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Hardinge (NASDAQ:HDNG)

Q4 2013 Earnings Call

February 13, 2014 11:00 am ET

Executives

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

Douglas J. Malone - Chief Financial Officer, Chief Accounting Officer and Vice President

Analysts

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Operator

Greetings, and welcome to the Hardinge Incorporated Fourth Quarter and Full Year 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Karen Howard [ph], Investor Relations. Thank you. You may begin.

Unknown Executive

Thank you, Brenda, and good morning, everyone. We appreciate your interest in Hardinge. On the call with me today, I have Rick Simons, Chairman, President and CEO; and Doug Malone, Vice President and CFO. Rick and Doug will review the fourth quarter and full year results 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. On our website, you'll also find slides that accompany the discussion to which Rick and Doug will be referring.

As you look at the slide deck, on Slide 2, you will find our Safe Harbor statement. As you are aware, we may make 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 with the other documents filed by the company with the Securities and Exchange Commission. These documents can be found on the company's website or at sec.gov.

With that, let me turn it over to you, Rick.

Richard L. Simons

Thank you, Karen. Good morning, everyone, and thank you for joining us today for our 2013 fourth quarter and full year financial review. I'd like to begin today's call by introducing our new CFO, Doug Malone. Doug joined Hardinge's team in 2008, and capably served as our Corporate Controller until we appointed him as CFO in mid-December. He's displayed a deep understanding of accounting and finance, has proven experience managing international and financial matters and possesses strong leadership skills. I expect that these attributes along with his high energy level will help Doug thrive in his new role, making him a key member of our senior management team here at Hardinge. I would also like to expand on the importance of Ed Gaio's new role as Vice President of Business Development. Ed will proactively look for potential acquisitions that meet our strategic goals to add to our global breadth and expand our product line within the machine tool accessories line. In addition, he'll be actively involved with driving the integration of the existing recently acquired businesses into the other parts of the company. His knowledge of Hardinge and our industry, his acquisition experience and his financial background make him uniquely suited for this new and strategic role.

Regarding highlights for the quarter, I believe that the fourth quarter operating results that we released this morning were solid, as good execution on our Usach and other backlog led to top line results that were somewhat better than we expected. As with prior quarters during the fiscal year, revenue from our acquired businesses continued to offset the economic softness in our base business demonstrating the success of the strategy to diversify our revenue base. Another highlight in the quarter is our strong cash flow. We generated over $17 million in cash from operations in the quarter and we also raised $10 million through January of this year from our at-the-market equity sale program.

I'm going to talk a little more specifically about our top line results for the quarter and full year, as well as some unusual items that affected our income statement for these periods. Then, I'll pass it over to Doug to provide more details on the financial results.

On Slide 3 of the presentation, you can see that fourth quarter sales were up significantly over the prior year and trailing third quarter. As I just mentioned a moment ago, our acquisitions contributed strong results during the quarter more than offsetting the economics softness we've been experiencing in our base business. Compared with last year's fourth quarter, this resulted in higher sales in Asia and North America and when comparing this quarter's results with the trailing third quarter, we realized growth in all 3 geographic regions. In North America, shipments out of the Usach backlog were the primary driver of the significantly higher sales level. Also contributing to our outperformance compared with what we had anticipated was the benefit of not having any shipment delays, no changes in customer delivery schedules that we typically have at quarter end and solid execution by our team. I believe that reflects well on our team's responsiveness to our customers' needs. In Asia, our fourth quarter sales were also impressive. This was primarily related again to Usach, which had a large multi-machine shipment to China. This more than offset the decline in organic sales from last year's quarter, as well as the trailing quarter. Europe's fourth quarter sales declined modestly from last year's fourth quarter due to the economic climate in that part of the world earlier in the year. Revenue of the acquired businesses offset most but not all of the economically-impacted organic decline.

