Zacks_Analysts' Blog : Lincoln Electric Beats Zacks Ests - Analyst Blog

Lincoln Electric Holdings Inc. (LECO) delivered adjusted earnings per share (EPS) of 90 cents in its fourth quarter ended December 31, 2010, ahead of the Zacks Consensus Estimate of 82 cents, and 38% above the EPS of 65 cents in the year-ago quarter.

Adjusted EPS for the quarter excludes the per share effect of special items. Including these items, EPS in the quarter was 98 cents compared with 57 cents in the year-ago quarter.

Revenues climbed 22% to $564 million outpacing the Zacks Consensus Estimate of $521 million as demand levels improved in most markets and geographic regions. All of its segments posted positive growth with North America Welding leading the pack with a revenue growth of 24.8%. 

Cost & Margin Performance 

Cost of sales spiked 27% to $416.5 million in the quarter, but based on revenue it expanded 300 basis points to 73.8%. Gross profit upped 10% to $147.8 million whereas gross margin contracted 290 basis points to 26.2%.

Selling, general, administrative and engineering expenses inched up 2% to $93 million in the quarter and based on revenue dipped 330 basis points to 16.5%. Lincoln Electric’s adjusted operating income was $54.5 million compared with $43.2 million in the prior year quarter. Adjusted operating margin increased 40 basis points to 9.7% in the quarter.

Fiscal 2010 Performance

For fiscal 2010, Lincoln Electric’s adjusted EPS was $3.04 compared with $1.71 in the prior year. Including one time items, EPS in the year was $3.06, up 168% from $1.14 in the prior year. Revenues upped 20% year over year to $2.07 billion.

Financial Position

As of December 31, 2010, Lincoln Electric had cash and cash equivalents of $366.2 million, down from $388.1 million as of December 31, 2009. During the year, the company generated operating cash flows of $157 million compared with $250 million in the prior year.

Lincoln Electric returned $87.1 million to its shareholders through the payment of $47.4 million in dividends and the repurchase of $39.7 million of its shares during 2010.

As of December 31, 2010, debt-to-capitalization ratio marginally dropped to 7.8% from 8% as of September 30, 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.

Also, Lincoln Electric is implementing various cost-control measures. Further, 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), Charter International Plc and ESAB Group Holdings Ltd.