NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
NOTE ABASIS OF PRESENTATION
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
Operating results for the three month period and the nine month period
ended September 30, 2007 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2007. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys
annual report on Form 10-K for the year ended December 31, 2006. The Company operates in only one business
segment industrial machine tools.
The consolidated balance sheet at December 31,
2006 has been derived from the audited consolidated financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
NOTE BSTOCK-BASED COMPENSATION
On
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004
),
Share-Based
Payment
(SFAS 123R), which
requires all equity-based payments to employees, including grants of employee
stock options, to be recognized in the statement of earnings based on the grant
date fair value of the award.
The Company did
not issue any new stock options during 2007 or 2006. All previously awarded
stock option grants were fully vested at the date of the adoption of SFAS 123R,
thus, the Company did not recognize any share-based compensation expense in
2007 or 2006, related to stock options.
The Company does
recognize share-based compensation expense in relation to restricted stock
awards issued prior to January 1, 2006 and thereafter. A summary of the
restricted stock activity under the Incentive Stock Plan is as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Shares at
beginning of period
|
|
164,500
|
|
146,250
|
|
143,000
|
|
193,750
|
|
Shares granted
|
|
|
|
|
|
49,500
|
|
3,000
|
|
Units granted
|
|
14,500
|
|
|
|
14,500
|
|
|
|
Shares vested
|
|
(3,000
|
)
|
(1,081
|
)
|
(29,000
|
)
|
(29,815
|
)
|
Intrinsic value
of shares vested (in millions)
|
|
|
|
|
|
$
|
0.4
|
|
$
|
0.5
|
|
Shares
cancelled, forfeited or exercised
|
|
(2,000
|
)
|
(2,169
|
)
|
(4,000
|
)
|
(23,935
|
)
|
Shares and units
at end of period
|
|
174,000
|
|
143,000
|
|
174,000
|
|
143,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes
compensation expense for restricted stock and units over the vesting period of
the grant. Total share-based compensation expense on restricted stock and units
for the three months and nine months ended September 30, 2007 was $78,167 and
$217,665, respectively. Total share-based compensation expense on restricted
stock and units for the three months and nine months ended September
7
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2007
NOTE BSTOCK-BASED COMPENSATION
(Continued
)
30, 2006 was $40,793 and
$98,237, respectively. There were a total of 174,000 shares or units of restricted
stock outstanding at September 30, 2007. The compensation cost not yet
recognized on these restricted shares and units as of September 30, 2007 was
$1.7 million, which will be amortized over a weighted average term of 3.7
years.
A summary of the
stock option activity under the Incentive Stock Plan is as follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Options at
beginning of period
|
|
87,000
|
|
162,119
|
|
136,119
|
|
184,288
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
Options
cancelled, forfeited or exercised
|
|
(50,510
|
)
|
|
|
(99,629
|
)
|
(22,169
|
)
|
Weighted average
price per share
|
|
$
|
11.48
|
|
|
|
$
|
12.84
|
|
$
|
15.52
|
|
Options at end
of period
|
|
36,490
|
|
162,119
|
|
36,490
|
|
162,119
|
|
Weighted average
price per share
|
|
$
|
12.04
|
|
$
|
13.37
|
|
$
|
12.04
|
|
$
|
13.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following characteristics apply to the Plan
stock options that are fully vested, as of September 30, 2007:
Number
of options outstanding that are currently exercisable
|
|
|
36,490
|
|
Weighted-average
exercise price of options currently exercisable
|
|
$
|
12.04
|
|
Aggregate
intrinsic value of options currently exercisable (in millions)
|
|
$
|
0.8
|
|
Weighted-average
contractual term of currently exercisable
|
|
|
5.63
|
yrs.
|
NOTE CWARRANTIES
The Company
offers warranties for its products. The
specific terms and conditions of those warranties vary depending upon the
product sold and the country in which the Company sold the product. The Company generally provides a basic
limited warranty, including parts and labor for a period of one year. The Company estimates the costs that may be
incurred under its basic limited warranty, based largely upon actual warranty
repair cost history, and records a liability in the amount of such costs in the
month that product revenue is recognized. The resulting accrual balance is
reviewed during the year. Factors that affect the Companys warranty liability
include the number of installed units, historical and anticipated rates of
warranty claims, and cost per claim.
The Company also
sells extended warranties for some of its products. These extended warranties usually cover a
12-24 month period that begins 0-12 months after time of sale. Revenues for these extended warranties are
recognized monthly on a prorated basis until the warranty expires.
These
liabilities are reported as accrued expenses on the Companys consolidated
balance sheet.
8
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2007
NOTE CWARRANTIES (Continued
)
A reconciliation
of the changes in the Companys product warranty liability during the three
month and nine month periods ended September 30, 2007 and 2006 is as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in
thousands )
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
2,061
|
|
$
|
1,809
|
|
$
|
1,957
|
|
$
|
1,503
|
|
Provision for
warranties
|
|
695
|
|
336
|
|
1,822
|
|
1,330
|
|
Warranties
settlement costs
|
|
(698
|
)
|
(420
|
)
|
(1,718
|
)
|
(1,190
|
)
|
Other currency
translation impact
|
|
65
|
|
(17
|
)
|
62
|
|
65
|
|
Quarter end
balance
|
|
$
|
2,123
|
|
$
|
1,708
|
|
$
|
2,123
|
|
$
|
1,708
|
|
NOTE DINVENTORIES
Inventories are
summarized as follows:
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in
thousands )
|
|
Finished
products
|
|
$
|
80,288
|
|
$
|
61,389
|
|
Work-in-process
|
|
33,524
|
|
32,061
|
|
Raw materials
and purchased components
|
|
48,692
|
|
39,384
|
|
|
|
$
|
162,504
|
|
$
|
132,834
|
|
|
|
|
|
|
|
|
|
|
NOTE EINCOME TAXES
Hardinge continues to maintain a full valuation
allowance on the tax benefits of its U.S. and Canadian net deferred tax assets
and the Company expects to continue to record a full valuation allowance on
future tax benefits until an appropriate level of profitability in the U.S. and
Canada is sustained. Additionally, until
an appropriate level of profitability is reached, the Company does not expect
to recognize any significant tax benefits in future results of operations. The
Company also maintains a valuation allowance on its U.K. deferred tax asset for
minimum pension liabilities.
Each quarter,
the Company estimates its full year tax rate for jurisdictions not subject to
valuation allowances based upon its most recent forecast of full year
anticipated results and adjusts year-to-date tax expense to reflect its full
year anticipated tax rate. The effective tax rate was 19.8% and 26.0% for the
three months and nine months ended September 30, 2007. The anticipated full
year tax rate has been affected by the following discrete period items, both of
which occurred in the third quarter of 2007: a decrease in the amount of
unrecognized tax benefits and a nontaxable gain in the UK.
