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, 2023
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, 2023 was 57,199,736.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
3
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (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 5. Other Information
38
Item 6. Exhibits
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,
2023
2022
Net sales (Note 2)
$
1,033,214
935,240
3,133,122
2,830,277
Cost of goods sold
667,584
625,722
2,038,707
1,857,501
Gross profit
365,630
309,518
1,094,415
972,776
Selling, general & administrative expenses
187,115
159,045
569,979
492,523
Rationalization and asset impairment charges (Note 6)
7,074
8,364
10,618
9,405
Operating income
171,441
142,109
513,818
470,848
Interest expense, net
10,809
8,210
35,708
20,867
Other income (Note 11)
801
3,588
11,727
7,088
Income before income taxes
161,433
137,487
489,837
457,069
Income taxes (Note 12)
32,090
28,262
101,232
93,991
Net income
129,343
109,225
388,605
363,078
Basic earnings per share (Note 3)
2.26
1.89
6.76
6.24
Diluted earnings per share (Note 3)
2.22
1.87
6.67
6.17
Cash dividends declared per share
0.64
0.56
1.92
1.68
See notes to these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Other comprehensive income (loss), net of tax:
Unrealized gain on derivatives designated and qualifying as cash flow hedges
2,665
7,777
6,908
22,082
Defined benefit pension plan activity
(15)
85
(821)
148
Currency translation adjustment
(32,297)
(52,129)
3,478
(94,193)
Other comprehensive (loss) income:
(29,647)
(44,267)
9,565
(71,963)
Comprehensive income
99,696
64,958
398,170
291,115
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2023
December 31, 2022
(NOTE 1)
ASSETS
Current Assets
Cash and cash equivalents
342,667
197,150
Accounts receivable (less allowance for doubtful accounts of $11,202 in 2023; $12,556 in 2022)
537,637
541,529
Inventories (Note 8)
612,338
665,451
Other current assets
179,652
153,660
Total Current Assets
1,672,294
1,557,790
Property, plant and equipment (less accumulated depreciation of $920,048 in 2023; $890,543 in 2022)
565,875
544,871
Goodwill
686,625
665,257
Other assets
401,101
412,628
TOTAL ASSETS
3,325,895
3,180,546
LIABILITIES AND EQUITY
Current Liabilities
Short-term debt (Note 10)
7,700
93,483
Trade accounts payable
328,460
352,079
Accrued employee compensation and benefits
207,116
109,369
Other current liabilities
264,866
297,966
Total Current Liabilities
808,142
852,897
Long-term debt, less current portion (Note 10)
1,102,858
1,110,396
Other liabilities
189,313
183,212
Total Liabilities
2,100,313
2,146,505
Shareholders' Equity
Common Shares
9,858
Additional paid-in capital
519,151
481,857
Retained earnings
3,578,154
3,306,500
Accumulated other comprehensive loss
(265,833)
(275,398)
Treasury Shares
(2,615,748)
(2,488,776)
Total Equity
1,225,582
1,034,041
TOTAL LIABILITIES AND TOTAL EQUITY
CONSOLIDATED STATEMENTS OF EQUITY
Accumulated
Common
Additional
Other
Shares
Paid-In
Retained
Comprehensive
Treasury
Outstanding
Capital
Earnings
Income (Loss)
Total
Balance at December 31, 2022
57,624
121,931
Unrecognized amounts from defined benefit pension plans, net of tax
560
Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax
9,131
Currency translation adjustment, net of tax
14,818
Cash dividends declared - $0.64 per share
(36,971)
Stock-based compensation activity
143
12,475
1,635
14,110
Purchase of shares for treasury
(194)
(32,158)
3,691
(3,917)
(226)
Balance at March 31, 2023
57,573
498,023
3,387,543
(250,889)
(2,519,299)
1,125,236
137,331
(1,366)
Unrealized (loss) on derivatives designated and qualifying as cash flow hedges, net of tax
(4,888)
20,957
Cash dividends declared – $0.64 per share
(36,917)
152
12,818
1,697
14,515
(312)
(53,076)
4,462
(4,830)
(368)
Balance at June 30, 2023
57,413
515,303
3,483,127
(236,186)
(2,570,678)
