Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-1402
LINCOLN ELECTRIC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Ohio
34-1860551
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
22801 St. Clair Avenue, Cleveland, Ohio
44117
(Address of principal executive offices)
(Zip Code)
(216) 481-8100
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common Shares, without par value
LECO
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “small reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
The number of shares outstanding of the registrant’s common shares as of September 30, 2022 was 57,738,400.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
3
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
4
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
5
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
8
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
36
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
37
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
38
Signatures
39
EX-31.1
Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
EX-31.2
Certification of the Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
EX-32.1
Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) and Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101
Instance Document
Schema Document
Calculation Linkbase Document
Label Linkbase Document
Presentation Linkbase Document
Definition Linkbase Document
2
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
2022
2021
Net sales (Note 2)
$
935,240
806,454
2,830,277
2,389,929
Cost of goods sold
625,722
538,282
1,857,501
1,593,981
Gross profit
309,518
268,172
972,776
795,948
Selling, general & administrative expenses
159,045
149,118
492,523
446,351
Rationalization and asset impairment charges (Note 6)
8,364
3,484
9,405
8,277
Operating income
142,109
115,570
470,848
341,320
Interest expense, net
8,210
5,714
20,867
16,736
Other income (expense) (Note 14)
3,588
(71,441)
7,088
(71,155)
Income before income taxes
137,487
38,415
457,069
253,429
Income taxes (Note 15)
28,262
6,658
93,991
51,259
Net income including non-controlling interests
109,225
31,757
363,078
202,170
Non-controlling interests in subsidiaries’ income (loss)
—
131
Net income
202,039
Basic earnings per share (Note 3)
1.89
0.54
6.24
3.40
Diluted earnings per share (Note 3)
1.87
0.53
6.17
3.36
Cash dividends declared per share
0.56
0.51
1.68
1.53
See notes to these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges, net of tax of $3,234 and $8,079 in the three and nine months ended September 30, 2022; $707 and $1,493 in the three and nine months ended September 30, 2021
7,777
2,876
22,082
5,412
Defined benefit pension plan activity, net of tax of $47 and $506 in the three and nine months ended September 30, 2022; $18,759 and $19,005 in the three and nine months ended September 30, 2021
85
55,558
148
58,916
Currency translation adjustment
(52,129)
(19,120)
(94,193)
(28,284)
Other comprehensive income (loss):
(44,267)
39,314
(71,963)
36,044
Comprehensive income
64,958
71,071
291,115
238,214
Comprehensive income (loss) attributable to non-controlling interests
(13)
(58)
102
(196)
Comprehensive income attributable to shareholders
64,971
71,129
291,013
238,410
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2022
December 31, 2021
(NOTE 1)
ASSETS
Current Assets
Cash and cash equivalents
141,307
192,958
Accounts receivable (less allowance for doubtful accounts of $10,009 in 2022; $11,105 in 2021)
463,106
429,074
Inventories (Note 9)
632,376
539,919
Other current assets
158,609
127,642
Total Current Assets
1,395,398
1,289,593
Property, plant and equipment (less accumulated depreciation of $863,983 in 2022; $868,036 in 2021)
489,961
511,744
Goodwill
424,505
430,162
Other assets
342,101
360,808
TOTAL ASSETS
2,651,965
2,592,307
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt (Note 12)
68,375
52,730
Trade accounts payable
329,890
330,230
Accrued employee compensation and benefits
183,638
108,562
Other current liabilities
238,425
264,383
Total Current Liabilities
820,328
755,905
Long-term debt, less current portion (Note 12)
711,250
717,089
Other liabilities
196,159
255,404
Total Liabilities
1,727,737
1,728,398
Shareholders' Equity
Common Shares
9,858
Additional paid-in capital
471,172
451,268
Retained earnings
3,237,200
2,970,303
Accumulated other comprehensive loss
(329,451)
(257,386)
Treasury Shares
(2,464,460)
(2,309,941)
Total Shareholders' Equity
924,319
864,102
Non-controlling interests
(91)
(193)
Total Equity
924,228
863,909
TOTAL LIABILITIES AND TOTAL EQUITY
CONSOLIDATED STATEMENTS OF EQUITY
Accumulated
Common
Additional
Other
Non-
Shares
Paid-In
Retained
Comprehensive
Treasury
Controlling
Outstanding
Capital
Earnings
Income (Loss)
Interests
Total
Balance at December 31, 2021
58,787
126,030
1
126,031
Unrecognized amounts from defined benefit pension plans, net of tax
107
