Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended June 30, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number: 000-15760
Hardinge Inc.
(Exact name of Registrant as specified in its charter)
New York
|
|
16-0470200
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification No.)
|
Hardinge Inc.
One Hardinge Drive
Elmira, NY 14902
(Address of principal executive offices) (Zip code)
(607) 734-2281
(Registrants telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant has submitted electronically and posted to its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulations S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a small reporting company. See definitions of large
accelerated filer, accelerated filer, and small reporting company in Rule 12b-2
in the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as
defined by Exchange Act Rule 12b-2).
Yes
o
No
x
As of June 30, 2009 there were 11,532,252 shares of Common Stock of the Registrant outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARDINGE INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(In Thousands)
|
|
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
16,508
|
|
$
|
18,430
|
|
Accounts
receivable, net
|
|
37,630
|
|
60,110
|
|
Notes
receivable, net
|
|
1,682
|
|
994
|
|
Inventories,
net
|
|
131,149
|
|
144,957
|
|
Deferred
income taxes
|
|
397
|
|
398
|
|
Prepaid
expenses
|
|
10,240
|
|
10,964
|
|
Total
current assets
|
|
197,606
|
|
235,853
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
180,040
|
|
183,387
|
|
Less
accumulated depreciation
|
|
123,093
|
|
123,790
|
|
Net
property, plant and equipment
|
|
56,947
|
|
59,597
|
|
|
|
|
|
|
|
Notes
receivable, net
|
|
744
|
|
923
|
|
Deferred
income taxes
|
|
1,460
|
|
1,406
|
|
Intangible
assets
|
|
10,516
|
|
10,725
|
|
Other
long-term assets
|
|
606
|
|
1,321
|
|
Total
non-current assets
|
|
13,326
|
|
14,375
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
267,879
|
|
$
|
309,825
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
Accounts
payable
|
|
$
|
13,432
|
|
$
|
20,059
|
|
Notes
payable to bank
|
|
8,354
|
|
|
|
Accrued
expenses
|
|
24,136
|
|
33,255
|
|
Accrued
income taxes
|
|
2,178
|
|
2,911
|
|
Deferred
income taxes
|
|
3,445
|
|
3,466
|
|
Current
portion of long-term debt
|
|
548
|
|
24,549
|
|
Total
current liabilities
|
|
52,093
|
|
84,240
|
|
|
|
|
|
|
|
Long-term
debt
|
|
3,286
|
|
3,572
|
|
Accrued
pension expense
|
|
44,314
|
|
44,962
|
|
Deferred
income taxes
|
|
10
|
|
|
|
Accrued
postretirement benefits
|
|
2,552
|
|
2,528
|
|
Accrued
income taxes
|
|
2,270
|
|
2,153
|
|
Other
liabilities
|
|
4,456
|
|
4,243
|
|
Total
other liabilities
|
|
56,888
|
|
57,458
|
|
|
|
|
|
|
|
Common
Stock - $0.01 par value
|
|
125
|
|
125
|
|
Additional
paid-in capital
|
|
114,288
|
|
114,841
|
|
Retained
earnings
|
|
82,194
|
|
92,700
|
|
Treasury
shares - 940,740 shares at June 30, 2009 and 1,003,828 shares at
December 31, 2008
|
|
(12,097
|
)
|
(13,037
|
)
|
Accumulated
other comprehensive (loss)
|
|
(25,612
|
)
|
(26,502
|
)
|
Total
shareholders equity
|
|
158,898
|
|
168,127
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
267,879
|
|
$
|
309,825
|
|
See
accompanying notes.
3
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In
Thousands, Except Per Share Data)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
55,262
|
|
$
|
96,565
|
|
$
|
107,376
|
|
$
|
182,164
|
|
Cost
of sales
|
|
42,316
|
|
66,255
|
|
80,379
|
|
126,726
|
|
Gross
profit
|
|
12,946
|
|
30,310
|
|
26,997
|
|
55,438
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
17,142
|
|
27,963
|
|
35,292
|
|
51,464
|
|
Other
expense (income)
|
|
637
|
|
(68
|
)
|
448
|
|
1,956
|
|
(Loss)
income from operations
|
|
(4,833
|
)
|
2,415
|
|
(8,743
|
)
|
2,018
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
241
|
|
470
|
|
1,473
|
|
921
|
|
Interest
income
|
|
(8
|
)
|
(143
|
)
|
(54
|
)
|
(183
|
)
|
(Loss)
income before income taxes
|
|
(5,066
|
)
|
2,088
|
|
(10,162
|
)
|
1,280
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
(109
|
)
|
1,640
|
|
171
|
|
1,562
|
|
Net
(loss) income
|
|
$
|
(4,957
|
)
|
$
|
448
|
|
$
|
(10,333
|
)
|
$
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share:
|
|
$
|
(0.44
|
)
|
$
|
0.04
|
|
$
|
(0.91
|
)
|
$
|
(0.02
|
)
|
Weighted
average number of common shares outstanding (in thousands)
|
|
11,373
|
|
11,300
|
|
11,371
|
|
11,312
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share:
|
|
$
|
(0.44
|
)
|
$
|
0.04
|
|
$
|
(0.91
|
)
|
$
|
(0.02
|
)
|
Weighted
average number of common shares outstanding (in thousands)
|
|
11,373
|
|
11,370
|
|
11,371
|
|
11,312
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$
|
0.005
|
|
$
|
0.05
|
|
$
|
0.015
|
|
$
|
0.10
|
|
See
accompanying notes.
4
Table of
Contents
HARDINGE
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In
Thousands)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(10,333
|
)
|
$
|
(282
|
)
|
Adjustments
to reconcile net (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
and amortization
|
|
4,395
|
|
5,351
|
|
Provision
for deferred income taxes
|
|
(355
|
)
|
904
|
|
Loss
(gain) on sale of asset
|
|
59
|
|
(23
|
)
|
Debt
issuance amortization
|
|
1,148
|
|
180
|
|
Unrealized
intercompany foreign currency transaction (gain) loss
|
|
(7
|
)
|
1,673
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
22,172
|
|
5,257
|
|
Notes
receivable
|
|
(519
|
)
|
1,357
|
|
Inventories
|
|
14,685
|
|
(561
|
)
|
Prepaids/other
assets
|
|
1,256
|
|
(1,201
|
)
|
Accounts
payable
|
|
(6,514
|
)
|
(2,819
|
)
|
Accrued
expenses
|
|
(9,360
|
)
|
(5,296
|
)
|
Accrued
postretirement benefits
|
|
21
|
|
(216
|
)
|
Net
cash provided by operating activities
|
|
16,648
|
|
4,324
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Capital
expenditures
|
|
(1,655
|
)
|
(2,514
|
)
|
Proceeds
from sale of asset
|
|
9
|
|
60
|
|
Net
cash used in investing activities
|
|
(1,646
|
)
|
(2,454
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Increase
(decrease) in short-term notes payable to bank
|
|
8,354
|
|
(2,800
|
)
|
(Decrease)
increase in long-term debt
|
|
(24,269
|
)
|
910
|
|
Net
purchases of treasury stock
|
|
|
|
(589
|
)
|
Dividends
paid
|
|
(173
|
)
|
(1,148
|
)
|
Debt
issuance fees paid
|
|
(706
|
)
|
(893
|
)
|
Net
cash used in financing activities
|
|
(16,794
|
)
|
(4,520
|
)
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
(130
|
)
|
948
|
|
Net
decrease in cash
|
|
(1,922
|
)
|
(1,702
|
)
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
18,430
|
|
16,003
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
16,508
|
|
$
|
14,301
|
|
See
accompanying notes.
5
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2009
NOTE 1BASIS OF PRESENTATION
In these notes, the terms
Hardinge, Company, we, us, or our mean Hardinge Inc. and its
predecessors together with its subsidiaries.
The accompanying
unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles 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 U.S. generally
accepted accounting principles 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 six month period
ended June 30, 2009 are not necessarily indicative of the results that may
be expected for the year ended December 31, 2009. 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, 2008. We operate in only one business segment
industrial machine tools.
The consolidated balance sheet at December 31, 2008 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.
Certain amounts in the
2008 consolidated financial statements have been reclassified to conform to the
June 30, 2009 presentation.