For the full year 2013, the acquisitions helped to offset the overall decline in organic sales as the year represented a soft period in the cyclical machine tool business with all 3 major markets experiencing industry-wide reductions in demand. North American sales in the year were up almost $26 million with all of that improvement coming from the 2 acquisitions. Sales to Asia for the year were down about 8%, but we were encouraged as orders in this region progressively improved each quarter. A portion of this improvement can be attributed to the acquisitions, but the majority of the sequential growth was from improvements in our organic business. Sales into Europe in 2013 were down significantly as the economy there has suffered recession over the last couple of years and we had some disruption in our distribution network, but we have some beneficial offset from the Forkardt business. As demonstrated on this slide, you can clearly see that the sales mix among regions will vary over time, but because of our well diversified global exposure, we are able to better manage the impact of economic changes within specific regions. Additionally, the acquisition of our Forkardt Workholding Accessories business further diversifies our revenue base and helps to mitigate the cyclicality.

Now let me touch on a couple of unusual items recorded this quarter. As we announced in December, we divested of our Forkardt Switzerland business so our reported financial statements now reflects the financial results of that entity as a discontinued operation, as well as the gain recorded on the divestiture. The gain is significant and represents a proceeds of $6 million minus a relatively small amount of assets attributed to this Swiss operation, which was carved out of the total Forkardt acquisition according to the accounting rules prescribed for such a transaction. Additionally, as part of the accounting for that transaction, we recorded a noncash impairment charge related to the Forkardt tradename with part of the value of that asset attributed to Forkardt Switzerland. Obviously, we have retained the Forkardt name globally. I want to remind you that Forkardt Switzerland historically had a concentration of more than 50% of sales with 2 grinding machine tool manufacturers that are competitors with Hardinge's grinding machine brands. Through conversations with these customers, we recognize the sensitivity of the situation and their likelihood of identifying alternative sources for Forkardt-type products. Although now material to Hardinge as a whole, we concluded that selling this standalone entity allowed us to avoid the cost and issues of what likely would have become a deteriorating business. The net impact of the gain on sales and the operations of Forkardt Switzerland minus the related noncash impairment charge for intangibles was $3.9 million or $0.32 per diluted share.

Separately, our annual review for impairment of goodwill and other intangibles resulted in a $5.1 million charge relating to our Usach business, which we acquired on December 31, 2012. Usach contributed significantly to our 2013 income, generating approximately $6.5 million of EBITDA, returning over 1/3 of our $18 million purchase price. However, 2013 orders were low, which result in a lower level income in 2014 for that entity. Through the mathematical models used for an impairment review under GAAP in which short-term forecasts have a significant impact, we were required to take this charge. And we knew going into this acquisition that orders and results would vary significantly from year-to-year. We've seen an increase in activity over the past 4 months and in addition to the value it brought us in 2013, which was significant, we're confident Usach will develop into an important part of our machine operations in the future.

Now to give my own editorial comments, both this and the gain recorded on the sale of Forkardt Switzerland, the company we just purchased in May, show that some of the accounting rules today related to purchase accounting and subsequent valuations provide results that don't make logical sense, look too much at a specific point in time rather than long-term economic value and, I believe, provide results which don't help shareholders evaluate the true near- and long-term operational outlook of the company. Nevertheless, the rules have been applied as prescribed and are accurate, but I hope shareholders look pass them and concentrate on the cash generation we've achieved.

With that, I'll turn it over to Doug.

Douglas J. Malone

Thank you, Rick, and good morning, everyone. Thank you for joining us today. Please turn to Slide 4. And you can see that our adjusted gross margin was 29.4% in the fourth quarter, after being adjusted to exclude an $800,000 inventory step-up charge associated with the Usach acquisition. This represents a 1.2 percentage point decrease from the prior year's quarter, as we had some under-absorption of overhead at certain facilities in Europe related to low production volumes. Adjusted gross margin of 28.9% for the full year was down 0.1 percentage point over 2012 and excludes the $1.9 million of inventory step-up charges associated with the 2 acquisitions.

