LINCOLN ELECTRIC HOLDINGS INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share amounts ) This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read together with the Company’s unaudited consolidated financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q. General The Company is the world’s largest designer and manufacturer of arc welding and cutting products, manufacturing a broad line of arc welding equipment, consumable welding products and other welding and cutting products. Welding products include arc welding power sources, computer numerical control and plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes, welding accessories and specialty welding consumables and fabrication. The Company’s product offering also includes oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. In addition, the Company has a leading global position in the brazing and soldering alloys market. The Company’s products are sold in both domestic and international markets. In the Americas, products are sold principally through industrial distributors, retailers and directly to users of welding products. Outside of the Americas, the Company has an international sales organization comprised of Company employees and agents who sell products from the Company’s various manufacturing sites to distributors and product users. The Company’s business units are aligned into three operating segments. The operating segments consist of Americas Welding, International Welding and The Harris Products Group. The Americas Welding segment includes welding operations in North and South America. The International Welding segment includes welding operations in Europe, Africa, Asia and Australia. The Harris Products Group includes the Company’s global oxy-fuel cutting, soldering and brazing businesses as well as its retail business in the United States. The current coronavirus disease (“COVID- 19”) pandemic has adversely impacted global economic conditions and has contributed to significant volatility in financial markets beginning in early calendar year 2020. Although the Company's estimates contemplate current conditions, the inputs into certain significant and critical accounting estimates include judgments and assumptions about the economic implications of the COVID-19 pandemic and how management expects them to change in the future. It is reasonably possible that actual results experienced may differ materially from the Company's estimates in future periods, which could affect our results of operations and financial condition. For additional discussion, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 24 Table of Contents Results of Operations The following table shows the Company’s results of operations: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ 2021 ​ 2020 ​ 2021 vs. 2020 ​ ​ Amount % of Sales Amount % of Sales $ % Net sales $ 806,454 ​ ​ ​ ​ $ 668,888 ​ ​ $ 137,566 20.6 % Cost of goods sold 538,282 ​ ​ ​ 453,501 ​ ​ (84,781) (18.7) % Gross profit 268,172 ​ 33.3 % 215,387 32.2 % 52,785 24.5 % Selling, general & administrative expenses 149,118 ​ 18.5 % 131,337 19.6 % (17,781) (13.5) % Rationalization and asset impairment charges 3,484 ​ 0.4 % 6,257 0.9 % 2,773 44.3 % Operating income 115,570 ​ 14.3 % 77,793 11.6 % 37,777 48.6 % Interest expense, net 5,714 ​ ​ ​ 5,552 ​ ​ (162) (2.9) % Other income (expense) (71,441) ​ ​ ​ 1,062 ​ ​ (72,503) (6,827.0) % Income before income taxes 38,415 ​ 4.8 % 73,303 11.0 % (34,888) (47.6) % Income taxes 6,658 ​ ​ ​ 14,797 ​ ​ 8,139 55.0 % Effective tax rate 17.3 % ​ ​ 20.2 % ​ ​ 2.9 % ​ ​ Net income including non-controlling interests 31,757 ​ ​ ​ 58,506 ​ ​ (26,749) (45.7) % Non-controlling interests in subsidiaries' loss — ​ ​ ​ 27 ​ ​ (27) (100.0) % Net income $ 31,757 ​ 3.9 % $ 58,479 8.7 % $ (26,722) (45.7) % Diluted earnings per share $ 0.53 ​ ​ ​ ​ $ 0.97 ​ $ (0.44) (44.9) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ 2021 ​ 2020 ​ 2021 vs. 2020 ​ ​ Amount % of Sales Amount % of Sales $ % Net sales $ 2,389,929 ​ ​ ​ ​ $ 1,961,606 ​ ​ $ 428,323 21.8 % Cost of goods sold 1,593,981 ​ ​ ​ 1,319,519 ​ ​ (274,462) (20.8) % Gross profit 795,948 ​ 33.3 % 642,087 32.7 % 153,861 24.0 % Selling, general & administrative expenses 