Lincoln Electric capped 2025 with record full-year sales of $4.2 billion and record adjusted EPS of $9.87 while maintaining its record operating margin, though fourth quarter volumes fell 6.4% as automation declined 11% against a tough comparison. Management cited accelerating December orders, OEM capex plans, and a January PMI inflection as signs of an early industrial recovery, guiding 2026 to mid-single-digit sales growth weighted to second-half volume. The company also launched its new RISE strategy with 2030 targets including sales above $6 billion, a 19% average operating margin, and high-20s incremental margins.
Thank you, Colby, and good morning, everyone. Welcome to Lincoln Electric's fourth quarter 2025 conference call, where we'll be covering our fourth quarter and full year 2025 financial results, as well as our new 2030 targets. We released our financial results earlier today, and you can find our release and this call slide presentation at lincolnelectric.com in the Investor Relations section. Joining me on the call today is Steve Hedlund, Chairman and Chief Executive Officer, as well as Gabe Bruno, our Chief Financial Officer. Following our prepared remarks, we're happy to take your questions.
Before we start our discussion, please note that certain statements made during this call may be forward-looking, and actual results may differ materially from our expectations due to a number of risk factors and uncertainties, which are provided in our press release and in our SEC filings on Forms 10-K and 10-Q. In addition, we discussed financial measures that do not conform to U.S. GAAP. A reconciliation of non-GAAP measures to the most comparable GAAP measure is found in the financial tables in our earnings release, which again, is available in the Investor Relations section of our website at lincolnelectric.com. Now, I will turn the call over to Steve Hedlund. Steve?
Thank you, Amanda. Good morning, everyone. Turning to Slide 3, I am proud to report record 2025 performance. Despite challenged end markets, our sales increased 6% to a record $4.2 billion from acquisitions and price. We maintained last year's record adjusted operating income margin, increased adjusted EPS to a record $9.87, and generated strong cash flows from operations. This resulted in record cash returns to shareholders. Disciplined cost management and the agility of our supply chain team mitigated unprecedented levels of inflation, finishing the year at our neutral price cost target. In addition, our savings programs generated an incremental $31 million of permanent savings. These achievements, combined with solid commercial and operational execution, culminated in top-quartile ROIC and total shareholder return performance versus our peers.
On behalf of the board and leadership team, I would like to thank our global team for delivering these superb results. Their commitment, focus, and agility continue to position the company to outperform in the years to come. Turning to Slide 4 to cover demand trends in the fourth quarter. Organic sales grew 2.5% from price, which was largely offset by weaker volume performance. As discussed on earlier calls, we faced a challenging prior year comparison in our automation portfolio, which magnified volume declines. Excluding automation, organic sales would have increased approximately 8%. The growth reflects price contributions in consumable and equipment, as well as relatively steady volume performance in our welding consumables in Americas and International Welding. 2025 was a challenging year for automation due to lower capital spending and project deferrals.
Automation sales were $240 million in the quarter, an 11% decline versus a record prior year. On a full year basis, we achieved $870 million, which is a mid-single-digit % decline. We are encouraged by strong order rates and a solid backlog in our automation business in the fourth quarter. This is expected to drive growth in 2026. Due to seasonality and the timing of revenue recognition, we expect first quarter sales to be steady with prior year levels and then pivot to growth starting in the second quarter. This follows the typical seasonality cadence of a 40%-60% split between the first and second half of the year. Looking at end markets in the quarter, three of our five sectors grew with an acceleration in December, notably in Americas Welding.
Excluding automation due to its challenging prior year comparison, all five end markets were flat to up. This momentum, combined with a return to more normalized customer product production activity, OEM announcements of higher capital spending plans for 2026, and the manufacturing PMI pivoting to growth in January, are all encouraging signs that we may be in the early stages of an industrial recovery. A few highlights to note are the continued outperformance in Energy, which is due to strong project activity in both Americas and Asia Pacific. General Industries achieved double-digit growth in Americas, but was impacted by lower HVAC activity in the quarter. We are seeing HVAC demand start to normalize in January, and our non-resi structural steel sector was flat globally, but up mid-teens% in Americas on strength in both North and South America from a range of projects.
