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Hardinge (NASDAQ:HDNG)

Q4 2012 Earnings Call

February 14, 2013 11:00 am ET

Executives

Deborah K. Pawlowski - Director

Richard L. Simons - Chairman, Chief Executive Officer and President

Edward J. Gaio - Chief Financial Officer and Vice President

Analysts

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Bruce C. Baughman - Franklin Advisory Services, LLC

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Operator

Greetings, and welcome to the Hardinge Incorporated Fourth Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Hardinge Incorporated. Thank you. Ms. Pawlowski, you may begin.

Deborah K. Pawlowski

Thank you, Brenda, and good morning, everyone. We certainly appreciate your time today and your interest in Hardinge. On the call, I have Rick Simons, Chairman, President and CEO; and Ed Gaio, Vice President and CFO. Rick and Ed will provide a review of the results of the fourth quarter and full year 2012 and also give an update on the company's outlook and strategic progress.

You should have a copy of the financial results that were released this morning before the market opened and if not, you can access it at the company's website, www.hardinge.com. You will also find on our website, slides that accompany the discussion to which Rick and Ed will be referring. They're right there on the homepage next to the link for the webcast.

As you look at the slide deck then and turn to Slide 2, you will find our Safe Harbor statement. As you are aware, we may make some forward-looking statements during the formal discussion, as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ from what is stated in today's call. These risks and uncertainties and other factors are provided in the earnings release, as well as other documents filed by the company with Securities and Exchange Commission. These documents can be found on the company's website or at sec.gov.

So with that, let me turn it over to you, Rick.

Richard L. Simons

Thank you, Debbie. Good morning, everyone, and thank you for joining us today for our 2012 fourth quarter and full year financial review. This morning, we reported what we consider to be very good results for the fourth quarter, with over $90 million in revenue and significantly improved margins. We generated $18 million in cash from operations during the fourth quarter and as a result, we're able to increase our cash position by $5 million, even after the cash use in the acquisition of Usach in December. Once we've gone through the fourth quarter and full year results, I'll talk a little more about Usach.

Let me provide a brief overview of our top line results, and then Ed will provide more details on the financials for the quarter and at the end of the year. After that, I'll talk about our order rates and outlook for 2013.

Please turn to Slide 3 of the presentation. Sales were relatively comparable with the fourth quarter of 2011, although the mix was quite different. Strong sales in Europe offset the decline in the U.S., while Asia, quarter-over-quarter, was relatively flat. And despite the continued weakness in the European economy, European sales were up 32% or $8 million, driven by strong grinding machine tool sales, especially to Germany. Keep in mind, grinding machines can have a much longer lead time than our other products, sometimes as much as 12 months. So part of these sales are grinding machines reflect orders received during stronger periods over a year ago. For the full year, sales in Europe were up by $70 million or 15% and this too was primarily related to grinding machine sales of orders received in 2011 and the first half of 2012.

North American sales were down by $8 million or 24% in the quarter. This quarter was up against a tough comparison to the fourth quarter of 2011, which was unusually high at $32 million, while the average quarterly sales were -- in 2011 was $23 million. If you look across the year 2012, North America was relatively stable around $20 million, with the fourth quarter being the strongest as we met customers' year-end delivery requirements. For the full year 2012, North American sales decreased by $7 million or 7%, with our distributors managing their operations to a lower level of inventory on hand.

Sales to Asia in the quarter were down $1 million or 4% from the prior year period and for the full year, Asia sales were down $17 million or 12%. Quarterly sales throughout the year were around the $30 million to $35 million, but the full year decline in sales in that region was directly a result of the deceleration in growth China experienced throughout 2012.

This does appear to have stabilized as China had sequentially higher GDP growth during the fourth quarter. Although they always have shown positive GDP growth, the percentage of growth had declined every quarter since 2009. We believe these quarter-after-quarter declines in the growth rate put a damper on people's confidence in making machine tool purchases. This inflection point the fourth quarter increasing from 7.4% growth to 7.9% growth may be the beginning of a return to confidence and return to making capital expenditures. We believe the Chinese machine tool market is capable of moving from periods of stagnation to a rapid growth very quickly and with our recent footprint expansion there, we will be ready to capture a rapid surge in orders when it comes.

