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Lincoln Electric Beats on Q1 Earnings

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Shares of Lincoln Electric Holdings Inc. (LECO - Free Report) fell around 5% and closed at $65.54 on Apr 23, following its first-quarter 2014 earnings results.  Earnings per share came in at 91 cents, which decreased 1.1% from 92 cents per share in the year-ago quarter but beat the Zacks Consensus Estimate by a penny.

Adjusted income excluded a net effect of 22 cents per share pertaining to rationalization and asset impairment gains, along with the impact of the Venezuelan remeasurement loss. The year-ago quarter figure excluded 12 cents related to rationalization and asset impairment charges and the impact of devaluation of the Venezuelan currency. Including these, reported earnings were 69 cents per share in the quarter versus 80 cents in the year-ago quarter.

Total revenue decreased 4.7% year over year to $685 million, due to a 5% fall in volumes that offset the benefits achieved from acquisitions and steady price-performance. Moreover, the reported figure lagged the Zacks Consensus Estimate of $734 million.

Cost and Margins

Cost of goods sold increased 6.8% year over year to $458.7 million. Gross profit dropped to $226 million from the year-ago quarter. Gross margin rose 150 basis points (bps) year over year to 33% aided by a better sales mix, operational improvements and rising margins in Venezuela.

Selling, general and administrative expenses increased 6.6% to $145.9 million from $136.9 million in the year-ago quarter. Adjusted operating profit fell 1.3% year over year to $98.1 million in the quarter. Adjusted operating margin increased 50 bps to 14.3%.

Financial Updates

As of Mar 31, 2014, Lincoln Electric’s cash and cash equivalents were $205.4 million versus $299.8 million as of Dec 31, 2013. Cash flow from operations came in at $13.6 million in the reported quarter as against cash usage of $20 million in the year-ago quarter.

Debt-to-capitalization ratio was 0.7% as of Mar 31, 2014, down from 1.2% as of Dec 31, 2013. The company repurchased 709,838 shares for $51 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 $18.6 million in the quarter.

Our View

Though Lincoln Electric did not provide any specific guidance for 2014, we believe it will benefit from investment in business, which includes an active acquisition program and development in manufacturing platforms. Moreover, investment in a new printed circuit board platform in Ohio will likely help it to enhance quality, reduce cycle times and order. This new facility will expectedly be launched in the third quarter of 2014.

In North America, Lincoln Electric continues to drive sales force efficiency with new CRM tools, hardware and enhanced training. The company also remains focused on ramping up the greenfield automation business in Brazil.

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, the operating environment in Venezuela will remain a challenge in 2014 due to the persistent economic uncertainty prevalent in the country and limitation in converting bolivars to U.S. dollars. Moreover, 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 #4 (Sell).

Peer Performance

Pentair Ltd. (PNR - Free Report) reported first-quarter 2014 adjusted earnings of 73 cents per share, up 26% from 58 cents reported in the year-ago quarter. The results were in line with the Zacks Consensus Estimate and came at the upper end of the company’s guidance range of 70 to 73 cents.

Among other companies in the same industry, Kennametal Inc. (KMT - Free Report) will report third-quarter earnings on May 1, 2014 while industrial tool maker, Stanley Black & Decker, Inc. (SWK - Free Report) will release first-quarter earnings results today.

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