9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2007
NOTE E INCOME TAXES (Continued)
On January 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes:
An interpretation of FASB Statement No. 109 (FIN 48). As a result of the adoption of FIN 48 and
recognition of the cumulative effect of adoption of a new accounting principle,
the Company recorded a $0.4 million increase in the liability for uncertain
income tax benefits, with an offsetting reduction in retained earnings. This
adjustment reflects the net difference between related balance sheet accounts
before applying FIN 48, and then as measured pursuant to the provisions of FIN
48. In addition, the Company
derecognized $1.46 million of deferred tax assets, for which a full valuation
allowance had previously been provided.
The valuation allowance was also reduced by $1.46 million as part of the
adoption of FIN 48. As of September 30,
2007, the total liability for uncertain income tax benefits was $0.4
million. If recognized, essentially all
of the uncertain tax benefits and related interest would be recorded as a
benefit to income tax expense on the Consolidated Statement of Operations.
Additionally,
the adoption of FIN 48 resulted in the accrual for uncertain tax positions
being reclassified from accrued income taxes to other liabilities in the
Companys Consolidated Balance Sheet. The adoption of FIN 48 did not have a
significant impact on the Consolidated Statement of Operations for the quarter
ended September 30, 2007.
The Company
records interest and penalties on tax reserves as income tax expense in the
financial statements. For the quarter
ended September 30, 2007 a nominal interest expense was recorded; the Company
currently does not have a liability for tax penalties. As of September 30, 2007, there was $0.1
million of accrued interest related to uncertain tax positions included in the
liability for uncertain tax positions.
During the
quarter ended September 30, 2007, the Company recorded a decrease of $0.1
million in unrecognized tax benefits due to settlements with tax authorities.
The tax years 2003 to 2006 remain open to examination
by United States taxing authorities, and for the Companys other major
jurisdictions (Switzerland, UK, Taiwan, Germany, Canada, and China), the tax
years 2001 to 2006 generally remain open to routine examination by foreign
taxing authorities.
On April 1, 2007, legislation was enacted in New York
State that changed the apportionment methodology for corporate income from a three
factor formula comprised of payroll, property and sales, to one which uses
only sales. The law also provides for a
lowering of the general corporate income tax rate. These changes are fully effective for the tax
year 2007 and thereafter. As a result of
this significant change in expected state income tax rates to the Company, the
Company has reduced its net deferred tax assets by $3.1 million. Concurrently with this action, the Company
has also reduced its valuation allowance by $3.1 million due to this item. Both items were recorded in the quarter ended
June 30, 2007.
During the quarter ended September 30, 2007, the
Company was not required to record a tax provision of $0.4 million due to the
disposition of a capital asset by the UK subsidiary. Due to capital asset
indexation, most of the realized gain was not taxable.
10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2007
NOTE F DERIVATIVE FINANCIAL INSTRUMENTS
The Company
accounts for derivative financial instruments in accordance with Financial
Accounting Standards Board Statement No. 133,
Accounting
for Derivative Instruments and Hedging Activities
. The statement requires the Company to
recognize all its derivative instruments on the balance sheet at fair
value. Derivatives that are not
qualifying hedges must be adjusted to fair value through income. If the derivative is a qualifying hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives
change in fair value is immediately recognized in earnings.
NOTE GEARNINGS PER SHARE AND WEIGHTED AVERAGE
SHARES OUTSTANDING
Earnings per
share are computed in accordance with Statement of Financial Accounting
Standards No. 128
Earnings per Share
. Basic earnings per share are computed using
the weighted average number of shares of common stock outstanding during the
period. For diluted earnings per share,
the weighted average number of shares includes common stock equivalents related
primarily to restricted stock and stock options.
The following is
a reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations required by SFAS No. 128:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2007
|
|
2006
|
2007
|
|
2006
|
|
|
|
(in
thousands except per
share data )
|
|
(in
thousands except per
share data )
|
|
Net income
|
|
$
|
3,715
|
|
$
|
2,761
|
|
$
|
15,023
|
|
$
|
7,715
|
|
Numerator for
basic earnings per share
|
|
3,715
|
|
2,761
|
|
15,023
|
|
7,715
|
|
Numerator for
diluted earnings per share
|
|
3,715
|
|
2,761
|
|
15,023
|
|
7,715
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share
|
|
|
|
|
|
|
|
|
|
-weighted
average shares
|
|
11,301
|
|
8,771
|
|
10,151
|
|
8,767
|
|
Effect of
diluted securities:
|
|
|
|
|
|
|
|
|
|
Restricted stock
and stock options
|
|
131
|
|
35
|
|
126
|
|
33
|
|
Denominator for
diluted earnings per share
|
|
|
|
|
|
|
|
|
|
-adjusted
weighted average shares
|
|
11,432
|
|
8,806
|
|
10,277
|
|
8,800
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
per share
|
|
$
|
0.33
|
|
$
|
0.31
|
|
$
|
1.48
|
|
$
|
0.88
|
|
Diluted earnings
per share
|
|
$
|
0.32
|
|
$
|
0.31
|
|
$
|
1.46
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2007
NOTE HREPORTING COMPREHENSIVE INCOME (LOSS)
During the three
and nine month periods ended September 30, 2007 and 2006, the components of
total comprehensive income (loss) consisted of the following:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in
thousands )
|
|
(in
thousands)
|
|
Net Income
|
|
$
|
3,715
|
|
$
|
2,761
|
|
$
|
15,023
|
|
$
|
7,715
|
|
Other
Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments
|
|
5,682
|
|
(1,510
|
)
|
6,050
|
|
6,400
|
|
Pension
liability adjustment, net of tax
|
|
(406
|
)
|
7
|
|
(473
|
)
|
(414
|
)
|
Unrealized gain
(loss) on derivatives, net of tax:
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
11
|
|
16
|
|
47
|
|
(42
|
)
|
Net investment
hedges
|
|
(220
|
)
|
330
|
|
(157
|
)
|
(561
|
)
|
Other
comprehensive income (loss)
|
|
5,067
|
|
(1,157
|
)
|
5,467
|
|
5,383
|
|
Total
Comprehensive Income
|
|
$
|
8,782
|
|
$
|
1,604
|
|
$
|
20,490
|
|
$
|
13,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated balances of the components of
other comprehensive income (loss) consisted of the following at September 30,
2007 and December 31, 2006:
|
|
Accumulated balances
|
|
September 30,
|
|
Dec. 31,
|
|
2007
|
|
2006
|
|
|
|
(in
thousands )
|
|
Accumulated
Other Comprehensive Income (Loss):
|
|
|
|
|
|
Minimum pension
liability (net of tax of $4,124
and $4,041, respectively)
|
|
$
|
(6,664
|
)
|
$
|
(6,191
|
)
|
Implementation
of SFAS 158 on Retirement related plans (net of tax of $1,181 and $1,181,
respectively)
|
|
(11,944
|
)
|
(11,944
|
)
|
Foreign currency
translation adjustments
|
|
21,710
|
|
15,660
|
|
Unrealized gain
(loss) on derivatives, net of tax:
|
|
|
|
|
|
Cash flow
hedges, (net of tax of $634
and $642, respectively)
|
|
634
|
|
587
|
|
Net investment
hedges, (net of tax of $715 and $715, respectively)
|
|
(3,522
|
)
|
(3,365
|
)
|
Accumulated
Other Comprehensive Income (Loss)
|
|
$
|
214
|
|
$
|
(5,253
|
)
|
|
|
|
|
|
|
|
|
|
NOTE
IGOODWILL AND OTHER INTANGIBLE ASSETS
The Company
accounts for goodwill and intangibles in accordance with Statements of
Financial Accounting Standards No. 141 (SFAS 141),
Business
Combinations
, and No. 142 (SFAS 142),
Goodwill and
Other
Intangible Assets
. SFAS 142 prohibits the amortization of
goodwill and intangible assets with indefinite useful lives. The statement
requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives are amortized over their estimated useful
lives.
