LINCOLN ELECTRIC HOLDINGS INC

INCOME TAXES

The components of income before income taxes for the three years ended December 31, 2017 were as follows:



	Year Ended December 31,
	2017		2016		2015
U.S.	$	213,171	$	209,409	$	118,037
Non-U.S.	153,065		67,979		51,750
Total	$	366,236	$	277,388	$	169,787

The components of income tax expense (benefit) for the three years ended December 31, 2017 were as follows:



	Year Ended December 31,
	2017			2016			2015
Current:
Federal	$	89,182		$	57,090		$	60,500
Non-U.S.	25,746			23,344			28,046
State and local	7,640			8,386			9,557
	122,568			88,820			98,103
Deferred:
Federal	(4,391		)	(1,716		)	(47,902		)
Non-U.S.	(82		)	(8,261		)	(3,362		)
State and local	666			172			(4,464		)
	(3,807		)	(9,805		)	(55,728		)
Total	$	118,761		$	79,015		$	42,375

The U.S. Tax Cuts and Jobs Act (the "U.S. Tax Act") was enacted on December 22, 2017. The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides for a one-year measurement period and provides guidance for the application of ASC Topic 740, Income Taxes. In accordance with SAB 118, the Company recognized the income tax effects of the U.S. Tax Act to the extent applicable for the year of enactment. The expense primarily relates to taxes on the Company's unremitted foreign earnings and profits, partially offset by the re-measurement of deferred tax assets and liabilities. The amounts recorded are based on reasonable estimates and may require further adjustments as additional guidance from the U.S. Department of Treasury is provided, the Company's assumptions change or as further information and interpretations become available.

The provisional amount recorded for the remeasurement of the Company's deferred tax assets and liabilities is a tax benefit of $14,532. The Company is still analyzing certain aspects of the U.S. Tax Act and refining calculations that could potentially affect the measurement of deferred income tax balances, including law changes surrounding deferred compensation.

The one-time transition tax is based on total post-1986 earnings and profits for which the Company had previously deferred from U.S. income taxes. The Company recorded a provisional amount for the one-time transition tax liability of $36,387, resulting in an increase to income tax expense. The transition tax is based partially on the earnings and profits held in cash and partially on the earnings and profits invested in assets.

The provisional amount recorded for taxes on the planned repatriation of certain earnings and profits subject to the transition tax is $6,667. This additional tax pertains to foreign withholding taxes associated with the repatriation of earnings that are not indefinitely reinvested in the foreign operations.

The net impact of the U.S. Tax Act provisional amounts are included in Income taxes in the accompanying Consolidated Statements of Income.

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, 2017 were as follows:



	Year Ended December 31,
	2017			2016			2015
Statutory rate of 35% applied to pre-tax income	$	128,182		$	97,086		$	59,426
State and local income taxes, net of federal tax benefit	5,671			5,554			1,868
Excess tax benefits resulting from exercises of stock-based compensation	(6,276		)	—			—
Net impact of the U.S. Tax Act	21,949			—			—
Foreign withholding taxes	6,667			—			—
Intangible and asset impairments/(write-off)	—			(4,438		)	2,184
Foreign rate variance	(13,929		)	(8,128		)	(11,399		)
Venezuela deconsolidation/devaluation	—			5,192			11,396
Bargain purchase gain	(17,556		)	—			—
Valuation allowances	102			(8,525		)	2,900
Manufacturing deduction	(5,922		)	(5,190		)	(9,207		)
U.S. tax cost (benefit) of foreign source income	294			(489		)	(8,754		)
Other	(421		)	(2,047		)	(6,039		)
Total	$	118,761		$	79,015		$	42,375
Effective tax rate	32.4		%	28.5		%	25.0		%

The 2017 effective tax rate is impacted by the nontaxable bargain purchase gain recorded in connection with the acquisition of Air Liquide Welding, excess tax benefits from the exercise of stock based compensation awards, the net impact of the U.S. Tax Act and income earned in lower tax rate jurisdictions. Total income tax payments, net of refunds, were $81,691 in 2017, $72,965 in 2016 and $101,939 in 2015.

Deferred Taxes

Significant components of deferred tax assets and liabilities at December 31, 2017 and 2016, were as follows:



	December 31,
	2017			2016
Deferred tax assets:
Tax loss and credit carry-forwards	$	65,284		$	52,270
Inventory	2,501			2,080
Other accruals	14,873			18,186
Employee benefits	18,468			23,596
Pension obligations	12,363			2,503
Other	4,923			3,020
Deferred tax assets, gross	118,412			101,655
Valuation allowance	(68,694		)	(47,849		)
Deferred tax assets, net	49,718			53,806
Deferred tax liabilities:
Property, plant and equipment	21,427			32,210
Intangible assets	10,729			17,506
Inventory	5,891			10,059
Pension obligations	16,137			17,915
Other	20,313			9,309
Deferred tax liabilities	74,497			86,999
Total deferred taxes	$	(24,779	)	$	(33,193	)

At December 31, 2017, certain subsidiaries had tax loss carry-forwards of approximately $80,961 that expire in various years from 2018 through 2033, plus $177,796 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, 2017, a valuation allowance of $68,694 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 previously considered the earnings in non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. As a result of the U.S. Tax Act, 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 $6,667. The Company considers remaining earnings 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 are classified as Other liabilities unless expected to be paid in one year, with a portion recorded to Deferred income taxes to offset tax attributes. The Company recognizes interest and penalties related to unrecognized tax benefits in Income taxes. Current income tax expense included expense of $1,079 for the year ended December 31, 2017 and expense of $597 for the year ended December 31, 2016 for interest and penalties. For those same years, the Company's accrual for interest and penalties related to unrecognized tax benefits totaled $8,135 and $6,431, respectively.

The following table summarizes the activity related to unrecognized tax benefits:



	2017			2016
Balance at beginning of year	$	18,499		$	14,332
Increase related to current year tax provisions	1,448			1,975
Increase related to prior years' tax positions	1,460			5,188
Increase related to acquisitions	8,223			—
Decrease related to settlements with taxing authorities	(522		)	(265		)
Resolution of and other decreases in prior years' tax liabilities	(1,734		)	(1,982		)
Other	1,075			(749		)
Balance at end of year	$	28,449		$	18,499

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $12,709 at December 31, 2017 and $9,813 at December 31, 2016.

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 2013. The Company is currently subject to U.S. federal, 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 uncertain tax positions that may be challenged by local authorities and may not be fully sustained.

Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations. Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits. It is reasonably possible there could be a further reduction of $2,414 in prior years' unrecognized tax benefits in 2018.