Slide 5 shows our quarterly and annual operating margin trends. Adjusted operating margin of 8.3% in the fourth quarter was up 0.8 percentage points from the prior year period's adjusted operating margin. And was adjusted to exclude the $6.2 million of impairment charges that Rick spoke of, about $300,000 of acquisition-related expenses and the inventory step-up charges I just mentioned. The prior year period's adjusted operating margin excludes about $300,000 of expenses related to the Usach acquisition. Fourth quarter adjusted operating margin was higher than we've experienced recently due to leverage we realized on higher sales. Adjusted operating margin in the fourth quarter included about $4.2 million of incremental SG&A associated with the acquired businesses, partially offset by $2 million of savings from the realignment of our sales structure in the United Kingdom, which was completed in the first quarter of 2013. We expect that SG&A will be in the range of $20 million to $21 million per quarter as we look forward. Adjusted operating margin for the full year of 5.3% was down 0.8 percentage points from 2012's adjusted operating margin on virtually flat consolidated revenue, but lower absorption at certain facilities.

Slide 6 illustrates that adjusted net income for the quarter of $8.4 million or $0.68 per share was up by over 50% from the fourth quarter of 2012 adjusted net income. Fourth quarter adjusted net income for both periods excludes the items I referenced earlier, as well as a prior year $2.7 million tax benefit. Jurisdictional mix and reserves led to an effective rate that is not meaningful in this year's fourth quarter. Net income for the full year, when adjusted to exclude the items I've talked about, was $14.9 million or $1.25 per share, which is down by about $500,000 or $0.08 per share from 2012 levels.

On Slide 7, we show some of the key metrics that we monitor. As a percentage of sales, our working capital averaged 42% in 2013 and we averaged inventory turns of 1.9. The machine tool industry generally requires high levels of inventory to be responsive to our customer needs and, as a result, we typically carry higher inventory levels than other industries. One of the ways we try to differentiate ourselves from our competition is by our ability to deliver high-quality products within our customers' required timeframe while continuing to generate cash flow through our productivity initiatives and working capital management processes.

We depict the strength of our balance sheet on Slide 8. Operating free cash flow during the quarter was an impressive $17.4 million against an equally strong $17.8 million in the prior year's quarter. We have under $27 million of debt, which represents about 11% of total capitalization. Our shareholders' equity improved by over $42 million from the end of 2012, driven by net income, our at-the-market equity sale program and a reduction in the accumulated other comprehensive loss. The $24 million decrease in accumulated other comprehensive loss is directly attributed to a decrease in our pension liability. As you can see on the balance sheet, our pension liability decreased $22 million compared to the prior year. This decrease was the result of higher discount rates and the impact of favorable return on plan assets. Capital expenditures for 2013 were about $4 million. For 2014, we're expecting capital expenditures to be in the range of $5.5 million to $6.5 million, primarily for maintenance purposes.

That concludes my remarks. I'll now turn it back to you, Rick.

Richard L. Simons

Thanks, Doug. Please turn to Slide 9, while I discuss the status of our end markets and our order trends, which is a predictor of future sales. As you can see, our fourth quarter order level was a significant improvement over last year's quarter and also reflects growth over the trailing third quarter. In North America, orders increased as economic activity improved and we saw growth in both our base and acquired businesses. In Asia, the base business order improvement over last year's quarter was augmented by the addition of orders from the acquired businesses. While we've all read about the growth concerns in countries like China and other emerging economies, we've seen indications that sales of basic machine tools, which is a market we don't address, has seen significant softness. However, there is still growth occurring in those regions and for our target customers, meaning those in need of higher-end machines, activity still remains strong. Accordingly, our business growth was successful throughout 2013 including fourth quarter.

Turning to Europe, orders did improve in the fourth quarter compared with the prior year, but if I isolate the orders received by the acquired operations, organic order levels were actually slightly lower than the prior year quarter. We've been seeing an increase in the level of quoting activity in Europe, but that increased level of activity didn't turn into orders during the fourth quarter. With a very gradual pace of economic recovery in Europe, we're proactively working with our customers and distributors to be ready to respond to their needs once those quotes turn into orders. A good portion of our European market is for grinding machines and with the lower order levels from that region in the second half of 2013, we don't yet have a clear visibility as to how sales of grinding machines will play out during 2014. This will also negatively affect our profits as our factories there aren't operating at anywhere near full capacity. Simply put, we need orders in the first half of the year in order for them to affect sales in the year.

Turning to Slide 10, we show our backlog trends by product line. Given the extremely high shipment levels and the modest order levels in the fourth quarter, backlog declined by over $30 million as compared with the end of the third quarter. You can see that most of the reduction is in grinding machines, which is to be expected given the significant amount of shipments that we saw from Usach's backlog in the fourth quarter.

From a macro economic perspective, Slide 11 shows the fall 2013 Oxford Economics machine tool forecast that we introduced last quarter. As you can see, machine tool consumption is expected to grow from 2013 levels in all regions, while Asia being the main driver of a worldwide annual growth rate of about 8% from 2013 to 2017. Nearly 70% of the Asian machine tool consumption is expected to come from China and our past investments and planned expansion in China will enable us to be responsive to the ramp-up in demand and in our expanded localized manufacturing and distributions structure. Despite the noise you are likely hearing about the economy in China, when I visited there in January, conversations with our sales team and customers gave me confidence that we'll continue to see growth in that country. We serve a high-end niche in the region and have fared well, whereas the lower-end machine tool manufacturers have struggled. In the past, I've talked about how China can turn out a dime, so we carefully monitor the economic situation there and we'll be ready for any ramp-up or, on the other side, any pull back in customer demand.

Please turn to Slide 12, as I discuss some of our long-term expectations and an update on our outlook for 2014. We remain confident that the machine tool industry will grow and we have a positive outlook for the future. We diversified our revenue base and we've improved the outlook for growth profitability of our company. For the full year 2014, we're forecasting moderate growth compared with what we reported today for 2013. However, the timing of orders, particularly for grinding machines, the Chinese New Year and the fact that there were none of the typical shipments slipping over from the fourth quarter, lead us to expect the first quarter to be relatively weak. Nonetheless, the incremental sales of Forkardt products should make sales somewhat comparable to the prior year. We expect to improve from there on a comparative basis as we achieved growth in our base business throughout the year. As you might expect, it's a challenge to grow sales in this large global and fragmented market, but we believe we've been successful at building our base of customers, applications and repeat sales. We remain dedicated to developing new innovative products to serve our customers' ever-changing needs. We also maximize our sales channels and drive competitiveness to take market share. As the earnings power, I speak frequently about HIPEx, which stands for Hardinge Inc. Performance Excellence. This is an important long-term Six Sigma based operational excellence initiative at Hardinge and I expect it will contribute in future years to improve margins as well. Our focus is on improving cash generation through inventory management and building a culture of problem-solving, productivity and continuous improvement to positively affect our operational metrics. And a critical component of our growth strategy is acquisitions. We'll be more aggressively pursuing acquisitions which can complement our expected organic growth, while driving stronger margins and reducing our cyclicality.

I want to take a minute to thank our team for the hard work and efficient execution during the fourth quarter and throughout the year of 2013. Overall, machine tool demand was down in each of our major regions, but we managed through that with respectable results. This sort of operating performance builds my confidence in the ability of the Hardinge family of management and employees to capitalize on the growth that is anticipated in the years ahead.

With that, Brenda, we'd now like to open the call up for any questions.

Question-and-Answer Session

Operator

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

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Give me a sense from the standpoint of -- you talked a little bit about end markets. Can you break down a little -- maybe general industrial, automotive, aerospace, just a sense -- you can do it on a global basis. I'm just -- kind of the key end markets, I'd be curious as to kind of where you see strength or weakness. And then also talk -- you mentioned a little bit about Europe with bid quote activity and the conversion of bid quote activity to actually orders. Kind of, how you're seeing that play across the world?

