Lincoln Electric Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company designs and manufactures welding, cutting, automation, brazing and soldering products. Financial amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $969.6 | $826.5 | $1,895.0 | $1,583.5 |
| Gross profit / margin | $333.5 / 34.4% | $274.0 / 33.2% | $663.3 / 35.0% | $527.8 / 33.3% |
| Operating income / margin | $167.5 / 17.3% | $121.8 / 14.7% | $328.7 / 17.3% | $225.8 / 14.3% |
| Net income / margin | $127.8 / 13.2% | $96.1 / 11.6% | $253.9 / 13.4% | $170.3 / 10.8% |
| Diluted EPS | $2.18 | $1.60 | $4.30 | $2.83 |
- Q2 sales increased 17.3%; higher pricing contributed 17.1 percentage points, while volume contributed 3.4 points and acquisitions 2.9 points. Foreign exchange reduced sales by 6.1 points.
- For the first half, sales rose 19.7%, with pricing contributing 18.0 percentage points, acquisitions 3.7 points and volume 3.3 points; foreign exchange reduced sales by 5.3 points.
- Adjusted EBIT, a non-GAAP measure, was $167.0 million in Q2, up 30.0%, with a 17.2% margin versus 15.5%. For the first half it was $330.5 million, up 37.0%, with a 17.4% margin versus 15.2%.
- Q2 segment sales were $595.7 million for Americas Welding (up 30.2%), $236.6 million for International Welding (down 6.2%) and $137.3 million for The Harris Products Group (up 17.7%). Americas and International segment adjusted EBIT improved; Harris adjusted EBIT declined 1.6% in Q2, reflecting integration activity, mix and commodity pricing.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $141.3 million, compared with $145.2 million in 2021. The filing attributes the decline mainly to increased working-capital investment. Capital expenditures were $34.6 million; acquisitions used $22.1 million.
- Cash declined $40.2 million from year-end to $152.8 million. Financing used $122.4 million, including $129.7 million for treasury-share purchases and $65.9 million of dividends, partly offset by $71.8 million in net borrowings.
- At June 30, current assets were $1,465.2 million and current liabilities $903.7 million. Inventory was $639.4 million, up from $539.9 million at year-end; management said it increased inventory to help limit supply-chain disruption.
- Total debt was $838.4 million: $125.5 million short-term and $712.9 million long-term. Total equity was $913.0 million. The company reported covenant compliance; $85.0 million was outstanding on its $500 million revolver and $29.4 million on other credit lines.
- Management said it expects to meet ongoing cash needs for at least the next 12 months using operating cash flow, cash balances and available financing. It anticipates 2022 capital expenditures of $70–$80 million.
Changes, outlook and notable items
- Management cited higher demand, pricing actions to offset higher input costs, cost-reduction initiatives and acquisitions as drivers of growth and margin improvement. Higher employee costs increased SG&A; LIFO charges also rose to $10.4 million in Q2 and $17.3 million in the first half.
- No full-year revenue or earnings guidance is provided in the filing. The stated capex range is the principal quantified outlook item.
- The company acquired Brazilian specialty-consumables manufacturer Kestra in March 2022; the filing says the acquisition’s pro forma impact was not material.
- In March 2022 the company announced it was ceasing operations in Russia. Russia represented less than 1% of 2021 consolidated sales and year-end assets, but sanctions and the Russia-Ukraine conflict may cause economic and supply-chain disruptions whose ultimate impact cannot be estimated.
- From April 1, 2022, the Turkish operation was accounted for under highly inflationary rules. The Q2 remeasurement impact was not significant to reported results.
- First-half results included a $3.7 million pension-plan settlement gain; Q2 included $1.5 million of acquired-inventory step-up amortization. Rationalization and impairment actions continue; management said expected benefits should improve future results and current actions should not materially affect liquidity.
- Asbestos-related illness claims named the company as a co-defendant in cases involving approximately 1,501 plaintiffs at June 30. Claims generally seek unspecified compensatory and punitive damages; the filing does not provide a clear quantified exposure for these pending cases.
- Other risks identified include foreign exchange and commodity costs, interest rates, supply-chain and economic disruption, acquisition integration, litigation, regulation and tax changes. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether price increases and cost savings continue to offset inflation, employee costs and other input pressures without weakening demand or volumes.
- Whether elevated inventory and working-capital needs convert into operating cash flow; first-half cash generation lagged net income and declined year over year.
- How foreign-exchange movements, including the euro and Turkish lira, affect International Welding sales and earnings.
- Debt, borrowing costs and covenant headroom as borrowings and capital-allocation needs evolve; also verify the timing and execution of planned capital expenditures.
- Potential financial exposure from asbestos litigation and the Russia-Ukraine conflict, both of which remain uncertain in the filing.