The total
carrying amount of goodwill was $22.0 million as of September 30, 2007 and
$19.1 million as of December 31, 2006.
The majority of this asset resulted from the acquisition of HTT Hauser
Tripet Tschudin AG in 2000. The acquisition
of the European sales and service operations of Bridgeport in 2004
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2007
NOTE
IGOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
added $0.5 million to goodwill.
The acquisition of a Canadian entity in April of 2007 added $2.8 million
to goodwill. The Company completed a valuation of intangibles acquired from the
Canadian entity and other purchase adjustments in the third quarter of 2007
that decreased the goodwill by $0.9 million. The purchase price of the Canadian
entity was approximately $2.3 million and the assumption of certain
liabilities. The results of this entity are included in the Companys results
of operations since the acquisition date of April 30, 2007. The asset value of
the goodwill increased by $1.0 million and $1.0 million, respectively, during
the three month and nine month periods ended September 30, 2007 due to the
increased dollar value of the functional currency of the Companys subsidiaries
whose balance
sheets include the goodwill.
Other intangible
assets include $6.6 million representing the value of the name, trademarks and
copyrights associated with the former worldwide operations of Bridgeport, which
were acquired in 2004. The Company uses
this strong brand name on all of its machining center lines, and therefore, the
asset has been determined to have an indefinite useful life. The asset will be
reviewed annually for impairment under the provisions of SFAS 142.
Other net
intangible assets include $4.1 million for the technical information of the
Bridgeport knee-mill purchased in January 2006, which is being amortized over
ten years, $0.7 million for intangibles acquired with the Canadian entity and
$0.6 million for patents and non-competition agreements.
NOTE JPENSION AND POST RETIREMENT PLANS
The Company
accounts for the pension plans and postretirement benefits in accordance with
Statements of Financial Accounting Standards No. 158,
Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans
an amendment of SFAS No. 87, 106 and 132
.
The following
disclosures related to the pension and postretirement benefits are presented in
accordance with Statements of Financial Accounting Standards No. 132,
Employers Disclosures about Pensions and Other Postretirement Benefit
s
as revised.
A summary of the
components of net periodic pension costs for the Company for the three and nine
months ended September 30, 2007 and 2006 is presented below:
|
|
Pension Benefits
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in
thousands )
|
|
(in
thousands )
|
|
Service cost
|
|
$
|
1,048
|
|
$
|
825
|
|
$
|
3,143
|
|
$
|
2,475
|
|
Interest cost
|
|
2,045
|
|
1,900
|
|
6,135
|
|
5,699
|
|
Expected return
on plan assets
|
|
(1,864
|
)
|
(2,243
|
)
|
(6,793
|
)
|
(6,729
|
)
|
Amortization of
prior service cost
|
|
(35
|
)
|
(33
|
)
|
(92
|
)
|
(98
|
)
|
Amortization of
transition asset
|
|
(94
|
)
|
(93
|
)
|
(295
|
)
|
(278
|
)
|
Amortization of
loss
|
|
301
|
|
347
|
|
904
|
|
1,041
|
|
Net periodic
cost
|
|
$
|
1,401
|
|
$
|
703
|
|
$
|
3,002
|
|
$
|
2,110
|
|
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2007
NOTE JPENSION AND POST RETIREMENT PLANS
(Continued)
A summary of the
components of net postretirement benefits costs for the consolidated company
for the three and nine months ended September 30, 2007 and 2006 is presented
below:
|
|
Postretirement Benefits
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in
thousands )
|
|
(in
thousands)
|
|
Service cost
|
|
$
|
8
|
|
$
|
8
|
|
$
|
23
|
|
$
|
25
|
|
Interest cost
|
|
36
|
|
39
|
|
108
|
|
116
|
|
Amortization of
prior service cost
|
|
(126
|
)
|
(126
|
)
|
(379
|
)
|
(379
|
)
|
Amortization of
loss
|
|
2
|
|
10
|
|
5
|
|
31
|
|
Net periodic
(benefit) cost
|
|
$
|
(80
|
)
|
$
|
(69
|
)
|
$
|
(243
|
)
|
$
|
(207
|
)
|
The expected
contributions to be paid during the year ending December 31, 2007 to the
domestic defined benefit plan are $1.5 million.
Contributions to the domestic plan as of September 30, 2007 and 2006
were $1.1 million and $1.8 million, respectively. The Company also provides
defined benefit pension plans or defined contribution pension plans for some of
its foreign subsidiaries. The expected
contributions to be paid during the year ending December 31, 2007 to the
foreign defined benefit plans are $2.2 million.
For each of the Companys foreign plans, contributions are made on a
monthly basis and are determined by applicable governmental regulations. As of September 30, 2007 and 2006, $1.8
million and $1.7 million of contributions have been made to the foreign plans,
respectively. Also, each of the foreign plans requires employee and employer
contributions, except for Taiwan, which has only employer contributions.
NOTE KCOMMITMENTS AND CONTINGENCIES
The Companys operations are subject to extensive
federal and state legislation and regulation relating to environmental matters.
Certain environmental laws can impose joint and
several liability for releases or threatened releases of hazardous substances
upon certain statutorily defined parties regardless of fault or the lawfulness
of the original activity or disposal.