Richard L. Simons

Okay. Sure, Brian. As we look around the world, obviously, the first industry everybody talks about in terms of your growth opportunity is aerospace. It remains strong worldwide. Obviously, with the backlog of Boeing and Airbus, and then China ramping up to develop their own airplane manufacturing. So aerospace is -- it remains strong and I assume it will. Automotive is important as well. Automotive in the United States, between the growth in unit production that we all hear about, as well as new model and reductions, gives us opportunities in all our product lines, especially grinding but also the milling and turning area. And then here in the United States, the housing industry seems to be turning around and that ends up benefiting us as well. Obviously, indirectly but as the housing industry grows, then appliances and other things that our products might affect do get affected. In China, the -- really a lot of the slowdown is in the infrastructure and the big stuff, so big Caterpillar, John Deere-type of equipments for roadways, big equipment for building large buildings. And that really isn't area where we get involved in a great deal. So that's another reason why we seem, probably, to be doing better in China than what the rest of the machine tool industry is doing. And then in Europe, you've got a good question there on Europe. A lot of our sales there are grinding. The time between an actual interest or lead through the quote process, which is -- the quote process generally takes us proving that we can do a part and make sure we can do it. And then because of the dollar amount of the machines, I mean, usually $0.5 million to $1 million, the actual approval through a company's departments, management, sometimes takes longer; so a longer lead time from a quote to eventually getting the order and then building the machine. And that's why I made the comment in terms of grinding machines. We really need to see some improvement here in the first half because the orders in the first half, here, will equate to sales in the second half.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Well, could you put just a little numeric on that? Maybe the extension of that lead-in quote and engineering design time, has it gone from 6 months to a year? I mean, what kind of a duration are we talking?

Richard L. Simons

Yes, that's a good one. It always depends on the economic conditions. Obviously, when the economy is going well, people speed up and when it's going slower, everybody slows down with that final approval part. So even though we might be getting quotes and we're talking to the engineers and we're proving we can do their part, when they go to the management it takes longer during a down cycle. So I would say, normally, probably a 6-months cycle from quote to order and now it's probably extended out beyond that.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, and I'll ask one more and get back in line. With the U.S. x the disfunction in Washington, with the U.S. being somewhat of an oasis in energy, natural gas up in abundance, we've seen some reimport of manufacturing to the United States, transit cost, quality, piracy, pick your subject. Are you seeing any North American strength -- it's always been China, China, China -- given that it looks like the U.S. is having somewhat of a renaissance in manufacture?

Richard L. Simons

I personally, absolutely believe in that renaissance. I'm on the board of the AMT, our trade association, and as part of the board, we sit and talk about business and we all are seeing that. I can't quantify it. I wish I could, but it's real. And when we talk to customers, we are talking to customers and their distributors that are making parts that they had lost to, not just China but anywhere in Southeast Asia, and those parts are coming back for all the reasons you mentioned. I don't know -- I mean, I don't know of anyone that has been able to quantify that, but it's so pervasive that I'm sure it's happening. When you look at the Oxford Economics forecast for the United States, they are showing growth in machine tool consumption in the United States and I think that's part of it. I think that we are going to continue to always be a major manufacturer, and I think people are finding that, that is true. I saw another report somewhere where they start comparing the average cost per unit and it's a unit of something they've made up, but a unit of U.S. wages versus China. And with 10% inflation in China, which is real, they're catching up to that cost. Between that and the additional costs of managing quality and managing logistics and so on, it's -- we're not by any means on equal playing field, but it's -- the gap closing.

Operator

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

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Give me a sense -- I didn't see it -- I didn't get a chance to take a look at the full text. Kind of the holding collets and some of the holding tools, what was that as a percentage of sales for the year?