446,351 ​ 18.7 % 407,440 20.8 % (38,911) (9.6) % Rationalization and asset impairment charges 8,277 ​ 0.3 % 36,016 1.8 % 27,739 77.0 % Operating income 341,320 ​ 14.3 % 198,631 10.1 % 142,689 71.8 % Interest expense, net 16,736 ​ ​ ​ 16,891 ​ ​ 155 0.9 % Other income (expense) (71,155) ​ ​ ​ 1,168 ​ ​ (72,323) (6,192.0) % Income before income taxes 253,429 ​ 10.6 % 182,908 9.3 % 70,521 38.6 % Income taxes 51,259 ​ ​ ​ 41,834 ​ ​ (9,425) (22.5) % Effective tax rate 20.2 % ​ ​ 22.9 % ​ ​ 2.7 % ​ ​ Net income including non-controlling interests 202,170 ​ ​ ​ 141,074 ​ ​ 61,096 43.3 % Non-controlling interests in subsidiaries' loss 131 ​ ​ ​ 37 ​ ​ 94 254.1 % Net income $ 202,039 ​ 8.5 % $ 141,037 7.2 % $ 61,002 43.3 % Diluted earnings per share $ 3.36 ​ ​ ​ ​ $ 2.34 ​ $ 1.02 43.7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 25 Table of Contents Net Sales: The following table summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales on a consolidated basis: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ ​ ​ Net Sales ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign ​ Net Sales ​ ​ 2020 Volume Acquisitions Price Exchange 2021 Lincoln Electric Holdings, Inc. ​ $ 668,888 ​ $ 48,506 ​ $ 13,251 ​ $ 73,771 $ 2,038 ​ $ 806,454 ​ % Change ​ ​ ​ ​ ​ ​ ​ ​ ​ Lincoln Electric Holdings, Inc. ​ ​ ​ ​ 7.3 % 2.0 % 11.0 % ​ 0.3 % ​ 20.6 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ ​ ​ Net Sales ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign ​ Net Sales ​ ​ 2020 Volume Acquisitions Price Exchange 2021 Lincoln Electric Holdings, Inc. ​ $ 1,961,606 ​ $ 221,408 ​ $ 16,836 ​ $ 158,920 $ 31,159 ​ $ 2,389,929 ​ % Change ​ ​ ​ ​ ​ ​ ​ ​ ​ Lincoln Electric Holdings, Inc. ​ ​ ​ ​ 11.3 % 0.9 % 8.1 % ​ 1.6 % ​ 21.8 % Net sales increased in the three and nine months ended September 30, 2021 driven by higher demand reflecting recovery from the impacts of the pandemic, increased product pricing as a result of higher input costs and favorable foreign exchange. The increase in Net sales from acquisitions was driven by the acquisitions of Zeman Bauelemente within International Welding and FTP and Shoals within The Harris Products Group. Refer to Note 4 to the consolidated financial statements for details. Gross Profit: Gross profit for the three and nine months ended September 30, 2021 increased 24.5% and 24.0%, respectively, and to 33.3% as a percent of sales, driven by higher volumes and pricing actions which offset higher input costs. Last-in, first-out (“LIFO”) charges were $10,908 and $24,236 in the three and nine months ended September 30, 2021, respectively, as compared with charges of $597 and $732 in the same 2020 periods, respectively. Selling, General & Administrative ("SG&A") Expenses: SG&A expenses increased for the three and nine months ended September 30, 2021 as compared to the same 2020 periods, primarily due to higher employee costs. Rationalization and Asset Impairment Charges: The Company recorded charges of $3,484 ($3,383 after-tax) and $8,277 ($8,033 after-tax) in the three and nine months ended September 30, 2021, respectively, primarily related to severance charges and gains or losses on the disposal of assets. The Company recorded charges of $6,257 ($5,142 after-tax) and $36,016 ($28,181 after-tax) in the three and nine months ended September 30, 2020, respectively, primarily related to severance charges, non-cash asset impairments of long-lived assets, and gains or losses on the disposal of assets. Other Income (Expense): The decrease in Other income (expense) for the three and nine months ended September 30, 2021 as compared to September 30, 2020 was primarily due to non-cash pension settlement charges resulting from lump sum pension payments related to the termination of the Lincoln Electric Company Retirement Annuity Program (“RAP”) plan. Refer to Note 13 to the consolidated financial statements for details. 