NOTE 2
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. Discounts and customer sales
incentives are typically negotiated as part of the sales terms at the time of
sale and are recorded. The Company does
not routinely permit customers to return machines. In the rare case that a machine return is
permitted, a restocking fee is typically charged. Returns of spare parts and workholding
products are limited to a period of 90 days subsequent to purchase, excluding
special orders which are not eligible for return. An estimate of returns, which is not
significant, is recorded as a reduction of revenue and is based on historical
experience. Transfer of ownership and risk of loss are generally not contingent
upon contractual customer acceptance. Prior to shipment, each machine is tested
to ensure the machines 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.
6
Table of
Contents
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2009
NOTE 3 SIGNIFICANT RECENT EVENTS
On March 16,
2009, we entered into a new financing arrangement with Manufacturers and
Traders Trust Company (M&T), which provided the Company a $10 million
term loan due March 16, 2010 secured by substantially all of the Companys
U.S. assets, as well as two thirds of the Companys investment in Hardinge
Holdings GmbH. Proceeds from the term loan were used to repay $8.0 million of
Company indebtedness under the multi-currency secured credit facility entered
into in June 2008. The multi-currency secured credit facility has been
paid in full and terminated. The Company is currently evaluating long-term
financing alternatives to replace the term loan with a flexible credit facility
that could adjust to working capital needs as business volumes dictate.
At June 30, 2009,
the Company had borrowings of $8.4 million outstanding under the term loan. At December 31,
2008, the Company had borrowings of $24.0 million outstanding under the former
multi-currency secured credit facility. Total consolidated outstanding
borrowings at June 30, 2009 and December 31, 2008 were $12.2 million
and $28.1 million, respectively. The
reduction in debt was funded with cash flow from operations. The Company had access of up to $27.4 million
at June 30, 2009.
In response to the global
economic recession, the Company is continually assessing and implementing cost
reduction initiatives.
In February 2009,
the Company implemented a Voluntary Early Retirement Program (VERP) to
employees whose sum of current age and length of service equaled 94 years or
more as of April 1, 2009. This VERP covers post-retirement health care
costs for 60 months or until Medicare coverage begins, whichever occurs first.
This VERP also provided 10 weeks of severance pay. The Company recorded a charge for the VERP of
approximately $0.9 million during the quarter ended March 31, 2009.
In March 2009, the Company implemented voluntary
and involuntary lay-offs in North America and Europe, reducing staffing by 72
employees. The Company recorded a $0.6 million charge for severance related
expenses during the quarter ended March 31, 2009.
In May 2009, the
Company implemented a series of actions in response to the continued weakness
in the machine tool industry. These
actions included: a pay reduction for all U.S. based salaried employees,
including corporate officers, by 5%, which, when combined with a similar action
in February 2009, brings the year to date pay decreases to 10%; a
reduction to the Board of Directors cash compensation of 10%; suspension of
benefits under the U.S. defined benefit pension plan (which was closed to new
participants in 2004), and suspension of Company contributions to the 401(K) program
as of June 15, 2009. The Company
also implemented a ten week furlough for approximately 80 employees in the Elmira,
NY machine manufacturing division. The
furlough ran from May 11 to July 17, 2009, with furloughed employees
returning to work on July 20, 2009.
In June 2009, the
Company announced it was closing its Exeter, England facility and consolidating
operations into its Leicester, England facility. The Exeter facility was
primarily used for back office support operations. In addition to cost savings,
the consolidation with the Leicester facility will provide operational
efficiencies. In conjunction with the closure,
the Company has also announced involuntary lay-offs and early retirements,
reducing staff by 7 employees. The
Company expects to cease operational activities in Exeter by September 2009
and will exit the facility in December 2009, when the lease for the
facility expires. In connection with the
closing of the Exeter facility, the Company recorded a charge of $0.2 million
for severance related expenses in SG&A in the quarter ended June 30,
2009. The Company also announced that it
will be consolidating its German and Holland operations into a new technical
center near Dusseldorf, Germany which will serve as the European hub of
technical and warehousing support for turning, milling and workholding
products.
7
Table of
Contents
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2009
NOTE 3 SIGNIFICANT RECENT EVENTS (continued)
On July 21, 2009 the
Company implemented additional involuntary lay-offs in North America, reducing
staffing by 44 employees. The Company expects to record a $0.1 million charge
for severance related expenses during the third quarter of 2009.
NOTE 4STOCK-BASED COMPENSATION
We account for stock
based compensation under 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 operations based on the
grant date fair value of the award.
We did not issue any new
stock options during the first half of 2009 or 2008. We issued 46,000 stock
options in December of 2008. The three months and six months ended June 30,
2009 expense recognized on these options was immaterial. All of the other
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 related to those stock options.
For restricted stock
awards issued, the cost is equal to the fair value of the award at the date of
grant and compensation expense is recognized for those awards over the
requisite service period of the grant. A
summary of the restricted stock activity under the Incentive Stock Plan for the
three month and six month periods ended June 30, 2009 and 2008 is as
follows:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Shares
and units at beginning of period
|
|
183,000
|
|
195,000
|
|
179,483
|
|
177,000
|
|
Shares/Units
granted
|
|
|
|
|
|
26,000
|
|
42,000
|
|
Shares
vested
|
|
|
|
(17,750
|
)
|
(20,883
|
)
|
(33,750
|
)
|
Shares
cancelled, forfeited or exercised
|
|
|
|
(33,517
|
)
|
(1,600
|
)
|
(41,517
|
)
|
Shares
and units at end of period
|
|
183,000
|
|
143,733
|
|
183,000
|
|
143,733
|
|
The value of the
restricted stock awarded in the six months ended June 30, 2009 and 2008
was $0.1 million and $0.5 million, respectively. Total share-based compensation
expense relating to restricted stock for the three months and six months ended June 30,
2009 was $0.1 million and $0.2 million, respectively. Total share-based
compensation expense for the three months and six months ended June 30,
2008 was $0.1 million and $0.2 million, respectively. At June 30, 2009,
the compensation cost not yet recognized on these shares was $1.2 million,
which will be amortized over a weighted average term of 2.5 years.
8
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2009
NOTE 5EARNINGS 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
(SFAS 128). Basic (loss) 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 to stock options and restricted
stock.
The following is a
reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per share computations required by SFAS 128: (dollars in
thousands except for per share data)
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net
(loss) income
|
|
$
|
(4,957
|
)
|
$
|
448
|
|
$
|
(10,333
|
)
|
$
|
(282
|
)
|
Numerator
for basic (loss) earnings per share
|
|
(4,957
|
)
|
448
|
|
(10,333
|
)
|
(282
|
)
|
Numerator
for diluted (loss) earnings per share
|
|
(4,957
|
)
|
448
|
|
(10,333
|
)
|
(282
|
)
|
Denominator
for basic (loss) earnings per share-weighted average shares (in thousands)
|
|
11,373
|
|
11,300
|
|
11,371
|
|
11,312
|
|
Effect
of diluted securities:
|
|
|
|
|
|
|
|
|
|
Restricted
stock and stock options (in thousands)
|
|
|
|
70
|
|
|
|
|
|
Denominator
for diluted (loss) earnings per share-adjusted weighted average shares (in
thousands)
|
|
11,373
|
|
11,370
|
|
11,371
|
|
11,312
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
$
|
(0.44
|
)
|
$
|
0.04
|
|
$
|
(0.91
|
)
|
$
|
(0.02
|
)
|
Diluted
(loss) earnings per share
|
|
$
|
(0.44
|
)
|
$
|
0.04
|
|
$
|
(0.91
|
)
|
$
|
(0.02
|
)
|
There
is no dilutive effect of the restrictive stock and stock options for the three
month period ended June 30, 2009 and the six month periods ended June 30,
2009 and 2008, since the impact would be anti-dilutive.
NOTE
6INVENTORIES
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:
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
Finished
products
|
|
$
|
72,128
|
|
$
|
74,287
|
|
Work-in-process
|
|
26,789
|
|
32,827
|
|
Raw
materials and purchased components
|
|
32,232
|
|
37,843
|
|
Inventories,
net
|
|
$
|
131,149
|
|
$
|
144,957
|
|
9
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2009
NOTE 7GOODWILL AND OTHER
INTANGIBLE ASSETS
We account 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 provides
that goodwill and other separately recognized intangible assets with indefinite
lives are no longer amortized, but reviewed at least annually for impairment or
will be reviewed for impairment between annual tests if an event occurs or
circumstances change that more likely than not would indicate the carrying
amount may be impaired. 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.
