Lincoln Electric Holdings Inc (LECO) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Lincoln Electric 2010 fourth-quarter full-year financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Vince Petrella, Chief Financial Officer for Lincoln Electric. Thank you, Mr. Petrella, you may begin.

Thank you, Jody, and good morning to all of you that are joining our call today. We issued our financial results prior to the market's opening this morning. The release is also available on Lincoln Electric's website. Lincoln's Chairman and Chief Executive Officer, John Stropki, will lead the discussion this morning, and provide commentary on the quarter and the regions in a moment.

But before we start that discussion, I'd like to remind you all that certain statements made during this call and our discussions may be forward-looking, and actual results may differ from our expectations. Risks and uncertainties that may affect our results are provided in our Press Release, and in our SEC filings on forms 10-K and 10-Q.

Now, let me turn the call over to John Stropki.

Thank you, Vince. Good morning to everyone, and thank you for joining us today. 2010 represented a significant rebound in our Company's performance. Aided by the economic growth in most of the world economies, increased demand-driven output in the manufacturing sectors around the world, and the continued growth in global infrastructure, Lincoln Electric strengthened its position as the world's leading welding product and service provider. Our 2010 results are a testament to the resilience of our business model driven by our performance-based culture, our dedicated team of great employees, a laser focus on delivering value-added products and services to our global customers, and our commitment to returning value to our shareholders.

Vince will give you specific details for the quarter and the year in a few minutes, but first here are the highlights of our 2010 performance. Total sales in the fourth quarter were $564 million, up 22% from the 2009 fourth quarter. More significantly, sequential growth from the 2010 third quarter was 9%, with our traditionally weaker fourth quarter actually representing our seventh consecutive quarter of sequential sales growth, and our strongest revenue quarter of 2010. Annual sales of $2.1 billion increased 20% on a year-over-year basis. Strong sales growth in 2010 was driven by equipment sales up 18%, and welding consumable sales increasing 22%.

Exports of our high-technology equipment developed in the US, and preferred by many key customers in the BRIC countries and other key geographies, continue to grow at double-digit pace. With almost 60% of our sales, by destination, outside the United States, and nearly 20% of our sales destined for the BRIC countries, our global market penetration initiatives are growing our presence and reputation in the fastest growing markets of the world.

In 2010, we remained focused on increasing global market penetration by offering the most comprehensive products; by providing our global customers with seamless support of process solution; by strengthening our interface with our distributor networks; and by improving our world-class after-sales support. For example, our recent MGM acquisition in Russia has established us with a significant market presence in a key region that is one of the world's fastest-growing welding markets. Our second acquisition, Severstal-Metiz Welding, announced in December, has now cleared Russian regulatory approvals and is scheduled to close by the end of the first quarter. When completed, we will be a major player in Russia and the CIS countries.

Staying the course on our strategic R&D investments during the economic downturn is really paying dividends. New designs of patented electronic inverter-based power sources, such as our Power Wave 355 and the Flextec 450 are being extremely well received around the globe. These and other new products have been designed to enhance energy efficiency, improve operator productivity, and ensure weld quality. Our new application-specific consumable offerings, such as the Pipeliner [AD Nickel], have strengthened our market position in many mission-critical welding opportunities, including nuclear and pipeline applications.

Our revolutionary VRTEX360 virtual welding training system introduced in 2010, is proving to be the global-industry standard for educating the next generation of welders. The VRTEK system has been enthusiastically endorsed by many customers in the preeminent training institutions and programs around the world, such as the world-renowned WorldSkills International mentioned on our last call.

We are also in the process of developing a virtual reality equipped show trailer in partnership with the American Welding Society. The trailer will travel extensively throughout the United States promoting the welding industry as a great career choice, appearing in such venues as state teachers convention, large trade shows, and skills competition.

Our strategy of providing the broadest product portfolio does not end with just robust internal development pipeline. During 2010, we teamed with IPG Photonics, the world leading fiber laser manufacturer. A strategic alliance agreement with IPG is expected to produce leading hybrid welding solutions for this important segment of the welding industry. Most recently we announced the acquisition of Arc Products. This San Diego-based welding firm will bring leading technology for orbital welding applications within the industry. Orbital welding is one of the fastest-growing segments of the industry, and the combination of Arc Products, cost effective orbital welding products, Lincoln's advanced power source and world-class consumables, as well as our extensive engineering capability, will allow us to quickly build a global leadership position in this important segment.

Not only are we developing great new products, we are also developing innovative marketing campaigns to help our distributor partners improve their margins and grow their business. As an example, our Money Matters program here in North America proved to be a huge success in 2010, and is being rejuvenated and expanded for 2011. The distributor channel and the end-user customers, both feel the program offers outstanding value, and increased Lincoln's brand awareness and market share by highlighting the value of our product portfolio to the marketplace. We remain focused on having the solution to all of our customer's welding applications, and we'll add new alliances and acquisitions as appropriate to achieve this goal.