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
5,355
(7,583)
134
(7,449)
Cash dividends declared - $0.56 per share
(32,505)
Stock-based compensation activity
116
10,834
1,349
12,183
Purchase of shares for treasury
(805)
(104,579)
115
(107)
Balance at March 31, 2022
58,098
462,217
3,063,721
(259,507)
(2,413,171)
863,060
127,823
(1)
127,822
(44)
8,950
(34,596)
(19)
(34,615)
Cash dividends declared – $0.56 per share
(32,698)
15
5,428
146
5,574
(191)
(25,119)
(2,021)
2,074
53
Balance at June 30, 2022
57,922
465,624
3,160,920
(285,197)
(2,438,144)
(78)
912,983
(52,116)
(32,580)
14
5,158
202
5,360
(198)
(26,518)
390
(365)
Balance at September 30, 2022
57,738
Balance at December 31, 2020
59,641
409,958
2,821,359
(302,190)
(2,149,714)
979
790,250
74,177
74,133
5,060
7,290
(22,584)
(159)
(22,743)
Cash dividends declared – $0.51 per share
(30,572)
7,680
1,502
9,182
(237)
(28,459)
891
(741)
(883)
(733)
Balance at March 31, 2021
59,538
418,529
2,864,223
(312,424)
(2,176,671)
803,408
96,105
175
96,280
(1,702)
Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax
(4,754)
13,689
(110)
13,579
(30,552)
46
8,638
503
9,141
(197)
(25,229)
409
(957)
(548)
Balance at June 30, 2021
59,387
427,576
2,928,819
(305,191)
(2,201,397)
(42)
859,623
(19,062)
(30,379)
34
7,449
364
7,813
(373)
(50,160)
(239)
164
(75)
Balance at September 30, 2021
59,048
434,786
2,930,361
(265,819)
(2,251,193)
(100)
857,893
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Non-controlling interests in subsidiaries' income (loss)
Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities:
Rationalization and asset impairment net charges (gains) (Note 6)
7,776
(1,162)
Depreciation and amortization
59,009
60,558
Equity earnings (loss) in affiliates, net
254
(399)
Deferred income taxes
(34,403)
(28,428)
Stock-based compensation
20,949
18,215
Pension settlement charges
80,098
Other, net
15,867
(754)
Changes in operating assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable
(64,569)
(71,212)
Increase in inventories
(135,578)
(128,856)
Increase in other current assets
(34,368)
(10,610)
Increase in trade accounts payable
19,572
54,981
Increase in other current liabilities
66,838
89,569
Net change in other assets and liabilities
(12,841)
(9,045)
NET CASH PROVIDED BY OPERATING ACTIVITIES
271,584
255,125
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
(52,301)
(46,440)
Acquisition of businesses, net of cash acquired
(22,294)
(158,605)
Proceeds from sale of property, plant and equipment
2,338
3,847
Other investing activities
6,500
NET CASH USED BY INVESTING ACTIVITIES
(72,257)
(194,698)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in borrowings
14,999
32,295
Proceeds from exercise of stock options
2,168
7,921
Purchase of shares for treasury (Note 8)
(156,216)
(103,848)
Cash dividends paid to shareholders
(98,377)
(91,717)
Other financing activities
(763)
NET CASH USED BY FINANCING ACTIVITIES
(237,426)
(156,112)
Effect of exchange rate changes on Cash and cash equivalents
(13,552)
(1,035)
DECREASE IN CASH AND CASH EQUIVALENTS
(51,651)
(96,720)
Cash and cash equivalents at beginning of period
257,279
CASH AND CASH EQUIVALENTS AT END OF PERIOD
160,559
Dollars in thousands, except per share amounts
NOTE 1 — SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Lincoln Electric Holdings, Inc. and its wholly-owned and majority-owned subsidiaries for which it has a controlling interest (the “Company”) after elimination of all inter-company accounts, transactions and profits.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements. However, in the opinion of management, these unaudited consolidated financial statements contain all the adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position, results of operations and cash flows for the interim periods. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022.
The accompanying Consolidated Balance Sheet at December 31, 2021 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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.
Turkey – Highly Inflationary Economy
An economy is considered highly inflationary under GAAP if the cumulative inflation rate for a three-year period meets or exceeds 100 percent. The Turkish economy exceeded the three-year cumulative inflation rate of 100 percent during the second quarter of 2022. As a result, the financial statements of the Company’s Turkish operation are reported under highly inflationary accounting rules as of April 1, 2022. Under highly inflationary accounting, the financial statements of the Company’s Turkish operation have been remeasured into the Company’s reporting currency (U.S. dollar). Beginning April 1, 2022, the exchange gains and losses from the remeasurement of monetary assets and liabilities are reflected in current earnings, rather than “Accumulated other comprehensive loss” on the balance sheet. As of September 30, 2022, this impact was not significant to the Company’s results.
