liquidity and sources and uses of capital. The Company continues to evaluate its cost structure and additional rationalization actions may result in charges in future periods.
The following table summarizes the activity related to the rationalization liabilities:
International
Welding
Consolidated
Balance at December 31, 2020
$
13,597
$
13,622
Payments and other adjustments
( 21,488 )
( 21,513 )
Charged to expense
10,881
10,881
Balance at December 31, 2021
$
2,990
$
2,990
Payments and other adjustments
( 4,471 )
( 4,471 )
Charged to expense
3,688
3,688
Balance at December 31, 2022
$
2,207
$
2,207
NOTE 8 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI")
The following tables set forth the total changes in accumulated other comprehensive income (loss) ("AOCI") by component, net of taxes:
Year Ended December 31, 2022
Unrealized gain
(loss) on derivatives
designated and
Defined benefit
Currency
qualifying as cash
pension plan
translation
flow hedges
activity
adjustment
Total
Balance at December 31, 2020
$
2,487
$
( 101,770 )
$
( 202,907 )
$
( 302,190 )
Other comprehensive income (loss) before reclassification
6,753
6,279
( 49,342 )
3
( 36,310 )
Amounts reclassified from AOCI
( 1,146 )
1
82,260
2
—
81,114
Net current-period other comprehensive income (loss)
5,607
88,539
( 49,342 )
44,804
Balance at December 31, 2021
$
8,094
$
( 13,231 )
$
( 252,249 )
$
( 257,386 )
Other comprehensive income (loss) before reclassification
7,866
13,911
( 35,178 )
3, 4
( 13,401 )
Amounts reclassified from AOCI
( 2,051 )
1
( 2,461 )
2
—
( 4,512 )
Net current-period other comprehensive income (loss)
5,815
11,450
( 35,178 )
( 17,913 )
Balance at December 31, 2022
$
13,909
$
( 1,781 )
$
( 287,427 )
$
( 275,299 )
(1) During 2022, this AOCI reclassification is a component of Net sales of $ 665 (net of tax of $ 297 ) and Cost of goods sold of $( 1,386 ) (net of tax of $( 351 ) ); during 2021, the reclassification is a component of Net sales of $ 1,553 (net of tax of $ 671 ) and Cost of goods sold of $ 407 (net of tax of $ 179 ). Refer to Note 14 to the consolidated financial statements for additional details.
(2) This AOCI component is included in the computation of net periodic pension costs (net of tax of $( 476 ) and $ 46,609 during the years ended December 31, 2022 and 2021, respectively). Refer to Note 11 to the consolidated financial statements for additional details.
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(3) The Other comprehensive income before reclassifications excludes $ 94 and $( 403 ) attributable to Non-controlling interests in the years ended December 31, 2022 and 2021, respectively. The reclassified AOCI component is included in the computation of Non-controlling interests. Refer to the Consolidated Statements of Equity for additional details.
(4) Includes a gain of $ 9,440 from derivatives designated as net investment hedges.
NOTE 9 – DEBT
At December 31, 2022 and 2021, debt consisted of the following:
December 31,
2022
2021
Long-term debt
Senior Unsecured Notes due through 2045, interest at 2.8 % to 4.0 % (net of debt issuance costs of $ 1,585 and $ 1,074 at December 31, 2022 and 2021, respectively)
$
703,124
$
704,313
Term Loan due through 2025
400,000
—
Other borrowings due through 2030, interest up to 16.0 %
18,311
13,542
1,121,435
717,855
Less current portion
11,039
766
Long-term debt, less current portion
1,110,396
717,089
Short-term debt
Amounts due banks, weighted average interest at 4.0 % in 2022 and 1.8 % in 2021
82,444
51,964
Current portion long-term debt
11,039
766
Total short-term debt
93,483
52,730
Total debt
$
1,203,879
$
769,819
At December 31, 2022 and 2021, the fair value of long-term debt, including the current portion, was approximately $ 1,009,020 and $ 776,655 , respectively, which was determined using available market information and methodologies requiring judgment. The carrying value of this debt at such dates was $ 1,121,435 and $ 717,855 , respectively. Since 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 and October 20, 2016, the Company entered into separate Note Purchase Agreements pursuant to which it issued senior unsecured notes (the "Notes") through a private placement. Interest on the Notes is paid semi-annually. The proceeds of the Notes were used for general corporate purposes. The Notes contain certain affirmative and negative covenants. As of December 31, 2022, the Company was in compliance with all of its debt covenants relating to the Notes.
The maturity and interest rates of the 2015 Notes and 2016 Notes are as follows:
Amount
Maturity Date
Interest Rate
2015 Notes
Series A
$
100,000
August 20, 2025
3.15
%
Series B
100,000
August 20, 2030
3.35
%
Series C
50,000
April 1, 2035
3.61
%
Series D
100,000
April 1, 2045
4.02
%
2016 Notes
Series A
$
100,000
October 20, 2028
2.75
%
Series B
100,000
October 20, 2033
3.03
%
Series C
100,000
October 20, 2037
3.27
%
Series D
50,000
October 20, 2041
3.52
%
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The Company’s total weighted average effective interest rate and remaining weighted average term, inclusive of the 2015 Notes and 2016 Notes, is 3.3 % and 11.4 years, respectively.
Revolving Credit Agreement
On April 23, 2021, the Company amended and restated the agreement governing its line of credit by entering into the Second Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement has a line of credit totaling $ 500,000 , has a term of 5 years with a maturity date of April 23, 2026 and may be increased, subject to certain conditions including the consent of its lenders, by an additional amount up to $ 150,000 . The interest rate on borrowings is based on LIBOR plus a spread based on the Company’s net leverage ratio. The Credit Agreement contains customary representations and warranties, as well as customary affirmative, negative and financial covenants for credit facilities of this type (subject to negotiated baskets and exceptions), including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates. As of December 31, 2022, the Company was in compliance with all of its covenants and had $ 45,000 of outstanding borrowings under the Credit Agreement .
