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Lincoln Electric Holdings Inc. (LECO - Analyst Report) delivered adjusted earnings per share (EPS) of $1.00 in its first quarter ended March 31, 2011, ahead of the Zacks Consensus Estimate of 88 cents and 72% above EPS of 58 cents in the year-ago quarter.

Adjusted EPS for both quarters excludes the per share effect of special items, such as charges associated with severance and other costs related to the consolidation of manufacturing operations initiated in 2009. These were excluded from the results of both periods, and so were the impact of the change in the functional currency of the company's Venezuelan operation to the U.S. dollar and the devaluation of the Venezuelan currency in the year-ago quarter.

Including these items, EPS in the quarter was $1.11, compared with 55 cents in the year-ago quarter.

Revenues climbed 27% to $599 million, outpacing the Zacks Consensus Estimate of $555 million as demand levels remained strong in most markets and geographic regions. All of its segments posted positive growth with South America Welding leading the pack as revenue grew 49.8%. 

Cost & Margin Performance 

Cost of sales spiked 26% to $437.7 million in the quarter. However, based on revenue, it improved 70 basis points to 73.1%. Gross profit rose 31% to $161.4 million whereas gross margin expanded 70 basis points to 26.9%.

Selling, general, administrative and engineering expenses went up 16% to $101.6 million in the quarter, but it dipped 160 basis points to 17% as a percentage of revenue. Lincoln Electric’s adjusted operating income was $59.8 million, compared with $35.5 million in the prior-year quarter. Adjusted operating margin increased 250 basis points to 10% in the quarter.

Financial Position

As of March 31, 2011, Lincoln Electric had cash and cash equivalents of $341.4 million, down from $366.2 million as of December 31, 2010. During the quarter, the company generated operating cash flows of $16.7 million compared with $15.6 million in the prior-year quarter.

As of March 31, 2011, the debt-to-capitalization ratio marginally dropped to 7.4% from 7.8% as of December 31, 2010.

Our Take

Lincoln Electric is pursuing a multi-year strategy to become more cost competitive by building manufacturing facilities in Eastern Europe and Asia. Recently, the company entered the Russian market with the acquisition of Mezhgosmetiz-Mtsensk OAO and OOO Severstal-metiz.

These acquisitions are likely to strengthen Lincoln's presence in the Russian market. In addition to the above acquisitions, the company also partnered with IPG Photonics Corporation to explore global opportunities in the high-power laser welding and cutting market.

Allied with its aim of turning cost competitive, Lincoln Electric is implementing various cost-control measures. Further, the demand for its products is on the rise, leading us to believe that the company will post strong growth on the heels of an economic recovery and investments in the emerging markets. We currently have a Zacks #2 Rank (short-term 'Buy' recommendation) on the stock.

Cleveland, Ohio-based Lincoln Electric designs, develops and manufactures arc welding products, robotic arc-welding systems, plasma and oxyfuel cutting equipment and commands a leading position in the brazing and soldering alloys market. Lincoln Electric competes with Illinois Tool Works Inc. ((ITW - Analyst Report)), Charter International Plc and ESAB Group Holdings Ltd.

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