Activities at properties owned by the Company and on adjacent areas have
resulted in environmental impacts.
In particular, the Companys New York
manufacturing facility is located within the Kentucky Avenue Wellfield on the
National Priorities List of hazardous waste sites designated for cleanup by the
United States Environmental Protection Agency (EPA) because of groundwater
contamination. The Kentucky Avenue
Wellfield site encompasses an area of approximately three square miles, which
includes sections of the Town of Horseheads and the Village of Elmira Heights
in Chemung County, New York. In February 2006, the Company received a Special
Notice Concerning a Remedial Investigation/Feasibility Study for the Koppers
Pond portion of the Kentucky Avenue Wellfield site. The EPA has documented the release and
threatened release of hazardous substances into the environment at the Kentucky
Avenue Well Field Superfund site, including releases into and in the vicinity
of the Koppers Pond (the Pond). The
hazardous substances, including metals and polychlorinated biphenyls, have been
detected in sediments in the Pond.
14
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
September
30, 2007
NOTE
KCOMMITMENTS AND CONTINGENCIES
(Continued)
A substantial
portion of the Pond is located on the Companys property. The Company, along with Beazer East, Inc.,
the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS
Corporation, and Toshiba America, Inc., has agreed to voluntarily participate
in the Remedial Investigation and Feasibility Study (RI/FS) by signing an
Administrative Settlement Agreement and Order of Consent on September 29,
2006. On September 29, 2006, the
Director of Emergency and Remedial Response Division of the U.S. Environmental
Protection Agency, Region II, approved and executed the Agreement on behalf of
the EPA. The PRPs also signed a PRP
Member Agreement, agreeing to share the cost of the RI/FS study on a per capita
basis. The cost of the RI/FS was
originally estimated to be between $0.3 million and $0.8 million. The
consultants now believe the range may be $0.6 million to $0.8 million. The
Company increased its established reserve to $0.08 million (our minimum portion
of the RI/FS study). The PRPs are currently developing the RI with the
consultants that they have retained.
Until receipt of
this notice, the Company had never been named as a potentially responsible
party at the site or received any requests for information from the EPA
concerning the site. Environmental
sampling on the Companys property within this site under supervision of
regulatory authorities has identified off-site sources for such groundwater
contamination and sediment contamination in the Pond and has found no evidence
that the Companys property is contributing to the contamination. Since the
RI/FS has not commenced, the Company has not established, other than as
described above, a reserve for any potential costs relating to this site, as it
is too early in the process to determine the Companys responsibility as well
as to estimate any potential costs to remediate. The Company did notify all
appropriate insurance carriers and is actively cooperating with them, but
whether coverage will be available has not yet been determined and possible
insurance recovery cannot now be estimated with any degree of certainty.
NOTE
LSTOCK OFFERING
On April 25, 2007,
the Company completed its public offering of 2,553,000 shares of common stock,
including a 330,000 share over-allotment option exercised in full by the
underwriters, with net proceeds of approximately $55.9 million after deducting
underwriting discounts and commissions, and offering expenses. Hardinge used these funds to repay
indebtedness under its U.S. overdraft and revolving line of credit facilities.
On September 30, 2007 Hardinge had 11,476,916 shares of common stock
outstanding.
15
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2007
NOTE MNEW ACCOUNTING STANDARDS
On
January 1, 2007, the Company adopted FIN 48.
FIN 48 clarifies the accounting for income taxes by prescribing a
minimum recognition threshold that a tax position is required to meet before
being recognized in the financial statements.
FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. Refer to Note
E, Income Taxes, for information related to the effect of adoption of FIN 48.
In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in
applying generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies whenever an entity is
measuring fair value under other accounting pronouncements that require or
permit fair value measurement. This statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of SFAS 157 on its consolidated
results of operations and financial condition.
In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS
159). This Statement allows all entities a one-time election to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value (the fair value option). SFAS
159 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of SFAS 159 on its consolidated
results of operations and financial condition.
In March 2007, the FASB
ratified Emerging Issues Task Force (EITF) issue No. 06-10 Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Collateral
Assignment Split-Dollar Life Insurance Arrangements (EITF 06-10). EITF 06-10
requires that an employer recognize a liability for the postretirement benefit
obligation related to a collateral assignment arrangementin accordance with
SFAS 106 (if deemed part of a postretirement plan) or APB 12 (if not part of a
plan). The consensus is applicable if, based on the substantive agreement with
the employee, the employer has agreed to (a) maintain a life insurance policy
during the postretirement period or (b) provide a death benefit. The EITF also
reached a consensus that an employer should recognize and measure the
associated asset on the basis of the terms of the collateral assignment
arrangement. This pronouncement is effective for fiscal years beginning after
December 15, 2007. The Company is currently assessing the impact of this EITF
Issue.
In June 2007, the FASB issued EITF Issue No. 06-11 Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF
06-11). This issue relates to the accounting for income tax benefits related
to the payment of dividends on equity-classified employee share-based payment
awards declared in fiscal years beginning after September 15, 2007. The Company
is currently evaluating the impact of EITF 06-11 on its consolidated results of
operations and financial condition.
16
PART I. ITEM 2
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview.
The following Managements Discussion and
Analysis (MD&A) is written to help the reader understand our company. The
MD&A is provided as a supplement to, and should be read in conjunction
with, our unaudited condensed financial statements, the accompanying condensed
financial notes (Notes) appearing elsewhere in this report and our annual
report on Form 10-K for the year ended December 31, 2006.
Our primary business is designing, manufacturing and
distributing high precision computer controlled metal cutting turning,
grinding, and milling machines, and related accessories. We are geographically
diversified with manufacturing facilities in the U.S and Switzerland and
assembly operations in Taiwan, China and the United Kingdom, with sales to most
industrialized countries. Approximately 65% of our net sales are to customers
outside North America and approximately 57% of our employees are located
outside of North America.
Our machine products are considered to be capital
goods and are part of what has historically been a highly cyclical industry.
Our management believes that a key performance indicator is our order level
compared to industry measures of market activity.
The U.S. market activity metric most closely watched
by our management has been metal-cutting machine orders as reported by the
Association of Manufacturing Technology (AMT), the primary industry group for
U.S. machine tool manufacturers. Other closely followed U.S. market indicators
are tracked to determine activity levels in U.S. manufacturing plants that
might purchase our products. One such measurement is the PMI (formerly called
the Purchasing Managers Index), as reported by the Institute for Supply
Management. Another measurement is capacity utilization of U.S. manufacturing
plants, as reported by the Federal Reserve Board. Similar information regarding
machine tool consumption in foreign countries is published in various trade
journals
Other key performance indicators are geographic
distribution of sales and orders, income from operations, working capital
changes, and debt level trends. In an industry where constant product
technology development has led to an average life of three to five years,
effectiveness of technological innovation and development of new products are
also key performance indicators.