2010 was a solid recovery for our business, and we look forward to 2011 with renewed optimism. It would appear that the worst of the economic recession is behind us. On the economic front, as we enter the new year, many of the metrics that measure overall business expectations, such as purchasing managers index, industrial production, and capacity utilization, are improving around the world. Other key variables impacting our business, such as global steel production and consumption, are also showing improvement on a global basis. World steel production was up 15% in 2010 compared with 2009, to a record level of 1.4 billion metric tons. Although the growth rate in China has moderated, Chinese annual steel production of 627 million metric tons still represents 9% year-over-year growth, and 44% share of world production. According to the World Steel Association, the outlook for steel demand in 2011 is for continued growth in both developing and emerging economies, and with an industry-wide growth rate of 5%.

One headwind, however, is steel prices, which are heading up. Rising demand has driven raw material costs higher with spot iron ore prices up 8% from the first quarter. The tight supply of coking coal is expected to send these spot prices higher. Many steel suppliers have already implemented price increases, as profit margins are clearly being squeezed, and more increases are likely. As a result of the increased raw material costs, we announced price increases of 3% to 5% for both consumables and equipment effective February 1 in North America. Lincoln Europe announced similar price increases for electrode shipments after February 1. Additional pricing actions in our other regions will reflect local cost implications and market timing dynamics.

A closer look of some of the end market segments and the correlation with Lincoln Electric business prospects is very promising. The automotive sector, where Lincoln enjoys a strong global market presence with an outstanding line-up of fit-for-purpose products, is forecasting 10% growth to nearly 61 million light truck and automotive units around the world in 2011. This is on the heels of a very strong recovery in 2010. In the US automotive and light truck, sales grew nearly 10% to 1.5 million units. With the sales rate for motor vehicles still below the replacement rate, and inventory levels under 60 days, the 2011 forecast is for nearly 13 million units, another double-digit growth rate. As an example, last week, Ford announced it will increase factory production by 13% in the first quarter to meet higher demand, and said that further increases are likely throughout the year.

In the oil patch, with prices hovering in the $90, all indications are that oil companies will increase their capital investments in oil and gas exploration, production, and downstream investments compared to 2010. Oil-driven activity has accelerated here in the United States with rig counts up as energy companies explore new sources of crude, such as shale rock formations. This new interest could boost domestic oil production, and help to offset declining output in the Gulf and Alaska. Barclay's is forecasting that the global expenditures for oil and gas exploration and extraction will rebound significantly, rising 11% to a record of nearly $500 billion in 2011.

The pipeline and pipe mill sectors will also benefit from this boom in spending, which will occur in a large part in the harder to access areas requiring a significant transportation infrastructure. This sector has been a stronghold for Lincoln historically, and our recently enhanced technology products are targeted to strengthen our position in this market segment. Asia, including the Persian Gulf, the Caspian Sea, and the Pacific Rim, continue to be the most attractive regions within the pipeline sector.

In the power generation sector, China and India continue to invest heavily in coal, and oil and gas, for power plants to meet their energy requirements. However, even with resources dedicated to increasing fossil fuel capacity, the two countries are still accelerating their construction and installment of nuclear power reactors. In the renewable energy wind tower fabrication market, China is clearly leading the world investment in increased megawatt capacity. With the capacity increased to 42,000 megawatts in 2010, from only 7,000 in 2007, China's wind power capacity grew by more than 60% in 2010. The European and US demand, hurt by credit scarcity since the economic downturn, has only served to temporarily slow growth rates. The forecast for new installations during 2011 is approximately 45,000 megawatts, with about 2,000 megawatts to be installed in China , 8,000 megawatts in the EU, and 6,000 megawatts in the United States.

In heavy fab sector, infrastructure, mining and agricultural equipment sales are all experiencing strong growth. Brazil, China and India are expected to be the key markets which will lead this growth during 2011. Now that's a macro look at the segments and the economy in the regions. Let me now turn to the results of the segments.

In North America, sales were up 25%, to $272 million in the fourth quarter compared with the $209 million in the fourth quarter. Overall, North America sales growth continues to be aided by export sales as a result of our strong demand for high-technology products developed and manufactured at our Cleveland operations. But domestic sales also enjoyed similar growth rates in the fourth quarter, compared with the same quarter in 2009.

In the US, economic indicators continue to show improvement during the quarter. The ISM Purchasing Managers Index recently reported at 60.8%, is still indicating expansion in manufacturing. Actual Industrial Production Index for manufacturers, including high-tech, was at 90.5% in December. This was the strongest performance of any month during the year, with an improvement of 5.4% from year-end 2009. Capacity utilization continued to improve for the sixth straight month through December to 73.2%.

Another bit of good news is that the consumer is finally experiencing a recovery, with retail spending in the fourth quarter reaching pre-crisis levels. In Canada, the macroeconomic environment is improving, with GDP forecast increased to 2.7% for 2011, with industrial production also expected to grow. South of the border, Mexico expects continued GDP growth in 2011, but at a slower rate, in the 3% range rather than the 5% in 2011. The leading sectors will be automotive, manufacturing, and infrastructure, all strong welding sectors.

In Europe, Lincoln Europe sales of $104 million in the quarter were up 21% on a year-over-year basis, and sequential growth was also up 21% compared with the 2010 third quarter. This is an encouraging result for the region, which has experienced a slower economic recovery.

Our hard automation and consumable business experienced the strongest sales growth in the region. The Euro zone is still facing a number of economic challenges, including the fear that the debt crisis spreads from Portugal to Spain and even deeper into the Euro zone. Combine this with the fear that the austerity measures may further depress the already fragile economic outlook, reflects an economic backdrop with modest improvement in GDP growing at 1.5% in 2011.

Germany remains the bright spot in the region, with 2010 economic growth at the fastest pace since reunification in 1991. The strong impact is coming from the automotive sector. Capacity utilization at the German big three auto plants of 89% in 2010, was up from 76% in 2009, and is forecasted at 93% for 2011. The Russian industrial economy is also expected to have strong growth. Particularly in the welding and tech sectors where our recent acquisitions in the region will accelerate the growth of our European segment.

Turning to South America, sales in South America during the quarter were $32 million, which is an increase of 8% from the 2009 fourth quarter. Expectations for continued improvement as most countries in the region have already rebounded from 2009 with a positive GDP growth rate in 2010, favorably impacted by commodity prices and fiscal stimulus projects throughout the region. Of particular importance to the welding business is the capital investment outlook in Brazil. For infrastructure, energy-related programs, and projects for global sporting events, and new investments in ports and shipping. The forecast for Brazil is for economic growth to slow from 7.5% GDP growth in 2010 to a more sustainable 4.5% in 2011. The silver lining is that the growth rate is anticipated to be approximately 5% through 2015, which would exceed even the 4.8% annual expansion recorded in the pre-crisis boom years of 2004 to 2008.

In Asia-Pacific, China continued on its trajectory with economic growth of 10% in the fourth quarter. The country's manufacturing sector is still experiencing rapid growth. As an example, industrial production rose 15.7% on a year-over-year comparison. HSBCs, China manufacturing purchasing managers index, rose from 54.4% in December to 54.5% in January. In India, the other large economy in the region, GDP growth was 7.7% in 2010, and is forecasted to be 5.6% in 2011. This positive economic environment benefited our Lincoln Asia-Pacific area. Sales grew over 20% in the 2010 fourth quarter to $90 million.

Looking at the Harris Products Group, sales in the quarter were $65 million, up 22% year-over-year. Precious metal costs increased by over 46% for copper, and nearly 38% for silver, but 10% of the growth was still driven by volume. Brazil continues to be a strong market for our products, as the synergy of our Brasstech and Harris names gains continued momentum in the region.

Although housing starts will remain at historic lows, they are expected to increase 32% in 2011. The HVAC industry is also predicting growth. Irrespective of the housing starts as a replacement market for air conditioning equipment is forecasting growth as aging installed units need to be replaced or repaired. This sector will be aided by the continued tax incentives for energy-efficiency heating and cooling appliances.

Finally, the retail sales showed light in the 2010 fourth quarter, as DIY big box stores had a strong quarter. This distribution channel continues to grow for Harris and our WTCA group in both the number of stores supplied and the broader product offerings. That's a summary of the regions and the market segments for the year, and our outlook for 2011.

Now, Vince will cover the financial results in detail.

Okay, thank you John. As John pointed out in his comments, our fourth-quarter 2010 financial results did reflect a substantial improvement in revenues and operating earnings compared with the fourth quarter of 2009, as well as on a sequential comparison with the 2010 third quarter, and then finally on a full-year comparison to the prior year of 2009, all up significantly. Compared with the fourth quarter of 2009, our consolidated sales grew by 22%. Sales in North America, Europe, Asia and Harris were up 25%, 21%, 20%, and 22%, respectively. Our South American sales grew at 8%, feeling the effects of the devalued currency in Venezuela.

For the quarter, volume increased reported sales by nearly 20%, and pricing increased sales by about 3%. Foreign exchange decreased sales by 2%, and acquisitions contributed an increase of over 1% quarter-over-quarter. Please refer to the attachment to the press release for further details of volume, price, foreign exchange and acquisition changes by segment.

Our fourth-quarter gross profit margins decreased to 26.2% of sales compared with 29.1% of sales in the comparable prior-year period. The quarter did include a LIFO charge of $1.7 million. This compares to a LIFO credit of $14.9 million in the comparable quarter of 2009. The prior year's LIFO credit included an estimated $7.5 million related to inventory reductions.

SG&A expense for the fourth quarter was $93 million or 16.5% of sales, compared to $91 million or 19.8% of sales in the prior year, an improvement of 330 basis points. The nominal $2 million dollar increase in SG&A expenses for the quarter is primarily attributable to the increase in bonus expenses, incremental SG&A from acquisitions, and increases in R&D expenses. These increases were partially offset by reductions in pension costs, as well as legal expenses.

