Lincoln Electric Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Financial amounts below are in U.S. dollars; millions unless otherwise noted. Lincoln Electric designs and manufactures welding, cutting, automation, brazing and soldering products. Its segments are Americas Welding, International Welding and The Harris Products Group.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $935.2 | $806.5 | $2,830.3 | $2,389.9 |
| Gross profit / margin | $309.5 / 33.1% | $268.2 / 33.3% | $972.8 / 34.4% | $795.9 / 33.3% |
| Operating income / margin | $142.1 / 15.2% | $115.6 / 14.3% | $470.8 / 16.6% | $341.3 / 14.3% |
| Net income | $109.2 | $31.8 | $363.1 | $202.0 |
| Diluted EPS | $1.87 | $0.53 | $6.17 | $3.36 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $271.6 | $255.1 |
- Q3 sales grew 16.0%; management attributed the increase to volume, pricing and acquisitions, partly offset by foreign exchange. For the first nine months, sales rose 18.4%, including a 16.1% contribution from price and a 5.7% headwind from currency.
- Q3 gross margin edged down 0.2 percentage points year over year, while nine-month gross margin improved 1.1 points. Management cited higher volume, pricing and cost-reduction initiatives; Q3 and nine-month LIFO charges were $3.1 million and $20.4 million, respectively.
- Q3 adjusted EBIT was $156.8 million, up 25.6%, with a 16.8% margin versus 15.5%. Nine-month adjusted EBIT was $487.2 million, up 33.1%, with a 17.2% margin versus 15.3%. These are non-GAAP measures.
- Q3 diluted EPS was $2.04 on an adjusted basis versus $1.56; nine-month adjusted diluted EPS was $6.33 versus $4.61. GAAP earnings comparisons were affected by 2021 pension settlement charges: $73.6 million in Q3 and $80.1 million for the first nine months. The 2022 nine-month period included a $3.7 million pension-plan settlement gain.
- Cash from operations less capital expenditures was approximately $219.3 million for the first nine months of 2022, compared with $208.7 million in 2021. This is a calculated cash-flow measure, not a company-reported free-cash-flow figure.
Liquidity, debt and capital allocation
- At September 30, cash and cash equivalents were $141.3 million, down from $193.0 million at December 31, 2021. Operating cash was $271.6 million; investing activities used $72.3 million and financing activities used $237.4 million for the first nine months.
- Total debt was $779.6 million, comprising $68.4 million short-term and $711.3 million long-term debt, compared with $769.8 million at year-end 2021. The company reported compliance with debt covenants.
- The $500 million revolving credit facility matures in April 2026; $37.0 million was drawn. Other credit lines and debt agreements totaled $104.3 million, with $20.3 million outstanding. The company also reported $350 million aggregate principal amount of senior notes, bearing rates of 2.75%–4.02%.
- Inventories increased to $632.4 million from $539.9 million at year-end. Management said it built inventory to reduce potential supply-chain disruptions; days sales in inventory rose to 129.0 from 121.0.
- The company repurchased $156.2 million of shares and paid $98.4 million in dividends during the first nine months. It declared dividends of $0.56 per share in each 2022 quarter reported. Management anticipated 2022 capital expenditures of $70–$80 million.
- Management stated that operating cash flow, cash balances and available borrowing capacity should meet ongoing cash requirements for at least the next 12 months.
Segments and material changes
- Americas Welding: Q3 sales increased 26.9% to $585.6 million and adjusted EBIT rose 40.5% to $118.8 million. Higher volume, pricing and productivity initiatives supported performance.
- International Welding: Q3 sales declined 4.7% to $216.5 million, with currency reducing sales by 21.0%; adjusted EBIT fell 13.1% to $25.2 million. Nine-month sales were up 1.2% and adjusted EBIT up 25.0%.
- The Harris Products Group: Q3 sales increased 13.0% to $133.1 million, but adjusted EBIT declined 9.7% to $14.4 million. The company cited acquisition integration, unfavorable mix and declining commodity prices in certain metal offerings.
- For the first nine months, the company acquired Brazilian welding consumables manufacturer Kestra for $22.3 million. Kestra contributed $11.9 million in sales through September 30; its net-income impact was not material.
Outlook, risks and unusual items
- On October 14, 2022, after quarter-end, Lincoln Electric agreed to acquire Fori Automation for $427 million in cash, subject to a customary working-capital adjustment, regulatory approval and other closing conditions. The company expected closing in Q4 2022 and planned to use cash on hand and arranged credit. It recorded $3.1 million of related transaction costs through September 30.
- Russia operations were being wound down following the invasion of Ukraine. Russia represented less than 1% of consolidated sales and assets based on the cited 2021 measures; the company said the ultimate impact of the conflict and sanctions could not be reasonably estimated.
- The filing identifies risks including economic and market conditions, input and energy prices, foreign exchange, supply-chain disruption, interest rates and credit-market access, acquisitions and integration, litigation, regulation, taxes, and geopolitical events. The company reported no material change in market-risk exposure since year-end 2021.
- Q3 2022 included $8.4 million of rationalization and asset impairment charges, primarily associated with International Welding. The company said further rationalization actions could result in future charges.
- At September 30, the company was a co-defendant in asbestos-related cases involving approximately 1,489 plaintiffs. Claims generally sought unspecified compensatory and punitive damages; the filing describes a substantial history of prior claims resolved largely through dismissals or defense outcomes.
- Turkey was accounted for as a highly inflationary economy beginning April 1, 2022; the company said the impact was not significant as of September 30. Management also said disclosure controls were effective and there were no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and margin gains persist as pricing, input costs, demand and foreign-exchange effects change.
- The expected financing, regulatory status, closing timing and integration costs of the $427 million Fori Automation acquisition, and its impact on debt and liquidity.
- Inventory levels, working-capital needs and operating cash conversion, particularly given higher inventory and supply-chain precautions.
- The scale and timing of future rationalization charges, foreign-exchange exposure and any material consequences from the Russia-Ukraine conflict.
- Developments in asbestos litigation and tax audits or unrecognized tax benefits; the filing said a $3.7 million reduction in unrecognized tax benefits by Q3 2023 was reasonably possible.