1,201,424
(36,876)
26
6,513
285
6,798
(238)
(45,355)
(2,665)
2,560
(105)
Balance at September 30, 2023
57,201
Balance at December 31, 2021
58,787
451,268
2,970,303
(257,579)
(2,309,941)
863,909
126,030
107
5,355
(7,448)
Cash dividends declared – $0.56 per share
(32,505)
116
10,834
1,349
12,183
(805)
(104,579)
115
(107)
Balance at March 31, 2022
58,098
462,217
3,063,721
(259,565)
(2,413,171)
863,060
127,823
(44)
8,950
(34,616)
(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
(285,275)
(2,438,144)
912,983
(32,580)
14
5,158
202
5,360
(198)
(26,518)
390
(365)
Balance at September 30, 2022
57,738
471,172
3,237,200
(329,542)
(2,464,460)
924,228
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile Net income to Net cash provided by operating activities:
Rationalization and asset impairment net charges
1,128
7,776
Depreciation and amortization
64,701
59,009
Equity (earnings) loss in affiliates, net
(463)
254
Deferred income taxes
3,201
(34,403)
Stock-based compensation
22,124
20,949
Other, net
(3,435)
15,867
Changes in operating assets and liabilities, net of effects from acquisitions:
Decrease (increase) in accounts receivable
6,695
(64,569)
Decrease (increase) in inventories
57,781
(135,578)
Increase in other current assets
(14,729)
(34,368)
(Decrease) increase in trade accounts payable
(24,672)
19,572
Increase in other current liabilities
57,975
66,838
Net change in other assets and liabilities
(13,031)
(12,841)
NET CASH PROVIDED BY OPERATING ACTIVITIES
545,880
271,584
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures
(66,459)
(52,301)
Acquisition of businesses, net of cash acquired
(32,685)
(22,294)
Proceeds from sale of property, plant and equipment
4,596
2,338
Purchase of marketable securities
(6,561)
—
NET CASH USED BY INVESTING ACTIVITIES
(101,109)
(72,257)
CASH FLOWS FROM FINANCING ACTIVITIES
(Payments on) proceeds from short-term borrowings
(74,818)
9,399
(Payments on) proceeds from long-term borrowings
(7,997)
5,600
Proceeds from exercise of stock options
13,299
2,168
(130,589)
(156,216)
Cash dividends paid to shareholders
(111,277)
(98,377)
NET CASH USED BY FINANCING ACTIVITIES
(311,382)
(237,426)
Effect of exchange rate changes on Cash and cash equivalents
12,128
(13,552)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
145,517
(51,651)
Cash and cash equivalents at beginning of period
192,958
CASH AND CASH EQUIVALENTS AT END OF PERIOD
141,307
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, 2023 are not necessarily indicative of the results to be expected for the year ending December 31, 2023.
The accompanying Condensed Consolidated Balance Sheet at December 31, 2022 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, 2022.
Certain reclassifications have been made to the prior period amounts to conform to the current period presentation, none of which are material.
Turkey – Highly Inflationary Economy
Effective April 1, 2022, the financial statements of the Company’s Turkish operation are reported under highly inflationary accounting rules. As a result, the financial statements of the Company’s Turkish operation have been remeasured into the Company’s reporting currency (U.S. dollar) and 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. For the nine months ended September 30, 2023, this impact was not significant to the Company’s results.
New Accounting Pronouncements:
This section provides a description of new accounting pronouncements (“Accounting Standards Updates” or “ASUs”) issued by the Financial Accounting Standards Board (“FASB”) that are applicable to the Company.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following ASUs were adopted as of January 1, 2023:
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, and presentation on the balance sheet. Refer to Note 15 for the impacts on the Company’s consolidated financial statements.
