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LINCOLN ELECTRIC HOLDINGS INC - Quarter Report: 2022 June (Form 10-Q)

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 June 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

Graphic

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).

Yes   No

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 June 30, 2022 was 57,919,337.

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements

3

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

3

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

24

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

35

 

 

PART II. OTHER INFORMATION

36

Item 1. Legal Proceedings

36

Item 1A. Risk Factors

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 4. Mine Safety Disclosures

36

Item 6. Exhibits

37

Signatures

38

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

 

EX-101

Schema Document

 

EX-101

Calculation Linkbase Document

 

EX-101

Label Linkbase Document

 

EX-101

Presentation Linkbase Document

 

EX-101

Definition Linkbase Document

 

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share amounts)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net sales (Note 2)

    

$

969,589

    

$

826,454

    

$

1,895,037

    

$

1,583,475

Cost of goods sold

 

636,108

 

552,445

 

1,231,779

 

1,055,699

Gross profit

 

333,481

 

274,009

 

663,258

 

527,776

Selling, general & administrative expenses

 

166,792

 

151,557

 

333,478

 

297,233

Rationalization and asset impairment charges (Note 6)

 

(844)

 

630

 

1,041

 

4,793

Operating income

 

167,533

 

121,822

 

328,739

 

225,750

Interest expense, net

 

6,459

 

5,663

 

12,657

 

11,022

Other income (expense) (Note 14)

 

(1,134)

 

1,702

 

3,500

 

286

Income before income taxes

 

159,940

 

117,861

 

319,582

 

215,014

Income taxes (Note 15)

 

32,118

 

21,581

 

65,729

 

44,601

Net income including non-controlling interests

 

127,822

 

96,280

 

253,853

 

170,413

Non-controlling interests in subsidiaries’ income (loss)

 

(1)

 

175

 

 

131

Net income

$

127,823

$

96,105

$

253,853

$

170,282

Basic earnings per share (Note 3)

$

2.20

$

1.62

$

4.35

$

2.86

Diluted earnings per share (Note 3)

$

2.18

$

1.60

$

4.30

$

2.83

Cash dividends declared per share

$

0.56

$

0.51

$

1.12

$

1.02

See notes to these consolidated financial statements.

3

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Net income including non-controlling interests

    

$

127,822

    

$

96,280

    

$

253,853

    

$

170,413

Other comprehensive income (loss), net of tax:

 

  

 

  

 

  

 

  

Unrealized gain (loss) on derivatives designated and qualifying as cash flow hedges, net of tax of $2,794 and $4,845 in the three and six months ended June 30, 2022; $(1,012) and $1,297 in the three and six months ended June 30, 2021

 

8,950

 

(4,754)

14,305

2,536

Defined benefit pension plan activity, net of tax of $382 and $459 in the three and six months ended June 30, 2022; $(569) and $246 in the three and six months ended June 30, 2021

 

(44)

 

(1,702)

63

3,358

Currency translation adjustment

 

(34,615)

 

13,579

 

(42,064)

 

(9,164)

Other comprehensive income (loss):

 

(25,709)

 

7,123

 

(27,696)

 

(3,270)

Comprehensive income

 

102,113

 

103,403

 

226,157

 

167,143

Comprehensive income (loss) attributable to non-controlling interests

 

(20)

 

65

 

115

 

(138)

Comprehensive income attributable to shareholders

$

102,133

$

103,338

$

226,042

$

167,281

See notes to these consolidated financial statements.

4

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LINCOLN ELECTRIC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

June 30, 2022

December 31, 2021

(UNAUDITED)

(NOTE 1)

ASSETS

    

  

    

  

Current Assets

 

  

 

  

Cash and cash equivalents

$

152,796

$

192,958

Accounts receivable (less allowance for doubtful accounts of $10,227 in 2022; $11,105 in 2021)

 

518,371

 

429,074

Inventories (Note 9)

 

639,393

 

539,919

Other current assets

 

154,643

 

127,642

Total Current Assets

 

1,465,203

 

1,289,593

Property, plant and equipment (less accumulated depreciation of $876,354 in 2022; $868,036 in 2021)

503,088

511,744

Goodwill

 

431,615

 

430,162

Other assets

 

341,907

 

360,808

TOTAL ASSETS

$

2,741,813

$

2,592,307

LIABILITIES AND EQUITY

 

 

  

Current Liabilities

 

 

  

Short-term debt (Note 12)

$

125,458

$

52,730

Trade accounts payable

 

364,495

 

330,230

Accrued employee compensation and benefits

 

144,253

 

108,562

Other current liabilities

 

269,477

 

264,383

Total Current Liabilities

 

903,683

 

755,905

Long-term debt, less current portion (Note 12)

 

712,908

 

717,089

Other liabilities

 

212,239

 

255,404

Total Liabilities

 

1,828,830

 

1,728,398

Shareholders' Equity

 

 

  

Common Shares

 

9,858

 

9,858

Additional paid-in capital

 

465,624

 

451,268

Retained earnings

 

3,160,920

 

2,970,303

Accumulated other comprehensive loss

 

(285,197)

 

(257,386)

Treasury Shares

 

(2,438,144)

 

(2,309,941)

Total Shareholders' Equity

 

913,061

 

864,102

Non-controlling interests

 

(78)

 

(193)

Total Equity

 

912,983

 

863,909

TOTAL LIABILITIES AND TOTAL EQUITY

$

2,741,813

$

2,592,307

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

(In thousands, except per share amounts)

    

    

    

    

    

Accumulated

    

    

    

Common

Additional

Other

Non-

Shares

Common

Paid-In

Retained

Comprehensive

Treasury

Controlling

    

Outstanding

    

Shares

    

Capital

    

Earnings

    

Income (Loss)

    

Shares

    

Interests

    

Total

Balance at December 31, 2021

 

58,787

$

9,858

$

451,268

$

2,970,303

$

(257,386)

$

(2,309,941)

$

(193)

$

863,909

Net income

 

126,030

1

 

126,031

Unrecognized amounts from defined benefit pension plans, net of tax

 

107

 

107

Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax

 

5,355

 

5,355

Currency translation adjustment

 

(7,583)

134

 

(7,449)

Cash dividends declared - $0.56 per share

 

(32,505)

 

(32,505)

Stock-based compensation activity

 

116

10,834

1,349

 

12,183

Purchase of shares for treasury

 

(805)

(104,579)

 

(104,579)

Other

 

115

(107)

 

8

Balance at March 31, 2022

 

58,098

$

9,858

$

462,217

$

3,063,721

$

(259,507)

$

(2,413,171)

$

(58)

$

863,060

Net income

 

127,823

(1)

 

127,822

Unrecognized amounts from defined benefit pension plans, net of tax

 

(44)

 

(44)

Unrealized gain on derivatives designated and qualifying as cash flow hedges, net of tax

 

8,950

 

8,950

Currency translation adjustment

 

(34,596)

(19)

 

(34,615)

Cash dividends declared – $0.56 per share

 

(32,698)

 

(32,698)

Stock-based compensation activity

 

15

5,428

146

 

5,574

Purchase of shares for treasury

 

(191)

(25,119)

 

(25,119)

Other

 

(2,021)

2,074

 

53

Balance at June 30, 2022

 

57,922

$

9,858

$

465,624

$

3,160,920

$

(285,197)

$

(2,438,144)

$

(78)

$

912,983

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED)

(In thousands, except per share amounts)

    

    

    

    

    

Accumulated

    

    

    

Common

Additional

Other

Non-

Shares

Common

Paid-In

Retained

Comprehensive

Treasury

Controlling

    

Outstanding

    

Shares

    

Capital

    

Earnings

    

