HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
1. Significant Accounting Policies
Nature of Business
Hardinge Inc. (the "Company") is a machine tool manufacturer, which designs and manufactures computer-numerically controlled cutting lathes, machining
centers, grinding machines, collets, chucks, index fixtures and other industrial products. Sales are to customers in North America, Europe, and Asia. A substantial portion of the Company's sales are
to small and medium-sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and indirectly served by the Company include: aerospace,
automotive, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment, telecommunications, and transportation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. In December of 2005, we purchased
the minority interest in the Hardinge Taiwan subsidiary and now all of the Company's subsidiaries are wholly owned. All significant intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP")
which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
The
Company identified adjustments related to intercompany profit in inventory elimination and accounts payable which have been recorded in 2007. While these adjustments related to years
2003-2006, the effect of the adjustments was not material to net income for any of the prior periods and not significant in the aggregate to net income in 2007. The impact in 2007 was a
reduction to net income of approximately $0.7 million.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of purchase. The fair value of the Company's
cash and cash equivalents approximates carrying amounts due to the short maturities.
Accounts Receivable
We perform periodic credit evaluations of the financial condition of our customers. In the past, we offered financing terms of up to seven years for our customers
in the United States and Canada and filed a lien against the equipment purchased under those terms. A description of that financing is included in Notes Receivable below. No collateral is required for
sales made on open account terms. Letters of credit from major banks back the majority of sales in the Asian region. Concentrations of credit risk with respect to accounts receivable are limited due
to the large number of customers comprising our customer base. We consider trade accounts receivable to be past due when in excess of
43
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
30 days
past terms, and charge off uncollectible balances when all collection efforts have been exhausted.
We
maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts was
$1.3 million and $1.0 million at December 31, 2007 and 2006, respectively. If the financial condition of the our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances would result in additional expense to the Company.
Notes Receivable
In the past, we provided long-term financing for the purchase of our equipment by qualified end-user customers in North America. In 2002,
we replaced the internal program by offering lease programs from selected established equipment lease financing companies in the U.S. and Canada. Before that change, customer financing was generally
offered for a term of up to seven years, with the Company retaining a security interest in the purchased equipment and filing appropriate liens. The amount of notes receivable outstanding was
$4.5 million and $6.9 million at December 31, 2007, and December 31, 2006, respectively. These amounts are net of bad debt allowances of $1.5 million and
$1.6 million at December 31, 2007 and 2006, respectively. In the event of a customer default and foreclosure, it is our practice to recondition and resell the equipment. It has been our
experience that such equipment resales have realized most, but not all, of the remaining contract value. We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our note customers to make required payments.
We
previously sold a substantial portion of our underlying customer notes receivable to various financial institutions. As of December 31, 2007 there was no outstanding balance of
the sold notes. The remaining outstanding balance as of December 31, 2006 was $0.5 million. Recourse against the Company from default of most of the notes included in the sales was
limited to 10% of the then outstanding balance of the underlying notes. We retained no rights to any retained interest in these notes and surrendered ultimate control over the notes. There were no
repurchase or remarketing agreements with these third parties.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of prepaid insurance, prepaid real estate taxes, prepaid software license agreements, and security deposits on
certain inventory purchases. Prepayments are expensed on a straight-line basis over the corresponding life of the underlying asset.
Inventories
Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost
include materials, labor and overhead.
We
assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable
value. We estimate the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Reductions to
the carrying value
44
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
of
inventories are recorded in cost of goods sold. If future demand for our products is less favorable than our forecasts, inventories may be required to be reduced, which would result in additional
expense to the Company.
|
|
Years Ended December 31
|
|
Reserve for Excess and Obsolete Inventory
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Balance at Beginning of Period
|
|
$
|
13,456
|
|
$
|
14,391
|
|
$
|
18,735
|
|
|
Additions to provision
|
|
|
2,858
|
|
|
2,600
|
|
|
(615
|
)
|
|
Less deductions
|
|
|
2,939
|
|
|
3,535
|
|
|
3,729
|
|
|
|
|
|
|
|
|
|
Balance at End of Period
|
|
$
|
13,375
|
|
$
|
13,456
|
|
$
|
14,391
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major additions, renewals or betterments are capitalized to property accounts. Maintenance and repairs are
expensed to operations as incurred. The cost of assets retired, sold or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts at the time of disposal and any
resultant gain or loss is credited or included as a component of income from operations.
Depreciation
expense is computed on the straight-line and accelerated methods over the assets' estimated useful lives. Total depreciation expense on property, plant and
equipment was $8.3 million, $8.5 million, and $8.1 million for 2007, 2006 and 2005, respectively. The depreciable lives of our fixed assets vary according to their estimated
useful lives and generally are: 40 years for buildings, 12 years for machinery, 10 years for patterns, tools, jigs, and furniture and fixtures, and 5 years for office and
computer equipment.
Goodwill and Intangibles
We account for goodwill and intangibles in accordance with Statements of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 provides that goodwill and other separately recognized intangible assets with indefinite lives are
no longer amortized, but reviewed at least annually for impairment. Intangible assets that are determined to have a finite life will continue to be amortized over their estimated useful lives and are
also subject to review for impairment.
Other
intangible assets include the value of the name, trademarks and copyrights associated with the former worldwide operations of Bridgeport, which were acquired in November 2004. The
Company uses the Bridgeport brand name on all of its machining center lines, and therefore, the asset has been determined to have an indefinite useful life. No instances of impairment were noted on
our goodwill and other intangible assets for the years ended December 31, 2007, 2006 and 2005. Footnote 3 provides a summary of goodwill and intangible assets segregated into amortizable and
nonamortizable amounts.
45
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
Income Taxes
We account for income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred
tax assets and liabilities are recognized based on differences between financial reporting and tax bases of assets and liabilities. These deferred tax assets and liabilities are measured using the
enacted tax rates and laws that will be in effect when the differences are expected to reverse. In addition, the amount of any future tax benefits is reduced by a valuation allowance until it is more
likely than not those benefits will be realized.
The
Company recorded a full valuation allowance for its U.S. net deferred tax assets in 2003. SFAS 109 requires that a valuation allowance be established when it is "more likely
than not" that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company's current and past
performance, the market conditions in which the company operates, the utilization of past tax credits, the length of carryback and carryforward periods, sales backlogs, etc. that will result in future
profits. It further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Therefore,
cumulative losses weigh heavily in the overall assessment and are a major consideration in our decision to establish a valuation allowance.
We
continue to maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax
benefits until an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K. deferred tax asset for minimum pension liabilities and maintain a
valuation allowance on our Canadian deferred tax asset for net operating loss carryforwards. Additionally, until an appropriate level of profitability is reached, we do not expect to recognize any
significant tax benefits in future results of our U.S. operations.
The
determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for
income taxes reflects a combination of income earned and taxed in the U.S. federal and various states, as well as Switzerland, U.K., Canada, Germany, China and Taiwan federal and provincial
jurisdictions. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation
allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Accordingly, these substantial judgment items impacted the effective tax
rate for 2007.
On
January 1, 2007, the Company adopted FIN 48, and thus accounts for its uncertain tax positions in accordance with the provisions of FIN 48 guidance. Refer to
Note 5, Income Taxes, for information related to the effect of adoption of FIN 48, and the accounting for the Company's uncertain tax positions.
Revenue Recognition
Revenue from product sales is generally recognized upon shipment, provided persuasive evidence of an arrangement exists, the sales price is fixed or determinable,
collectibility is reasonably assured and the title and risk of loss have passed to the customer. Sales are recorded net of discounts, customer sales incentives and returns. Transfer of ownership and
risk of loss are generally not contingent upon
46
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
contractual
customer acceptance. Prior to shipment, each machine is tested to ensure the machine's compliance with standard operating specifications as listed in our promotional literature. On an
exception basis, where larger multiple machine installations are delivered which require run-offs and customer acceptance at their facility, revenue is recognized in the period of customer
acceptance.
Revenue
from extended warranties are deferred and recognized on a pro-rata basis across the term of the warranty contract.
Sales Tax/VAT
We collect and remit taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue producing transactions between the
Company and its customers. These taxes may include sales, use and value-added taxes. We report the collection of these taxes on a net basis (excluded from revenues).
Shipping and Handling Costs
Shipping and handling cost are recorded as part of cost of goods sold.