Now I'll turn the call over to Ed who will provide more detail on our operating and financial performance.

Edward J. Gaio

Thanks, Rick, and good morning, everyone. On Slide 4, you can see that gross margin for the fourth quarter of 2012 was 30.6%, an improvement of 5.2 points when compared with the prior year's fourth quarter on comparable sales.

Last year's fourth quarter gross profit was also negatively impacted by $900,000 or 1.2 points in related inventory adjustments. So the 4-point improvement reflects both favorable product mix and pricing, as we had more grinding machine sales in the fourth quarter compared with the prior year period. Product mix and pricing also drove a sequential improvement in margin. Our 2012 gross margin expanded 2.3 points to 29% of sales.

If you would, please turn to Slide 5. The chart on the left side of the slide shows how our efforts to improve productivity have led to an improving trend in operating margin, as well as our improved operating leverage. This was our fourth consecutive quarter of improved operating margin. Operating income in the fourth quarter was $6.5 million, which was an 80% increase over the prior year period.

Compared with the fourth quarter of 2011, our operating margin expanded 3.2 points to 7.2% of sales. Sequentially, our operating margin grew by 0.8 points from 6.4% during the trailing third quarter. We continue to expect to operate at about an $18 million to $19 million run rate for SG&A.

The fourth quarter's SG&A of $21 million or 23% of sales was above this range, due to some unusual expenses, including cost tied to the Usach acquisition and restructuring cost in Europe, as well as increased sales commissions. For the full year, operating income was $20.1 million or 6% of sales, measurably improved over $16.6 million or 4.9% of sales in 2011.

Slide 6 illustrates that we have strengthened our ability to convert sales to the bottom line. Fourth quarter net income was $7.8 million or $0.66 per diluted share, includes a tax benefit of $2.7 million or $0.23 per share, related to the Usach acquisition. As shown on the slide, if you exclude the tax benefit, fourth quarter net income was $5.1 million or $0.43 per diluted share, still measurably improved over to fourth quarter of 2011. For the year of 2012, net income was $17.9 million or $1.53 per diluted share. Excluding the tax benefit in the fourth quarter, net income for 2012 was $15.1 million, up nearly 26% over the prior year.

The metrics on Slide 7, we believe, help demonstrate the improvements that we have made to our business model in achieving our goal of reducing working capital requirements in the industry inherently that has high working capital needs. Our concentration on receivables and inventory management resulted in managed working capital as a percent of sales to be an average of 41% for 2012. While this marks an increase compared with the 2011 full year, we remain well below historical levels.

While average inventory did increase early in the year to avoid supply chain challenges, we were able to rebalance that by the end of the year. Excluding the inventory of $5 million acquired from Usach in late December, inventory was slightly lower on a constant currency basis versus 2011.

Although inventory turns will be influenced by the level of sales, we expect the change we made to our operating structure to require less working capital than we had historically. We believe our inventory turns remain in the upper quartile of the machine tool industry. As I mentioned before, in this industry, working capital requirements are very high as our customers need us to have high levels of finished capital goods, repair parts and accessories on hand.

Please turn to Slide 8. Our balance sheet continues to improve and, as a result, is very strong, providing the financial flexibility for us to execute our growth strategy, as well as maintain our competitive position. As a result of our focus on cash generation, we were able to simultaneously increase our cash by $5 million to $27 million, while using $4 million to complete the construction of our new facilities in China and Switzerland and $9 million to purchase Usach Technologies in the fourth quarter.

Our operating free cash flow, defined as operating cash flow minus capital expenditures, was $8 million during the fourth quarter 2012 compared with the negative $4 million in the prior year period, representing an improvement of over $12 million year-over-year.

Fourth quarter and full year capital expenditures were $1.5 million and $7.6 million, respectively. For 2013, we are expecting capital expenditures of approximately $4 million to -- and $5 million, primarily for general maintenance capital requirements. At December 31, 2012, we had cash of $27 million and debt of $20 million.

That concludes my remarks and I now would like to turn the call back to Rick.