ASU No. 2021-08, Business Combinations (Subtopic 805), issued October 2021.
Requires the acquirer in a business combination to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The adoption did not have a material impact on the Company’s consolidated financial statements.
The Company is currently evaluating the impact on its financial statements of the following ASUs:
ASU No. 2023-01, Leases-Common Control Arrangements (Topic 842), issued March 2023
Requires a lessee in a common-control arrangement to amortize leasehold improvements that it owns over the improvements’ useful life, regardless of the lease term. The requirement of the ASU is effective January 1, 2024.
Requires disclosure about a company’s supplier finance program, including a period-over-period balance roll forward. This requirement of the ASU is effective January 1, 2024 and should be applied prospectively.
NOTE 2 — REVENUE RECOGNITION
The following table presents the Company’s Net sales disaggregated by product line:
Consumables
543,132
547,596
1,690,726
1,655,613
Equipment
490,082
387,644
1,442,396
1,174,664
Net sales
Consumable sales consist of welding, brazing and soldering filler metals. Equipment sales consist of arc welding, welding accessories, arc welding equipment, wire feeding systems, fume control equipment, plasma and oxy-fuel cutting systems, 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. 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, 2023, the Company recorded $60,312 related to advance customer payments and $58,971 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, 2022, the balances related to advance customer payments and billings in excess of revenue recognized were $78,756 and $34,771, respectively. Substantially all of the Company’s contract liabilities are recognized within twelve months based on contract duration. The Company records an asset for
10
contracts where it has recognized revenue, but has not yet invoiced the customer for goods or services. At September 30, 2023 and December 31, 2022, the Company recorded $55,078 and $35,252, 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.
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
57,320
57,823
57,465
58,148
Effect of dilutive securities - Stock options and awards
816
703
812
667
Diluted weighted average shares outstanding
58,136
58,526
58,277
58,815
Basic earnings per share
Diluted earnings per share
For the three months ended September 30, 2023 and 2022, common shares subject to equity-based awards of 19,368 and 52,495, 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, 2023 and 2022, common shares subject to equity-based awards of 67,549 and 120,106, 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 May 3, 2023, the Company acquired 100% ownership of Powermig Automação e Soldagem Ltda. (“Powermig”), a privately held automation engineering firm headquartered in Caxias do Sul, Rio Grande do Sul, in Brazil. The net purchase price was $29,572, net of cash acquired, and it was accounted for as a business combination. In 2022, Powermig generated sales of approximately $15,000 (unaudited). Beginning May 3, 2023, the Company’s Consolidated Statement of Income includes the results of Powermig, which were not material for the three and nine months ended September 30, 2023. Powermig specializes in designing and engineering industrial welding automation solutions for the heavy industry and transportation sectors. The acquisition broadened the Company’s automation portfolio and capabilities.
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, for total purchase price consideration of $468,683, or $416,353 net of cash acquired, before final and customary adjustments. In 2022, the Company recognized $5,196 in acquisition costs related to Fori and were expensed as incurred. 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 acquisition of Fori extended the Company’s market presence within the automotive sector as well as its automation footprint in the International Welding segment. For the three and nine months ended September 30, 2023, the Company’s Consolidated Statements of Income include the results of Fori, including Net Sales of $77,674 and $174,675, respectively, while net income for the periods was not material.
11
The acquisition of Fori has been accounted for as a business combination, which requires the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The process of estimating the fair values of certain tangible assets, identifiable intangible assets and assumed liabilities requires the use of judgment in determining the appropriate assumptions and estimates. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date. These preliminary estimates are based on available information and may be revised during the measurement period, not to exceed 12 months from the acquisition date, as third-party valuations are finalized, further information becomes available and additional analyses are performed. The Company does not expect any such revisions to have a material impact on the Company's preliminary purchase price allocation. As of and for the three and nine months ended September 30, 2023, these revisions did not have a material impact on the Condensed Consolidated Balance Sheets or Consolidated Statements of Income.