The Company has other lines of credit and debt agreements totaling $ 92,078 . As of December 31, 2022 the Company was in compliance with all of its covenants and had $ 37,444 outstanding at December 31, 2022.
Shelf Agreements
On November 27, 2018, the Company entered into seven uncommitted master note facilities (the "Shelf Agreements") that allow borrowings up to $ 700,000 in the aggregate. The Shelf Agreements have a term of 5 years and the average life of borrowings cannot exceed 15 years . The Company is required to comply with covenants similar to those contained in the 2015 Notes and 2016 Notes. As of December 31, 2022, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements.
Term Loan
On November 29, 2022, the Company entered into a term loan in the aggregate principal amount of $ 400,000 (the “Term Loan”), which was borrowed in full. The Term Loan matures on November 29, 2025. The Term Loan bears an interest at a rate based on SOFR, plus a margin ranging from 0.75 % to 1.75 % based on the Company’s consolidated net leverage ratio. The proceeds of the Term Loan were used to pay a portion of the purchase price in connection with the acquisition of Fori.
The agreement governing the Term Loan (the “Term Loan Credit Agreement”) contains representations and warranties, as well as 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 and transactions with affiliates. The Term Loan Credit Agreement requires the Company to maintain a minimum consolidated fixed charges coverage ratio and maximum consolidated net leverage ratio. As of December 31, 2022, the Company was in compliance with all of its covenants.
Other
Maturities of long-term debt, including payments for amounts due banks, for the five years succeeding December 31, 2022 are $ 93,483 in 2023, $ 5 in 2024, $ 507,292 in 2025, $ 0 in 2026, $ 0 in 2027 and $ 600,000 thereafter. Total interest paid was $ 23,547 in 2022, $ 23,752 in 2021 and $ 26,332 in 2020. The difference between interest paid and interest expense is due to the accrual of interest associated with the Senior Unsecured Notes and interest rate derivative contracts discussed in Note 14 to the consolidated financial statements.
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NOTE 10 – STOCK PLANS
On April 23, 2015, the shareholders of the Company approved the 2015 Equity and Incentive Compensation Plan ("Employee 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"). 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, 2022, there were 1,381,427 common shares available for future grant under all plans.
Stock Options
The following table summarizes stock option activity for the year ended December 31, 2022 under all Plans:
Weighted
Average
Number of
Exercise
Options
Price
Balance at beginning of year
1,068,224
$
86.28
Options granted
145,213
128.19
Options exercised
( 94,234 )
75.16
Options canceled
( 591 )
47.91
Options forfeited
( 1,253 )
89.63
Balance at end of year
1,117,359
93.31
Exercisable at end of year
800,353
84.22
Options granted under both the Employee Plan and its predecessor plans may be outstanding for a maximum of 10 years from the date of grant. The majority of options granted vest ratably over a period of 3 years from the grant date. The exercise prices of all options were equal to the quoted market price of the Company’s common shares at the date of grant. The Company issued shares of common stock from treasury upon all exercises of stock options in 2022. In 2022, all options issued were under the Employee Plan.
The Company uses the Black-Scholes option pricing model for estimating fair values of options. In estimating the fair value of options granted, the expected option life is based on the Company’s historical experience. The expected volatility is based on historical volatility. The weighted average assumptions for each of the three years ended December 31 were as follows:
2022
2021
2020
Expected volatility
27.14
%
28.01
%
25.80
%
Dividend yield
1.84
%
2.17
%
2.51
%
Risk-free interest rate
1.94
%
0.55
%
1.41
%
Expected option life (years)
4.7
4.7
4.6
Weighted average fair value per option granted during the year
$
27.42
$
21.70
$
15.97
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The following table summarizes non-vested stock options for the year ended December 31, 2022:
Weighted Average
Number of
Fair Value at
Options
Grant Date
Balance at beginning of year
341,253
$
19.11
Granted
145,213
27.42
Vested
( 167,616 )
18.41
Canceled
( 591 )
15.91
Forfeited
( 1,253 )
15.97
Balance at end of year
317,006
13.93
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, 2022 was $ 58,282 and $ 49,024 , respectively. The total intrinsic value of awards exercised during 2022, 2021 and 2020 was $ 7,082 , $ 20,442 and $ 13,269 , respectively. The total fair value of options that vested during 2022, 2021 and 2020 was $ 3,086 , $ 2,983 and $ 3,564 , respectively.
The following table summarizes information about awards outstanding as of December 31, 2022:
Outstanding
Exercisable
Weighted
Weighted
Weighted
Weighted
Number of
Average
Average
Number of
Average
Average
Stock
Exercise
Remaining
Stock
Exercise
Remaining
Exercise Price Range
Options
Price
Life (years)
Options
Price
Life (years)
Under $ 49.99
—
$
—
—
—
$
—
—
$ 50.00 - $ 59.99
119,681
58.13
3.10
119,681
58.13
3.10
Over $ 60.00
997,678
97.53
6.30
680,672
88.80
5.40
1,117,359
6.00
800,353
5.00
Restricted Stock Units ("RSUs") and Performance Share Units ("PSUs")
The following table summarizes RSU and PSU activity for the year ended December 31, 2022 under all Plans:
Weighted
Average
Number of
Grant Date
Units
Fair Value
Balance at beginning of year
403,826
$
98.65
Units granted
139,733
129.75
Units vested
( 140,013 )
91.70
Units forfeited
( 12,474 )
109.59
Balance at end of year
391,072
111.90
RSUs are valued at the quoted market price on the grant date. The majority of RSUs vest over a period of 3 years . The Company issues shares of common stock from treasury upon the vesting of RSUs and any earned dividend equivalents. Conversion of 24,404 RSUs and PSUs to common shares in 2022 were deferred as part of the 2005 Deferred Compensation Plan for Executives (the "2005 Plan"). As of December 31, 2022, 130,674 RSUs and PSUs, including related dividend equivalents, have been deferred under the 2005 Plan. These units are reflected within dilutive shares in the calculation of earnings per share. In 2022, 106,170 RSUs were issued under the Employee Plan and the 2015 Director Plan. The remaining weighted average vesting period of all non-vested RSUs is 1.2 years as of December 31, 2022.
