Business context and reporting period
Lincoln Electric Holdings, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021; the filing reports full-year results, not standalone fourth-quarter results. The company makes welding, cutting, brazing and automation products and reports three segments: Americas Welding, International Welding and The Harris Products Group.
Financial performance
Amounts below are in U.S. dollars; financial amounts are in millions unless noted.
| Metric | FY 2021 | FY 2020 | Change |
|---|---|---|---|
| Net sales | $3,234.2 | $2,655.4 | +21.8% |
| Gross profit / margin | $1,068.6 / 33.0% | $871.3 / 32.8% | Margin +0.2 percentage points |
| Operating income / margin | $461.7 / 14.3% | $282.1 / 10.6% | +63.7% |
| Net income / margin | $276.5 / 8.5% | $206.1 / 7.8% | +34.1% |
| Diluted earnings per share | $4.60 | $3.42 | +34.5% |
| Cash from operating activities | $365.1 | $351.4 | +$13.7 |
| Capital expenditures | $62.5 | $59.2 | +$3.3 |
Management attributed sales growth primarily to recovering demand after the pandemic and pricing actions. Its sales bridge attributed $260.4 million to volume, $251.9 million to price, $49.4 million to acquisitions and $17.1 million to foreign exchange. Gross margin improved modestly as volume and pricing offset higher input costs; 2021 LIFO charges were $38.6 million, versus $0.3 million in 2020.
Special items materially affected reported earnings. A $126.5 million non-cash pension settlement charge followed termination of the U.S. Retirement Annuity Program. Management’s non-GAAP adjusted net income was $373.3 million and adjusted diluted EPS was $6.22, compared with $249.9 million and $4.15 in 2020. Adjusted EBIT was $491.3 million, up 44.3%. These adjusted measures exclude specified special items and are not GAAP results.
Segments
- Americas Welding: sales of $1,824.5 million, up 20.8%; adjusted EBIT of $329.0 million, up 33.9%.
- International Welding: sales of $948.1 million, up 20.5%; adjusted EBIT of $106.2 million, up 136.1%.
- The Harris Products Group: sales of $461.6 million, up 28.7%; adjusted EBIT of $68.4 million, up 24.1%. Its adjusted EBIT margin declined to 14.6% from 15.1%, reflecting input costs, product mix and acquisitions.
Acquisitions included Zeman, which expands international automation capabilities, and FTP, which expands Harris Products Group’s HVAC offerings.
Cash, debt and liquidity
- Cash and equivalents were $193.0 million at year-end, down from $257.3 million. Cash from operations was $365.1 million; after $62.5 million of capital expenditures, free cash flow was approximately $302.5 million, using the company’s stated definition.
- Investing activities used $205.4 million, including $156.1 million for acquisitions. Financing activities used $221.9 million, including $164.5 million for share repurchases and $121.9 million for dividends.
- Total debt was $769.8 million, compared with $718.2 million a year earlier. Long-term debt carrying value was $717.9 million; the company reported $52.0 million of amounts due banks. It was in compliance with its debt covenants.
- The $500 million revolving credit facility had $40 million outstanding at year-end and matures in April 2026. Other credit lines totaled $91.3 million, with $12.0 million outstanding; $700 million of shelf facilities had no outstanding borrowings.
- Current assets were $1,289.6 million and current liabilities were $755.9 million. Inventory rose to $539.9 million from $381.3 million; management said it increased inventory to help protect customer service amid supply-chain disruption. Inventory days increased to 121.0 from 104.7.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. The company expects 2022 capital expenditures of $70 million to $80 million and anticipates retirement-plan expense to rise by approximately $1.5 million to $2.5 million, excluding settlement charges.
- Management said supply shortages and inflationary pressures on components and raw materials were ongoing and expected to continue for the foreseeable future. Risks also include economic cyclicality, higher logistics and labor costs, foreign exchange movements, international operations, cybersecurity, and changing environmental or climate regulation.
- At year-end, the company was a co-defendant in asbestos-related cases involving approximately 2,709 plaintiffs. It intends to contest the claims and cited insurance and cost-sharing arrangements; it said resolution was not expected to materially affect consolidated financial statements, while noting uncertainty around ultimate exposure.
- The company recorded $9.8 million of rationalization and asset impairment charges in 2021, versus $45.5 million in 2020, primarily related to severance and asset disposals. It said it did not anticipate significant additional charges to complete current plans, though further actions could result in future charges.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of the sales and margin improvement persists after price increases, and how successfully pricing continues to offset raw-material, labor and logistics inflation.
- Whether inventory levels, supply availability and working-capital needs normalize, given the substantial inventory increase and higher inventory days.
- The effect of the pension-plan termination charge on comparisons: reported 2021 earnings differ materially from management’s adjusted, non-GAAP results.
- How the Zeman and FTP acquisitions perform and contribute to segment growth and returns.
- Future cash deployment among acquisitions, repurchases and dividends, alongside debt levels and the planned 2022 capital expenditures.
- Developments in asbestos claims, including any changes in insurance coverage, cost-sharing arrangements or litigation outcomes.