What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-28 compared with 2021-10-28 · 56 added, 127 removed, 199 unchanged (48% of the section changed)

13 unchanged sentences

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.

In March 2022, in response to Russia’s invasion of Ukraine, the Company announced it was ceasing operations in Russia and implementing plans to support its Russian employees.

Although the Company’s Net sales and Total assets in Russia are less than 1% of consolidated Net sales for the year ended December 31, 2021 and less than 1% of consolidated Total assets as of December 31, 2021, the Russia-Ukraine conflict and sanctions imposed globally may result in economic and supply chain disruptions, the ultimate financial impact of which cannot be reasonably estimated at this time.

The Company will continue to monitor the Russia-Ukraine conflict and its potential impacts.

Results of Operations

The following table shows the Company’s results of operations:

Three Months Ended September 30,

Favorable (Unfavorable)

Cost of goods sold

Selling, general & administrative expenses

Rationalization and asset impairment charges

Operating income

Interest expense, net

Other income (expense)

Income before income taxes

Effective tax rate

Net income including non-controlling interests

Non-controlling interests in subsidiaries' loss

Diluted earnings per share

Nine Months Ended September 30,

Three Months Ended March 31,

Favorable (Unfavorable)

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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:

Lincoln Electric Holdings, Inc.

Nine Months Ended September 30,

Three Months Ended March 31,

Change in Net Sales due to:

1 unchanged sentence

Lincoln Electric Holdings, Inc.

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.

Net sales increased in the three months ended March 31, 2022 driven by higher demand levels, increased product pricing as a result of higher input costs and the impact of acquisitions, partially offset by unfavorable foreign exchange

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.

Gross profit for the three months ended March 31, 2022 increased 30.0% driven by higher volumes, the impact of cost reduction initiatives and pricing actions taken to offset higher input costs.

Last-in, first-out (“LIFO”) charges were $6,888 in the three months ended March 31, 2022, as compared with charges of $3,854 in 2021.

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.

SG&A expenses increased for the three months ended March 31, 2022 as compared to the same 2021 period, 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.

The Company recorded charges of $1,885 ($1,836 after-tax) and $4,163 ($3,831 after-tax) in the three months ended March 31, 2022 and 2021, respectively, primarily related to severance charges 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.

The increase in Other income (expense) for the three months ended March 31, 2022 as compared to March 31, 2021 was primarily due to the final settlement associated with the termination of a pension plan in the current year and non-cash pension settlement charges resulting from lump sum pension payments in 2021.

Refer to Note 13 to the consolidated financial statements for details.

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.

The effective tax rate was lower for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to favorable discrete tax adjustments in 2022 and geographic mix of earnings.

Segment Results

Three Months Ended September 30,

Change in Net Sales due to:

Acquisitions (2)

Operating Segments

Americas Welding

International Welding

The Harris Products Group

Americas Welding

International Welding

The Harris Products Group

Nine Months Ended September 30,

Three Months Ended March 31,

Change in Net Sales due to:

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The Harris Products Group

(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.

(1) Increase for the three months ended March 31, 2022 were due to the acquisitions discussed in Note 4 to the consolidated financial statements.

(2) Increase for the three months ended March 31, 2022 in Americas Welding and International Welding reflects increased product pricing as a result of higher input costs.

Increase for The Harris Products Group was also due to increased commodity costs.

(3) Decrease for the three months ended March 31, 2022 in International Welding primarily due to the devaluation of the Turkish Lira.

Adjusted Earnings Before Interest and Income Taxes:

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Favorable (Unfavorable)

Three Months Ended September 30,

Americas Welding:

Inter-segment sales

Adjusted EBIT (3)

As a percent of total sales (1)

International Welding:

Inter-segment sales

Adjusted EBIT (4)

As a percent of total sales (1)

The Harris Products Group:

Inter-segment sales

Adjusted EBIT (5)

As a percent of total sales (2)

Corporate / Eliminations:

Inter-segment sales

Adjusted EBIT

Consolidated:

As a percent of total sales

Adjusted EBIT (6)

As a percent of sales

(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.

(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,

Three Months Ended March 31,

Americas Welding:

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As a percent of sales

(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.

(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.

(1) Increase for the three months ended March 31, 2022 as compared to March 31, 2021 primarily driven by higher volumes, the impact of profit improvement initiatives and pricing actions taken to offset higher input costs, partially offset by higher employee costs.

(2) Increase for the three months ended March 31, 2022 as compared to March 31, 2021 primarily driven by pricing actions taken to offset higher input costs and cost reduction initiatives.

(3) Decrease for the three months ended March 31, 2022 as compared to March 31, 2021 driven primarily by higher input costs, product mix and integration activities.

