Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Hardinge (NASDAQ:HDNG)

Q2 2014 Earnings Call

August 07, 2014 11:00 am ET

Executives

Karen Howard -

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

Douglas J. Malone - Chief Financial Officer and Vice President

Analysts

Les Sulewski - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Hardinge Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mrs. Karen Howard, Investor Relations. Ma'am, you may begin.

Karen Howard

Thank you, Taria, 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 second quarter 2014 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 that at the company's website, www.hardinge.com. On our website, you will 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 in other documents filed by the company with the Securities and Exchange Commission. These documents can be found on the company's website or at www.sec.gov. And 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 2014 second quarter financial review. Our results were in line with our expectations, realizing sales of about $79 million and $0.11 per share in income. Let me briefly comment on our sales for the quarter, and then I'll turn -- I'll have Doug talk us through the income statement and some balance sheet observations. After that, I'll discuss order trends and Hardinge's outlook.

On Slide 3 of the presentation, you can see that sales for the quarter were about flat compared with last year, but were sequentially up 11% from the low first quarter. Year-on-year, our sales improved some in Europe, but that small increase was offset by slight declines in the other 2 regions. With differences of $2 million or less, the comparisons can be affected by the timing of shipments of just a few machines, and don't imply any specific trend for Hardinge or the industry. On a sequential basis, our Asian sales were up 27% over the trailing quarter. Of course, keep in mind that the first quarter is traditionally weak in that part of the world, having been impacted by the Chinese New Year. However, we are feeling solid demand trends there, and part of the increase represents our growth in that market. The Chinese machine tool market has been significantly depressed over the past 2 years, but during that time, we've gained market share. As you know, we've invested in that growing region with increased technical manpower and a large manufacturing facility, providing strong customer support and manufacturing responsiveness to service our growing customer base there.

Our European sales grew 9% with a full 3 month contribution from Forkardt accounting for the entire gain. Recall that we acquired Forkardt last May, so last year's quarter only includes about 2 months for that business. Overall, the European market continues to feel stagnant to us. In North America, sales were down slightly compared with last year, about 4%. We benefited from having a full quarter of Forkardt, but our organic machine business was down. The shortfall was mainly in larger ticket grinding machines. We had relatively low backlog starting the second quarter of this year resulting from low orders at the tail end of last year for those products. Sequentially, we showed modest growth in the first quarter in all parts of our business. With that background on the top line, I'll turn it over to Doug for his commentary.

Douglas J. Malone

Thank you, Rick, and good morning to everyone on the call today. If you turn to Slide 4, you can see that our adjusted gross margin of 28% for the second quarter was down from the prior year's second quarter, but improved by 90 basis points over the trailing first quarter. The gross margin decrease compared with the prior year is primarily due to lower production levels at certain facilities, particularly those where we've manufactured grinding machines, causing under-absorption of overhead at those locations.

Turning to Slide 5. We have our quarterly and annual operating margin trends. Adjusted operating margin was 2.2% for the second quarter, which is down from prior year, but increased by 2.6 percentage points compared with the trailing first quarter. As with gross margin, our current period operating margin, when compared with other periods, have been impacted by under-absorption, as well as the incremental SG&A from the acquired Forkardt business on the associated sales volume. Looking forward, we expect SG&A to remain in the $20 million to $21 million range, with the third quarter near the high end of that range as a result of the IMTS Trade Show in September.

Turning to the next slide. Adjusted net income of $1.4 million in the second quarter was down by $2.3 million from the second quarter of 2013, which was the result of the aforementioned items. Net income in the second quarter reflects an improvement over the slight loss in the first quarter due to the improved sales levels.

On Slide 7, you can see several metrics that help us gauge our cash flow efficiency. Our managed working capital as a percentage of sales improved modestly to 41%. This was driven by our inventory turns, increasing to 2x for the 12-month period ended June 30, 2014. Our receivable days outstanding stayed flat at 60 days. I'd like to remind you that the machine tool industry requires a higher level of inventory on hand than most industries in order to meet our customer requirements. And at 41% managed working capital as a percentage of sales, we believe that this level is in the upper quartile of the machine tool industry.

