What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-27 compared with 2022-10-27 · 73 added, 125 removed, 195 unchanged (50% 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.

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.

On December 1, 2022, the Company acquired 100% ownership of Fori Automation, LLC (“Fori”) for an agreed upon purchase price of $427,000, which was adjusted for certain debt like obligations .

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.

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

Diluted earnings per share

Nine Months Ended September 30,

Three Months Ended March 31,

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 6)

Operating income

Interest expense, net

Other income (expense)

Other income (Note 11)

Income before income taxes

Effective tax rate

Income taxes (Note 12)

Effective tax rate (Note 12)

Net income including non-controlling interests

Non-controlling interests in subsidiaries' loss

Diluted earnings per share

Non-controlling interests in subsidiaries' income

Diluted earnings per share (Note 3)

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:

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Lincoln Electric Holdings, Inc.

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.

Net sales increased in the three months ended March 31, 2023 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.

Gross profit for the three months ended March 31, 2023 increased 7.8% driven by higher volumes offset by acquisitions and challenging prior year comparisons.

Last-in, first-out (“LIFO”) charges were $2,191 in the three months ended March 31, 2023, as compared with charges of $6,888 in the same 2022 period.

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.

SG&A expenses increased for the three months ended March 31, 2023 as compared to the same 2022 period, primarily due to acquisitions and higher employee-related costs.

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.

The effective tax rate was slightly higher for the three months ended March 31, 2023 as compared to the same period in 2022, primarily due to a change in the mix of earnings and discrete tax items.

Segment Results

Three Months Ended September 30,

Change in Net Sales due to:

Acquisitions (1)

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:

7 unchanged sentences

The Harris Products Group

(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.

(1) Increase for the three months ended March 31, 2023 for Americas Welding due to higher volumes in all product groups.

Decrease in International Welding due to challenging prior year comparisons.

Decreases in The Harris Products Group due to lower retail volumes.

(2) Increases for the three months ended March 31, 2023 were due to the acquisitions discussed in Note 4 to the consolidated financial statements.

(3) Increase for the three months ended March 31, 2023 for all segments reflects increased product pricing to offset higher input costs.

(4) Decrease for the three months ended March 31, 2023 in International Welding primarily due to the Turkish Lira and Euro.

Adjusted Earnings Before Interest and Income Taxes:

4 unchanged sentences

Favorable (Unfavorable)

Three Months Ended September 30,

Americas Welding:

Inter-segment sales

Adjusted EBIT (4)

As a percent of total sales (1)

International Welding:

Inter-segment sales

Adjusted EBIT (5)

As a percent of total sales (2)

The Harris Products Group:

Inter-segment sales

Adjusted EBIT (6)

As a percent of total sales (3)

Corporate / Eliminations:

Inter-segment sales

Adjusted EBIT (7)

Consolidated:

As a percent of total sales

Adjusted EBIT (8)

As a percent of sales

(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.

(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,

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, 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) 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.

(1) Decrease for the three months ended March 31, 2023 as compared to March 31, 2022 primarily driven by acquisition impacts.

(2) Decrease for the three months ended March 31, 2023 as compared to March 31, 2022 primarily driven by challenging prior year comparisons.

(3) The three months ended March 31, 2023 exclude the amortization of the step up in value of acquired inventories of $2,785 as discussed in Note 4 to the consolidated financial statements.

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

(4) The three months ended March 31, 2023 exclude Rationalization and asset impairment net charges of $877 primarily due to restructuring activities as discussed in Note 6 to the consolidated financial statements, the amortization of the step up in value of acquired inventories of $1,071 as discussed in Note 4 to the consolidated financial statements and a gain on asset disposal of $1,646.

The three months ended March 31, 2022 exclude Rationalization and asset impairment charges of $1,885 related to severance and gains or losses on the disposal of assets as disclosed in Note 6 to the consolidated financial statements.

(5) 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.

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 (“Adjusted 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.

1 unchanged sentence

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

1 unchanged sentence

Rationalization and asset impairment charges (1)

Acquisition transaction costs (2)

Amortization of step up in value of acquired inventories (2)

3 unchanged sentences

Rationalization and asset impairment charges (1)

Acquisition transaction costs (2)

Pension charges and other net gains (4)

Pension settlement net gains (3)

Amortization of step up in value of acquired inventories (2)

Gains on asset disposal (4)

Tax effect of Special items (5)

11 unchanged sentences

Adjusted diluted earnings per share

(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).