At June 30, 2009, we
do not have any goodwill on our balance sheet.
During 2008, we conducted impairment testing and noted that the implied
fair value of our remaining goodwill and a portion of our intangible assets
were $0, accordingly we recorded a goodwill impairment charge of $23.7 million
in 2008 as well as $0.6 million impairment on other intangible assets.
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. We use the
Bridgeport brand name on all of our machining center lines, and therefore, the
asset has been determined to have an indefinite useful life. These assets are
reviewed annually for impairment under the provisions of SFAS 142. Amortizable
intangible assets of $3.9 million include the Bridgeport technical information,
patents, distribution agreements, and other items. The estimated useful lives
of these intangible assets range from five to ten years.
NOTE 8WARRANTIES
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 up to one year. We estimate
the costs that may be incurred under the 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 as accrued expenses on our consolidated balance sheet.
10
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2009
NOTE 8WARRANTIES (continued)
A reconciliation of the
changes in our product warranty accrual during the three and six month periods
ended June 30, 2009 and 2008 is as follows:
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Balance
at the beginning of period
|
|
$
|
2,625
|
|
$
|
2,696
|
|
$
|
2,872
|
|
$
|
2,469
|
|
Warranty
settlement costs
|
|
(497
|
)
|
(603
|
)
|
(1,259
|
)
|
(1,032
|
)
|
Warranties
Issued
|
|
703
|
|
940
|
|
1,335
|
|
1,726
|
|
Changes
in accruals for pre-existing warranties
|
|
(379
|
)
|
(256
|
)
|
(372
|
)
|
(622
|
)
|
Other
currency translation impact
|
|
82
|
|
(52
|
)
|
(42
|
)
|
184
|
|
Balance
at the end of period
|
|
$
|
2,534
|
|
$
|
2,725
|
|
$
|
2,534
|
|
$
|
2,725
|
|
NOTE 9INCOME TAXES
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., Germany, and
Canadian deferred tax assets related to tax loss carryforwards in those
jurisdictions, as well as all other deferred tax assets of those entities.
Each quarter, we estimate
our full year tax rate for jurisdictions not subject to valuation allowances
based upon our most recent forecast of full year anticipated results and adjust
year to date tax expense to reflect our full year anticipated tax rate. The effective tax rate was (2.2)% and 1.7% for the three months and six months
ended June 30, 2009, respectively.
The anticipated full year tax rate has been affected by the
non-recognition of tax benefits for certain entities in a loss position for
which a full valuation allowance has been recorded.
The tax years 2005 to
2008 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 2003 to 2008 generally remain open to routine examination
by foreign taxing authorities, depending on the jurisdiction.
At June 30, 2009 and
December 31, 2008, we had a $2.3 million and $2.2 million liability
recorded for uncertain income tax positions, respectively, which included
interest and penalties of $0.6 and $0.5 million, respectively. If recognized,
the liability with related penalties and interest at June 30, 2009 and December 31,
2008 would be recorded as a benefit to income tax expense on the Consolidated
Statement of Operations.
During the quarter ended June 30,
2009, we reviewed the historical tax filing positions at one of our foreign
subsidiaries, and determined that it is more likely than not that $0.47 million
of their deferred tax assets can be used to generate refund claims, and thus
that portion of the existing valuation allowance has been released.
11
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2009
NOTE
10PENSION AND POST RETIREMENT PLANS
We account for
defined benefit pension and other 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, 88, 106 and 132(R).
A summary of the
components of net periodic pension costs for the consolidated company for the
three and six months ended June 30, 2009 and 2008 is presented below:
|
|
Pension Benefits
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Service
cost
|
|
$
|
937
|
|
$
|
861
|
|
$
|
1,928
|
|
$
|
1,722
|
|
Interest
cost
|
|
2,150
|
|
2,271
|
|
4,309
|
|
4,542
|
|
Expected
return on plan assets
|
|
(2,472
|
)
|
(2,781
|
)
|
(4,963
|
)
|
(5,563
|
)
|
Amortization
of prior service cost
|
|
(16
|
)
|
(13
|
)
|
(51
|
)
|
(25
|
)
|
Amortization
of transition asset
|
|
(55
|
)
|
(91
|
)
|
(110
|
)
|
(181
|
)
|
Amortization
of loss
|
|
348
|
|
34
|
|
746
|
|
68
|
|
Net
periodic benefit cost
|
|
$
|
892
|
|
$
|
281
|
|
$
|
1,859
|
|
$
|
563
|
|
A summary of the
components of net postretirement benefits costs for the consolidated company
for the three and six months ended June 30, 2009 and 2008 is presented
below:
|
|
Postretirement Benefits
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Service
cost
|
|
$
|
3
|
|
$
|
6
|
|
$
|
9
|
|
$
|
13
|
|
Interest
cost
|
|
58
|
|
38
|
|
102
|
|
75
|
|
Amortization
of prior service cost
|
|
(126
|
)
|
(126
|
)
|
(253
|
)
|
(252
|
)
|
Amortization
of actuarial gain
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
Special
termination benefits
|
|
(62
|
)
|
|
|
376
|
|
|
|
Net
periodic benefit (credit) cost
|
|
$
|
(135
|
)
|
$
|
(82
|
)
|
$
|
226
|
|
$
|
(164
|
)
|
The expected
contributions to be paid during the year ending December 31, 2009 to the
domestic defined benefit plan are $2.4 million.
Contributions to the domestic plans as of June 30, 2009 and 2008
were $1.3
million and $2.0 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, 2009 to the
foreign defined benefit plans are $2.4
million. For each of the Companys foreign plans,
contributions are made on a monthly or quarterly basis and are determined by
applicable governmental regulations. As
of June 30, 2009 and 2008, $1.2
million and $2.4 million of contributions have been made to the foreign plans,
respectively. Each of the foreign plans requires employee and employer
contributions, except for Taiwan, to which only employer contributions are
made. The postretirement plan special termination
benefits are part of the voluntary early retirement plan discussed in Note 2.
12
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2009
NOTE
10PENSION AND POST RETIREMENT PLANS (continued)
In May 2009, the
Company announced that future accrual of benefits under its U.S. defined
benefit pension plan (which was closed to new participants in 2004) would be
suspended as of June 15, 2009 and Company contributions to the 401(K) program
would be suspended as of the same date.
NOTE 11REPORTING COMPREHENSIVE
INCOME (LOSS)
The components of other
comprehensive income (loss), net of tax, for the three months and six months
ended June 30, 2009 and 2008 consisted of the following:
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Net
(Loss) Income
|
|
$
|
(4,957
|
)
|
$
|
448
|
|
$
|
(10,333
|
)
|
$
|
(282
|
)
|
Other
Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
8,256
|
|
(2,553
|
)
|
758
|
|
14,632
|
|
Pension
liability adjustment, net of tax
|
|
(1,279
|
)
|
43
|
|
132
|
|
(203
|
)
|
Unrealized
(loss) on derivatives, net of tax:
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
(654
|
)
|
Other
comprehensive income (loss)
|
|
6,977
|
|
(2,510
|
)
|
890
|
|
13,775
|
|
Total
Comprehensive Income (Loss)
|
|
$
|
2,020
|
|
$
|
(2,062
|
)
|
$
|
(9,443
|
)
|
$
|
13,493
|
|
Accumulated balances of
the components of other comprehensive (loss) consisted of the following at June 30,
2009 and December 31, 2008:
|
|
Accumulated balances
|
|
|
|
June 30,
|
|
Dec. 31,
|
|
|
|
2009
|
|
2008
|
|
Accumulated
Other Comprehensive (Loss):
|
|
|
|
|
|
Impact
of SFAS 158 and 87 on retirement related plans (net of tax of $8,476
and $8,571 in 2009 and 2008, respectively)
|
|
$
|
(44,301
|
)
|
$
|
(44,433
|
)
|
Foreign
currency translation adjustments
|
|
18,689
|
|
17,931
|
|
Accumulated
Other Comprehensive (Loss)
|
|
$
|
(25,612
|
)
|
$
|
(26,502
|
)
|
13
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2009
NOTE 12
DERIVATIVE FINANCIAL INSTRUMENTS
In March 2008, the
FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about
Derivative Instruments and Hedging Activities
(SFAS 161) an
amendment to Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities
. The statement
requires companies with derivative instruments to disclose information that
should enable financial statement users to understand how and why a company
uses derivative instruments, how derivative instruments and related hedged
items are accounted for under SFAS 133 and how derivative instruments and
related hedged items affect a companys financial position, financial
performance and cash flows. We adopted SFAS 161 in the first quarter of
fiscal 2009. Since SFAS 161 only required additional disclosure, the adoption
did not impact our consolidated financial position, results of operations or
cash flows.