Operating income for the quarter was a $52.3 million or 9.3% of sales, compared with $39 million or 8.4% of sales in the same year-ago quarter . The 2010 fourth quarter included charges of $2.2 million primarily related to rationalization actions and asset impairments in Europe, Asia, and the Harris Products segment. The prior year's quarter included charges of $4.2 million, primarily related to rationalization actions in those same segments. Operating income before these charges was $54.5 million or 9.7% of sales, compared with $43.2 million or 9.3% of sales in 2009. Again, LIFO accounting had a significant impact on fourth-quarter results in 2009.

On a geographical segment basis and excluding special items, North America Welding achieved an EBIT margin of 15.9% in the fourth quarter, compared to 17.4% in the comparable quarter in 2009. The prior year's fourth quarter included a $14.9 million LIFO credit, or income. Europe Welding EBIT margin was 2.1% compared to 3% in 2009. South America Welding's EBIT margin was 6.3% compared to 11.7% in the prior year same quarter. The Harris Products Group reported a 4.4% EBIT margin in the fourth quarter, compared to 1.9% in 2009. And finally, Asia Pacific segment recorded an EBIT margin of approximately 1% compared to a loss in 2009.

Net income for the fourth quarter was $41.5 million or $0.98 per diluted share, compared with $24.3 million or $0.57 per diluted share in the 2009 fourth quarter. Now excluding special items, net income was $38.3 million or $0.90 per diluted share in the 2010 fourth quarter. The effective tax rate for the fourth quarter was 20.1%, compared with 40.1% in the 2009 fourth quarter. A significant factor driving the lower effective tax rate was a change in applicable tax regulations in Asia-Pacific, resulting in a $5.1 million reduction in income taxes.

Now, turning to the full-year results. Sales for the year were up approximately 20%, to $2.1 billion. The global economic rebound favorably affected all segments, with North America, South America, and Harris all growing about 18%. Europe experienced a 4% growth rate, and Asia was up 56% aided by the July 2009 acquisition of Jintai in China. Without the impact of this acquisition, Asia grew approximately 14%. The 2010 sales increase was primarily volume driven, with a sales impact of 14%. Foreign currency effects and pricing had insignificant impact on sales for the year, and acquisitions contributed an increase of over 5%.

Gross profit margin for 2010 was 27.2%, compared with 26.4% of sales in 2009. The improvement is a result of operating efficiencies driven by higher sales volumes, the benefits of our previously announced and initiated rationalization actions, and lower product liability costs. The full-year results included a LIFO charge in 2010 of $8.5 million, compared to a $28.5 million LIFO credit in 2009.

SG&A expense for the year was up $45 million to $378 million or 18.2% of sales, compared with $333 million or 19.3% of sales in 2009. The increase in SG&A expense was primarily driven by the impact of an increase in bonus expense, and incremental SG&A expense from acquisitions. Leverage associated with the growth in the business resulted in a 110-basis point improvement in SG&A as a percentage of sales.

Operating income doubled in 2009 to $186 million, representing 9% of sales compared with $93 million or 5.4% of sales in 2009. During the year, rationalization of special items charges totaled $2.7 million.Excluding these charges, operating income on an adjusted basis would be $189 million or 9.1% of sales.

On a geographical segment basis, and excluding special items, North America achieved EBIT margins of 14.5%, up slightly from 2009. South America had 6.4% EBIT margins as the devaluation of the Venezuelan currency and the impact of the highly inflationary economy decreased earnings compared with 2009. Europe returned to profitability with an EBIT margin of 4.6% as higher volumes and rationalization efforts initiated in 2009 benefited our performance there. Harris improved its EBIT margin to 4.4% in 2010, compared with a breakeven position in the prior year. Asia had an EBIT margin of approximately 0.5% after reporting a loss in 2009.

Our net income increased 168% for the full-year 2010 to $130.2 million or $3.06 per diluted share, compared with $48.6 million or $1.14 per diluted share in 2009. Again, excluding special items, net income was $129.6 million or $3.04 per diluted share in 2010.

The income tax provision for 2010 reflects an effective tax rate of 29.3% compared with 43.7% in 2009. The effective rate is lower than the prior year primarily because of income earned in lower tax-rate jurisdictions, the utilization of foreign tax credits, and finally, the tax adjustment in Asia-Pacific that I discussed previously. The effective tax rate in 2011 should be in the low 30%s depending, of course, on the mix of earnings around the Lincoln world.

During the quarter, the Company invested $17.4 million in capital expenditures, resulting in a full-year CapEx amount of $60.6 million in 2010. At this point in time, we expect our 2010 capital spending plan to range between $50 million and $60 million.

During the quarter, we paid cash dividends of $11.8 million, resulting in dividend payments for the year of $47.4 million. The dividend rate was increased by 10.7% in the fourth quarter of 2010, to a $0.31 per share rate. During the quarter, we spent $16.7 million repurchasing about 273,000 shares at an average share repurchase price of about $61. And for the year, we've spent $39.7 million on stock repurchases totaling 703,000 shares at about $56.44 per share. Weighted average shares outstanding for the quarter ending December 31, 2010, were approximately 42,120,000 shares.

