Hardinge (NASDAQ:HDNG), has manufactured engine lathes, a metal cutting machine, for other a century and is now selling these machines to large industrial markets such as aerospace and energy. In the machine tools & accessories oligopoly, HDNG competes against Kennametal (KMT), Stanley Works (SWK), Timken Company (TKR), and a handful of similar mid-cap companies.
HDNG is unique in the machine tools industry because the company is based in Europe. Due to the declining dollar, HDNG has seen decreased sales in the U.S., because U.S. consumers would rather buy cheaper alternatives than a more expensive European product. In June 2008, HDNG acquired a multi-currency credit facility, with the help of JP Morgan Chase, to easily exchange currencies. HDNG has seen increased sales outside of North America, particularly in Germany and China, which has further soothed the damage of the declining dollar. Like all machine tools & accessories companies, HDNG has been affected by rising raw materials prices, particularly steel prices. From March 2006 to March 2008, the average price of scrap metal increased from $212.50/tonne to $500/tonne,  causing operating margins to decrease from 7.07% to 6.42% from 2006 to 2007.
Hardinge operates in one segment:
HDNG supplies high precision computer controlled material-cutting turning machines, grinding machines, and milling machines. These products are sold to many markets, from aerospace to energy. The engine lathe, as the horizontal metal-turning machine is commonly called, is the most important of all the machine tools. It is usually considered the father of all other machine tools because many of its fundamental mechanical elements are incorporated into the design of other machine tools.
From 2006 to 2007, HDNG sales increased 9.0%, gross profit increased 7.2%, and costs of sales increased 9.9%. In that time span, grinding product sales increased 16%, milling product sales increased 7%, and turning product sales increased 2%. Backlog rose rose 4% to $360.5 million in 2007 compared to $347.8 million in 2006.
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In the machine tools industry, Hardinge competes in an oligopoly against Timken Company (TKR), Stanley Works (SWK), and Kennametal (KMT). In 2007, HDNG's sales total was 9.05% as large as its biggest machine tools competitor, KMT. These three companies have pricing power and more capital for investments and acquisitions, so HDNG and other smaller cap companies find unique ways to compete in the industry. HDNG has made efforts to capitalize on the increasing strength of the Euro as compared to the dollar.
Hardinge is a European-based machine tools company. Its industry competitors are all based in the United States. Hardinge has taken advantage of the stronger Euro by making investments. From December 2006 to December 2007, the Euro/Dollar exchange rate increased 14%, giving European companies an advantage over U.S. companies when purchasing international labor, materials, and shipping. In June 2008, HDNG acquired a multi-currency credit facility, with the help of JP Morgan Chase, to easily exchange currencies during these international transactions. The credit facility offers up to $100.0 million in secured credit (HDNG has borrowed $21.5 million since the acquisition).
The declining dollar has also caused a decrease in U.S. sales (along with the weaker U.S. economy). With the Euro/dollar translation increasing, consumers (both international and European) will look to buy cheaper U.S. products.
Hardinge sells two thirds of its products to international markets and one third to North America. From 2006 to 2007, North American orders declined 6% due to a weaker U.S. economy. The U.S. dollar is weakening, so demand for machine tools will decrease due to less manufacturing. Sales to Europe, however, grew $24.0 million (16%) in 2007 and averaged more than $42 million per quarter. European sales, at $170.9 million, accounted for half of HDNG's 2007 annual sales. HDNG was particularly strong in Germany and China. China is the number one consumer of machine tools with annual consumption of over $15 billion, approximately 23% of total world consumption. From 2006 to 2007, HDNG sales to China increased 17%. In 2007, Germany had a machine tools consumption of $12 billion. In that time period, HDNG sales to Germany increased 29%.
Rising steel and oil prices plague the machine tools & accessories industry. Scrap metal is an ingredient in Hardinge's turning machine production, so rising scrap metal costs increase Hardinge's cost of production. From 2004 to 2008, scrap metal price has grown from $75 per ton to over $550 per ton. HDNG also uses oil and gas in manufacturing and transportation. Oil prices have increased 35% since the end of 2007. Despite attempting to pass costs to consumers, HDNG's operating margin decreased from 7.07% to 6.42% from 2006 to 2007.
|Competition||Hardinge (HDNG)||Stanley Works (SWK)||Thermadyne Holding (THMD)|| Kennametal (KMT)
|Market Cap $Mil||161.20||3,800.00||228.32||2,830.00|
|Gross Profit $Mil||107.41||1,692.90||154.35||841.56|
|Net Profit Margin %||4.19%||6.20%||2.14%||7.50%|
|Operating Margin %||6.42%||10.06%||8.97%||11.29%|