Richard L. Simons

Thanks, Ed. I'd like to talk a little bit about the acquisition we completed during the quarter before we discuss our economic outlook for 2013, so please turn to Slide 9. As we announced on December 21, we acquired Usach Technologies, which is the leading designer and manufacturer of internal, external and simultaneous grinding machines in the U.S.

Usach has a strong grinding machine portfolio and solid direct relationships with several large U.S. OEM customers. Their equipment is an excellent extension of our existing grinding machine product lines, as they are capable of grinding much larger pieces than our existing brands, and also added machines devoted to internal dimension or ID grinding capability.

Within these styles of products, the majority of their sales are for custom-designed configurations, which are intended to improve -- intended to provide a special solution to the customers' needs. As is the case with some of our other grinding products, their quote-to-shipment cycles are longer, but overall, their business tends to result in the stronger operating margins.

We believe we can add significant marketing synergies for the Usach brands by leveraging our existing channels in Asia, where they have one specific order and backlog, but no sales in the past to the general Chinese markets and into Europe where they have not had any sales at all. Although it takes time to introduce the new products to our international markets, we entered the year with Usach having about $29 million in backlog, most of which we expect to ship in 2013, but which will utilize most of their short-term capacity.

Acquisitions are part of our growth strategy, but we will be selective and think that Usach is an excellent fit on many levels. Our acquisition efforts will continue to be focused on grinding products, machine tool accessories and milling and turning products capable of handling workpieces that are larger than our current product lines.

Turning to our overall outlook. Capital spending by our customers throughout the 3 major regions slowed measurably in the second half of 2012, as you can see by the decline in orders on the chart on Slide 10.

The fourth quarter was especially weak. We believe the weakness in Europe was directly related to the region's economy. We currently expect that to continue throughout 2013. We believe the softness in the fourth quarter in North America was primarily related to our distributors managing their inventories. They are reporting that their orders for our products from their end-use customers were actually up 3% year-on-year, which is slightly higher than the 0.8% growth, or practically nonexisting growth, the entire industry experienced, according to reports on AMT, our trade association. Our distributors tell us that they believe full year 2013 sales to end-use customers will be similar to 2012, although we do expect that the year may get off to a slow start.

Orders in Asia picked up 5% in the quarter over the prior year period. I was in China 3 weeks ago, meeting with our sales team, and I also had an opportunity to meet with some of our suppliers as the entire machine tool industry while I was over there. The feeling of uncertainty is still evident. However, we have seen an increase in quoting and bidding activity in the last 2 months compared with the very low activity levels in the third quarter and early fourth quarter of last year. That said, we likely will not know the true nature of that market's dynamics until some time in the second quarter of 2013. The Chinese New Year Spring Festival, which is this week, causes business to grind to a halt for 10 to 15 days and on top of that, people may be waiting for deals at the CIMT Show in April.

Jim Langa, our Senior Vice President Asian Operations, will be attending the Taiwanese Machine Tool Exhibition, TMTS, in the first week of March in Taipei, where people from around the world go to see the latest products offered by the many Taiwanese machine tool builders. We will both be attending the Chinese International Machine Tool Show in Beijing from April 22 to 27. Machine tool manufacturers from all the world, including Hardinge, will be there to exhibit and demonstrate new technologies and innovations to the Chinese market. We expect to learn more about the nature and progress of economic growth in China and the rest of Asia while at these shows, which will help provide a clearer picture for what the rest of 2013 may look like for the Asian markets and for Hardinge specifically.

We continue to have a positive long-term outlook for the Machine tool industry, but given current order levels and backlog, we expect 2013 is going to start off slowly. Likely, organic sales will be down from 2012 unless Asia or any of our other markets turn more positive in the first half of the year. Of course, the acquisition of Usach will add sales to our results in 2013.

We expect to have strong cash generation despite the global economy and where we are in the industry cycle on our various markets. We feel comfortable that we are in a better position than ever to act quickly no matter which direction the markets may force us.