Warranties
We offer warranties for our products. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which we sold
the product. We generally provide a
basic limited warranty, including parts and labor, for a period of one year. We estimate the costs that may be incurred under our basic limited warranty, based largely upon actual warranty repair cost
history, and record a liability for such costs in the month that product revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect our warranty liability
include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.
We
also sell extended warranties for some of our products. These extended warranties usually cover a 12-24 month period that begins up to 12 months after time
of sale. Revenues for these extended warranties are recognized monthly as a portion of the warranty expires.
These
liabilities are reported in accrued expenses on our consolidated balance sheet.
Changes
in our product warranty accrual are as follows:
|
|
2007
|
|
2006
|
|
|
|
(dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
1,957
|
|
$
|
1,503
|
|
Provisions for warranties
|
|
|
3,165
|
|
|
2,280
|
|
Warranties settlement costs
|
|
|
(2,751
|
)
|
|
(1,912
|
)
|
Othercurrency translation impact
|
|
|
98
|
|
|
86
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,469
|
|
$
|
1,957
|
|
|
|
|
|
|
|
47
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
Research and Development Costs
The costs associated with research and development programs for new products and significant product improvements are expensed as incurred as a component of cost
of goods sold. Research and development expenses totaled $10.6 million, $9.8 million, and $9.1 million, in 2007, 2006, and 2005, respectively.
Foreign Currency Translation
In accordance with SFAS No. 52 "Foreign Currency Translation", we translate foreign currencies into U.S. dollars. The functional currency for translating
the accounts of our operations outside the U.S. is the currency of the country in which the subsidiary is geographically located. The translation from the applicable foreign currencies is performed
for all balance sheet accounts of foreign subsidiaries using exchange rates in effect at the balance sheet date and income statement items are translated at an average exchange rate for the period.
The gain or loss resulting from translating subsidiary financial statements is recorded as a separate component of the consolidated statement of shareholders' equity as other comprehensive income.
Gains and losses resulting from foreign currency denominated transactions are included as a component of selling, general and administrative expense in our Consolidated Statement of Operations.
Impairment of Long Lived Assets
In accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", we review our long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such events or changes in circumstances are present, a comparison is
made of the carrying value of the asset to the estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an
impairment charge
is recognized for the amount by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to
sell and are no longer depreciated.
Fair Value of Financial Instruments
Financial Instruments are disclosed in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", which requires us to disclose
the fair value of our financial instruments for which it is practicable to estimate fair value. We used the following methods and assumptions in estimating our fair value disclosure for financial
instruments:
Cash
and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses: The carrying value of these items approximates fair
value because of the relatively short maturities of these instruments.
Notes
receivable: At December 31, 2007 and 2006, the carrying value of these notes approximated the fair value.
Long-term
debt: The fair value of variable interest rate debt is approximately equal to its carrying value, as the underlying interest rate is variable.
48
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
Interest
rate swap and foreign currency swap agreement: The fair value of the swap agreement is based on quoted market prices for similar instruments.
Related
to our term loan, we entered into a cross-currency swap agreement and an interest rate swap agreement (see Note 4). At December 31, 2007 the fair market value of
the currency swap was a liability of $0.6 million and the fair market value on the interest rate swap was immaterial. The notional amount of the cross currency swap at December 31, 2007
was $1.2 million. At December 31, 2006, the fair market values of the currency swap and interest rate swap were liabilities of $2.2 million and $0.03 million, respectively.
Derivative Financial Instruments
As a multinational Company, we are exposed to market risk from changes in foreign currency exchange rates and interest rates that could affect our results of
operations and financial condition.
We
enter into derivative instruments, including interest rate swaps and foreign currency forwards to manage our interest rate and foreign currency risks. We account for our derivative
financial instruments in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires us to recognize all of our derivative
instruments as either assets or liabilities on the balance sheet and measures those instruments at fair value. Our derivative instruments are held to hedge economic exposures, such as fluctuations in
foreign currency exchange rates on purchases of materials used in production and cash settlements of intercompany sales.
We
enter into foreign currency forwards to hedge fluctuations in foreign currency cash flows due to certain intercompany sales. We hedge this exposure with contracts settling in three to
six months and designate these forward contracts as cash flow hedges. Gains or losses resulting from the changes in the fair value of these hedging contracts, except for any ineffectiveness of the
hedge, are deferred in accumulated other comprehensive income. These deferred gains or losses are recognized in our Consolidated Statement of Operations in the same period that the hedged item is
recognized.
At
December 31, 2007 and 2006, we had notional principal amounts of approximately $3.8 million and $2.2 million, respectively, in contracts to purchase or sell
currency in the future from and to major commercial banks. The fair value of these contracts is not material.
Derivative
instruments that are not qualifying hedges must be adjusted to fair value through earnings. 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 accumulated other
comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings.
49
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
Earnings Per Share
We calculate earnings per share in accordance with SFAS No. 128 "Earnings Per Share". Basic earnings per share is computed by using the weighted average
number of shares of common stock outstanding during the year. 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:
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands except for
per share amounts)
|
Net income
|
|
$
|
14,926
|
|
$
|
13,950
|
|
$
|
7,006
|
Numerator for basic earnings per share
|
|
|
14,926
|
|
|
13,950
|
|
|
7,006
|
Numerator for diluted earnings per share
|
|
|
14,926
|
|
|
13,950
|
|
|
7,006
|
Denominator for basic earnings per share
weighted average shares
|
|
|
10,442
|
|
|
8,770
|
|
|
8,761
|
Effect of diluted securities:
restricted stock and stock options
|
|
|
120
|
|
|
39
|
|
|
61
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
adjusted weighted average shares
|
|
|
10,562
|
|
|
8,809
|
|
|
8,822
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.43
|
|
$
|
1.59
|
|
$
|
0.80
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
1.41
|
|
$
|
1.58
|
|
$
|
0.79
|
|
|
|
|
|
|
|
Stock-Based Compensation
On January 1, 2006, we 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. This was
adopted using the modified perspective method.
We
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, we did not
recognize any share-based compensation expense in 2007 or 2006, related to stock options.
We
do recognize share-based compensation expense in relation to restricted stock issued. During 2007, the Company awarded 56,000 shares of restricted stock with a value of
$1.1 million and awarded 14,500 units (a unit is equivalent to a share) with a value of $0.5 million. In 2007, 29,000 restricted shares vested with an intrinsic value of
$0.5 million and 7,500 restricted shares were forfeited. Amortization expense in 2007 for restricted stock and units was $0.3 million, offset by $0.1 million in forfeitures of
previously amortized awards. There were a total of 162,500 restricted shares and 14,500 units outstanding at December 31, 2007. We amortize compensation expense for restricted stock and
50
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
1. Significant Accounting Policies (Continued)
units
over the vesting period of the grant. The compensation cost not yet recognized on these shares is $1.8 million, which will be amortized over a weighted average term of 3.5 years.
The
following characteristics apply to the Plan stock options that are fully vested, as of December 31, 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)
|
|
$ 0.2
|
Weighted-average contractual term of options currently exercisable
|
|
5.38 years
|
We
use shares of stock held in treasury to fulfill restricted stock awards or shares earned from the exercise of stock options.
Additional
information related to the Company's Incentive Stock Plans is detailed in Note 6 of the Notes to Consolidated Financial Statements.
Comprehensive Income
We report comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes rules for the reporting
of comprehensive income and its components and requires the components to be listed in the financial statements. Comprehensive income consists of net income, minimum pension liability, foreign
currency translation adjustments and unrealized gains or losses on hedging, net of tax, and is presented in the Consolidated Statements of Shareholders' Equity.
2. Inventories
Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost
include materials, labor and overhead and are as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Finished products
|
|
$
|
85,009
|
|
$
|
61,389
|
Work-in-process
|
|
|
31,428
|
|
|
32,061
|
Raw materials and purchased components
|
|
|
42,180
|
|
|
39,384
|
|
|
|
|
|
|
|
$
|
158,617
|
|
$
|
132,834
|
|
|
|
|
|
51
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
3. Goodwill and Intangibles
The changes in the carrying amount of goodwill are as follows:
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
|
(dollars in thousands)
|
Balance at beginning of period
|
|
$
|
19,110
|
|
$
|
17,699
|
Canadian purchasegoodwill
|
|
|
2,099
|
|
|
|
Currency translation adjustment
|
|
|
1,632
|
|
|
1,411
|
|
|
|
|
|
Balance at end of period
|
|
$
|
22,841
|
|
$
|
19,110
|
|
|
|
|
|
Canadian
Hardinge Machine Tools purchased a Canadian entity for $2.3 million plus the assumption of certain liabilities and recorded $2.1 million in goodwill.