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PSUs are valued at the quoted market price on the grant date. PSUs vest over a period of 3 years and are based on the Company’s performance relative to pre-established performance goals. The Company issues common stock from treasury upon the vesting of PSUs and any earned dividend equivalents. In 2022, the Company issued 33,563 PSU’s and has 86,892 PSUs outstanding under the Employee Plan at a weighted average fair value of $ 110.93 per share. The remaining weighted average vesting period of all non-vested PSUs is 1.1 years as of December 31, 2022.
Stock-Based Compensation Expense
Expense is recognized for all awards of stock-based compensation by allocating the aggregate grant date fair value over the vesting period. No expense is recognized for any stock options, restricted or deferred shares, RSUs or PSUs ultimately forfeited because recipients fail to meet vesting requirements. Total stock-based compensation expense recognized in the Consolidated Statements of Income for 2022, 2021 and 2020 was $ 25,276 , $ 23,787 and $ 15,388 , respectively. The related tax benefit for 2022, 2021 and 2020 was $ 6,363 , $ 5,988 and $ 3,874 , respectively. As of December 31, 2022, total unrecognized stock-based compensation expense related to non-vested stock options, RSUs and PSUs was $ 17,610 , which is expected to be recognized over a weighted average period of approximately 1.3 years.
Lincoln Stock Purchase Plan
The 1995 Lincoln Stock Purchase Plan provides employees the ability to purchase open market shares on a commission-free basis up to a limit of ten thousand dollars annually. Under this plan, 800,000 shares have been authorized to be purchased. There were no shares purchased in 2022, 9,070 in 2021 and 13,667 in 2020.
NOTE 11 – RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS
The Company maintains a number of defined benefit and defined contribution plans to provide retirement benefits for employees. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974 ("ERISA"), local statutory law or as determined by the Board of Directors. The plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for a domestic non-qualified pension plan for certain key employees and certain foreign plans. The Company uses a December 31 measurement date for its plans.
The Company does not have, and does not provide for, any postretirement or postemployment benefits other than pensions and certain non-U.S. statutory termination benefits.
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Defined Benefit Plans
Contributions are made in amounts sufficient to fund current service costs on a current basis and to fund past service costs, if any, over various amortization periods.
Obligations and Funded Status
December 31,
2022
2021
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
plans
pension plans
plans
pension plans
Change in benefit obligations
Benefit obligations at beginning of year
$
10,930
$
164,005
$
557,946
$
190,141
Service cost
199
1,077
194
1,413
Interest cost
262
2,644
8,926
2,567
Plan participants' contributions
—
54
—
84
Acquisitions & other adjustments
2,689
( 341 )
—
( 115 )
Actuarial (gain) loss (1)
( 4,706 )
( 30,229 )
( 7,774 )
( 10,759 )
Benefits paid
—
( 7,066 )
( 10,118 )
( 9,586 )
Settlements/curtailments (2)
—
( 398 )
( 538,244 )
( 4,466 )
Currency translation
—
( 11,257 )
—
( 5,274 )
Benefit obligations at end of year
9,374
118,489
10,930
164,005
Change in plan assets
Fair value of plan assets at beginning of year
68,458
114,557
618,024
117,058
Actual return on plan assets
59
( 16,319 )
( 2,058 )
4,694
Employer contributions
—
1,634
—
2,097
Plan participants' contributions
—
54
—
84
Acquisitions & other adjustments
( 68,517 )
( 195 )
—
—
Benefits paid
—
( 4,757 )
( 9,264 )
( 6,864 )
Settlements (2)
—
—
( 538,244 )
( 1,072 )
Currency translation
—
( 8,431 )
—
( 1,440 )
Fair value of plan assets at end of year
—
86,543
68,458
114,557
Funded status at end of year
( 9,374 )
( 31,946 )
57,528
( 49,448 )
Unrecognized actuarial net loss
1,734
2,073
2,897
13,274
Unrecognized prior service cost
—
( 73 )
—
( 23 )
Unrecognized transition assets, net
—
25
—
25
Net amount recognized
$
( 7,640 )
$
( 29,921 )
$
60,425
$
( 36,172 )
(1) Actuarial gains in 2022 were primarily the result of an increase in the Company’s pension plan discount rates.
(2) Settlements in 2022 and 2021 resulting from lump sum pension payments and the purchase of a group annuity contract in October 2021 related to the termination of a pension plan.
The after-tax amounts of unrecognized actuarial net loss, prior service costs and transition assets included in Accumulated other comprehensive loss at December 31, 2022 were $ 1,815 , $( 51 ) and $ 17 , respectively. The actuarial loss represents changes in the estimated obligation not yet recognized in the Consolidated Income Statement.
In March 2020, the Company approved an amendment to terminate the Lincoln Electric Company Retirement Annuity Program (“RAP”) plan effective as of December 31, 2020. The Company provided notice to participants of the intent to terminate the plan and applied and received a determination letter. During 2021, pension obligations were distributed through a combination of lump sum payments to eligible plan participants and through the purchase of a group annuity
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contract in October 2021. The lump sum payments and annuity purchase resulted in pre-tax settlement charges of $ 126,056 in the twelve months ended December 31, 2021. The remaining surplus assets of $ 68,458 at December 31, 2021 were transferred to a suspense account in January 2022 and are being used to fund employer matching contributions in the Company’s Savings Plan. The surplus assets as of December 31, 2022 were $ 56,418 and are recorded in Other current assets and Other assets in the Company’s Consolidated Balance Sheets.