Assets acquired and liabilities assumed
Preliminary Purchase Price Allocation
52,330
Accounts receivable
64,439
Inventory
63,463
Property, plant and equipment (1)
36,863
Intangible assets (2)
69,350
Accounts payable
17,996
Net other assets and liabilities (3)
200,234
Total purchase price consideration
468,683
(1)
Property, plant and equipment acquired includes a number of manufacturing and distribution sites, including the related facilities, land and leased sites, and machinery and equipment for use in manufacturing operations.
(2)
Intangible asset balances of $22,000 and $18,200, respectively, were assigned to trade names and customer relationships (15 year weighted average useful life). Of the remaining amount, $24,900 was assigned to technology know-how (10 year weighted average useful life) and $4,250 was assigned to restrictive covenants (4 year weighted average life).
(3)
Consists primarily of goodwill of $245,625.
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Fori. A portion of the goodwill is deductible for tax purposes.
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 it was accounted for as a business combination. In 2022, the Company recognized $365 in acquisition costs related to Kestra and were expensed as incurred. 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 broadened the Company’s specialty alloys portfolio and services.
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.
12
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.
13
The following table presents Adjusted EBIT by segment:
The Harris
Americas
International
Products
Corporate /
Welding
Group
Eliminations
Consolidated
Three Months Ended September 30, 2023
665,228
242,010
125,976
Inter-segment sales
28,875
4,896
2,299
(36,070)
694,103
246,906
128,275
Adjusted EBIT
136,476
30,239
20,405
(2,952)
184,168
Special items charge (1)
4,056
7,870
11,926
EBIT
132,420
22,369
172,242
Interest income
1,852
Interest expense
(12,661)
Three Months Ended September 30, 2022
585,628
216,497
133,115
35,353
9,994
2,642
(47,989)
620,981
226,491
135,757
118,804
25,225
14,432
(1,685)
156,776
Special items charge (gain) (2)
(353)
3,068
11,079
119,157
16,861
(4,753)
145,697
376
(8,586)
Nine Months Ended September 30, 2023
2,000,839
747,829
384,454
92,043
19,941
8,063
(120,047)
2,092,882
767,770
392,517
408,800
93,609
58,898
(14,538)
546,769
9,798
11,426
21,224
399,002
82,183
525,545
3,520
(39,228)
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) (3)
(3,627)
9,865
9,306
352,066
87,456
(13,538)
477,936
980
(21,847)
NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS
The Company has 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, 2023, liabilities of $6,360 for International Welding were recognized in Other current liabilities in the Company’s Condensed Consolidated Balance Sheet. The Company does not anticipate significant additional charges related to the completion of these plans.
The Company recorded Rationalization and asset impairment net charges of $10,618 and $9,405 in the nine months ended September 30, 2023 and 2022, respectively. The charges are primarily related to restructuring activities.
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, 2023:
2,207
Payments and other adjustments
(5,337)
Charged to expense
9,490
6,360
NOTE 7 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) ("AOCI")
The following tables set forth the total changes in 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
18,152
(2,587)
(251,751)
Other comprehensive income (loss) before reclassification
4,063
(28,234)
Amounts reclassified from AOCI
(1,398)
1
(1,413)
Net current-period other comprehensive income (loss)
20,817
(2,602)
(284,048)
22,399
(13,168)
(294,506)
8,142
(43,987)
(280)
30,176
(13,083)
(346,635)
13,909
(1,781)
(287,526)
Other comprehensive income before reclassification
10,738
14,216
(3,830)
(4,651)
16
8,094
(13,231)
(252,442)
23,430
(70,763)
(1,348)
(1,200)
NOTE 8 — INVENTORIES
Inventories in the Condensed Consolidated Balance Sheets are comprised of the following components:
Raw materials
162,417
181,076
Work-in-process
149,205
164,778
Finished goods
300,716
319,597
At September 30, 2023 and December 31, 2022, approximately 36% and 38%, respectively, of total inventories were valued using the last-in, first-out ("LIFO") method. The excess of current cost over LIFO cost was $135,088 and $133,909 at September 30, 2023 and December 31, 2022, respectively.
