What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-18 · 91 added, 70 removed, 363 unchanged (31% of the section changed)

11 unchanged sentences

The Company also has a leading global position in brazing and soldering alloys.

The Company’s products include arc welding power sources, plasma cutters, wire feeding systems, robotic welding packages, integrated automation systems, fume extraction equipment, consumable electrodes, fluxes and welding accessories and specialty welding consumables and fabrication.

The Company’s product offering also includes computer numeric controlled ("CNC") plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing.

The Company’s products include arc welding, brazing and soldering filler metals (consumables), arc welding equipment, plasma and oxyfuel cutting systems, wire feeding systems, fume control equipment, welding accessories, specialty gas regulators, and education solutions;

as well as a comprehensive portfolio of automated solutions for joining, cutting, material handling, module assembly, and end of line testing.

The Company invests in the research and development of arc welding products in order to continue its market leading product offering.

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● general fabrication,

● energy and process industries,

● energy (oil and gas, power generation and process industries),

● heavy industries (heavy fabrication, ship building and maintenance and repair),

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● construction and infrastructure.

The Company has, through wholly-owned subsidiaries, manufacturing facilities located in the United States, Australia, Austria, Brazil, Canada, China, Colombia, France, Germany, India, Italy, Mexico, Poland, Portugal, Romania, Russia, Spain, Turkey and the United Kingdom.

The principal raw materials essential to the Company’s business are steel, electronic components, engines, brass, copper, silver, aluminum alloys, robotic components and various chemicals, all of which are normally available for purchase in the open market.

6 unchanged sentences

The Company’s products support our customers' sustainable operations through enhanced worker safety, reduced emissions, improved energy efficiency, reduced waste and regulatory compliance.

On December 1, 2022, the Company acquired Fori Automation, LLC (“Fori”) for a cash purchase price of $427,000, subject to customary working capital adjustments.

The Company funded the transaction with available cash on hand and a $400,000 senior unsecured term loan.

Fori is a leading designer and manufacturer of complex, multi-armed automated welding systems, with an extensive range of automated assembly systems, automated material handling solutions, automated large-scale, industrial guidance vehicles, and end of line testing systems.

The Fori acquisition will extend the Company’s market presence within the automotive sector as well as its automation footprint in the International Welding segment.

Fori’s balance sheet is included in the Company’s Consolidated Balance Sheet as of December 31, 2022.

Key Indicators

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Although these measures provide key information on trends relevant to the Company, the Company does not have available a more direct correlation of leading indicators which can provide a forward-looking view of demand levels in the markets which ultimately use the Company’s welding products.

Key operating measures utilized by the operating units to manage the Company include orders, sales, inventory and fill-rates, all of which provide key indicators of business trends.

Key operating measures utilized by the operating units to manage the Company include orders, backlog, sales, inventory and fill-rates, all of which provide key indicators of business trends.

These measures are reported on various cycles including daily, weekly and monthly depending on the needs established by operating management.

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Favorable (Unfavorable)

Net sales (Note 2)

Cost of goods sold

Selling, general & administrative expenses

Rationalization and asset impairment charges

Rationalization and asset impairment charges (Note 7)

Operating income

Interest expense, net

Other income (expense)

Other income (expense) (Note 12)

Income before income taxes

Effective tax rate

Income taxes (Note 13)

Effective tax rate (Note 13)

Net income including non-controlling interests

Non-controlling interests in subsidiaries' income

Diluted earnings per share

Diluted earnings per share (Note 3)

T he following table summarizes the impacts of volume, acquisitions, price and foreign currency exchange rates on Net sales for the twelve months ended December 31, 2022 on a consolidated basis:

2 unchanged sentences

Lincoln Electric Holdings, Inc.

Net sales increased primarily as a result of higher demand reflecting recovery from the impacts of the COVID-19 pandemic and increased product pricing as a result of higher input costs.

The increase in Net sales from acquisitions was driven by the acquisitions of Zeman within International Welding and FTP within The Harris Products Group.

Refer to Note 4 to the consolidated financial statements for details.

Net sales increased primarily as a result of 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 2021 increased, as a percent of sales, compared to the prior year primarily due to higher volumes and pricing actions which offset higher input costs and the benefit of cost reduction actions.