Amounts Recognized in Consolidated Balance Sheets
December 31,
2022
2021
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
plans
Pension plans
plans
pension plans
Prepaid pensions (1)
$
—
$
1,603
$
68,458
$
2,425
Accrued pension liability, current (2)
( 2,403 )
( 523 )
( 690 )
( 2,546 )
Accrued pension liability, long-term (3)
( 6,971 )
( 33,026 )
( 10,240 )
( 49,327 )
Accumulated other comprehensive loss, excluding tax effects
1,734
2,025
2,897
13,276
Net amount recognized in the balance sheets
$
( 7,640 )
$
( 29,921 )
$
60,425
$
( 36,172 )
(1) Included in Other assets. In 2021, U.S. pension plans include $ 9,776 in Other current assets and $ 58,682 in Other assets.
(2) Included in Other current liabilities.
(3) Included in Other liabilities.
Components of Pension Cost for Defined Benefit Plans
Year Ended December 31,
2022
2021
2020
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
plans
pension plans
plans
pension plans
plans
pension plans
Service cost
$
199
$
1,077
$
194
$
1,413
$
156
$
3,140
Interest cost
262
2,644
8,926
2,567
14,670
2,755
Expected return on plan assets
—
( 3,525 )
( 13,050 )
( 3,990 )
( 23,377 )
( 4,217 )
Amortization of prior service cost
—
—
—
8
—
57
Amortization of net loss
132
299
1,966
882
1,346
1,986
Settlement and curtailment charges (gains) (1)
( 3,735 )
367
126,055
( 42 )
8,118
237
Defined benefit plans
$
( 3,142 )
$
862
$
124,091
$
838
$
913
$
3,958
(1) Pension settlement net charges resulting from lump sum pension payments and the purchase of a group annuity contract in 2021.
The components of Pension cost for defined benefit plans, other than service cost, are included in Other income (expense) in the Company’s Consolidated Statements of Income.
Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets
December 31,
2022
2021
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
plans
pension plans
plans
pension plans
Projected benefit obligation
$
9,331
$
82,378
$
10,886
$
121,894
Accumulated benefit obligation
8,937
80,444
10,372
120,037
Fair value of plan assets
—
48,974
—
70,199
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The total accumulated benefit obligation for all plans was $ 125,031 as of December 31, 2022 and $ 171,755 as of December 31, 2021.
Benefit Payments for Plans
Benefits expected to be paid for the plans are as follows:
U.S. pension
Non-U.S.
Plans
pension plans
Estimated Payments
2023
$
2,575
$
7,173
2024
851
35,957
2025
1,160
7,196
2026
1,172
6,335
2027
1,147
5,684
2028 through 2032
5,546
31,065
Assumptions
Weighted average assumptions used to measure the benefit obligation for the Company’s significant defined benefit plans as of December 31, 2022 and 2021 were as follows:
December 31,
2022
2021
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
plans
pension plans
plans
pension plans
Discount Rate
5.8
%
4.2
%
2.5
%
1.8
%
Rate of increase in compensation
3.0
%
3.7
%
3.0
%
3.1
%
Weighted average assumptions used to measure the net periodic benefit cost for the Company’s significant defined benefit plans for each of the three years ended December 31 were as follows:
December 31,
2022
2021
2020
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
U.S. pension
Non-U.S.
plans
pension plans
plans
pension plans
plans
pension plans
Discount rate
2.5
%
1.8
%
2.2
%
1.3
%
3.4
%
1.7
%
Rate of increase in compensation
3.0
%
3.1
%
2.5
%
2.7
%
2.5
%
2.6
%
Expected return on plan assets
—
3.4
%
3.0
%
3.3
%
4.0
%
4.1
%
To develop the discount rate assumptions, the Company refers to the yield derived from matching projected pension payments with maturities of bonds rated AA or an equivalent quality. The expected long-term rate of return assumption is based on the weighted average expected return of the various asset classes in the plans’ portfolio and the targeted allocation of plan assets. The asset class return is developed using historical asset return performance as well as current market conditions such as inflation, interest rates and equity market performance. The rate of compensation increase is determined by the Company based upon annual reviews.
Pension Plans’ Assets
The primary objective of the pension plans’ investment policy is to ensure sufficient assets are available to provide benefit obligations when such obligations mature. Investment management practices must comply with ERISA or any other applicable regulations and rulings. The overall investment strategy for the defined benefit pension plans’ assets is to achieve a rate of return over a normal business cycle relative to an acceptable level of risk that is consistent with the
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long-term objectives of the portfolio. Excluding the RAP plan assets, the target allocation for plan assets is 30 % to 40 % equity securities and 60 % to 70 % debt and other securities.
The following table sets forth, by level within the fair value hierarchy, the pension plans’ assets as of December 31, 2022:
Pension Plans' Assets at Fair Value as of December 31, 2022
Quoted Prices in
Active Markets
Significant
for Identical
Significant Other
Unobservable
Assets
Observable Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
Cash and cash equivalents
$
16,694
$
—
$
—
$
16,694
Fixed income securities (1)
Corporate debt and other obligations
—
4,912
—
4,912
Investments measured at NAV (2)
Common trusts and 103-12 investments (3)
—
—
—
64,937
Total investments at fair value
$
16,694
$
4,912
$
—
$
86,543
The following table sets forth, by level within the fair value hierarchy, the pension plans’ assets as of December 31, 2021:
Pension Plans' Assets at Fair Value as of December 31, 2021
Quoted Prices
in Active Markets
Significant
for Identical
Significant Other
Unobservable
Assets
Observable Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
Cash and cash equivalents
$
71,199
$
—
$
—
$
71,199
Fixed income securities (1)
Corporate debt and other obligations
—
5,240
—
5,240
Investments measured at NAV (2)
Common trusts and 103-12 investments (3)
—
—
—
106,576
Total investments at fair value
$
71,199
$
5,240
$
—
$
183,015
(1) Fixed income securities are primarily comprised of governmental and corporate bonds directly held by the plans. Governmental and corporate bonds are valued using both market observable inputs for similar assets that are traded on an active market and the closing price on the active market on which the individual securities are traded.