Management has evaluated and disclosed all material events occurring subsequent to the date of the financial statements up to October 27, 2022, the filing date of this Quarterly Report on Form 10-Q.
New Accounting Pronouncements:
This section provides a description of new accounting pronouncements (“Accounting Standard Update” or “ASU”) issued by the Financial Accounting Standards Board (“FASB”) that are applicable to the Company.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is currently evaluating the impact on its financial statements of the following ASU:
Standard
Description
ASU No. 2022-04, Liabilities-Supplier Finance Programs (Subtopic 405-50), issued September 2022.
Requires disclosure about a company’s supplier finance program, including key terms, amount outstanding, assets pledged as applicable, presentation on the balance sheet and a period-over-period balance roll forward. Except for the roll forward requirement, the ASU is effective for interim and annual periods beginning January 1, 2023 and should be applied retrospectively. The roll forward requirement is effective January 1, 2024 and should be applied prospectively. Early adoption of the roll forward requirement is permitted.
NOTE 2 — REVENUE RECOGNITION
The following table presents the Company’s Net sales disaggregated by product line:
Consumables
547,596
465,829
1,655,613
1,375,567
Equipment
387,644
340,625
1,174,664
1,014,362
Net sales
Consumable sales consist of electrodes, fluxes, specialty welding consumables and brazing and soldering alloys. Equipment sales consist of arc welding power sources, welding accessories, fabrication, plasma cutters, wire feeding systems, automated joining, assembly and cutting systems, fume extraction equipment, CNC plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting and brazing. Consumable and Equipment products are sold within each of the Company’s operating segments.
Within the Equipment product line, there are certain customer contracts related to automation products that may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines the standalone selling price based on the prices charged to customers or using expected cost plus margin. Less than 10% of the Company’s Net sales are recognized over time.
At September 30, 2022, the Company recorded $42,552 related to advance customer payments and $31,772 related to billings in excess of revenue recognized. These contract liabilities are included in Other current liabilities in the Condensed Consolidated Balance Sheets. At December 31, 2021, the balances related to advance customer payments and billings in excess of revenue recognized were $72,047 and $40,450, respectively. Substantially all of the Company’s contract liabilities are recognized within twelve months based on contract duration. The Company records an asset for contracts where it has recognized revenue, but has not yet invoiced the customer for goods or services. At September 30, 2022 and December 31, 2021, the Company recorded $37,488 and $25,300, respectively, related to these contract assets which are included in Other current assets in the Condensed Consolidated Balance Sheets. Contract asset amounts are expected to be billed within the next twelve months.
10
NOTE 3 — EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Denominator (shares in 000's):
Basic weighted average shares outstanding
57,823
59,289
58,148
59,465
Effect of dilutive securities - Stock options and awards
703
766
667
Diluted weighted average shares outstanding
58,526
60,055
58,815
60,168
Basic earnings per share
Diluted earnings per share
For the three months ended September 30, 2022 and 2021, common shares subject to equity-based awards of 52,495 and 2,126, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive. For the nine months ended September 30, 2022 and 2021, common shares subject to equity-based awards of 120,106 and 150,254, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.
NOTE 4 — ACQUISITIONS
On March 1, 2022, the Company acquired 100% ownership of Kestra Universal Soldas, Industria e Comercio, Imporacao e Exportacao Ltda. (“Kestra”), a privately held manufacturer headquartered in Atibaia, Sao Paulo State, Brazil. The net purchase price was $22,294, net of cash acquired and accounted for as a business combination. In 2021, Kestra generated sales of approximately $15,000. Beginning March 1, 2022, the Company’s Consolidated Statements of Income include the results of Kestra, including Net sales of $11,906 through September 30, 2022 and the impact on net income for the three and nine months ended September 30, 2022 was not material. Kestra manufactures and provides specialty welding consumables, wear plates and maintenance and repair services for alloy and wear-resistant products commonly used in mining, steel, agricultural and industrial mill applications. The acquisition broadens the Company’s specialty alloys portfolio and services.
On July 28, 2021, the Company acquired 100% ownership of Overstreet-Hughes Company, Inc. and Shoals Tubular, Inc. (“FTP”). The net purchase price was $71,716, net of cash acquired and accounted for as a business combination. The Company recognized $346 in acquisition transaction costs in 2021 which were expensed as incurred and are included in “Selling, general, and administrative expenses” in the Consolidated Statements of Income. In 2020, FTP generated sales of approximately $50,000. Beginning July 28, 2021, the Company’s Consolidated Statements of Income include the results of FTP, including Net sales of $24,953 through December 31, 2021 and the impact on net income for the year ended December 31, 2021 was not material. FTP manufactures copper and aluminum headers, distributor assemblies and manifolds in the United States and Mexico for the heating, ventilation, and air conditioning sector (“HVAC”). The acquisition further differentiated The Harris Products Group’s competitive position serving HVAC original equipment manufacturers with a comprehensive portfolio of solutions for the fabrication of HVAC coils and accelerates growth in this market.