(4) The three months ended March 31, 2022 exclude a favorable adjustment related to the termination of a pension plan of $3,735.

The three months ended March 31, 2021 exclude pension settlement charges of $4,440.

(5) The three months ended March 31, 2022 and 2021 exclude Rationalization and asset impairment charges of $1,885 and $4,163, 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 March 31, 2021 also excludes pension settlement charges of $446.

(6) 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.

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 and Organic sales, 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.

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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,

Three Months Ended March 31,

Operating income as reported

2 unchanged sentences

Acquisition transaction costs (2)

Amortization of step up in value of acquired inventories (3)

Adjusted operating income

3 unchanged sentences

Acquisition transaction costs (2)

Pension settlement charges (4)

Amortization of step up in value of acquired inventories (3)

Pension charges and other net gains (3)

Tax effect of Special items (4)

11 unchanged sentences

Adjusted diluted earnings per share

(1) Charges primarily related to severance as discussed in Note 6 to the consolidated financial statements.

(1) Charges primarily related to severance and gains or losses on the disposal of assets 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).

(3) Primarily includes the final settlement associated with the termination of a pension plan and settlement charges due to lump sum pension payments and are included in Other income (expense).

(4) Includes the net tax impact of Special items recorded during the respective periods.

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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

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.

Management anticipates the Company will be able to satisfy cash requirements for its ongoing 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.

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The following table reflects changes in key cash flow measures:

Nine Months Ended September 30,

Three Months Ended March 31,

Cash provided by operating activities (1)

3 unchanged sentences

Cash used by financing activities (3)

Proceeds from short-term borrowings, net

Net change in borrowings

Purchase of shares for treasury

1 unchanged sentence

Decrease in Cash and cash equivalents (4)

(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.

(1) Cash provided by operating activities decreased for the three months ended March 31, 2022 , compared with the three months ended March 31, 2021 primarily due to increased investment in working capital.

(2) Cash used by investing activities increased for the three months ended March 31, 2022 , compared with the three months ended March 31, 2021 primarily due to cash used in the acquisition of businesses.

The Company currently anticipates capital expenditures of $70,000 to $80,000 in 2022.

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.

(3) Cash used by financing activities decreased in the three months ended March 31, 2022 , compared with the three months ended March 31, 2021 due to higher proceeds from borrowings, partially offset by the increased purchase of shares for treasury.

(4) Cash and cash equivalents decreased 20.0%, or $38,585, to $154,373 during the three months ended March 31, 2022 , from $192,958 as of December 31, 2021.

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 higher proceeds from short-term borrowings.

At March 31, 2022, $150,256 of Cash and cash equivalents was held by international subsidiaries.

In April 2022, the Company paid a cash dividend of $0.56 per share, or $32,535, to shareholders of record as of March 31, 2022.

Working Capital Ratios

September 30, 2021

March 31, 2022

December 31, 2021

September 30, 2020

March 31, 2021

Average operating working capital to Net sales (1) (2)

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(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.

(2) In order to minimize potential supply chain disruptions in serving customers due to the COVID-19 pandemic and increased global demand, 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

4 unchanged sentences

The following table presents ROIC:

Twelve Months Ended September 30,

Twelve Months Ended March 31,

Rationalization and asset impairment charges

8 unchanged sentences

Invested Capital

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Short-term debt

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Refer to Note 4 to the consolidated financial statements for a discussion of the Company’s recent acquisitions.

Fair Value of Debt

At March 31, 2022 and December 31, 2021, the fair value of long-term debt, including the current portion, was approximately $693,298 and $776,655, respectively, which was determined using available market information and methodologies requiring judgment.

The carrying value of this debt at such dates was $715,570 and $717,855, respectively.

Since judgment is required in interpreting market information, the fair value of the debt is not necessarily the amount which could be realized in a current market exchange.

Revolving Credit Agreement

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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.

As of March 31, 2022, the Company was in compliance with all of its covenants and had $110,000 of outstanding borrowings under the Credit Agreement.

The Company has other lines of credit totaling $108,048.

As of September 30, 2021, the Company was in compliance with all of its covenants and had $20,644 outstanding at September 30, 2021.

As of March 31, 2022, the Company was in compliance with all of its covenants and had $40,022 outstanding at March 31, 2022.

Senior Unsecured Notes

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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.

As of March 31, 2022, the Company was in compliance with all of its debt covenants relating to the Notes.

Shelf Agreements

2 unchanged sentences

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.

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.

As of March 31, 2022, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements.

Forward-looking Statements

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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.

and the possible effects of events beyond our control, such as the impact of the Russia-Ukraine conflict, 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.

5 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis