The Machine Tools & Accessories industry makes tools used to manufacture other products. Bearings, waterjet cutting machines, and engine lathes are all made by these companies and sold to several end markets -- from the automotive industry to the energy industry. Three companies dominate the machine tools & accessories market: Timken Company, Stanley Works, and Kennametal.
Since machine tools companies sell products to companies in other end markets, the success of machine tools companies depends upon the success of these end markets. Companies such as TKR and KMT have suffered due to declines in the U.S. Housing Market and automotive industry, while companies such as RBC Bearings and Kaydon have seen success creating niche products for the wind energy and U.S. Military industries, respectively. The automotive and housing declines have enticed companies to expand internationally, particularly to the booming Chinese and Indian economies (China is the number one consumer of machine tools, amassing 23% of the total world consumption). Rising steel prices plague the industry wherever it goes, however, forcing many of them to install more efficient manufacturing operations and to pass on rising costs to consumers, reducing demand and putting heavy pressure on margins.
Cutting tools have evolved over time, from the engine lathe of the early 20th century to the modern water-jet cutting machine, and have been in demand since their creation. The main cutting machines are lathes, shapers, planers, and power saws. These tools are vital for manufacturing, as materials of all shapes and sizes need to be formed in order to meet manufacturing specifications. Metal cutting tools are the most popular type, and have been used to cut metal since 1864.
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The four other types of machine tools include: power drills and drill presses, milling machines, grinding machines, and presses. Power drills and drill presses are used to impulse holes in hard materials. Milling machines remove metal from objects. Grinding machines include a rotating, abrasive, grinding wheel used to change the shape of a hard object. Machinists consider grinding machines to be the most accurate of the machine tools. Presses are used to change the size or shape of a material (usually sheet metal). Other accessories include objects used to connect materials, such as washers, nails, screws, and bolts.
|Competition||Timken Company (TKR)||Stanley Works (SWK)||Kennametal (KMT)||Kaydon (KDN)||RBC Bearings (ROLL)||Flow International (FLOW)||Hardinge (HDNG)||Thermadyne Holding (THMD)||CompX International (CIX)|| NN (NNBR) 
|Gross Profit $Mil||1,053.83||1,692.20||841.56||184.30||100.11||90.77||107.41||154.35||45.23||84.27|
|Net Profit Margin %||4.19%||7.51%||7.50%||17.22%||9.30%||8.72%||4.19%||2.15%||5.05%||-0.28%|
|Operating Margin %||6.22%||10.06%||11.29%||24.65%||16.96%||8.93%||6.42%||8.97%||8.75%||2.65%|
The machine tools and accessories industry is controlled by three companies: TKR, SWK, and KMT. Each of these three companies had 2007 revenues in excess of $2 billion. The rest of the companies in this industry had 2007 revenues less than $500 million. The rich get richer in this industry, and if a smaller-cap company is bidding for an acquisition, sponsorship, or new technology, one of the triad generally has the ability outbid with its pocket change.
The smaller cap companies have competed with the oligopoly by focusing on manufacturing niche products for one end market. By focusing on one end market, the smaller-cap companies can create unique products and become experts for that industry. For example, KDN's sales total is 18% as large as KMT's sales total. To compete in the machine tools industry, KDN has established itself as the market sales leader of a booming niche market -- wind energy. This strategy gave KDN higher 2007 revenue growth than SWK, TKR, and KMT. In 2007, FLOW's sales total was 4.36% of its biggest machine tools competitor, TKR. FLOW has been able to compete in this industry by producing a niche product: waterjet machine tools. Thanks to this focus, FLOW has claimed 60% of the global waterjet market.
The primary consumer of machine tools products are other industries. Hence, the successes of machine tools companies are contingent upon the successes of the companies they sell to. The oligopolists (TKR, KMT, and SWK) were negatively affected by the declining U.S. Housing Market and automotive industry in 2007 and 2008. Home construction is a primary buyer of SWK products, as SWK tools are used for do-it-yourself projects and home construction. The automotive industry affects Kennametal's second-largest end market, on-highway vehicles (28% of sales). Historically, the oligopoly has profited from the automotive and housing markets. Since the decline of these markets, the oligopoly companies have had to revamp their portfolios.
Other companies, such as RBC Bearings and Kaydon, have seen success due to success in their niche product markets. In fiscal 2008, an estimated 21.5% of RBC Bearing's net sales were to the U.S. Military. This gave RBC a backlog of $217.7 million - 23% growth from 2007 - due to increased military replacement parts for the Iraq War. In 2007, KDN was the market leader in wind turbine bearing sales. Wind energy is a booming industry in the U.S.; installed wind energy turbines in the United States grew 45% in 2007 making it the world's second-largest wind energy market after Germany. The U.S. invested $9 billion in wind energy in 2007, and is projected to invest $65 billion from 2007 to 2015. In Q3 2008, KDN's wind energy products had $60 million in backlog, contributing to the company's record $201.5 million total backlog in that quarter.
Steel is a prime input to the machine tools industry, used heavily in manufacturing products like bearings, drills, and cutting machines. From 2004 to mid-2008, scrap metal prices have grown from $75 per ton to over $550 per ton. Scrap metal is used to make steel, so a rise in scrap metal prices causes a rise in steel prices. This spike has pressured machine tools companies to maintain margins. A majority of the companies have used increased pricing to past costs to consumers, while others have developed more efficient programs to cut costs and eliminate waste. For example, Kennametal installed the Lean Initiatives program in 2005, which saved them $35 million in that year. Neither method, however, is very effective, as price increases can reduce demand while efficiency program savings are marginal at best. Steel prices, like other commodity prices, have declined since September 2008. The decline has given machine tools companies some breathing room for dealing with the 2008 Financial Crisis.
Timken is a company that benefits from rising steel prices; it produces steel alloy using scrap metal, nickel and other alloys. Since TKR makes steel, it can use pricing to take advantage of fluctuating scrap metal prices. Also, increased steel prices increase demand for TKR's heavy bearings, used in rolling mills to make steel more efficiently.
To safeguard against a U.S. recession, machine tools companies have looked to prosper in international economies. Mainly, companies have been expanding to two booming markets: China and India. China's gross domestic product increased 11.3% in 2007.. India's gross domestic product increased 9.0% from fiscal 2007-2008. The U.S. gross domestic product increased 2.2% in 2007. Hardinge is the only machine tools company not based in the U.S., so machine tools companies have been expanding internationally to lose dependence on the U.S. Economy. U.S. manufacturing firms have reduced their demand for machine tools. On average, machine tools require a costly investment -- an investment few companies will make after the crisis. Manufacturing firms in China and India, however, are looking to purchase machine tools to fuel their growing GDPs.
Timken has opened facilities in China and India, which led to annual sales in each country increasing 30% and 20% , respectively. Further, China is the number one machine tools consumer by far, with 23% of the total world consumption. Similarly, Kaydon acquired Avon Bearings in China and opened a facility in Germany to bolster its wind energy product line. In 2006, KMT divested its J&L Industrials segment to make a slew of international acquisitions, including Camco and Sintec.