During the quarter and for the total year, we generated $53 million and $157 million, respectively, in cash flows from operations, resulting in a cash balance at the end of the year of approximately $366 million. Our operating working capital to sales improved significantly, ending the year at 20.7% of sales, compared to 23.2% at the prior year end. Our net cash position ended the year at $268 million, and resulted in a net debt to total capital ratio of a positive 22%. ROIC for the year finished at 10.7%.

Those are my prepared comments for the call. At this point, I would like to open up the call to any questions we may have, Jodi.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions)Our first question is coming from Walt Liptak, Barrington Research.

Good morning, this is actually Mike Ruggirello in for Walt.

Good morning Mark.

I had a question about gross margin. We saw gross margin come down a little bit in the quarter. Is it correct to assume that there was some raw material increase in there that you guys couldn't pass along?

Yes. That is certainly part of the story in the fourth quarter. We reacted to that with the price increases around the world that John talked about in his presentation of 3% to 4%. So, we would expect there to be some improvement on that issue going into 2011. And probably just as important is our mix changed a little bit in the fourth quarter over previous quarters to products with lower margins compared to the previous year and the previous quarter.

That's on a sequential basis. And then on the year-over-year basis, fourth quarter of 2009 was significantly benefited from an approximately $14.5 million dollar LIFO credit, half of which was related to inventory reduction. And so, that should be considered when evaluating the year-over-year and the sequential gross margin.

Just to make sure I heard correctly. That price increase you said is already in place? It came in February 1, is that correct?

Yes,

Okay. And then just one other question on Asia profitability. So, it looks like you guys are getting great growth there, and I just wanted to ask about when do you really see the profitability start picking up there?

Well, we are working at improving that profitability continually, and as I have said before on calls, that's a region that we are building a business, we are building that business from the ground up. That marketplace, particularly in China, is volatile and with pricing moving around rapidly. And I would expect to see a continuing and steady long-term improvement in our margin position in China and Asia-Pacific in general. We will continue to see volatility and as we grow that business from the ground up.

And how is capacity looking there? I mean, it looks like this is the highest sales you've had in that region so far. How is that capacity?

The capacity really needs to be broken down by specific products, but I would say in general, our utilization numbers in the areas of the stick, wire and flux are very, very high. And in fact, in the case of all three are undergoing pretty extensive expansion plans. And we expect that, really, quite frankly to continue for the near future. And my comments about the steel capacity increases in China and the consumption numbers indicate to us that trend should continue and we will be making continued investments in capacity in that region for the foreseeable future.

The one exception to that is in the area of flux cord wire where we have significant capacity but the demand is not nearly what we would like it to be, primarily driven by the slowdown in the ship building industry in China. And as we have commented in calls in the past, we are now focusing that capacity on different products in different segments and we are starting to see some encouraging news in terms of our diversification of the type of products that we are producing their, as well as the type of markets that we are focused on serving.

Great. Thanks for the answers, guys. And a nice end of the year.

Thank you Mike.

Thank you, our next question comes from Mark Douglass, Longbow Research. Please proceed with your question.

Good morning gentlemen.

Good morning Mark.

Nice sales on the quarter. So, with that, John, can you talk about how system sales did in the quarter? Are they up to 10% of sales yet, or just what is going on with the systems automation business?

Vince may have the exact specifics, I know that we had a very strong year and quarter in our automation group. And we closed the year with a pretty nice backlog of orders yet to fill. That segment, Mark, really includes three different types of businesses.It has the automation, both robotics and hard automation group, it includes our burning tool pipe cutting business located out in California, and we have populated that area with the VRTEK virtual-reality welder. And I would say that we saw a very nice improvement in all three of those categories. Burning tool maybe being the one exception where their sales in 2009 virtually collapsed based on the financial crisis but now as the oil patch, in particular, is starting to ratchet up the spending, they are right in the sweet spot of that and we are quite encouraged for much more positive results in that segment in 2011.

And then, Mark, as far as numbers are concerned, that part of our business is not 10% of our total sales at this point, but I can say that part of our equipment business is growing more rapidly than the rest of the business on the equipment side. So, it's our fastest growing separate equipment category is in automation.

Okay. And what was the break out -- you mentioned the growth rates of consumables and equipment in the quarter, what was the percentage of sales?

It's about two thirds, about 67% consumables and 33% equipment.

Okay. Can you talk on Europe a little bit? Is that where you had a lot of your mix issues? Sequentially, the sales were up very strongly, but your EBIT went down significantly. Can you discuss Europe a little bit? What happened there?

Yes, we talked about that after the second and third quarter, that the EBIT margins in Europe were unusually high, particularly in the second quarter, as we had parts of our business delivering some high margins related to long-term contract activities. And we knew that in the third and fourth quarter that those projects would abate and our mix would change more towards lower margin core business in our European segment and indeed that happened. And that coupled that with the price cost question that I responded to earlier drove the fourth quarter margins down to about 2% plus in that segment.

