Lincoln Electric Still Under Pressure

Lincoln Electric Holdings Inc. (LECO) recently posted second-quarter EPS of $0.34, well above market expectations of $0.24. However, quarterly earnings were down 79.0% year over year primarily due to significant decline in sales volumes.

Lincoln Electric posted net sales of $413.3 million for the quarter, which is 40.9% below prior-year sales of $699.8 million. The weakness in industrial activity and strength of the U.S. dollar had an adverse impact on the company’s quarterly sales. It also faced weak demand for its welding products across markets. While North American sales were down 40.2%, sales from Lincoln subsidiaries outside North America declined 42.0%. U.S. export sales were down 41.4% during the quarter.

Gross margin declined 360 basis points year over year to 25.7%, while operating margin was down 670 basis points at 6.4%. Quarterly margins were hit by the impact of liquidating high cost inventory combined with declining volumes and a strong U.S. dollar.

Lincoln Electric has implemented various measures in an attempt to align its business costs with declining global demand. These actions include reductions in management compensation, a voluntary separation program for the company’s Cleveland-based workforce, reduced work hours, hiring and merit increase freezes, rationalization of factory operations in Europe and other discretionary cost reductions. These initiatives are expected to generate annualized cost savings of over $100 million.

However, we believe these measures are unlikely to fully offset the impact of declining volumes on the company’s margins in the next couple of quarters. We maintain a Hold recommendation on the stock.