Presented byRobert Eberhard, Rob Jannusch and Rodrigo Serna

April 1st, 2014

About Lincoln Electric• Founded in 1895 by John C. Lincoln in Cleveland, selling electric

motors of his own design• First welding product produced in 1909• Employee Advisory Board established in 1915, which meets every

two weeks to this day• Employee stock ownership plan introduced in 1925, one of the

first in the country, and first annual Incentive Bonus paid in 1934• Hired women after many workers were drafted during WWII• Expansion during past 15 years driven primarily by acquisitions

Source: Lincoln Electric Company History

Products and Markets• Broad-line manufacturer of welding, cutting, and brazing products

• Welding products include: Arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment

• Cutting products include: CNC plasma and oxy-fuel cutting systems and regulators and torches used in oxy-fuel welding, cutting, and brazing

• Brazing products are primarily the materials used in the welding process like soldering alloys

• Major end-uses for its products are pretty widespread:• General metal fabrication, power generation and processing, structural steel

construction, heavy equipment fabrication, shipbuilding, automotive, pipe mills and pipelines, and offshore oil and gas exploration

• Operate 48 manufacturing facilities, including operations and joint ventures in 19 countries

Source: Company 10-K

Macroeconomic Analysis - Welding• Manufacturing numbers expected to rise in 2014

• Global market for welding expected to grow substantially through 2018 due to continuous growth of automobile and construction industries and use of welding products in wide range of industries including homebuilding, bridges, ships, pipelines, submarines, tanks, etc.

• Emerging economies like Brazil, China, India and Russia will drive demand for welding products

• Robot welding segment expected to experience highest rate of growthSource: Transparency Market Research Report for Welding Products Market: 2012-2018 Global Industry Analysis

Macroeconomic Analysis - Global• UNIDO Statistics presents this report

on world manufacturing production growth quarterly based on indices of industrial production

• World manufacturing gained further strength in the 4th quarter of 2013 as a result of the continuing economic recovery of industrialized countries

• Manufacturing output grew in all industrialized country groups for the first time since 2010

• The manufacturing output of the U.S., the largest manufacturer in the world, grew by 3.0%

Source: United Nations Industrial Development Organization World Manufacturing Production Quarterly Report, Quarter IV 2013

Macroeconomic Analysis• Institute for Supply Management Report on

Business shows economic activity in the manufacturing sector expanded in February for the 9th consecutive month and in the overall economy for 57th consecutive month

• Of the 18 manufacturing industries, 14 are reporting growth in February

• Manufacturing expanded in February as the PMI registered 53.2%, an increase of 1.9 points over January’s 51.3%

• Reading above 50% indicates that manufacturing economy is generally expanding; below 50% contracting

• PMI in excess of 43.2 over a period of time indicates an expansion of the overall economy

MANUFACTURING AT A GLANCEFEBRUARY 2014

Index

SeriesIndexFeb

SeriesIndexJan

PercentagePointChange

Direction

RateofChange

Trend*(Months)

PMI® 53.2 51.3 +1.9 Growing Faster 9New Orders

54.5 51.2 +3.3 Growing Faster 9

Production

48.2 54.8 -6.6 Contracting

From Growing

1

Employment

52.3 52.3 0.0 Growing Same 8

Supplier Deliveries

58.5 54.3 +4.2 Slowing Faster 9

Inventories

52.5 44.0 +8.5 Growing From Contracti

ng

1

Customers' Inventories

46.5 44.0 +2.5 Too Low Slower 27

Prices 60.0 60.5 -0.5 Increasing

Slower 7

Backlog of Orders

52.0 48.0 +4.0 Growing From Contracti

ng

1

Exports 53.5 54.5 -1.0 Growing Slower 15Imports 53.5 53.5 0.0 Growing Same 13             

OVERALL ECONOMY Growing Faster 57Manufacturing Sector Growing Faster 9

Source: ISM February 2014 Manufacturing ISM Report on Business: March 3, 2014

Macroeconomic Analysis• Manufacturing numbers expected to rise in 2014,

according to Manufacturers Alliance for Productivity and Innovation

• Survey’s composite index improved from 66 to 67, highest level since 2012

• 17 straight quarters of index reading over 50, which is dividing line for growth in the manufacturing sector

• Capacity utilization index, which measures % of firms operating above 85% of capacity, was only index to drop

• U.S. manufacturers showed a preference for capital investment at home as opposed to internationally

Source: Industry Week, January 16, 2014

SWOT AnalysisStrengths Weaknesses

• Unique business model ; 8 HBS cases written about it

• Employee incentive system and guaranteed work

• Extensive Research & Development program

• Superior customer service

• Lack of production in some international markets

• Difference of opinion between domestic and international managers and labor

• Voltage level issues with products in Japan• Distribution network allowed to sell other

products in addition to the sale of Lincoln Electric products

Opportunities Threats• Poised to benefit from continued growth in

China, India, Brazil, and in other developed economies

• Emplaced in industries• Successful acquisition track record

• Imitation of products internationally• Brand awareness internationally • Continued liability from asbestos lawsuits• Competitive market in acquisitions could limit

impact of future acquisitions

Lincoln Electric Vision

“We are a global manufacturer and the market leader of the highest quality welding, cutting, and joining products. Our enduring passion for the development and application of our technologies allows us to create complete solutions that make our customers more productive and successful. We will distinguish ourselves through an unwavering commitment to our employees and a relentless drive to maximize shareholder value.”

Employees Matter!• In 1934, James Lincoln raised profit-sharing bonus to at least 25% of base

wages and salary, which has remained in place for 80 years• Averaged roughly 70% since 1950, topping out around 120% in really successful

years• For 2013, the average bonus per employee was $33,029, which was 62% of base

wagesand salary

• Employees are guaranteed to have at least 32 hours of work a week, and the company has not had a layoff since

• 3-year mutual approval prior to gaining lifetime employment guarantee, which includes a promise by employees not to unionize

• Employees are invested in the future of the company on their own• As of December 2012, 35% of employee 401k funds are invested in company stock

Major Acquisitions• 1998 was the beginning of major growth through acquisition

• Uhrhan & Schwill of Essen, Germany – installer of pipe welder systems• AS Kaynak of Turkey – welding consumables manufacturer• Indalco of Canada – aluminum wire manufacturer

• 2000 – acquires C.I.F.E. Spa, Italian manufacturer of welding consumables • 2002 – expansion into Eastern Europe with purchase of Bester, S.A.• 2004 – acquires three welding companies in China• 2011 – Severstal acquisition gives Lincoln the leading market position in

Russia• Recent acquisitions have expanded on current holdings and technologies,

including two companies acquired in 2013 that focus on robotic welding systems

Subsidiaries & Affiliates

Spark by Frank Koller (2012)• Canadian economics journalist Frank Koller

explored Lincoln Electric in his book Spark, focusing primarily on the company’s unique employee incentive program.

• A seminal case study by Harvard Business School in 1975 remains the school’s best-selling case study.

• An interesting read that highlights just how job security and employee investment in a company’s mission can inspire economic growth and the success of the company.

Valuation – Overview

Source: Company 10-K

• Continued North American growth

• Increase in foreign sales growth through acquisition

• Comfortable managing acquisitions due to smart investments

• Solid historical performance

Valuation – DCF

Discounted Cash Flow Analysis($ in thousands except per share data)

2014 2015 2016 2017 2018Earnings before interest and taxes $482,845 $558,678 $605,681 $654,135 $729,840

Taxes (144,854) (167,604) (181,704) (196,241) (218,952)

Depreciation and amortization 76,731 85,938 96,251 103,951 112,267

Minus change in net working capital (110,773) (73,809) (82,666) (61,724) (66,662)

Minus capital expenditure (80,252) (89,882) (100,668) (108,721) (117,419)

Free cash flow 223,697 313,323 336,894 391,401 439,075

Present value of free cash flow 194,519 236,917 221,514 223,785 218,298$60.04 12.0% 13.5% 15.0% 16.5% 18.5%

2.0% 69.94 62.14 56.04 51.13 45.86

2.5% 73.13 64.57 57.96 52.68 47.08

3.0% 76.68 67.24 60.04 54.35 48.37

3.5% 80.65 70.17 62.30 56.15 49.75

4.0% 85.11 73.40 64.76 58.09 51.23Term

inal

Gro

wth

WACC

Sensitivity Analysis

Terminal value 3,768,725

Enterprise value 4,863,758

Total Shares Outstanding 81,010,084

Implied share price $60.04

WACC 15%

Terminal growth rate 3%

Corporate Tax Rate 30%

Share Price

Valuation – WACC

4 Year 1.42

2 Year 1.35

1 Year 1.36

Half Year 1.29

One Month 1.04

Adj. Beta 1.30

BetaRisk Free Rate 2.73%

Market Return 17.5%

Market Risk Premium 14.8%

LECO LTM Return 31.9%

Cost of Debt 11.4%

Cost of Equity 22.0%

WACC 21.7%

Adj. WACC 15.0%

WACC

• Beta decreasing over time based on daily close prices

• Capitalization very concentrated in equity

• WACC adjusted down ~6% based on company track record

Debt 30,790 2.0%

Equity 1,530,688 98.0%

Total 1,561,478 100.0%

Capitalization

Valuation – CompsTarget Company Ticker Symbol Price Shares (millions) Equity Value Enterprise Value P/B Value TEV/Sales TEV/EBITDA P/ELincoln Electric Corp. LECO $72.01 81.98 $5,903 $5,520 18.84x 1.85x 10.88x 18.36x

Comparable CompaniesIllinois Tool Works ITW $81.33 446.20 36,289 37,287 22.55 2.51 12.34 18.06

Kennametal Inc. KMT $44.30 78.77 3,489 4,496 23.82 1.47 11.18 14.34

Rofin-Sinar Technologies RSTI $23.96 28.20 676 553 19.51 1.01 10.02 24.63

Hardinge HDNG $14.40 11.80 170 172 16.42 0.53 6.00 18.58

Roper industries ROP $133.51 99.12 13,234 15,296 42.42 4.34 14.78 21.41

Comparable Statistics High 42.42 4.34 14.78 24.63

Median 22.55 1.47 11.18 18.58

Low 16.42 0.53 6.00 14.34

Mean 24.95 1.97 10.86 19.41

Multiple Weight Implied PricePrice/Book Value 25% 86.18 Forward TEV/Sales 25% 53.05 Forward TEV/EBITDA 25% 68.82 Forward P/E 25% 72.89 Implied Stock Price $70.23

Recommendation

Watch List• Strong company with lots of potential, though currently

overpriced• Candidate to be re-reviewed in the future