We are always looking for ways to improve our product offerings in order to remain a top choice of our customers for complex applications, where high accuracies are required. Across all of our regions, we have recently begun to implement HIPEX, which is Hardinge Inc. Performance Excellence, our operational excellence program. This will bring the proven methodologies of Six Sigma Lean and Value Stream Mapping, among others, to each of our worldwide facilities. 2013 will be a year of education and rollout of the process but we anticipate long-term benefits.

Our organization is excited to learn about these effective tools, and I believe this will result in a lasting culture in the company for driving quality, productivity, continuous improvements and cash generation in all of our operations.

So with that, Brenda, we'd like to now open the call up for any questions people might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Rafn from Morgan Dempsey.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Can you give me a sense where -- there's been some discussions, [indiscernible] has read an article about a migration of general industrial manufacturer back to the United States, whether it's piracy, whether it's freight cost, cheap natural gas. What do you see here in the U.S.? And we're rebounding to maybe a $13 million, $14 million, $15 million automotive area. If you look just at the U.S., how viable is the North American market for tooling over the next few years?

Richard L. Simons

Well, we actually think it is very viable. It's still one of the largest consumers of machine tools in the world and the top 5 countries. And we have heard the same thing, Brian. I mean, you can't put a number on it, but we were out at IMTS in Chicago in September, talked to a lot of customers there, talked to the -- some of the trade magazines that had actually done a survey of customers. And I think -- I can't remember the number exactly, but it was like 1/3 of the people they talked to, customers of ours that they talked to that indicated that they were doing work now in their shops that they had lost to overseas competition before, that the people they were supplying had brought it back here because of quality problems, because of logistics problems and then the time it takes to fix the quality problem. So that is real. I mean, we're hearing it from our customers, we're hearing that throughout the industry. I'm on the Board of Directors of AMT, our trade association and we talk about it there as well. All of us are seeing that happening. Can't put a number on it, but it's real. It definitely is happening.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. And then maybe a sub-question to that is that, kind of the nature of the sense of what you see in the job shop area.

Richard L. Simons

Yes, the job shops are busy. Again, as we talked to them, most of them, their biggest headache is trying to find machinists to handle the workforce. There is an organization, PMPA, that publishes some information as they survey job shops. I will say, over the last few months, they have seen a decrease in hours worked per employee. But I think some of that, it relates to the back that they have brought other people in, as well as the fact that perhaps the business is a little softer in the fourth quarter is what we're hearing.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. And then, from the standpoint of Usach, what -- you talked about -- you gave a little flavor relative to your grinding machine or from [ph], I think, Kellenberger? How -- what kind of price differential would the Usach grinding machines be versus -- on a dollar basis, what are some of the lead time differences? Is it the same type of customer end market? Give me a sense as to how Usach is different from the grinding operations you have currently.

Richard L. Simons

Good question. I'll start out with the end markets and then work our way back to the price. But the end markets, they do provide products that we will typically go into with one of our Kellenberger or Jones & Shipman products, and the customer will need something that will grind a longer shaft or a bigger around shaft or bigger around piece of material. And Kellenberger products were built to get up to a certain level size of machine, but we've never gone into the bigger-sized machines. And so in some areas, it's the same customers we're visiting, where they said, "Jeez, if you had an offering in that size range, we would buy it from you." So at some cases there -- and then there also are some places like large manufacturers, John Deere, Caterpillar, which typically have never bought Kellenberger products, where in those markets, Usach is able to go in and have a product that we didn't have before. As I mentioned in my comments, a lot of their equipment is specialty equipment and it's quite often that someone has a new product that is requiring these new parts that needs to be ground maybe before it was turned. And so one of the strengths of Usach is really making a specialized configuration of a grinding machine. So as opposed to a standard line, they will then use components or modules from different machines to put them together for that very specific purchase. And so given that, their quote to delivery time or quote then hopefully order and delivery tends to be on the longer side of what we would do in some of our products in Switzerland, so maybe 9 months or so, 9 to 12 months, where a lot of the grinding stuff from Kellenberger is more in the 6 months range, when we're at the right level of capacity. Then last thing, price-wise, these are expensive systems. I mean, we're talking $500,000 to $1 million systems that they're putting together quite often, not only with grinding, but also with material handling to bring the parts into the machine. So again, Kellenberger products are the high ends are set at $500,000 to $750,000. As you know, the jig grinders get up to $1 million. So some overlaps price-wise, but Kellenbergers also have some -- and Jones & Shipman have some products that are down into $300,000 to $500,000 range as well.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Then just one final on what do you see guys see on commodity prices? Feed stocks, steel tooling, that type of thing?

