LINCOLN ELECTRIC HOLDINGS INC annual report, FY2023

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Lincoln Electric Holdings, Inc. — FY2023 Form 10-K

Reporting period: Year ended December 31, 2023; comparisons are with FY2022. All financial amounts below are U.S. dollars. The company manufactures welding, cutting, brazing and automation products, reporting through Americas Welding, International Welding and The Harris Products Group.

Financial performance

  • Sales: $4,191.6 million, up 11.4%. The filing attributes the increase to acquisitions (+$276.6 million), volume (+$85.7 million), pricing (+$64.1 million) and foreign exchange (+$4.0 million). Fori contributed $263.2 million of 2023 sales.
  • Profit and margins: Gross profit was $1,465.4 million, with a 35.0% gross margin versus 34.1%. Operating income was $717.8 million (17.1% margin versus 16.3%); net income was $545.2 million (13.0% margin versus 12.6%). Diluted EPS was $9.37 versus $8.04. Adjusted diluted EPS, a non-GAAP measure, was $9.41 versus $8.27.
  • Segments: Americas Welding sales rose 16.0% to $2,655.5 million; adjusted EBIT was $538.3 million. International Welding sales rose 9.0% to $1,040.0 million; adjusted EBIT was $136.5 million. Harris Products Group sales declined 4.2% to $496.1 million, while adjusted EBIT rose to $74.1 million from $64.0 million.
  • Cash flow: Operating cash flow was $667.5 million, up from $383.4 million, mainly due to higher earnings and improved working capital. Capital expenditures were $91.0 million. Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $576.6 million.
  • Liquidity and debt: Cash and equivalents were $393.8 million, up from $197.2 million. Current assets were $1,693.1 million and current liabilities $754.6 million. Total debt was $1,105.2 million versus $1,203.9 million; cash less total debt implies net debt of approximately $711.4 million. The $500 million revolving credit facility had no borrowings outstanding at year-end. The company reported compliance with debt covenants.
  • Shareholder returns: Cash dividends paid were $148.0 million and treasury-share purchases were $198.8 million. The 2023 declared dividend was $2.63 per share; in January 2024, the company paid $0.71 per share and reported an 11% increase in its dividend payout rate.

Changes versus FY2022

  • Reported net income increased 15.5%, and diluted EPS increased 16.5%. Operating income rose 17.2%; adjusted EBIT increased 14.8% to $731.4 million.
  • Sales growth was supported substantially by acquisitions, particularly Fori, acquired in December 2022. Harris sales weakened with end-market demand, even as its adjusted EBIT margin improved.
  • Operating cash flow strengthened considerably, and average operating working capital as a percentage of sales fell to 17.1% from 20.9%. Inventory days declined to 104.6 from 132.5.
  • Interest expense increased to $44.4 million from $29.5 million. The reported effective tax rate was 20.6%, compared with 20.3%.

Outlook, risks and notable items

  • The filing does not provide a specific sales or earnings forecast. Management anticipates 2024 capital expenditures of $90 million to $110 million, including capacity, efficiency, growth, safety and environmental investments.
  • Management identifies exposure to industrial-cycle and capital-spending fluctuations, inflation and raw-material and labor costs, supply disruptions, foreign exchange, interest rates, cybersecurity, workforce availability, competition, acquisitions and environmental regulation.
  • Operations in Russia were ceased in 2022. Russian sales and assets were each less than 1% of consolidated totals in 2023; the ultimate effects of the Russia-Ukraine conflict and sanctions remain uncertain.
  • At year-end, the company was a co-defendant in asbestos-related cases involving approximately 1,387 plaintiffs. It intends to defend the claims and believes insurance applies, but states that aggregate long-term effects are difficult to assess. Management believes the resolution of disclosed claims and proceedings will not materially affect the consolidated financial statements.
  • Unusual items included a $36.2 million property-sale gain, offset by rationalization and impairment charges; the resulting 2023 rationalization and asset-impairment line was a net gain of $11.3 million. Adjusted results exclude specified special items, including acquired-inventory step-up amortization.
  • Steven B. Hedlund became President and CEO on January 1, 2024, succeeding Christopher L. Mapes, who became Executive Chairman. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.

Investor verification priorities

  1. Assess how much reported growth and future profitability depend on Fori and other acquisitions versus organic demand, pricing and volume.
  2. Review the durability of margin improvement, including input-cost trends, pricing, segment mix and the adjusted-to-GAAP earnings reconciliations.
  3. Track working-capital and cash-flow sustainability, planned capital spending, debt repayment needs and the 2025 term-loan maturity.
  4. Monitor Harris end-market demand, asbestos and product-liability developments, and potential effects of geopolitical, currency, cybersecurity and regulatory risks.
  5. Verify management’s future outlook and any updated guidance in subsequent filings; this 10-K supplies capital-spending expectations but no specific sales or earnings guidance.