Foreign currency exchange
rate changes can be significant to our reported financial results for several
reasons. Our primary competitors, particularly for the most technologically
advanced products, are now largely manufacturers in Japan, Germany, and
Switzerland, which causes the worldwide valuation of the Japanese yen, Euro,
and Swiss franc to be central to competitive pricing in all of our markets.
Also, we translate the financial results of our Swiss, Taiwanese, Chinese,
English, German and Canadian subsidiaries into U.S. dollars for consolidation
and financial reporting purposes. Period to period changes in the exchange rate
between their local currency and the U.S. dollar may significantly affect
comparative data. We also purchase computer controls and other components from
suppliers throughout the world, and our purchase costs reflect these foreign
currency exchange rate changes.
17
In January 2006, we executed our option to
purchase the technical information of the Bridgeport knee-mill machine tools,
related accessories and spare parts from BPT IP, LLC (BPT). BPT had granted
us the exclusive right to manufacture and sell certain versions of the
knee-mill machine tool, accessories and spare parts under Alliance Agreements
dated October 29, 2002 and November 3, 2004. Per the Alliance
Agreements, we agreed to pay BPT royalties based on a percentage of net sales
attributable to the products, accessories and spare parts. Royalty expense
under this agreement was $1.3 million in 2005. The purchase price for the
technical information was $5.0 million and it is being amortized over a
ten-year period. The technical information purchased includes, but is not
limited to, blueprints, designs, schematics, drawings, specifications, computer
source and object codes, customer lists and proprietary rights and assets of a
similar nature. Subsequent to this purchase, no further royalties were earned
by BPT.
Results
of Operations
Summarized selected
financial data for the three and nine months ended September 30, 2007 and 2006:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2007
|
|
2006
|
|
Change
|
|
%
Change
|
|
2007
|
|
2006
|
|
Change
|
|
%
Change
|
|
|
|
(dollars in thousands, except
per share data
)
|
|
Orders
|
|
$
|
83,410
|
|
$
|
92,203
|
|
$
|
(8,793
|
)
|
(9.5
|
)%
|
$
|
264,985
|
|
$
|
261,316
|
|
$
|
3,669
|
|
1.4
|
%
|
Net sales
|
|
$
|
83,683
|
|
$
|
79,243
|
|
$
|
4,440
|
|
5.6
|
%
|
$
|
260,359
|
|
$
|
233,197
|
|
$
|
27,162
|
|
11.6
|
%
|
Gross profit
|
|
26,166
|
|
24,014
|
|
2,152
|
|
9.0
|
%
|
83,433
|
|
70,503
|
|
12,930
|
|
18.3
|
%
|
Selling, general and administrative expenses
|
|
22,467
|
|
18,257
|
|
4,210
|
|
23.1
|
%
|
62,093
|
|
55,797
|
|
6,296
|
|
11.3
|
%
|
Income from operations
|
|
3,699
|
|
5,757
|
|
(2,058
|
)
|
(35.7
|
)%
|
21,340
|
|
14,706
|
|
6,634
|
|
45.1
|
%
|
Net income
|
|
3,715
|
|
2,761
|
|
954
|
|
34.6
|
%
|
15,023
|
|
7,715
|
|
7,308
|
|
94.7
|
%
|
Diluted earnings per share
|
|
$
|
0.32
|
|
$
|
0.31
|
|
$
|
0.01
|
|
3.2
|
%
|
$
|
1.46
|
|
$
|
0.88
|
|
0.58
|
|
65.9
|
%
|
Weighted average shares outstanding (in thousands)
|
|
11,432
|
|
8,806
|
|
2,626
|
|
29.8
|
%
|
10,277
|
|
8,800
|
|
1,477
|
|
16.8
|
%
|
Gross profit as % of net sales
|
|
31.3
|
%
|
30.3
|
%
|
1.0
pts
|
|
|
|
32.0
|
%
|
30.2
|
%
|
1.8
pts
|
|
|
|
Selling, general and administrative expenses as % of sales
|
|
26.8
|
%
|
23.0
|
%
|
3.8
pts
|
|
|
|
23.8
|
%
|
23.9
|
%
|
(0.1
pts
|
)
|
|
|
Income from operations as % of net sales
|
|
4.4
|
%
|
7.3
|
%
|
(2.9pts
|
)
|
|
|
8.2
|
%
|
6.3
|
%
|
1.9
pts
|
|
|
|
Net income as % of net sales
|
|
4.4
|
%
|
3.5
|
%
|
.9pts
|
|
|
|
5.8
|
%
|
3.3
|
%
|
2.5
pts
|
|
|
|
Orders
:
The table below summarizes orders by geographical region for the three
and nine months ended September 30, 2007 compared to the same periods in 2006:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
(dollars in thousands)
|
|
Orders
from Customers in:
|
|
2007
|
|
2006
|
|
%
Change
|
|
2007
|
|
2006
|
|
%
Change
|
|
North America
|
|
$
|
28,861
|
|
$
|
36,433
|
|
(21
|
)%
|
$
|
87,870
|
|
$
|
99,615
|
|
(12
|
)%
|
Europe
|
|
39,068
|
|
40,387
|
|
(3
|
)%
|
124,875
|
|
104,992
|
|
19
|
%
|
Asia & Other
|
|
15,481
|
|
15,383
|
|
1
|
%
|
52,240
|
|
56,709
|
|
(8
|
)%
|
|
|
$
|
83,410
|
|
$
|
92,203
|
|
(10
|
)%
|
$
|
264,985
|
|
$
|
261,316
|
|
1
|
%
|
18
Orders for the
three months ended September 30, 2007 were $83.4 million; a decrease of $8.8
million or 10% compared to the three months ended September 30, 2006. Orders for the nine months ended September
30, 2007 were $265.0 million; an increase of $3.7 million or 1% compared to the
nine months ended September 30, 2006.
North American orders
decreased 21% for the third quarter of 2007 compared to the third quarter of
2006 primarily because the 2006 orders included significant levels of orders
received at the September, 2006 International Manufacturing Technology Show.
The IMTS show is held every other year. As discussed in the prior quarter, the
Company continues to invest in the restructuring of our distribution network in
regions where results have under performed.
European orders decreased
3% for the third quarter of 2007 in comparison to a strong third quarter in
2006. Year to date orders are up 19%. In the quarter and year to date, our
overall order growth has been negatively impacted by lower growth rates in the
UK, where we have a significant market presence, in comparison to the rest of
Europe where growth rates have been greater. Beginning with the third quarter
of 2006, we experienced a significant increase in our order levels driven by
growth in demand for machine tools. For the last five quarters, our orders have
averaged $41 million per quarter.