On April 1, 2021, the Company acquired 100% ownership of Zeman Bauelemente Produktionsgesellschaft m.b.H. (“Zeman"), a division of the Zeman Group. The net purchase price was $84,390, net of cash acquired and accounted for as a business combination. The Company recognized $1,577 in acquisition transaction costs in 2021 which were expensed as incurred and are included in “Selling, general, and administrative expenses” in the Consolidated Statements of Income. In 2020, Zeman generated sales of approximately $40,000. Beginning April 1, 2021, the Company’s
11
Consolidated Statements of Income include the results of Zeman, including Net sales of $24,473 through December 31, 2021 and the impact on net income for the year ended December 31, 2021 was not material. Zeman, based in Vienna, Austria, is a leading designer and manufacturer of robotic assembly and arc welding systems that automate the tacking and welding of steel beams. The acquisition expanded the Company’s international automation capabilities to serve customers in the structural steel and infrastructure sectors.
The acquired companies discussed above are not material individually, or in the aggregate, to the actual or pro forma Consolidated Statements of Income or Consolidated Statements of Cash Flows; as such, pro forma information related to these acquisitions have not been presented. The preliminary purchase price allocations are expected to be finalized within the allowable measurement period.
NOTE 5 — SEGMENT INFORMATION
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.
Segment performance is measured and resources are allocated based on a number of factors, the primary measure being the adjusted earnings before interest and income taxes (“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.
12
The following table presents Adjusted EBIT by segment:
The Harris
Americas
International
Products
Corporate /
Welding
Group
Eliminations
Consolidated
Three Months Ended September 30, 2022
585,628
216,497
133,115
Inter-segment sales
35,353
9,994
2,642
(47,989)
620,981
226,491
135,757
Adjusted EBIT
118,804
25,225
14,432
(1,685)
156,776
Special items charge (gain) (1)
(353)
3,068
11,079
EBIT
119,157
16,861
(4,753)
145,697
Interest income
376
Interest expense
(8,586)
Three Months Ended September 30, 2021
461,508
227,165
117,781
37,480
7,078
1,945
(46,503)
498,988
234,243
119,726
84,557
29,032
15,980
(4,704)
124,865
Special items charge (gain) (3)
73,574
6,615
547
80,736
10,983
22,417
15,433
44,129
333
(6,047)
Nine Months Ended September 30, 2022
1,715,342
711,167
403,768
92,540
25,749
8,570
(126,859)
1,807,882
736,916
412,338
348,439
97,321
51,952
(10,470)
487,242
Special items charge (gain) (2)
(3,627)
9,865
9,306
352,066
87,456
(13,538)
477,936
980
(21,847)
Nine Months Ended September 30, 2021
1,344,218
702,596
343,115
109,993
18,260
6,376
(134,629)
1,454,211
720,856
349,491
245,308
77,845
52,889
(10,048)
365,994
79,664
13,695
1,923
95,829
165,644
64,150
52,342
(11,971)
270,165
1,185
(17,921)
13
NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS
The Company recorded Rationalization and asset impairment net charges of $9,405 and $8,277 in the nine months ended September 30, 2022 and 2021, respectively. The charges are primarily related to employee severance, non-cash asset impairments and gains or losses on the disposal of assets.
During 2021, the Company initiated rationalization plans within the International Welding segment. The plans include headcount restructuring and the consolidation of manufacturing operations to better align the Company’s cost structure with economic conditions and operating needs. At September 30, 2022, liabilities of $1,097 for International Welding were recognized in Other current liabilities in the Company’s Condensed Consolidated Balance Sheet.
The Company believes the rationalization actions will positively impact future results of operations and will not have a material effect on liquidity and sources and uses of capital. The Company continues to evaluate its cost structure and additional rationalization actions may result in charges in future periods.