(2) Certain assets that are measured at fair value using the net asset value ("NAV") practical expedient have not been classified in the fair value hierarchy.
(3) Common trusts and 103-12 investments (collectively "Trusts") are comprised of a number of investment funds that invest in a diverse portfolio of assets including equity securities, corporate and governmental bonds, equity and credit indexes and money markets. Trusts are valued at the NAV as determined by their custodian. NAV represents the accumulation of the unadjusted quoted close prices on the reporting date for the underlying investments divided by the total shares outstanding at the reporting dates.
Supplemental Executive Retirement Plan
The Company maintained a domestic unfunded Supplemental Executive Retirement Plan ("SERP") under which non-qualified supplemental pension benefits are paid to certain employees in addition to amounts received under the Company’s qualified retirement plan which is subject to IRS limitations on covered compensation. The annual cost of this program has been included in the determination of total net pension costs shown above and was $ 253 , $ 213 and
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$ 1,225 in 2022, 2021 and 2020, respectively. The projected benefit obligation associated with this plan is also included in the pension disclosure shown above and was $ 7,339 , $ 7,947 and $ 8,194 at December 31, 2022, 2021 and 2020, respectively.
Defined Contribution Plans
Substantially all U.S. employees are covered under defined contribution plans. In October 2016, the Company announced a plan redesign of The Lincoln Electric Company Employee Savings Plan (“Savings Plan”) that was effective January 1, 2017. The Savings Plan provides that eligible employees receive up to 6 % of employees’ annual compensation through Company matching contributions of 100 % of the first 3 % of employee compensation contributed to the plan, and automatic Company contributions equal to 3 % of annual compensation. In addition, certain employees affected by the RAP freeze in 2016 are also eligible to receive employer contributions equal to 6 % of annual compensation for a minimum period of five years or to the end of the year in which they complete thirty years of service.
Effective January 1, 2017, the Company created The Lincoln Electric Company Restoration Plan (“Restoration Plan”). The Restoration Plan is a domestic unfunded plan maintained for the purpose of providing certain employees the ability to fully participate in standard employee retirement offerings, which are limited by IRS regulations on covered compensation.
The annual costs recognized for defined contribution plans were $ 29,569 , $ 26,282 and $ 22,593 in 2022, 2021 and 2020, respectively.
Other Benefits
The Cleveland, Ohio, area operations have a Guaranteed Continuous Employment Plan covering substantially all employees which, in general, provides that the Company will provide work for at least 75 % of every standard work week (presently 40 hours). This plan does not guarantee employment when the Company’s ability to continue normal operations is seriously restricted by events beyond the control of the Company. The Company has reserved the right to terminate this plan effective at the end of a calendar year by giving notice of such termination not less than six months prior to the end of such year.
NOTE 12 — OTHER INCOME (EXPENSE)
The components of Other income (expense) were as follows:
Year Ended December 31,
2022
2021
2020
Equity earnings in affiliates
$
( 153 )
$
499
$
408
Other components of net periodic pension (cost) income (1)
3,556
( 123,920 )
( 1,575 )
Other income (expense)
6,588
8,964
5,109
Total Other income (expense)
$
9,991
$
( 114,457 )
$
3,942
(1) Other components of net periodic pension (cost) income includes pension settlements and curtailments as discussed in Note 11 to the consolidated financial statements.
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NOTE 13 – INCOME TAXES
The components of income before income taxes were as follows:
Year Ended December 31,
2022
2021
2020
U.S.
$
359,760
$
143,290
$
179,650
Non-U.S.
233,067
181,708
84,390
Total
$
592,827
$
324,998
$
264,040
The components of income tax expense (benefit) were as follows:
Year Ended December 31,
2022
2021
2020
Current:
Federal
$
88,974
$
23,415
$
30,091
Non-U.S.
55,664
44,828
18,020
State and local
24,423
10,298
8,770
169,061
78,541
56,881
Deferred:
Federal
( 38,462 )
( 21,538 )
( 1,898 )
Non-U.S.
( 3,281 )
( 4,488 )
3,196
State and local
( 6,715 )
( 4,097 )
( 283 )
( 48,458 )
( 30,123 )
1,015
Total
$
120,603
$
48,418
$
57,896
The differences between total income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes for the three years ended December 31, 2022 were as follows:
Year Ended December 31,
2022
2021
2020
Statutory rate applied to pre-tax income
$
124,492
$
68,250
$
55,448
State and local income taxes, net of federal tax benefit
12,904
4,005
6,148
Excess tax benefits resulting from exercises of stock-based compensation
( 2,500 )
( 4,681 )
( 2,471 )
Resolution and settlements to uncertain tax positions
( 350 )
577
( 4,146 )
Foreign Derived Intangible Income Deduction
( 13,356 )
( 2,197 )
( 1,267 )
Foreign rate variance
5,020
2,131
85
Valuation allowances
( 4,547 )
( 4,209 )
4,753
Research and development credit
( 6,800 )
( 5,300 )
( 4,400 )
Pension plan termination adjustment
—
( 14,711 )
—
U.S. tax cost (benefit) of foreign source income
783
3,488
269
Other
4,957
1,065
3,477
Total
$
120,603
$
48,418
$
57,896
Effective tax rate
20.3
%
14.9
%
21.9
%
The 2022 effective tax rate was higher than 2021 primarily due to a change in the mix of earnings, as well as the impact of the 2021 pension plan termination.
Total income tax payments, net of refunds, were $ 151,818 in 2022, $ 87,288 in 2021 and $ 59,360 in 2020.
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Deferred Taxes
Significant components of deferred tax assets and liabilities at December 31, 2022 and 2021, were as follows:
December 31,
2022
2021
Deferred tax assets:
Tax loss and credit carry-forwards
$
44,674
$
46,967
Inventory
937
1,929
Other accruals
29,601
13,395
Research and development capitalization
26,982
—
Employee benefits
26,674
25,741
Pension obligations
6,218
9,760
Other
7,344
5,073
Deferred tax assets, gross
142,430
102,865
Valuation allowance
( 44,627 )
( 51,983 )
Deferred tax assets, net
97,803
50,882
Deferred tax liabilities:
Property, plant and equipment
40,198
40,422
Intangible assets
23,790
18,253
Inventory
3,846
3,716
Pension and other benefit liabilities
13,787
16,397
Other
10,393
10,494
Deferred tax liabilities
92,014
89,282
Total deferred taxes
$
5,789
$
( 38,400 )
At December 31, 2022, certain subsidiaries had net operating loss carry-forwards of approximately $ 6,995 that expire in various years from 2023 through 2036, plus $ 157,288 for which there is no expiration date.
In assessing the realizability of deferred tax assets, the Company assesses whether it is more-likely-than-not that a portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, tax planning strategies and projected future taxable income in making this assessment. At December 31, 2022, a valuation allowance of $ 44,627 was recorded against certain deferred tax assets based on this assessment. The Company believes it is more-likely-than-not that the tax benefit of the remaining net deferred tax assets will be realized. The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company’s assessment of future taxable income or tax planning strategies changes.
The Company determined it will repatriate earnings for certain non-U.S. subsidiaries, which are subject to foreign withholding taxes. The Company has estimated the associated tax to be $ 75 . The Company considers remaining earnings and outside basis in all other non-U.S. subsidiaries to be indefinitely reinvested and has not recorded any deferred taxes as such estimate is not practicable.
Unrecognized Tax Benefits
Liabilities for unrecognized tax benefits related to uncertain tax positions are classified as Other liabilities unless expected to be paid in one year. Additionally, to the extent a position would not result in a cash tax liability, those amounts are generally recorded to Deferred income taxes to offset tax attributes. The Company recognizes interest and penalties related to unrecognized tax benefits in Income taxes. Current income tax expense included benefits of $ 486 for the year ended December 31, 2022 and benefits of $ 485 for the year ended December 31, 2021 for interest and penalties. For those same years, the Company’s accrual for interest and penalties related to unrecognized tax benefits totaled $ 2,292 and $ 3,209 , respectively.
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The following table summarizes the activity related to unrecognized tax benefits:
2022
2021
Balance at beginning of year
$
18,211
$
17,596
Increase related to current year tax provisions
2,263
2,693
Increase/(decrease) related to prior years' tax positions
91
( 17 )
Decrease related to settlements with taxing authorities
( 868 )
—
Resolution of and other decreases in prior years' tax liabilities
( 1,379 )
( 1,585 )
Other
( 895 )
( 476 )
Balance at end of year
$
17,423
$
18,211
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $ 14,504 at December 31, 2022 and $ 14,918 at December 31, 2021.
The Company files income tax returns in the U.S. and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2018. The Company is currently subject to various state audits and non-U.S. income tax audits. The Company is generally not able to precisely estimate the ultimate settlement amounts or timing until after the close of an audit. The Company evaluates its tax positions and establishes liabilities for unrecognized tax benefits related to uncertain tax positions that may be challenged by local authorities and may not be fully sustained.
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including management’s judgment in the interpretation of applicable tax law, regulation or tax ruling, the progress of tax audits and closing of statutes of limitations. Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits. It is reasonably possible there could be a further reduction of $ 1,279 in prior years’ unrecognized tax benefits in 2023.
NOTE 14 – DERIVATIVES
The Company uses derivative instruments to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business. Both at inception and on an ongoing basis, the derivative instruments that qualify for hedge accounting are assessed as to their effectiveness, when applicable. Hedge ineffectiveness was immaterial for each of the three years in the period ended December 31, 2022.
The Company is subject to the credit risk of the counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. None of the concentrations of risk with any individual counterparty was considered significant at December 31, 2022. The Company does not expect any counterparties to fail to meet their obligations.
Cash flow hedges
Certain foreign currency forward contracts are qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of these short-term contracts was $ 66,296 at December 31, 2022 and $ 72,630 at December 31, 2021.
The Company has interest rate forward starting swap agreements that are qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of the long-term contracts was $ 100,000 at December 31, 2022 and 2021 and have a termination date of August 2025.
The Company has commodity contracts with a notional amount of 875,000 pounds at December 31, 2022 that are qualified and designated as cash flow hedges.
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Fair value hedges
Certain interest rate swap agreements are qualified and designated as fair value hedges. At December 31, 2022, the Company had no interest rate swap agreements outstanding. The Company terminated $ 50,000 of interest rate swaps in the year ended December 31, 2020, which resulted in a gain of $ 6,629 that is amortized to interest expense over the remaining life of the underlying debt.
Net investment hedges
The Company has held cross currency swaps that are qualified and designated as net investment hedges. The dollar equivalent gross notional amount of these contracts was $ 0 and $ 25,000 , respectively, as of December 31, 2022 and 2021.
The Company has foreign currency forward contracts that qualify and are designated as net investment hedges. The dollar equivalent gross notional amount of these short-term contracts was $ 88,843 at December 31, 2022.