Intangible Assets
The major components of other intangible assets are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(dollars in thousands)
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
Bridgeport technical information, patents, distribution agreement, customer list and other items
|
|
$
|
9,370
|
|
$
|
8,254
|
|
Nonamortizable intangible assets:
|
|
|
|
|
|
|
|
Bridgeport name, trademarks & copyrights
|
|
|
6,582
|
|
|
6,623
|
|
|
|
|
|
|
|
|
|
|
15,952
|
|
|
14,877
|
|
Less accumulated amortization
|
|
|
(4,025
|
)
|
|
(3,028
|
)
|
|
|
|
|
|
|
Other Intangible Assets, net
|
|
$
|
11,927
|
|
$
|
11,849
|
|
|
|
|
|
|
|
Our
intangible asset amortization expense for the years ended December 31, 2007 and 2006 was $0.9 million and $0.7 million. The estimated amortization expense on
existing intangible assets for each of the next five years is approximately $0.8 million, $0.8 million, $0.8 million, $0.6 million, and $0.6 million, respectively.
The estimated useful life of the intangible assets ranges from five to ten years.
52
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
4. Financing Arrangements
Long-term debt consists of:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Note payable under revolving loan agreements, with interest rate averaging 6.07% at December 31, 2007 and 7.12% at December 31, 2006
|
|
$
|
8,000
|
|
$
|
43,175
|
|
Note payable, under term loan agreement, with an effective interest rate of 5.93% at December 31, 2007 and 6.81% at December 31, 2006
|
|
|
12,300
|
|
|
20,400
|
|
Real estate secured loans payable under terms of various loan agreements with interest rate averaging 2.92% at December 31, 2007 and 3.41% at December 31, 2006
|
|
|
4,718
|
|
|
9,761
|
|
|
|
|
|
|
|
|
|
|
25,018
|
|
|
73,336
|
|
Less: current portion
|
|
|
(5,655
|
)
|
|
(5,758
|
)
|
|
|
|
|
|
|
|
|
$
|
19,363
|
|
$
|
67,578
|
|
|
|
|
|
|
|
Domestic:
In January 2005, the Company negotiated a revised loan agreement with a group of U.S. banks and amended our existing 2002 agreements. The amended agreement
provided for a revolving loan facility allowing for borrowing of up to $40.0 million through January 2010 and a term loan of $30.0 million with quarterly principal payments of
$1.2 million through December 2006 and quarterly principal payments of $1.3 million from March 2007 through March 2011. These loans were secured by substantially all of our domestic
assets, other than real estate, and a pledge of 65% of our investment in the Company's major subsidiaries. Interest charged on this debt was based on LIBOR plus a spread that varied depending on our
debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. A variable commitment fee of 0.175% to 0.375%, based on the Company's debt to EBITDA ratio, was payable on the
unused portion of the revolving loan facility.
In
November 2006, we executed our Second Amended and Restated Revolving Credit and Term Loan Agreement with a group of U.S. banks. The amendment and restated agreement increased the
revolving loan facility from $40.0 million to $70.0 million. The amendment also increased the permitted debt to EBITDA ratio for certain portions of the term of the facility, lowered the
variable commitment fee and borrowing rates at certain debt to EBITDA ratios, and provided for permitted annual acquisitions up to a certain amount. Additionally, mandatory prepayment of the term
loans upon equity issuance and the fixed charge coverage ratio were both eased. Other terms and conditions remain essentially the same as the prior agreement. At December 31, 2007 and 2006, the
outstanding balance on the amended revolving loan facility was $8.0 million and $43.2 million, respectively. At December 31, 2007 and 2006, the outstanding balance on the term
loan was $12.3 million and $20.4 million, respectively.
We
entered into a cross-currency swap and an interest rate swap in association with the term loan. These swaps effectively converted the loan to a borrowing of Swiss francs with an
effective interest rate of 4.73% and 5.48%, at December 31, 2007 and 2006, respectively. The cross-currency swap has been
53
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
4. Financing Arrangements (Continued)
designated
as a hedge against our net investment in Hauser Tripet Tschudin ("HTT") and had a notional amount of $1.2 million at December 31, 2007. The interest rate swap effectively
converts the floating interest rate to a fixed rate, with variance by year based on our spread over LIBOR. This swap was redesignated after the January 2005 term loan was established and acted as a
hedge against $3.8 million of the term loan at December 31, 2006. At December 31, 2007, the related term loan had been paid off and the interest rate swap was deemed ineffective.
The impact on our statement of operations was immaterial. The swap expires in March 2008.
Maturities
of long-term debt under the long-term financing agreements in place are as follows for the years ended December 31 (in thousands):
|
2008
|
|
$
|
5,655
|
|
2009
|
|
|
5,655
|
|
2010
|
|
|
2,655
|
|
2011
|
|
|
8,555
|
|
2012
|
|
|
555
|
Thereafter
|
|
|
1,943
|
We
have an $8.0 million unsecured short-term line of credit from a bank with interest based on the prime rate. At December 31, 2007 and 2006, the outstanding
balance on this line was $2.8 million and $0.6 million, respectively. The agreement is negotiated annually and requires no commitment fee.
We
maintain a $1.6 million standby letter of credit, which expires March 31, 2008, for potential liabilities pertaining to self-insured workers compensation
exposure. This standby letter of credit is
renewed annually. In total, we had various letters of credit totaling $5.6 million and $4.2 million at December 31, 2007 and 2006, respectively.
International:
Our Kellenberger AG ("Kellenberger") subsidiary maintains a loan agreement with a Swiss bank providing for borrowing of up to 7.3 million Swiss francs,
which is equivalent to approximately $6.4 million at December 31, 2007. This agreement is secured by the real property owned by Kellenberger. At December 31, 2007, there were no
borrowings under this facility. At December 31, 2006, borrowings under this facility were $2.9 million.
During
2005, Kellenberger entered into an amended unsecured overdraft facility with a commercial bank that permitted borrowings of up to 7.5 million Swiss Francs, which is
equivalent to approximately $6.6 million at December 31, 2007. These lines provide for interest at competitive short-term interest rates and carry no commitment fees on
unused funds. At December 31, 2007 there was no outstanding balance under this facility and at December 31, 2006, the outstanding balance under this facility was $0.3 million.
Our
HTT subsidiary maintains a loan agreement with a Swiss bank providing for borrowings of up to 4.0 million Swiss Francs, which is equivalent to approximately
$3.5 million at December 31, 2007. This agreement is secured by real property owned by HTT. There were no borrowings under this agreement at December 31, 2007 or 2006.
54
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
4. Financing Arrangements (Continued)
HTT
also maintains an unsecured overdraft facility with a commercial bank that permits borrowings of up to 8.5 million Swiss Francs, which is equivalent to approximately
$7.5 million at December 31, 2007. These lines provide for interest at competitive short-term interest rates and carry no commitment fees on unused funds. There were no
borrowings under this overdraft line at December 31, 2007. Borrowings were $3.7 million at December 31, 2006.
Our
Hardinge Machine Tools, Ltd. subsidiary maintains an overdraft facility that allows for borrowing up to 0.4 million pounds sterling, which is equivalent to
approximately $0.7 million at December 31, 2007. There were no borrowings under this facility at December 31, 2007 and 2006. Hardinge Machine Tool, Ltd. also had a mortgage
agreement with a remaining loan balances of $1.6 million at December 31, 2006. The mortgage was paid off when the facility in the UK was sold during 2007.
In
June 2006, our Taiwan subsidiary negotiated a mortgage loan with a bank secured by the real property owned by the Taiwan subsidiary which provides borrowings of 153.0 million
New Taiwanese dollars which is equivalent to approximately $4.7 million. At December 31, 2007 and 2006 borrowings under this agreement were $4.7 million and $5.2 million,
respectively. Principal on the mortgage loan is repaid quarterly in the amount of 4.5 million New Taiwanese dollars, which is equivalent to approximately $0.1 million.
Certain
of these debt agreements require, among other things, that we maintain specified levels of tangible net worth, working capital, and specified ratios of debt to EBITDA, and EBITDA
minus capital expenditures to fixed charges.
Consolidated:
The domestic and international credit facilities, along with other short-term credit agreements, provide for access of up to $119.8 million. We
were in compliance with all financial covenants at December 31, 2007 and 2006. Total consolidated outstanding borrowings at December 31, 2007 and 2006 were $27.8 million and
$77.9 million, respectively.