Income (Loss)

    

Shares

    

Interests

    

Total

Balance at December 31, 2020

 

59,641

$

9,858

$

409,958

$

2,821,359

$

(302,190)

$

(2,149,714)

$

979

$

790,250

Net income

 

74,177

(44)

 

74,133

Unrecognized amounts from defined benefit pension plans, net of tax

 

5,060

 

5,060

Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax

 

7,290

 

7,290

Currency translation adjustment

 

(22,584)

(159)

 

(22,743)

Cash dividends declared – $0.51 per share

 

(30,572)

 

(30,572)

Stock-based compensation activity

 

134

7,680

1,502

 

9,182

Purchase of shares for treasury

 

(237)

(28,459)

 

(28,459)

Other

 

891

(741)

(883)

 

(733)

Balance at March 31, 2021

 

59,538

$

9,858

$

418,529

$

2,864,223

$

(312,424)

$

(2,176,671)

$

(107)

$

803,408

Net income

 

 

  

 

 

96,105

 

 

 

175

 

96,280

Unrecognized amounts from defined benefit pension plans, net of tax

 

 

  

 

 

 

(1,702)

 

 

 

(1,702)

Unrealized loss on derivatives designated and qualifying as cash flow hedges, net of tax

 

 

  

 

 

 

(4,754)

 

 

 

(4,754)

Currency translation adjustment

 

 

  

 

 

 

13,689

 

 

(110)

 

13,579

Cash dividends declared – $0.51 per share

 

 

  

 

 

(30,552)

 

 

 

 

(30,552)

Stock-based compensation activity

 

46

 

  

 

8,638

 

 

 

503

 

 

9,141

Purchase of shares for treasury

 

(197)

 

  

 

 

 

 

(25,229)

 

 

(25,229)

Other

 

 

  

 

409

 

(957)

 

 

 

 

(548)

Balance at June 30, 2021

 

59,387

$

9,858

$

427,576

$

2,928,819

$

(305,191)

$

(2,201,397)

$

(42)

$

859,623

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LINCOLN ELECTRIC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

Six Months Ended June 30, 

    

    

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES

 

  

  

Net income

$

253,853

$

170,282

Non-controlling interests in subsidiaries' income (loss)

 

 

131

Net income including non-controlling interests

 

253,853

 

170,413

Adjustments to reconcile Net income including non-controlling interests to Net cash provided by operating activities:

 

 

  

Rationalization and asset impairment net gains (Note 6)

 

(113)

 

(1,374)

Depreciation and amortization

 

39,759

 

38,508

Equity earnings in affiliates, net

 

(180)

 

(291)

Deferred income taxes

 

(21,772)

 

(20,995)

Stock-based compensation

 

16,340

 

12,651

Other, net

 

9,254

 

3,524

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

  

Increase in accounts receivable

 

(103,959)

 

(87,571)

Increase in inventories

 

(112,594)

 

(83,186)

Increase in other current assets

 

(26,169)

 

(12,007)

Increase in trade accounts payable

 

44,252

 

63,275

Increase in other current liabilities

 

47,343

 

59,128

Net change in other assets and liabilities

 

(4,713)

 

3,159

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

141,301

 

145,234

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

  

Capital expenditures

 

(34,602)

 

(27,768)

Acquisition of businesses, net of cash acquired

 

(22,095)

 

(83,723)

Proceeds from sale of property, plant and equipment

 

1,692

 

2,557

Other investing activities

 

 

6,500

NET CASH USED BY INVESTING ACTIVITIES

 

(55,005)

 

(102,434)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

  

Net change in borrowings

 

71,829

 

1,163

Proceeds from exercise of stock options

 

1,417

 

5,672

Purchase of shares for treasury (Note 8)

 

(129,698)

 

(53,688)

Cash dividends paid to shareholders

 

(65,914)

 

(61,379)

Other financing activities

 

 

(763)

NET CASH USED BY FINANCING ACTIVITIES

 

(122,366)

 

(108,995)

Effect of exchange rate changes on Cash and cash equivalents

 

(4,092)

 

(200)

DECREASE IN CASH AND CASH EQUIVALENTS

 

(40,162)

 

(66,395)

Cash and cash equivalents at beginning of period

 

192,958

 

257,279

CASH AND CASH EQUIVALENTS AT END OF PERIOD

$

152,796

$

190,884

See notes to these consolidated financial statements.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 six months ended June 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 will continue 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). For the second quarter 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 June 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 July 28, 2022, the filing date of this Quarterly Report on Form 10-Q.

New Accounting Pronouncements:

There were no new accounting pronouncements ("Accounting Standard Updates" or "ASUs") issued by the Financial Accounting Standards Board ("FASB") that are applicable to the Company as of January 1, 2022.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

NOTE 2 — REVENUE RECOGNITION

The following table presents the Company’s Net sales disaggregated by product line:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Consumables

$

568,855

$

475,559

$

1,108,017

$

909,738

Equipment

 

400,734

 

350,895

 

787,020

 

673,737

Net sales

$

969,589

$

826,454

$

1,895,037

$

1,583,475

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 June 30, 2022, the Company recorded $62,793 related to advance customer payments and $32,728 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 June 30, 2022 and December 31, 2021, the Company recorded $38,651 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.

NOTE 3 — EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

 

2021

 

2022

 

2021

Numerator:

 

 

  

 

  

 

  

Net income

$

127,823

$

96,105

$

253,853

$

170,282

Denominator (shares in 000's):

 

 

 

 

Basic weighted average shares outstanding

 

58,016

 

59,464

 

58,311

 

59,553

Effect of dilutive securities - Stock options and awards

 

672

 

700

 

659

 

676

Diluted weighted average shares outstanding

 

58,688

 

60,164

 

58,970

 

60,229

Basic earnings per share

$

2.20

$

1.62

$

4.35

$

2.86

Diluted earnings per share

$

2.18

$

1.60

$

4.30

$

2.83

For the three months ended June 30, 2022 and 2021, common shares subject to equity-based awards of 62,987 and 179,861, respectively, were excluded from the computation of diluted earnings per share because the

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

effect of their exercise would be anti-dilutive. For the six months ended June 30, 2022 and 2021, common shares subject to equity-based awards of 108,497 and 134,388, respectively, were excluded from the computation of diluted earnings per share because the effect of their exercise would be anti-dilutive.

NOTE 4 — ACQUISITIONS

During March 2022, the Company acquired Kestra Universal Soldas, Industria e Comercio, Imporacao e Exportacao Ltda. (“Kestra”), a privately held manufacturer headquartered in Atibaia, Sao Paulo State, Brazil. 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.

During July 2021, the Company acquired Overstreet-Hughes Company, Inc. and Shoals Tubular, Inc. (“FTP”). 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.

During April 2021, the Company acquired Zeman Bauelemente Produktionsgesellschaft m.b.H. (“Zeman"), a division of the Zeman Group. 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.

Pro forma information related to the acquisitions discussed above has not been presented because the impact on the Company’s Consolidated Statements of Income is not material. The preliminary purchase price allocations are expected to be finalized within the allowable measurement period. The acquired companies are included in the Company's consolidated financial statements as of the date of acquisition.