The two challenged sectors were Automotive and Heavy Industries, and both were impacted by automation's prior year comparison. Transportation, excluding automation, grew at a mid- to high-single-digit % rate, largely from consumable demand for vehicle production. Heavy Industries organic sales, excluding automation, was modestly higher year-over-year as construction and ag sector production activity continued to improve, resulting in solid consumable volume growth. So we are well-positioned with strong backlog levels and broadening pockets of growth in Americas and Asia Pacific to drive growth in the year ahead. I will now pass the call to Gabe Bruno to cover fourth quarter financials in more detail.
Thank you, Steve. Moving to Slide 5, our fourth quarter sales increased 5.5% to $1,079 million from 8.9% higher price, 1.9% favorable foreign exchange translation, and a 1.1% benefit from acquisitions. These increases were partially offset by 6.4% lower volumes. Gross profit dollars increased approximately 1% to $374 million, and gross profit margin compressed 140 basis points to 34.7%. A $3 million benefit from our savings actions, as well as diligent cost management and operational initiatives, was offset by lower volumes and a $3 million LIFO charge in the quarter.
SG&A expense decreased approximately $3 million versus the prior year from the benefit of $5 million of permanent savings and lower employee costs, which were partially offset by unfavorable foreign exchange translation and higher discretionary spending. SG&A expense as a percent of sales declined 130 basis points to 17%. Reported operating income increased 4% to $184 million. Excluding special items, primarily related to acquisitions, as well as rationalization and asset impairment charges, adjusted operating income increased 4% to $194 million. Our adjusted operating income margin declined 20 basis points to 18%, reflecting a 15% incremental margin. We reported an effective tax rate of 21.2%, which is 510 basis points higher versus prior year.
Our effective tax rate reflected an approximate $3 million special item tax expense from the election of provisions with the One Big Beautiful Bill Act. This election also reduced tax payments by approximately $25 million in the quarter, which we expect to realize again in the first quarter of 2026. Excluding special items, our effective tax rate was 19.8%, which was 300 basis points higher versus the prior year's adjusted effective tax rate, which benefited from a favorable mix of earnings in the timing of discrete items. We reported fourth quarter diluted earnings per share of $2.45. On an adjusted basis, earnings per share increased 3% to $2.65. Our earnings per share results include a $0.07 benefit from share repurchases and a $0.01 favorable impact from foreign exchange translation.
Moving to our reportable segments on Slide 6. Americas Welding sales increased approximately 4%, driven by 10.4% higher price and 60 basis points of favorable foreign exchange translation. Volumes declined approximately 7%, primarily from the automation portfolio, which had a challenging prior year comparison. While automation order rates accelerated in the fourth quarter and the segment has a strong backlog entering into 2026, revenue recognition is not expected to begin to ramp until the second quarter. The price increase reflects prior actions taken to address rising input costs. We anticipate price levels to hold sequentially in the first quarter, prior to substantially anniversarying in the second quarter. We will continue to monitor trade policy decisions and take appropriate actions as needed. Americas Welding segment's fourth quarter Adjusted EBIT increased 7% to $141 million.
The Adjusted EBIT margin increased 90 basis points to 20%, primarily due to effective cost management, favorable mix, and $5 million in permanent savings. We expect Americas Welding to continue to operate the mid-18% to mid-19% EBIT margin range in 2026. Moving to Slide 7, the International Welding segment sales increased approximately 7% as a 5% benefit from our alloy steel acquisition, a 5% favorable foreign exchange translation, and 50 basis points of price were partially offset by 4% lower volumes. Volume compression reflected the continued challenges in European industrial demand trends, which were partially offset by pockets of growth in Asia Pacific and in the Middle East. Adjusted EBIT decreased approximately 4% to $31 million.
Margin compressed 100 basis points to 11.8% as the benefits of our alloy steel acquisition, effective cost management, and $3 million of permanent savings were offset by the impact of lower volumes. We expect International Welding's margin performance to be in the mid-11% to mid-12% margin range in 2026. Moving to the Harris Products Group on Slide 8. Fourth quarter sales increased 11%, driven by 18% higher price and 170 basis points of favorable foreign exchange translation. As expected, volumes compressed 9% due to the decline in HVAC sector production activity in the quarter. Price continued to increase on metal costs and price actions taken to mitigate rising input costs. Adjusted EBIT increased 8% to $23 million as margin declined 30 basis points on lower volumes and mix.