26 Table of Contents Income Taxes: The effective tax rate was lower for the three and nine months ended September 30, 2021 as compared to the same 2020 periods, primarily due to favorable discrete tax adjustments in 2021, as well as higher tax expense associated with a valuation allowance recorded in the nine months ended September 30, 2020. Segment Results ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ Net Sales ​ ​ ​ ​ ​ ​ ​ Foreign ​ Net Sales ​ ​ 2020 Volume (1) Acquisitions (2) Price (3) Exchange 2021 ​ Operating Segments ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Americas Welding $ 371,535 ​ $ 42,341 ​ $ — ​ $ 43,957 $ 3,675 ​ $ 461,508 ​ International Welding ​ 196,937 ​ 7,452 ​ 3,371 ​ 21,205 ​ (1,800) ​ 227,165 ​ The Harris Products Group ​ 100,416 ​ (1,287) ​ 9,880 ​ 8,609 ​ 163 ​ 117,781 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % Change ​ ​ ​ ​ ​ ​ ​ Americas Welding ​ ​ ​ ​ 11.4 % — ​ ​ 11.8 % ​ 1.0 % ​ 24.2 % International Welding ​ ​ ​ ​ 3.8 % 1.7 % ​ 10.8 % ​ (0.9) % ​ 15.3 % The Harris Products Group ​ ​ ​ ​ (1.3) % 9.8 % ​ 8.6 % ​ 0.2 % ​ 17.3 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ Net Sales ​ ​ ​ ​ ​ ​ Foreign Net Sales ​ 2020 ​ Volume (1) Acquisitions (2) Price (3) ​ Exchange ​ 2021 ​ Operating Segments ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Americas Welding $ 1,123,299 ​ $ 128,836 ​ $ — ​ $ 80,352 $ 11,731 ​ $ 1,344,218 ​ International Welding ​ 572,027 ​ 63,797 ​ 6,956 ​ 40,537 ​ 19,279 ​ 702,596 ​ The Harris Products Group ​ 266,280 ​ 28,775 ​ 9,880 ​ 38,031 ​ 149 ​ 343,115 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % Change ​ ​ ​ ​ ​ ​ ​ Americas Welding ​ ​ ​ ​ 11.5 % — ​ ​ 7.2 % ​ 1.0 % ​ 19.7 % International Welding ​ ​ ​ ​ 11.2 % 1.2 % ​ 7.1 % ​ 3.4 % ​ 22.8 % The Harris Products Group ​ ​ ​ ​ 10.8 % 3.7 % ​ 14.3 % ​ 0.1 % ​ 28.9 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (1) Increases for three and nine months ended September 30, 2021 for Americas Welding and International Welding was primarily due to higher demand reflecting recovery from the impacts of the COVID-19 pandemic. (2) Increase for the three and nine months ended September 30, 2021 were due to the acquisition of Zeman Bauelemente in International Welding and FTP and Shoals in The Harris Products Group, as discussed in Note 4 to the consolidated financial statements. (3) Increase for the three and nine months ended September 30, 2021 in Americas Welding and International Welding reflects increased product pricing as a result of higher input costs. Increase for The Harris Products Group in the three and nine months ended September 30, 2021 was due to increased commodity costs. 27 Table of Contents Adjusted Earnings Before Interest and Income Taxes: Segment performance is measured and resources are allocated based on a number of factors, the primary measure being the Adjusted EBIT profit measure. EBIT is defined as Operating income plus Other income (expense). EBIT is adjusted for special items as determined by management such as the impact of rationalization activities, certain asset impairment charges and gains or losses on disposals of assets. The following table presents Adjusted EBIT by segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ ​ Three Months Ended September 30, ​ 2021 vs. 2020 ​ 2021 2020 $ % Americas Welding: ​ ​ ​ ​ ​ Net sales ​ $ 461,508 ​ $ 371,535 ​ $ 89,973 ​ 24.2 % Inter-segment sales ​ 37,480 ​ 29,368 ​ 8,112 ​ 27.6 % Total Sales ​ $ 498,988 ​ $ 400,903 ​ ​ 98,085 ​ 24.5 % Adjusted EBIT (3) ​ $ 84,557 ​ $ 59,120 ​ ​ 25,437 ​ 43.0 % As a percent of total sales (1) ​ 16.9 % 14.7 % ​ ​ ​ 2.2 % International Welding: ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 227,165 ​ $ 196,937 ​ ​ 30,228 ​ 15.3 % Inter-segment sales ​ 7,078 ​ 4,898 ​ ​ 2,180 ​ 44.5 % Total Sales ​ $ 234,243 ​ $ 201,835 ​ ​ 32,408 ​ 16.1 % Adjusted EBIT (4) ​ $ 29,032 ​ $ 13,432 ​ ​ 15,600 ​ 116.1 % As a percent of total sales (1) ​ 12.4 % 6.7 % ​ ​ ​ 5.7 % The Harris Products Group: ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 117,781 ​ $ 100,416 ​ ​ 17,365 ​ 17.3 % Inter-segment sales ​ 1,945 ​ 1,898 ​ ​ 47 ​ 2.5 % Total Sales ​ $ 119,726 ​ $ 102,314 ​ ​ 17,412 ​ 17.0 % Adjusted EBIT (5) ​ $ 15,980 ​ $ 17,587 ​ ​ (1,607) ​ (9.1) % As a percent of total sales (2) ​ 13.3 % 17.2 % ​ ​ ​ (3.9) % Corporate / Eliminations: ​ ​ ​ ​ ​ ​ ​ Inter-segment sales ​ $ (46,503) ​ $ (36,164) ​ ​ (10,339) ​ (28.6) % Adjusted EBIT ​ (4,704) ​ (1,839) ​ ​ (2,865) ​ (155.8) % Consolidated: ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 