Interest
paid in 2007, 2006, and 2005 totaled $3.1 million, $5.3 million, and $4.2 million, respectively.
5. Income Taxes
The Company's pre-tax income for domestic and foreign sources is as follows:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Domestic
|
|
$
|
(4,081
|
)
|
$
|
(1,290
|
)
|
$
|
(2,716
|
)
|
Foreign
|
|
|
25,517
|
|
|
19,806
|
|
|
14,561
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,436
|
|
$
|
18,516
|
|
$
|
11,845
|
|
|
|
|
|
|
|
|
|
55
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
5. Income Taxes (Continued)
Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal, state, and foreign net operating losses
|
|
$
|
9,707
|
|
$
|
10,888
|
|
|
State tax credit carryforwards
|
|
|
4,329
|
|
|
4,431
|
|
|
Postretirement benefits
|
|
|
733
|
|
|
953
|
|
|
Deferred employee benefits
|
|
|
1,596
|
|
|
1,937
|
|
|
Accrued pension
|
|
|
1,360
|
|
|
8,908
|
|
|
Inventory valuation
|
|
|
432
|
|
|
514
|
|
|
Currency and interest rate derivatives
|
|
|
60
|
|
|
1,138
|
|
|
Other
|
|
|
2,759
|
|
|
2,676
|
|
|
|
|
|
|
|
|
|
|
20,976
|
|
|
31,445
|
|
|
Less valuation allowance
|
|
|
(17,956
|
)
|
|
(26,239
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,020
|
|
|
5,206
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Tax over book depreciation
|
|
|
(4,597
|
)
|
|
(5,224
|
)
|
|
Inventory valuation
|
|
|
(2,375
|
)
|
|
(2,116
|
)
|
|
Other
|
|
|
(1,446
|
)
|
|
(1,263
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(8,418
|
)
|
|
(8,603
|
)
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(5,398
|
)
|
$
|
(3,397
|
)
|
|
|
|
|
|
|
We
continue to maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax
benefits until an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K. deferred tax asset for minimum pension liabilities and maintain a
valuation allowance on our Canadian deferred tax asset for net operating loss carryforwards. Additionally, until an appropriate level of profitability is reached, we do not expect to recognize any
significant tax benefits in future results of our U.S. operations.
In
2007, the valuation allowance decreased by $8.3 million. This was due to an increase of $0.9 million due to not recording a tax benefit on losses in the U.S. and Canada,
a decrease of $5.5 million due to the reduction in minimum pension liabilities in the U.S. and the U.K. (recorded in Other Comprehensive Income), a decrease of $3.1 million due to a
reduction in tax assets as a result of decrease in applicable U.S. state tax rates, and a decrease of $0.6 million due a reduction and a reversal of tax assets in accordance with FIN 48.
In
2006, the valuation allowance increased by $3.3 million in the U.S., $0.5 million in Canada and $0.5 million in the U.K.
At
December 31, 2007 and 2006, we had state investment tax credits of $4.3 million and $4.4 million, respectively, expiring at various dates through the year 2016.
In addition, we have U.S.
56
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
5. Income Taxes (Continued)
and
state net operating loss carryforwards of $27.0 million and $56.3 million, respectively, which expire from 2021 through 2027. We also have foreign net operating loss carryforwards of
$3.2 million. The U.S. net operating loss includes approximately $1.4 million of the net operating loss carryforward for which a benefit will be recorded in Additional Paid in Capital
when realized.
Significant
components of income tax expense (benefit) attributable to continuing operations are as follows:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
$
|
92
|
|
$
|
|
|
$
|
(410
|
)
|
|
Foreign
|
|
|
6,337
|
|
|
4,486
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
6,429
|
|
|
4,486
|
|
|
4,001
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
81
|
|
|
80
|
|
|
(1,628
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
81
|
|
|
80
|
|
|
(1,628
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
6,510
|
|
$
|
4,566
|
|
$
|
2,373
|
|
|
|
|
|
|
|
|
|
There
were no income tax refunds in 2007, 2006 or 2005. Income tax payments primarily related to foreign locations totaled $5.9 million, $4.6 million, and
$4.1 million, in 2007, 2006, and 2005, respectively.
The
following is a reconciliation of income tax expense (benefit) computed at the United States statutory rate to amounts shown in the Consolidated Statements of Income.
|
|
2007
|
|
2006
|
|
2005
|
|
Federal income taxes at statutory rate
|
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
Taxes on foreign income which differ from the U.S. statutory rate
|
|
(11.8
|
)
|
(9.9
|
)
|
(9.3
|
)
|
Effect of change in the enacted rate in Swiss jurisdiction
|
|
(0.5
|
)
|
(3.7
|
)
|
|
|
Increase in valuation allowance
|
|
4.5
|
|
2.6
|
|
1.5
|
|
Change in estimated liabilities
|
|
3.0
|
|
|
|
(8.2
|
)
|
Other
|
|
0.2
|
|
0.7
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
30.4
|
%
|
24.7
|
%
|
20.0
|
%
|
|
|
|
|
|
|
|
|
Undistributed
earnings of the foreign subsidiaries, which amounted to approximately $120.7 million at December 31, 2007, are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
57
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
5. Income Taxes (Continued)
We
had been granted a tax holiday in China. For 2007, our tax rate for our Chinese subsidiary was 7.5%, which is 50% of the normal 15% tax rate for the jurisdiction in which we operate.
As a result of new legislation effective for 2008, the corporate income tax rate will increase to 9%, which is 50% of the new 2008 tax rate of 18%. Thereafter, our tax rate in China will be phased in
until ultimately reaching a rate of 25% in 2012.
On
January 1, 2007, we 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, we reversed $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. Additionally, the
adoption of FIN 48 resulted in the accrual for uncertain tax positions being reclassified from accrued income taxes to other liabilities in our Consolidated Balance Sheet.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2007
|
|
$
|
475
|
|
Additions for tax positions related to the current year
|
|
|
32
|
|
Additions for tax positions of prior years
|
|
|
1,511
|
|
Reductions for tax positions of prior years
|
|
|
(702
|
)
|
Reductions due to lapse of applicable statute of limitations
|
|
|
|
|
Settlements
|
|
|
(230
|
)
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,086
|
|
|
|
|
|
If
recognized, essentially all of the uncertain tax benefits and related interest at December 31, 2007 would be recorded as a benefit to income tax expense on the Consolidated
Statement of Operations.
We
record interest and penalties on tax reserves as income tax expense in the financial statements. For the year ended December 31, 2007 interest expense of $0.1 million
and penalties of $0.3 million were recorded, and there was $0.2 million of accrued interest and $0.3 million of accrued penalties related to uncertain tax positions included in
the liability for uncertain tax positions at December 31, 2007.
For
the year ended December 31, 2007, we recognized $0.8 million of deferred tax assets that had previously been reversed, due to the lapse of applicable statutes of
limitations. We determined that the deferred tax assets should be subject to a full valuation allowance, and the valuation allowance was also increased by $0.8 million.
The
tax years 2004 to 2007 remain open to examination by United States taxing authorities, and for our other major jurisdictions (Switzerland, UK, Taiwan, Germany, Canada, and China),
the tax years 2002 to 2007 generally remain open to routine examination by foreign taxing authorities.
58
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
5. Income Taxes (Continued)
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, we reduced our net deferred tax assets by $3.1 million during 2007. Concurrently with this
action, we also reduced our valuation allowance by $3.1 million due to this item.
6. Incentive Stock Plans
We have an Incentive Stock Plan which allows the Board of Directors to issue restricted stock, performance share awards, stock options, and stock appreciation
rights. Under the 2002 Plan, an aggregate of 450,000 shares of common stock can be awarded.
The
Company recognizes share-based compensation expense in relation to restricted stock awards. A summary of the restricted stock activity under the Incentive Stock Plan is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Shares at beginning of period
|
|
|
143,000
|
|
|
193,750
|
|
200,750
|
|
Shares granted
|
|
|
56,000
|
|
|
3,000
|
|
46,000
|
|
Units granted
|
|
|
14,500
|
|
|
|
|
|
|
Shares vested
|
|
|
(29,000
|
)
|
|
(29,815
|
)
|
|
|
Shares cancelled or forfeited
|
|
|
(7,500
|
)
|
|
(23,935
|
)
|
(53,000
|
)
|
|
|
|
|
|
|
|
|
Shares and units at end of period
|
|
|
177,000
|
|
|
143,000
|
|
193,750
|
|
|
|
|
|
|
|
|
|
Intrinsic value of shares vested (in millions)
|
|
$
|
0.5M
|
|
$
|
0.5M
|
|
|
|
A
total of 177,000 and 143,000 restricted shares/units of common stock were outstanding under the plans at December 31, 2007 and December 31, 2006, respectively. All shares
of restricted stock are subject to forfeiture and restrictions on transfer. Unconditional vesting occurs upon the completion of a specified period ranging from three to eight years from date of grant.
