Lincoln Electric Holdings, Inc. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where appropriate.
Business context
Lincoln Electric manufactures welding, cutting, brazing and soldering products and automation systems. Its operating segments are Americas Welding, International Welding and The Harris Products Group. The company reported approximately 12,000 employees and operates globally. No customer represented more than 10% of sales.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Net sales | $3,761.2 million | $3,234.2 million | Up 16.3% |
| Gross profit / margin | $1,280.8 million / 34.1% | $1,068.6 million / 33.0% | Margin up 1.1 percentage points |
| Operating income / margin | $612.3 million / 16.3% | $461.7 million / 14.3% | Up 32.6% |
| Net income / margin | $472.2 million / 12.6% | $276.5 million / 8.5% | Up 70.8% |
| Diluted EPS | $8.04 | $4.60 | Up 74.6%; adjusted diluted EPS was $8.27 versus $6.22 |
| Cash from operations | $383.4 million | $365.1 million | Up $18.3 million |
| Capital expenditures | $71.9 million | $62.5 million | Implied free cash flow was approximately $311.5 million |
| Cash and cash equivalents | $197.2 million | $193.0 million | Balance sheet and cash-flow statement value |
| Total debt | $1,203.9 million | $769.8 million | Increase primarily reflects Fori acquisition financing |
Sales growth reflected higher volume, pricing to offset input costs and acquisitions, partly offset by unfavorable foreign exchange. Management attributed improved gross margin to higher volume and profit-improvement and cost-reduction actions, which offset higher input costs. Adjusted EBIT was $637.0 million, or 16.9% of sales, compared with $491.3 million, or 15.2%.
Segment sales were $2,288.9 million for Americas Welding (up 25.5%), $954.3 million for International Welding (up 0.6%) and $518.0 million for Harris Products Group (up 12.2%). Adjusted EBIT increased in Americas Welding and International Welding, but declined 6.5% at Harris, where management cited acquisition integration, unfavorable mix and lower commodity pricing in certain metal offerings.
At year-end, current assets were $1,557.8 million and current liabilities were $852.9 million. Total equity was $1,034.0 million. The company reported $45 million drawn on its $500 million revolving credit facility and $37.4 million drawn on other lines and debt agreements; it was in compliance with stated debt covenants. A $400 million term loan borrowed in November 2022 matures in 2025 and helped fund Fori.
Cash dividends paid were $130.7 million. The company declared dividends of $2.32 per share for 2022; a January 2023 payment of $0.64 per share represented a 14.3% increase in the payout rate. Treasury-share purchases totaled $181.3 million.
Material changes versus FY2021
- Revenue, operating income and net income increased; gross, operating and net margins also improved.
- Foreign exchange reduced reported sales by $176.9 million, with the largest effect in International Welding. International segment pricing and volume were substantially offset by currency effects.
- Other income improved to $10.0 million from an expense of $114.5 million, primarily because FY2021 included substantial non-cash pension settlement charges related to termination of a pension plan.
- The effective tax rate rose to 20.3% from 14.9%, which the company attributed primarily to earnings mix and the prior-year pension termination impact.
- Debt rose by $434.1 million, while investing cash outflow increased, mainly due to acquisitions. Inventory increased to $665.5 million from $539.9 million; average operating working capital rose to 20.9% of sales from 16.3%.
Outlook, commentary, risks and unusual items
- Outlook: Management anticipated 2023 capital expenditures of $80 million to $100 million, for capacity, efficiency, growth, safety and environmental improvements. The filing provides no clear full-year revenue or earnings guidance.
- Fori acquisition: Acquired December 1, 2022, expanding automation capabilities and automotive exposure. The filing reports purchase-price consideration of $465.6 million, or $413.3 million net of cash acquired; Fori generated approximately $200 million of 2022 sales on an unaudited basis. Purchase accounting was preliminary. Fori represented approximately 14.6% of year-end assets and was excluded from management’s and the auditor’s internal-control assessment; integration into company systems was expected during 2023.
- Operating risks: Management highlighted persistent supply constraints and inflationary pressures affecting some materials and components, with potential for excess or obsolete inventory. Results are sensitive to industrial cycles, raw-material and labor costs, interest rates, and foreign exchange.
- Geopolitical and currency exposure: The company ceased Russian operations in March 2022. Russia represented less than 1% of consolidated sales and assets, but the ultimate impact of the conflict and sanctions could not be reasonably estimated. Turkey became subject to highly inflationary accounting in April 2022; the reported 2022 earnings impact was not significant.
- Contingencies: The company was a co-defendant in asbestos-related cases involving approximately 1,483 plaintiffs. It intends to contest the claims and believes applicable insurance and its litigation experience mitigate exposure; the ultimate aggregate impact remains difficult to assess. The filing also discusses product-liability, contractual-performance, tax and environmental risks.
- Other items: FY2022 included $11.8 million of rationalization and asset impairment charges and $6.0 million of acquisition transaction costs. Adjusted measures exclude specified special items and are non-GAAP. The auditor issued unqualified opinions on the financial statements and on internal control, with Fori excluded from the internal-control audit.
Important facts for investors to verify
- Reconcile the cash balance: the balance sheet and cash-flow statement report $197.2 million, while MD&A text states $197.95 million.
- Review Fori’s finalized purchase accounting, contribution to results after the acquisition date, integration progress and internal-control inclusion.
- Track inventory, working-capital requirements and cash conversion as supply conditions normalize; elevated inventory supported customer service but may carry obsolescence risk.
- Assess the higher debt balance, term-loan repayment and refinancing needs, interest-rate exposure, facility availability and covenant headroom.
- Monitor International Welding currency exposure, commodity and labor costs, and the company’s ability to sustain price increases and margin gains.
- Review the status and financial exposure of asbestos and other contingencies, noting that the filing does not provide a clear estimable range of potential asbestos losses.