Richard L. Simons

So far, we haven't seen any significant movement one way or the other. I would say, in Taiwan, we have seen some reduced prices on cast iron as realistically the island that does supply a lot of machine tools has gotten less busy, and so vendors are more -- are hungrier than they were before. Their control packages, as you know, we buy those from Japanese suppliers, as well as the German supplier. The weakening of the Japanese yen certainly will help us some on that. But of course, it's -- most of the competitors use the same control, so it probably won't give us a pricing advantage.

Operator

[Operator Instructions] Our next question comes from the line of Bruce Baughman with Franklin.

Bruce C. Baughman - Franklin Advisory Services, LLC

The -- with the outlook anticipating some softer sales, softer organic sales and also anticipating, I'm not sure what the adjective was, but good cash flow generation, are you anticipating bringing working capital out and therefore, you can be confident that cash flow is going to be good? Or do you anticipate being able to hold margins on lower sales?

Richard L. Simons

Well, I think we'll be able to hold margins at a gross margin level, but obviously, the operating margin, as we get to lower sales, some of the fixed costs and SG&A will hurt us on the operating margins. But we still believe very much, Bruce, that we've got a business model now that will be producing positive EBITDA through even a lower cycle. As you know, lower cycle sales will generate cash from the balance sheet, from the shrinkage of working capital. So we feel comfortable with that. So I think, very good -- we feel very good about generating cash from operations. Truthfully, my hope would be that sales start to pick up, and so then we might be using cash and working capital aside because even though we've gotten it down to a lower percentage than we had in the past, obviously, if sales go up, there will be investment in receivables and inventory. So it's a long answer. I'd say if sales kind of stays flat to where it looks like we're going to be, then we'll generate cash from operations and then, whether we generate more cash from working capital or depending upon which direction sales go.

Operator

Our next question comes from the line of Brian Rafn with Morgan Dempsey.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Rick, can you give us a sense of some of the end markets? Just give us a little flavor of what you're seeing, order patterns, industrial, aerospace, any opportunities in oil and gas, just kind of your end markets, maybe on a global basis. You don't have to do it by region.

Richard L. Simons

Yes. Okay. I mean, obviously, aerospace continues to be strong for everybody that's involved in it, and we tend to get involved in it a lot and sub-suppliers to the hydraulic fittings and so on within that industry, so we do get involved at that level. Certainly, auto, actually, in the United States, as you mentioned before, is doing well. Auto in China is not doing well. They went down dramatically. I'm hopeful that as the Chinese economy starts to pick up, the auto suppliers there get stronger. Medical, which is a small piece of our business we consider, but it still is obviously always steady. The area where we have been hurting is defense. Actually, as we look at -- specifically grinding machine activity in the United States has suffered significantly in 2012 relative to the prior couple of years because, realistically, the government as well as some of the suppliers are not buying grinding products right now. Oil -- and then let me go to oil and gas. Oil and gas, that tends to be bigger equipment. I've always mentioned that we do get some business there as well, because even though there's big pieces of equipment within oil and gas, there's some smaller pumps that have small parts in it that we do get involved in. And especially in our Southwest area business, we've actually had some good orders down there. We're hopeful, with the addition of Usach, which is capable of grinding larger components that, that might help us to get into those industries, especially with a very strong distributor down in that area.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Rick, the Usach acquisition, is that a high-end premium technology that might not be available for China? Or where is that from the standpoint of how you price the specification of that?