Asia & Other orders
increased 1% for the quarter and decreased 8% on a year to date basis. The
primary driver to performance has been uneven demand patterns in the region,
which distorts comparability quarter to quarter. On a year to date basis,
excluding the impact of a single, large $6.0 million turbine blade grinder
order, Asia and Other would have increased 3%. The growth in the region is
driven by China demand, which increased 9% in the current quarter over prior
year and increased 10% on a year to date basis.
Net Sales
. The table
below summarizes net sales by geographical region for the three and nine months
ended September 30, 2007 compared to the same periods in 2006:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
(dollars in thousands)
|
|
Net Sales to Customers in:
|
|
2007
|
|
2006
|
|
%
Change
|
|
2007
|
|
2006
|
|
%
Change
|
|
North America
|
|
$
|
31,397
|
|
$
|
29,709
|
|
6
|
%
|
$
|
91,990
|
|
$
|
87,136
|
|
6
|
%
|
Europe
|
|
38,040
|
|
26,917
|
|
41
|
%
|
117,684
|
|
87,825
|
|
34
|
%
|
Asia & Other
|
|
14,246
|
|
22,617
|
|
(37
|
)%
|
50,685
|
|
58,236
|
|
(13
|
)%
|
|
|
$
|
83,683
|
|
$
|
79,243
|
|
6
|
%
|
$
|
260,359
|
|
$
|
233,197
|
|
12
|
%
|
Net sales for the three
months ended September 30, 2007 were $83.7 million; an increase of $4.4 million
or 6% compared to the three months ended September 30, 2006. Net sales for the nine months ended September
30, 2007 were $260.4 million; an increase of $27.2 million or 12% compared to
the nine months ended September 30, 2006.
The increase in
North American net sales for the third quarter and year to date in 2007
compared to the same periods in 2006 resulted from a strong demand for grinding
products offset by a reduction in turning products.
The increase in
the net sales in Europe resulted from continued strong growth in all product
categories for both the quarter and year to date in 2007 compared to the same periods
in 2006.
The decrease in net sales in Asia
& Other for the quarter resulted primarily from reductions in milling and
turning products. The decrease in milling products is a result of shipments of
turbine blade grinders of $1.8 million and $6.0 million, respectively, for the
third quarter and year to date of 2006, which did not repeat in 2007. The
decrease in turning products is a result of shipments to two China customers
for specialty application turning machines, which amounted to $4.1 million for
the quarter and year to date of 2006, which
19
did not repeat in 2007.
Excluding the impact of these shipments, net sales in the third quarter of 2007
compared to 2006 would have decreased $2.5 million, while on a year to date
basis, net sales would have increased $2.5 million. Import compliance and supply chain issues
have extended lead times and as a result delayed shipments as local assembly
backlog in China has increased by $4.6 million since the end of the first
quarter of 2007.
Under U.S. accounting
standards, results of foreign subsidiaries are translated into U.S. dollars at
the average exchange rate during the periods presented. For the third quarter
of 2007, the U.S. dollar strengthened by .4% against the New Taiwanese dollar,
while it weakened by 7.3% against the Canadian dollar, 3.3% against the Swiss
Franc, 7.9% against the British Pound Sterling, 8.0% against the Euro, and 5.4%
against the Chinese Renminbi compared to the average rates during the same
period in 2006. During the first nine
months of 2007, the U.S. dollar strengthened by 1.8% against the New Taiwanese
dollar, while it weakened by 2.8% against the Canadian dollar, 3.4% against the
Swiss Franc, 9.3% against the British Pound Sterling, 8.1% against the Euro,
and 4.5% against the Chinese Renminbi compared to the average rates for the
first nine months of 2006. The net of these foreign currencies relative to the
U.S. dollar was a favorable translation impact of $3.1 million and $8.1 million
on net sales for the three and nine months ended September 30, 2007 compared to
the same periods in 2006.
Net sales of machines accounted for 73% and
74% of consolidated net sales for the three months and nine months ended
September 30, 2007, compared to 74% and 72%, respectively, for the same periods
in 2006. Sales of non-machine products and services consist of workholding,
repair parts, service and accessories.
Gross Profit.
Gross profit for the three months ended
September 30, 2007 was $26.2 million, an increase of $2.2 million or 9%
compared to the three months ended September 30, 2006. Gross profit for the nine months ended
September 30, 2007 was $83.4 million, an increase of $12.9 million or 18%
compared to the nine months ended September 30, 2006. The increased gross profit is primarily due
to the increased sales levels discussed above, and improved product mix.
Additionally, the strengthening of foreign currencies relative to the U.S. dollar
had a favorable translation impact of $0.9 million and $2.4 million on gross
profit for the three and nine months ended September 30, 2007 compared to the
same periods in 2006. Gross profit percentage for the three and nine months
ended September 30, 2007 was 31.3% and 32.0% of net sales, respectively,
compared to 30.3% and 30.2% of net sales for the three and nine months ended
September 30, 2006, respectively. The
increase in gross profit percentage resulted from changes in channel and
product mix.
Selling, General and
Administrative Expenses
. Selling,
general and administrative (SG&A) expenses were $22.5 million, or 26.8% of
net sales for the third quarter of 2007, an increase of $4.2 million or 23%
compared to $18.3 million or 23.0% of net sales for the third quarter of 2006. SG&A expenses were $62.1 million or 23.8%
of net sales for the nine months ended September 30, 2007, an increase of $6.3
million or 11% compared to $55.8 million or 23.9% of net sales for the nine
months ended September 30, 2006. The
increase in SG&A for the third quarter of 2007 compared to the third
quarter of 2006 is primarily attributable to: $1.6 million due to the expansion
of direct sales teams in the United States, Canada, and China; a decrease in
net foreign exchange gains of $1.5 million; other costs of $0.5 million; and
the strengthening of foreign currencies relative to the U.S. dollar, which had
an unfavorable translation effect of $0.6 million. The year to date increase
for SG&A in 2007 compared to 2006 is primarily attributable to: $2.9 million
due to expansion of direct sales teams in the United States, Canada and China;
the strengthening of foreign currencies relative to the U.S. dollar, which had
an unfavorable translation effect of $1.8 million; and $1.6 million in other
costs.
20
Gain on Sale of Assets
. During the
quarter, the company sold a facility in Exeter, England and recorded a $1.4
million gain as a result of the sale.
