Lincoln Electric Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise. Lincoln Electric designs and manufactures welding, cutting, automation, brazing and soldering products, reported through Americas Welding, International Welding and The Harris Products Group.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,060.6m | $969.6m | $2,099.9m | $1,895.0m |
| Gross profit / margin | $373.4m / 35.2% | $333.5m / 34.4% | $728.8m / 34.7% | $663.3m / 35.0% |
| Operating income / margin | $178.0m / 16.8% | $167.5m / 17.3% | $342.4m / 16.3% | $328.7m / 17.3% |
| Net income / margin | $137.3m / 12.9% | $127.8m / 13.2% | $259.3m / 12.3% | $253.9m / 13.4% |
| Diluted EPS | $2.36 | $2.18 | $4.44 | $4.30 |
| Operating cash flow | Not presented separately by quarter | $322.8m | $141.3m |
- Q2 sales increased 9.4%; management attributed growth to higher demand, pricing and acquisitions, partly offset by foreign exchange. Sales growth contributions were volume 3.6%, acquisitions 5.2%, price 0.9% and currency (0.2%).
- Q2 gross profit rose 12.0%, with margin up 0.8 percentage points. Operating income rose 6.3%, while operating margin declined 0.5 points as SG&A increased 15.6%, primarily from acquisitions and higher employee costs.
- Six-month sales rose 10.8%, while net income rose 2.1% and diluted EPS rose 3.3%. Gross margin declined 0.3 points and net margin declined 1.1 points. Lower LIFO charges helped results: $2.5m for the first half of 2023 versus $17.3m in 2022.
- Adjusted EBIT, a non-GAAP measure, was $191.0m in Q2, up 14.3%, and $362.6m for the first half, up 9.7%. First-half adjusted EBIT margin was 17.3%, compared with 17.4%.
Liquidity, debt and capital allocation
- At June 30, cash and cash equivalents were $220.5m, current assets $1,646.2m and current liabilities $810.8m. Total debt was $1,114.3m, comprising $10.4m short-term and $1,103.9m long-term debt; approximate net debt was $893.8m.
- Cash from operations of $322.8m was substantially higher than the prior-year $141.3m, primarily due to improved working capital. Investing activities used $76.3m, including $40.6m of capital expenditures and $32.7m for acquisitions. Financing activities used $226.9m, including $85.2m of share repurchases and $74.5m of dividends paid.
- Cash increased $23.3m from year-end 2022. The company had no borrowings under its $500m revolving credit agreement and reported compliance with debt covenants. Its $400m SOFR-based term loan, used partly to fund the Fori acquisition, matures in November 2025; swaps fixed the rate on $150m of that loan.
- The company declared dividends of $0.64 per share in each 2023 quarter. It paid a further $0.64-per-share dividend in July 2023. Management expects 2023 capital expenditures of $80m–$100m.
Segments, acquisitions and other changes
- Q2 Americas Welding sales rose 13.6% and Adjusted EBIT rose 18.5%; International Welding sales rose 7.1% but Adjusted EBIT declined 3.5%; Harris Products Group sales fell 5.2% while Adjusted EBIT rose 8.9%. Harris’s sales decline was attributed mainly to lower retail volumes.
- For the first half, Americas Welding sales rose 18.2% and Adjusted EBIT rose 18.6%. International Welding sales rose 2.3%, but Adjusted EBIT fell 12.1%, with margin declining from 14.1% to 12.2%. Harris sales declined 4.5%, while Adjusted EBIT rose 2.6%.
- The December 2022 Fori Automation acquisition contributed $97.0m of first-half 2023 sales; its net income was not material. In May 2023, Lincoln acquired Brazilian automation firm Powermig for $29.6m net of cash acquired; its Q2 results were not material.
- Q2 other income included non-recurring items, primarily royalty and other non-operating gains. First-half other income was $10.9m versus $3.5m a year earlier. Restructuring charges were $3.5m in the first half, mainly related to International Welding; management did not anticipate significant further charges to complete current plans, though additional actions could generate future charges.
Outlook, risks and contingencies
- Management said it expects to meet cash needs for at least the next 12 months and the foreseeable future using operating cash flow, cash balances and available borrowing or capital-market access. No earnings or sales guidance is provided in the supplied filing text.
- Key identified risks include economic and credit-market conditions, interest rates, currencies, commodity and energy prices, acquisition integration, litigation, taxes, tariffs, regulation, and geopolitical events including the Russia-Ukraine conflict. Management reported no material change in market-risk exposure since year-end 2022.
- Asbestos-related proceedings involved approximately 1,458 plaintiffs at June 30, 2023; Lincoln is one of multiple defendants in each case. Claims generally seek unspecified compensatory and punitive damages. The filing does not provide a clear estimate of potential exposure.
- Management reported effective disclosure controls. Fori continued to use much of its own systems and control environment pending integration, which the company expected to complete in 2023.
- CEO Christopher Mapes notified the company of his planned retirement effective December 31, 2023; Steven Hedlund was elected to succeed him effective January 1, 2024. Mapes is expected to become Executive Chairman.
Most important facts for investors to verify
- Whether sales and margin trends persist, especially International Welding’s lower first-half Adjusted EBIT margin and Harris’s declining sales.
- How much future growth and profitability depend on Fori and other acquisitions, and whether integration delivers expected benefits.
- Working-capital and operating cash-flow durability, given the substantial year-over-year first-half cash-flow improvement.
- Debt servicing costs and refinancing exposure as SOFR-based borrowing rates change, including the term loan and swap arrangements.
- Potential asbestos, tax-audit and other legal or regulatory exposures, for which ultimate outcomes may differ from current expectations.