The Harris segment is expected to operate in the 18%-19% margin range in 2026. Moving to Slide 9, We generated solid cash flows from operations in the quarter, aided by lower tax payments. Average operating working capital rose 100 basis points versus the comparable prior year period to 17.9%, primarily due to higher inventory levels and reflects top-quartile performance compared to peers. Moving to Slide 10. We continued to execute on our balanced capital allocation strategy with high-quartile returns. In the quarter, we invested $44 million in growth, reflecting an acceleration in CapEx investments and returned $94 million to shareholders. We generated an adjusted return on invested capital of 21.3%. Moving to Slide 11 to discuss our operating assumptions for 2026.
While conditions remain dynamic in many of our regions from ongoing trade negotiations and geopolitics, we are encouraged by recent OEM commentary on capital spending plans and growing infrastructure project commitments. This gives us cautious optimism that we may be in the early stages of an industrial sector recovery that would translate to broader demand momentum in our business in the second half of the year. While domestic distribution channel demand and consumable volumes have remained resilient, demand for our equipment and automation portfolios has been choppy. We will be looking for consumable volumes to inflect to consistent growth, which is typically followed by an acceleration in capital spending after one to two quarters. Once we see those drivers, we are confident that our channel mix, diversified end markets, and portfolio solutions positions us well to capitalize on accelerating growth.
Our full year 2026 operating framework assumes a sales growth rate in the mid-single-digit % range, with organic sales split 50/50 between volume and the 2025 price actions that carry over to 2026. We expect volume growth rates to improve starting in the second quarter and through year-end. Price is expected to be strongest in the first quarter, especially in the Americas Welding segment, before largely anniversarying last year's price actions in the second quarter. Our price assumption does not include dynamic metal price adjustments in our Harris Products Group segment due to the volatility of metal markets. Our 2025 alloy steel acquisition is expected to provide an approximate 7 basis points contribution to sales. These assumptions support a first quarter sales estimate that is similar to fourth quarter sales results.
We will continue to pursue a neutral price cost posture and expect a mid-20% incremental operating income margin from volume growth and enterprise initiatives, which will result in a modest improvement in our operating margin for the full year. In the first quarter, we expect a seasonal sequential increase of approximately $10 million in incentive costs as we reset incentive targets and issue long-term incentives. This will impact margins and cash flow performance as we start the year. For the full year, we are confident in strong cash flow generation, which supports our capital allocation strategy and helps compound earnings performance through the cycle. We will continue to maintain an elevated level of capital spending with a target range of $110 million-$130 million as we invest across a range of safety, growth, and productivity-oriented projects to drive long-term value.
Our expected tax rate and interest expense are generally in line with last year at a low-to-mid 20% rate and in the range of $50-$55 million, respectively. Now I'll pass the call back to Steve to cover our RISE strategy and new 2030 targets.
Thank you, Gabe. Turning to Slide 13, our next strategy builds upon the success of our Higher Standard strategy, which concluded in 2025. Despite a volatile five-year period that no one could have predicted, we are proud to have advanced the business and achieved most of our strategic targets, reaffirming our strong Say-Do reputation and our commitment to deliver on our goals. This is a testament to our incredible global team, the agility of our operations, and the tremendous support of our customers, partners, and shareholders. On behalf of the leadership team and the board of directors, thank you for your support. Turning to Slide 14, each reportable segment made progress during the Higher Standard strategy, most notably in profit contribution without the benefit of significant operating leverage. Diligent cost management, savings programs, and operational improvements were all drivers to segment improvement.
Key highlights are the doubling of our automation, sales, and EBIT margin over the five years, the outperformance of Harris Products Group's margins, and the groundwork we laid in leveraging the scale and scope of our enterprise to drive higher returns. The persistent drive for continuous improvement has delivered superior returns for our shareholders, as highlighted on Slide 15, with a 122% total shareholder return rate, which is over double proxy peers in the last strategy cycle. Turning to Slide 16, for 130 years, we have consistently operated with a value framework that balances being people-focused with growth, continuous improvement, and financial discipline. Our unwillingness to trade off one element for another is what sets us apart and is foundational to our culture and success. It has also delivered superior returns for our shareholders.