We principally use
derivative financial instruments to manage foreign exchange risk related to
foreign operations and foreign currency transactions. We enter into derivative
financial instruments with a number of major financial institutions to minimize
foreign exchange risk. We have foreign currency exposure on receivables and
payables that are denominated in a foreign currency and are adjusted to current
values using period-end exchange rates. The resulting gains or losses are
recorded in the statement of operations. To minimize foreign currency exposure,
we have foreign currency forwards with notional amounts of approximately $32.6
million and $22.1 million at June 30, 2009 and December 31, 2008,
respectively.
The foreign currency
forwards are recorded in the balance sheet at fair value and resulting gains or
losses are recorded in the statements of operations, generally offsetting the
gains or losses from the adjustments on the foreign currency denominated
transactions and revaluation of the foreign currency denominated assets and
liabilities. At June 30, 2009, the fair value of the foreign currency
forwards was a $0.2 million asset, which was included in prepaid expenses and a
$0.5 million liability which was included in accrued expenses. At December 31,
2008, the fair value of the foreign currency forwards was a $0.7 million asset,
which was included in prepaid expenses. The (gain) loss recognized for
derivative instruments in the statement of operations for the three and six
month periods ended June 30, 2009 of ($0.2) and $0.4 million,
respectively, was included in other (income) expense.
14
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2009
NOTE
13FAIR VALUE OF FINANCIAL INSTRUMENTS
In September 2006,
the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 157, Fair Value
Measurements. This statement establishes a framework for measuring fair value
in generally accepted accounting principles, clarifies the definition of fair
value within that framework and expands disclosures about the use of fair value
measurement. SFAS No. 157 emphasizes that fair value is a market-based
measurement, as opposed to a transaction-specific measurement. We adopted SFAS
157 as of January 1, 2008, with the
exception of the application of the statement to non-recurring nonfinancial
assets and nonfinancial liabilities, which was delayed by FSP FAS 157-2 to
fiscal years beginning after November 15, 2008, which we adopted as of January 1,
2009. As of June 30, 2009, we do not have any significant non-recurring
measurements of nonfinancial assets and nonfinancial liabilities.
Fair value is defined by
SFAS No. 157 as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
at the measurement date. Depending on the nature of the asset or liability,
various techniques and assumptions can be used to estimate fair value. SFAS No. 157
defines the following fair value hierarchy:
Level 1 Quoted prices in
active markets for identical assets and liabilities.
Level 2 Observable
inputs other than quoted prices in active markets for similar assets and
liabilities.
Level
3 Inputs for which significant valuation assumptions are unobservable in a
market and therefore value is based on the best available data, some of which
is internally developed and considers risk premiums that a market participant
would require.
The following table
presents the fair values and classification of our financial assets and liabilities
measured on a recurring basis as of June 30,
2009:
|
|
Classification
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Foreign
currency forwards
|
|
Prepaid expenses
|
|
$
|
151
|
|
$
|
|
|
$
|
151
|
|
$
|
|
|
Foreign
currency forwards
|
|
Accrued expenses
|
|
$
|
509
|
|
$
|
|
|
$
|
509
|
|
$
|
|
|
Fair value of foreign
currency derivative assets and liabilities are determined by using market
prices obtained from the banks using foreign currency spot rate and forward
rates.
SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an
amendment of FASB Statement No. 115 (SFAS 159) permits entities to choose
to measure many financial instruments and certain other items at fair value.
This statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. Unrealized
gains and losses on items for which the fair value option is elected would be
reported in earnings. We have elected not to measure any additional financial
instruments and other items at fair value.
15
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2009
NOTE
13FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
In April 2009, the Company adopted the provisions
of FSP SFAS No. 107-1,
Interim Disclosures about
Fair Value of Financial Instruments
(FSP SFAS 107-1), which
amends SFAS No. 107,
Disclosures about Fair
Value of Financial Instruments
, and APB Opinion No. 28,
Interim Financial Reporting
. FSP SFAS No. 107-1
requires disclosures about fair value of financial instruments in financial
statements for interim reporting periods and in annual financial statements of
publicly-traded companies. This FSP also requires entities to disclose the
method(s) and significant assumptions used to estimate the fair value of
financial instruments in financial statements on an interim and annual basis
and to highlight any changes from prior periods. The adoption of FSP SFAS 107-1
did not have a material impact on the Companys consolidated financial position
or results of operations.
The carrying amounts of cash and cash equivalents,
trade receivables, notes receivable, and trade payables approximate fair value
because of the short maturity of these financial instruments. The fair value of our debt also approximates
its carrying value.
NOTE
14COMMITMENTS AND CONTINGENCIES
On October 28, 2008,
a putative class-action lawsuit was filed in the United States District Court
for the Western District of New York against the Company and certain of our
officers and former officers. This
complaint, as amended, alleges that during the period from January 16,
2007 to February 21, 2008 the defendants made misleading statements and/or
omissions relating to our business and operating results in violation of the
Federal securities laws. On May 29,
2009, the Company filed a motion to dismiss the complaint. While the Company
believes the lawsuit to be without merit and intends to vigorously defend
itself, the impact of the lawsuit on the Company cannot be assessed at this
time
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.
16
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30,
2009
NOTE
14COMMITMENTS 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 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
estimated to be approximately $0.8 million. We estimated our portion of the
study to be $0.11 million for which we established a reserve. As of June 30,
2009 we have incurred expenses of $0.1 million, thus the remaining reserve
balance at June 30, 2009 was $0.01 million. The PRPs developed a Draft RI/FS
with their consultants and, following EPA comments, submitted a Revised RI/FS
on December 6, 2007. In April 2008, the PRPs were notified that the
EPA approved the RI/FS Work Plan which now includes the PRPs responses to EPAs
comments on their December 6th submission.
The PRPs commenced field
work in the spring of 2008 and completed the field investigations that June. In
the fall of 2008, the PRPs forwarded the results of the investigation to the
EPA and the New York State Department of Environmental Conservation (DEC).
During the winter and spring of 2009, the PRPs have been working with the EPA
and the DEC to respond to comments and to clarify and resolve technical issues.
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. Other than as described above, we have not
established a reserve for any potential costs relating to this site, as it is too
early in the process to determine our responsibility as well as 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.
On May 22, 2008 the Company President and CEO separated from
Hardinge Inc. In conjunction with his departure, the Company recognized
$1.6 million in severance related expenses during the second quarter of 2008.
At June 30, 2009 the liability on our balance sheet for this reserve was
$0.6 million.
In 2008, the Company
offered a Voluntary Early Retirement Program (VERP) to employees whose sum of
current age and length of service equaled 94 or more as of November 1,
2008. The VERP covers post-retirement
health care costs for 60 months or until Medicare coverage begins, which ever
occurs first. We recorded a charge for the VERP of approximately $1.0 million
during 2008.
In February 2009,
the Company re-offered a VERP which provided 10 weeks of severance pay in
addition to the post-retirement health care costs. The Company recorded a charge for the VERP of
approximately $0.9 million during the quarter ended March 31, 2009. At June 30,
2009, the liability associated with these VERPs was $1.7 million.
17
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30,
2009
NOTE
15SUBSEQUENT EVENTS
On July 21, 2009 the
Company implemented additional involuntary lay-offs in North America, reducing
staffing by 44 employees. The Company expects to record a $0.1 million charge
for severance related expenses during the third quarter of 2009.
On August 4, 2009,
in its Switzerland based operations, the Company announced a reduced work
schedule resulting in cutbacks of 40% in most manufacturing and support
operations. The Company is also planning a workforce reduction of approximately
65 employees in those operations, which would be effective near the end of the
year after the statutorily mandated notification period. The Company anticipates that it will record a
charge for severance related expenses of between $0.3 million and $0.5 million
in the second half of 2009.