On Slide 8, we show that we generated about $600,000 in operating free cash flow for the quarter. While down from last year, it reflects our preparation for delivery on the recent increase in orders that we have experienced. Our total capitalization has remained relatively flat from the end of 2013. As you can see, shareholders' equity increased as we sold stock on to our aftermarket equity issuance program, but paid down some of our outstanding debt. Our 1 year stock sale program came to its completion this week. Cash and equivalents at end of the quarter stood at $22 million, reflecting a reduction from year end due to debt repayment, acquisition-related cash outflows and networking capital requirements. Capital expenditures were $800,000 in the second quarter, putting us at $1 million for the first half. Our full year expectation for capital expenditures is now in the range of $3 million to $5 million, which is primarily for general maintenance purposes. That concludes my remarks. I'll now turn it back to Rick to discuss our orders and outlook.

Richard L. Simons

Thanks, Doug. Please turn to Slide 9, while I discuss our recent order trend. We maintained a quarterly order level above $80 million for the second consecutive quarter after having been below that level since mid-2012. This led to our trailing 12-month total for the period ending June 30, 2014, to come in almost $20 million higher than what we've experienced in calendar year 2012 and 2013. First half 2014 orders of $161 million are sequentially 11% ahead of the last half of last year. Looking around the world, as I mentioned earlier, we believe demand for our products is increasing in Asia as we see requests for quotes continue to build. We have had 2 strong order quarters in that region, and expect those levels to continue into the second half of the year. The year-on-year comparisons in our North American business benefited from a full quarter of Forkardt this year. The overall industry machine tool orders, according to AMT, our trade association, were down 1% from last year through May. Even in that environment, we were expecting comparatively higher than last year's order levels since they were so low in 2013.

This coming quarter, we would expect orders levels to be low in the first part of the quarter because of the lead up to the International Manufacturing Technology Show, IMTS, in September. Although we do book some orders at the show, the more important impact is the weeks after as our sales organization follow up on leads obtained. Also, we believe that the interest in our new products will encourage our distributors to place stocking orders for future delivery. The third quarter is usually a slow period in Europe due to planned summer vacation shutdowns by our customers in their own plant. I really can't say anything particularly promising for a big growth in orders there at this time, but on the other hand, I don't expect a continuation of the declines which appear when looking at sequential orders. We will be showing new products at our regional exhibition in Germany later in September, which we believe will generate orders in future months.

Turning to Slide 10. You can see the slightly growing backlog for grinding machines over the past 3 quarters. Remember, the large drop from third quarter to fourth last year was the result of shipping a significant dollar amount of Usach products in that quarter. The gradually increasing trend since then reflects the growing trend in orders, but that growth is not yet sufficient to get our factories in Switzerland up to anywhere near practical capacity.

Turning to Slide 11. We have the Oxford Economics' Global Machine Tool Consumption Forecast which was published in April. The Oxford Group releases their report twice a year, in the spring and autumn. As we pointed out before, following a period of flat or negative growth from 2011 through '13, machine tool consumption is forecasted to experience long-term growth well above global GDP growth, driven by the Asia region, which is heavily influenced by China activity. Remember, we nearly tripled the capacity in our manufacturing facility there in 2011, so we are well prepared to serve our customers in China at a competitive price. In October, I would expect that Oxford will scale-back their forecast for the U.S. in 2014 from the slight growth they are showing here, but I don't expect any change in their long-term outlook. A compounded annual growth rate of 7% for machine tools, with emphasis on China, along with market share gains from new products, will help us realize margin leverage on our worldwide manufacturing capacity.