Derivatives not designated as hedging instruments
The Company has certain foreign exchange forward contracts which are not designated as hedges. These derivatives are held as hedges of certain balance sheet exposures. The dollar equivalent gross notional amount of these contracts was $ 380,443 at December 31, 2022 and $ 301,685 at December 31, 2021.
Fair values of derivative instruments in the Company’s Consolidated Balance Sheets follow:
December 31, 2022
December 31, 2021
Other
Other
Other
Other
Current
Current
Other
Other
Current
Current
Other
Other
Derivatives by hedge designation
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Assets
Liabilities
Designated as hedging instruments:
Foreign exchange contracts
$
1,467
$
738
$
—
$
—
$
772
$
535
$
—
$
—
Forward starting swap agreements
—
—
19,291
—
—
—
6,990
—
Net investment contracts
—
2,229
—
—
2,095
—
—
608
Commodity contracts
181
33
—
—
311
—
—
—
Not designated as hedging instruments:
Foreign exchange contracts
2,348
790
—
—
4,656
3,445
—
—
Total derivatives
$
3,996
$
3,790
$
19,291
$
—
$
7,834
$
3,980
$
6,990
$
608
The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income consisted of the following:
Year Ended December 31,
Derivatives by hedge designation
Classification of gain (loss)
2022
2021
Not designated as hedges:
Foreign exchange contracts
Selling, general
& administrative expenses
$
4,805
$
7,707
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The effects of designated cash flow hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:
Total gain (loss) recognized in AOCI, net of tax
December 31, 2022
December 31, 2021
Foreign exchange contracts
$
627
$
284
Forward starting swap agreements
13,191
5,232
Net investment contracts
9,440
2,339
Commodity contracts
91
239
The Company expects a gain of $ 718 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized.
Year Ended December 31,
Gain (loss) recognized in the
Derivative type
Consolidated Statements of Income:
2022
2021
Foreign exchange contracts
Sales
$
962
$
2,224
Cost of goods sold
1,906
586
Commodity contracts
Cost of goods sold
( 169 )
—
NOTE 15 – FAIR VALUE
The following table provides a summary of fair value assets and liabilities as of December 31, 2022 measured at fair value on a recurring basis:
Quoted Prices in
Active Markets for
Identical Assets or
Significant Other
Significant
Balance as of
Liabilities
Observable Inputs
Unobservable
Description
December 31, 2022
(Level 1)
(Level 2)
Inputs (Level 3)
Assets:
Foreign exchange contracts
$
3,815
$
—
$
3,815
$
—
Commodity contracts
181
—
181
—
Forward starting swap agreements
19,291
—
19,291
—
Pension surplus
56,418
56,418
—
—
Total assets
$
79,705
$
56,418
$
23,287
$
—
Liabilities:
Foreign exchange contracts
$
1,528
$
—
$
1,528
$
—
Net investment contracts
2,229
—
2,229
—
Commodity contracts
33
—
33
—
Deferred compensation
39,090
—
39,090
—
Total liabilities
$
42,880
$
—
$
42,880
$
—
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The following table provides a summary of fair value assets and liabilities as of December 31, 2021 measured at fair value on a recurring basis:
Quoted Prices in
Active Markets for
Identical Assets or
Significant Other
Significant
Balance as of
Liabilities
Observable Inputs
Unobservable
Description
December 31, 2021
(Level 1)
(Level 2)
Inputs (Level 3)
Assets:
Foreign exchange contracts
$
5,428
$
—
$
5,428
$
—
Net investment contracts
2,095
—
2,095
—
Commodity Contracts
311
—
311
—
Forward starting swap agreements
6,990
—
6,990
—
Total assets
$
14,824
$
—
$
14,824
$
—
Liabilities:
Foreign exchange contracts
$
3,980
$
—
$
3,980
$
—
Net investment contracts
608
—
608
—
Deferred compensation
41,612
—
41,612
—
Total liabilities
$
46,200
$
—
$
46,200
$
—
The Company’s derivative contracts are valued at fair value using the market approach. The Company measures the fair value of foreign exchange contracts, interest rate swap agreements, forward starting swap agreements and cross currency swaps using Level 2 inputs based on observable spot and forward rates in active markets. During the year ended December 31, 2022, there were no transfers between Levels 1, 2 or 3.
The deferred compensation liability is the Company’s obligation under its executive deferred compensation plan. The Company measures the fair value of the liability using the market values of the participants’ underlying investment fund elections.
The fair value of the Company’s pension surplus assets are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The pension surplus assets are invested in money market and short-term duration bond funds at December 31, 2022.
The Company has various financial instruments, including cash and cash equivalents, short and long-term debt and forward contracts. While these financial instruments are subject to concentrations of credit risk, the Company has minimized this risk by entering into arrangements with a number of major banks and financial institutions and investing in several high-quality instruments. The Company does not expect any counterparties to fail to meet their obligations. The fair value of Cash and cash equivalents, Accounts receivable, Amounts due banks and Trade accounts payable approximated book value due to the short-term nature of these instruments at both December 31, 2022 and December 31, 2021. Refer to Note 9 to the consolidated financial statements for the fair value estimate of debt.
NOTE 16 – INVENTORY
Inventories in the Consolidated Balance Sheet is comprised of the following components:
December 31, 2022
December 31, 2021
Raw materials
$
181,076
$
143,394
Work-in-process
164,778
97,834
Finished goods
319,597
298,691
Total
$
665,451
$
539,919
The valuation of LIFO inventories is made at the end of each year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and costs. Actual year-end inventory levels and costs may differ from interim LIFO inventory valuations. At December 31,
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2022 and 2021, approximately 38 % and 36 % of total inventories, respectively, were valued using the LIFO method. The excess of current cost over LIFO cost was $ 133,909 at December 31, 2022 and $ 114,176 at December 31, 2021.