The following table summarizes the activity related to rationalization liabilities for the nine months ended September 30, 2022:
2,990
Payments and other adjustments
(3,522)
Charged to expense
1,629
1,097
NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI")
The following tables set forth the total changes in accumulated other comprehensive income (loss) ("AOCI") by component, net of taxes:
Unrealized gain
(loss) on derivatives
designated and
Defined benefit
Currency
qualifying as cash
pension plan
translation
flow hedges
activity
adjustment
22,399
(13,168)
(294,428)
Other comprehensive income (loss) before reclassification
8,142
(43,974)
Amounts reclassified from AOCI
(280)
Net current-period other comprehensive income (loss)
(44,254)
30,176
(13,083)
(346,544)
5,023
(98,412)
(211,802)
3,162
(235)
(16,135)
(286)
55,793
55,507
39,372
7,899
(42,854)
(230,864)
8,094
(13,231)
(252,249)
23,430
(94,295)
(70,865)
(1,348)
(1,200)
(72,065)
2,487
(101,770)
(202,907)
6,275
(2,220)
(27,957)
(23,902)
(863)
61,136
60,273
36,371
NOTE 8 — COMMON STOCK REPURCHASE PROGRAM
From time to time at management’s discretion, the Company is authorized to repurchase its common shares in the open market, depending on market conditions, stock price and other factors. During the three months ended September 30, 2022, the Company purchased a total of 0.2 million shares at an average cost per share of $133.74. During the nine months ended September 30, 2022, the Company purchased a total of 1.2 million shares at an average cost per share of $130.90. As of September 30, 2022, 9.1 million common shares remained available for repurchase. The repurchased common shares remain in treasury and have not been retired.
16
NOTE 9 — INVENTORIES
Inventories in the Condensed Consolidated Balance Sheets are comprised of the following components:
Raw materials
190,369
143,394
Work-in-process
106,212
97,834
Finished goods
335,795
298,691
At September 30, 2022 and December 31, 2021, approximately 40% and 36%, respectively, of total inventories were valued using the last-in, first-out ("LIFO") method. The excess of current cost over LIFO cost was $134,597 and $114,176 at September 30, 2022 and December 31, 2021, respectively.
NOTE 10 — LEASES
The table below summarizes the right-of-use assets and lease liabilities in the Company’s Condensed Consolidated Balance sheets:
Operating Leases
Balance Sheet Classification
Right-of-use assets
45,222
47,966
Current liabilities
9,963
10,218
Noncurrent liabilities
36,636
38,960
Total lease liabilities
46,599
49,178
Total lease expense, which is included in Cost of goods sold and Selling, general & administrative expenses in the Company’s Consolidated Statements of Income, was $5,109 and $15,415 in the three and nine months ended September 30, 2022, respectively, and $5,619 and $16,279 in the three and nine months ended September 30, 2021, respectively. Cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2022 were $2,930 and $9,101, respectively, and are included in Net cash provided by operating activities in the Company’s Consolidated Statements of Cash Flows. Cash paid for amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2021 were $5,896 and $12,548, respectively, and are included in Net cash provided by operating activities in the Company’s Consolidated Statements of Cash Flows. Right-of-use assets obtained in exchange for operating lease liabilities were $4,739 and $8,217 during the three and nine months ended September 30, 2022, respectively, and $3,218 and $12,912 for the three and nine months ended September 30, 2021, respectively.
17
The total future minimum lease payments for noncancelable operating leases were as follows:
2,868
2023
10,794
2024
9,313
2025
6,307
2026
5,124
After 2026
17,915
Total lease payments
52,321
Less: Imputed interest
5,722
Operating lease liabilities
As of September 30, 2022, the weighted average remaining lease term is 7.9 years and the weighted average discount rate used to determine the operating lease liability is 3.0%.
NOTE 11 — PRODUCT WARRANTY COSTS
The changes in the carrying amount of product warranty accruals are as follows:
Balance at beginning of year
20,466
21,760
Accruals for warranties
9,790
8,446
Settlements
(10,346)
(8,809)
Foreign currency translation and other adjustments
(723)
(306)
Balance at end of period
19,187
21,091
NOTE 12 — DEBT
Revolving Credit Agreements
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
18
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% to 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.
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.
NOTE 13 — RETIREMENT AND POSTRETIREMENT BENEFIT PLANS
The components of total pension cost were as follows:
U.S. pension
Non-U.S.
plans
pension plans
Service cost
50
49
395
149
827
1,190
Interest cost
66
607
2,622
924
197
1,947
8,675
1,932
Expected return on plan assets
(759)
(3,888)
(1,487)
(2,637)
(12,595)
(2,996)
Amortization of prior service cost
Amortization of net loss
44
71
616
291
133
225
1,867
737
Settlement charges (gains) (1)
73,562
(3,735)
79,652
446
Defined benefit plans
160
173
72,961
124
(3,256)
361
77,745
1,321
Multi-employer plans
74
138
289
640
Defined contribution plans
7,850
679
6,572
898
20,180
2,284
17,606
2,296
Total pension cost
8,010
926
79,533
1,160
16,924
2,934
95,351
4,257
The defined benefit plan components of Total pension cost, other than service cost, are included in Other income (expense) in the Company’s Consolidated Statements of Income.