Please turn to Slide 12, and I'll try to summarize our current feelings about the market and Hardinge. We mentioned in the press release that our outlook for 2014 has been slightly dampened by the global machine tool environment during most of the first half of 2014. Our current outlook of approximately 3% below 2013 sounds, perhaps, a little precise, and obviously, several things could affect that number between now and the end of the year. We do have visibility regarding long lead time machines and system, but not on the book and bill smaller dollar amount machines. We're optimistic about order rates in the coming quarters due to the new products, the IMTS Show and the momentum we continue to feel in Asia, but if achieved, some of those orders will affect sales in 2015, not this year.

In 2015, the outlook for China is very positive, particularly for the complex and high-performance machine and systems we sell to the aerospace and automotive industries. Reports of a slowing pace of economic growth are real, but we have found that the industries being impacted are those where we don't tend to have a strong presence. I'd like to also point out that with the GDP growth rate around 7.5%, it still is the fastest-growing economy in the world, and we have confidence that the strength in China that we're experiencing today will continue and result in long-term growth for us in that region.

Economic conditions in Europe appear to be continuing on a slow growth path overall. As I talk with our sales organizations in Europe, I have noticed that their overall attitude is very positive, and I can sense the optimism they have for the future, which has not been the case for some time. The United States has been a bit of a disappointment for us so far this year, as we've anticipated stronger growth over our historically low levels of last year. With that in mind, I'm excited about IMTS in the 2nd week of September. As inferred earlier, I've observed over the years that, sometimes, with the show approaching, there can be a bit of a pause in activity as customers wait for the new machine introductions.

Our long-term outlook for the industry remains positive, and we think that the stagnation in the industry impacting 2014 is temporary. The drivers of machine tool consumption shown on the Oxford Economics slide are real, and if anything, intensifying throughout the world. In addition to our optimistic view of our organic business, we continue to pursue acquisitions that we believe will complement our current operations. In grinding, we'll look to continue to broaden our product offerings and worldwide presence. In the aftermarket tooling accessory part of our company, we will continue to look for small add-on businesses that can share distribution, engineering and manufacturing resources. This part of Hardinge is being run completely separate from the machine solutions business, with separate leadership, operations and goals. Forkardt is a good fit within its strategic thinking, and by focusing our energy towards the identification of good acquisition opportunities, we're hopeful to find other solid fits. However, companies of this size tend to be family-owned so the timing of the owners' desire to sell will impact the pace with which we can execute on that strategy. With that, Taria, we'd like to open the call up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Les Sulewski of Sidoti & Company.

Les Sulewski - Sidoti & Company, LLC

I just wanted to focus in on your order flow, significantly improvement sequentially in North America. Can you talk about a little bit more if that's coming from 1 customer? Are you seeing a little bit more general-based approach?

Richard L. Simons

No, actually, that was -- a good share of that came from our Usach business. We had a strong quarter order level for our new grinding business out in Chicago, and so those tend to be big-ticket items as well. So that's realistically where most of that increase came from. Workholding -- the Forkardt business and our traditional Workholding was up a little bit and machines were fairly flat, fairly disappointing. When I say machine, it's turning and milling machine, as opposed to the Usach grinding.

Les Sulewski - Sidoti & Company, LLC

And then coming off a pretty strong order number in the first quarter, I mean, it's down at 23 now, but I mean, that's pretty much in line with how you went in second quarter of last year. So perhaps, there'll be some movements around in that space there for looking out the second half of this year, you think?

Richard L. Simons

You're looking at Europe numbers?

Les Sulewski - Sidoti & Company, LLC

Yes.

Richard L. Simons

Are you referring to Europe?

Les Sulewski - Sidoti & Company, LLC

For Europe, yes.

Richard L. Simons

Yes, certainly, in Europe, actually, our grinding business, over 50% of our Kellenberger products and Jones & Shipman products are in Europe, and they can be kind of lumpy because of the dollar amount of them. We actually had a good quarter in the first quarter, not so much in terms of closing orders in the second quarter, but the pipeline of orders, the pipeline of opportunities for quotes and leads, actually, is stronger in the second quarter than they were in the first, so we're pretty comfortable that we'll increase in the second half of the year.

