HARDINGE INC HDNG
November 14, 2011 - 9:35pm EST by
chris815
2011 2012
Price: 9.98 EPS $1.00 $0.00
Shares Out. (in M): 12 P/E 10.0x 0.0x
Market Cap (in $M): 117 P/FCF NM 0.0x
Net Debt (in $M): 0 EBIT 17 0
TEV (in $M): 111 TEV/EBIT 6.4x 0.0x

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Description

Hardinge, Inc. (HDNG) is a manufacturer of precision lathes, mills and grinding equipment (precision meaning that their equipment cuts and shapes metals to tolerances of one millionth of an inch). At $9.98/share, the company may be purchased for 0.8x tangible book value, 4.4x trailing EBITDA. This is remarkable in light of the following:

 

  1. The company typically makes money; median annual earnings over the last twelve years were $6 million; median EBITDA was $21 million. 
  2. HDNG manufactures and sells its products globally; just shy of  80% of revenue is from sales outside of the U.S.
  3. The company’s assets are probably understated, e.g., they maintain a $26 million reserve against the value of their inventory (12/31/10) and have a $54 million valuation allowance (12/31/10) against their tax assets. Their gross property, plant and equipment is $157 million, while their net PP&E is $57 million.

 

Valuation

The following table shows HDGN’s current capital structure and valuation:

 

(000 except share price & dividend)

 

 

 

 

Shares outstanding, 9/30/11

 11,659

 

 

 

Options, 12/31/10

 60

 

0.5%

WASP= $6.64

Restricted shares/units, 12/31/10

 

 248

2.1%

 

diluted share count

 11,719

     

Share price, 11/14/11

 9.98

     

Market capitalization

 116,952

     

Cash, 6/30/11

 24,216

     

Operating lease obligations, 12/31/10

 7,266

     

Debt, 6/30/11

 10,805

     

Enterprise value, net

 110,807

     
         

Dividend (annualized)

 0.080

     

Dividend yield

0.8%

     

 

Background

Founded in 1890, HDNG is headquartered in Elmira, New York.   HDNG is known worldwide for its precision metal turning lathes. In the 1970s, HDNG began producing computer numeric control machining centers and in 1995 HDNG acquired Kellenberger, a manufacturer of precision grinders based in Switzerland.  HDNG’s specialty is making machines that cut and shape metal to very close tolerances, measured in millionths of an inch.  These machines are used in a broad range of industries including aerospace, defense, automotive, electronics and medical equipment. HDNG’s largest customer in 2010 accounted for 11% of revenue. Typically, 25% of revenue is from collets and parts; the balance is from new machines. The company has manufacturing facilities in Elmira as well as in Switzerland, Taiwan and China.  The following table summarized HDGN’s revenue by country.

 

Revenue by Country

(000)

2009

2008

2007

U.S.

60,550

99,193

113,423

China

51,667

51,503

43,455

Germany

40,349

51,850

45,295

U.K.

15,973

26,595

35,312

Other

45,532

115,865

118,837

totals

214,071

345,006

356,322

 

In China, Germany and the U.K., HDNG sells its products through a direct sales force.  Historically, HDGN used distributors in the U.S. In 2007, however, the company fired its distributors and built a direct sales force for the U.S.  Coincidentally, we listened to the Q108 HDGN earnings call and management’s explanation of why they were changing their distribution channel in the U.S. As with other industrial equipment business, HDNG’s distribution channels are a key competitive barrier. At the time, we were concerned with management’s lack of sensitivity to the effects of dickering with their distribution channel, both from an overhead standpoint (a direct sales force is a fixed cost while distributors are a variable cost) and a customer service standpoint (distributors often form close bonds with customers over many years). This, along with valuation concerns, were reasons we did not pursue this investment in 2008.  As it turned-out, HDNG’s board of directors fired Patrick Ervin, chairman / CEO, on 5/22/08.  HDNG’s new management team recently announced that they have signed-on three distributors to cover the U.S. and have laid-off the U.S. direct sales force.  Of course, this is risky, but the risk is already priced into the stock.  Also note that the directors asserted their authority by firing Ervin and splitting the job of chairman from that of president – we infer that HDNG’s directors are serious about corporate governance.

 

Why HDNG, why now

The table at the top of this report shows that HDNG may be purchased for just slightly more than its current assets less all of its liabilities.  This gives zero value to the company’s property, plant and equipment (gross value of $144 million, net value of $55 million).  It also gives zero value to the company’s U.S. tax assets (approximately $45 million), zero value to the $24 million of inventory write-offs (which depressed gross margins by $8 million in 2009 and $7.6 million in 2008) and zero value to the company as an ongoing business. That is a lot of upside optionality that we don’t need to pay for.  Here is a summary of HDNG’s earnings since 1998.

 

 

 

 

 

 

 

 

  Earnings GAAP

 Earnings Adjusted

FCF

EBIT

EBITDA

9 ME 9/30/11

8,744

8,729

1,094

12,938

18,823

2010

(5,234)

(5,289)

(1,975)

(2,786)

4,256

2009

(33,309)

(32,081)

(25,414)

(28,422)

(18,577)

2008

(34,305)

(18,512)

(13,345)

(14,035)

(4,175)

2007

14,926

14,034

18,186

23,371

33,105

2006

13,950

13,950

16,904

23,097

29,642

2005

9,472

9,472

12,967

15,560

23,869

2004

6,825

6,825

9,944

12,494

21,474

2003

(11,284)

(11,284)

(4,150)

5,800

14,468

2002

2,000

2,000

8,630

4,614

13,581

2001

(21,853)

(562)

3,867

(7,660)

3,062

2000

7,532

7,532

14,233

12,317

22,189

1999

6,041

6,041

11,054

10,273

20,731

1998

20,283

20,901

12,305

34,258

43,282

Totals

(16,212)

21,756

64,300

101,819

225,730

           

Mean (ex 2011)

(1,920)

1,002

4,862

6,837

15,916

Median (ex 2011)

6,041

6,041

9,944

10,273

20,731

           

Current mrk. capitalization

 

 116,952

   

Current enterprise value

 

 110,807

   

 

 

The table shows that 2008 – 2010 were abysmal and 2011 will be a good year. Going forward, we have no idea of how HDNG’s business will develop.  What we do know, however, is that they have been producing equipment for the last 12 months full out, and their backlog continues to be strong.  HDNG builds equipment that is used by customers around the world to make everything from planes, to artificial femurs, to iPods.  The company is well financed and is able to produce and sell its equipment profitably in most years. 

Catalyst

This is not a spcieal situation, hence there is no particular catalyst other than it is very modestly valued and it is a real business making real products.
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