19
NOTE 14 — OTHER INCOME (EXPENSE)
The components of Other income (expense) were as follows:
Equity earnings (loss) in affiliates
(434)
108
(254)
399
Other components of net periodic pension (cost) income (1)
(29)
(72,641)
3,871
(77,730)
Other income (expense)
4,051
1,092
3,471
6,176
Total Other income (expense)
NOTE 15 — INCOME TAXES
The Company recognized $93,991 of tax expense on pretax income of $457,069, resulting in an effective income tax rate of 20.6% for the nine months ended September 30, 2022. The effective income tax rate was 20.2% for the nine months ended September 30, 2021.
The effective tax rate was higher for the nine months ended September 30, 2022, as compared with the same period in 2021, primarily due to the geographic mix of earnings and the impact of favorable discrete tax adjustments in 2021.
As of September 30, 2022, the Company had $18,375 of unrecognized tax benefits. If recognized, approximately $15,195 would be reflected as a component of income tax expense.
The Company files income tax returns in the U.S. and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2017. The Company is currently subject to U.S., various state and non-U.S. income tax audits.
Unrecognized tax benefits are reviewed on an ongoing basis and are adjusted for changing facts and circumstances, including progress of tax audits and closing of statutes of limitations. Based on information currently available, management believes that additional audit activity could be completed and/or statutes of limitations may close relating to existing unrecognized tax benefits. It is reasonably possible there could be a reduction of $3,655 in previously unrecognized tax benefits by the end of the third quarter 2023.
NOTE 16 — DERIVATIVES
The Company uses derivative instruments to manage exposures to currency exchange rates, interest rates and commodity prices arising in the normal course of business. Both at inception and on an ongoing basis, the derivative instruments that qualify for hedge accounting are assessed as to their effectiveness, when applicable. Hedge ineffectiveness was immaterial in the nine months ended September 30, 2022 and 2021.
The Company is subject to the credit risk of the counterparties to derivative instruments. Counterparties include a number of major banks and financial institutions. None of the concentrations of risk with any individual counterparty was considered significant at September 30, 2022. The Company does not expect any counterparties to fail to meet their obligations.
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Cash Flow Hedges
The Company has certain foreign currency forward contracts that are qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of these short-term contracts was $54,600 at September 30, 2022 and $72,630 at December 31, 2021.
The Company has interest rate forward starting swap agreements that are qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of the long-term contracts was $100,000 at September 30, 2022 and December 31, 2021 and have a termination date of August 2025.
The Company has commodity contracts with a notional amount of 1,475,000 pounds and 975,000 pounds at September 30, 2022 and December 31, 2021, respectively, which are qualified and designated as cash flow hedges.
Net Investment Hedges
The Company has cross currency swap agreements that are qualified and designated as net investment hedges. The dollar equivalent gross notional amount of these contracts is $25,000 as of September 30, 2022 and December 31, 2021, respectively.
The Company has foreign currency forward contracts that qualify and are designated as net investment hedges. The dollar equivalent gross notional amount of these short-term contracts was $81,398 at September 30, 2022 and $94,479 at December 31, 2021.
Derivatives Not Designated as Hedging Instruments
The Company has certain foreign exchange forward contracts that are not designated as hedges. These derivatives are held as economic hedges of certain balance sheet exposures. The dollar equivalent gross notional amount of these contracts was $260,594 and $301,685 at September 30, 2022 and December 31, 2021, respectively.
Fair values of derivative instruments in the Company’s Condensed Consolidated Balance Sheets follow:
Current
Derivatives by hedge designation
Assets
Liabilities
Designated as hedging instruments:
Foreign exchange contracts
2,039
508
772
535
Forward starting swap agreements
19,479
6,990
Net investment contracts
13,394
2,718
2,095
608
Commodity contracts
311
Not designated as hedging instruments:
1,684
3,394
4,656
3,445
Total derivatives
17,117
4,449
22,197
7,834
3,980
21
The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income consisted of the following:
Classification of gain (loss)
Not designated as hedges:
(3,374)
(878)
(2,836)
5,000
Commodity Contracts
(319)
(40)
The effects of designated hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:
Total gain (loss) recognized in AOCI, net of tax
1,325
284
14,133
5,232
15,000
2,339
(282)
239
The Company expects a gain of $1,043 related to existing contracts to be reclassified from AOCI, net of tax, to earnings over the next 12 months as the hedged transactions are realized.