What has evolved over time is the how the work gets done in each of these areas. This is driven by changes in technologies, processes, and organizational structures. In the next five years, we will further evolve how we operate under a new strategy named RISE. This next phase of our development is focused on structurally aligning the global organization to drive even greater efficiency and agility in our operations, further differentiating our technologies and solutions, exposing the business to broader growth opportunities, and generating value for our employees, customers, and shareholders. Let's walk through the key themes of RISE on Slide 17. The R stands for Reimagining how work gets done over the next five years. We will be completing the transition from regionally led businesses to center-led functions that will drive higher levels of efficiency across one standard enterprise. I stands for Innovating to differentiate.
We are challenging our R&D, product management, and M&A teams to further differentiate our portfolio to accelerate wins, whether that's through internal development, external partnerships, or techquisitions. We see great opportunities to expand our market impact by amplifying the value we bring to customers' operations. Inrotech is an excellent example of a recent tech acquisition. Their technology is being integrated into our first autonomous automation solution that uses vision and AI to weld with precision while adjusting the variables just like a human welder would. We believe this, among other innovations, will redefine productivity expectations for customers in the years ahead. S stands for Serve. Today, many customers tell us that our service outperforms industry peers, but we know that we can do better.
We have identified opportunities to improve supply and service levels across the business, which can be a growth driver for us in the next five years. And finally, we will be investing to elevate our team. We are renowned for our industry-leading technical sales reps, engineers, application experts, automation specialists, and a strong operating and supply chain organization. But we want to achieve best-in-class engagement with our employees. New development programs, combined with more proactive career planning, will help ensure our team is engaged, upskilled, and that we are attracting and retaining industry-leading talent to help us grow. Looking at the 2030 financial targets, starting on Slide 18, we are maintaining a high single-digit to low double-digit % sales growth rate framework. Our growth stack consists of organic sales increasing at a mid-single-digit % rate.
We are well positioned to benefit from cyclical growth and key secular growth drivers. Our customers need partners that can offer the expertise and the solutions to address the shortage of skilled welders that support greater safety and productivity in their operations, enable reshoring and capacity expansions, and deliver the right engineered solutions for electrification and infrastructure investments, whether for Energy, AI data centers, or for civil infrastructure projects. We also have a long-standing position servicing defense contractors, predominantly in the maritime industrial base, and have added some exposure to aerospace through recent acquisitions. So favorable macro trends, coupled with innovation, a targeted expansion of our TAM, where we can add value, share gains, and 300-400 basis points of sales growth from acquisitions, are all catalysts that give us attractive growth opportunities to leverage.
During the next five years, we expect higher contribution from growth at an average high 20% Incremental Operating Income Margin. This compares with a mid-20% rate in our prior cycle. Turning to Slide 19, we expect varying rates of organic sales growth across our reportable segments, reflecting regional dynamics and segment strategies. Americas Welding will lead with a mid- to high single-digit % organic growth rate. Strong regional positioning will allow the team to capitalize on cyclical, cyclical and secular trends. In addition, the majority of our automation portfolio is in region, and we continue to expect automation's organic sales growth at twice the rate of the core business. In International, we are pursuing a two-pronged approach to growth.
We'll be pursuing accelerated growth in portions of the Middle East and Asia Pacific, which have high levels of project activity and where we can invest to expand our reach. In core industrial Europe, we are assuming a low growth profile given macro trends, but we'll monitor European industrial trends to ensure we are aligned with customer needs and can capitalize on any growth opportunities which could offer upside to our model. We are expecting a mid-single-digit % growth rate in Harris Products Group from ongoing HVAC sector growth, a strategic expansion of fabricated solutions for targeted industrial applications, and expectations for an improvement in residential and retail channel trends. While operating leverage from volume growth is important to our strategy, enterprise initiatives are also a driver of higher incremental margin performance.