On August 6,
2009, the Company announced strategic changes within the Elmira, NY
manufacturing facility. This facility
has long been a vertically integrated operation with machining operations
converting parts from raw castings to finished goods, the costs of which have
proven to be prohibitive. During the
third quarter, the Company will begin moving towards a more variable cost
business model, outsourcing many of the components and subassemblies for
machines currently made in this facility.
In conjunction with this change, the Company will be closing significant
sections of the manufacturing operation involved in parts production. The Company expects that these changes will
further reduce the Elmira workforce by approximately 70 employees. The Company anticipates that it will record a
charge for severance related expenses of between $1.0 million and $1.5 million
in the second half of the year as a result of these strategic actions. In
conjunction with these strategic changes, the Company anticipates that it will
record a charge of up to $10.0 million for asset write-downs during the second
half of the year.
NOTE
16NEW ACCOUNTING STANDARDS
In December 2007,
the FASB issued Statement No. 141 (revised 2007), Business Combinations (FAS 141R). FAS 141R establishes
principles and requirements for how an acquirer in a business combination (i) recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree, (ii) recognizes
and measures goodwill acquired in a business combination or a gain from a
bargain purchase, and (iii) determines what information to disclose to
enable users of financial statements to evaluate the nature and financial
effects of the business combination. In addition, FAS 141R requires that
changes in the amount of acquired tax attributes be included in the Companys
results of operations. FAS 141R became effective for the Company on January 1,
2009 and will be applied to business combinations that have an acquisition date
on or after January 1, 2009. While FAS 141R applies only to business
combinations with an acquisition date after its effective date, the amendments
to FASB Statement No. 109, Accounting
for Income Taxes
(FAS
109), with respect to deferred tax asset valuation allowances and liabilities
for income tax uncertainties, are being applied to all deferred tax valuation
allowances and liabilities for income tax uncertainties recognized in prior
business combinations. The adoption of FAS 141R has not impacted the Companys
consolidated financial statements for prior periods; however, the Companys
financial statements may be impacted to the extent the Company acquires
entities in a purchase business combination in the future.
18
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30,
2009
NOTE
16NEW ACCOUNTING STANDARDS (continued)
In March 2008, the
FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities. This statement
requires companies with derivative instruments to disclose information that
should enable financial statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items are
accounted for under SFAS 133 and how derivative instruments and related
hedged items affect a companys financial position, financial performance and
cash flows. We adopted SFAS 161 in the first quarter of fiscal 2009. Since
SFAS 161 only required additional disclosure, the adoption did not impact our
consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3 Determination
of the Useful Life of Intangible Assets. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142). The objective of this FSP is
to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141(R), and other U.S. Generally Accepted
Accounting Principles (GAAP). This FSP applies to all intangible assets,
whether acquired in a business combination or otherwise and shall be effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years and applied prospectively
to intangible assets acquired after the effective date. The adoption of this
statement did not have a material impact on our financial statements.
In June 2008, the
FASB issued Staff Position (FSP) EITF Issue No. 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities
(FSP EITF 03-6-1), in which the
FASB concluded that all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends or dividend equivalents are
considered participating securities. Because the awards are considered
participating securities, the issuing entity is required to apply the two-class
method of computing basic and diluted earnings per share. The provisions of FSP
EITF 03-6-1 became effective for the Company on January 1, 2009 and are
being applied retrospectively to all prior-period earnings per share
computations. The adoption of FSP EITF 03-6-1 did not impact net income
attributable to the Companys per common share for prior periods and is not
expected to have a material impact on future periods.
In
December 2008, the FASB issued FSP FAS 132(R)-1, Employers Disclosures
about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1). FSP FAS 132(R)-1
amends FASB Statement No. 132 (Revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, to provide guidance on an employers
disclosures about plan assets of a defined benefit pension or other
postretirement plan. Required disclosures address: how investment allocation
decisions are made; the major categories of plan assets; the inputs and
valuation techniques used to measure the fair value of plan assets; the effect
of fair value measurements using significant unobservable inputs on changes in
plan assets for the period; and significant concentrations of risk within plan
assets. Disclosures required by this FSP shall be provided for fiscal years
ending after December 15, 2009, and are not required for earlier periods
presented for comparative purposes. We are currently evaluating the disclosure
requirements of this new FSP.
19
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30,
2009
NOTE
16NEW ACCOUNTING STANDARDS (Continued)
In April 2009, the
FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FSP FAS 157-4
amends SFAS 157 and provides additional guidance for estimating fair value in
accordance with SFAS 157 when the volume and level of activity for the asset or
liability have significantly decreased and also includes guidance on
identifying circumstances that indicate a transaction is not orderly for fair
value measurements. This FSP shall be applied prospectively with retrospective
application not permitted. This FSP shall be effective for interim and annual
periods ending after June 15, 2009. The adoption of FSP SFAS 157-4 did not
have a material impact on the Companys consolidated financial position or results
of operations.
In April 2009, the Company adopted the provisions
of FSP SFAS No. 107-1, Interim Disclosures about Fair Value of Financial
Instruments (FSP SFAS 107-1), which amends SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, and APB Opinion No. 28,
Interim Financial Reporting
. FSP SFAS No. 107-1
requires disclosures about fair value of financial instruments in financial
statements for interim reporting periods and in annual financial statements of
publicly-traded companies. This FSP also requires entities to disclose the
method(s) and significant assumptions used to estimate the fair value of
financial instruments in financial statements on an interim and annual basis
and to highlight any changes from prior periods. The adoption of FSP SFAS 107-1
did not have a material impact on the Companys consolidated financial position
or results of operations. Disclosures required by SFAS 107 are included in Note
13.
In May 2009,
the FASB issued SFAS No. 165, Subsequent
Events
(SFAS 165).
SFAS 165 establishes general standards for accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are available to be issued (subsequent events). More specifically,
SFAS 165 sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that
may occur for potential recognition in the financial statements, identifies the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. SFAS 165 provides largely the same guidance on subsequent
events which previously existed only in auditing literature. The Company
adopted SFAS 165 in the second quarter of 2009.
We have evaluated subsequent events through August 6, 2009, the
date this quarterly report on Form 10-Q was filed with the U.S. Securities
and Exchange Commission. We made no significant changes to our condensed
consolidated financial statements as a result of our subsequent events
evaluation. Disclosures required by SFAS 165 are included in Note 15.
20
Table
of Contents
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 statement notes (Notes)
appearing elsewhere in this report and our annual report on Form 10-K for
the year ended December 31, 2008.
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., Switzerland, Taiwan, and China, with sales to most industrialized
countries. Approximately 69% of our 2008 sales were to customers outside North
America, and 70% of our 2008 products were manufactured outside of North
America. At June 30, 2009
approximately 67% of our employees were 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 levels.
The global
economic recession, which began in 2008, continues to impact the industries in
which we conduct business. The reduced
availability of credit has impacted our customers ability to obtain
financing. As a result, we continue to
experience order cancellations and low levels of incoming orders and related
sales activity. Due to these conditions, management is continually assessing
and implementing cost reduction initiatives throughout the Company to preserve
cash flow.
In February 2009,
the Company implemented a Voluntary Early Retirement Program (VERP) covering
post-retirement health care costs for 60 months or until Medicare coverage
begins, whichever occurs first. The VERP also provided 10 weeks of severance
pay. This program was available to employees whose sum total of current age and
length of service equaled 94 years or more as of April 1, 2009. The Company recorded a charge for the VERP of
approximately $0.9 million during the quarter ended March 31, 2009.
In March 2009,
the Company implemented voluntary and involuntary lay-offs in North America and
Europe, reducing staffing by 72 employees. The Company recorded a $0.6 million
charge for severance related expenses during the quarter ended March 31,
2009.
In May 2009, the Company implemented a series of actions in
response to the continued weakness in the machine tool industry. These actions included: a pay reduction for
all U.S. based salaried employees, including corporate officers, by 5%, which,
when combined with a similar action in February 2009, brings the year to
date pay decreases to 10%; a reduction to the Board of Directors cash
compensation of 10%; suspension of benefits under the U.S. defined benefit
pension plan (which was closed to new participants in 2004), and suspension of
Company contributions to the 401(K) program as of June 15, 2009. The Company also implemented a ten week
furlough for approximately 80 employees in the Elmira, NY machine manufacturing
division. The furlough ran from May 11
to July 17, 2009, with furloughed employees returning to work on July 20,
2009.