NOTE 9 — 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
52,736
44,810
Current liabilities
12,480
10,378
Noncurrent liabilities
41,752
35,945
Total lease liabilities
54,232
46,323
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 $5,322 and $11,173 in the three and nine months ended September 30, 2023 and $5,109 and $15,415 in the three and nine months ended September 30, 2022, respectively. Cash paid for
17
amounts included in the measurement of lease liabilities for the three and nine months ended September 30, 2023, respectively, were $3,494 and $9,716 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, 2022, respectively, were $2,930 and $9,101 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 $1,077 and $6,410 during the three and nine months ended September 30, 2023 and $4,739 and $8,217 for the three and nine months ended September 30, 2022, respectively.
The total future minimum lease payments for noncancelable operating leases were as follows:
4,716
2024
13,631
2025
10,853
2026
8,276
2027
6,113
After 2027
18,475
Total lease payments
62,064
Less: Imputed interest
7,832
Operating lease liabilities
As of September 30, 2023, the weighted average remaining lease term is 7.1 years and the weighted average discount rate used to determine the operating lease liability is 3.4%.
NOTE 10 — 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. 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, 2023, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Credit Agreement.
The Company has other lines of credit and debt agreements totaling $84,876. As of September 30, 2023, the Company was in compliance with all of its covenants and had outstanding debt under short-term lines of credit of $7,482.
Senior Unsecured Notes
On April 1, 2015 and October 20, 2016, the Company entered into separate Note Purchase Agreements pursuant to which it issued senior unsecured notes (the "Notes") through a private placement. The 2015 Notes and 2016 Notes each have an aggregate principal amount of $350,000, comprised of four different series ranging from $50,000 to $100,000,
18
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 10.6 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, 2023, the Company was in compliance with all of its debt covenants relating to the Notes.
Term Loan
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 September 30, 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
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, 2023, 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, 2023 and December 31, 2022, the fair value of long-term debt, including the current portion, was approximately $974,061 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 $1,103,076 and $1,121,435, 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 11 — OTHER INCOME
The components of Other income were as follows:
Equity earnings (loss) in affiliates
169
(434)
463
(254)
Other components of net periodic pension (cost) income (1)
(293)
(29)
(907)
3,871
Other income (2)
925
4,051
12,171
3,471
Total Other income
19
NOTE 12 — INCOME TAXES
The Company recognized $101,232 of tax expense on pretax income of $489,837, resulting in an effective income tax rate of 20.7% for the nine months ended September 30, 2023. The effective income tax rate was 20.6% for the nine months ended September 30, 2022.
The effective tax rate was slightly higher for the nine months ended September 30, 2023, as compared with the same period in 2022, primarily due to mix of earnings and discrete tax items.
As of September 30, 2023, the Company had $13,750 of unrecognized tax benefits. If recognized, approximately $10,714 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 2018. 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 $1,203 in previously unrecognized tax benefits by the end of the third quarter 2024.
NOTE 13 — 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 three and nine months ended September 30, 2023 and 2022.
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, 2023. The Company does not expect any counterparties to fail to meet their obligations.
Cash Flow Hedges
Certain foreign currency forward contracts are qualified and designated as cash flow hedges. The dollar equivalent gross notional amount of these short-term contracts was $68,390 at September 30, 2023 and $66,296 at December 31, 2022.
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, 2023 and December 31, 2022 and have a termination date of August 2025.
The Company has no commodity contracts outstanding at September 30, 2023. The Company had commodity contracts with a notional amount of 875,000 pounds at December 31, 2022, which were qualified and designated as cash flow hedges.