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.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

The following table presents Adjusted EBIT by segment:

The Harris

Americas

International

Products

Corporate /

    

Welding

    

Welding

    

Group

    

Eliminations

    

Consolidated

Three Months Ended June 30, 2022

 

  

 

  

 

  

 

  

 

  

Net sales

$

595,659

$

236,629

$

137,301

$

$

969,589

Inter-segment sales

 

29,031

9,527

2,866

(41,424)

Total

$

624,690

$

246,156

$

140,167

$

(41,424)

$

969,589

Adjusted EBIT

$

118,067

$

35,009

$

17,922

$

(3,984)

$

167,014

Special items charge (gain) (1)

 

461

154

615

EBIT

$

117,606

$

34,855

$

17,922

$

(3,984)

$

166,399

Interest income

228

Interest expense

(6,687)

Income before income taxes

 

 

 

$

159,940

Three Months Ended June 30, 2021

 

  

 

  

 

  

 

  

 

  

Net sales

$

457,468

$

252,352

$

116,634

$

$

826,454

Inter-segment sales

 

39,765

 

6,897

 

2,284

 

(48,946)

Total

$

497,233

$

259,249

$

118,918

$

(48,946)

$

826,454

Adjusted EBIT

$

84,134

$

29,997

$

18,212

$

(3,888)

$

128,455

Special items charge (gain) (2)

 

1,650

 

2,471

 

 

810

4,931

EBIT

$

82,484

$

27,526

$

18,212

$

(4,698)

$

123,524

Interest income

 

  

 

  

 

  

 

398

Interest expense

 

  

 

  

 

  

 

(6,061)

Income before income taxes

 

  

 

  

 

  

$

117,861

Six Months Ended June 30, 2022

 

 

  

Net sales

$

1,129,714

$

494,670

$

270,653

$

$

1,895,037

Inter-segment sales

 

57,187

 

15,755

 

5,928

 

(78,870)

Total

$

1,186,901

$

510,425

$

276,581

$

(78,870)

$

1,895,037

Adjusted EBIT

$

229,635

$

72,096

$

37,520

$

(8,785)

$

330,466

Special items charge (gain) (1)

 

(3,274)

 

1,501

 

 

(1,773)

EBIT

$

232,909

$

70,595

$

37,520

$

(8,785)

$

332,239

Interest income

 

  

 

  

 

  

 

604

Interest expense

 

  

 

  

 

  

 

(13,261)

Income before income taxes

 

  

 

  

 

  

$

319,582

Six Months Ended June 30, 2021

 

 

  

Net sales

$

882,710

$

475,431

$

225,334

$

$

1,583,475

Inter-segment sales

 

72,513

 

11,182

 

4,431

 

(88,126)

Total

$

955,223

$

486,613

$

229,765

$

(88,126)

$

1,583,475

Adjusted EBIT

$

160,751

$

48,813

$

36,909

$

(5,344)

$

241,129

Special items charge (gain) (2)

 

6,090

 

7,080

 

 

1,923

15,093

EBIT

$

154,661

$

41,733

$

36,909

$

(7,267)

$

226,036

Interest income

 

  

 

  

 

  

 

852

Interest expense

 

  

 

  

 

  

 

(11,874)

Income before income taxes

 

  

 

  

 

  

$

215,014

(1)In the three and six months ended June 30, 2022, special items reflect Rationalization and asset impairment net gains of $998 in Americas Welding and net charges of $154 and $2,039, respectively, in International Welding and amortization of step up in value of acquired inventories of $1,459 in Americas Welding. In the six months ended June 30, 2022, the final settlement related to the termination of a pension plan of $3,735 in Americas Welding.
(2)In the three and six months ended June 30, 2021, special items reflect Rationalization and asset impairment charges of $630 and $4,793, respectively, in International Welding, amortization of step up in value of acquired

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

inventories of $1,841 in International Welding and pension settlement charges of $1,650 and $6,536 in Americas Welding, respectively, and $446 in International Welding in the six months ended June 30, 2021. Also in the three and six months ended June 30, 2021, special items reflect acquisition transaction costs of $810 and $1,923, respectively, in Corporate/Eliminations.

NOTE 6 — RATIONALIZATION AND ASSET IMPAIRMENTS

The Company recorded Rationalization and asset impairment net charges of $1,041 and $4,793 in the six months ended June 30, 2022 and 2021, respectively. The charges are primarily related to employee severance, non-cash asset impairments of long-lived assets 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 June 30, 2022, liabilities of $1,871 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 six months ended June 30, 2022:

    

International

    

    

Welding

    

Consolidated

Balance at December 31, 2021

$

2,990

$

2,990

Payments and other adjustments

 

(2,068)

 

(2,068)

Charged to expense

 

949

 

949

Balance at June 30, 2022

$

1,871

$

1,871

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

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:

Three Months Ended June 30, 2022

Unrealized gain

(loss) on derivatives

designated and

Defined benefit

Currency

qualifying as cash

pension plan

translation

flow hedges

activity

adjustment

Total

Balance at March 31, 2022

$

13,449

$

(13,124)

$

(259,832)

$

(259,507)

Other comprehensive income (loss) before reclassification

 

9,439

(34,596)

3

(25,157)

Amounts reclassified from AOCI

 

(489)

1

(44)

2

(533)

Net current-period other comprehensive income (loss)

 

8,950

 

(44)

 

(34,596)

 

(25,690)

Balance at June 30, 2022

$

22,399

$

(13,168)

$

(294,428)

$

(285,197)

Three Months Ended June 30, 2021

Unrealized gain

(loss) on derivatives

designated and

Defined benefit

Currency

qualifying as cash

pension plan

translation

flow hedges

activity

adjustment

Total

Balance at March 31, 2021

$

9,777

$

(96,710)

$

(225,491)

$

(312,424)

Other comprehensive income (loss) before reclassification

 

(5,089)

 

(2,587)

 

13,689

3

 

6,013

Amounts reclassified from AOCI

 

335

1

 

885

2

 

 

1,220

Net current-period other comprehensive income (loss)

 

(4,754)

 

(1,702)

 

13,689

 

7,233

Balance at June 30, 2021

$

5,023

$

(98,412)

$

(211,802)

$

(305,191)

(1)During the three months ended June 30, 2022, the AOCI reclassification is a component of Net sales of $122 (net of tax of $59) and Cost of goods sold of $(367) (net of tax of $(86)); during the three months ended June 30, 2021, the reclassification is a component of Net sales of $70 (net of tax of $27) and Cost of goods sold of $405 (net of tax of $90). See Note 16 to the consolidated financial statements for additional details.

(2)This AOCI component is included in the computation of net periodic pension costs (net of tax of $165 and $1,445) during the three months ended June 30, 2022 and 2021, respectively. See Note 13 to the consolidated financial statements for additional details.
(3)The Other comprehensive income (loss) before reclassifications excludes $(19) and $(110) attributable to Non-controlling interests in the three months ended June 30, 2022 and 2021, respectively.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

Six Months Ended June 30, 2022

Unrealized gain

(loss) on derivatives

designated and

Defined benefit

Currency

qualifying as cash

pension plan

translation

flow hedges

activity

adjustment

Total

Balance at December 31, 2021

$

8,094

$

(13,231)

$

(252,249)

$

(257,386)

Other comprehensive income (loss) before reclassification

 

15,288

(42,179)

3

(26,891)

Amounts reclassified from AOCI

 

(983)

1

63

2

(920)

Net current-period other comprehensive income (loss)

 

14,305

 

63

 

(42,179)

 

(27,811)

Balance at June 30, 2022

$

22,399

$

(13,168)

$

(294,428)

$

(285,197)

Six Months Ended June 30, 2021

Unrealized gain

(loss) on derivatives

designated and

Defined benefit

Currency

qualifying as cash

pension plan

translation

flow hedges

activity

adjustment

Total

Balance at December 31, 2020

$

2,487

$

(101,770)

$

(202,907)

$

(302,190)

Other comprehensive income (loss) before reclassification

 

1,977

 

(1,985)

 

(8,895)

3

 

(8,903)

Amounts reclassified from AOCI

 

559

1

 

5,343

2

 

 

5,902

Net current-period other comprehensive income (loss)

 

2,536

 

3,358

 

(8,895)

 

(3,001)

Balance at June 30, 2021

$

5,023

$

(98,412)

$

(211,802)

$

(305,191)

(1)During the six months ended June 30, 2022, the AOCI reclassification is a component of Net sales of $254 (net of tax of $107) and Cost of goods sold of $(729) (net of tax of $(179)); during the six months ended June 30, 2021, the reclassification is a component of Net sales of $172 (net of tax of $69) and Cost of goods sold of $731 (net of tax of $243). See Note 16 to the consolidated financial statements for additional details.
(2)This AOCI component is included in the computation of net periodic pension costs (net of tax of $179 and $2,901) during the six months ended June 30, 2022 and 2021, respectively. See Note 13 to the consolidated financial statements for additional details.
(3)The Other comprehensive income (loss) before reclassifications excludes $115 and $ (269) attributable to Non-controlling interests in the six months ended June 30, 2022 and 2021, respectively.

