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Lincoln Electric’s 2Q16 Operating Cash Flows: Why the Increase?

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Jul. 29 2016, Updated 8:05 a.m. ET

Lincoln Electric’s cash flow from operation surges despite dents in profits

Cash flow from operations shows how cash is generated during a period of time. In 2Q16, Lincoln Electric’s (LECO) cash from operations stood at $100.9 million, an increase of 30.6% compared to $77.2 million in 2Q15.

In 2Q16, net profit stood at $31.3 million, a decline of 55% compared to $70.8 million in 2Q15. The surge in LECO’s operating cash flows was primarily due to the adjustment of its Venezuelan subsidiary and better working capital management.

Cash flow from operations is also a good proxy of a company’s net income. For example, if reported operating cash flows are higher than net income, it’s considered positive.

LECO’s operating cash flows are clearly more than net profit in 2Q16. This can be attributed to adjustments made. Net profit was impacted by underperformance in the company’s macro industrials (XLI) segment, particularly in the machinery segment, which led to sales erosion.

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Lincoln Electric’s cash position 

In 2Q16, LECO’s interest expense was 4.1% more than in 2Q15. Interest expense was $4.1 million for 2Q16 compared to $4.3 million in 2Q15. The increase in interest expense was due to increased borrowing for US operations. LECO’s substantial cash is overseas. As of 2Q16, cash on LECO’s books stood at $237 million.

Investors who want to trade in industrials can consider investing in the Industrial Select Sector SPDR ETF (XLI). General Electric (GE), 3M (MMM), and Honeywell International (HON) account for 11.2%, 5.7%, and 4.8%, respectively, of XLI.

Next, let’s look at Lincoln Electric’s return on capital.

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