In March 2023, the Company entered into interest rate swap agreements, which were qualified and designated as cash flow hedges, with an aggregate notional amount of $150,000. The interest rate swaps will effectively convert the interest rate on $150,000 of the Term Loan discussed in Note 10 from a variable rate based on one-month SOFR to a fixed rate.
20
Net Investment Hedges
The Company has foreign currency forward contracts that qualify and are designated as net investment hedges. The dollar equivalent gross notional amount of these contracts was $87,748 at September 30, 2023 and $88,843 at December 31, 2022.
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 $403,802 and $380,443 at September 30, 2023 and December 31, 2022, 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
2,079
786
1,467
738
Interest rate swap agreements
3,946
Forward starting swap agreements
24,877
19,291
Net investment contracts
291
2,229
Commodity contracts
181
33
Not designated as hedging instruments:
1,157
2,162
2,348
790
Total derivatives
3,527
2,948
28,823
3,996
3,790
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:
(6,705)
(3,374)
5,066
(2,836)
The effects of designated hedges on AOCI and the Company’s Consolidated Statements of Income consisted of the following:
Total gain recognized in AOCI, net of tax
715
627
2,952
17,150
13,191
10,295
9,440
91
21
The Company expects a gain of $715 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
1,757
229
4,847
590
159
573
187
1,202
(319)
194
(40)
NOTE 14 - FAIR VALUE
The following table provides a summary of assets and liabilities as of September 30, 2023, 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:
3,236
Pension surplus
48,093
Total assets
80,443
32,350
Liabilities:
Deferred compensation
39,136
Total liabilities
42,084
22
The following table provides a summary of assets and liabilities as of December 31, 2022, measured at fair value on a recurring basis:
3,815
Pension Surplus
56,418
79,705
23,287
1,528
39,090
42,880
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, 2023.
The Company’s derivative contracts are valued at fair value using the market approach. The Company measures the fair value of foreign exchange contracts, forward starting swap agreements, net investment contracts and interest rate swap agreements 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.
The fair value of Cash and cash equivalents, Marketable securities, 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, 2023 and December 31, 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.
23
NOTE 15 – SUPPLIER FINANCING PROGRAM
The Company’s suppliers, at the supplier’s sole discretion, are able to factor receivables due from the Company to a financial institution on terms directly negotiated with the financial institution without affecting the Company’s balance sheet classification of the corresponding payable. The Company pays the financial institution the stated amount of the confirmed invoices from its designated suppliers on the original maturity dates of the invoices. Invoices with suppliers have terms between 120 and 180 days. The Company does not provide secured legal assets or other forms of guarantees under the arrangement and has no involvement in establishing the terms or conditions of the arrangement between its suppliers and the financial institution. The amounts due to the financial institution for suppliers that participate in the supplier financing program are included in Trade accounts payable on the Company’s Consolidated Balance Sheets, and the associated payments are included in operating activities in the Consolidated Statements of Cash Flows. At September 30, 2023 and December 31, 2022, Trade accounts payable included $35,745 and $33,475, respectively, payable to suppliers that have elected to participate in the supplier financing program.
24
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.
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 extended the Company’s market presence within the automotive sector as well as its automation footprint in the International Welding segment.
On July 21, 2023, Christopher L. Mapes, the Company’s President and Chief Executive Officer and Chairman of the Board of Directors, notified the Company of his intention to retire from his position as President and Chief Executive Officer effective as of the close of business on December 31, 2023. After December 31, 2023, Mr. Mapes will be designated Executive Chairman of the Board. In connection with Mr. Mapes’ notification of his retirement, the Board elected Steven B. Hedlund as President and Chief Executive Officer of the Company, effective as of January 1, 2024 (the “Transition Date”). Mr. Mapes will remain the Company’s principal executive officer until the close of business on December 31, 2023, and Mr. Hedlund will succeed Mr. Mapes as principal executive officer as of the Transition Date.