Income
from Operations
. Income
from operations was $3.7 million, or
4.4% of net sales for the three months ended September 30, 2007, compared to
$5.8 million or 7.3% of net sales for the three months ended September 30,
2006. Income from operations was $21.3
million or 8.2% of net sales for the nine months ended September 30, 2007,
compared to $14.7 million or 6.3% of net sales for the nine months ended
September 30, 2006.
Interest Expense &
Interest Income.
Net interest
expense was $0.4 million and $2.4 million for the three months and nine months
ended September 30, 2007, respectively, compared to $1.4 million and $3.7
million for the same periods in 2006, respectively. The decrease for the third
quarter of 2007 compared to the third quarter of 2006 was primarily due to the
reduction of long-term debt resulting from the sale of $55.9 million of common
stock as previously disclosed in filings with the Securities and Exchange
Commission.
Income Taxes.
The provision for income taxes was $0.9 million and $5.3 million for the
three and nine months ended September 30, 2007, compared to $1.6 million and
$3.3 million for the three and nine months ended September 30, 2006. The effective tax rate was 19.8%,
and 26.0% for the three months and nine months ended September
30, 2007, compared to 36.7% and 30.1% for the same periods of 2006. The primary
driver for the differences in the effective tax rates was the mix of earnings
by country. Additionally, the effective tax rates for 2007 include the
non-taxable gain on the sale of the Exeter facility previously discussed.
Each quarter, an estimate of the full
year tax rate for jurisdictions not subject to a full valuation allowance is
developed based upon anticipated annual results and an adjustment is made, if
required, to the year to date income tax expense to reflect the full year
anticipated effective tax rate. We expect the 2007 effective income tax rate to
be in the range of 26% to 28%.
In 2003, the Company
recorded a valuation allowance for the full value of the deferred tax assets of
our U.S. operations. Consistent with
accounting for taxes under FAS109, no tax expense (benefits) were recorded as a
result of the pre-tax income (loss) of the U.S. operations for 2007 or 2006 to
offset the taxes accrued for pre-tax earnings from profitable foreign
subsidiaries.
Net
Income.
Net income for
the three months ended September 30, 2007 was $3.7 million, or 4.4% of net
sales, compared to $2.8 million, or 3.5% of net sales for the three months
ended September 30, 2006. Net income for
the nine months ended September 30, 2007 was $15.0 million or 5.8% of net
sales, compared to $7.7 million or 3.3% of net sales for the nine months ended
September 30, 2006. Basic and diluted
earnings per share for the three months ended September 30, 2007 were $0.33 and
$0.32, respectively, compared to $0.31 and $0.31, respectively, for the three
months ended September 30, 2006. Basic and diluted earnings per share for the
nine months ended September 30, 2007 were $1.48 and $1.46, respectively,
compared to $0.88 and $0.88, respectively, for the nine months ended September
30, 2006. Earnings per share were impacted by our issuance of 2,553,000 shares
on April 25, 2007. There were 1.5 million more weighted average shares
outstanding at September 30, 2007 following the Companys common stock
offering.
21
Liquidity and Capital Resources
At September 30, 2007 cash and cash
equivalents were $11.5 million compared to $6.8 million at December 31,
2006. The current ratio at September 30,
2007 was 3.45:1 compared to 3.22:1 at December 31, 2006.
Cash
Flow Provided By (Used In) Operating Activities and Investing Activities:
Cash flow provided by (used in)
operating and investing activities for the nine months ended September 30, 2007
compared to the same period in 2006 are summarized in the table below:
|
|
Nine months ended
September 30,
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
Net cash
provided by operating activities
|
|
$
|
488
|
|
$
|
2,813
|
|
Cash flow (used
in) investing activities
|
|
$
|
(224
|
)
|
$
|
(12,896
|
)
|
Capital
expenditures (included in investing activities)
|
|
$
|
(3,615
|
)
|
$
|
(2,715
|
)
|
Net cash provided by operating activities was $0.5 million for the nine
months ended September 30, 2007 compared to $2.8 million for the same period in
2006. This represents a decrease in cash provided by operating activities of
$2.3 million, primarily due to the increase investment in inventories.
Net cash used in investing activities was
$0.2 million for the nine months ended September 30, 2007 compared to $12.9
million for the same period in 2006.
Investing activities for the nine months ended September 30, 2007 were
primarily related to capital expenditures for routine maintenance offset by
proceeds of $3.6 million for the sale of the facility in Exeter, England. The
Company completed the acquisition of a Canadian distributor for $0.3 million in
the second quarter of 2007 for a total purchase price of $2.3 million and the
assumption of certain liabilities. The higher investing activities in 2006 were
primarily related to the $5.1 million payment for the purchase of U-Sung Co.,
Ltd., which owned the land and building previously leased by Hardinge Taiwan;
the purchase of the technical information of the Bridgeport knee-mill machine
tool business for $5.0 million; payment of $0.1 million on the purchase of the
49% interest in Hardinge Taiwan acquired in the fourth quarter of 2005, and
capital expenditures of $2.7 million.
Cash Flow Provided by Financing Activities:
Cash flow provided by financing activities for the nine months ended
September 30, 2007 and 2006 are summarized in the table below:
|
|
Nine months ended
September 30,
(in thousands)
|
|
|
|
2007
|
|
2006
|
|
(Decrease)
increase in long-term debt
|
|
$
|
(50,237
|
)
|
$
|
9,252
|
|
(Decrease)
increase in short-term notes payable to bank
|
|
(158
|
)
|
2,227
|
|
Net proceeds
from issuance of common stock
|
|
55,946
|
|
|
|
Net (purchases)
of treasury stock
|
|
(89
|
)
|
(83
|
)
|
Dividends paid
|
|
(1,590
|
)
|
(796
|
)
|
Net cash
provided by financing activities
|
|
$
|
3,872
|
|
$
|
10,600
|
|
Cash flow provided by financing activities was $3.9 million for the nine
months ended September 30, 2007 compared to $10.6 million for the same period
in 2006. The Company received net
proceeds of $55.9 million from its public offering of common stock, which was
used to repay indebtedness under its U.S. overdraft and revolving debt
outstanding, including notes payable
22
Credit Facilities:
The Company maintains a revolving loan agreement with a group of U.S.
banks. This agreement, which expires in
January 2011
,
provides for borrowings
of up to $70.0 million, secured by substantially all of the Companys domestic
assets, other than real estate, and by a pledge of 65% of its investment in its
major subsidiaries. Interest charged on
this debt is based on London Interbank Offered Rates plus a spread which varies
depending on the Companys Debt to EBITDA (earnings before interest, taxes,
depreciation and amortization) ratio. A
variable commitment fee of 0.15% to 0.375%, based on the Companys debt to
EBITDA ratio, is payable on the unused portion of the revolving loan
facility. The Company had borrowings of
$5.0 million under this agreement at September 30, 2007.
