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. Russia Operations 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 continues to monitor the Russia-Ukraine conflict and its potential impacts. 25 Table of Contents Results of Operations The following table shows the Company’s results of operations: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ 2022 ​ 2021 ​ 2022 vs. 2021 ​ ​ Amount % of Sales Amount % of Sales $ % Net sales $ 935,240 ​ ​ ​ ​ $ 806,454 ​ ​ $ 128,786 16.0 % Cost of goods sold 625,722 ​ ​ ​ 538,282 ​ ​ (87,440) (16.2) % Gross profit 309,518 ​ 33.1 % 268,172 33.3 % 41,346 15.4 % Selling, general & administrative expenses 159,045 ​ 17.0 % 149,118 18.5 % (9,927) (6.7) % Rationalization and asset impairment charges 8,364 ​ 0.9 % 3,484 0.4 % (4,880) (140.1) % Operating income 142,109 ​ 15.2 % 115,570 14.3 % 26,539 23.0 % Interest expense, net 8,210 ​ ​ ​ 5,714 ​ ​ (2,496) (43.7) % Other income (expense) 3,588 ​ ​ ​ (71,441) ​ ​ 75,029 105.0 % Income before income taxes 137,487 ​ 14.7 % 38,415 4.8 % 99,072 257.9 % Income taxes 28,262 ​ ​ ​ 6,658 ​ ​ (21,604) (324.5) % Effective tax rate 20.6 % ​ ​ 17.3 % ​ ​ (3.3) % ​ ​ Net income $ 109,225 ​ 11.7 % $ 31,757 3.9 % $ 77,468 243.9 % Diluted earnings per share $ 1.87 ​ ​ ​ ​ $ 0.53 ​ $ 1.34 253.4 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ 2022 ​ 2021 ​ 2022 vs. 2021 ​ ​ Amount % of Sales Amount % of Sales $ % Net sales $ 2,830,277 ​ ​ ​ ​ $ 2,389,929 ​ ​ $ 440,348 18.4 % Cost of goods sold 1,857,501 ​ ​ ​ 1,593,981 ​ ​ (263,520) (16.5) % Gross profit 972,776 ​ 34.4 % 795,948 33.3 % 176,828 22.2 % Selling, general & administrative expenses 492,523 ​ 17.4 % 446,351 18.7 % (46,172) (10.3) % Rationalization and asset impairment charges 9,405 ​ 0.3 % 8,277 0.3 % (1,128) (13.6) % Operating income 470,848 ​ 16.6 % 341,320 14.3 % 129,528 37.9 % Interest expense, net 20,867 ​ ​ ​ 16,736 ​ ​ (4,131) (24.7) % Other income (expense) 7,088 ​ ​ ​ (71,155) ​ ​ 78,243 110.0 % Income before income taxes 457,069 ​ 16.1 % 253,429 10.6 % 203,640 80.4 % Income taxes 93,991 ​ ​ ​ 51,259 ​ ​ (42,732) (83.4) % Effective tax rate 20.6 % ​ ​ 20.2 % ​ ​ (0.4) % ​ ​ Net income including non-controlling interests 363,078 ​ ​ ​ 202,170 ​ ​ 160,908 79.6 % Non-controlling interests in subsidiaries' loss — ​ ​ ​ 131 ​ ​ (131) (100.0) % Net income $ 363,078 ​ 12.8 % $ 202,039 8.5 % $ 161,039 79.7 % Diluted earnings per share $ 6.17 ​ ​ ​ ​ $ 3.36 ​ $ 2.81 83.6 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 26 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 ​ ​ 2021 Volume Acquisitions Price Exchange 2022 Lincoln Electric Holdings, Inc. ​ $ 806,454 ​ $ 71,148 ​ $ 10,276 ​ $ 100,739 $ (53,377) ​ $ 935,240 ​ % Change ​ ​ ​ ​ ​ ​ ​ ​ ​ Lincoln Electric Holdings, Inc. ​ ​ ​ ​ 8.8 % 1.3 % 12.5 % ​ (6.6) % ​ 16.0 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ ​ ​ Net Sales ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Foreign ​ Net Sales ​ ​ 2021 Volume Acquisitions Price Exchange 2022 Lincoln Electric Holdings, Inc. ​ $ 2,389,929 ​ $ 123,118 ​ $ 68,949 ​ $ 385,357 $ (137,076) ​ $ 2,830,277 ​ % Change ​ ​ ​ ​ ​ ​ ​ ​ ​ Lincoln Electric Holdings, Inc. ​ ​ ​ ​ 5.2 % 2.9 % 16.1 % ​ (5.7) % ​ 18.4 % ​ Net sales increased in the three and nine months ended September 30, 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, 2022 increased 15.4% and 22.2%, respectively, 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 $3,108 and $20,420 in three and nine months ended September 30, 2022, respectively, as compared with charges of $10,908 and $24,236 in the same 2021 periods. Selling, General & Administrative ("SG&A") Expenses: SG&A expenses increased for the