Lincoln Electric Doubles EPS - Analyst Blog

Lincoln Electric Holdings Inc. (LECO) delivered earnings per share (EPS) of 77 cents in its second quarter ended June 30, 2010, ahead of the Zacks Consensus Estimate of 68 cents, and more than double the EPS of 34 cents in the year-ago quarter. The year-over-year improvement was driven by the improving demand, new product introductions and margin expansion as a result of its ongoing cost improvement initiatives.

Adjusted EPS for the quarter excludes the per-share effect of special items in view of an after-tax rationalization gain of $3.8 million and a $2.3 million impact of Venezuelan currency. Including these items, EPS in the quarter was 76 cents. The year-ago EPS of 34 cents excluded the net-per-share effect of charges relating to rationalization activities of $6.6 million, gains relating to a pension settlement of $2.1 million and $5.7 million for sale of property in equity earnings.

Revenues climbed 25% to $515.6 million outpacing the Zacks Consensus Estimate of $496 million as demand levels improved in most markets and geographic regions.

Cost & Margin Performance

Cost of sales spiked 20% to $367 million in the quarter but based on revenue, it contracted 310 basis points to 71.2%. Gross profit surged 40% to $148.6 million, gross margin expanded 310 basis points to 28.8%.

On the other hand, selling, general, administrative and engineering expenses climbed 27% to $101.1 million in the quarter and, based on revenue, increased 40 basis points to 19.6%. Lincoln Electric’s adjusted operating income almost doubled to $49.8 million from $24.8 million in the prior-year period. Adjusted operating margin increased 370 basis points to 9.7% in the quarter. Lincoln Electric’s margin benefited from its cost improvement initiatives resulting from rationalization actions taken throughout 2009 and early 2010, as well as its ongoing strategic capital investments.

Financial Position

As of June 30, 2010, Lincoln Electric had cash and cash equivalents of $373.9 million, down from $376.6 million as of March 31, 2010. During the quarter, the company generated operating cash flows of $32.1 million compared with $62.6 million in the year-ago quarter.

As of June 30, 2010, debt-to-capitalization ratio marginally dropped to 9.2% as of June 30, 2010, from 9.6% as of March 31, 2010.

Our Take

Lincoln Electric is pursuing a multi-year strategy to become more cost competitive by building manufacturing facilities in Eastern Europe, India, China and South East Asia. The company is using acquisitions to expand its manufacturing capabilities, broaden distribution networks and access growth markets.

Also, the company is implementing various cost-control measures to align with the current demand. Demand seems to be improving for the company and we believe it will post strong growth on an economic recovery, boosted by its investments in emerging markets.

Cleveland, Ohio-based Lincoln Electric is a full-line manufacturer and reseller of welding and cutting products. The company’s welding products range from welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumables and fluxes to regulators and torches used in cutting. Lincoln Electric has 37 manufacturing locations, including operations and joint ventures in 18 countries and a worldwide network of distributors and sales offices covering more than 160 countries.
 
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