NOTE 8 — COMMON STOCK REPURCHASE PROGRAM

The Company has a share repurchase program for up to 10 million shares of the Company’s common shares. From time to time at management’s discretion, the Company repurchases its common shares in the open market, depending on market conditions, stock price and other factors. During the three months ended June 30, 2022, the Company purchased a total of 0.2 million shares at an average cost per share of $131.68. During the six months ended June 30, 2022, the Company purchased a total of 1.0 million shares at an average cost per share of $130.31. As of June 30, 2022, 9.3 million common shares remained available for repurchase under these programs. The repurchased common shares remain in treasury and have not been retired.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

NOTE 9 — INVENTORIES

Inventories in the Condensed Consolidated Balance Sheets are comprised of the following components:

    

    

June 30, 2022

    

December 31, 2021

Raw materials

$

179,412

$

143,394

Work-in-process

 

111,748

 

97,834

Finished goods

 

348,233

 

298,691

Total

$

639,393

$

539,919

At June 30, 2022 and December 31, 2021, approximately 37% 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 $131,488 and $114,176 at June 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

    

June 30, 2022

    

December 31, 2021

Right-of-use assets

 

Other assets

$

43,812

$

47,966

Current liabilities

 

Other current liabilities

$

9,571

$

10,218

Noncurrent liabilities

 

Other liabilities

 

35,610

 

38,960

Total lease liabilities

 

  

$

45,181

$

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 $5,862 and $11,061 in the three and six months ended June 30, 2022 and $5,608 and $10,660 in the three and six months ended June 30, 2021, respectively. Cash paid for amounts included in the measurement of lease liabilities for the three and six months ended June 30, 2022, respectively, were $2,984 and $6,171 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 six months ended June 30, 2021, respectively, were $3,263 and $6,652 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 $742 and $3,479 during the three and six months ended June 30, 2022 and $9,694 for the three and six months ended June 30, 2021, respectively.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

The total future minimum lease payments for noncancelable operating leases were as follows:

    

June 30, 2022

2022

$

5,463

2023

 

10,378

2024

 

8,903

2025

 

5,852

2026

 

4,480

After 2026

 

15,926

Total lease payments

$

51,002

Less: Imputed interest

 

5,821

Operating lease liabilities

$

45,181

As of June 30, 2022, the weighted average remaining lease term is 8.2 years and the weighted average discount rate used to determine the operating lease liability is 3.02%.

NOTE 11 — PRODUCT WARRANTY COSTS

The changes in the carrying amount of product warranty accruals are as follows:

Six Months Ended June 30, 

    

2022

    

2021

Balance at beginning of year

$

20,466

$

21,760

Accruals for warranties

 

6,330

 

7,637

Settlements

 

(6,957)

 

(6,603)

Foreign currency translation and other adjustments

 

(392)

 

(176)

Balance at end of period

$

19,447

$

22,618

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 June 30, 2022, the Company was in compliance with all of its covenants and had $85,000 of outstanding borrowings under the Credit Agreement.

The Company has other lines of credit totaling $103,956. As of June 30, 2022, the Company was in compliance with all of its covenants and had $29,421 outstanding at June 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

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

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 11.9 years, respectively. The proceeds of the Notes were used for general corporate purposes. The Notes contain certain affirmative and negative covenants. As of June 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 June 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 June 30, 2022 and December 31, 2021, the fair value of long-term debt, including the current portion, was approximately $639,863 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 $723,945 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:

Three Months Ended June 30, 

Six Months Ended June 30, 

2022

2021

2022

2021

U.S. pension

Non-U.S.

U.S. pension

Non-U.S.

U.S. pension

Non-U.S.

U.S. pension

Non-U.S.

    

plans

 

pension plans

 

plans

 

pension plans

 

plans

 

pension plans

 

plans

 

pension plans

    

Service cost

$

49

$

268

$

48

$

324

$

99

$

573

$

97

$

795

Interest cost

 

65

636

 

3,072

 

392

 

131

 

1,340

 

6,053

 

1,008

Expected return on plan assets

 

(874)

 

(4,198)

 

(537)

 

 

(1,878)

 

(8,707)

 

(1,509)

Amortization of prior service cost

 

 

 

(1)

 

 

(1)

 

 

11

Amortization of net loss

 

45

76

 

670

 

11

 

89

 

154

 

1,251

 

446

Settlement charges (gains) (1)

 

 

1,650

 

 

(3,735)

 

 

6,090

 

446

Defined benefit plans

159

106

1,242

189

(3,416)

188

4,784

1,197

Multi-employer plans

105

258

215

502

Defined contribution plans

6,295

980

5,872

553

12,330

1,605

11,034

1,398

Total pension cost

$

6,454

$

1,191

$

7,114

$

1,000

$

8,914

$

2,008

$

15,818

$

3,097

(1)Gains in the six months ended June 30, 2022 related to the final settlement associated with the termination of a pension plan. Charges primarily resulting from lump sum pension payments in the three and six months ended June 30, 2021.

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.

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LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

NOTE 14 — OTHER INCOME (EXPENSE)

The components of Other income (expense) were as follows:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

    

2022

    

2021

Equity earnings in affiliates

$

67

 

$

114

$

180

$

291

Other components of net periodic pension (cost) income (1)

 

52

 

 

(1,059)

 

3,900

 

(5,089)

Other income (expense)

 

(1,253)

 

 

2,647

 

(580)

 

5,084

Total Other income (expense)

$

(1,134)

 

$

1,702

$

3,500

$

286

(1)Other components of net periodic pension (cost) income includes pension settlements and curtailments as discussed in Note 13 to the consolidated financial statements.

NOTE 15 — INCOME TAXES

The Company recognized $65,729 of tax expense on pretax income of $319,582, resulting in an effective income tax rate of 20.6% for the six months ended June 30, 2022. The effective income tax rate was 20.7% for the six months ended June 30, 2021.

The effective tax rate was lower for the six months ended June 30, 2022, as compared with the same period in 2021, primarily due to favorable discrete tax adjustments in 2022 and geographic mix of earnings.

As of June 30, 2022, the Company had $19,890 of unrecognized tax benefits. If recognized, approximately $16,649 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 $3,649 in previously unrecognized tax benefits by the end of the second 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 six months ended June 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 June 30, 2022. The Company does not expect any counterparties to fail to meet their obligations.

19

Table of Contents

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

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 $58,312 at June 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 June 30, 2022 and December 31, 2021 and have a termination date of August 2025.

The Company has commodity contracts with a notional amount of 800,000 pounds and 975,000 pounds at June 30, 2022 and December 31, 2021, respectively, that 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 June 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 $86,992 at June 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 $223,992 and $301,685 at June 30, 2022 and December 31, 2021, respectively.

