Lincoln Electric Beats Q3 Earnings on Top-line Growth - Analyst Blog

Shares of Lincoln Electric Holdings Inc. (LECO) gained around 1.8% and closed at $72.48 on Oct 31, a day after the company reported strong third-quarter 2014 results. Adjusted earnings increased 9% to 94 cents per share from 86 cents in the year-ago quarter driven by strong top-line growth and margin contributions from North America Welding and Europe Welding segments. Earnings also beat the Zacks Consensus Estimate of 90 cents.
 
Adjusted income excluded a net effect of 37 cents per share pertaining to asset impairment charges. The year-ago quarter figure excluded net charges of 6 cents per share associated with long-lived asset impairments and severance and other costs from the consolidation of manufacturing operation. Including these, reported earnings were 57 cents per share in the quarter versus 80 cents in the year-ago quarter.
 
Total revenue rose 3.5% year over year to $716 million. Excluding the unfavorable impact of foreign exchange translation, sales increased around 6%. The year-on-year growth was led by widespread demand across the key segments in North America, Europe and in Harris Products Group. The reported figure surpassed the Zacks Consensus Estimate of $702 million.
 
Segment wise, increase in sales in North America Welding (7%) and Europe Welding (8%) were offset by decline in Asia Pacific Welding (10%) and South America Welding (37%). South America was the most challenged, with a 40% decline in volumes, as the Venezuelan business continued to contract due limited operations and from intermittent local supply disruptions in the quarter.

Cost and Margins
 
Cost of goods sold increased 3.3% year over year to $474 million. Gross profit increased to $241.6 million from $232.7 million in the year-ago quarter. Gross margin rose 20 basis points (bps) year over year to 33.8%.
 
Selling, general and administrative expenses increased 4% to $136 million from $131 million in the year-ago quarter. Adjusted operating profit increased 3.7% year over year to $105 million in the quarter. Adjusted operating margin remained flat year over year at 14.7%.
 
Financial Updates
 
As of Sep 30, 2014, Lincoln Electric's cash and cash equivalents were $280 million versus $300 million as of 2013-end. Cash flow from operations came in at $149 million in the reported quarter as against $155 million in the year-ago quarter.
 
Debt-to-capitalization ratio was 6% as of Sep 30, 2014, up from 1.2% as of Dec 31, 2013. The company repurchased 1.9 million shares for $130 million in the quarter. Lincoln Electric increased its 2014 share repurchase target by 20% to $300 million, which compares with its prior target of $250 million.

The company also raised its quarterly dividend by 26% to 29 cents per share from 23 cents. Annualized, this represents a payout of $1.16 per share. The raised quarterly dividend will be paid on Jan 15, 2015, to shareholders of record as of Dec 31, 2014. The company paid dividends of $18 million in the quarter.

Our View
 
Though Lincoln Electric did not provide any specific guidance for 2014, we believe it will benefit from improving end market trends in the general fabrication and structural sectors. Demand for innovative solutions combined with benefits from strategic initiatives and accelerated returns will also drive growth.

Further, the company advanced its automation solutions with the acquisition of Easom Automation in the quarter. Easom will provide Lincoln Electric an opportunity to expand its automation capabilities into the heavy fabrication sector. The company also signed a licensing agreement with Helical Robotics to leverage its joint technologies in order to develop a trackless automated welding solution which is expected to commercialize late next year.

Additionally, Lincoln Electric is planning to divest the manufacturing capacity in Asia-Pacific segment, to better align with strategic repositioning in the region. The company remains optimistic about its 2020 vision and strategy.

The company's share repurchase activity will also be accretive to earnings, going forward. However, weakness within the global mining sector and volatility in raw material price are headwinds in the near term.

Currently, Lincoln Electric carries a Zacks Rank #3 (Hold).
 
Some better-ranked stocks in the industrial products sector include Advanced Emissions Solutions, Inc. (ADES), AO Smith Corp. (AOS) and Apogee Enterprises, Inc. (APOG). All of these stocks carry a Zacks Rank #2 (Buy).
 

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