Lincoln Electric Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Comparisons are with Q1 2022 unless noted. Financial amounts are in U.S. dollars; figures below are rounded to millions where appropriate.
Business context
Lincoln Electric designs and manufactures welding, cutting, brazing, soldering and automation products. Its operating segments are Americas Welding, International Welding and The Harris Products Group. The December 2022 acquisition of Fori Automation expanded automation capabilities and automotive-sector exposure; Fori contributed $49.2 million of Q1 2023 sales.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,039.3 million | $925.4 million | +12.3% |
| Gross profit / margin | $355.4 million / 34.2% | $329.8 million / 35.6% | Profit +7.8%; margin down 1.4 percentage points |
| Operating income / margin | $164.4 million / 15.8% | $161.2 million / 17.4% | Income +2.0%; margin down 1.6 points |
| Net income | $121.9 million | $126.0 million | -3.3% |
| Diluted EPS | $2.09 | $2.13 | -1.9% |
| Adjusted diluted EPS (non-GAAP) | $2.13 | $2.10 | Up $0.03 |
| Adjusted EBIT (non-GAAP) | $171.7 million | $163.5 million | +5.0%; margin 16.5% vs. 17.7% |
| Cash from operations | $123.9 million | $43.1 million | +$80.8 million |
| Capital expenditures | $18.8 million | $18.7 million | Approximately flat |
Sales growth reflected higher volume (+4.2%), acquisitions (+5.7%) and pricing (+4.3%), partly offset by foreign exchange (-1.9%). Higher volumes and pricing supported gross profit, while gross margin declined. SG&A rose to $190.1 million from $166.7 million, primarily due to acquisitions and employee-related costs. Net interest expense increased to $13.2 million from $6.2 million. The effective tax rate was 21.5%, versus 21.1%.
By segment, Americas Welding sales increased 23.3% and Adjusted EBIT rose 18.7%; International Welding sales declined 2.2% and Adjusted EBIT declined 20.2%; Harris Products Group sales declined 3.8% and Adjusted EBIT declined 3.1%. International performance reflected lower volume, unfavorable currency and challenging prior-year comparisons.
Cash, debt and liquidity
- Cash and cash equivalents were $198.8 million at March 31, 2023, versus $197.2 million at year-end 2022; $173.6 million was held by international subsidiaries.
- Operating cash flow was $123.9 million, primarily reflecting improved working capital. Cash used in investing was $16.0 million; cash used in financing was $111.3 million, including $32.2 million of share repurchases and $37.6 million of dividends paid.
- Total debt, calculated from reported short- and long-term debt, was $1,160.0 million, down from $1,203.9 million at December 31, 2022. The company reported compliance with debt covenants. It had $25.0 million drawn on its $500 million revolving credit facility and $13.4 million outstanding under other lines and debt agreements.
- The $400 million term loan used partly to fund Fori matures in November 2025. In March 2023, swaps fixed the rate on $150 million of that loan. The revolving facility was amended to use SOFR in place of LIBOR.
- Management stated that cash from operations, cash balances and available financing should meet ongoing cash requirements for at least the next 12 months. The company expects 2023 capital expenditures of $80 million to $100 million.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management cited demand, pricing and acquisition contributions to sales growth, while noting foreign-exchange headwinds and challenging comparisons.
- Q1 included $3.9 million of acquired-inventory step-up amortization, $0.9 million of rationalization and asset impairment charges, and a $1.6 million gain on asset disposal. Prior-year results included a $4.3 million net pension settlement gain. These items affect reported-versus-adjusted comparisons.
- Rationalization actions are focused on restructuring and consolidating International Welding operations. The company said it does not expect significant additional charges to complete current plans, though further actions could result in future charges.
- Management identified economic and market conditions, interest rates, currency changes, credit-market access, commodity and energy costs, litigation, acquisitions and integration, regulation, tariffs, tax changes, and geopolitical events as risks.
- Asbestos-related claims involved approximately 1,467 plaintiffs at March 31, 2023. The filing text does not provide a clear quantified estimate of potential exposure for these claims.
- Unrecognized tax benefits were $16.2 million; management said a $1.3 million reduction was reasonably possible by the end of Q1 2024. The company also disclosed that Fori continued to operate with its own systems and much of its own control environment; integration was expected to be completed in 2023. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether sales and margin trends persist, particularly the weaker International Welding segment and pressure on consolidated margins.
- Fori’s contribution to growth, profitability, integration progress and the associated debt and interest costs.
- Cash conversion and working-capital performance, alongside the planned $80 million to $100 million in 2023 capital spending and ongoing shareholder returns.
- Debt levels, variable-rate exposure, covenant headroom and the effect of currency, commodity and interest-rate movements.
- Potential developments in asbestos litigation, tax audits and the Fori controls-integration timeline.