Richard L. Simons

That's a good one. We sell a fair amount of grinding machines in China from our Swiss operation. I will say, again, we're seeing the Chinese market continue to get more and more precise. Obviously, the things they're doing, they're trying to get parts more and more precise. So we believe that market will continue to improve in accuracies of their requirements, and that's going to give us the opportunity to sell machines. I think again back to the point with Usach, I mean, when I know that they have had historical sales to John Deere and to Caterpillar and to General Motors -- in China, there are -- number one, those companies have operations over there. And then secondly, there's indigenous manufacturers that compete with John Deere and Caterpillar, and they're going to be looking for that same sort of technology. So we think China is going to be a good market for us. Obviously, when we get to the very high super precision level, we end up needing an import license on it. I'm not sure where we'll stand with grinding. We've got to research that. But even that is not something we can't get through because if it's a dual [indiscernible] company that is doing something that's allowed by the -- our government, then we can get a license. It just takes a little more time.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes, okay, okay. You had some free floor space up at Elmira because you'll move your footprint around it. You -- any plans in 2013 or '14 to be able to utilize that? Or what's kind of the area there?

Richard L. Simons

Yes, well, certainly, I mean, we do have space here. You we do hope to grow the Usach business. As we mentioned or I mentioned in my comments, I mean, right now, their backlog pretty much uses their capacity out there right now. So as we get additional orders, we're hopeful that we might be able to do some work here on behalf of them that will help us grow without having, obviously, to put bricks and mortars out there. I'll tell you, just right now, with our capacity, we have some people from -- some assembly people here from Elmira going back and forth to Chicago to supplement their workforce so that we can get this big backlog out this year. And so we're hopeful we'll be able to work between the 2 plants and do exactly what you were saying and trying to utilize this facility a little bit more.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes. What are you guys running on labor shifts? Have you go -- is a Elmira versus Bridgeport versus Kellenberger versus HKK [ph], maybe even Usach, how many labors you have, how many days, how much overtime?

Richard L. Simons

Yes. And I'll go plant by plant. Here in the United States, most of the factory here is dedicated to work holding accessories business now. And in that case, we are running 3 shifts, although the 2 -- the second and third shifts are limited shifts, where we really have bottleneck on specific machines that we need to have them running all night long. And Kellenberger, same sort of thing, and some of the machining areas with the big equipment and machining, we're running 3 shifts. Assembly, typically around the world for that matter. Assembly isn't something we do more than one shift. It's a very difficult thing to hand off, mid-assembly, to the next team and have a continuity of machines. And so in our industry, for that matter, not just Hardinge, not many people run 3 shifts on assembly. And so for instance, Usach does not run 3 shifts. They try to handle some with overtime. We've mentioned before our Taiwanese plants and our Chinese plants, both of which are assembly, those people want to work overtime a lot. So we kind of flex our needs based on work -- based on overtime as much as possible.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. And what is the percentage of top line revenue for the year? What were work holding, call its [ph] and pictures on that? What was the tool...

Richard L. Simons

We've grouped that all within our repair parts, because it's kind of all mashed in together. So overall, that still ended up -- I didn't see the exact number, probably 23%, 24%, somewhere in that range.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, okay. When you look at -- you guys talked about HIPEX and we've talked in the past about best practices in that. Is that process -- does that have a dollar productivity and margin accretion component to it? Or is it just more of a universal kind of a homogenous best practices from an operation standpoint?

Richard L. Simons

I thank you for giving me the opportunity to expand on that, because it's something that I'm really passionate about. It is about getting some standard methodologies around the world so we can get operating efficiencies. I've always said, our people around the world, and I don't care whether it's in United States, Taiwan, China, Switzerland, England, all of our places, are awfully hard-working people. And I will tell you, if we -- if there -- a problem comes up, they're going to solve it. They're going to go and fix. And I shouldn't say solve it, they're going to fix that problem, but not always in a way that really fixes the root cause and make sure that we develop processes where it's in control going forward. The things like Six Sigma, with demerits [ph], processes and so on, I feel very strongly, can provide us with a methodology that not only define the problem and really go after it, but then also measure it, come with a long-term solution that will improve it and keep it from going out of control. I know that from reading about it, talking to other companies. We are blessed by the fact that Corning Incorporated is very near our main factory here and it's helped us a great deal with providing some training and advice on this whole process. And for instance, they have achieved -- they've had a target, I think, of 5% cost reduction each year, and I think in a lot of their facilities, they achieve that. They actually happen to have facilities in Taichung, which is near our Taiwan plant; in Shanghai, which, obviously, is near our Shanghai plant. Here in Corning, obviously, next to our plant here. Not in Switzerland, but in nearby Germany, they have facilities. And so a great thing, it's been able to our have our people go visit their facilities and talk to people in their own language, in their own culture and see that this kind of stuff can work everywhere in the world, not just in America. So I'm really excited about it. I tell people that this. Hopefully, it's going to be my legacy if people look back and see what impact Rick Simons had on Hardinge, it's because the biggest impact was introduced this HIPEX and getting us to be an organized organization solving problems, which will equate to better margins and better cost structure going forward.

