Lincoln Electric Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
Lincoln Electric designs and manufactures arc-welding and cutting products, consumables, automation solutions, and oxy-fuel, brazing, and soldering products. It reports three segments: Americas Welding, International Welding, and The Harris Products Group. The December 2022 Fori Automation acquisition expanded automation capabilities; Fori contributed $174.7 million of sales in the first nine months of 2023. The May 2023 Powermig acquisition was not material to reported results.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First 9 months 2023 | First 9 months 2022 |
|---|---|---|---|---|
| Net sales | $1,033.2 | $935.2 | $3,133.1 | $2,830.3 |
| Gross profit / margin | $365.6 / 35.4% | $309.5 / 33.1% | $1,094.4 / 34.9% | $972.8 / 34.4% |
| Operating income / margin | $171.4 / 16.6% | $142.1 / 15.2% | $513.8 / 16.4% | $470.8 / 16.6% |
| Net income / margin | $129.3 / 12.5% | $109.2 / 11.7% | $388.6 / 12.4% | $363.1 / 12.8% |
| Diluted EPS | $2.22 | $1.87 | $6.67 | $6.17 |
| Adjusted diluted EPS (non-GAAP) | $2.40 | $2.04 | $6.97 | $6.33 |
Cash flow and liquidity: Operating cash flow for the first nine months was $545.9 million, versus $271.6 million a year earlier, which management primarily attributed to improved working capital. Investing cash outflow was $101.1 million, including $66.5 million of capital expenditures and $32.7 million for acquisitions. Financing cash outflow was $311.4 million, including $130.6 million of share repurchases and $111.3 million of dividends paid. Cash and equivalents ended the period at $342.7 million, up from $197.2 million at year-end 2022; $169.2 million was held by international subsidiaries.
Debt: Short-term debt was $7.7 million and long-term debt was $1,102.9 million at September 30, 2023. The company had no borrowings under its $500 million revolving credit facility and reported compliance with debt covenants. The $400 million term loan, used in part to fund Fori, matures in November 2025; swaps fixed the rate on $150 million of that loan.
Changes versus prior comparable periods
- Q3 sales rose 10.5% and net income rose 18.4%; diluted EPS increased 18.7%. Gross margin improved 2.3 percentage points, while SG&A rose 17.6%, mainly from acquisitions and higher employee costs.
- For Q3, acquisitions added $82.7 million to sales; volume reduced sales by $6.6 million, while pricing and currency added $10.2 million and $11.6 million, respectively. For the nine-month period, sales growth reflected acquisitions, higher demand, and pricing; currency was a modest offset.
- For the first nine months, sales rose 10.7% and net income rose 7.0%. Gross margin increased modestly, but operating and net margins declined year over year. Net interest expense rose to $35.7 million from $20.9 million.
- Q3 Adjusted EBIT increased 17.5% to $184.2 million. Americas Welding and International Welding Adjusted EBIT rose 14.9% and 19.9%; Harris Products Group sales declined 5.4%, although its Adjusted EBIT increased 41.4%.
Outlook, commentary, and risks
- Management expects to fund ongoing cash needs for at least the next 12 months and the foreseeable future through operating cash flow, cash balances, credit facilities, and capital markets as needed. Planned 2023 capital expenditures are $80 million to $100 million.
- No specific revenue or earnings guidance is provided in the filing. Management noted operating results for the nine months are not necessarily indicative of full-year results.
- Management cited favorable Q3 mix, cost management, and benefits from prior pricing actions; nine-month gross profit growth was driven by pricing to offset higher input costs. Q3 included a $1.3 million LIFO benefit, while the nine-month period included a $1.2 million LIFO charge.
- Rationalization and asset impairment charges were $10.6 million for the first nine months, primarily related to restructuring. Management does not anticipate significant additional charges to complete current plans, but further actions could generate future charges.
- Other income included non-recurring items, primarily royalty and other non-operating gains, and was $11.7 million for the first nine months. Foreign-currency translation reduced Q3 comprehensive income by $32.3 million.
- CEO Christopher Mapes planned to retire effective December 31, 2023 and become Executive Chairman; Steven Hedlund was elected to succeed him as CEO on January 1, 2024.
- Disclosed risks include economic and market conditions, interest rates and capital-market access, foreign exchange, commodity and energy costs, acquisitions and integration, regulation and tax changes, litigation, and geopolitical events. The company reported approximately 1,409 asbestos-related plaintiffs as of September 30, 2023; claims generally seek unspecified damages.
- Disclosure controls were deemed effective. Fori continued to operate under its own systems and much of its existing control environment while integration into the company’s systems was underway; completion was expected in 2023.
Important facts for investors to verify
- Whether sales and margin momentum persists after separating organic performance from acquisition contributions, particularly Fori’s contribution.
- Whether working-capital-driven operating cash flow is sustainable and whether planned capital expenditures remain within the $80 million to $100 million range.
- Debt-service costs, the floating-rate exposure on the term loan, and covenant compliance as borrowing costs and market conditions change.
- Progress integrating Fori’s systems and controls, and execution of the announced CEO transition.
- Potential future restructuring charges, tax-audit developments, and outcomes or costs associated with asbestos and other legal proceedings.