Now, mind you the fourth quarter is, from a margin standpoint, tends to be a little softer than other quarters of the year. Simply because of the capacity utilization of our factories and places like Europe and other parts of the world that aren't operating at as high a level of utilization as other quarters during the year. And so, even though our sales could go up, our margins might suffer a bit because of that utilization issue.

But, are you gaining at least some benefits and traction from all the restructuring, the re-footprinting consolidation that you did last year? Okay. And then, my final question. You've definitely kept SG&A down as a percentage of sales. Is the 16% to 17% range a reasonable run rate going forward, or maybe you want to talk about it on a more absolute basis, do you think it's going to modestly increase with sales or what do you expect on SG&A?

Certainly, it will increase with sales, Mark, because there is an important part of SG&A that is variable.

Right.

And one of the biggest variable cost is our profit sharing and bonus programs. And those can run on an annual basis 25% to 27% of our -- the cost in EBIT. So, when profitability rises we set aside more charges for profit sharing and bonus costs. There is a significant element of the SG&A line, however, that is fixed in nature and we will gain leverage on that line as our sales results improve.

Mark, one thing that you should expect is in 2011 we do expect to implement modest wage increases in the areas of SG&A, which we have been quite light on over the course of the recovery here . So, we have to be sure that we address that as the economies around the world improve, be sure that our retention is properly addressed.

Right. Okay. Thank you.

Thank you.

Our next question is coming from Steve Barger, KeyBanc Capital Markets. Please proceed with your question.

Hello, good morning guys.

Hello, Steve.

Morning, Steve.

The February price increase that you talked about, were you early or late versus your competitors, in terms of that? And have you seen any real share shift to speak of, as people have thought about pricing actions as steel prices have gone up?

I would say, Steve, we are traditionally early in that activity. Again, it does depend on the specific markets, but in the traditional developed markets of the North America and the European areas, I would say that we were ahead of our competitors in that. And, that's fine. We base our price increases based on our past views of our costs and we deal with the consequences of maintaining share and capturing those price increases. And, I think our history with that has been pretty positive.

Right. And when you think about your lower market share, markets like Asia or Europe, and I know it can be harder to get price there, have you seen any really aggressive actions in terms of not raising prices in the face of steel? Is anybody out there trying to take share in those markets?

I wouldn't say specifically, no, I think that those markets quite frankly are becoming a little more disciplined. They are probably more timing specific but over the course of a reasonable period of time. The steel costs really are the drivers there, and as I said earlier, in terms of our capacity utilization, I think that's fairly true in most of the major players, is that the market has been growing fast enough, and not many are sitting there with high availabilities of unutilized capacity.

We still have dynamics of state owned enterprises and what that model is versus private owned enterprises and what that model is, and as we have said, we will continue to face that for years to come. But we are working very hard on our sales organization there to really educate them to the value-added approach that we use in the developed markets. Now, it's going to take time, but we are deeply committed to that, and we are seeing some encouraging signs in terms of the sophistication of our sales organization on focusing as much on margins as they do on volumes.

Got it. So, for Europe specifically, Vince had talked about some contracts that affected them -- the operating margin in the back half and the seasonal absorption issues. Is it reasonable to think that we go back to a mid-to-high single digit operating margin as we progress through 2011 in Europe?

Well, our core business in Europe is still down significantly from the peak in 2008. But I would expect our EBIT margins to improve during the course of 2011, as our volumes improve and as our pricing alignments get better. In terms of the project business, that can't be predicted at this point in time for the rest of the year, but again, the second and third quarter fee was benefited from projects that we were completing that had been going on for -- through 2010. So, there will be improvements . Where we end up, we don't know at this point in time. It will be the subject to what our volumes do for the rest of the year, but we are optimistic that you will see improvements in EBIT margins in Europe during the course of '11.

Okay. And to the subject of the pricing alignment, based on what you're seeing in the market right now, will that 3% to 5% increase cover you or is what you're seeing in steel markets making you think prices are going to need to have to go up before long?

Well, our expectations are, and this isn't exactly clear at this point in time because were still in discussions and negotiations, but I wouldn't expect that the price increase that was announced in February would be our last move for 2011 based on all of the dynamics that we see at this point in time. If the steel capacity utilization stays high and there are inputs, iron ore, scrap and energy continue to increase, we would expect further increases and we would expect that we would be passing those increases on to the market place sometime in the second or third quarter of this year.

Right. Does this feel like it's 2008, where you guys had to raise prices five times in short order? And you did a great job of capturing it then, but does it feel like it's that same kind of environment where you can see really persistent and strong steel price increases?

Not at this time. Again, the 2007, 2008 dynamic was not only the volatility, it was the magnitude. And that we think that it will be a little more predictable than what we saw in that period of time. But again, that being said, we are not in control of that and we have to adapt to it by looking at the different sourcing options that we have, the different commitments and contracts that we have in place. But, most importantly it's the execution of our pricing strategy that allows us to capture the margin regardless of what the circumstances are.

Right. One more and I will hop back in line. John, as you said, you have had seven quarters of sequential revenue growth coming off the low point. Do you expect that same pattern again in 201, or do you think you're going back to some of the normal seasonality where historically 3Q would come in below 2Q a little bit on the revenue line, maybe due to summer shutdowns?

