Lincoln Electric Holdings Inc. LECO reported adjusted earnings of 89 cents per share in third-quarter 2015, down 5.3% from 94 cents earned in the year-ago quarter due to unfavorable impact of foreign exchange swings. Earnings were in line with the Zacks Consensus Estimate.
Including one-time items, the company reported a loss of 82 cents per share, versus earnings of 57 cents in the year-ago quarter.
Total revenue decreased roughly 9.9% year over year to $645.2 million mainly due to lower volumes and unfavorable foreign currency translation. The reported figure also missed the Zacks Consensus Estimate of $655 million.
The company said that it remains optimistic about its cost-saving actions, investment in 2020 growth strategies and robust pipeline of new solutions. These factors will drive growth in the fourth quarter of 2015 and also in 2016. Shares of Lincoln Electric gained around 1.9% to close at $59.81 last Friday.
Cost and Margins
Cost of goods sold decreased 5.9% year over year to $446.3 million. Gross profit also declined 17.7% to $198.9 million from $241.6 million in the year-ago quarter. Gross margin declined 300 basis points (bps) year over year to 30.8%. Impact of special charges resulted in the margin decline.
Selling, general and administrative expenses decreased 6% to $128.3 million from $136.4 million in the year-ago quarter. Adjusted operating profit also decreased 7.7% year over year to $97 million in the quarter. Adjusted operating margin increased 40 bps year over year to 15.1% primarily on the back of cost-reduction actions and operational improvements.
Financial Updates
Lincoln Electric had cash and cash equivalents of $364.3 million at the end of the third quarter compared with $278 million as of 2014-end. Cash flow from operations came in at $105.4 million in the reported quarter compared with $149.4 million in the year-ago quarter.
On Oct 27, the company announced increase in the quarterly cash dividend by 10.3% to 32 cents, which amounts to $1.28 per share annually. The quarterly cash dividend will be paid on Jan 15, 2016 to shareholders of record as of Dec 31, 2015.
The company returned $161 million to shareholders through dividends and repurchase of 2.4 million shares during the quarter. Lincoln Electric maintained its 2015 share repurchase target of $400 million.
Venezuela Update
Lincoln Electric will now utilize the SIMADI rate as of Sep 30, 2015 for its Venezuelan operations. The SIMADI rate is an auction-based exchange rate which, per the company, is more appropriate for remeasurement purposes. Regarding this, the company incurred a pre-tax and after-tax charge of $26.5 million in the third quarter. Lincoln Electric declared that the fourth-quarter 2015 Venezuela results will be presented using the SIMADI rate.
Outlook
Lincoln Electric expects to benefit from its focus on margin improvement and cash flow generation. The company continues to invest in strategic programs which will help it to maximize profitability and shareholder returns.
The company initiated cost-reduction plan in the third quarter in addition to the measures taken in the second quarter. The actions taken in the second and third quarters are expected to generate annualized cost savings of $20 million to $25 million and $10 million to $12 million in annualized structural cost savings. These aggressive cost reduction actions will also drive margin performance.
Further, the company will continue to execute its '2020 Vision and Strategy.' Looking at end sectors, Lincoln Electric expects modest growth in transportation, non-residential construction and in pipe mills.
During the third quarter, Lincoln Electric announced the acquisition of, Rimrock, with emphasis on the subsidiary Wolf Robotics. Wolf Robotics is a leader in robot integrations for the heavy fabrication sector in North America. The acquisition will help boost Lincoln Electric’s heavy fabrication capabilities and expan its presence in the Western region of the U.S. Additionally, the company’s acquisition of SWP will help to expand its presence and specialty alloy offering.
However, Lincoln Electric remains cautious about demand trends for 2015. Strength of the U.S. dollar, weakness in the oil and gas sector and its related industries will negatively impact revenues and earnings for the full year. The company stated that the fourth quarter will remain challenging on compressing revenue trends, extended OEM shutdowns and difficult year-over-year comparisons.
In addition, Lincoln Electric remains concerned about its Venezuelan operations which could be negatively impacted by additional currency remeasurements or devaluations and increased costs due to changes in raw material sourcing. Inability to obtain required production materials will result in interruptions to operations. Further distinct actions taken by the Venezuelan government could limit or cause cessation of operations.
Currently, Lincoln Electric carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the industrial products sector are Advanced Emissions Solutions, Inc. ADES, Alarm.Com Holdings, Inc. ALRM and Greif, Inc. GEF. All these stocks carry a Zacks Rank #2 (Buy).
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