Results of Operations
The following table shows the Company’s results of operations:
Favorable (Unfavorable)
2023 vs. 2022
Amount
% of Sales
%
97,974
10.5
(41,862)
(6.7)
35.4
33.1
56,112
18.1
17.0
(28,070)
(17.6)
Rationalization and asset impairment charges
0.7
0.9
1,290
15.4
16.6
15.2
29,332
20.6
(2,599)
(31.7)
Other income
(2,787)
(77.7)
15.6
14.7
23,946
17.4
Income taxes
(3,828)
(13.5)
Effective tax rate
19.9
12.5
11.7
20,118
18.4
0.35
18.7
302,845
10.7
(181,206)
(9.8)
34.9
34.4
121,639
18.2
(77,456)
(15.7)
0.3
(1,213)
(12.9)
16.4
42,970
9.1
(14,841)
(71.1)
4,639
65.4
16.1
32,768
7.2
(7,241)
(7.7)
20.7
(0.1)
12.4
12.8
25,527
7.0
0.50
8.1
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.
(6,551)
82,723
10,196
11,606
% Change
(0.7)
8.8
1.1
1.2
66,962
185,284
58,710
(8,111)
2.4
6.5
2.1
(0.3)
Net sales increased for the three months ended September 30, 2023 primarily due to the benefit of acquisitions.
Net sales increased for the nine months ended September 30, 2023 primarily due to the benefit of acquisitions, higher demand levels and increased product pricing as a result of higher input costs.
Gross Profit:
Gross profit increased for the three months ended September 30, 2023 driven by favorable mix, effective cost management and benefits of prior pricing actions.
Gross profit increased for the nine months ended September 30, 2023 driven by pricing actions taken to offset higher inputs costs. The three and nine months ended September 30, 2023 includes a last-in, first-out (“LIFO”) benefit of $1,323 and a charge of $1,179, respectively, as compared with charges of $3,108 and $20,420, respectively, in the same 2022 periods.
Selling, General & Administrative ("SG&A") Expenses:
SG&A expenses increased for the three and nine months ended September 30, 2023 as compared to the same 2022 periods, primarily due to acquisitions and higher employee-related costs.
Income Taxes:
The effective tax rate was slightly lower for the three months and slightly higher for the nine months ended September 30, 2023 as compared to the same periods in 2022, primarily due to mix of earnings and discrete tax items.
Segment Results
Volume (1)
Acquisitions (2)
Price (3)
Exchange (4)
Operating Segments
Americas Welding
2,072
72,159
3,488
1,881
International Welding
6,296
10,564
477
8,176
The Harris Products Group
(14,919)
6,231
1,549
0.4
12.3
0.6
13.6
2.9
4.9
0.2
3.8
11.8
(11.2)
4.7
(5.4)
27
95,106
161,355
34,161
(5,125)
645
23,929
16,345
(4,257)
(28,789)
8,204
1,271
5.5
9.4
2.0
0.1
3.4
2.3
(0.6)
5.2
(7.1)
(4.8)
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.
28
Americas Welding:
79,600
(6,478)
(18.3)
Total Sales
73,122
Adjusted EBIT (4)
17,672
14.9
As a percent of total sales (1)
19.7
19.1
International Welding:
25,513
(5,098)
(51.0)
20,415
9.0
Adjusted EBIT (5)
5,014
As a percent of total sales (2)
12.2
11.1
The Harris Products Group:
(7,139)
(343)
(13.0)
(7,482)
(5.5)
5,973
41.4
As a percent of total sales (3)
15.9
10.6
5.3
Corporate / Eliminations:
11,919
24.8
Adjusted EBIT (6)
(1,267)
(75.2)
Consolidated:
As a percent of total sales
0.8
Adjusted EBIT (7)
27,392
17.5
As a percent of sales
17.8
16.8
1.0
29
285,497
(497)
(0.5)
285,000
15.8
60,361
17.3
19.5
19.3
36,662
(5,808)
(22.6)
30,854
4.2
(3,712)
(3.8)
13.2
(1.0)
(19,314)
(507)
(5.9)
(19,821)
6,946
13.4
15.0
12.6
6,812
5.4
(4,068)
(38.9)
(0.4)
59,527
17.2
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 (“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. 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.
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)
4,852
12,252
1,106
Adjusted operating income
183,367
153,188
536,688
484,427
Net income as reported
Special items:
Pension settlement net gains (4)
(4,273)
Gains on asset disposal (5)
(1,646)
Tax effect of Special items (6)
(1,780)
(731)
(3,908)
58
Adjusted net income
139,489
119,573
405,921
372,442
Income taxes as reported
1,780
731
3,908
(58)
Effective tax rate as reported
Net special item tax impact
(1.1)
Adjusted effective tax rate
20.1
Diluted earnings per share as reported
Special items per share
0.18
0.17
0.30
0.16
Adjusted diluted earnings per share
2.40
2.04
6.97
6.33
31
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.
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)
274,296
Cash used by investing activities (2)
(28,852)
(14,158)
(10,391)
Cash used by financing activities (3)
(73,956)
(84,217)
(13,597)
25,627
(12,900)
Increase (decrease) in Cash and cash equivalents (4)
197,168
32
In October 2023, the Company paid a cash dividend of $0.64 per share, or $36,608, to shareholders of record as of September 30, 2023.
Working Capital Ratios
September 30, 2022
Average operating working capital to Net sales (1)
18.3
20.9
Days sales in Inventories
116.6
132.5
129.0
Days sales in Accounts receivable
50.5
57.0
48.4
Average days in Trade accounts payable
49.8
54.0
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,
497,751
437,505
Plus: Interest expense (after-tax)
36,283
20,732
Less: Interest income (after-tax)
3,104
1,019
Net operating profit after taxes
530,930
457,218
13,001
10,955
Acquisition transaction costs
2,935
Pension settlement charges (1)
42,131
Amortization of step up in value of acquired inventories
12,253
1,379
Gain on asset disposal
Tax effect of Special items (2)
(5,159)
(26,393)
Adjusted net operating profit after taxes
552,314
488,358
Invested Capital
Short-term debt
68,375
Long-term debt, less current portion
711,250
Total debt
1,110,558
779,625
Total equity
Invested capital
2,336,140
1,703,853
Return on invested capital as reported
22.7
26.8
Adjusted return on invested capital
23.6
28.7
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.
34
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 10.6 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, 2023, the Company was in compliance with all of its debt covenants relating to the Notes.
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
35
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, 2023, the Company was in compliance with all of its covenants and had no outstanding borrowings under the Shelf Agreements.
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, 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, 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, 2022. 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, 2022.
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, 2023.
Changes in Internal Control Over Financial Reporting
In December 2022, the Company acquired Fori. The acquired business operated under its own set of systems and internal controls and the Company is currently maintaining those systems and much of that control environment until it is able to incorporate its processes into the Company’s own systems and control environment. The Company expects to complete the incorporation of the acquired business’ operations into the Company’s systems and control environment in 2023.
Except for changes in connection with the Company’s acquisition of Fori business noted above, there have been no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2023 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, 2023, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 1,409 plaintiffs, which is a net decrease of 49 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 asbestos cases that have been resolved as follows: 56,960 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 1,014 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, 2022, which could materially affect the Company’s business, financial condition or future results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Issuer purchases of its common shares during the third quarter of 2023 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, 2023
56,362
(1)
200.74
55,773
8,386,013
August 1 - 31, 2023
93,548
190.69
92,274
8,293,739
September 1 - 30, 2023
88,583
182.91
87,720
8,206,019
238,493
190.17
235,767
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the quarter ended September 30, 2023, none of the Company’s directors or officers adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408(a) of Regulation S-K.
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, 2023