Gross profit for 2022 increased, as a percent of sales, compared to the prior year primarily due to higher volumes, the benefit of profit improvement and cost reduction actions, which offset higher input costs.

Last-in, first-out (“LIFO”) charges were $19,733 in the twelve months ended December 31, 2022 as compared with charges of $38,595 in the prior year.

Selling, General & Administrative ("SG&A") Expenses:

The increase in SG&A expense in 2021 as compared to 2020 was primarily due to higher employee costs, partially offset by cost reduction actions .

Rationalization and Asset Impairment Charges:

In 2021, the Company recorded $9,827 ($9,545 after-tax) in charges primarily related to employee severance and gains or losses on the disposal of assets.

In 2020, the Company recorded $45,468 ($36,904 after-tax) in charges primarily related to employee severance, non-cash asset impairments of long-lived assets and gains or losses on the disposal of assets.

Refer to Note 7 to the consolidated financial statements for additional details.

SG&A expense increased in 2022 as compared to 2021 was primarily due to higher employee costs .

Other Income (Expense):

The decrease in 2021 as compared to 2020 was due to non-cash pension settlement charges of $126,502 ($80,018 after-tax) in 2021 related to the termination of a pension plan.

The increase in 2022 as compared to 2021 was primarily due to non-cash pension settlement charges in 2021 related to the termination of a pension plan.

Refer to Note 12 to the consolidated financial statements for details.

Income Taxes:

The 2021 effective tax rate was lower than 2020 primarily due to the impact of a pension plan termination and utilization of certain loss carryforwards previously subject to valuation allowances in the current year offset by the impact of lower income tax benefits for the settlement of tax items recorded in the prior year.

The 2022 effective tax rate was higher than 2021 primarily due to a change in the mix of earnings, as well as the impact of the 2021 pension plan termination.

Segment Results

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The Harris Products Group

(1) Increase for all segments due to higher demand reflecting recovery from the impacts of the COVID-19 pandemic.

(2) Increase due to the acquisition of Zeman within International Welding and FTP within The Harris Products Group.

Refer to Note 4 to the consolidated financial statements for details.

(3) Increase for Americas Welding and International Welding due to price actions taken in response to higher input costs in 2021 compared to 2020.

Increase for The Harris Products Group due to price actions taken in response to higher commodity costs.

(1) Increase due to the acquisitions discussed in Note 4.

(2) Increase for all segments reflects increased product pricing taken in response to higher input costs and unfavorable foreign exchange translation.

(3) Decrease for 2022 in International Welding primarily due to the devaluation of the Turkish Lira and Euro .

Adjusted Earnings Before Interest and Income Taxes (“Adjusted EBIT”):

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As a percent of sales

(1) 2021 increase as compared to 2020 primarily driven by higher volumes and pricing actions, which offset higher input costs, and cost reduction actions.

(2) 2021 decrease as compared to 2020 driven by higher input costs, product mix and acquisitions.

(1) Increase for 2022 as compared to 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 2022 as compared to 2021 primarily driven by profit improvement initiatives including cost reduction activities.

(3) Decrease for 2022 compared to 2021 primarily driven by acquisition integration activities, unfavorable mix and declining commodity pricing in certain metal offerings .

(4) 2022 excludes a favorable adjustment related to the termination of a pension plan of $3,735, the amortization of step up in value of acquired inventories of $1,106 and Rationalization and asset impairment gains of $431 related to severance and gains or losses on the disposal of assets as discussed in Note 7 to the consolidated financial statements .

2021 excludes non-cash pension settlement charges of $123,091 as discussed in Note 11 to the consolidated financial statements .

2020 excludes Rationalization and asset impairment charges of $26,870 as discussed in Note 7 to the consolidated financial statements and non-cash pension settlement charges of $8,119.

(5) 2022 excludes Rationalization and asset impairment gains of $11,681 related to impairment charges as discussed in Note 7 to the consolidated financial statements .

2021 excludes Rationalization and asset impairment charges of $9,804 related to severance and gains or losses on the disposal of assets as discussed in Note 7 to the consolidated financial statements, the amortization of step up in value of acquired inventories of $4,984 related to an acquisition and pension settlement charges of $446 .