Fair values of derivative instruments in the Company’s Condensed Consolidated Balance Sheets follow:

June 30, 2022

December 31, 2021

Other

Other

Other

Other

Current

Current

Other

Other

Current

Current

Other

Other

Derivatives by hedge designation

Assets

    

Liabilities

    

Assets

    

Liabilities

    

Assets

    

Liabilities

    

Assets

    

Liabilities

Designated as hedging instruments:

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Foreign exchange contracts

$

1,482

$

365

$

$

$

772

$

535

$

$

Forward starting swap agreements

16,481

6,990

Net investment contracts

7,160

1,143

2,095

608

Commodity contracts

9

346

311

Not designated as hedging instruments:

 

 

 

 

 

  

Foreign exchange contracts

 

2,400

446

 

4,656

 

3,445

 

 

Total derivatives

$

11,051

$

1,157

$

17,624

$

$

7,834

$

3,980

$

6,990

$

608

20

Table of Contents

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

The effects of undesignated derivative instruments on the Company’s Consolidated Statements of Income consisted of the following:

    

    

Three Months Ended June 30, 

    

Six Months Ended June 30, 

Derivatives by hedge designation

    

Classification of gain (loss)

    

2022

    

2021

    

2022

    

2021

Not designated as hedges:

  

  

 

  

  

 

  

Foreign exchange contracts

Selling, general
& administrative expenses

$

(1,359)

$

7,164

$

538

$

5,878

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

    

June 30, 2022

    

December 31, 2021

    

Foreign exchange contracts

$

994

$

284

Forward starting swap agreements

12,429

5,232

Net investment contracts

9,238

 

2,339

Commodity Contracts

 

(262)

 

239

The Company expects a loss of $732 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.

    

    

Three Months Ended June 30, 

    

Six Months Ended June 30, 

Gain (loss) recognized in the

Derivative type

    

Consolidated Statements of Income:

    

2022

    

2021

    

2022

    

2021

Foreign exchange contracts

 

Sales

$

181

$

97

$

361

$

241

 

Cost of goods sold

 

343

 

(495)

 

628

 

(974)

Commodity contracts

Cost of goods sold

110

280

21

Table of Contents

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

NOTE 17 - FAIR VALUE

The following table provides a summary of assets and liabilities as of June 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

Liabilities

Observable Inputs

Unobservable

Description

    

June 30, 2022

    

(Level 1)

    

(Level 2)

    

Inputs (Level 3)

Assets:

 

  

 

  

 

  

 

  

Foreign exchange contracts

$

3,882

$

$

3,882

$

Net investment contracts

8,303

8,303

Commodity contracts

9

9

Forward starting swap agreements

 

16,481

 

 

16,481

 

Pension surplus

61,625

61,625

Total assets

$

90,300

$

61,625

$

28,675

$

Liabilities:

 

  

 

  

 

  

 

  

Foreign exchange contracts

$

811

$

$

811

$

Commodity contracts

346

346

Deferred compensation

 

38,604

 

 

38,604

 

Total liabilities

$

39,761

$

$

39,761

$

The following table provides a summary of assets and liabilities as of December 31, 2021, measured at fair value on a recurring basis:

    

    

Quoted Prices in

    

    

Active Markets for

Identical Assets or

Significant Other

Significant

Balance as of

Liabilities

Observable Inputs

Unobservable

Description

    

December 31, 2021

    

(Level 1)

    

(Level 2)

    

Inputs (Level 3)

Assets:

 

  

 

  

 

  

 

  

Foreign exchange contracts

$

5,428

$

$

5,428

$

Net investment contracts

2,095

2,095

Commodity contracts

311

311

Forward starting swap agreements

 

6,990

 

 

6,990

 

Total assets

$

14,824

$

$

14,824

$

Liabilities:

 

  

 

  

 

  

 

  

Foreign exchange contracts

$

3,980

$

$

3,980

$

Net investment contracts

 

608

 

 

608

 

Deferred compensation

 

41,612

 

 

41,612

 

Total liabilities

$

46,200

$

$

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.

22

Table of Contents

LINCOLN ELECTRIC HOLDINGS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Dollars in thousands, except per share amounts

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 June 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 June 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.

23

Table of Contents

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.

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.

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 will continue to monitor the Russia-Ukraine conflict and its potential impacts.

24

Table of Contents

Results of Operations

The following table shows the Company’s results of operations:

Three Months Ended June 30, 

 

Favorable  (Unfavorable) 

 

2022

2021

2022 vs. 2021

Amount

    

% of Sales

    

Amount

    

% of Sales

    

$

    

%

 

Net sales

$

969,589

$

826,454

 

$

143,135

 

17.3

%

Cost of goods sold

 

636,108

 

 

552,445

 

  

(83,663)

 

(15.1)

%

Gross profit

 

333,481

 

34.4

%

 

274,009

 

33.2

%

 

59,472

 

21.7

%

Selling, general & administrative expenses

 

166,792

 

17.2

%

 

151,557

 

18.3

%

 

(15,235)

 

(10.1)

%

Rationalization and asset impairment charges

 

(844)

 

0.1

%

 

630

 

0.1

%

  

1,474

 

234.0

%

Operating income

 

167,533

 

17.3

%

 

121,822

 

14.7

%

 

45,711

 

37.5

%

Interest expense, net

 

6,459

 

 

5,663

 

 

(796)

 

(14.1)

%

Other income (expense)

 

(1,134)

 

 

1,702

 

  

(2,836)

 

(166.6)

%

Income before income taxes

 

159,940

 

16.5

%

 

117,861

 

14.3

%

 

42,079

 

35.7

%

Income taxes

 

32,118

 

 

21,581

 

 

(10,537)

 

(48.8)

%

Effective tax rate

 

20.1

%  

 

 

18.3

%  

  

(1.8)

%  

Net income including non-controlling interests

 

127,822

 

 

96,280

 

 

31,542

 

32.8

%

Non-controlling interests in subsidiaries' loss

 

(1)

 

 

175

 

  

(176)

 

(100.6)

%

Net income

$

127,823

 

13.2

%

$

96,105

 

11.6

%

$

31,718

 

33.0

%

Diluted earnings per share

$

2.18

$

1.60

 

  

$

0.58

 

36.7

%

Six Months Ended June 30, 

 

Favorable  (Unfavorable) 

 

2022

2021

2022 vs. 2021

Amount

    

% of Sales

    

Amount

    

% of Sales

    

$

    

%

 

Net sales

$

1,895,037

$

1,583,475

 

$

311,562

 

19.7

%

Cost of goods sold

 

1,231,779

 

 

1,055,699

 

  

(176,080)

 

(16.7)

%

Gross profit

 

663,258

 

35.0

%

 

527,776

 

33.3

%

 

135,482

 

25.7

%

Selling, general & administrative expenses

 

333,478

 

17.6

%

 

297,233

 

18.8

%

 

(36,245)

 

(12.2)

%

Rationalization and asset impairment charges

 

1,041

 

0.1

%

 

4,793

 

0.3

%

  

3,752

 

78.3

%

Operating income

 

328,739

 

17.3

%

 

225,750

 

14.3

%

 

102,989

 

45.6

%

Interest expense, net

 

12,657

 

 

11,022

 

 

(1,635)

 

(14.8)

%

Other income (expense)

 

3,500

 

 

286

 

  

3,214

 

1,123.8

%

Income before income taxes

 

319,582

 

16.9

%

 

215,014

 

13.6

%

 

104,568

 

48.6

%

Income taxes

 

65,729

 

 

44,601

 

 

(21,128)

 

(47.4)

%

Effective tax rate

 

20.6

%  

 

 

20.7

%  

  

0.1

%  

Net income including non-controlling interests

 

253,853

 

 

170,413

 

 

83,440

 

49.0

%

Non-controlling interests in subsidiaries' loss

 

 

 

131

 

  

(131)

 

(100.0)

%

Net income

$

253,853

 

13.4

%

$

170,282

 

10.8

%

$

83,571

 

49.1

%

Diluted earnings per share

$

4.30

$

2.83

 

  

$

1.47

 

51.9

%

25

Table of Contents

Net Sales:

The following table summarizes the impact of volume, acquisitions, price and foreign currency exchange rates on Net sales on a consolidated basis:

Three Months Ended June 30, 

    

    

Change in Net Sales due to:

    

 

Net Sales

Foreign

Net Sales

    

2021

    

Volume

    

Acquisitions

    

Price

    

Exchange

    

2022

 

Lincoln Electric Holdings, Inc.