806,454 ​ $ 668,888 ​ ​ 137,566 ​ 20.6 % Net income ​ $ 31,757 ​ $ 58,479 ​ ​ (26,722) ​ (45.7) % As a percent of total sales ​ 3.9 % 8.7 % ​ ​ ​ (4.8) % Adjusted EBIT (6) ​ $ 124,865 ​ $ 88,300 ​ ​ 36,565 ​ 41.4 % As a percent of sales ​ 15.5 % 13.2 % ​ ​ 2.3 % ​ (1) Increase for the three months ended September 30, 2021 as compared to September 30, 2020 primarily driven by higher volumes and pricing actions offsetting higher input and employee costs. The increase for International Welding was also driven by cost reduction actions. (2) Decrease for the three months ended September 30, 2021 as compared to September 30, 2020 driven primarily by higher input costs, product mix and integration activities. (3) The three months ended September 30, 2021 and 2020 exclude pension settlement charges of $73,562 and $3,188, respectively. The three months ended September 30, 2020 also excludes Rationalization and asset impairment charges of $3,856 related to severance charges as discussed in Note 6 to the consolidated financial statements. 28 Table of Contents (4) The three months ended September 30, 2021 and 2020 exclude Rationalization and asset impairment charges of $3,472 and $2,401, respectively, related to severance and gains or losses on the disposal of assets as discussed in Note 6 to the consolidated financial statements. The three months ended September 30, 2021 also exclude amortization of the step up in value of acquired inventories of $3,143 related to the acquisition of Zeman Bauelemente as discussed in Note 4 to the consolidated financial statements. (5) The three months ended September 30, 2021 exclude amortization of the step up in value of acquired inventories of $547 related to the acquisition of FTP and Shoals as discussed in Note 4 to the consolidated financial statements. (6) See non-GAAP Financial Measures for a reconciliation of Net income as reported and Adjusted EBIT. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ ​ ​ Nine Months Ended September 30, ​ 2021 vs. 2020 ​ ​ 2021 2020 $ % Americas Welding: ​ ​ ​ ​ ​ Net sales ​ $ 1,344,218 ​ $ 1,123,299 ​ $ 220,919 ​ 19.7 % ​ Inter-segment sales ​ 109,993 ​ 81,644 ​ 28,349 ​ 34.7 % ​ Total Sales ​ $ 1,454,211 ​ $ 1,204,943 ​ ​ 249,268 ​ 20.7 % ​ Adjusted EBIT (3) ​ $ 245,308 ​ $ 176,524 ​ ​ 68,784 ​ 39.0 % ​ As a percent of total sales (1) ​ 16.9 % 14.6 % ​ ​ ​ 2.3 % ​ International Welding: ​ ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 702,596 ​ $ 572,027 ​ ​ 130,569 ​ 22.8 % ​ Inter-segment sales ​ 18,260 ​ 13,667 ​ ​ 4,593 ​ 33.6 % ​ Total Sales ​ $ 720,856 ​ $ 585,694 ​ ​ 135,162 ​ 23.1 % ​ Adjusted EBIT (4) ​ $ 77,845 ​ $ 29,729 ​ ​ 48,116 ​ 161.8 % ​ As a percent of total sales (1) ​ 10.8 % 5.1 % ​ ​ ​ 5.7 % ​ The Harris Products Group: ​ ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 343,115 ​ $ 266,280 ​ ​ 76,835 ​ 28.9 % ​ Inter-segment sales ​ 6,376 ​ 5,376 ​ ​ 1,000 ​ 18.6 % ​ Total Sales ​ $ 349,491 ​ $ 271,656 ​ ​ 77,835 ​ 28.7 % ​ Adjusted EBIT (5) ​ $ 52,889 ​ $ 41,792 ​ ​ 11,097 ​ 26.6 % ​ As a percent of total sales (2) ​ 15.1 % 15.4 % ​ ​ ​ (0.3) % ​ Corporate / Eliminations: ​ ​ ​ ​ ​ ​ ​ ​ Inter-segment sales ​ $ (134,629) ​ $ (100,687) ​ ​ (33,942) ​ (33.7) % ​ Adjusted EBIT (6) ​ (10,048) ​ (4,902) ​ ​ (5,146) ​ (105.0) % ​ Consolidated: ​ ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 2,389,929 ​ $ 1,961,606 ​ ​ 428,323 ​ 21.8 % ​ Net income ​ $ 202,039 ​ $ 141,037 ​ ​ 61,002 ​ 43.3 % ​ As a percent of total sales ​ 8.5 % 7.2 % ​ ​ ​ 1.3 % ​ Adjusted EBIT (7) ​ $ 365,994 ​ $ 243,143 ​ ​ 122,851 ​ 50.5 % ​ As a percent of sales ​ 15.3 % 12.4 % ​ ​ 2.9 % ​ (1) Increase for the nine months ended September 30, 2021 as compared to September 30, 2020 primarily driven higher volumes and pricing actions, which offset higher input costs, and cost reduction actions. (2) Decrease for the nine months ended September 30, 2021 as compared to September 30, 2020 primarily driven by higher input costs and product mix. (3) The nine months ended September 30, 2021 and 2020 exclude pension settlement charges of $79,652 and $6,522, respectively. The nine months ended September 30, 2020 also exclude Rationalization and asset impairment charges of $27,719 related to severance charges and non-cash asset impairments of long-lived assets as discussed in Note 6 to the consolidated financial statements. 