Lincoln Electric Beats on Q2 Earnings Despite Flat Revenues

Lincoln Electric Holdings Inc. LECO reported second-quarter 2014 earnings of $1.01, up 11% from 91 cents in the year-ago quarter. Earnings also beat the Zacks Consensus Estimate of 91 cents. 

 

Adjusted income excluded a net effect of 5 cents per share pertaining to rationalization and asset impairment charges along with the impact of the Venezuelan remeasurement loss. The year-ago quarter figure excluded 4 cents pertaining to the same items. Including these, reported earnings were 96 cents per share in the quarter versus 87 cents in the year-ago quarter.

 

 

 

Total revenue remained flat at $728 million compared with the year-ago quarter. A 1.4% fall in volumes and a negative foreign exchange effect of 1.9% offset the benefits from acquisitions (1.2%) and pricing (2.3%). The reported figure lagged the Zacks Consensus Estimate of $732 million.

 

Segment wise, increase in sales in North America Welding (2%) and Europe Welding (7%) were offset by decline in Asia Pacific Welding (4%) and South America Welding (12%).

 

Cost and Margins

 

Cost of goods sold decreased 2% year over year to $478 million. Gross profit increased to $250 million from $240 million in the year-ago quarter. Gross margin rose 140 basis points (bps) year over year to 34.4%.

 

Selling, general and administrative expenses increased 1% to $137 million from $135 million in the year-ago quarter. Adjusted operating profit increased 8% year over year to $116 million in the quarter. Adjusted operating margin increased 120 bps to 16%.

 

Financial Updates

 

As of Jun 30, 2014, Lincoln Electric's cash and cash equivalents were $204 million versus $299.8 million as of Dec 31, 2013. Cash flow from operations came in at $105 million in the reported quarter as against $107 million in the year-ago quarter.

 

Debt-to-capitalization ratio was 0.5% as of Jun 30, 2014, down from 1.2% as of Dec 31, 2013. The company repurchased 1 million shares for $68.3 million in the quarter. Lincoln Electric's board of directors announced a quarterly cash dividend of 23 cents per share. The company paid dividends of $18.5 million in the quarter.

 

Our View

 

Though Lincoln Electric did not provide any specific guidance for 2014, we believe it will benefit from investments, which includes an active acquisition program and development in manufacturing platforms. In North America, Lincoln Electric continues to drive sales force efficiency with new CRM tools, hardware and enhanced training. 

 

Additionally, Lincoln Electric is leveraging investment in SAP, which will provide greater visibility through data and management tools, with seven additional SAP rollout slated for 2014. The company's dividend program and share repurchase activity will also be accretive, 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).

 

Peer Performance

 

Industrial tool maker Stanley Black & Decker, Inc. SWK, reported earnings from continuing operations of $1.43 per share in second-quarter 2014. The bottom-line result grew 17.2% year over year, surpassing the Zacks Consensus Estimate of $1.37.

 

Leading manufacturer and aftermarket service provider of comprehensive flow control systems, Flowserve Corporation FLS reported second-quarter 2014 earnings per share of 90 cents, missing the Zacks Consensus Estimate by a couple of cents. However, earnings increased 7.1% from 84 cents per share in the prior-year quarter.

 

Among other companies in the same industry, Kennametal Inc. KMT will report third-quarter earnings on Jul 31 2014. The Zacks Consensus Estimate for the quarter is at 89 cents, up 17.54% year over year.