Deferred
compensation associated with these restricted stock awards is measured by the market value of the stock on the date of grant and totaled $1.6 million,
$0.1 million, and $0.7 million, related to awards in 2007, 2006, and 2005, respectively. This deferred compensation is being amortized on a straight-line basis over the
specified service period, which ranges from three to eight years. The unamortized deferred compensation at December 31, 2007, and 2006 totaled $1.8 million and $0.6 million,
repectively, and is included in additional paid in capital as a reduction of shareholders' equity. At December 31, 2005, the unamortized deferred compensation was $1.0 million and was
included in deferred employee benefits as a reduction to shareholders' equity.
59
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
6. Incentive Stock Plans (Continued)
A summary of the stock option activity under the Incentive Stock Plans is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Options at beginning of period
|
|
|
136,119
|
|
|
184,288
|
|
|
235,918
|
|
Options granted
|
|
|
|
|
|
|
|
|
4,500
|
|
Weighted average grant price per share
|
|
|
|
|
|
|
|
$
|
14.80
|
|
Market value per share at date of grant
|
|
|
|
|
|
|
|
$
|
14.80
|
|
Options canceled or forfeited
|
|
|
(29,250
|
)
|
|
(41,917
|
)
|
|
(27,083
|
)
|
Weighted average price per share
|
|
$
|
17.19
|
|
$
|
17.27
|
|
$
|
12.69
|
|
Options exercised
|
|
|
(70,379
|
)
|
|
(6,252
|
)
|
|
(29,047
|
)
|
Weighted average price per share
|
|
$
|
11.04
|
|
$
|
9.00
|
|
$
|
9.51
|
|
|
|
|
|
|
|
|
|
Options at end of period
|
|
|
36,490
|
|
|
136,119
|
|
|
184,288
|
|
|
|
|
|
|
|
|
|
During
2007, the Company received cash of $0.8 million for 70,379 options that were exercised. The aggregate intrinsic value of options exercised during the year ended
December 31, 2007 was $1.5 million.
The
following table summarizes information about the exercisable stock options outstanding as of December 31, 2007:
Range of exercise prices
|
|
Number
outstanding
and exercisable
at 12/31/07
|
|
Weighted
average
remaining life
in years
|
|
Weighted
average
exercise price
|
$6.71 to $7.81
|
|
11,990
|
|
6.1
|
|
$
|
7.60
|
$10.50 to $14.80
|
|
20,750
|
|
5.8
|
|
$
|
12.79
|
$17.44 to $25.67
|
|
3,750
|
|
0.6
|
|
$
|
22.04
|
|
|
|
|
|
|
|
Total
|
|
36,490
|
|
5.4
|
|
$
|
12.04
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of exercisable options as of December 31, 2007 was $0.2 million.
60
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
7. Industry Segment and Foreign Operations
We operate in one business segmentindustrial machine tools.
Domestic
and foreign operations consist of:
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
North
America
|
|
Europe
|
|
Asia/
Other
|
|
North
America
|
|
Europe
|
|
Asia/
Other
|
|
North
America
|
|
Europe
|
|
Asia/
Other
|
|
|
(in thousands)
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
120,755
|
|
158,349
|
|
52,413
|
|
124,403
|
|
124,507
|
|
38,598
|
|
112,576
|
|
115,349
|
|
32,302
|
Export
|
|
25,931
|
|
39,269
|
|
41,908
|
|
25,959
|
|
43,413
|
|
33,846
|
|
23,515
|
|
37,386
|
|
22,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,686
|
|
197,618
|
|
94,321
|
|
150,362
|
|
167,920
|
|
72,444
|
|
136,091
|
|
152,735
|
|
55,015
|
Less interarea eliminations
|
|
23,641
|
|
17,967
|
|
40,695
|
|
17,521
|
|
13,261
|
|
33,323
|
|
17,026
|
|
10,911
|
|
25,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
123,045
|
|
179,651
|
|
53,626
|
|
132,841
|
|
154,659
|
|
39,121
|
|
119,065
|
|
141,824
|
|
29,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
135,595
|
|
172,564
|
|
53,669
|
|
135,295
|
|
154,402
|
|
40,963
|
|
128,630
|
|
137,080
|
|
34,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales attributable to European Operations and Asian Operations are based on those sales generated by subsidiaries located in Europe and Asia.
Interarea
sales are accounted for at prices comparable to normal, unaffiliated customer sales, reduced by estimated costs not incurred on these sales.
No
single customer accounted for more than 5% of consolidated sales in 2007 and 2006. In 2005, one customer accounted for approximately 6% of consolidated sales.
Machine
sales accounted for 74.8% and 73.3% of 2007 and 2006 net sales, respectively. Sales on non-machine products and services, primarily repair parts and accessories made
up the balance.
Revenues from external customers by country:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
% of
Total
|
|
2006
|
|
% of
Total
|
|
2005
|
|
% of
Total
|
|
|
|
(in thousands)
|
|
U.S. Sales
|
|
$
|
113,423
|
|
31.8
|
%
|
$
|
109,288
|
|
33.4
|
%
|
$
|
94,101
|
|
32.5
|
%
|
Germany
|
|
|
45,295
|
|
12.7
|
%
|
|
32,631
|
|
10.0
|
%
|
|
28,906
|
|
10.0
|
%
|
China
|
|
|
43,455
|
|
12.3
|
%
|
|
45,581
|
|
14.0
|
%
|
|
33,637
|
|
11.6
|
%
|
England
|
|
|
35,312
|
|
9.9
|
%
|
|
25,037
|
|
7.7
|
%
|
|
24,529
|
|
8.4
|
%
|
Other Foreign
|
|
|
118,837
|
|
33.3
|
%
|
|
114,084
|
|
34.9
|
%
|
|
108,752
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign
|
|
|
242,899
|
|
|
|
|
217,333
|
|
|
|
|
195,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales
|
|
$
|
356,322
|
|
100.0
|
%
|
$
|
326,621
|
|
100.0
|
%
|
$
|
289,925
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
7. Industry Segment and Foreign Operations (Continued)
Net Property, Plant and Equipment by country:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
% of
Total
|
|
2006
|
|
% of
Total
|
|
2005
|
|
% of
Total
|
|
|
|
(in thousands)
|
|
U.S.
|
|
$
|
21,569
|
|
35.0
|
%
|
$
|
23,763
|
|
37.1
|
%
|
$
|
27,114
|
|
40.9
|
%
|
Switzerland
|
|
|
29,306
|
|
47.6
|
%
|
|
27,202
|
|
42.5
|
%
|
|
26,042
|
|
39.2
|
%
|
Taiwan
|
|
|
7,791
|
|
12.7
|
%
|
|
7,937
|
|
12.4
|
%
|
|
8,077
|
|
12.2
|
%
|
Other Foreign
|
|
|
2,865
|
|
4.7
|
%
|
|
5,150
|
|
8.0
|
%
|
|
5,088
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Foreign
|
|
|
39,962
|
|
|
|
|
40,289
|
|
|
|
|
39,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net PP&E
|
|
$
|
61,531
|
|
100.0
|
%
|
$
|
64,052
|
|
100.0
|
%
|
$
|
66,321
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Shareholders' Equity
Stock 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. We used these funds
to repay indebtedness under our U.S. overdraft and revolving line of credit facilities. On December 31, 2007 and 2006, we had 11,479,916 and 8,836,875 shares of common stock outstanding,
respectively.
