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Lincoln Electric Holdings (LECO) |
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WIKI ANALYSIS
Lincoln Electric (Nasdaq: LECO) produces and sells the largest number of industrial arc welding and cutting products,[1] which are used primarily in construction, mining, and manufacturing to cut and join metal. The company's sales are linked to the strength of these sectors, which have higher growth in developing countries such as China.[2]
Lincoln's sales are linked to the cycles of the economy, and so, unlike many of its competitors, it has entered markets across the globe to provide stability.[3] Lincoln Electric has patents for some technologies used in its arc welders and relies on those patents to keep its competitive advantage, but some of the regions it has entered, such as Venezuela, have poor protection of intellectual property rights, The company is involved in pending litigation over illnesses caused by asbestos and manganese, which are used in the welding process.[4]
Business Overview
Lincoln Electric is the world's largest producer of arc welding and cutting products.[1] It sells both welding equipment[5] and welding consumables.[6] Arc welding is a process which uses the concentrated heat from an electric arc to melt and fuse metal parts.[7]
These products are used in a variety of markets such as: metal fabrication, oil and gas pipelines, buildings, bridges, rails, ships, construction, farming and mining. It does not rely on a single customer and sales are not seasonal, but they are related to the cyclical changes in the economy.[2]
Business & Financial Metrics[8]
In 2009, LECO generated a net income of $48.6 million on revenues of $1.73 billion. This represents a 77.1% decrease in net income and a 30.2% decrease in revenues from 2008, when the company earned $212.3 million on $2.48 billion in revenues.
Business Segments[9]
Lincoln has 5 reportable business segments:
- North America Welding (49.6% of total revenues): Lincoln Electric has approximately 25%[10] of the market share in the US and 21% in Latin America[10]. The US has few robotic welding systems (Japan has 10 times more) and Lincoln Electric plans to develop this segment in America.[10] High end equipment is built in Cleveland, Ohio while low-end products are built in Mexico.[10]
- Europe Welding (20.0% of total revenues): LECO is the second largest in the region with 12% of the market.[10] In order to lower costs, it shifted its Harris Ireland and its LE France operations to Katowice, Poland. The eastern European factory is cheaper to run and is closer to the market for goods in the region.[11]
- Asia Pacific Welding (12.0% of total revenues): Lincoln Electric has the second largest share in sales with approximately 5.5%-6.0%[12]. The company has increased its production facilities there in recent years.[12] The Chinese market purchases around 30% of its high end equipment from foreign companies.[12] However, the lower-end margins are better in India where Lincoln Electric controls approximately 80% of the arc welding market share.[12]
- South America Welding (5.7% of total revenues): This is Lincoln's smallest segment and runs the company's welding operations in South America.
- The Harris Products Group (12.6% of total revenues): This segment includes the company's global cutting, soldering, and brazing businesses in the United States.[13]
Trends and Forces
Lincoln Electric's sales are linked to the growth of manufacturing and construction
The majority of Lincoln's welding and cutting instruments are used in manufacturing, construction, and other industrial sectors. The company's sales are inherently linked to the growth of these sectors. When construction and manufacturing industries grow, so do the sales of Lincoln Electric equipment. These sectors are also related to movements in the economy. Industrial capital investments tends to occur during the growth section of the business cycle. Arc welders are also used extensively to build and attach oil pipelines.[14] The economic development and industrialization in China, India, and other emerging markets have improved Lincoln's sales.
Competition
Unlike much of its competition, the majority of Lincoln Electric's sales are outside the US, and it specializes in arc welders and cutting tools. It is the largest producer of arc welders.[1]
- Kennametal (KMT): produces metalworking and wear-resistant parts. Its products include tools for milling and drilling metal and radial bearings used in directional oil and gas drilling. Kennametal is much more diversified in products then Lincoln Electric, but has a much smaller market share of arc welders.[15]
- Hardinge (HDNG) specializes in the production of high precision computer controlled cutting and turning machines. These high level tools are used in aerospace, automotive, telecommunications, and other such industries. Unlike Lincoln, Hardinge's products are higher precision and are not as frequently used in construction and mining.[16]
- Thermadyne Holding (THMD) produces cutting and welding tools. It competes with Lincoln Electric for the same markets. However, it is not internationally established and its sales from arc welders makes up a relatively small percentage of its revenue.[17]
- Flow International (FLOW) specializes in the production of waterjet cutting and cleaning tools. Instead of using standard cutting tools such as metals, ceramics or sand embedded resin, Flow International uses water pressurized from 40,000 to 87,000 pounds per square inch (psi) to cut or clean material.[18]
References
- ↑ 1.0 1.1 1.2 CNN Money: Fortune 1000
- ↑ 2.0 2.1 LECO 10-K 2008 Item 1 "Customers" p.2
- ↑
- ↑
- ↑ [LECO 2008 Company Report Sterne Agee p.1]
- ↑ LECO 10-K 2008 Item 7 "General" p.12
- ↑ Energy Technologies: "Arc Welding"
- ↑ LECO 2009 10-K pg. 15
- ↑ 9.0 9.1 LECO 2009 10-K pg. F-19
- ↑ 10.0 10.1 10.2 10.3 10.4 [LECO 2008 Company Report Sterne Agee p.2]
- ↑ LECO 10-K 2008 Item 7 "Rationalization" p.18
- ↑ 12.0 12.1 12.2 12.3 [LECO 2008 Company Report Sterne Agee p.3]
- ↑ LECO 2009 10-K pg. 14
- ↑ LECO 10-K 2008 Item 1A "Risk Factors" p.5
- ↑ Reuters Business & Finance: "Kennametal Inc"
- ↑ Google Finance: Hardinge Inc
- ↑ Reuters Business & Finance: "Thermadyne Holdings Corp"
- ↑ Google Finance: Flow International Corporation
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