29 Table of Contents (4) The nine months ended September 30, 2021, and 2020 exclude Rationalization and asset impairment charges of $8,265 and $8,297, respectively, related to severance, asset impairments and gains or losses on the disposal of assets discussed in Note 6 to the consolidated financial statements. The nine months ended September 30, 2021 and 2020 also excludes amortization of the step up in value of acquired inventories of $4,984 and $806, respectively, related to acquisitions as discussed in Note 4 to the consolidated financial statements . The nine months ended September 30, 2021 exclude pension settlement charges of $446. (5) The nine months ended September 30, 2021 excludes amortization of the step up in value of acquired inventories of $547 related to the acquisition of FTP and Shoals as discussed in Note 4 to the consolidated financial statements . (6) The nine months ended September 30, 2021 exclude acquisition transaction costs of $1,923 related to acquisitions. (7) See non-GAAP Financial Measures for a reconciliation of Net Income as reported and Adjusted EBIT. Non-GAAP Financial Measures The Company reviews Adjusted operating income, Adjusted net income, Adjusted EBIT, Adjusted effective tax rate, Adjusted diluted earnings per share, Return on invested capital, Cash conversion, Organic sales, and Earnings before interest, taxes, depreciation and amortization, all non-GAAP financial measures, in assessing and evaluating the Company’s underlying operating performance. These non-GAAP financial measures exclude the impact of special items on the Company’s reported financial results. Non-GAAP financial measures should be read in conjunction with the generally accepted accounting principles in the United States ("GAAP") financial measures, as non-GAAP measures are a supplement to, and not a replacement for, GAAP financial measures. 30 Table of Contents The following table presents the reconciliations of Operating income as reported to Adjusted operating income, Net income as reported to Adjusted net income and Adjusted EBIT, Effective tax rate as reported to Adjusted effective tax rate and Diluted earnings per share as reported to Adjusted diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, Nine Months Ended September 30, ​ 2021 2020 2021 2020 Operating income as reported ​ $ 115,570 ​ $ 77,793 ​ $ 341,320 ​ $ 198,631 ​ Special items (pre-tax): ​ ​ ​ ​ ​ Rationalization and asset impairment charges (1) ​ 3,484 ​ 6,257 ​ 8,277 ​ 36,016 ​ Acquisition transaction costs (2) ​ — ​ — ​ 1,923 ​ — ​ Amortization of step up in value of acquired inventories (3) ​ 3,690 ​ — ​ 5,531 ​ 806 ​ Adjusted operating income ​ $ 122,744 ​ $ 84,050 ​ $ 357,051 ​ $ 235,453 ​ Net income as reported ​ $ 31,757 $ 58,479 ​ $ 202,039 ​ $ 141,037 ​ Special items: ​ ​ ​ ​ ​ ​ ​ ​ Rationalization and asset impairment charges (1) ​ 3,484 6,257 ​ 8,277 ​ ​ 36,016 ​ Acquisition transaction costs (2) ​ — — ​ 1,923 ​ ​ — ​ Pension settlement charges (4) ​ 73,562 3,188 ​ 80,098 ​ ​ 6,522 ​ Amortization of step up in value of acquired inventories (3) ​ 3,690 — ​ 5,531 ​ ​ 806 ​ Tax effect of Special items (5) ​ (18,743) (1,911) ​ (20,737) ​ ​ (9,463) ​ Adjusted net income ​ ​ 93,750 ​ 66,013 ​ ​ 277,131 ​ ​ 174,918 ​ Non-controlling interests in subsidiaries’ income (loss) ​ ​ — ​ 27 ​ ​ 131 ​ ​ 37 ​ Interest expense, net ​ 5,714 5,552 ​ 16,736 ​ ​ 16,891 ​ Income taxes as reported ​ 6,658 14,797 ​ 51,259 ​ ​ 41,834 ​ Tax effect of Special items (5) ​ 18,743 1,911 ​ 20,737 ​ ​ 9,463 ​ Adjusted EBIT ​ $ 124,865 $ 88,300 ​ $ 365,994 ​ $ 243,143 ​ Effective tax rate as reported ​ 17.3 % 20.2 % 20.2 % ​ 22.9 % Net special item tax impact ​ 4.0 % — % 0.4 % ​ (0.2) % Adjusted effective tax rate ​ 21.3 % 20.2 % 20.6 % ​ 22.7 % Diluted earnings per share as reported ​ $ 0.53 $ 0.97 ​ $ 3.36 ​ $ 2.34 ​ Special items per share ​ 1.03 0.13 ​ 1.25 ​ ​ 0.57 ​ Adjusted diluted earnings per share ​ $ 1.56 $ 1.10 ​ $ 4.61 ​ $ 2.91 ​ ​ (1) Charges primarily related to severance as discussed in Note 6 to the consolidated financial statements. (2) Costs