Les Sulewski - Sidoti & Company, LLC

And looking at the acquisition space, do you think some of companies that, let's say, were available-for-sale last year or things that maybe were on your watch list, do you think prices have kind of gotten ahead of themselves lately or what is your take on the acquisition front?

Richard L. Simons

Yes, I agree with you, Les. I think that there's not a lot of deals done. These are $10 million, $15 million deals, and so we obviously don't hear about all of them, but I do get the sense that they're getting some pretty nice multiples on behalf of the seller. They are quite high. We are going to be disciplined about that. I mean, we're going to be looking for opportunities that if we're going to pay a little bit higher multiple, then it means we are absolutely comfortable that we're going to get synergies out of it to get back to our 20% return goal. So I do believe your point is valid. Right now, it seems to be there's a lot of money out there buying even small companies. And so as I mentioned, the pace of this, I can't guarantee you right now, but I will guarantee you we're working at it hard, and over the next 6 years, we intend to have it be an important part of our business.

Les Sulewski - Sidoti & Company, LLC

Fair enough. So it doesn't sound like you're looking to be very aggressive and just kind of overpay for something that's, even though beneficial to you, but perhaps, not at a price that's appropriate?

Richard L. Simons

Overpay, I don't know how you define that, but certainly, we aren't going to pay a lot, unless we absolutely know that the synergy there, and we're going to be able to take out costs or grow sales dramatically very quickly.

Les Sulewski - Sidoti & Company, LLC

Fair enough. And then one more for you, Rick, can you provide us an update on the Lean 6 Sigma initiative?

Richard L. Simons

Yes, I didn't include this because I was afraid I kind of included it so often, so you guys might get tired of hearing about it. But it is -- as you know, my passion is what I want to be remembered for at somewhere in, hopefully, the far future when I retire, but it's going well. I mean, the education process, the involvement, the engagement of the employees is going well. As I mentioned before, we're still in that time frame where we're educating and we're actually shooting for 100% of our employees in the 4 major operations area to be educated, at least at the Yellow Belt by the end of this year. And then we will start setting some financial goals, specifically, for them. We're encouraging people to use the tools in simple projects. But in our annual operating plan for next year, we will be setting monetary goals. I will say they aren't going to be astronomical because we still need the practices. If we try to take too big of projects on relative to this process, I think we will get overwhelmed, and I want us to get really, really good at the tools before we start taking on the gorillas or the ocean on some of those projects.

Operator

[Operator Instructions] And at this time, I'm showing no further participants in the queue. I would like to turn the call back over to management for any closing remarks.

Richard L. Simons

Okay, thank you, Taria. Slide 13, if you go back to that, provides some details of our presence at IMTS in Chicago in September, which truthfully is a big deal for our industry and a big deal for Hardinge. As you can see, we'll have 2 booths, and I encourage anyone that can and attend the show to visit us to see the new and innovative offerings we're introducing to better serve our customers' ever-changing needs. At that show, we have an operator in front of every machine we show. I think we're showing somewhere between 15 and 20 machines between the 2 booths, and having an operator in front of every one of them ready to show our customers what they can do. It's expected to be attended by over 100,000 manufacturing people, with over 1.2 million square feet of space used for display of machine tools and accessories. If anybody's been at the McCormick center, it takes up the entire building complex of the McCormick center. I'm personally excited about this year's show due to the new products we'll be exhibiting. In each of the grinding, turning and milling product lines, we'll have something new for each of those types of machines. And the excitement of these new machines not only generate demand for those specific products, but also always tend to provide positive momentum across all our lines, as customers really continue to view us as a progressive company moving aggressively forward. So it will be a good show for us. I'm excited. To close, I'd like to thank you, all, for joining us. We look forward to updating you on November for our third quarter 2014 results. Thank you, and I wish you a good day.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hardinge's (HDNG) CEO Richard Simons on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts