Lincoln Electric(LECO) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides a comprehensive overview of the company's financial performance, position, and cash flows for the period ended June 30, 2023, along with management's analysis and disclosures on market risks and internal controls Item 1. Financial Statements The financial statements for the period ended June 30, 2023, show a notable increase in Net Sales and Net Income compared to the same period in 2022, with total assets growing primarily due to increases in current assets and goodwill, and significantly higher cash flow from operating activities Consolidated Statements of Income For the three and six months ended June 30, 2023, the company reported increased Net Sales and Net Income compared to the prior-year periods, with diluted EPS rising to $2.36 for the second quarter and $4.44 for the six months Consolidated Statements of Income (in millions) | Financial Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,060.6 | $969.6 | $2,099.9 | $1,895.0 | | Gross Profit | $373.4 | $333.5 | $728.8 | $663.3 | | Operating Income | $178.0 | $167.5 | $342.4 | $328.7 | | Net Income | $137.3 | $127.8 | $259.3 | $253.9 | | Diluted EPS | $2.36 | $2.18 | $4.44 | $4.30 | Condensed Consolidated Balance Sheets As of June 30, 2023, total assets increased to $3,311.2 million from $3,180.5 million at December 31, 2022, driven by increases in accounts receivable, goodwill, and other current assets, while total equity rose to $1,201.4 million Condensed Consolidated Balance Sheets (in millions) | Balance Sheet Item | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $1,646.2 | $1,557.8 | | Total Assets | $3,311.2 | $3,180.5 | | Total Current Liabilities | $810.8 | $852.9 | | Total Liabilities | $2,109.8 | $2,146.5 | | Total Equity | $1,201.4 | $1,034.0 | Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash provided by operating activities significantly increased to $322.8 million from $141.3 million in the prior-year period, with cash used in investing and financing activities primarily for capital expenditures, acquisitions, share repurchases, and dividends Consolidated Statements of Cash Flows (Six Months Ended June 30, in millions) | Cash Flow Activity (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $322.8 | $141.3 | | Net Cash Used by Investing Activities | ($76.3) | ($55.0) | | Net Cash Used by Financing Activities | ($226.9) | ($122.4) | | Increase (Decrease) in Cash | $23.3 | ($40.2) | | Cash and Cash Equivalents at End of Period | $220.5 | $152.8 | Notes to Unaudited Consolidated Financial Statements The notes detail significant accounting policies, revenue recognition by product line, and recent acquisitions, including Powermig in May 2023 and the ongoing integration of Fori Automation, which contributed $97.0 million in net sales for the first six months of 2023 - On May 3, 2023, the Company acquired 100% of Powermig Automação e Soldagem Ltda., a Brazilian automation engineering firm, for a net purchase price of $29.6 million, net of cash acquired[35] - The acquisition of Fori Automation in December 2022 contributed Net Sales of $47.8 million for the three months and $97.0 million for the six months ended June 30, 2023[36] Net Sales by Product Line (Six Months Ended June 30, in millions) | Net Sales by Product Line (Six Months Ended June 30) | 2023 | 2022 | | :--- | :--- | :--- | | Consumables | $1,147.6 | $1,108.0 | | Equipment | $952.3 | $787.0 | | Total Net Sales | $2,099.9 | $1,895.0 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 10.8% increase in net sales for the first six months of 2023 to higher demand, increased pricing, and contributions from acquisitions, partially offset by unfavorable foreign exchange, while maintaining a strong liquidity position with significantly increased operating cash flow Change in Net Sales (Six Months Ended June 30, 2023 vs 2022) | Change in Net Sales (Six Months Ended June 30, 2023 vs 2022) | Percentage Change | | :--- | :--- | | Volume | 3.9% | | Acquisitions | 5.4% | | Price | 2.6% | | Foreign Exchange | (1.0)% | | Total Net Sales Change | 10.8% | - Gross profit increased due to higher volumes and pricing actions, with LIFO charges significantly lower in H1 2023 ($2.5 million) compared to H1 2022 ($17.3 million)[98] - SG&A expenses increased primarily due to acquisitions and higher employee-related costs[99] Segment Results For the first six months of 2023, Americas Welding net sales grew 18.2% to $1,335.6 million, International Welding sales increased by 2.3% to $505.8 million, and The Harris Products Group saw a 4.5% decline in sales to $258.5 million Segment Net Sales (Six Months Ended June 30, 2023, in millions) | Segment Net Sales (Six Months Ended June 30, 2023) | Net Sales | % Change vs 2022 | | :--- | :--- | :--- | | Americas Welding | $1,335.6 | 18.2% | | International Welding | $505.8 | 2.3% | | The Harris Products Group | $258.5 | (4.5)% | Segment Adjusted EBIT (Six Months Ended June 30, 2023, in millions) | Segment Adjusted EBIT (Six Months Ended June 30, 2023) | Adjusted EBIT | % Change vs 2022 | | :--- | :--- | :--- | | Americas Welding | $272.3 | 18.6% | | International Welding | $63.4 | (12.1)% | | The Harris Products Group | $38.5 | 2.6% | Liquidity and Capital Resources The company's liquidity remains strong, with cash from operations increasing to $322.8 million in the first half of 2023, driven by improved working capital, while key uses of cash included capital expenditures, acquisitions, share repurchases, and dividends - Cash provided by operating activities increased by $181.5 million in H1 2023 compared to H1 2022, primarily due to an improved working capital position[118][119] - The company repurchased $85.2 million of its shares and paid $74.5 million in dividends during the first six months of 2023[118] - Adjusted return on invested capital (ROIC) was 22.9% for the twelve months ended June 30, 2023, compared to 26.3% for the prior-year period[122] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its exposure to market risk since December 31, 2022, referring readers to its Annual Report on Form 10-K for detailed disclosure - There have been no material changes in the Company's exposure to market risk since December 31, 2022[136] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with the integration of the recently acquired Fori business systems and control environment expected to be completed in 2023 - The company's management concluded that disclosure controls and procedures were effective as of June 30, 2023[137] - The company is currently integrating the systems and internal controls of the Fori acquisition, with completion expected in 2023[138] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, other information, and a list of exhibits filed with the Form 10-Q Item 1. Legal Proceedings The company is a co-defendant in numerous cases alleging asbestos-induced illness, with approximately 1,458 plaintiffs having claims against the company as of June 30, 2023, representing a net decrease of 9 claims - As of June 30, 2023, the Company was a co-defendant in cases alleging asbestos-induced illness involving claims by approximately 1,458 plaintiffs[142] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed, and the report directs readers to the detailed discussion in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - The company refers readers to the risk factors discussed in its Annual Report on Form 10-K for the year ended December 31, 2022, for potential risks that could materially affect the business[143] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2023, the company repurchased a total of 311,974 common shares at an average price of $170.13 per share as part of publicly announced share repurchase programs Share Repurchases (2023) | Period (2023) | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April | 50,648 | $160.90 | | May | 118,209 | $169.40 | | June | 143,117 | $174.00 | | Q2 Total | 311,974 | $170.13 | - As of June 30, 2023, 8,441,786 shares remained authorized for repurchase under the company's current program[144][146] Item 5. Other Information The report discloses that Steve Hedlund, Executive Vice President & Chief Operating Officer, terminated a Rule 10b5-1 trading plan on May 11, 2023, which covered the sale of 8,235 shares - Executive Vice President & Chief Operating Officer Steve Hedlund terminated a Rule 10b5-1 trading plan on May 11, 2023, which was originally adopted on November 30, 2022, for the sale of 8,235 shares[148] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various management compensation agreements, officer certifications required by the Sarbanes-Oxley Act, and Inline XBRL data files - Exhibits filed include forms of various stock and performance award agreements for directors and executive officers, as well as certifications from the CEO and CFO[149]