Well, I think it's pretty difficult to predict out to the third quarter at this particular point in time. I would say, as I have said in my prepared remarks, is that most of the economic and market data that we are looking at right now is fairly positive. But, there are still issues that we deal with. The weather impact in the Midwest that we saw has seen some impact not only on shutdowns of customers but on the ability to move product around. We are coming off the Chinese New Year. Who knows what impact the Middle East is going to have. I would say that our short-term outlook, based on the economic data and, again, market specific things that I went through is positive, but we are not prepared to look that far out and commit to what we might see in the second half of the year.

And I would agree that I think at this point there is some optimism that 2011 will certainly be a better revenue and sales year than 2010. But it's difficult at this point to predict that it will be four quarters string of increasing sales quarter-over-quarter. But surely at this point we have some level of confidence that '11 will be a better year than 2010.

Well, since you open that door Vince, when you say better, are you thinking double-digit growth on a global basis?

That door is now closed.

Alright. Thanks.

You're welcome.

Thank you. Our next question is coming from Tom Hayes, Piper Jaffray. Please proceed with your question.

Thank you, good morning gentlemen.

Good morning, Tom.

I was wondering maybe, John, if you could provide a little bit more color on the pipeline business, you referenced in your comments the orbital products. Is that the primary end market for the orbital products? The pipeline business?

No, I would say it's not. The arc product acquisition that we talked about is generally for smaller diameter, higher alloy type of pipe used in power plants, particularly, in the nuclear segment. That's one of the real attractiveness to us. We've always been very, very strongly positioned in cross country pipe for oil, gas, water. But this sector, which is more, again thick wall, high alloy, small diameter stuff, is a whole new segment for us, and again, the attractiveness is the power generation industry which is growing quite rapidly all around the world.

Okay. And, just a refresher, what percentage of sales does the pipeline and the pipe mill business represent?

Combined I think it's less than 10%.

Yes. It's less than 10%.

And it varies depending on what's going on. There's a seasonality to that in some parts of the world. In Russia they can only put in the pipelines in the middle of the winter when the ground is frozen. And other type of applications. But, what we're seeing is that the pipe mill capacity around the world has been built out pretty good, and now that capacity is being used on these pipeline projects, with a real heavy focus in Asia and Eastern Europe in particular Russia.

Okay. I think we have talked about every other geography but maybe South America and Brazil. Any parts of that infrastructure build out that's looking better than others?

Well, I would say all are looking pretty good. Just as an example, just this week we had a contingent of shipyard customers visiting us a from Brazil. And there were five separate entities that represent brand new shipyard investments. So, these aren't existing yards that are expanding. These are companies that are making investments, be they steel companies or people that have other presence in Brazil, that are deciding to diversify in the ship building industry. Primarily driven by their ability to transport oil around the world. So, I would say that side of the infrastructure is very good.

They've got power issues in Brazil. The middle class is growing quite rapidly there. They don't have enough energy to cover that. So, we are seeing commitments on the energy expansion side. And then, as we have talked for a number of calls, they're sporting events with the World Cup and the Olympics are going to require pretty significant enhancements in they are airports, in hotel capacities, road, bridges, and even in soccer stadium and venue type related infrastructures.And if you track that around the world, particularly, if you went back and tracked that to South Africa, which was an emerging market that got the World Cup, the amount of activity that they needed to invest in to support that program was very expansive . We are seeing some signs of that, but I will tell you, that Brazil's got to hurry up in order to get ready and we are optimistic that they will.

Okay. And just lastly, you mentioned alternative fuels with the price of oil rising, and one area that you have talked about before was wind turbines and your specialty as far as building out to the wind towers. Is there any recovery in sight in the wind power business?

Well, what we are seeing, Tom, some nice investments in that capacity side of that. I don't know whether you saw Worthington Industries announced the joint venture with a Spanish company to build a wind turbine tower factory in Wyoming, and some commitments that they have gotten for power turbines in that area. We have got a very extensive contract in Eastern Canada. For a big new project there so, as I said, there was a slowdown of that in the US during the financial crisis. I think there's still some uncertainty as to where the government subsidies may or may not go in regards to that, but regardless, we are seeing some pretty big numbers about future plans in both onshore and maybe even more importantly for us, offshore. Because the offshore towers require a lot heavier construction and more alloy base material, which is good for the consumable side of it. So, I think that was the pause that refreshes and we will look for 2000- late 2011, 2012 to ratchet up in that.

Okay, great. And just lastly, I'm just wondering as you are out talking to clients, specifically, here in the US. Are you hearing them talk at all about their view on the accelerated tax depreciation benefit in 2011? Maybe moving equipment purchases off the holding dock and committing to new purchases?

No, I can't say that I've had that conversation with anybody. I mean, most of the companies that I go to visit are fairly large, sophisticated companies and they've got good cash flow right now and their investments are more driven by the need to increase capacity. If you look at what's going on in the construction and the agricultural sectors with people like Caterpillar and Deere, most of them are predicting 15% to 20% increases in capacity during the course of 2011, 2012. I think that will be the fact that it drives their capital spend more so, than the accelerated depreciation side.