On Slide 20, we highlight four key enterprise initiatives that are being implemented in conjunction with local continuous improvement projects and our safety and environmental initiatives, which are highlighted in the appendix. Together, we expect all of these initiatives to drive approximately one-third of the improvement in our higher incremental operating income margin performance through the strategy cycle. Our first key initiative is our shift from a more regional operating structure to a global enterprise of center-led functions. This allows us to align our work on standardized tools, data sets, and establish highly efficient core processes. It will also enable us to leverage our scale and reduce complexity in our structure. In addition, standardization supports increased digitization, automation, and the use of AI bots to drive improved supply chain and administrative efficiency.
Second, we will continue to invest in factory automation and modernize our production platforms to improve safety, productivity, sustainability, and lower conversion costs in our operations. Third, we have piloted what we call our Spotlight process over the last couple of years in our Harris business, and we will be deploying this process more broadly across the enterprise. We have demonstrated that modest adjustments to our operating posture can result in improved service for customers, helping us gain market share, while also generating internal efficiencies and productivity. And finally, we regularly shape our footprint to ensure utilization, quality, and service are aligned with any shifts in demand. During the Higher Standard Strategy, we generated approximately $60 million in permanent savings from optimization projects. And while the opportunity list is shorter, we will continue our disciplined approach, which will contribute to margin performance.
Now I'll pass the call to Gabe to cover margin targets, cash flow, and capital allocation.
Turning to Slide 21, as Steve mentioned, we expect a step-up in our incremental margins on average operating income to high 20% range. This is about two-thirds from volume leverage and one-third from enterprise initiatives. This will increase our average operating income margin to 19% across the cycle, which is a 300 basis point improvement compared to the 16% average in our last strategy. This is a step-up from our typical 200 basis point improvement that we have historically achieved cycle to cycle. Our new framework targets a peak consolidated operating income margin of 20%+. By segment, all segment target EBIT margin ranges have increased from their 2025 levels based on their growth plans, enterprise initiatives, and segment-specific action plans.
In addition, we are targeting a mid-teens % EBIT margin contribution from our acquisitions and our automation portfolio, which is largely in the Americas Welding segment. Moving to Slide 22, we have improved our working capital performance over time to top decile levels. While our ratio increased in the last few years as we have strategically increased inventory during supply chain challenges, we continue to operate at top decile levels versus peers. As we execute our RISE strategy, we will continue to optimize working capital and target a 16%-17% ratio to sales over the next five years. Cash flows from operations have also improved over each cycle, with improved margin and working capital performance. We expect to generate over $3.7 billion in cash flows from operations at a 100% cash conversion ratio through 2030.
This will allow us to continue to fund growth and return excess cash to shareholders through the cycle. Turning to Slide 23, in our capital allocation strategy. We have followed a balanced capital allocation strategy, which you can see on the right side of the slide, with approximately 48% invested in growth and 52% returned to shareholders over the last cycle. We will be maintaining this balanced approach moving forward. Our growth investments include internal CapEx and R&D initiatives, as well as acquisitions. Internal investments yield our highest returns, and we target M&A returns in the mid-teens % by year three. We will also continue to return capital to shareholders. We expect to return approximately 30% of net income to shareholders through the dividend. As a Dividend Aristocrat with 30 years of consecutive annual dividend increases, we remain committed to our dividend program.
In addition, we will continue to repurchase shares to prevent dilution at approximately $75 million a year and will then opportunistically buy back shares using excess strategic cash. Our capital allocation strategy allows us to effectively fund growth and generate superior returns for our shareholders through the cycle. To summarize our 2030 financial targets on Slide 24, we are targeting growth that will position sales above $6 billion in 2030. Profit margins will expand at high 20% incremental operating income margin, which will generate an average operating income margin that is 300 basis points higher than the last cycle's average. We are expecting a peak 20+% operating income margin in this cycle. Earnings per share is expected to grow at a mid-teens% CAGR, reflecting improved performance in capital deployment.
Cash flow from operations is expected to expand to over $3.7 billion, which will fund growth and shareholder returns while allowing us to maintain a solid balance sheet profile. This strategy is expected to maintain top-quartile ROIC performance and elevate Lincoln Electric to consistently higher levels of performance as we continue to shape the company for another 130 years of success. Now we will pass the call to the operator to take questions.