$

826,454

$

27,848

$

23,844

$

141,487

 

$

(50,044)

$

969,589

% Change

 

  

 

  

 

  

 

  

 

  

Lincoln Electric Holdings, Inc.

 

3.4

%

 

2.9

%  

 

17.1

%  

(6.1)

%

17.3

%

Six Months Ended June 30, 

    

    

Change in Net Sales due to:

    

 

Net Sales

Foreign

Net Sales

    

2021

    

Volume

    

Acquisitions

    

Price

    

Exchange

    

2022

 

Lincoln Electric Holdings, Inc.

$

1,583,475

$

51,970

$

58,673

$

284,618

 

$

(83,699)

$

1,895,037

% Change

 

  

 

  

 

  

 

  

 

  

Lincoln Electric Holdings, Inc.

 

3.3

%

 

3.7

%  

 

18.0

%  

(5.3)

%

19.7

%

Net sales increased in the three and six months ended June 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 six months ended June 30, 2022 increased 21.7% and 25.7%, 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 $10,424 and $17,312 in three and six months ended June 30, 2022, respectively, as compared with charges of $9,474 and $13,328 in the same 2021 periods.

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

SG&A expenses increased for the three and six months ended June 30, 2022 as compared to the same 2021 period, primarily due to higher employee costs.

Other Income (Expense):

Other income (expense) includes non-operating income and expense, primarily including other components of net periodic pension costs. Refer to Note 14 to the consolidated financial statements for details.

Income Taxes:

The effective tax rate was higher for the three months ended June 30, 2022 as compared to the same period in 2021, primarily due to geographic mix of earnings. The effective tax rate was lower for the six months ended June 30, 2022 as compared to the same period in 2021, primarily due to favorable discrete tax adjustments in 2022 and geographic mix of earnings.

26

Table of Contents

Segment Results

Three Months Ended June 30, 

    

Change in Net Sales due to:

    

    

 

Net Sales

Foreign

Net Sales

2021

  

Volume

  

Acquisitions (1)

  

Price (2)

  

 Exchange (3)

  

2022

Operating Segments

Americas Welding

$

457,468

$

45,284

$

5,437

$

89,854

 

$

(2,384)

$

595,659

International Welding

252,352

 

(16,862)

 

 

46,813

 

(45,674)

 

236,629

The Harris Products Group

116,634

 

(574)

 

18,407

 

4,820

 

(1,986)

 

137,301

% Change

  

 

  

 

  

 

  

 

  

 

  

Americas Welding

9.9

%

 

1.2

%

19.6

%

(0.5)

%

30.2

%

International Welding

(6.7)

%

 

18.6

%

(18.1)

%

(6.2)

%

The Harris Products Group

(0.5)

%

 

15.8

%

4.1

%

(1.7)

%

17.7

%

Six Months Ended June 30, 

    

Change in Net Sales due to:

    

    

 

Net Sales

    

Foreign

    

Net Sales

 

2021

Volume

  

Acquisitions (1)

  

Price (2)

  

 Exchange (3)

2022

Operating Segments

Americas Welding

$

882,710

$

67,288

$

7,182

$

174,072

 

$

(1,538)

$

1,129,714

International Welding

475,431

 

(17,886)

 

17,632

 

99,003

 

(79,510)

 

494,670

The Harris Products Group

225,334

 

2,568

 

33,859

 

11,543

 

(2,651)

 

270,653

% Change

  

 

  

 

  

 

  

 

  

 

  

Americas Welding

7.6

%

 

0.8

%

19.7

%

(0.2)

%

28.0

%

International Welding

(3.8)

%

 

3.7

%

20.8

%

(16.7)

%

4.0

%

The Harris Products Group

1.1

%

 

15.0

%

5.1

%

(1.2)

%

20.1

%

(1)Increases for the three and six months ended June 30, 2022 were due to the acquisitions discussed in Note 4 to the consolidated financial statements.
(2)Increase for the three and six months ended June 30, 2022 in Americas Welding and International Welding reflects increased product pricing as a result of higher input costs. Increase for The Harris Products Group was also due to increased commodity costs.
(3)Decrease for the three and six months ended June 30, 2022 in International Welding primarily due to the devaluation of the Turkish Lira and Euro.

27

Table of Contents

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.

The following table presents Adjusted EBIT by segment:

Favorable (Unfavorable) 

 

Three Months Ended June 30, 

2022 vs. 2021

 

    

2022

    

2021

    

$

    

%

 

Americas Welding:

 

  

 

  

 

  

  

Net sales

$

595,659

$

457,468

$

138,191

30.2

%

Inter-segment sales

 

29,031

 

39,765

 

(10,734)

(27.0)

%

Total Sales

$

624,690

$

497,233

127,457

25.6

%

Adjusted EBIT (4)

$

118,067

$

84,134

33,933

40.3

%

As a percent of total sales (1)

 

18.9

%  

 

16.9

%  

2.0

%

International Welding:

 

 

  

  

  

Net sales

$

236,629

$

252,352

(15,723)

(6.2)

%

Inter-segment sales

 

9,527

 

6,897

2,630

38.1

%

Total Sales

$

246,156

$

259,249

(13,093)

(5.1)

%

Adjusted EBIT (5)

$

35,009

$

29,997

5,012

16.7

%

As a percent of total sales (2)

 

14.2

%  

 

11.6

%  

2.6

%

The Harris Products Group:

 

 

  

  

  

Net sales

$

137,301

$

116,634

20,667

17.7

%

Inter-segment sales

 

2,866

 

2,284

582

25.5

%

Total Sales

$

140,167

$

118,918

21,249

17.9

%

Adjusted EBIT

$

17,922

$

18,212

(290)

(1.6)

%

As a percent of total sales (3)

 

12.8

%  

 

15.3

%  

(2.5)

%

Corporate / Eliminations:

 

 

  

  

  

Inter-segment sales

$

(41,424)

$

(48,946)

7,522

15.4

%

Adjusted EBIT (6)

 

(3,984)

 

(3,888)

(96)

(2.5)

%

Consolidated:

 

 

  

  

  

Net sales

$

969,589

$

826,454

143,135

17.3

%

Net income

$

127,823

$

96,105

31,718

33.0

%

As a percent of total sales

 

13.2

%  

 

11.6

%  

1.6

%

Adjusted EBIT (7)

$

167,014

$

128,455

38,559

30.0

%

As a percent of sales

 

17.2

%  

 

15.5

%  

 

1.7

%

(1)Increase for the three months ended June 30, 2022 as compared to June 30, 2021 primarily driven by higher volumes, the impact of profit improvement initiatives and pricing actions taken to offset higher input costs, partially offset by higher employee costs.
(2)Increase for the three months ended June 30, 2022 as compared to June 30, 2021 primarily driven by pricing actions taken to offset higher input costs and cost reduction initiatives.
(3)Decrease for the three months ended June 30, 2022 as compared to June 30, 2021 primarily driven by acquisition integration activities, unfavorable mix and declining commodity pricing in certain metal offerings.
(4)The three months ended June 30, 2022 exclude the amortization of step up in value of acquired inventories of $1,459 related to an acquisition as discussed in Note 4 to the consolidated financial statements and

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Rationalization and asset impairment net gains of $998 as discussed in Note 6 to the consolidated financial statements. The three months ended June 30, 2021 exclude pension settlement charges of $1,650.
(5)The three months ended June 30, 2022 and June 30, 2021 exclude Rationalization and asset impairment charges of $154 and $630, respectively, as discussed in Note 6 to the consolidated financial statements. The three months ended June 30, 2021 also exclude the amortization of step up in value of acquired inventories of $1,841, related to an acquisition as discussed in Note 4 to the consolidated financial statements.
(6)The three months ended June 30, 2021 exclude acquisition transaction costs of $810.
(7)See non-GAAP Financial Measures for a reconciliation of Net income as reported and Adjusted EBIT.