The Company also has a term loan, maturing in January 2011, with
substantially the same security and financial covenants as provided under the
revolving loan agreement described above.
At September 30, 2007, the balance of the term loan was $13.6 million
with quarterly principal payments of $1.3 million from 2007 through June 2010.
The Company maintains an $8.0 million unsecured short-term line of
credit from a bank with interest based on current prime. At September 30, 2007 borrowings under this
line of credit were $4.0 million.
The Companys
Swiss
subsidiar
ies
maintain
unsecured overdraft facilities with commercial banks, providing borrowing up to
16.1 million Swiss francs, which is equivalent to approximately $13.8 million
at September 30, 2007. The borrowing
limits on these facilities are reduced 0.1 million Swiss francs or
approximately $0.1 million per quarter. At September 30, 2007, there were no
borrowings under the overdraft facilities.
The Companys Swiss subsidiaries also have loan agreement
s
with a Swiss bank,
which are secured by the real property owned
by the Swiss subsidiaries,
which
provide for borrowings up to 11.3 million Swiss francs, which is equivalent to
approximately $9.6 million at September 30, 2007. The borrowing limits on these
facilities are reduced 0.3 million Swiss francs or approximately $0.2 million
per year. At September 30, 2007, there
were no borrowings under the mortgage facilities.
The Companys U.K.
subsidiary maintains an overdraft facility with a bank, providing borrowings up
to 0.4 million pounds sterling, which is equivalent to approximately $0.7
million at September 30, 2007. At
September 30, 2007, there were no borrowings under this facility. The Companys U.K. subsidiary also had a
mortgage debt in the amount of 0.8 million pounds sterling, which was
equivalent to approximately $1.6 million at June 30, 2007. The Company sold the Exeter, England facility
in the third quarter of 2007 and paid off the mortgage loan.
The Companys Taiwan subsidiary has
mortgage debt in the amount of 162.0 million New Taiwanese dollars which is
equivalent to approximately $4.8 million. This credit facility is secured by
the real property owned by the Taiwan subsidiary. Principal on the mortgage
loan is repaid quarterly in the amount of 4.5 million New Taiwan dollars, which
is equivalent to approximately $0.1 million.
Certain of these debt agreements require, among other
things, that the company maintain specified levels of tangible net worth,
working capital, and specified ratios of debt to EBITDA, and EBITDA minus
capital expenditures to fixed charges.
The Company was in compliance with all financial covenants at September
30, 2007.
In aggregate,
these and other borrowing agreements provide for borrowing availability of up
to $120.5 million, of which $27.4 million was borrowed at September 30,
2007.
The Company believes that
the currently available funds and credit facilities, along with internally
generated funds, will provide sufficient financial resources for ongoing
operations.
On April 25, 2007, the Company completed a common
stock offering, which resulted in the sale of 2,553,000 shares of common stock
for net proceeds of approximately $55.9 million after deducting underwriting
discounts and commissions, and estimated offering expenses. Hardinge used the net proceeds to repay
indebtedness under its U.S. overdraft and revolving line of credit facilities.
23
Our contractual obligations and commercial commitments
have not changed materially, including the impact from FIN 48, from the
disclosures in our 2006 Form 10K.
This report contains forward-look statements within
the meaning of the federal securities laws. Such statements are based upon
information known to management at this time.
The company cautions that such statements necessarily involve
uncertainties and risk and deal with matters beyond the companys ability to
control, and in many cases the company cannot predict what factors would cause
actual results to differ materially from those indicated. Among the many factors that could cause
actual results to differ from those set forth in the forward-looking statements
are fluctuations in the machine tool business cycles, changes in general
economic conditions in the U.S. or internationally, the mix of products sold
and the profit margins thereon, the relative success of the companys entry
into new product and geographic markets, the companys ability to manage its operating
costs, actions taken by customers such as order cancellations or reduced
bookings by customers or distributors, competitors actions such as price
discounting or new product introductions, governmental regulations and
environmental matters, changes in the availability and cost of materials and
supplies, the implementation of new technologies and currency
fluctuations. Any forward-looking
statement should be considered in light of these factors. The company undertakes no obligation to
revise its forward-looking statements if unanticipated events alter their
accuracy.
24
PART I.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material
changes to our market risk exposures during the first nine months of 2007. For a discussion of our exposure to market
risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market
Risks, contained in our Annual Report on Form 10-K for the year ended December
31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
The Companys management, with the participation of the Companys Chief
Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of the Companys disclosure controls and procedures as of
September 30, 2007 and has concluded that the Companys disclosure controls and
procedures were effective as of September 30, 2007. There were no changes in the Companys
internal control over financial reporting during the third quarter of 2007.
PART II. OTHER INFORMATION
Item
1. Legal Proceedings
None
Item 1.a. Risk Factors
There is no change to the risk factors disclosed in
the Companys Annual Report on Form 10K for the year ended December 31, 2006.
Item
2. Unregistered Sales of Equity
Securities and Use of Proceeds
The following table provides information about issuer
repurchases of our common stock by month for the quarter ended September 30,
2007:
Issuer Purchases of Equity
Securities
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average
Price Paid
per Share
|
|
July 1 - July
31, 2007
|
|
205
|
|
$
|
37.54
|
|
August 1 -
August 31, 2007
|
|
3,753
|
|
$
|
32.13
|
|
September 1 -
September 30, 2007
|
|
16,773
|
|
$
|
35.92
|
|
Total
|
|
20,731
|
|
|
|
The above shares were
repurchased as part of the Companys Stock Incentive Plan to satisfy tax
withholding obligations or payment for the exercise of stock options.
Item
3. Default upon Senior Securities
None
25
Item
4. Submission of Matters to a Vote of
Security Holders
None
Item
5. Other Information
None
Item 6. Exhibits
31.1
Chief
Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Chief
Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
|
|
Hardinge Inc.
|
|
|
|
November 9, 2007
|
|
By:
|
/s/ J. Patrick Ervin
|
Date
|
|
|
J. Patrick Ervin
|
|
|
|
Chairman of the Board,
President/CEO
|
|
|
|
|
November 9, 2007
|
|
By:
|
/s/ Charles R. Trego,
Jr.
|
Date
|
|
|
Charles R. Trego, Jr.
|
|
|
|
Senior Vice
President/CFO
|
|
|
|
(Principal Financial
Officer)
|
|
|
|
|
November 9, 2007
|
|
By:
|
/s/ Edward J. Gaio
|
Date
|
|
|
Edward J. Gaio.
|
|
|
|
Corporate Controller
|
|
|
|
(Principal Accounting
Officer)
|
27
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