Lincoln Electric Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. Lincoln Electric designs and manufactures welding, cutting, automation, oxy-fuel, brazing and soldering products. Amounts below are in U.S. dollars; “$m” means millions.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $925.4m | $757.0m | +22.2% |
| Gross profit / margin | $329.8m / 35.6% | $253.8m / 33.5% | Margin +2.1 percentage points |
| Operating income / margin | $161.2m / 17.4% | $103.9m / 13.7% | +55.1%; margin +3.7 points |
| Net income | $126.0m | $74.2m | +69.9% |
| Diluted EPS | $2.13 | $1.23 | +73.2% |
| Adjusted diluted EPS (non-GAAP) | $2.10 | $1.37 | +53.3% |
| Operating cash flow | $43.1m | $45.3m | Down $2.2m |
| Cash and equivalents at period end | $154.4m | $243.1m at Dec. 31, 2021 | Down $38.6m from year-end |
| Total debt at period end | $865.6m | $769.8m at Dec. 31, 2021 | Up $95.8m |
Cash from operations was pressured by investment in working capital, including increases in receivables and inventory. Investing cash outflow was $40.1m, including $22.0m for acquisitions and $18.7m in capital expenditures. Financing cash outflow was $40.6m, including $104.6m of share repurchases and $33.4m of dividends, partly offset by $96.3m of net borrowing proceeds. The current ratio, calculated from reported balance-sheet totals, was approximately 1.54.
At March 31, short-term debt was $150.6m and long-term debt, less current portion, was $715.0m. The $500m revolving facility had $110.0m drawn; other credit lines totaling $108.0m had $40.0m drawn. The company reported covenant compliance. It declared dividends of $0.56 per share and repurchased 0.8m shares for approximately $104.6m.
Material changes and segment results
- Sales increased $168.4m. Management attributed growth to higher demand and pricing to offset higher input costs, with acquisitions also contributing; unfavorable foreign exchange partly offset the increase. Reported sales growth reflected volume of 3.2%, acquisitions of 4.6%, price of 18.9%, and foreign exchange of negative 4.4%.
- Gross margin improved with higher volume, pricing and cost-reduction initiatives. LIFO charges rose to $6.9m from $3.9m. SG&A increased 14.4%, primarily due to higher employee costs.
- Americas Welding sales were $534.1m (+25.6%) and adjusted EBIT was $111.6m (+45.6%). International Welding sales were $258.0m (+15.7%) and adjusted EBIT was $37.1m (+97.1%). Harris Products Group sales were $133.4m (+22.7%) and adjusted EBIT was $19.6m (+4.8%); its adjusted EBIT margin fell 2.5 percentage points, mainly due to input costs, product mix and integration activities.
- Adjusted EBIT, a non-GAAP measure, was $163.5m versus $112.7m. Adjusted net income was $124.7m versus $82.8m. These measures exclude special items and should be considered alongside GAAP results.
Outlook, risks and unusual items
- The company anticipated 2022 capital expenditures of $70m–$80m. It stated that operating cash flow, cash balances, existing credit facilities and potential capital-market borrowing were expected to meet ongoing cash needs. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management reported ongoing supply shortages and inflation in certain components and raw materials, with challenges and cost impacts expected to continue for the foreseeable future. Higher inventory levels support customer service but could result in excess or obsolete stock if demand falls short.
- In March 2022, the company announced it was ceasing operations in Russia. Russia accounted for less than 1% of consolidated sales and assets on the stated 2021 bases, but the company said the conflict and sanctions could disrupt economic activity and supply chains; the ultimate financial effect could not be reasonably estimated.
- In April 2022, the company changed its Turkish subsidiary’s functional currency to the U.S. dollar following cumulative three-year inflation in Turkey reaching 100% during Q1.
- Other income included a $3.7m gain from final settlement of a terminated pension plan. The effective tax rate was 21.1%, versus 23.7%, reflecting favorable discrete tax adjustments and geographic earnings mix. Rationalization and asset impairment charges were $1.9m; further actions and charges remain possible.
- Asbestos-related illness cases named the company as a co-defendant in claims involving approximately 1,524 plaintiffs at March 31. Claimants seek compensatory and punitive damages, often in unspecified amounts. The filing describes the company as one of many defendants; no clear estimate of potential exposure is provided.
- Management identified risks including geopolitical events, supply-chain and distribution disruptions, inflation and commodity costs, currency movements, litigation, acquisitions and integration, and broader economic conditions. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether price increases and margin gains can be sustained as input costs, supply constraints and demand evolve.
- Working-capital and inventory trends, given lower operating cash flow and higher inventory days than a year earlier.
- Debt and liquidity needs after increased borrowing, share repurchases and dividends; confirm available facility capacity and covenant headroom.
- The eventual impact of Russia-related actions and sanctions, Turkish currency accounting, and any further foreign-exchange or supply-chain effects.
- Potential exposure and developments in asbestos litigation, and the timing and cost of rationalization plans.