    

    

 

    

Favorable (Unfavorable) 

 

Six Months Ended June 30, 

2022 vs. 2021

 

    

2022

    

2021

    

$

    

%

 

    

Americas Welding:

 

  

 

  

 

  

  

 

Net sales

$

1,129,714

$

882,710

$

247,004

28.0

%

Inter-segment sales

 

57,187

 

72,513

 

(15,326)

(21.1)

%

Total Sales

$

1,186,901

$

955,223

231,678

24.3

%

Adjusted EBIT (4)

$

229,635

$

160,751

68,884

42.9

%

As a percent of total sales (1)

 

19.3

%  

 

16.8

%  

2.5

%

International Welding:

 

 

  

  

  

Net sales

$

494,670

$

475,431

19,239

4.0

%

Inter-segment sales

 

15,755

 

11,182

4,573

40.9

%

Total Sales

$

510,425

$

486,613

23,812

4.9

%

Adjusted EBIT (5)

$

72,096

$

48,813

23,283

47.7

%

As a percent of total sales (2)

 

14.1

%  

 

10.0

%  

4.1

%

The Harris Products Group:

 

 

  

  

  

Net sales

$

270,653

$

225,334

45,319

20.1

%

Inter-segment sales

 

5,928

 

4,431

1,497

33.8

%

Total Sales

$

276,581

$

229,765

46,816

20.4

%

Adjusted EBIT

$

37,520

$

36,909

611

1.7

%

As a percent of total sales (3)

 

13.6

%  

 

16.1

%  

(2.5)

%

Corporate / Eliminations:

 

 

  

  

  

Inter-segment sales

$

(78,870)

$

(88,126)

9,256

10.5

%

Adjusted EBIT (6)

 

(8,785)

 

(5,344)

(3,441)

(64.4)

%

Consolidated:

 

 

  

  

  

Net sales

$

1,895,037

$

1,583,475

311,562

19.7

%

Net income

$

253,853

$

170,282

83,571

49.1

%

As a percent of total sales

 

13.4

%  

 

10.8

%  

2.6

%

Adjusted EBIT (7)

$

330,466

$

241,129

89,337

37.0

%

As a percent of sales

 

17.4

%  

 

15.2

%  

 

2.2

%

(1)Increase for the six months ended June 30, 2022 as compared to June 30, 2021 primarily driven by higher volumes, the impact of profit improvement initiatives and pricing actions taken to offset higher input costs, partially offset by higher employee costs.
(2)Increase for the six months ended June 30, 2022 as compared to June 30, 2021 primarily driven by pricing actions taken to offset higher input costs and cost reduction initiatives.
(3)Decrease for the six months ended June 30, 2022 as compared to June 30, 2021 driven primarily by acquisition integration activities, unfavorable mix and declining commodity pricing in certain metal offerings.

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(4)The six months ended June 30, 2022 exclude a favorable adjustment related to the termination of a pension plan of $3,735, the amortization of step up in value of acquired inventories of $1,459 as discussed in Note 4 to the consolidated financial statements and Rationalization and asset impairment net gains of $988 as discussed in Note 6 to the consolidated financial statements. The three months ended June 30, 2021 exclude pension settlement charges of $6,536.
(5)The six months ended June 30, 2022 and 2021 exclude Rationalization and asset impairment charges of $2,039 and $4,793, respectively, as discussed in Note 6 to the consolidated financial statements. The six months ended June 30, 2021 also excludes the amortization of step up in value of acquired inventories of $1,841, as discussed in Note 4 to the consolidated financial statements.
(6)The six months ended June 30, 2021 exclude acquisition transaction costs of $1,923.
(7)See non-GAAP Financial Measures for a reconciliation of Net income as reported and Adjusted EBIT.

Non-GAAP Financial Measures

The Company reviews Adjusted operating income, Adjusted net income, Adjusted EBIT, Adjusted effective tax rate, Adjusted diluted earnings per share, Return on invested capital, 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.

30

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The following table presents the reconciliations of Operating income as reported to Adjusted operating income, Net income as reported to Adjusted net income and Adjusted EBIT, Effective tax rate as reported to Adjusted effective tax rate and Diluted earnings per share as reported to Adjusted diluted earnings per share:

    

Three Months Ended June 30, 

    

Six Months Ended June 30, 

 

    

2022

    

2021

    

2022

    

2021

 

Operating income as reported

$

167,533

$

121,822

$

328,739

$

225,750

Special items (pre-tax):

 

  

 

  

 

  

 

  

Rationalization and asset impairment charges (1)

 

(844)

 

630

 

1,041

 

4,793

Acquisition transaction costs (2)

 

 

810

 

 

1,923

Amortization of step up in value of acquired inventories (3)

 

1,459

 

1,841

 

1,459

 

1,841

Adjusted operating income

$

168,148

$

125,103

$

331,239

$

234,307

Net income as reported

$

127,823

 

$

96,105

$

253,853

$

170,282

Special items:

 

 

 

  

 

Rationalization and asset impairment charges (1)

 

(844)

 

 

630

 

1,041

4,793

Acquisition transaction costs (2)

 

 

 

810

 

1,923

Pension charges and other net gains (4)

 

 

 

1,650

 

(4,273)

6,536

Amortization of step up in value of acquired inventories (3)

 

1,459

 

 

1,841

 

1,459

1,841

Tax effect of Special items (5)

 

(252)

 

 

(433)

 

789

(1,994)

Adjusted net income

128,186

 

100,603

252,869

183,381

Non-controlling interests in subsidiaries’ income (loss)

(1)

 

175

131

Interest expense, net

 

6,459

 

 

5,663

 

12,657

11,022

Income taxes as reported

 

32,118

 

 

21,581

 

65,729

44,601

Tax effect of Special items (5)

 

252

 

 

433

 

(789)

1,994

Adjusted EBIT

$

167,014

 

$

128,455

$

330,466

$

241,129

Effective tax rate as reported

 

20.1

%  

 

18.3

%

20.6

%  

20.7

%

Net special item tax impact

 

0.1

%  

 

(0.4)

%

(0.2)

%  

(0.5)

%

Adjusted effective tax rate

 

20.2

%  

 

17.9

%

20.4

%  

20.2

%

Diluted earnings per share as reported

$

2.18

 

$

1.60

$

4.30

$

2.83

Special items per share

 

 

 

0.07

 

(0.01)

0.21

Adjusted diluted earnings per share

$

2.18

 

$

1.67

$

4.29

$

3.04

(1)Charges primarily related to severance, gains or losses on the disposal of assets.
(2)Costs related to acquisitions and are included in SG&A expenses.
(3)Costs related to acquisitions and are included in Cost of Goods Sold.
(4)Primarily includes the final settlement associated with the termination of a pension plan and settlement charges due to lump sum pension payments and are included in Other income (expense).
(5)Includes the net tax impact of Special items recorded during the respective periods.