(1) Primarily related to restructuring activities as discussed in Note 6 to the consolidated financial statements.

(2) Costs related to the acquisition and are included in Cost of goods sold.

(3) Pension net gains primarily due to the final settlement associated with the termination of a pension plan and are included in Other income (expense).

(4) Gain on asset disposal and included in Other income (expense).

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

12 unchanged sentences

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)

Net change in borrowings

(Payments on) proceeds from short-term borrowings

Payments on long-term borrowings

Purchase of shares for treasury

Cash dividends paid to shareholders

Decrease in Cash and cash equivalents (4)

(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.

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

(1) Cash provided by operating activities increased for the three months ended March 31, 2023 , compared with the three months ended March 31, 2022 primarily due to improved working capital position.

(2) Cash used by investing activities decreased for the three months ended March 31, 2023 , compared with the three months ended March 31, 2022 primarily due to cash used in the acquisition of businesses in 2022.

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

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.

(3) Cash used by financing activities increased in the three months ended March 31, 2023 , compared with the three months ended March 31, 2022 due to increased payments on short and long-term borrowings in 2023.

(4) Cash and cash equivalents increased 0.8%, or $1,653, to $198,803 during the three months ended March 31, 2023 , from $197,150 as of December 31, 2022.

At March 31, 2023, $173,624 of Cash and cash equivalents was held by international subsidiaries.

In April 2023, the Company paid a cash dividend of $0.64 per share, or $36,847, to shareholders of record as of March 31, 2023.

Working Capital Ratios

September 30, 2022

March 31, 2023

December 31, 2022

September 30, 2021

March 31, 2022

Average operating working capital to Net sales (1)

3 unchanged sentences

(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

5 unchanged sentences

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

Twelve Months Ended September 30,

Twelve Months Ended March 31,

Net income as reported

7 unchanged sentences

Amortization of step up in value of acquired inventories

Gain on asset disposal

Tax effect of Special items (3)

1 unchanged sentence

Invested Capital

September 30, 2022

September 30, 2021

March 31, 2023

March 31, 2022

Short-term debt

3 unchanged sentences

Adjusted return on invested capital

(1) Related to acquisitions and are included in Selling, general & administrative expenses.

(2) Related to lump sum pension payments due to the final settlement associated with the termination of a pension plan.

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

5 unchanged sentences

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.

At March 31, 2023 and December 31, 2022, the fair value of long-term debt, including the current portion, was approximately $1,033,063 and $1,009,020, respectively, which was determined using available market information and methodologies requiring judgment.

The carrying value of this debt at such dates was $1,121,558 and $1,121,435, respectively.

3 unchanged sentences

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.

On March 8, 2023, the Credit Agreement was amended to replace the LIBOR rate to a term secured overnight finance rate (“SOFR”);

as such, the interest rate on borrowings is based on SOFR plus a spread of 0.85% to 1.85% based on (1) the Company’s net leverage ratio and (2) a credit spread adjustment.

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.

As of March 31, 2023, the Company was in compliance with all of its covenants and had $25,000 of outstanding borrowings under the Credit Agreement.

The Company has other lines of credit and debt agreements totaling $98,692.

As of September 30, 2022, the Company was in compliance with all of its covenants and had $20,338 outstanding at September 30, 2022.

As of March 31, 2023, the Company was in compliance with all of its covenants and had $13,408 outstanding.

Senior Unsecured Notes

5 unchanged sentences

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.

As of March 31, 2023, the Company was in compliance with all of its debt covenants relating to the Notes.

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 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.

As of March 31, 2023, the Company was in compliance with all of its covenants.

In March 2023, the Company entered into interest rate swap agreements to effectively convert the interest rate on $150,000 of the Term Loan from a variable rate to a fixed rate.

Shelf Agreements

2 unchanged sentences

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.

As of March 31, 2023, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements.

Forward-looking Statements

17 unchanged sentences

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.

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 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.

Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

3 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