2020 excludes Rationalization and asset impairment charges of $18,598 related to severance, asset impairments and gains or losses on the disposal of assets as discussed in Note 7 to the consolidated financial statements and the amortization of step up in value of acquired inventories of $806 related to an acquisition.

(6) 2021 excludes the amortization of step up in value of acquired inventories of $820 related to an acquisition and non-cash pension settlement charges of $2,965 as discussed in Note 11 to the consolidated financial statements.

(7) 2022 excludes acquisition transaction and integration costs of $6,003 related to the acquisition as discussed in Note 4 to the consolidated financial statements.

2021 excludes acquisition transaction and integration costs of $1,923 related to the acquisitions as discussed in Note 4 to the consolidated financial statements.

1 unchanged sentence

Non-GAAP Financial Measures

The Company reviews Adjusted operating income, Adjusted EBIT, Adjusted net income, Adjusted effective tax rate, Adjusted diluted earnings per share and Return on invested capital, all non-GAAP financial measures, in assessing and evaluating the Company’s underlying operating performance.

The Company reviews Adjusted operating income, Adjusted EBIT, Adjusted net income, Adjusted effective tax rate, Adjusted diluted earnings per share, Adjusted return on invested capital, and Adjusted net operating profit after taxes, 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.

12 unchanged sentences

Adjusted operating income

(1) Charges primarily consist of employee severance, gains or losses on the disposal of assets and non-cash asset impairment charges.

(2) Acquisition-related costs included in Selling, general & administrative expenses related to the acquisitions as discussed in Note 4 to the consolidated financial statements.

(3) Charges represent the step up in value of acquired inventories related to acquisitions and are included in Cost of goods sold.

(1) Charges primarily consist of employee severance, gains or losses on the disposal of assets and other related costs and non-cash asset impairment charges.

(2) Costs related to acquisition and included in Selling, general & administrative expenses.

(3) Costs related to acquisitions and included in Cost of goods sold.

The following table presents the reconciliations of 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:

4 unchanged sentences

Acquisition transaction costs (2)

Pension settlement charges (3)

Pension settlement net charges (3)

Amortization of step up in value of acquired inventories (4)

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Adjusted diluted earnings per share

(1) Charges consist of employee severance, gains or losses on the disposal of assets and other related costs, non-cash goodwill impairment charges and non-cash asset impairment charges.

(2) Acquisition-related costs related to the acquisitions of Zeman and FTP.

(3) Charges related to lump sum pension payments and the purchase of a group annuity contract as discussed in Note 12 to the consolidated financial statements.

(4) Charges represent the step up in value of acquired inventories related to acquisitions and are included in Cost of goods sold.

(1) Charges primarily consist of employee severance, gains or losses on the disposal of assets and other related costs and non-cash asset impairment charges.

(2) Costs related to acquisitions as discussed in Note 4 to the consolidated financial statements.

(3) Net charges related to lump sum pension payments and the purchase of a group annuity contract as discussed in Note 11 to the consolidated financial statements.

(4) Costs related to acquisitions and included in Cost of goods sold.

(5) 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.

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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Acquisition of businesses, net of cash acquired

Cash used by financing activities (3)

Proceeds from (payments on) short-term borrowings, net

Cash provided by (used by) financing activities (3)

Proceeds from short-term borrowings

Proceeds from (payments on) long-term borrowings

Purchase of shares for treasury

Cash dividends paid to shareholders

(Decrease) increase in Cash and cash equivalents (4)

Increase (decrease) in Cash and cash equivalents (4)

(1) Cash provided by operating activities increased for the twelve months ended December 31, 2022 compared with the twelve months ended December 31, 2021 primarily due to higher company earnings.

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The Company currently anticipates capital expenditures of $80,000 to $100,000 in 2023.

Anticipated capital expenditures include investments for capital maintenance to improve operational effectiveness.

Anticipated capital expenditures include investments to increase capacity and improve operational effectiveness.

Management critically evaluates all proposed capital expenditures and expects each project 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 twelve months ended December 31, 2021 compared with the twelve months ended December 31, 2020 due to higher short-term borrowings in 2021 partially offset by an increase in the purchase of shares for treasury.

(4) Cash and cash equivalents decreased 25.0%, or $64,321, to $192,958 during the twelve months ended December 31, 2021, from $257,279 as of December 31, 2020.