related to acquisitions and are included in SG&A expenses. (3) Costs related to acquisitions and are included in Cost of goods sold. (4) Settlement charges related to lump sum pension payments associated with the termination of a pension plan and are included in Other income (expense). (5) Includes the net tax impact of Special items recorded during the respective periods. The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate. The applicable tax rates reflect the taxable jurisdiction and nature of each Special item. Liquidity and Capital Resources The Company’s cash flow from operations can be cyclical. Operational cash flow is a key driver of liquidity, providing cash and access to capital markets. In assessing liquidity, the Company reviews working capital measurements to define areas for improvement. Management anticipates the Company will be able to satisfy cash requirements for its ongoing 31 Table of Contents businesses for the foreseeable future primarily with cash generated by operations, existing cash balances, borrowings under its existing credit facilities and raising debt in capital markets. The Company continues to expand globally and periodically looks at transactions that would involve significant investments. The Company can fund its global expansion plans with operational cash flow, but a significant acquisition may require access to capital markets, in particular, the long-term debt market, as well as the syndicated bank loan market. The Company’s financing strategy is to fund itself at the lowest after-tax cost of funding. Where possible, the Company utilizes operational cash flows and raises capital in the most efficient market, usually the United States, and then lends funds to the specific subsidiary that requires funding. If additional acquisitions providing appropriate financial benefits become available, additional expenditures may be made. The following table reflects changes in key cash flow measures: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ 2021 2020 $ Change Cash provided by operating activities (1) ​ $ 255,125 ​ $ 215,561 ​ $ 39,564 Cash used by investing activities (2) ​ (194,698) ​ (30,159) ​ (164,539) Capital expenditures ​ (46,440) ​ (37,116) ​ (9,324) Acquisition of businesses, net of cash acquired ​ (158,605) ​ — ​ (158,605) Cash used by financing activities (3) ​ (156,112) ​ (227,317) ​ 71,205 Proceeds from short-term borrowings, net ​ 32,295 ​ (33,123) ​ 65,418 Purchase of shares for treasury ​ (103,848) ​ (113,198) ​ 9,350 Cash dividends paid to shareholders ​ (91,717) ​ (88,945) ​ (2,772) Decrease in Cash and cash equivalents (4) ​ (96,720) ​ (47,084) ​ (49,636) ​ (1) Cash provided by operating activities increased for the nine months ended September 30, 2021 , compared with the nine months ended September 30, 2020 primarily due to higher company earnings. (2) Cash used by investing activities increased for the nine months ended September 30, 2021 , compared with the nine months ended September 30, 2020 primarily due to cash used in the acquisition of businesses. The Company currently anticipates capital expenditures of $65,000 to $70,000 in 2021. Anticipated capital expenditures include investments for capital maintenance and projects to increase efficiency, reduce costs, promote business growth or improve the overall safety and environmental conditions of the Company’s facilities. (3) Cash used by financing activities decreased in the nine months ended September 30, 2021 , compared with the nine months ended September 30, 2020 due to higher proceeds from short-term borrowings. (4) Cash and cash equivalents decreased 37.6%, or $96,720, to $160,559 during the nine months ended September 30, 2021 , from $257,279 as of December 31, 2020. This decrease was predominantly due to cash used in the acquisition of businesses, purchases of common shares for treasury and cash dividends paid to shareholders, partially offset by cash provided by operating activities. At September 30, 2021, $155,914 of Cash and cash equivalents was held by international subsidiaries. In October 2021, the Company paid a cash dividend of $0.51 per share, or $30,115, to shareholders of record as of September 30, 2021. Working