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Lincoln Electric's Q2 Earnings Sliver Past Estimates

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Lincoln Electric Holdings Inc.’s (LECO - Free Report) second-quarter 2013 adjusted earnings of 91 cents per share improved 12% from 81 cents earned in the year-earlier quarter and slivered past the Zacks Consensus Estimate by a penny.

Adjusted income excluded a net effect of 4 cents pertaining to rationalization and asset impairment charges and impact of the devaluation of the Venezuelan currency in the reported quarter. The year-ago quarter excluded special items rationalization and asset impairment charges and a Venezuelan statutory severance obligation due to a change in Venezuelan labor law, which provided for increased employee severance obligations. Including these, reported earnings were 87 cents per share in the quarter versus 79 cents in the year-ago quarter.

Total revenue slipped 2% year over year to $727 million, missing the Zacks Consensus Estimate of $769 million. Benefit from acquisitions completed last year and pricing actions taken to address the devaluation of the Venezuelan currency were offset by lower pricing in the Harris Products Group from lower pricing on declining raw material costs, particularly in silver and copper.

Volumes dipped 5% overall despite 8% higher volumes in South America on rising demand and 2% higher volumes in Harris Products Group on international expansion. However, volumes were weak in North America, with approximately half of the decline driven by Lincoln Electric’ strategy to reshape part of its business mix toward differentiated and specialty-oriented products.

Cost and Margins

Cost of goods sold declined 6% to $487 million in the quarter. Gross profit increased 7% to $240 million. Gross margin expanded 280 basis points (bps) year over year to 33% in the quarter aided by better sales mix, an improved price cost relationship and operational improvements.

Selling, general & administrative expenses increased 6% to $135 million from $128 million in the year-ago quarter due to incremental expenses from acquisitions and general increases in SG&A spending. Adjusted operating profit improved 9% to $107.7 million in the quarter. Adjusted operating margin inflated 150 bps to 14.8%.

Financial Position

As of Jun 30, 2013, cash and cash equivalents were $256 million versus $286 million as of Dec 31, 2012. Cash from operating activities was $87 million in the first half of fiscal 2013 compared with $161 million in the prior-year comparable period.

As of Jun 30, 2013, the debt-to-capitalization ratio was 1.1% compared with 1.5% as of Dec 31, 2012. The company spent $57 million for share repurchases, paid a dividend of $17 million and voluntarily contributed $25 million to its U.S. pension plans. Its board of directors also approved a new 15 million share repurchase program.

Our View

Lincoln continues to effectively drive margins through enhanced product mix, optimizing manufacturing footprint and focusing on cost. Going forward, Lincoln Electric will benefit from its acquisition strategy, introduction of new products and long-term growth in its key global markets as well as recovery in the construction sector.  Lincoln Electric currently retains a short-term Zacks Rank #2 (Buy).

Peer Performance

Stanley Black & Decker (SWK - Free Report) reported earnings per share from continuing operations of $1.21 in the second quarter of 2013, up 7% from $1.13 reported in the year-ago quarter and above the Zacks Consensus Estimate of $1.19.

llinois Tool Works Inc. (ITW - Free Report) reported adjusted earnings per share from continuing operations of $1.08 in second quarter 2013, up 6% compared with the year-ago quarter, but a cent below the Zacks Consensus Estimate of $1.09.

Kennametal Inc.’s (KMT - Free Report) adjusted earnings per share declined 28% to 76 cents in the fourth quarter of fiscal year 2013 (ended Jun 30, 2013), but were above the Zacks Consensus Estimate of 73 cents.

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