Treasury Shares
The number of shares of common stock in treasury was as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Sharesbeginning of year
|
|
1,083,117
|
|
1,063,287
|
|
1,090,941
|
|
Shares distributed/exercised
|
|
(135,031
|
)
|
(16,767
|
)
|
(84,034
|
)
|
Shares purchased
|
|
37,490
|
|
12,662
|
|
3,380
|
|
Shares forfeited
|
|
7,500
|
|
23,935
|
|
53,000
|
|
|
|
|
|
|
|
|
|
Sharesend of year
|
|
993,076
|
|
1,083,117
|
|
1,063,287
|
|
|
|
|
|
|
|
|
|
Share Repurchase Program
At the February 19, 2008 Board of Directors meeting, the Board approved a share repurchase program for up to $10.0 million of our common stock to be
purchased through February 28, 2010. As of March 10, 2008, we have repurchased 45,500 shares of our common stock at an average price of $12.72.
62
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits
Pension and Postretirement 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(R).
All
of the plans consolidated within this disclosure comply with the December 31 measurement date. The information for 2007 and 2006 reflects the actuarial valuation for the U.S.
and foreign pension plans.
Hardinge
provides a qualified defined benefit pension plan covering all eligible domestic employees hired before March 1, 2004. The Plan bases benefits upon both years of service
and earnings. Our policy is to fund at least an amount necessary to satisfy the minimum funding requirements of ERISA. The amount to be funded is subject to annual review by management and our
consulting actuary. For each of our foreign plans, contributions are made on a monthly basis and are governed by their governmental regulations. Also, each of these plans requires employee and
employer contributions except Hardinge Taiwan, which requires only employer contributions.
Domestic
employees hired after March 1, 2004 will have retirement benefits under our 401k defined contribution plan. After one year of service, Hardinge will contribute 4% of the
employee's pay and will further match, at a rate of 25%, the employee's contributions up to 4% of their salary. Those employees, as well as domestic employees hired prior to March 1, 2004, are
eligible to contribute additional funds to the plan for which there is no required Company match. We made contributions of $0.2 million and $0.1 million in 2007 and 2006, respectively.
Hardinge
provides a contributory retiree health plan covering all eligible domestic employees who retired at normal retirement age prior to January 1, 1993 and all retirees who
will retire at normal
retirement age after January 1, 1993 with at least 10 years of active service. Employees who elect early retirement are eligible for the plan benefits if they have 15 years of
active service at retirement. Benefit obligations and funding policies are at the discretion of management. We also provide a non-contributory life insurance plan to retirees. Because the
amount of liability relative to this plan is insignificant, it is combined with the health plan for purposes of this disclosure.
Under
the terms of the retiree health plan, all increases in the cost of the plan after 2001 are paid by the participants. Therefore, the rate of healthcare cost increases would not have
affected the service cost and interest cost for 2007, 2006, and 2005 and does not affect the accumulated postretirement benefit obligation for any years after 2001.
The
discount rate for determining benefit obligations in the Postretirement Benefits Plan was 6.56% and 5.75% at December 31, 2007 and 2006, respectively. The change in the
discount rate decreased the accumulated postretirement benefit obligation as of December 31, 2007 by less than $0.2 million.
63
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits (Continued)
A
summary of the components of net periodic pension cost and postretirement benefit costs for the consolidated company is presented below.
|
|
Pension Benefits
Year Ended December 31,
|
|
Postretirement Benefits
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Service cost
|
|
$
|
4,216
|
|
$
|
3,643
|
|
$
|
2,989
|
|
$
|
31
|
|
$
|
33
|
|
$
|
81
|
|
Interest cost
|
|
|
8,129
|
|
|
7,590
|
|
|
7,454
|
|
|
144
|
|
|
155
|
|
|
360
|
|
Expected return on plan assets
|
|
|
(9,904
|
)
|
|
(9,229
|
)
|
|
(8,992
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
(141
|
)
|
|
(138
|
)
|
|
(138
|
)
|
|
(505
|
)
|
|
(505
|
)
|
|
(24
|
)
|
Amortization of transition asset
|
|
|
(372
|
)
|
|
(365
|
)
|
|
(366
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of loss
|
|
|
1,028
|
|
|
1,009
|
|
|
666
|
|
|
7
|
|
|
42
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,956
|
|
$
|
2,510
|
|
$
|
1,613
|
|
$
|
(323
|
)
|
$
|
(275
|
)
|
$
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net periodic benefit cost for the foreign pension plans included in the amounts above was $0.7 million, $0.5 million, and $0.4 million, for the years ended
December 31, 2007, 2006, and 2005, respectively.
64
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits (Continued)
A
summary of the Pension and Postretirement Plans' funded status and amounts recognized in our consolidated balance sheets is as follows:
|
|
Pension Benefits
December 31,
|
|
Postretirement Benefits
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Change in benefit obligation
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
176,242
|
|
$
|
163,016
|
|
$
|
2,595
|
|
$
|
2,948
|
|
Service cost
|
|
|
4,216
|
|
|
3,643
|
|
|
31
|
|
|
33
|
|
Interest cost
|
|
|
8,129
|
|
|
7,590
|
|
|
144
|
|
|
155
|
|
Plan participants' contributions
|
|
|
1,870
|
|
|
1,827
|
|
|
624
|
|
|
601
|
|
Adjustment due to change in measurement date
|
|
|
|
|
|
1,791
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
(18,514
|
)
|
|
2,594
|
|
|
(292
|
)
|
|
(422
|
)
|
Foreign currency impact
|
|
|
5,650
|
|
|
6,406
|
|
|
|
|
|
|
|
Benefits and administrative expenses paid
|
|
|
(10,201
|
)
|
|
(10,625
|
)
|
|
(733
|
)
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
|
167,392
|
|
|
176,242
|
|
|
2,369
|
|
|
2,595
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
151,341
|
|
|
130,910
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
13,228
|
|
|
17,848
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
4,150
|
|
|
4,546
|
|
|
109
|
|
|
119
|
|
Adjustment due to change in measurement date
|
|
|
|
|
|
1,435
|
|
|
|
|
|
|
|
Plan participants' contributions
|
|
|
1,870
|
|
|
1,827
|
|
|
624
|
|
|
601
|
|
Foreign currency impact
|
|
|
5,149
|
|
|
5,400
|
|
|
|
|
|
|
|
Benefits and administrative expenses paid
|
|
|
(10,201
|
)
|
|
(10,625
|
)
|
|
(733
|
)
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end period
|
|
|
165,537
|
|
|
151,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(1,855
|
)
|
|
(24,901
|
)
|
|
(2,369
|
)
|
|
(2,595
|
)
|
Unrecognized net actuarial loss
|
|
|
8,028
|
|
|
28,891
|
|
|
|
|
|
335
|
|
Unrecognized transition (asset)
|
|
|
(1,927
|
)
|
|
(2,278
|
)
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
(731
|
)
|
|
(1,548
|
)
|
|
|
|
|
(3,330
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
3,515
|
|
$
|
164
|
|
$
|
(2,369
|
)
|
$
|
(5,590
|
)
|
|
|
|
|
|
|
|
|
|
|
65
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits (Continued)
|
|
Pension Benefits
December 31,
|
|
Postretirement Benefits
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
6,290
|
|
$
|
1,913
|
|
$
|
|
|
$
|
|
|
Accrued benefit liability
|
|
|
(8,145
|
)
|
|
(26,814
|
)
|
|
(2,369
|
)
|
|
(2,595
|
)
|
Accumulated other comprehensive (income) loss
|
|
|
5,370
|
|
|
25,065
|
|
|
(2,789
|
)
|
|
(2,995
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
3,515
|
|
$
|
164
|
|
$
|
(5,158
|
)
|
$
|
(5,590
|
)
|
|
|
|
|
|
|
|
|
|
|
The
projected benefit obligation for the foreign pension plans included in the amounts above was $80.0 million and $82.5 million at December 31, 2007 and 2006,
respectively. The plan assets for the foreign pension plans included above was $82.3 million and $75.0 million at December 31, 2007 and 2006, respectively.
Prepaid
benefit cost is included in other assets on the balance sheet.
The
accumulated benefit obligation is $155.1 million and $161.6 million at December 31, 2007 and 2006, respectively.