Capital Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 December 31, 2020 September 30, 2020 Average operating working capital to Net sales (1) (2) 18.6 % 17.4 % 20.3 % Days sales in Inventories (2) 124.7 104.7 ​ 111.6 ​ Days sales in Accounts receivable 53.9 53.5 ​ 55.2 ​ Average days in Trade accounts payable 60.1 56.5 ​ 51.3 ​ 32 Table of Contents ​ (1) Average operating working capital to net sales is defined as the sum of Accounts receivable, Inventories and contract assets less Trade accounts payable and contract liabilities as of period end divided by annualized rolling three months of Net sales. (2) In order to minimize potential supply chain disruptions in serving customers due to the COVID-19 pandemic, the Company increased inventories relative to expected Net sales resulting in higher Days sales in Inventories and had an unfavorable impact on Average operating working capital to Net sales. Return on Invested Capital The Company reviews return on invested capital ("ROIC") in assessing and evaluating the Company’s underlying operating performance. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. ROIC is defined as rolling 12 months of Adjusted net income excluding tax-effected interest income and expense divided by invested capital. Invested capital is defined as total debt, which includes Short-term debt and Long-term debt, less current portions, plus Total equity. The following table presents ROIC: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Months Ended September 30, ​ ​ 2021 2020 Net income ​ $ 267,117 $ 204,753 ​ Rationalization and asset impairment charges ​ 17,729 44,867 ​ Acquisition transaction costs ​ 1,923 — Pension settlement charges ​ 81,695 6,522 ​ Amortization of step up in value of acquired inventories ​ 5,531 806 ​ Tax effect of Special items (1) ​ (21,868) (11,030) ​ Adjusted net income ​ $ 352,127 $ 245,918 ​ Plus: Interest expense, net of tax of $5,893 and $6,177 in 2021 and 2020, respectively ​ 17,520 ​ 18,564 ​ Less: Interest income, net of tax of $402 and $513 in 2021 and 2020, respectively ​ 1,193 ​ 1,543 ​ Adjusted net income before tax effected interest ​ $ 368,454 $ 262,939 ​ ​ ​ ​ ​ ​ ​ ​ ​ Invested Capital September 30, 2021 September 30, 2020 ​ Short-term debt ​ $ 41,404 ​ $ 1,147 ​ Long-term debt, less current portion ​ ​ 717,787 ​ ​ 715,687 ​ Total debt ​ ​ 759,191 ​ ​ 716,834 ​ Total equity ​ 857,893 ​ 710,744 ​ Invested capital ​ $ 1,617,084 ​ $ 1,427,578 ​ Return on invested capital ​ 22.8 % 18.4 % ​ (1) Includes the net tax impact of Special items recorded during the respective periods. The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate. The applicable tax rates reflect the taxable jurisdiction and nature of each Special item. New Accounting Pronouncements Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements. 33 Table of Contents Acquisitions Refer to Note 4 to the consolidated financial statements for a discussion of the Company’s recent acquisitions. Debt Revolving Credit Agreement On April 23, 2021, the Company amended and restated the agreement governing its line of credit by entering into the Second Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement has a line of credit totaling $500,000, has a term of 5 years with a maturity date of April 23, 2026 and may be increased, subject to certain conditions including the consent of its lenders, by an additional amount up to $150,000. The interest rate on borrowings is based on LIBOR plus a spread based on the Company’s net leverage ratio. The Credit Agreement contains customary representations and warranties, as well as customary affirmative, negative and financial covenants for credit facilities of this type (subject to negotiated baskets and exceptions), including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates. As of September 30, 2021, the Company was in compliance with all of its covenants and had $20,000 of outstanding borrowings under the Credit Agreement. The Company has other lines of credit totaling $97,848. As of September 30, 2021, the Company was in compliance with all of its covenants and had $20,644 outstanding at September 30, 2021. Senior Unsecured Notes On April 1, 2015 and October 20, 2016, the Company entered into separate