Richard L. Simons

Well actually, overall, we group that for reporting purposes and we have in the past with workholding, as well as repair parts. And we're -- typically, it was in the high 20s, 25 percentage level. With the addition of Forkardt now, it's going to equate to almost 1/3 of our business. And then, as you know, and that's why you're asking the question, that it's far less cyclical than other parts of our business. And the traditional business was very much weighted towards United States, but Forkardt gets more international as well. But around the world, it's just a less cyclical than the capital goods side.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes. With Ed targeting a little more in the M&A activity, you talked about that, your strategy to -- you get -- if you look globally with the '07, '08 mortgage crisis, machine tool being down 60%, 70% globally in sales. I mean, that's just a nuclear winner. So there's no question that, that's a great strategy. As you're looking at some of those markets between actually buying machine tool companies but versus, say, some of the less cyclical workholding, the tooling collets, some of that, what are you seeing in the markets themselves? Is there any more fragmentation in either of those areas? What's pricing, availability of companies? What's kind of the general tone of business, things being offered more, pricing up, down, multiples of EBITDA? Put a little color if you could on some of those M&A target markets.

Richard L. Simons

I will set aside, as you did -- on the machine side, I mean, Usach was an important purchase for us. Although, again, these valuation models would imply otherwise. It was a good price that we achieved. But on the machine side, we really aren't looking at any other acquisitions at this time. We're concentrating Ed's efforts on the accessories side of the business, which tends to have better margins. I mean, Forkardt -- one of the reasons we were attracted to Forkardt is the fact that a lot of their business is custom solutions, where they're going into a factory and really working with the customer for productivity improvements. And when you're doing that, the pricing pressure is a lot less. I mean, they're able to -- the benefit to the customer is so significant compared to someone else's capability, that the customer is willing to pay a reasonable price for that. So that's on the pricing, the products. I know you're asking also on the pricing of the companies. We were very fortunate with Forkardt to have a company that had $40 million in sales and that made an immediate bump to our overall sales. As I said in the past, a lot of these companies are going to be much smaller, $10 million to $15 million in level, typically, privately-held, family-held businesses that -- we have looked at a couple this past year where the multiples have been a little bit richer than what we would like. But what we're going to be looking for there is that we have to pay a little bit higher multiple, we're going to make sure the synergies are real and that we can bring that value to them.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Your sense, you guys have always had a superb culture. And you look at getting into that area, is part of the acquisition of some of those targets not only just the assimilation of different cultures, but are you looking for private owners exiting the business? Or is there value in keeping the retention of those management teams with those acquisitions that you make?

Richard L. Simons

I mean, actually, it was Forkardt, for instance, we were very fortunate in that we were able to keep the management team and Bill Sepanik, who came with it, our Vice President now at Forkardt operations providing great worldwide leadership in terms of that group. But you've got a valid point, Brian. When it comes to these smaller companies, quite often, it is an owner that's ready to retire and doesn't have children to pass it onto. And so that's going to be a bit more of a challenge for us to manage but, on the other hand, we have people here that we could give opportunities in the small business like that. They will be similar businesses to what our workholding here is or our Forkardt Workholding. So we think we will have to bring in some management, but there are manageable-sized companies as well.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. What -- you had some commentary, Rick, that you talked a little bit about capacity utilization, under utilization. If you kind of look, maybe, based by business, Hardinge versus Kellenberger versus some of these others, what might, in broad terms, be your capacity utilization? How many ships are you running? And then some of that's, obviously, flexible. Maybe how much overtime areas? I'm just trying to get a sense, globally, your footprint, how much excess capacity you guys have.

Richard L. Simons

In the United States, we are working overtime. In China, we're working overtime. In our factory in Taiwan, Nantou Taiwan makes products that service the rest of the world other than China. And so all of our issues that we talked about in 2013 relative to the U.S. market being down and the European market being down really affected Taiwan. But realistically in the grinding areas, we are on, what we call, short time over there. So there are days off that people are experiencing. I'd say we're probably, and this is a really rough -- I'm speaking from the cuff, here. But I would say, maybe, we're at 60% utilization of the factories over there now as we've used the short time and adjusting to the current level of orders. And that's where we -- Doug talked a bit about the pressure on the absorption of fixed costs over there because they are vertically oriented [ph].

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

What -- you talk -- in the U.S., China, what -- when you say a little overtime, are you running one shift with overtime, a second flex shift? Or I'm assuming there's got to be -- how many labor shifts would you be running in the areas where you're seeing good capacity utilization?