three and nine months ended September 30, 2022 as compared to the same 2021 period, primarily due to higher employee costs. Other Income (Expense): The increase in Other income (expense) for the three and nine months ended September 30, 2022 as compared to the same period in 2021 was primarily due to non-cash pension settlement charges resulting from the termination of a pension plan in 2021. Refer to Note 13 to the consolidated financial statements for details. Income Taxes: The effective tax rate was higher for the three and nine months ended September 30, 2022 as compared to the same period in 2021, primarily due to the geographic mix of earnings and the impact of favorable discrete tax in 2021. 27 Table of Contents Segment Results ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ Net Sales ​ ​ ​ ​ ​ ​ ​ Foreign ​ Net Sales ​ ​ 2021 Volume Acquisitions (1) Price (2) Exchange (3) 2022 ​ Operating Segments ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Americas Welding $ 461,508 ​ $ 52,521 ​ $ 4,724 ​ $ 69,888 $ (3,013) ​ $ 585,628 ​ International Welding ​ 227,165 ​ 5,538 ​ — ​ 31,430 ​ (47,636) ​ 216,497 ​ The Harris Products Group ​ 117,781 ​ 13,089 ​ 5,552 ​ (579) ​ (2,728) ​ 133,115 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % Change ​ ​ ​ ​ ​ ​ ​ Americas Welding ​ ​ ​ ​ 11.4 % 1.0 % ​ 15.1 % ​ (0.7) % ​ 26.9 % International Welding ​ ​ ​ ​ 2.4 % — ​ ​ 13.8 % ​ (21.0) % ​ (4.7) % The Harris Products Group ​ ​ ​ ​ 11.1 % 4.7 % ​ (0.5) % ​ (2.3) % ​ 13.0 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ Change in Net Sales due to: ​ ​ Net Sales ​ ​ ​ ​ ​ ​ Foreign Net Sales ​ 2021 ​ Volume Acquisitions (1) Price (2) Exchange (3) ​ 2022 ​ Operating Segments ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Americas Welding $ 1,344,218 ​ $ 119,809 ​ $ 11,906 ​ $ 243,960 $ (4,551) ​ $ 1,715,342 ​ International Welding ​ 702,596 ​ (12,348) ​ 17,632 ​ 130,433 ​ (127,146) ​ 711,167 ​ The Harris Products Group ​ 343,115 ​ 15,657 ​ 39,411 ​ 10,964 ​ (5,379) ​ 403,768 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ % Change ​ ​ ​ ​ ​ ​ ​ Americas Welding ​ ​ ​ ​ 8.9 % 0.9 % ​ 18.1 % ​ (0.3) % ​ 27.6 % International Welding ​ ​ ​ ​ (1.8) % 2.5 % ​ 18.6 % ​ (18.1) % ​ 1.2 % The Harris Products Group ​ ​ ​ ​ 4.6 % 11.5 % ​ 3.2 % ​ (1.6) % ​ 17.7 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (1) Increases for the three and nine months ended September 30, 2022 were due to the acquisitions discussed in Note 4 to the consolidated financial statements. (2) Increase for the three and nine months ended September 30, 2022 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 nine months ended September 30, 2022 was primarily due to increased product pricing. (3) Decrease for the three and nine months ended September 30, 2022 in International Welding primarily due to the devaluation of the Turkish Lira and Euro. 28 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, ​ 2022 vs. 2021 ​ 2022 2021 $ % Americas Welding: ​ ​ ​ ​ ​ Net sales ​ $ 585,628 ​ $ 461,508 ​ $ 124,120 ​ 26.9 % Inter-segment sales ​ 35,353 ​ 37,480 ​ (2,127) ​ (5.7) % Total Sales ​ $ 620,981 ​ $ 498,988 ​ ​ 121,993 ​ 24.4 % Adjusted EBIT (4) ​ $ 118,804 ​ $ 84,557 ​ ​ 34,247 ​ 40.5 % As a percent of total sales (1) ​ 19.1 % 16.9 % ​ ​ ​ 2.2 % International Welding: ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 216,497 ​ $ 227,165 ​ ​ (10,668) ​ (4.7) % Inter-segment sales ​ 9,994 ​ 7,078 ​ ​ 2,916 ​ 41.2 % Total Sales ​ $ 226,491 ​ $ 234,243 ​ ​ (7,752) ​ (3.3) % Adjusted EBIT (5) ​ $ 25,225 ​ $ 29,032 ​ ​ (3,807) ​ (13.1) % As a percent of total sales (2) ​ 11.1 % 12.4 % ​ ​ ​ (1.3) % The Harris Products Group: ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 133,115 ​ $ 117,781 ​ ​ 15,334 ​ 13.0 % Inter-segment sales ​ 2,642 ​ 1,945 ​ ​ 697 ​ 35.8 % Total Sales ​ $ 135,757 ​ $ 119,726 ​ ​ 16,031 ​ 13.4 % Adjusted EBIT (6) ​ $ 14,432 ​ $ 15,980 ​ ​ (1,548) ​ (9.7) % As a percent of total sales (3) ​ 10.6 % 13.3 % ​ ​ ​ (2.7) % Corporate / Eliminations: ​ ​ ​ ​ ​ ​ ​ Inter-segment sales ​ $ (47,989) ​ $ (46,503) ​ ​ (1,486) ​ (3.2) % Adjusted EBIT (7) ​ (1,685) ​ (4,704) ​ ​ 3,019 ​ 64.2 % Consolidated: ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 935,240 ​ $ 806,454 ​ ​ 128,786 ​ 16.0 % Net income ​ $ 109,225 ​ $ 31,757 ​ ​ 77,468 ​ 243.9 % As a percent of total sales ​ 11.7 % 3.9 % ​ ​ ​ 7.8 % Adjusted EBIT (8) ​ $ 156,776 ​ $ 124,865 ​ ​ 31,911 ​ 25.6 % As a percent of sales ​ 16.8 % 15.5 % ​ ​ 1.3 % ​ (1) Increase for the three months ended September 30, 2022 as compared to September 30, 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) Decrease for the three months ended September 30, 2022 as compared to September 30, 2021 was impacted by the timing of pricing actions and product mix. (3) Decrease for the three months ended September 30, 2022 as compared to September 30, 2021 primarily driven by acquisition integration activities, unfavorable mix and declining commodity pricing in certain metal offerings. 29 Table of Contents (4) The three months ended September 30, 2022 exclude an adjustment to the amortization of the step up in value of acquired inventories of $353 related to an acquisition as discussed in Note 4 to the consolidated financial statements. The three months ended September 30, 2021 exclude pension settlement charges of $73,562. (5) The three months ended September 30, 2022 exclude Rationalization and asset impairment charges of $8,364 primarily due to impairment charges as discussed in Note 6 to the consolidated financial statements. The three months ended September 30, 2021 excludes the amortization of the step up in value of acquired inventories of $3,143, related to an acquisition as discussed in Note 4 to the consolidated financial statements. (6) The three months ended September 30, 2021 exclude the amortization of the step up in value of acquired inventories of $547 as discussed in Note 4 to the consolidated financial statements. (7) The three months ended September 30, 2022 exclude acquisition transaction costs of $3,068 related to the contemplated acquisition as defined in Note 18 to the consolidated financial statements. (8) See non-GAAP Financial Measures for a reconciliation of Net income as reported and Adjusted EBIT. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Favorable (Unfavorable) ​ ​ ​ Nine Months Ended September 30, ​ 2022 vs. 2021 ​ ​ 2022 2021 $ % Americas Welding: ​ ​ ​ ​ ​ Net sales ​ $ 1,715,342 ​ $ 1,344,218 ​ $ 371,124 ​ 27.6 % ​ Inter-segment sales ​ 92,540 ​ 109,993 ​ (17,453) ​ (15.9) % ​ Total Sales ​ $ 1,807,882 ​ $ 1,454,211 ​ ​ 353,671 ​ 24.3 % ​ Adjusted EBIT (4) ​ $ 348,439 ​ $ 245,308 ​ ​ 103,131 ​ 42.0 % ​ As a percent of total sales (1) ​ 19.3 % 16.9 % ​ ​ ​ 2.4 % ​ International Welding: ​ ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 711,167 ​ $ 702,596 ​ ​ 8,571 ​ 1.2 % ​ Inter-segment sales ​ 25,749 ​ 18,260 ​ ​ 7,489 ​ 41.0 % ​ Total Sales ​ $ 736,916 ​ $ 720,856 ​ ​ 16,060 ​ 2.2 % ​ Adjusted EBIT (5) ​ $ 97,321 ​ $ 77,845 ​ ​ 19,476 ​ 25.0 % ​ As a percent of total sales (2) ​ 13.2 % 10.8 % ​ ​ ​ 2.4 % ​ The Harris Products Group: ​ ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 403,768 ​ $ 343,115 ​ ​ 60,653 ​ 17.7 % ​ Inter-segment sales ​ 8,570 ​ 6,376 ​ ​ 2,194 ​ 34.4 % ​ Total Sales ​ $ 412,338 ​ $ 349,491 ​ ​ 62,847 ​ 18.0 % ​ Adjusted