NOTE 17 – LEASES
The table below summarizes the right-of-use assets and lease liabilities in the Company’s Consolidated Balance sheets:
Operating Leases
Balance Sheet Classification
December 31, 2022
December 31, 2021
Right-of-use assets
Other assets
$
44,810
$
47,966
Current liabilities
Other current liabilities
$
10,378
$
10,218
Noncurrent liabilities
Other liabilities
35,945
38,960
Total lease liabilities
$
46,323
$
49,178
Total lease expense, which is included in Cost of goods sold and Selling, general and administrative expenses in the Company’s Consolidated Statements of Income, was $ 20,548 , $ 21,630 and $ 23,499 in the years ended December 31, 2022, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease liabilities for the years ended December 31, 2022 and 2021 was $ 12,036 and $ 15,723 , respectively, are included in Net cash provided by operating activities in the Company’s Consolidated Statements of Cash Flows. Right-of-use assets obtained in exchange for operating lease liabilities during the years ended December 31, 2022 and 2021 were $ 9,332 and $ 12,257 , respectively.
The total future minimum lease payments for noncancelable operating leases were as follows:
December 31, 2022
2023
$
11,342
2024
9,911
2025
6,677
2026
5,417
2027
3,893
After 2027
14,558
Total lease payments
$
51,798
Less: Imputed interest
5,475
Operating lease liabilities
$
46,323
As of December 31, 2022 and 2021, the weighted average remaining lease term was 7.8 years and 8.6 years, respectively. As of December 31, 2022 and 2021, the weighted average discount rate used to determine the operating lease liability was 2.96 % and 3.1 %, respectively.
NOTE 18 – 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, employment-related claims and health, safety and environmental claims, some of which relate to cases alleging asbestos induced illnesses. The claimants in the asbestos cases seek compensatory and punitive damages, in most cases for unspecified amounts. The Company believes it has meritorious defenses to these claims and intends to contest such suits vigorously.
The Company accrues its best estimate of the probable costs, after a review of the facts with management and counsel and taking into account past experience. For claims or litigation that are material, if an unfavorable outcome is determined to be reasonably possible and the amount of loss can be reasonably estimated, or if an unfavorable outcome is determined to be probable and the amount of loss cannot be reasonably estimated, disclosure would be provided. Many of the current cases are in differing procedural stages and information on the circumstances of each claimant,
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which forms the basis for judgments as to the validity or ultimate disposition of such actions, varies greatly. Therefore, in many situations a range of possible losses cannot be made. Reserves are adjusted as facts and circumstances change and related management assessments of the underlying merits and the likelihood of outcomes change. Moreover, reserves only cover identified and/or asserted claims. Future claims could, therefore, give rise to increases to such reserves.
Based on the Company’s historical experience in litigating product liability claims, including a significant number of dismissals, summary judgments and defense verdicts in many cases and immaterial settlement amounts, as well as the Company’s current assessment of the underlying merits of the claims and applicable insurance, the Company believes resolution of these claims and proceedings, individually or in the aggregate, will not have a material effect on the Company’s consolidated financial statements.
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SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
LINCOLN ELECTRIC HOLDINGS, INC.
(In thousands)
Additions
Balance at
Charged to
Charged
Beginning
Costs and
(Credited) to
Balance at End
Description
Of period
Expenses
Other Accounts (1)
Deductions (2)
of Period
Allowance for doubtful accounts:
Year Ended December 31, 2022
$
11,105
$
1,778
$
598
$
925
$
12,556
Year Ended December 31, 2021
14,779
718
( 2,491 )
1,901
11,105
Year Ended December 31, 2020
16,002
1,391
( 1,239 )
1,375
14,779
Deferred tax asset valuation allowance:
Year Ended December 31, 2022
$
55,619
$
2,262
$
( 5,197 )
$
8,057
$
44,627
Year Ended December 31, 2021
65,413
1,147
( 3,873 )
7,068
55,619
Year Ended December 31, 2020
71,546
9,606
( 6,741 )
8,998
65,413
(1) Currency translation adjustment, reductions from restructuring and other adjustments.
(2) For the Allowance for doubtful accounts, deductions relate to uncollectible accounts written-off, net of recoveries. For the Deferred tax asset valuation allowance, deductions relate to the reversal of valuation allowances due to the realization of net operating loss carryforwards.
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QuickLinks
ITEM 1.
BUSINESS
1
ITEM 1A.
RISK FACTORS
5
ITEM 1B.
UNRESOLVED STAFF COMMENTS
12
ITEM 1C.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
13
ITEM 2.
PROPERTIES
13
ITEM 3.
LEGAL PROCEEDINGS
15
ITEM 4.
MINE SAFETY DISCLOSURES
15
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
15
ITEM 6.
SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)
16
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts)
16
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in thousands, except per share amounts)
32
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
33
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
33
ITEM 9A.
CONTROLS AND PROCEDURES
33
ITEM 9B.
OTHER INFORMATION
34
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURSIDICTIONS THAT PREVENT INSPECTIONS
34
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
34
ITEM 11.
EXECUTIVE COMPENSATION
34
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
34
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
35
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
35
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
35
ITEM 16.
FORM 10-K SUMMARY
40
SIGNATURES
41
Report of Independent Registered Public Accounting Firm
F-1
Report of Independent Registered Public Accounting Firm
F-3
LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
F-7
LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
F-5
LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands, except per share amounts)
F-6
LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED STATEMENTS OF EQUITY (In thousands, except per share amounts)
F-8
LINCOLN ELECTRIC HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
F-9
LINCOLN ELECTRIC HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts)
F-10
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS LINCOLN ELECTRIC HOLDINGS, INC. (In thousands)
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