The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate. The applicable tax 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

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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:

    

Six Months Ended June 30, 

2022

    

2021

    

$ Change

Cash provided by operating activities (1)

$

141,301

$

145,234

$

(3,933)

Cash used by investing activities (2)

 

(55,005)

 

(102,434)

 

47,429

Capital expenditures

 

(34,602)

 

(27,768)

 

(6,834)

Acquisition of businesses, net of cash acquired

 

(22,095)

 

(83,723)

 

61,628

Cash used by financing activities (3)

 

(122,366)

 

(108,995)

 

(13,371)

Net change in borrowings

 

71,829

 

1,163

 

70,666

Purchase of shares for treasury

 

(129,698)

 

(53,688)

 

(76,010)

Cash dividends paid to shareholders

 

(65,914)

 

(61,379)

 

(4,535)

Decrease in Cash and cash equivalents (4)

 

(40,162)

 

(66,395)

 

26,233

(1)Cash provided by operating activities decreased for the six months ended June 30, 2022, compared with the six months ended June 30, 2021 primarily due to increased investment in working capital.
(2)Cash used by investing activities decreased for the six months ended June 30, 2022, compared with the six months ended June 30, 2021 primarily due to higher cash used in the acquisition of businesses in 2021. The Company currently anticipates capital expenditures of $70,000 to $80,000 in 2022. Anticipated capital expenditures include investments for capital maintenance and projects to increase efficiency, reduce costs, promote business growth or improve the overall safety and environmental conditions of the Company’s facilities.
(3)Cash used by financing activities increased in the six months ended June 30, 2022, compared with the six months ended June 30, 2021 due to increased purchase of shares for treasury, partially offset by higher borrowings in 2022.
(4)Cash and cash equivalents decreased 20.8%, or $40,162 to $152,796 during the six months ended June 30, 2022, from $192,958 as of December 31, 2021. This decrease was predominantly due to cash used for the purchase of common shares for treasury, dividends paid to shareholders and capital expenditures, partially offset by cash from operations and proceeds from borrowings. At June 30, 2022, $146,705 of Cash and cash equivalents was held by international subsidiaries.

In July 2022, the Company paid a cash dividend of $0.56 per share, or $32,435, to shareholders of record as of June 30, 2022.

Working Capital Ratios

June 30, 2022

    

December 31, 2021

 

June 30, 2021

 

Average operating working capital to Net sales (1) (2)

 

19.0

%  

16.3

%

17.2

%

Days sales in Inventories (2)

 

128.4

 

121.0

110.2

Days sales in Accounts receivable

 

51.5

 

50.3

53.9

Average days in Trade accounts payable

 

59.6

 

59.8

59.9

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Table of Contents

(1)Average operating working capital to net sales is defined as the sum of Accounts receivable, Inventories and contract assets less Trade accounts payable and contract liabilities as of period end divided by annualized rolling three months of Net sales.
(2)In order to minimize potential supply chain disruptions in serving customers in a challenging operating environment, the Company increased inventories relative to expected Net sales resulting in higher Days sales in Inventories and had an unfavorable impact on Average operating working capital to Net sales.

Return on Invested Capital

The Company reviews return on invested capital ("ROIC") in assessing and evaluating the Company’s underlying operating performance. ROIC is a non-GAAP financial measure that the Company believes is a meaningful metric to investors in evaluating the Company’s financial performance and may be different than the method used by other companies to calculate ROIC. ROIC is defined as rolling 12 months of Adjusted net income excluding tax-effected interest income and expense divided by invested capital. 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 ROIC:

Twelve Months Ended June 30, 

    

2022

    

2021

 

Net income

$

360,037

 

$

293,839

Rationalization and asset impairment charges

 

6,075

 

 

20,502

Acquisition transaction costs

 

 

 

1,923

 

Pension settlement charges

 

115,693

 

 

11,321

Amortization of step up in value of acquired inventories

 

5,422

 

 

1,841

Tax effect of Special items (1)

 

(44,405)

 

 

(5,036)

Adjusted net income

$

442,822

 

$

324,390

Plus: Interest expense, net of tax of $6,336 and $5,843 in 2022 and 2021, respectively

 

18,832

 

17,368

Less: Interest income, net of tax of $333 and $389 in 2022 and 2021, respectively

 

986

 

1,166

Adjusted net income before tax effected interest

$

460,668

 

$

340,592

Invested Capital

    

June 30, 2022

    

June 30, 2021

Short-term debt

$

125,458

$

10,435

Long-term debt, less current portion

712,908

718,137

Total debt

838,366

728,572

Total equity

 

912,983

 

859,623

Invested capital

$

1,751,349

$

1,588,195

Return on invested capital

 

26.3

%  

 

21.4

%

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

The tax effect of Special items impacting pre-tax income was calculated as the pre-tax amount multiplied by the applicable tax rate. The applicable tax rates reflect the taxable jurisdiction and nature of each Special item.

New Accounting Pronouncements

Refer to Note 1 to the consolidated financial statements for a discussion of new accounting pronouncements.

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Table of Contents

Acquisitions

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

Debt

Fair Value of Debt

At June 30, 2022 and December 31, 2021, the fair value of long-term debt, including the current portion, was approximately $639,863 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 $723,945 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.

Revolving Credit Agreement

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 June 30, 2022, the Company was in compliance with all of its covenants and had $85,000 of outstanding borrowings under the Credit Agreement.

The Company has other lines of credit totaling $103,956. As of June 30, 2022, the Company was in compliance with all of its covenants and had $29,421 outstanding at June 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 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 11.9 years, respectively. The proceeds of the Notes were used for general corporate purposes. The Notes contain certain affirmative and negative covenants. As of June 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 June 30, 2022, 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

34

Table of Contents

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 June 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 June 30, 2022 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION

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 June 30, 2022, the Company was a co-defendant in cases alleging asbestos induced illness involving claims by approximately 1,501 plaintiffs, which is a net decrease of 23 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: 56,849 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 second quarter of 2022 were as follows:

Total Number of

    

    

    

Shares

    

Maximum Number

Repurchased

of Shares that May

Total Number of

as Part of Publicly

Yet be Purchased

Shares

Average Price

Announced Plans or

Under the Plans or

Period

Repurchased

Paid Per Share

Programs

Programs (2)

April 1 - 30, 2022

 

61,516

(1)

$

131.77

 

60,743

 

9,409,669

May 1 - 31, 2022

 

52,721

(1)

 

132.78

 

52,531

 

9,357,138

June 1 - 30, 2022

 

76,477

(1)

 

130.93

 

76,189

 

9,280,949

Total

 

190,714

 

131.71

 

189,463

 

  

(1)The above share repurchases include the surrender of the Company’s common shares in connection with the vesting of restricted awards.
(2)On February 12, 2020, the Company’s Board of Directors authorized a new share repurchase program for up to an additional 10 million shares of the Company’s common stock. Total shares purchased through the share repurchase programs were 0.7 million shares at a total cost of $94.6 million for a weighted average cost of $130.69 per share through June 30, 2022.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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Table of Contents

ITEM 6. EXHIBITS

(a)Exhibits

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.

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)

37

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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.

    

LINCOLN ELECTRIC HOLDINGS, INC.

/s/ Gabriel Bruno

Gabriel Bruno

Executive Vice President, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

July 28, 2022

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XBRL-Only Content Section

39