In June 2009,
the Company announced it was closing its Exeter, England facility and
consolidating operations into its Leicester, England facility. The Exeter facility was primarily used for
back office support operations. In addition to cost savings, the consolidation
with the Leicester facility will provide operational efficiencies. In conjunction with the closure, the Company
has also announced involuntary lay-offs and early retirements, reducing staff
by 7 employees. The Company expects to
cease operational
21
Table
of Contents
activities in Exeter by September 2009
and will exit the facility in December 2009, when the lease for the
facility expires. In connection with our closure of the Exeter facility, we
recorded a charge of $0.2 million in SG&A for severance related expenses in
the quarter ended June 30, 2009.
On July 21, 2009 the Company announced additional involuntary
lay-offs in North America, reducing staffing by 44 employees. The Company
expects to record a $0.1 million charge for severance related expenses during
the third quarter of 2009.
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 (Purchasing Managers Index), as reported by the
Institute for Supply Management. Another 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
model life of three to five years, effectiveness of technological innovation
and development of new products are also key performance indicators.
We are exposed to
financial market risk resulting from changes in interest and foreign currency
rates. The current global recessionary conditions and related disruptions
within the financial markets have also increased our exposure to the possible
liquidity and credit risks of our counterparties. We believe we have sufficient
liquidity to fund our foreseeable business needs, including cash and cash
equivalents, cash flows from operations, and our bank financing arrangements.
We monitor the
third-party depository institutions that hold our cash and equivalents. Our
emphasis is primarily on safety of principal. Our cash and equivalents are
diversified among counterparties to minimize exposure to any one of these
entities.
We are also
subject to credit risks relating to the ability of counterparties of hedging
transactions to meet their contractual payment obligations. The risks, related
to creditworthiness and nonperformance, have been considered in the fair value
measurements of our foreign currency forward exchange contracts.
We also expect
that some of our customers and vendors may experience difficulty in maintaining
the liquidity required to buy inventory or raw materials. We continue to
monitor our customers financial condition in order to mitigate our accounts receivable
collectibility risks.
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, British, German, Dutch 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 affect
comparative data significantly. We also purchase computer controls and other
components from suppliers throughout the world, with purchase costs reflecting
currency changes.
On March 16, 2009, we entered into an agreement
with a bank for a 366 day $10.0 million term loan. This term loan replaced a multi-currency
secured credit facility, which as of March 15, 2009 had an outstanding
balance of $8.0 million. The term loan is secured by substantially all of the
Companys assets, a negative pledge on the Companys headquarters in Elmira, NY
and a pledge of 66 and 2/3% of the Companys investment in Hardinge
Holdings GmbH. Interest is based on one-month London Interbank
22
Table
of Contents
Offered Rates (LIBOR)
plus 5.0%. The interest rate will
increase by 1.0% to LIBOR plus 6.0% on September 30, 2009, with a minimum
interest rate of 5.5% at all times. The
Company is currently evaluating long-term financing alternatives to replace the
term loan with a flexible credit facility that could adjust to working capital
needs as business volumes dictate.
Results of Operations
Summarized selected financial data for the three months and six months
ended June 30, 2009 and 2008:
|
|
Three
months ended
June 30,
|
|
$
|
|
%
|
|
Six
months ended
June 30,
|
|
$
|
|
%
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
|
|
(dollars in thousands, except
per share data)
|
|
Orders
|
|
$
|
44,566
|
|
$
|
109,357
|
|
$
|
(64,791
|
)
|
(59
|
)%
|
$
|
77,373
|
|
$
|
202,477
|
|
$
|
(125,104
|
)
|
(62
|
)%
|
Net sales
|
|
55,262
|
|
96,565
|
|
(41,303
|
)
|
(43
|
)%
|
107,376
|
|
182,164
|
|
(74,788
|
)
|
(41
|
)%
|
Gross profit
|
|
12,946
|
|
30,310
|
|
(17,364
|
)
|
(57
|
)%
|
26,997
|
|
55,438
|
|
(28,441
|
)
|
(51
|
)%
|
Selling, general and administrative expenses
|
|
17,142
|
|
27,963
|
|
(10,821
|
)
|
(39
|
)%
|
35,292
|
|
51,464
|
|
(16,172
|
)
|
(31
|
)%
|
Other expense (income)
|
|
637
|
|
(68
|
)
|
705
|
|
(1037
|
)%
|
448
|
|
1,956
|
|
(1,508
|
)
|
(77
|
)%
|
(Loss) income from operations
|
|
(4,833
|
)
|
2,415
|
|
(7,248
|
)
|
(300
|
)%
|
(8,743
|
)
|
2,018
|
|
(10,761
|
)
|
(533
|
)%
|
Net (loss) income
|
|
(4,957
|
)
|
448
|
|
(5,405
|
)
|
|
|
(10,333
|
)
|
(282
|
)
|
(10,051
|
)
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.44
|
)
|
$
|
0.04
|
|
$
|
(0.48
|
)
|
|
|
$
|
(0.91
|
)
|
$
|
(0.02
|
)
|
$
|
(0.89
|
)
|
|
|
Weighted average shares outstanding (in thousands)
|
|
11,373
|
|
11,370
|
|
3
|
|
|
|
11,371
|
|
11,312
|
|
59
|
|
|
|
Gross profit as % of net sales
|
|
23.4
|
%
|
31.4
|
%
|
(8.0
|
)pts.
|
|
|
25.1
|
%
|
30.4
|
%
|
(5.3
|
)pts
|
|
|
Selling, general and administrative expenses as % of
sales
|
|
31.0
|
%
|
29.0
|
%
|
2.0
|
pts.
|
|
|
32.9
|
%
|
28.3
|
%
|
4.6
|
pts.
|
|
|
Other expense (income) as % of net sales
|
|
1.2
|
%
|
(0.1
|
)%
|
1.3
|
pts.
|
|
|
0.4
|
%
|
1.1
|
%
|
(0.7
|
)pts.
|
|
|
(Loss) income from operations as % of net sales
|
|
(8.7
|
)%
|
2.5
|
%
|
(11.2
|
)pts.
|
|
|
(8.1
|
)%
|
1.1
|
%
|
(9.2
|
)pts.
|
|
|
Net (loss) income as % of net sales
|
|
(9.0
|
)%
|
0.5
|
%
|
(9.5
|
)pts.
|
|
|
(9.6
|
)%
|
(0.2
|
)%
|
(9.4
|
)pts.
|
|
|
Orders
: The table below summarizes orders by geographical
region for the three months and six months ended June 30, 2009 compared to
the same period in 2008:
|
|
Three
Months Ended
June 30,
|
|
%
|
|
Six
Months Ended
June 30,
|
|
%
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
Orders from Customers in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
11,107
|
|
$
|
31,761
|
|
(65
|
)%
|
$
|
23,546
|
|
$
|
57,459
|
|
(59
|
)%
|
Europe
|
|
14,228
|
|
56,118
|
|
(75
|
)%
|
30,350
|
|
99,466
|
|
(69
|
)%
|
Asia &
Other
|
|
19,231
|
|
21,478
|
|
(10
|
)%
|
23,477
|
|
45,552
|
|
(48
|
)%
|
|
|
$
|
44,566
|
|
$
|
109,357
|
|
(59
|
)%
|
$
|
77,373
|
|
$
|
202,477
|
|
(62
|
)%
|
23
Table
of Contents
Orders, net of cancellations, for the three months ended June 30,
2009 were $44.6 million, a decrease of $64.8 million or 59% compared to the
three months ended June 30, 2008.
Orders, net of cancellations, for the six months ended June 30,
2009 were $77.4 million, a decrease of $125.1 million or 62% compared to the
six months ended June 30, 2008. The
decrease in orders is directly related to the global economic recession and
related financial crisis which has affected all of the regions and product
lines in which we conduct business. Currency exchange rates had an unfavorable
impact on new orders of approximately $1.9 million for the three months and
$3.4 million for the six months ended June 30, 2009 compared to the same
period in 2008. Cancellations related to current economic conditions for the
three and six months ended June 30, 2009 were $2.1 million and $4.2
million, respectively.
North American orders decreased by $20.7 million or 65% for the three
months ended June 30, 2009 and $33.9 million or 59% for the six months
ended June 30, 2009 compared to the same periods in 2008 primarily due to
the global economic recession and related financial crisis. The decreases were noted across all of our
product lines.
