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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]
The American-based company sells its products across the globe, and as of 2007, 53% of its revenue came from outside the U.S..[3] It acquired 2 arc welding manufacturing companies in China. Although these companies are small, they give Lincoln access to a production facility closer to the Asian market. It also shifted its factories in France and Ireland to Poland to lower costs and to be situated closer to the eastern European manufacturing markets.[4]
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.[5] One of these court cases, which was settled in December 2007, forced Lincoln Electric to pay $20.5 million to a welder claiming sickness.[6]
Business Overview
Lincoln Electric is the world's largest producer of arc welding and cutting products, and in 2007, it was ranked 866th in the Fortune 1000.[1] It sells both welding equipment, 40% of revenue,[8] and welding consumables, 60%.[9] Arc welding is a process which uses the concentrated heat from an electric arc to melt and fuse metal parts.[10]
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]
Lincoln operates in three main sectors, America, Europe and RAM, and Asia-Pacific.
- America: Lincoln Electric has approximately 25%[12] of the market share in the US and 21% in Latin America[12]. The US has few robotic welding systems (Japan has 10 times more) and Lincoln Electric plans to develop this segment in America.[12] High end equipment is built in Cleveland, Ohio while low-end products are built in Mexico.[12]
- Europe and RAM (Russia, Africa and the Middle-East): LECO is the second largest in the region with 12% of the market.[12] 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.[4] The transaction saved the company $188,000, in 2007, after severance charges and transportation fees.[11] In April 2008, Lincoln acquired Electro-Arco, a privately held welding company in Lisbon, Portugal, for $24 million and assumed debt.[13] The purchase gives Lincoln Electric access to a production facility at lower costs.[14]
- Asia-Pacific: Lincoln Electric has the second largest share in sales with approximately 5.5%-6.0%[15]. The company has increased its production facilities there in recent years.[15] The Chinese market purchases around 30% of its high end equipment from foreign companies.[15] However, the lower-end margins are better in India where Lincoln Electric controls approximately 80% of the arc welding market share.[15]
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Lincoln Electric has pushed to achieve a significant position in developing nations around the world. In 2007, it acquired production facilities in China, Indonesia, Poland, and others. Lincoln's efforts can be seen in the steady rise of foreign sales. In 2005, it was 48% of revenue, 49% in 2006, and 53% in 2007. As of 2007, Lincoln Electric's revenue came more from foreign countries than the US.[3] During the first quarter of 2008, Lincoln's sales in South America were up 30% due to a rise in the oil and gas industry and mining.[16]
| Breakdown of Revenue by Geography (in thousands) | 2005 | 2006 | 2007 |
| United States | $839,038 | $1,004,786 | $1,064,113 |
| Foreign countries | $762,152 | $967,129 | $1,216,671 |
| Total | $1,601,190 | $1,971,915 | $2,280,784 |
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.[17] The rise in the oil and gas industry has contributed to a 30% rise in sales in South America in early 2008.[16] India's industrial production growth was 8.9% in 2007 while China's was 13.4%.[18][19] This economic development and industrialization in China, India, and other emerging markets have improved Lincoln's sales.
Acquisitions in Asia lead to strong positions in developing nations
Lincoln Electric has attempted to capitalize on the economic growth of China by acquiring and establishing joint-ventures in the People's Republic of China.[20] In November 2007, Lincoln entered a majority owned joint-venture with Zhengzhou Heli Welding Materials Co., Ltd., which manufactures parts for arc welders and is based in Zhengzhou, China. In July 2007, it acquired Nanjing Kuang Tai Welding Company, Ltd., a Nanjing, China based company which produces electrodes - a key part of arc welders. Lincoln Electric purchased these two companies for $12 million and assumed debt. These two investments were intended to act as a production facility in the region. Instead of shipping heavy equipment, Lincoln Electric can simply produce on site.[21]
Outcome of pending litigation threatens Lincoln Electric's profits
As of December 2007, Lincoln Electric was a co-defendant in a case in which the approximately 3,000 plaintiffs claim that using Lincoln's welding equipment on steel made them sick. Manganese is a key component of steel, and the plaintifs claim welding the maganese-containing steel caused neurological damage - a disease called manganism. The plaintiffs argue that Lincoln Electric did not put proper warnings on its equipment. The company is also a defendent in a case in which 28,362 plaintiffs claim they were exposed to asbestos in welding consumables and developed pulmonary diseases, such as mesothelioma and other lung cancers. Asbestos was used in Lincoln's welding products, but was discontinued in 1981. In both cases, the plantiffs are welders who used Lincoln's products. In 2007, a court ruled on one of the individual cases that Lincoln was to pay $20.5 million to a welder with neurological problems.[6]
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.[22]
- 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.[23]
- 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.[24]
- 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.[25]
References
- ↑ 1.0 1.1 1.2 CNN Money: Fortune 1000
- ↑ 2.0 2.1 LECO 10-K 2008 Item 1 "Customers" p.2
- ↑ 3.0 3.1 3.2 LECO 10-K 2008 Note J "Segment Information" F-28
- ↑ 4.0 4.1 LECO 10-K 2008 Item 7 "Rationalization" p.18
- ↑
- ↑ 6.0 6.1 Metro: "Jury returns $20.5 million judgment in welding fumes lawsuit"
- ↑ [LECO 2008 Company Report Sterne Agee "Welding Overview" p.3]
- ↑ [LECO 2008 Company Report Sterne Agee p.1]
- ↑ LECO 10-K 2008 Item 7 "General" p.12
- ↑ Energy Technologies: "Arc Welding"
- ↑ 11.0 11.1 LECO 10-K 2008 "Consolidated Statements of Income" F-5
- ↑ 12.0 12.1 12.2 12.3 12.4 [LECO 2008 Company Report Sterne Agee p.2]
- ↑ LECO 10-Q 2008 Note J "Acquisitions" p.9
- ↑ Reuters Business & Finance: "Lincoln Electric Holdings Inc"
- ↑ 15.0 15.1 15.2 15.3 [LECO 2008 Company Report Sterne Agee p.3]
- ↑ 16.0 16.1 Seeking Alpha: "Lincoln Electric Holdings, Inc. Q1 2008 Earnings Call Transcript"
- ↑ LECO 10-K 2008 Item 1A "Risk Factors" p.5
- ↑ CIA Factbook: India "Economy"
- ↑ CIA Factbook: China "Economy"
- ↑ LECO 10-K 2008 Item 1A "Risk Factors" p.6
- ↑ LECO 10-K 2008 Item 7 "Acquisitions" p.18
- ↑ Reuters Business & Finance: "Kennametal Inc"
- ↑ Google Finance: Hardinge Inc
- ↑ Reuters Business & Finance: "Thermadyne Holdings Corp"
- ↑ Google Finance: Flow International Corporation
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