Richard L. Simons

Actually, I'm really proud of our management team here in the United States and most of our business here now is workholding. And Tom Mitchell, who manages the factory here, has worked with our employees and now we have 2 balanced shifts. We have only a first and second shift, whereas before we had 3. But not only do we have 2, but we have the same number of people on each of those shifts, which provides, basically, the most efficient manufacturing you can have from a standpoint of throughput. And so obviously, from those empowerments or those shifts, we do end up working some on Saturdays, some overtime on Saturdays, typically in critical -- basically, critical machines sales and not across the board.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, okay. I wouldn't be -- being from Milwaukee, I wouldn't be appropriate if I didn't ask about the job shop business. What -- anything unique in that area or trends in that area versus some of the larger, more global end markets?

Richard L. Simons

I think, there's a PMPA, which is Precision Machined Products Association, that publish a monthly thing that really targets those job shops and talks about what their activity levels are. And right now, they're still strong. They're stronger than they were in the prior year. I have to say in November and December, there was a bit of a downward trend. They always report average hours worked and also kind of a sales index, and so there was a trend downward in November and December. On the flip side, if you look at AMT's orders for machine tools, November and December actually showed a tick up. And so I think some seasonal things probably affect those guys. As we go out and talk to both our distributors and the occasions where we talk directly to customers here in the United States, they're all busy. They're still very busy and doing work for all the kind of industries we just talked about.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Yes. You've said in the past that over the last 3 or so 4 years, in the job shop area, Rick, that it's primarily been investments in throughput speed and not so much in capacity. Are you seeing any capacity being added to the job shop side?

Richard L. Simons

In the job shop, no. I would say in the Tier-2 suppliers to some of the larger companies, some -- our distributors, our strong distributor group with Morris, Gosiger and Hartwig have been working on larger projects with Tier-2 suppliers to industries like the auto industry and like the ammunition industries and so on. So we've been getting some good business in those regards. But -- and so those, I guess, they would be considered job shops. They're just bigger job shops that what our traditional base would have been. But no, the smaller job shops, I don't really hear of them buying so much for capacity as they are for productivity.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Right, got you. You alluded a little to my next question. One of the general industries that's been so strong has been the guns, ordnance, munitions in the U.S., almost 19% topline sales growth the last 3 years. Is that an area that you guys supply to when you look at the Sturm, Rugers or the Smith & Wessons or the Remingtons, having been so strong? Or on the ammunition side, is that viable end market for you guys?

Richard L. Simons

Yes, it is. I mean, I won't mention specific names out of confidentiality, but it is an end market for us. Actually, both with the machines as well as the workholding products, so yes.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, okay. And then on -- any cost inflation? Are you guys seeing anything in metals or any of the tool steel, anything that you can kind of use as inputs?

Richard L. Simons

Knock on wood, no. We aren't seeing anything dramatic. If anything, on the computer controls for our machines, the weaker yen has certainly helped us a bit there.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay. SG&A, you talked a little bit about. What are you seeing kind of general salary wage inflation across your factories? I'm guessing kind of low-single digit, but I'll put the question out anyways.

Richard L. Simons

Yes, inflationary low-single digit. I mean, really inflation is down around the world and so we react to that.

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

Okay, have you guys solved the healthcare problem? Is there any...

Richard L. Simons

Sorry, Brian, what did you say?

Brian Gary Rafn - Morgan Dempsey Capital Management, LLC

I said have you guys solved the healthcare problem, anything on the healthcare costs? What -- I'm just interested kind of in your perspective as a manufacturer?

Richard L. Simons

No. I mean, it's bad. That's as much as I need to say.

Operator

It seems we have no further questions at this time. I'd like to turn the floor back over for closing comments.

Richard L. Simons

Thank you, Brenda. To close, I'd like to thank you all for joining us. I know there were some people online that weren't asking questions, but thank you for joining us for our financial and business overview. We look forward to updating you in May for our first quarter 2014 results. Thank you and I hope you have a good day.

Operator

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

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Source: Hardinge Management Discusses Q4 2013 Results - Earnings Call Transcript
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