The
following information is presented for pension plans where the projected benefit obligations exceeded the fair value of plan assets:
|
|
Pension Benefits
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Projected benefit obligations
|
|
$
|
102,796
|
|
$
|
171,793
|
Plan assets
|
|
|
94,651
|
|
|
144,979
|
|
|
|
|
|
Excess of projected benefit obligations over plan assets
|
|
$
|
8,145
|
|
$
|
26,814
|
|
|
|
|
|
The
following information is presented for pension plans where the accumulated benefit obligations exceeded the fair value of plan assets (only Hardinge UK, for 2007 and U.S., Hardinge
UK, and HTT for 2006):
|
|
Pension Benefits
December 31,
|
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
Accumulated benefit obligations
|
|
$
|
11,931
|
|
$
|
124,920
|
Plan assets
|
|
|
10,818
|
|
|
111,865
|
|
|
|
|
|
Excess of accumulated benefit obligations over plan assets
|
|
$
|
1,113
|
|
$
|
13,055
|
|
|
|
|
|
66
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits (Continued)
Actuarial assumptions used to determine pension costs and other postretirement benefit costs include:
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
For the domestic pension plan:
|
|
|
|
|
|
|
|
|
|
Assumptions at January 1
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.02
|
%
|
5.85
|
%
|
|
|
|
|
Expected return on plan assets
|
|
8.50
|
%
|
8.50
|
%
|
|
|
|
|
Rate of compensation increase
|
|
3.50
|
%
|
3.50
|
%
|
|
|
|
|
For the foreign pension plans and the domestic post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions at January 1,
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.19
|
%
|
3.25
|
%
|
5.75
|
%
|
5.50
|
%
|
Expected return on plan assets
|
|
5.05
|
%
|
4.94
|
%
|
N/A
|
|
N/A
|
|
Rate of compensation increase
|
|
2.79
|
%
|
2.77
|
%
|
N/A
|
|
N/A
|
|
Actuarial
assumptions used to determine pension obligations and other postretirement obligations include:
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
For the domestic pension plan:
|
|
|
|
|
|
|
|
|
|
Assumptions as of December 31,
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.77
|
%
|
6.02
|
%
|
|
|
|
|
Rate of compensation increase
|
|
3.50
|
%
|
3.50
|
%
|
|
|
|
|
For the foreign pension plans and the domestic post-retirement benefit plans:
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions as of December 31,
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.93
|
%
|
3.18
|
%
|
6.56
|
%
|
5.75
|
%
|
Rate of compensation increase
|
|
2.86
|
%
|
2.77
|
%
|
N/A
|
|
N/A
|
|
We
annually review the discount rate to be used for retirement plan liabilities, considering rates of return on high quality, long term corporate bonds that receive AA or AAA ratings by
recognized rating agencies. To develop the expected long-term rate of return on assets assumption, we considered the current level of expected returns on risk free investments (primarily
government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The
expected return for each asset class was then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption.
67
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits (Continued)
Plan Assets
Our pension plan weighted-average asset allocations at December 31, 2007 and December 31, 2006 by asset category are as follows:
|
|
Domestic
Plan Assets
|
|
Foreign
Plan Assets
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
63
|
%
|
60
|
%
|
44
|
%
|
43
|
%
|
Hardinge Inc. stock
|
|
0
|
%
|
4
|
%
|
0
|
%
|
0
|
%
|
Debt securities
|
|
32
|
%
|
30
|
%
|
44
|
%
|
43
|
%
|
Cash and equivalents
|
|
5
|
%
|
6
|
%
|
1
|
%
|
1
|
%
|
Other
|
|
0
|
%
|
0
|
%
|
11
|
%
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
Domestic
pension plan assets did not include any shares of Hardinge Inc. common stock at December 31, 2007. Domestic pension plan assets included 205,386 shares of the
Company's common stock valued at approximately $3.1 million at December 31, 2006. Dividends paid on those shares were less than $0.1 million for the years ended
December 31, 2007 and December 31, 2006.
Investment Policies and Strategies
For the United States defined benefit plan, as of December 31, 2007 and 2006, the fair value of plan assets included 63% and 64% benchmarked to equity
securities, 32% and 30% benchmarked to debt securities, and 5% and 6% of cash and cash equivalents, respectively. The plan targets an asset allocation of 40-70% equity securities,
21-51% debt securities, and 0-8% other. The plan's expected long-term rate of return is primarily based on historical returns of similarly diversified passive
portfolios and expected results from active investment management.
Given
the relatively long horizon of our aggregate obligation, our investment strategy is to improve and maintain the funded status of our U.S. and non-U.S. plans over time
without exposure to excessive asset value volatility. We manage this risk primarily by maintaining actual asset allocations between equity and fixed income securities for the plans within a specified
range of its target asset
allocation. In addition, we ensure that diversification across various investment subcategories within each plan are also maintained within specified ranges.
All
of the our pension assets are managed by outside investment managers and held in trust by third-party custodians. The selection and oversight of these outside service providers is
the responsibility of management, investment committees and their advisors. The selection of specific securities is at the discretion of the investment manager and is subject to the provisions set
forth by written investment management agreements and related policy guidelines and applicable governmental regulations regarding permissible investments and risk control practices.
Our
funding policy is to contribute to defined benefit plans when pension laws and economics either require or encourage funding. Of our defined benefit plans, the U.S. plan covering the
parent
68
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
9. Employee Benefits (Continued)
company
is the largest. The contributions to the U.S. defined benefit plan for the year ended December 31, 2007 totaled $1.5 million.
Cash flows
Contributions
The expected contributions to be paid during the year ending December 31, 2008 to the domestic defined benefit plan are approximately $8.4 million.
We also provide defined benefit pension plans or defined contribution pension plans for its foreign subsidiaries. The expected contributions to be paid during the year ending December 31, 2008
to the foreign defined benefit plans are $2.4 million. For each of our foreign plans, contributions are made on a monthly basis and are determined by their governmental regulations. Also, each
of the foreign plans requires employee and employer contributions, except for Taiwan, which has only employer contributions.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
(in thousands)
|
2008
|
|
$
|
10,124
|
|
$
|
170
|
2009
|
|
|
7,531
|
|
|
176
|
2010
|
|
|
8,340
|
|
|
180
|
2011
|
|
|
9,001
|
|
|
197
|
2012
|
|
|
8,546
|
|
|
201
|
Years 2013-2017
|
|
|
55,057
|
|
|
1,100
|
Retirement Savings Plan
We maintain a 401(k) plan that covers all eligible domestic employees subject to minimum employment period requirements. In addition to the contribution
provisions described previously for employees hired after March 1, 2004, provisions of the plan allow employees to defer from 1% up to 100% of their
pre-tax salary to the plan. Those contributions may be invested at the option of the employees in a number of investment alternatives, one being Hardinge Inc. common stock. We did
not make a voluntary or discretionary matching contribution in 2007, 2006, or 2005. Management has the ability to reinstate a matching contribution at any future date. We may also make a discretionary
contribution to the plan to be distributed among all participants.
Foreign Operations
Hardinge also has employees in certain foreign countries that are covered by defined contribution pension plans and other employee benefit plans. Related
obligations and costs charged to operations for these are not material. The foreign entities with defined benefit plans are included in the consolidated pension plan described earlier within this
Employee Benefits Note.
69
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
10. Accumulated Other Comprehensive Income (Loss)
The components of other comprehensive income, net of tax, for the year ended December 31, 2007 and 2006 are as follows:
|
|
For the Year Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Other Comprehensive Income:
|
|
|
|
|
|
|
|
Retirement related plans adjustments (net of tax of ($1,360) and $1,099 in 2007 and 2006, respectively)
|
|
$
|
20,469
|
|
$
|
(3,144
|
)
|
Foreign currency translation adjustments
|
|
|
9,229
|
|
|
9,764
|
|
Unrealized gain (loss) on derivatives:
|
|
|
|
|
|
|
|
|
Cash flow hedges (net of tax of $0 in 2007 and 2006)
|
|
|
67
|
|
|
(48
|
)
|
|
Net investment hedges (net of tax of $0 in 2007 and 2006)
|
|
|
(278
|
)
|
|
(796
|
)
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
$
|
29,487
|
|
$
|
5,776
|
|
|
|
|
|
|
|
Accumulated
balances of the components of other comprehensive income (loss), net of tax, in the Consolidated Balance Sheets are as follows:
|
|
Accumulated balances at
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
Impact of SFAS 158 and 87 on retirement related plans (net of tax of $3,861 and $5,221 in 2007 and 2006, respectively)
|
|
$
|
2,334
|
|
$
|
(18,135
|
)
|
Foreign currency translation adjustments
|
|
|
24,889
|
|
|
15,660
|
|
Unrealized gain (loss) on derivatives:
|
|
|
|
|
|
|
|
|
Cash flow hedges (net of tax of $634 in 2007 and $642 in 2006)
|
|
|
654
|
|
|
587
|
|
|
Net investment hedges (net of tax of $715 in 2007 and $715 in 2006)
|
|
|
(3,643
|
)
|
|
(3,365
|
)
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
$
|
24,234
|
|
$
|
(5,253
|
)
|
|
|
|
|
|
|
11. New Accounting Standards
In July 2006, the FASB issued Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109 "Accounting for Income Taxes." The Company adopted FIN 48 on January 1, 2007. 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. 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
70
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
11. New Accounting Standards (Continued)
difference
between related balance sheet accounts before applying FIN 48, and then as measured pursuant to the provisions of FIN 48. In addition, we reversed $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.