Gain (loss) recognized in the
Derivative type
Consolidated Statements of Income:
Sales
229
439
590
2,303
573
1,202
(1,018)
22
NOTE 17 - FAIR VALUE
The following table provides a summary of assets and liabilities as of September 30, 2022, measured at fair value on a recurring basis:
Quoted Prices in
Active Markets for
Identical Assets or
Significant Other
Significant
Balance as of
Observable Inputs
Unobservable
(Level 1)
(Level 2)
Inputs (Level 3)
Assets:
3,723
16,112
Pension surplus
62,750
Total assets
102,064
Liabilities:
3,902
Deferred compensation
38,189
Total liabilities
42,638
The following table provides a summary of assets and liabilities as of December 31, 2021, measured at fair value on a recurring basis:
14,824
41,612
46,200
The Company’s derivative contracts are valued at fair value using the market approach. The Company measures the fair value of foreign exchange contracts, swap agreements and net investment contracts using Level 2 inputs based on observable spot and forward rates in active markets.
The deferred compensation liability is the Company’s obligation under its executive deferred compensation plan. The Company measures the fair value of the liability using the market values of the participants’ underlying investment fund elections.
23
The fair value of Cash and cash equivalents, Accounts receivable, Short-term debt excluding the current portion of long-term debt and Trade accounts payable approximated book value due to the short-term nature of these instruments at both September 30, 2022 and December 31, 2021.
The fair value of the Company’s pension surplus assets are based on quoted market prices in active markets and are included in the Level 1 fair value hierarchy. The pension surplus assets are invested in money market and short-term duration bond funds at September 30, 2022.
The Company has various financial instruments, including cash and cash equivalents, short and long-term debt and forward contracts. While these financial instruments are subject to concentrations of credit risk, the Company has minimized this risk by entering into arrangements with a number of major banks and financial institutions and investing in several high-quality instruments. The Company does not expect any counterparties to fail to meet their obligations.
NOTE 18 – SUBSEQUENT EVENTS
On October 14, 2022, the Company entered into a definitive agreement to acquire Fori Automation, Inc. (the “contemplated acquisition”). Upon completion of the contemplated acquisition, the acquired business will extend the Company’s market presence within the automotive sector, better position it to capitalize on accelerating investments in automotive electric vehicle platforms, offer cross-selling growth opportunities to industrial customers and expand the Company’s international automation footprint.
The definitive agreement provides for a cash purchase price of $427,000, subject to a customary working capital adjustment. The Company intends to fund the transaction with cash on hand and arranged credit. The contemplated acquisition is subject to regulatory approval and other customary closing conditions and is expected to close in the fourth quarter of 2022.
For the three and nine months ended September 30, 2022, the Company has incurred $3,068, respectively, of acquisition transaction costs related to the contemplated acquisition. These costs were expensed as incurred and are included in “Selling, general, and administrative expenses” in the Consolidated Statements of Income.
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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.
Russia Operations
Results of Operations
The following table shows the Company’s results of operations:
Favorable (Unfavorable)
2022 vs. 2021
Amount
% of Sales
%
128,786
16.0
(87,440)
(16.2)
33.1
33.3
41,346
15.4
17.0
18.5
(9,927)
(6.7)
Rationalization and asset impairment charges
0.9
0.4
(4,880)
(140.1)
15.2
14.3
26,539
23.0
(2,496)
(43.7)
75,029
105.0
14.7
4.8
99,072
257.9
Income taxes
(21,604)
(324.5)
Effective tax rate
20.6
17.3
(3.3)
11.7
3.9
77,468
243.9
1.34
253.4
440,348
18.4
(263,520)
(16.5)
34.4
176,828
22.2
17.4
18.7
(46,172)
(10.3)
0.3
(1,128)
(13.6)
16.6
129,528
37.9
(4,131)
(24.7)
78,243
110.0
16.1
10.6
203,640
80.4
(42,732)
(83.4)
20.2
(0.4)
160,908
79.6
Non-controlling interests in subsidiaries' loss
(131)
(100.0)
12.8
8.5
161,039
79.7
2.81
83.6
26
Net Sales:
The following table summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales on a consolidated basis:
Change in Net Sales due to:
Net Sales
Foreign
Volume
Acquisitions
Price
Exchange
Lincoln Electric Holdings, Inc.
71,148
10,276
100,739
(53,377)
% Change
8.8
1.3
12.5
(6.6)
123,118
68,949
385,357
(137,076)
5.2
2.9
(5.7)
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
Segment Results
Acquisitions (1)
Price (2)
Exchange (3)
Operating Segments
Americas Welding
52,521
4,724
69,888
(3,013)
International Welding
5,538
31,430
(47,636)
The Harris Products Group
13,089
5,552
(579)
(2,728)
11.4
1.0
15.1
(0.7)
26.9
2.4
13.8
(21.0)
(4.7)
11.1
4.7
(0.5)
(2.3)
13.0
119,809
11,906
243,960
(4,551)
(12,348)
17,632
130,433
(127,146)
15,657
39,411
10,964
(5,379)
8.9
18.1
(0.3)
27.6
(1.8)
2.5
18.6
(18.1)
1.2
4.6
11.5
3.2
(1.6)
17.7
28
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.
