Lincoln Electric Holdings, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company designs and manufactures welding, cutting, brazing and soldering products. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
- Q3 revenue: $806.5, up 20.6% year over year. Management attributed the increase to higher volume (+7.3%), pricing (+11.0%), acquisitions (+2.0%) and foreign exchange (+0.3%).
- Q3 gross profit and margin: $268.2 and 33.3%, versus $215.4 and 32.2% a year earlier. Higher volumes and pricing offset higher input costs; Q3 LIFO charges rose to $10.9 from $0.6.
- Q3 operating income: $115.6, up 48.6%; operating margin was 14.3%, compared with 11.6%. Reported net income was $31.8, down 45.7%, and diluted EPS was $0.53 versus $0.97.
- Adjusted results: Q3 adjusted diluted EPS was $1.56 versus $1.10, excluding special items. For the first nine months, revenue was $2,389.9, up 21.8%; reported net income was $202.0 versus $141.0, diluted EPS was $3.36 versus $2.34, and adjusted diluted EPS was $4.61 versus $2.91.
- Cash flow: Nine-month operating cash flow was $255.1, up from $215.6. Capital expenditures were $46.4; acquisitions used $158.6. Cash and cash equivalents fell $96.7 to $160.6, mainly reflecting acquisitions, share repurchases and dividends. Operating cash flow less capital expenditures was approximately $208.7, a derived measure.
- Liquidity and debt: Current assets were $1,236.0 and current liabilities $745.4 at September 30. Short-term debt was $41.4 and long-term debt $717.8; cash was $160.6. The company reported compliance with debt covenants. Its $500 million revolving facility had $20 million drawn; other credit lines totaled $97.8 million, with $20.6 million outstanding.
- Shareholder returns: The company declared dividends of $0.51 per share in Q3 and paid $91.7 in dividends during the first nine months. It repurchased $103.8 of shares during that period.
Material changes and segment performance
- Q3 sales increased across all segments: Americas Welding +24.2%, International Welding +15.3%, and The Harris Products Group +17.3%. Q3 adjusted EBIT rose to $84.6 from $59.1 in Americas and $29.0 from $13.4 in International; Harris adjusted EBIT declined to $16.0 from $17.6.
- Nine-month sales growth reflected post-pandemic demand recovery, price increases in response to higher input and commodity costs, favorable foreign exchange and acquisitions. LIFO charges were $24.2 for the nine months, versus $0.7 in 2020.
- Inventory increased to $524.4 from $381.3 at year-end. Management said it increased inventories to help limit potential pandemic-related supply disruptions; days sales in inventory rose to 124.7 from 104.7 at year-end.
- The company acquired Zeman Bauelemente, FTP and Shoals in 2021 to expand automation and HVAC-related offerings. The filing says their pro forma income-statement impact was not material; purchase-price allocations remained preliminary.
Outlook, unusual items and risks
- Pension settlement: Noncash pension settlement charges were $73.6 in Q3 and $79.7 for the first nine months, primarily related to terminating the Lincoln Electric Company Retirement Annuity Program. After purchasing a group annuity contract in October, the company estimated an additional Q4 2021 pretax settlement charge of approximately $35–$45 and expected the termination process to be substantially complete by year-end. This charge was the principal reason reported Q3 net income fell despite higher operating income.
- Capital spending outlook: The company anticipated 2021 capital expenditures of $65–$70. Management said ongoing cash needs should be met primarily from operating cash flow, existing cash, credit facilities and debt-market access.
- Operating risks: Management cited COVID-19 uncertainty and potential effects on estimates and results. Other disclosed risks include economic and credit-market conditions, commodity and energy prices, currency movements, tariffs, regulation, litigation, acquisitions and integration, and disruptions affecting suppliers or customers. The filing reported no material change in market-risk exposure since year-end 2020.
- Contingencies: At September 30, the company was a co-defendant in asbestos-related illness cases involving approximately 2,768 plaintiffs. Claim amounts were generally unspecified; the filing does not provide a clear estimate of potential loss for these pending cases.
- Management reported effective disclosure controls as of September 30, 2021 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Q4 pension settlement charges fall within the estimated $35–$45 range and how the remaining plan termination affects reported earnings and AOCI.
- Whether pricing continues to offset elevated input costs, including LIFO charges, and whether margins remain resilient.
- Whether inventory growth converts into sales and cash without further pressure on working capital or supply availability.
- Whether acquisitions integrate as planned and contribute to growth and segment profitability.
- Any developments in asbestos litigation, tax audits or other contingencies that could materially affect cash flows or results.