Note Purchase Agreements pursuant to which it issued senior unsecured notes (the "Notes") through a private placement. The 2015 Notes and 2016 Notes each have an aggregate principal amount of $350,000, comprised of four different series ranging from $50,000 to $100,000, with maturity dates ranging from August 20, 2025 through April 1, 2045, and interest rates ranging from 2.75% and 4.02%. Interest on the Notes is paid semi-annually. The Company’s total weighted average effective interest rate and remaining weighted average tenure of the Notes is 3.3% and 12.6 years, respectively. The proceeds of the Notes were used for general corporate purposes. The Notes contain certain affirmative and negative covenants. As of September 30, 2021, the Company was in compliance with all of its debt covenants relating to the Notes. Shelf Agreements On November 27, 2018, the Company entered into seven uncommitted master note facilities (the "Shelf Agreements") that allow borrowings up to $700,000 in the aggregate. The Shelf Agreements have a term of 5 years and the average life of borrowings cannot exceed 15 years. The Company is required to comply with covenants similar to those contained in the Notes. As of September 30, 2021, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements. 34 Table of Contents Pensions In March 2020, the Company approved an amendment to terminate the Lincoln Electric Company Retirement Annuity Program plan effective as of December 31, 2020. The Company provided notice to participants of the intent to terminate the plan and applied for a determination letter. Pension obligations were distributed through lump sum payments to eligible plan participants during 2021 and resulted in pre-tax pension settlement charges of $73,562 and $79,652 in the three and nine months ended September 30, 2021, respectively. In October 2021, the remaining pension obligations were distributed through the purchase of a group annuity contract and the Company will reclassify any remaining unrecognized actuarial gains or losses, currently recorded in AOCI, net of tax, to the Company’s Consolidated Statements of Income as settlement charges. The Company estimates the fourth quarter 2021 pre-tax settlement charge to be approximately $35,000 - $45,000. The Company anticipates using any remaining assets after liquidation to fund employer contributions in a different qualified plan. The Company expects the termination process will be substantially complete by the end of 2021. Forward-looking Statements The Company’s expectations and beliefs concerning the future contained in this report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current expectations and involve a number of risks and uncertainties. Forward-looking statements generally can be identified by the use of words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “forecast,” “guidance” or words of similar meaning. Actual results may differ materially from such statements due to a variety of factors that could adversely affect the Company’s operating results. The factors include, but are not limited to: general economic, financial and market conditions; the effectiveness of operating initiatives; completion of planned divestitures; interest rates; disruptions, uncertainty or volatility in the credit markets that may limit our access to capital; currency exchange rates and devaluations; adverse outcome of pending or potential litigation; actual costs of the Company’s rationalization plans; possible acquisitions, including the Company’s ability to successfully integrate acquisitions; market risks and price fluctuations related to the purchase of commodities and energy; global regulatory complexity; the effects of changes in tax law; tariff rates in the countries where the Company conducts business; and the possible effects of events beyond our control, such as political unrest, acts of terror, natural disasters and pandemics, including the COVID- 19 pandemic, on the Company or its customers, suppliers and the economy in general. For additional discussion, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company’s exposure to market risk since December 31, 2020. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.