Okay. Thanks gentlemen.

Thank you, our next question coming from Chuck Murphy, Sidoti & Co. Please proceed with your question, sir.

Morning, guys.

Good morning, Chuck.

Just wanted to clarify something. You said that the prices for 2010 were up about 3% and on top of that you have done another 3% to 4% in February? Is that correct?

Yes, so you see a sequential improvement in pricing from the fourth to the first quarter, somewhere around 3% because we put them in at the beginning of February.

Got you, okay. And then just more a general question. How do you guys think about pricing? Is it something that you do just to offset the rising raw material costs, or are you trying to get a net benefit out of it?

Well, we think about it in a lot of different -- factors. We obviously have to consider our costs, that being the primary discussion point. We attempt to, at minimum, capture our margin but there are timing issues associated with that, as we said, about contracts that we have in place, forward buys on the part of customers, market dynamics that we have to be sensitive to. So, and there are a lot of factors. I think, again, the thing that we can most point to is our past success and our ongoing commitment to deliver shareholder value. And we understand the importance of price increases, and I think we've demonstrated pretty clearly in the major markets that we participate in, our capabilities of implementing cost -- or price increases.

So, Chuck, I would sum that up to say that it depends. It depends on what our particular position is in a particular product category in a particular geography, and some categories that are -- were stronger have unique products there will be a different type of pricing dynamic then other categories that we're participating in a more fragmented highly competitive market place. So, it is a very unique to the products that you're dealing with in terms of how we approach pricing.

And I would just again, Chuck, reiterate that in the developed market where traditional pricing exists we have seen all major competitors increase prices to the same, or in some cases, greater extent than we have that based on their cost's curves.

Okay. Thank you

Thank you Chuck.

Thank you, our next question is coming from Greg Halter with Great Lakes Review. Please proceed with your question.

Yes, good morning, guys.

Morning Greg.

First question is an easy one, just wondering where your cash is primarily located currently?

75% of the total cash is in the US, Greg.

And then related to that, just wondered if you could expand on uses of cash, in terms of the share repurchase, the dividend, and possible looking for more merger acquisition candidates.

Well, starting with the share repurchase, we did spend about $40 million in 2010 on share repurchases. We had a fairly heavy fourth quarter at around $16 million, $17 million of repurchases. We have available under our authorization to buy shares approved by our Board of Directors the ability to buy up to another 3 million shares, I believe, at this point in time. So, we will continue to look at opportunities to take shares out of the marketplace at attractive prices.

I mentioned, Greg, that we did raise our dividend in the fall by about 10.7%, and we have a very regular review process and we are looking at our dividend payout towards the end of the fiscal year . So, we will be doing that again in November, December of 2011.

And then acquisitions is the -- is certainly the wild card and as we've talked about a number of times in the past, it is a high priority for Lincoln. We continue to look at the opportunities that are appropriately priced for us . And John talked about in his comments, we did close a deal in Russia in October of last year. And we are poised to close another one in the first quarter here of 2011. We recognize that our space that we participate in is still fairly highly fragmented in many parts of the world. There are a few broad line players like Lincoln that have a global presence and the ability to gain synergies and leverage by buying those opportunities in places like Russia. So, we are continuing to look hard, but we're not going to overpay and we're going to make sure we get the right properties at the right prices to meet our strategic objectives. So, we're going to be patient.

Okay. And relative to foreign currency, did that have any impact that you can spell out on a dollar amount, either in cost of goods sold or SG&A in the quarter?

Well, from a foreign currency transaction standpoint, there was very little, there was almost no foreign exchange gain or losses in the quarter, or the year in 2010. From a translation standpoint, though, we did translate higher net income in US dollars in the fourth quarter of about, just shy of $0.5 million, about $440,000 improvement in net income on foreign currency translation. And then the year was about $800,000 of higher net income in 2010 because of translations into dollars. But from a P&L standpoint, no significant charges or credits.

Okay. And, the last -- sorry in 2009, the profit sharing bonus payments were $44 million. Do you have that figure for 2010?

Yes, it's a $73 million.

Okay. And, John, you mentioned the IPG Photonics. I just wondered if you could elaborate a little more on what we could be seeing out of that partnership?

Well, I think we're pretty early into that discussion. I will say that I'm quite pleased with the amount of activity that we've generated. As you know, we have a large operational functional laser sell in our automation group. We are demonstrating that capabilities to customers and we're learning the process, particularly the hybrid laser process, which uses welding and laser together to accomplish higher travel speeds and do some unique things. And we're optimistic that we're going to do very well on the capital equipment side of that in the years to come.

Okay, great. Thank you very much.

You're welcome Greg.

There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Okay, thank you Jody. And thanks to all of you for joining us on this fourth quarter call. We very much look forward to talking to you in April about our first quarter results and our further progress in running the business. Talk to you in April.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.