European orders decreased by $41.9 million or 75% for the three months
ended June 30, 2009 and $69.1 million or 69% for the six months ended June 30,
2009 compared to the same periods in 2008. This decrease was noted across all
of our product lines and countries within Europe. The decreases in comparison to the prior
periods were influenced by an unfavorable foreign currency translation impact
on European orders of approximately $1.8 million and $3.4 million for the three
and six months ended June 30, 2009, respectively.
Asia & Other orders decreased by $2.2 million or 10% for the
three months ended June 30, 2009 and $22.1 million or 48% for the six
months ended June 30, 2009 compared to the same periods in 2008. The
negative order trends were less severe in China, where we experienced a second
quarter increase in orders of $4.0 million or 29% and a year-to date decline of
$3.6 million or 12% compared to the rest of the Asia and Other region which
experienced declines in excess of 80% for the three and six months ended June 30,
2009, compared to the same periods in 2008.
The increase in order activity in China for the three months ended June 30,
2009 can be attributed to two large orders totaling approximately $5.6 million
in the computer and consumer electronics industry. The orders are expected to
ship primarily during the third quarter of 2009. The impact of foreign currency
translation on Asia and Other orders for the three and six months ended June 30,
2009 compared to the same periods in the prior year was not material.
Net Sales
. The table below summarizes net sales by
geographical region for the three and six months ended June 30, 2009
compared to the same periods in 2008:
|
|
Three
Months Ended
June 30,
|
|
%
|
|
Six
Months Ended
June 30,
|
|
%
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
Net Sales to Customers in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
14,546
|
|
$
|
30,549
|
|
(52
|
)%
|
$
|
30,669
|
|
$
|
59,105
|
|
(48
|
)%
|
Europe
|
|
23,779
|
|
44,753
|
|
(47
|
)%
|
48,066
|
|
82,316
|
|
(42
|
)%
|
Asia &
Other
|
|
16,937
|
|
21,263
|
|
(20
|
)%
|
28,641
|
|
40,743
|
|
(30
|
)%
|
|
|
$
|
55,262
|
|
$
|
96,565
|
|
(43
|
)%
|
$
|
107,376
|
|
$
|
182,164
|
|
(41
|
)%
|
Net sales for the three months ended June 30, 2009 were $55.3
million, a decrease of $41.3 million or 43% compared to the same period in
2008. Net sales for the six months ended
June 30, 2009 were $107.4 million, a decrease of $74.8 million or 41%
compared to the same period in 2008. Similar to our order activity, the
decreases in sales were primarily the result of the global economic recession
and the related financial crisis. We are
experiencing these decreases in all of the regions in which the Company conducts
business for both the three and six month periods ended June 30, 2009
compared to the same periods in the prior year, with the exception of
China. China sales increased 15% for the
three months
24
Table
of Contents
ended June 30, 2009
and decreased 10% for the six months ended June 30, 2009 compared to the
same periods in the prior year. Sales in
Grinding decreased by 29% and 20% for the three and six month periods ended June 30
2009 compared to a decrease of 48% in Turning and Milling for the three and six
month periods ended June 30 2009 compared to the same periods in the prior
year. Currency exchange rates had an
unfavorable impact on sales of approximately $3.4 million for the three months
ended June 30, 2009 compared to the same period in 2008 and approximately
$7.9 million for the six months ended June 30, 2009 compared to the same
period in 2008.
North American net sales
decreased by $16.0 million or 52% for the three months ended June 30, 2009
and $28.4 million or 48% for the six months period ended June 30, 2009
compared to the same periods in 2008.
These decreases were primarily due to the global economic recession and
related financial crisis. This decrease was noted across all of our product
lines and countries within North America.
Europe net sales
decreased by $21.0 million or 47% for the three months ended June 30, 2009
and $34.3 million or 42% for the six months period ended June 30, 2009
compared to the same periods in 2008. Sales in Grinding decreased by 22% and
11% for the three and six month periods ended June 30 2009 compared to a
decrease of 64% and 58% in Turning and Milling for the three and six month
periods ended June 30, 2009, compared to the same periods in the prior
year. Currency exchange rates had an
unfavorable impact on sales of approximately $3.1 million for the three months
ended June 30, 2009 compared to the same period in 2008 and approximately
$7.2 million for the six months ended June 30, 2009 compared to the same
period in 2008.
Net sales to customers in
Asia & Other decreased by $4.3 million or 20% for the three months
ended June 30, 2009 and $12.1 million or 30% for the six months period
ended June 30, 2009 compared to the same periods in 2008. Sales in
Grinding decreased by 43% and 36% for the three and six month periods ended June 30,
2009 compared to a decrease of 4% and 26% in Turning and Milling for the three
and six month periods ended June 30, 2009, compared to the same periods in
the prior year. The impact of foreign
currency translation on sales for the three and six months ended June 30,
2009 compared to the same periods in the prior year was not material.
Results of foreign subsidiaries are translated into U.S. Dollars at the
average exchange rate during the periods presented. For the second quarter of
2009, the U.S. Dollar strengthened by 21% against the British Pound Sterling,
8% against the New Taiwanese Dollar, 7% against the Swiss Franc, and 13%
against the Euro compared to the average rates during the same period in 2008.
The U. S. Dollar weakened by 2% against the Chinese Renminbi. The net of these foreign currencies relative
to the U.S. Dollar was an approximate unfavorable impact of approximately $3.4 million
and $7.9 on net sales for the three and six months ended June 30, 2009,
respectively, compared to the same periods in 2008.
Net sales of machines account for approximately 75% consolidated net
sales for the three and six months ended June 30, 2009 and 2008. Sales of
non-machine products and services consist of workholding, repair parts, service
and accessories.
Gross Profit.
Gross profit for the three months ended June 30,
2009 was $12.9 million, a decrease of $17.4 million or 57.3% compared to the
three months ended June 30, 2008.
Gross profit for the six months ended June 30, 2009 was $27.0
million, a decrease of $28.4 million or 51.3% compared to the six months ended June 30,
2008. The decreased gross profit is due
to the $41.3 million and $74.8 million reduction in sales for the three and six
month periods ended June 30, 2009, respectively, compared to the same
periods in 2008 as well as lower gross margins due to increasingly competitive
business conditions.
Selling, General and Administrative Expenses &
Other.
Selling,
general and administrative (SG&A) expenses were $17.1 million, or 31.0% of
net sales for the three months ended June 30, 2009, a decrease of $10.8
million or 39% compared to $28.0 million or 29.0% of net sales for the three months
ended June 30, 2008. SG&A expenses were $35.3 million, or 32.9% of net
sales for the six months ended June 30, 2009, a decrease of $16.2 million
or 31% compared to $51.5 million or 28.3% of net sales for the six months ended
June 30, 2008.
25
Table
of Contents
SG&A for the three
months ended June 30, 2009 were favorable to the same period in 2008 due
to 2008 expenses of $1.9 million in severance costs in the US and UK and $0.3 million related to the legal entity
restructuring of businesses in Europe and Asia.
The decrease was also driven by the impact of lower commissions and
strategic actions taken by the Company to manage operating expenses as a result
of the current order and sales activity levels as well as a favorable foreign
currency translation impact of approximately $1.4 million compared to the same
period in 2008. Exclusive of the foreign currency translation in 2009 and
severance and restructuring related charges in 2008, SG&A decreased $7.3
million over the same period in 2008 which is primarily due to the impact of
lower commissions, and strategic actions taken to manage operating expenses as
a result of the current sales and order activity level.
SG&A for the six
months ended June 30, 2009 were favorable to the same period in 2008 due
to 2008 expenses discussed above as well as the impact of lower commission
levels and strategic actions taken by the Company to manage operating expenses
as a result of the current order and sales activity levels. Foreign currency translation had a favorable
impact of approximately $3.2 million compared to the same period in 2008. These
favorable actions were offset by a $1.5 million charge related to a Voluntary
Early Retirement Program (VERP) and severance related expenses in the U.S. and
Europe. Exclusive of the foreign
currency translation, VERP and severance related charges in 2009 and the $1.9
million in severance costs in the US and UK and $0.3 million related to the
legal entity restructuring of business in Europe and Asia in 2008, SG&A
decreased $12.3 million over the same period in 2008 which is primarily due to
the impact of lower commissions and strategic actions taken to manage operating
expenses as a result of the current sales and order activity level.