Operator

Our next question comes from the line of John Deysher with Pinnacle.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Just a quick question, Rick. On the Usach, I think the press release says 2012 sales are expected to be approximately $14 million with an ending backlog of $24 million. Can you give us a sense of what Usach's sales contribution is going to be for 2013?

Richard L. Simons

Yes. Well, we're expecting 2013 to be between $22 million and $24 million, John.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Okay. And the release also says it's expected to be accretive in 2013. Can you give us any additional color on that?

Richard L. Simons

No. I mean, we're not going to give specific numbers. But certainly, I mean, the -- with that kind of sales level and obviously, their organization, they're going to be making money and actually good money. I will say, from an EBITA percentage perspective, there's been an excess of the 10%, and so that's what we're trying to look forward as well, is continuing to look for places that will give us that kind of returns.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Right. I think you also said, though, that the margins might be a little bit higher than the...

Richard L. Simons

Yes, the operating -- I want to say EBITDA percentage. That's the operating margin level. The gross margin versus SG&A and stuff that there will be a mixed difference there, but we'll report on that as we go through and get the actual results. But certainly, their operating margins, we anticipate to be up in the double digits.

John Eric Deysher - Bertolet Capital Trust - Pinnacle Value Fund

Operating margins?

Edward J. Gaio

Yes.

Operator

[Operator Instructions] Our next question comes from the line of Brian Rafn with Morgan Dempsey.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes, Rick. In the past, you guys have done a great job, certainly, in managing your working capital. As you kind of get this long ramp up, this kind of capital, be it an expansion in machine tool recovery, do you guys see any staging of these -- used to kind of do [ph] these semi-assembled machining centers. Is that a dinosaur of the past? Or do you see kind of -- as business picks up and you get a little more confidence that you might build a little more of that in your working capital inventory?

Richard L. Simons

That's a good point, Brian. While we still have do that situation, while we do have some machines in inventory, both -- especially in China and Taiwan, but also here in the United States. But also, at the same time, we do try to have almost finished machines, so that we can react fairly quickly. I will say, though, on a component level, we will always be watching trends. And for the long lead components, like bearings and ball screws, where you might have 4- to 6-month deliveries, we're not going to get too far out over our SKUs in terms how many of those we've ordered. So we'll -- we believe we need to be able to react quickly but we don't want to get carried away and guess wrong in terms of the market direction.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes, okay. And one final, Rick. Anything on -- with 4 more years of Obama, anything on regulatory issues that you guys see that might be material to the machine tool industry?

Edward J. Gaio

I think the biggest thing that -- we actually had our congressman here last week. And what I asked him, more than anything else, is to have them make a decision and get rid of the uncertainty. I mean, I think that -- I think the fourth quarter activity level in the United States was impacted significantly by people just being nervous and not knowing what's ahead of them. To some degree, they got through some of those, but still kicked it down -- kicked the can down the road. And I think the biggest thing they could do, of course, I'm asking for a big, big thing, but they actually work together as parties get down there and get something accomplished. And I think that's the biggest benefit we could have for the machine tool industry.

Operator

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

Richard L. Simons

Okay. Thank you, Brenda. In closing, I'd like to say that we feel 2012 was a year of accomplishment, with growth and earnings and generation of cash and still investment in the future. That is accomplished by the hard work of the employees of Hardinge throughout the world. And on behalf of all those 1,400 global employees of Hardinge and our Broad of Directors, I'd like to thank you for joining us on our fourth quarter and full year 2012 results conference call today and we look forward to updating you on our first quarter results in May. Thank you.

Operator

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

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