Americas Welding:
124,120
(2,127)
Total Sales
121,993
24.4
Adjusted EBIT (4)
34,247
40.5
As a percent of total sales (1)
19.1
16.9
2.2
International Welding:
(10,668)
2,916
41.2
(7,752)
Adjusted EBIT (5)
(3,807)
(13.1)
As a percent of total sales (2)
12.4
(1.3)
The Harris Products Group:
15,334
697
35.8
16,031
13.4
Adjusted EBIT (6)
(1,548)
(9.7)
As a percent of total sales (3)
13.3
(2.7)
Corporate / Eliminations:
(1,486)
(3.2)
Adjusted EBIT (7)
3,019
64.2
Consolidated:
As a percent of total sales
7.8
Adjusted EBIT (8)
31,911
25.6
As a percent of sales
16.8
15.5
29
371,124
(17,453)
(15.9)
353,671
24.3
103,131
42.0
19.3
8,571
7,489
41.0
16,060
19,476
25.0
13.2
10.8
60,653
2,194
62,847
18.0
(937)
12.6
(2.5)
7,770
5.8
(422)
(4.2)
4.3
121,248
17.2
15.3
1.9
30
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
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:
Operating income as reported
Special items (pre-tax):
Rationalization and asset impairment charges (1)
Acquisition transaction costs (2)
Amortization of step up in value of acquired inventories (3)
3,690
1,106
5,531
Adjusted operating income
153,188
122,744
484,427
357,051
Net income as reported
Special items:
Pension charges and other net gains (4)
(4,273)
Tax effect of Special items (5)
(731)
(18,743)
58
(20,737)
Adjusted net income
119,573
93,750
372,442
277,131
Income taxes as reported
731
18,743
20,737
Effective tax rate as reported
Net special item tax impact
(1.1)
4.0
Adjusted effective tax rate
19.5
21.3
20.1
Diluted earnings per share as reported
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
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
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:
$ Change
Cash provided by operating activities (1)
16,459
Cash used by investing activities (2)
122,441
(5,861)
136,311
Cash used by financing activities (3)
(81,314)
(17,296)
(52,368)
(6,660)
Decrease in Cash and cash equivalents (4)
45,069
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
Working Capital Ratios
September 30, 2021
Average operating working capital to Net sales (1) (2)
16.3
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
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,
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
10,955
17,729
Acquisition transaction costs
42,131
81,695
Amortization of step up in value of acquired inventories
1,379
Tax effect of Special items (1)
(26,393)
(21,868)
Adjusted net operating profit after taxes
488,358
368,454
Invested Capital
Short-term debt
41,404
Long-term debt, less current portion
717,787
Total debt
779,625
759,191
Total equity
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
New Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements.
Refer to Note 4 to the consolidated financial statements for a discussion of the Company’s recent acquisitions.
Debt
Revolving Credit Agreement
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.
35
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
The Company is subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, product liability claims, regulatory claims and health, safety and environmental claims. Among such proceedings are the cases described below.
As of September 30, 2022, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 1,489 plaintiffs, which is a net decrease of 12 claims from those previously reported. In each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. Since January 1, 1995, the Company has been a co-defendant in other similar cases that have been resolved as follows: 56,866 of those claims were dismissed, 23 were tried to defense verdicts, 7 were tried to plaintiff verdicts (which were reversed or resolved after appeal), 1 was resolved by agreement for an immaterial amount and 1,012 were decided in favor of the Company following summary judgment motions.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022, which could materially affect the Company’s business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer purchases of its common shares during the third quarter of 2022 were as follows:
Total Number of
Maximum Number
Repurchased
of Shares that May
as Part of Publicly
Yet be Purchased
Average Price
Announced Plans or
Under the Plans or
Period
Paid Per Share
Programs
Programs (2)
July 1 - 31, 2022
77,284
(1)
124.35
76,396
9,204,553
August 1 - 31, 2022
65,707
143.18
65,288
9,139,265
September 1 - 30, 2022
55,319
135.56
9,083,946
198,310
133.72
197,003
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 6. EXHIBITS
31.1
31.2
Certification of the Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1
Certification of the Chairman, President and Chief Executive Officer (Principal Executive Officer) and Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover page Interactive Data File (formatted as Inline XBRL and contained in the Exhibit 101 attachments)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Gabriel Bruno
Gabriel Bruno
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
October 27, 2022
XBRL-Only Content Section
40