Additionally, the adoption of FIN 48 resulted in the accrual for uncertain tax positions being reclassified from accrued income taxes to other liabilities in our Consolidated Balance Sheet.
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 under other accounting pronouncements that require or permit fair
value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a
material impact on our 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 adoption of SFAS 159 is not expected to have a
material impact on our consolidated results of operations and financial condition.
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. We are currently evaluating the impact of EITF 06-11 on our consolidated results of operations and financial condition.
In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations (revised2007)" (SFAS 141(R)). SFAS 141(R) is a revision to previously existing
guidance on accounting for business combinations. The statement retains the fundamental concept of the purchase method of accounting, and introduces new requirements for the recognition and
measurement of assets acquired, liabilities assumed, and noncontrolling interests. The statement is effective for fiscal years beginning after December 15, 2008 and impacts business
combinations after that date.
71
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
12. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2007 and 2006 is as follows:
|
|
Quarter
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(in thousands, except per share data)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
86,966
|
|
$
|
89,710
|
|
$
|
83,683
|
|
$
|
95,963
|
|
Gross profit
|
|
|
27,980
|
|
|
29,287
|
|
|
26,166
|
|
|
23,978
|
|
Income from operations
|
|
|
8,988
|
|
|
8,653
|
|
|
3,699
|
|
|
1,551
|
|
Net income (loss)
|
|
|
5,325
|
|
|
5,983
|
|
|
3,715
|
|
|
(97
|
)
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,786
|
|
|
10,502
|
|
|
11,301
|
|
|
11,317
|
|
|
Earnings (loss) per share
|
|
$
|
0.61
|
|
$
|
0.57
|
|
$
|
0.33
|
|
$
|
(0.01
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,845
|
|
|
10,575
|
|
|
11,432
|
|
|
11,417
|
|
|
Earnings (loss) per share
|
|
$
|
0.60
|
|
$
|
0.57
|
|
$
|
0.32
|
|
$
|
(0.01
|
)
|
In
2007, we recorded fourth quarter adjustments that reduced pre-tax income by $1.6 million and net income by $0.7 million.
|
|
Quarter
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(in thousands, except per share data)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
75,436
|
|
$
|
78,518
|
|
$
|
79,243
|
|
$
|
93,424
|
Gross profit
|
|
|
22,903
|
|
|
23,586
|
|
|
24,014
|
|
|
29,648
|
Income from operations
|
|
|
3,642
|
|
|
5,307
|
|
|
5,757
|
|
|
8,391
|
Net income
|
|
|
1,947
|
|
|
3,007
|
|
|
2,761
|
|
|
6,235
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,767
|
|
|
8,765
|
|
|
8,771
|
|
|
8,780
|
|
Earnings per share
|
|
$
|
0.22
|
|
$
|
0.34
|
|
$
|
0.31
|
|
$
|
0.71
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
8,800
|
|
|
8,807
|
|
|
8,806
|
|
|
8,811
|
|
Earnings per share
|
|
$
|
0.22
|
|
$
|
0.34
|
|
$
|
0.31
|
|
$
|
0.71
|
Earnings
per share amounts are based on the weighted average shares outstanding for each period presented. As a result of the changes in outstanding shares from quarter to quarter, the
total of the four quarters may not necessarily equal the annual earnings per share for the year.
13. Commitments and Contingencies
The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary course of business. Management believes the outcome of these
lawsuits will not have a material effect on our financial position or results of operations.
72
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
13. Commitments and Contingencies (Continued)
We
lease space for some of our manufacturing, sales and service operations with lease terms up to 10 years and use certain data processing equipment under lease agreements
expiring at various dates. Rent expense under these leases totaled $2.0 million, $2.2 million, and $3.0 million, during the years ended December 31, 2007, 2006, and 2005,
respectively.
Future
minimum payments under non-cancelable operating leases are as follows for the years ending December 31 (in thousands):
2008
|
|
$
|
1,679
|
2009
|
|
|
948
|
2010
|
|
|
723
|
2011
|
|
|
582
|
2012
|
|
|
388
|
Thereafter
|
|
|
604
|
|
|
|
Total
|
|
$
|
4,924
|
|
|
|
The
Company has entered into written employment contracts with certain of its executive officers and certain other management personnel. The term of the employment agreements range from
six months to two years, and in some cases the agreement contains an automatic, successive one-year extension unless either party provides the other with 60 days prior notice of
termination. In the case of a change in control, as defined in the employment contracts, the term of each officer's employment will be automatically extended for a period of two years following the
date of the change in control. These employment contracts also provide for severance payments in the event of specified termination of employment.
Our
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 we own or previously owned and on adjacent areas have resulted in environmental impacts.
In
particular, our Elmira,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, we received a Special Notice Concerning a Remedial
Investigation/Feasibility Study ("RI/FS") for the Koppers Pond (the "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 Wellfield Superfund site, including releases into and in the vicinity of the Pond. The hazardous substances, including metals and polychlorinated biphenyls, have been detected in
sediments in the Pond.
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
13. Commitments and Contingencies (Continued)
A
substantial portion of the Pond is located on our property. We, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS
Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the "PRPs") have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study ("RI/FS") by
signing an Administrative Settlement Agreement and Order on 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 has been estimated to be between $0.3 million and $0.8 million. We have established a reserve of $0.08 million for our portion of the
study. The PRPs developed a Draft RI/FS with their consultants and, following EPA comments, submitted a Revised RI/FS on December 6, 2007. The timing of further activities by the PRPs depends
on the EPA's review of the Revised RI/FS.
Until
receipt of this notice, we had never been named as a PRP at the site or received any requests for information from the EPA concerning the site. Environmental sampling on our
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 our operations or property have or are contributing to the contamination. Since the RI/FS has not commenced, the Company has not established, other than discussed above, a
reserve for any potential costs relating to this site, as it is too early in the process to determine our responsibility, if any, or to estimate any potential costs to remediate. We have notified all
appropriate insurance carriers and are 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.
Although
we believe, based upon information currently available, that, except as described in the preceding paragraphs, we will not have material liabilities for environmental
remediation, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in
material liabilities to us.
14. Related Party Transactions
In the normal course of business, we retain a law firm of which a Company director and his spouse were partners, before retiring in 2007. We retain the firm for
various legal matters involving corporate, employee benefit, collections, and environmental law. We paid the law firm $0.1 million, $0.3 million, and $0.2 million during the years
ended December 31, 2007, 2006, and 2005, respectively.
On
November 14, 2005, December 1, 2005 and January 5, 2006, the Company made non-interest bearing loans in the aggregate amount of $206,592 to
Mr. Trego to facilitate his relocation to the Elmira, New York area, in violation of the prohibition of loans by a public company to its executive officers and directors under the
Sarbanes-Oxley Act of 2002 (the "SOX Act"). The loans were made under a longstanding relocation policy of the Company that pre-dated the passage of the SOX Act and that had not been
revised to reflect the prohibition of loans to executive officers and directors set forth in the SOX Act. The Company became aware that the loans violated the SOX Act on January 30, 2006 and
the loans were repaid by Mr. Trego on February 1, 2006 with interest. The Governance and Nominating Committee of the Company's Board of Directors investigated the circumstances
surrounding the loans and has issued formal letters of reprimand to Mr. Trego and the other members
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2007
14. Related Party Transactions (Continued)
of
management involved with the making of the loans and ordered them to undergo additional training to prevent any future violations of the SOX Act and the Company's corporate governance policies and
procedures. The Company's relocation policy has been revised to reflect the loan prohibition set forth in the SOX Act and the Company has instituted additional controls on transactions between the
Company and its directors and executive officers.
The
Company's Taiwan subsidiary, Hardinge Taiwan, leased its facility from U-Sung. The shareholders of U-Sung were also minority shareholders in Hardinge Taiwan.
Under this operating lease agreement, rent expense was $0.9 million for the year ended December 31, 2005. Hardinge Taiwan purchased U-Sung in December of 2005.
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