EBIT (6) ​ $ 51,952 ​ $ 52,889 ​ ​ (937) ​ (1.8) % ​ As a percent of total sales (3) ​ 12.6 % 15.1 % ​ ​ ​ (2.5) % ​ Corporate / Eliminations: ​ ​ ​ ​ ​ ​ ​ ​ Inter-segment sales ​ $ (126,859) ​ $ (134,629) ​ ​ 7,770 ​ 5.8 % ​ Adjusted EBIT (7) ​ (10,470) ​ (10,048) ​ ​ (422) ​ (4.2) % ​ Consolidated: ​ ​ ​ ​ ​ ​ ​ ​ Net sales ​ $ 2,830,277 ​ $ 2,389,929 ​ ​ 440,348 ​ 18.4 % ​ Net income ​ $ 363,078 ​ $ 202,039 ​ ​ 161,039 ​ 79.7 % ​ As a percent of total sales ​ 12.8 % 8.5 % ​ ​ ​ 4.3 % ​ Adjusted EBIT (8) ​ $ 487,242 ​ $ 365,994 ​ ​ 121,248 ​ 33.1 % ​ As a percent of sales ​ 17.2 % 15.3 % ​ ​ 1.9 % ​ ​ (1) Increase for the nine months ended September 30, 2022 as compared to September 30, 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. 30 Table of Contents (2) Increase for the nine months ended September 30, 2022 as compared to September 30, 2021 primarily driven by pricing actions taken to offset higher input costs and cost reduction initiatives. (3) Decrease for the nine months ended September 30, 2022 as compared to September 30, 2021 driven primarily by acquisition integration activities, unfavorable mix and declining commodity pricing in certain metal offerings. (4) The nine months ended September 30, 2022 exclude a favorable adjustment related to the termination of a pension plan of $3,735, the amortization of the step up in value of acquired inventories of $1,106 as discussed in Note 4 to the consolidated financial statements and Rationalization and asset impairment net gains of $988 as discussed in Note 6 to the consolidated financial statements. The nine months ended September 30, 2021 exclude pension settlement charges of $79,652. (5) The nine months ended September 30, 2022 exclude Rationalization and asset impairment charges of $10,403 primarily due to impairment charges as discussed in Note 6 to the consolidated financial statements. The nine months ended September 30, 2021 excludes the amortization of the step up in value of acquired inventories of $4,984, as discussed in Note 4 to the consolidated financial statements and pension settlement charges of $446. (6) The nine months ended September 30, 2021 excludes the amortization of the step up in value of acquired inventories of $547 as discussed in Note 4 to the consolidated financial statements. (7) The nine months ended September 30, 2022 exclude acquisition transaction costs of $3,068 related to the contemplated acquisition as defined in Note 18 to the consolidated financial statements. The nine months ended September 30, 2021 exclude acquisition transaction costs of $1,923 related to the acquisition as discussed in Note 4 to the consolidated financial statements. (8) 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 (“EPS”), Adjusted return on invested capital (“ROIC”), Adjusted net operating profit after taxes, 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. 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. 31 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, ​ 2022 2021 2022 2021 Operating income as reported ​ $ 142,109 ​ $ 115,570 ​ $ 470,848 ​ $ 341,320 ​ Special items (pre-tax): ​ ​ ​ ​ ​ Rationalization and asset impairment charges (1) ​ 8,364 ​ 3,484 ​ 9,405 ​ 8,277 ​ Acquisition transaction costs (2) ​ 3,068 ​ — ​ 3,068 ​ 1,923 ​ Amortization of step up in value of acquired inventories (3) ​ (353) ​ 3,690 ​ 1,106 ​ 5,531 ​ Adjusted operating income ​ $ 153,188 ​ $ 122,744 ​ $ 484,427 ​ $ 357,051 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income as reported ​ $ 109,225 $ 31,757 ​ $ 363,078 ​ $ 202,039 ​ Special items: ​ ​ ​ ​ ​ ​ ​ ​ Rationalization and asset impairment charges (1) ​ 8,364 3,484 ​ 9,405 ​ ​ 8,277 ​ Acquisition transaction costs (2) ​ 3,068 — ​ 3,068 ​ ​ 1,923 ​ Pension charges and other net gains (4) ​ — 73,562 ​ (4,273) ​ ​ 80,098 ​ Amortization of step up in value of acquired inventories (3) ​ (353) 3,690 ​ 1,106 ​ ​ 5,531 ​ Tax effect of Special items (5) ​ (731) (18,743) ​ 58 ​ ​ (20,737) ​ Adjusted net income ​ ​ 119,573 ​ 93,750 ​ ​ 372,442 ​ ​ 277,131 ​ Non-controlling interests in subsidiaries’ income (loss) ​ ​ — ​ — ​ ​ — ​ ​ 131 ​ Interest expense, net ​ 8,210 5,714 ​ 20,867 ​ ​ 16,736 ​ Income taxes as reported ​ 28,262 6,658 ​ 93,991 ​ ​ 51,259 ​ Tax effect of Special items (5) ​ 731 18,743 ​ (58) ​ ​ 20,737 ​ Adjusted EBIT ​ $ 156,776 $ 124,865 ​ $ 487,242 ​ $ 365,994 ​ Effective tax rate as reported ​ 20.6 % 17.3 % ​ 20.6 % ​ 20.2 % Net special item tax impact ​ (1.1) % 4.0 % ​ (0.5) % ​ 0.4 % Adjusted effective tax rate ​ 19.5 % 21.3 % ​ 20.1 % ​ 20.6 % Diluted earnings per share as reported ​ $ 1.87 $ 0.53 ​ $ 6.17 ​ $ 3.36 ​ Special items per share ​ 0.17 1.03 ​ 0.16 ​ ​ 1.25 ​ Adjusted diluted earnings per share ​ $ 2.04 $ 1.56 ​ $ 6.33 ​ $ 4.61 ​ ​ (1) Primarily related to non-cash asset impairment charges as discussed in Note 6 to the consolidated financial statements. (2) Costs related to the contemplated acquisition and are included in SG&A expenses. (3) Costs related to acquisitions and are included in Cost of Goods Sold. (4) 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). (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. 32 Table of Contents 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 businesses for at least the next twelve months and the foreseeable future thereafter 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, ​ ​ 2022 2021 $ Change Cash provided by operating activities (1) ​ $ 271,584 ​ $ 255,125 ​ $ 16,459 Cash used by investing activities (2) ​ (72,257) ​ (194,698) ​ 122,441 Capital expenditures ​ (52,301) ​ (46,440) ​ (5,861) Acquisition of businesses, net of cash acquired ​ (22,294) ​ (158,605) ​ 136,311 Cash used by financing activities (3) ​ (237,426) ​ (156,112) ​ (81,314) Net change in borrowings ​ 14,999 ​ 32,295 ​ (17,296) Purchase of shares for treasury ​ (156,216) ​ (103,848) ​ (52,368) Cash dividends paid to shareholders ​ (98,377) ​ (91,717) ​ (6,660) Decrease in Cash and cash equivalents (4) ​ (51,651) ​ (96,720) ​ 45,069 ​ (1) Cash provided by operating activities increased for the nine months ended September 30, 2022 , compared with the nine months ended September 30, 2021 primarily due to higher company earnings. (2) Cash used by investing activities decreased for the nine months ended September 30, 2022 , compared with the nine months ended September 30, 2021 primarily due to higher cash used in the acquisition of businesses in 2021. 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 increased in the nine months ended September 30, 2022 , compared with the nine months ended September 30, 2021 due to increased purchase of shares for treasury and lower borrowings in 2022. (4) Cash and cash equivalents decreased 26.8%, or $51,651, to $141,307 during the nine months ended September 30, 2022 , from $192,958 as of December 31, 2021. This decrease was predominantly due to cash used for the purchase of common shares for treasury, dividends paid to shareholders and capital expenditures, partially offset by cash from operations and proceeds from borrowings. At September 30, 2022, $72,920 of Cash and cash equivalents was held by international subsidiaries. In October 2022, the Company paid a cash dividend of $0.56 per share, or $32,334, to shareholders of record as of September 30, 2022. 33 Table of Contents Working Capital Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 December 31, 2021 September 30, 2021 Average operating working capital to Net sales (1) (2) 19.5 % 16.3 % 18.6 % Days sales in Inventories (2) 129.0 121.0 ​ 124.7 ​ Days sales in Accounts receivable 48.4 50.3 ​ 53.9 ​ Average days in Trade accounts payable 54.0 59.8 ​ 60.1 ​ ​ (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 in a challenging operating environment, 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 ROIC in assessing and evaluating the Company’s underlying operating performance. As discussed in the Non-GAAP Financial Measures section above, Adjusted ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance. The calculation may be different than the method used by other companies to calculate ROIC. Adjusted 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 the reconciliations of ROIC and Adjusted ROIC to net income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Twelve Months Ended September 30, ​ ​ 2022 2021 Net income as reported ​ $ 437,505 $ 267,117 ​ Plus: Interest expense (after-tax) ​ ​ 20,732 ​ ​ 17,520 ​ Less: Interest income (after-tax) ​ ​ 1,019 ​ ​ 1,193 ​ Net operating profit after taxes ​ $ 457,218 ​ $ 283,444 ​ Special items: ​ ​ ​ ​ ​ ​ ​ Rationalization and asset impairment charges ​ 10,955 17,729 ​ Acquisition transaction costs ​ 3,068 1,923 Pension settlement charges ​ 42,131 81,695 ​ Amortization of step up in value of acquired inventories ​ 1,379 5,531 ​ Tax effect of Special items (1) ​ (26,393) (21,868) ​ Adjusted net operating profit after taxes ​ $ 488,358 $ 368,454 ​ ​ ​ ​ ​ ​ ​ Invested Capital September 30, 2022 September 30, 2021 ​ Short-term debt ​ $ 68,375 ​ $ 41,404 ​ Long-term debt, less current portion ​ ​ 711,250 ​ ​ 717,787 ​ Total debt ​ ​ 779,625 ​ ​ 759,191 ​ Total equity ​ 924,228 ​ 857,893 ​ Invested capital ​ $ 1,703,853 ​ $ 1,617,084 ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on invested capital as reported ​ 26.8 % 17.5 % Adjusted return on invested capital ​ 28.7 % 22.8 % ​ (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. 34 Table of Contents New Accounting Pronouncements Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements. Acquisitions Refer to Note 4 to the consolidated financial statements for a discussion of the Company’s recent acquisitions. Debt Fair Value of Debt At September 30, 2022 and December 31, 2021, the fair value of long-term debt, including the current portion, was approximately $597,972 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 $722,287 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 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, 2022, the Company was in compliance with all of its covenants and had $37,000 of outstanding borrowings under the Credit Agreement. The Company has other lines of credit and debt agreements totaling $104,293. As of September 30, 2022, the Company was in compliance with all of its covenants and had $20,338 outstanding at September 30, 2022. 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 11.6 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, 2022, 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, 2022, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements. 35 Table of Contents 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 the impact of the Russia-Ukraine conflict, political unrest, acts of terror, natural disasters and pandemics, including the current coronavirus disease (“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, 2021 and on Form 10-Q for the quarter ended March 31, 2022. 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, 2021. 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, 2021.