The decrease was predominantly due to an increase in cash used in the purchase of common shares for treasury, dividends paid to shareholders and for the acquisition of businesses in 2021, partially offset by cash provided by operating activities.

(3) Cash provided by (used by) financing activities increased in the twelve months ended December 31, 2022 compared with the twelve months ended December 31, 2021 due to higher long-term borrowings in 2022 partially offset by an increase in the purchase of shares for treasury.

(4) Cash and cash equivalents increased 2.2%, or $4,192, to $197,950 during the twelve months ended December 31, 2022, from $192,958 as of December 31, 2021.

The increase was predominantly due to higher cash provided by operating activities and an increase in long term borrowings offset by increase in cash used in the purchase of common shares for treasury, dividends paid to shareholders and for the acquisition of businesses in 2022.

The Company paid $130,724 and $121,851 in cash dividends to its shareholders in the twelve months ended December 31, 2022 and 2021, respectively.

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(2) In order to minimize potential supply chain disruptions in serving customers due to the continued impacts of the COVID-19 pandemic, the Company increased inventories relative to expected Net sales resulting in higher Days sales in Inventories.

(3) Average operating working capital excluding Fori would have been 18.6% as a percent of Net sales.

Rationalization and Asset Impairments

2 unchanged sentences

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

At December 31, 2021 and 2020, the fair value of long-term debt, including the current portion, was approximately $776,655 and $793,591, respectively, which was determined using available market information and methodologies requiring judgment.

At December 31, 2022 and 2021, the total amount of debt outstanding was $1,203,879 and $769,819, respectively, while the fair value of long-term debt, including the current portion, was approximately $1,009,020 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 $1,121,435 and $717,855, respectively.

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As of December 31, 2022, the Company was in compliance with all of its covenants and had $45,000 of outstanding borrowings under the Credit Agreement.

The Company has other lines of credit totaling $91,309.

The Company has other lines of credit and debt agreements totaling $92,078.

As of December 31, 2022, the Company was in compliance with all of its covenants and had $37,444 outstanding at December 31, 2022.

On November 29, 2022, the Company entered into a term loan in the aggregate principal amount of $400,000 (the “Term Loan”), which was borrowed in full.

The Term Loan matures on November 29, 2025.

The Term Loan bears an interest at a rate based on Term SOFR, plus a margin ranging from 0.75% to 1.75% based on the Company’s consolidated net leverage ratio.

The proceeds of the Term Loan were used to pay a portion of the purchase price in connection with the acquisition of Fori.

The agreement governing the Term Loan (the “Term Loan Credit Agreement”) contains representations and warranties, as well as customary affirmative, negative and financial covenants for credit facilities of this type, including limitations on the Company and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates.

The Term Loan Credit Agreement requires the Company to maintain a minimum consolidated fixed charges coverage ratio and maximum consolidated net leverage ratio.

As of December 31, 2022, the Company was in compliance with all of its covenants.

Shelf Agreements

5 unchanged sentences

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.

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 and 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 Amounts due banks, Current portion of long-term debt and Long-term debt, less current portions, plus Total equity.

ROIC as of December 31, were as follows:

The following table presents the reconciliation of ROIC and Adjusted ROIC to net income:

Return on Invested Capital

Adjusted net income (1)

Net income as reported

Interest expense (after-tax)

1 unchanged sentence

Net operating profit after taxes

Special items:

Rationalization and asset impairment charges

Acquisition transaction costs

Pension settlement net charges

Amortization of step up in value of acquired inventories

Tax effect of Special items (1)

Adjusted net operating profit after taxes

Invested Capital

Return on invested capital

(1) See “Non-GAAP Financial Measures” section for a tabular reconciliation of Net income to Adjusted net income.

Short-term debt

Long-term debt, less current portion

Invested capital

Return on invested capital as reported (2)

Adjusted return on invested capital (2)

(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 rate reflects the taxable jurisdiction and nature of each Special item.

(2) Return on invested capital and Adjusted return on invested capital excluding Fori would have been 27.9% and 28.6%, respectively.

Contractual and Other Obligations

6 unchanged sentences

Purchase commitments (1)

Transition Tax (2) (Note 14)

Transition Tax (2)

(1) Purchase commitments include contractual obligations for raw materials and services.

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Historically, the Company’s estimates have been determined to be reasonable.

No material changes to the Company’s accounting policies were made during 2021.

No material changes to the Company’s

accounting policies were made during 2022.

The Company believes the following accounting policies are some of the more critical judgment areas affecting its financial condition and results of operations.

34 unchanged sentences

At December 31, 2022, a valuation allowance of $44,627 was recorded against certain deferred tax assets based on this assessment.

The Company believes it is more-likely-than-not that the tax benefit of the remaining net deferred tax assets will be realized.

Company believes it is more-likely-than-not that the tax benefit of the remaining net deferred tax assets will be realized.

The amount of net deferred tax assets considered realizable could be increased or reduced in the future if the Company’s assessment of future taxable income or tax planning strategies changes.

7 unchanged sentences

A 10 basis point change in the discount rate would not have a significant impact to pension expense.

The Company’s defined benefit plan expense was $124,929 and $4,871 in 2021 and 2020, respectively.

The Company’s defined benefit plan (income) expense was $(2,280) and $124,929 in 2022 and 2021, respectively.

Pension expense includes $367 and $126,013 in settlement charges in 2022 and 2021, respectively.

8 unchanged sentences

The lump sum payments and annuity purchase resulted in pre-tax settlement charges of $126,056 in the twelve months ended December 31, 2021.

The remaining surplus assets of $68,458 at December 31, 2021 were transferred to a suspense account in January 2022 and will be used to fund employer matching contributions in a qualified employee savings plan.

The surplus assets are recorded in Other current assets and Other assets in the Company’s Consolidated Balance Sheets.

The remaining surplus assets of $68,458 at December 31, 2021 were transferred to a suspense account in January 2022 and are being used to fund employer matching contributions in a qualified employee savings plan.

The surplus assets as of December 31, 2022 were $56,418 and are recorded in Other current assets and Other assets in the Company’s Consolidated Balance Sheets.

Inventories are valued at the lower of cost or net realizable value.

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The Company reviews the net realizable value of inventory on an on-going basis with consideration given to deterioration, obsolescence and other factors.

If actual market conditions differ from those projected by management, and the Company’s estimates prove to be inaccurate, write-downs of inventory values and adjustments to Cost of goods sold may be required.

Historically, the Company’s reserves have approximated actual experience.

Accounts Receivable

The Company maintains an allowance for doubtful accounts for estimated losses from the failure of its customers to make required payments for products delivered.

The Company estimates this allowance based on the age of the related receivable, knowledge of the financial condition of customers, review of historical receivables and reserve trends and other pertinent information.

If the financial condition of customers deteriorates or an unfavorable trend in receivable collections is experienced in the future, additional allowances may be required.

If actual market conditions differ from those projected by management,

and the Company’s estimates prove to be inaccurate, write-downs of inventory values and adjustments to Cost of goods sold may be required.

Historically, the Company’s reserves have approximated actual experience.

9 unchanged sentences

For goodwill, the Company first assesses qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, and whether it is necessary to perform the quantitative goodwill impairment test.

The quantitative test is required only if the Company concludes that it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount.

The quantitative test is only required if the Company concludes that it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount.

The Company may also perform a quantitative test in instances where the more-likely-than-not threshold has not been met, including when general macroeconomic conditions or changes to the reporting unit warrant a refresh of the baseline used in a qualitative test.

For quantitative testing, the Company compares the fair value of each reporting unit with its carrying amount.

8 unchanged sentences

Management values acquired intangible assets using the relief from royalty method or excess earnings method, forms of the income approach supported by observable market data for peer companies.

The significant assumptions used to estimate the value of the acquired intangible assets include discount rates and certain assumptions that form the basis of future cash flows (such as revenue growth rates,

customer attrition rates and royalty rates).

Acquired inventories are marked to fair value.

For certain items, the carrying value is determined to be a reasonable approximation of fair value based on information available to the Company.

For certain items, the pre-acquisition carrying value is determined to be a reasonable approximation of fair value based on information available to the Company.

Refer to Note 4 to the consolidated financial statements for additional details.

15 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-K

Item 7. Management’s Discussion and Analysis