Other Expense
(Income).
Other expense was $0.6 million for the three
months ended June 30, 2009 compared to $0.1 million income for the same
period of the prior year. Other expense was $0.4 million for the six months
ended June 30, 2009 compared to $2.0 million expense in the same period of
the prior year. The improvement over the six months ended June 30, 2008 is
primarily related to realized and unrealized foreign exchange gains and losses.
(Loss) Income from
Operations
. Loss
from operations was $4.8 million, or (8.7)% of net sales for the three months
ended June 30, 2009 compared to income of $2.4 million in the same period
of the prior year. Loss from operations
was $8.7 million, or (8.1)% of net sales for the six months ended June 30,
2009 compared to income of $2.0 million in the same period of the prior year.
Interest Expense &
Interest Income
.
Net interest expense was $0.2 million and $1.4 million for the three and
six months ended June 30, 2009 compared to $0.3 million and $0.7 million
for the same periods in 2008. The increase for the six months of 2009 compared
to the same period in 2008 is attributed to $1.0 million of unamortized
deferred financing costs related to the termination of the multi-currency
credit facility which were expensed in the first half of 2009 offset by higher
levels of borrowings during the same period in the prior year.
Income Taxes.
The provision for income taxes was $(0.11)
million and $0.17 million for the three and six months ended June 30,
2009, compared to $1.6 million for the three and six months ended June 30,
2008. The effective tax rate was (2.2)%
and 1.7% for the three and six months ended June 30, 2009, compared to
78.5% and 122.0% for same periods in 2008.
This difference was driven by the non-recognition of tax benefits in
2009 for certain entities in a loss position for which a full valuation
allowance has been recorded, but which were not so situated in 2008. In addition, the effective tax rate was
affected by the mix of earnings by country.
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 2009 effective income tax rate to be in the range of (5%) to 10%,
inclusive of the effects of the valuation allowances described above, and
excluding discrete items, which would have a 2.5% favorable impact on the
effective tax rate.
26
Table
of Contents
We have recorded a valuation allowance for the full value of the
deferred tax assets of our U.S. operations, and consistent with accounting for
taxes under FAS109, no tax expense (benefits) were recorded as a result of the
pre-tax income (loss) from continuing operations of the U.S. for 2009 or 2008
to offset the taxes accrued for pre-tax earnings from profitable foreign
subsidiaries. We also maintain a valuation allowance on our U.K., Germany, and
Canadian deferred tax assets related to tax loss carryforwards in those
jurisdictions, as well as all other deferred tax assets of those entities.
The effective tax rate for the six month period ended June 30,
2009 of 1.7% differs from the U.S. statutory rate primarily due to no tax
benefit being recorded for certain entities in a loss position for which a full
valuation allowance has been recorded.
Net (Loss).
Net loss for the three months ended June 30,
2009 was $5.0 million, or (9.0%) of net sales, compared to a net income of $0.4
million, or 0.5% of net sales for the three months ended June 30, 2008.
Net loss was $10.3 million or (9.6%) of net sales for the six months ended June 30,
2009 compared to a net loss of $0.3 million or (0.2%) of net sales for the six
months ended June 30, 2008. Basic
and diluted (loss) per share for the three months ended June 30, 2009 were
($0.44) compared to basic and diluted earnings of $0.04 for the three months
ended June 30, 2008. Basic and diluted (loss) per share for the six months
ended June 30, 2009 were ($0.91) compared to ($0.02) for the six months
ended June 30, 2008.
Liquidity and Capital Resources
At June 30, 2009 cash and cash equivalents were
$16.5 million compared to $18.4 million at December 31, 2008. The $1.9 million decrease in cash was driven
by a $16.6 million repayment of outstanding debt and debt issuance fees, and
1.7 million capital expenditures, offset by cash flow generated by operating
activities of $16.6 million. The cash flow from operating activities was
generated as a result of net working capital reductions due to global economic
business conditions. The current ratio
at June 30, 2009 was 3.79:1 compared to 2.80:1 at December 31,
2008. The improvement in the current
ratio is a direct result of the reduction in net working capital, which
included the $16.6 million reduction in outstanding debt and fees.
Cash
Flow Provided By (Used In) Operating Activities and Investing Activities:
Cash flow provided by (used in) operating and
investing activities for the six months ended June 30, 2009 compared to
the same period in 2008 are summarized in the table below:
|
|
Six months ended
June 30,
|
|
|
|
(dollars in thousands)
|
|
|
|
2009
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$
|
16,648
|
|
$
|
4,324
|
|
Cash
flow used in investing activities
|
|
$
|
(1,646
|
)
|
$
|
(2,454
|
)
|
Capital
expenditures (included in investing activities)
|
|
$
|
(1,655
|
)
|
$
|
(2,514
|
)
|
Net cash provided by
operating activities was $16.6 million for the six months ended June 30,
2009 compared to $4.3 million for the same period in 2008 an increase of $12.3
million. This increase is attributed to lower sales levels due to the global
economy. In response to the reduced sales levels, we have cut manufacturing
production, and reduced our workforce and discretionary spending. As the sales
level and manufacturing output have decreased, our balance sheet has contracted
resulting in increased cash provided by operating activities. This increase in
cash provided by operating activities was primarily driven by decreases in
accounts receivable and inventory of $22.2 million and $14.7 million,
respectively. Reducing cash provided by operating activities were decreases in
accrued expenses of $9.4 million, driven by reductions in customer prepayments,
and decreases in accounts payable of $6.5 million related to spending cuts and
reductions in material purchases.
27
Table of Contents
Net cash used in
investing activities was $1.6 million for the six months ended June 30,
2009 compared to $2.5 million for the same period in 2008. Capital expenditures
for the six months ended June 30, 2009 included modest investment in
manufacturing equipment and updates to our overall information technology
infrastructure.
Cash Flow (Used In) Provided by Financing Activities:
Cash
flow (used in) provided by financing activities for the six months ended June 30,
2009 and 2008, are summarized in the table below:
|
|
Six months ended
June 30,
|
|
|
|
(dollars in thousands)
|
|
|
|
2009
|
|
2008
|
|
Borrowings
(repayments) of short-term notes payable
|
|
$
|
8,354
|
|
$
|
(2,800
|
)
|
(Repayments)
borrowings of long-term debt
|
|
(24,269
|
)
|
910
|
|
Net
purchases of treasury stock
|
|
|
|
(589
|
)
|
Payments
of dividends
|
|
(173
|
)
|
(1,148
|
)
|
Payments
of debt issuance fees
|
|
(706
|
)
|
(893
|
)
|
Net
cash (used in) financing activities
|
|
$
|
(16,794
|
)
|
$
|
(4,520
|
)
|
Cash flow used in
financing activities was $16.8 million for the six months ended June 30,
2009 compared to cash flow used in financing activities of $4.5 million for the
same period in 2008. During the six months ended June 30, 2009, we used
$24.0 million to repay the multi-currency debt facility. We borrowed $8.4 on
the new term loan. Dividend payments
during the first six month of 2009 decreased by $1.0 million over the same
period in 2008 as a result of our decreasing the quarterly dividend payout to
$0.01 per share for March 2009 and $0.005 per share for June 2009. During the first six months of 2009, we paid
fees of $0.7 million related to the term loan facility and the multi-currency
debt facility compared to $0.9 million during the same period of 2008.
There
were no shares of stock purchased under our Stock Repurchase Program during the
first six months of 2009. During the six months ended June 30, 2008, we
used $0.6 million to purchase stock through this program. We repurchased 45,500
shares of stock at an average price of $12.72 per share.
Debt
outstanding, including notes payable was $12.2 million on June 30, 2009
compared to $26.2 million on June 30, 2008.
Credit
Facilities:
In March 2009,
we entered into an agreement with a bank for a 366 day $10.0 million term loan
due on March 16, 2010. This term
loan replaced a multi-currency secured credit facility. The term loan is secured by substantially all
of the Companys assets, a negative pledge on the Companys headquarters in
Elmira, NY and a pledge of 66 and 2/3% of the Companys investment in
Hardinge Holdings GmbH. Interest is based on one-month London Interbank Offered
Rates (LIBOR) plus 5.0%. The interest
rate will increase by 1.0% to LIBOR plus 6.0% on September 30, 2009, with
a minimum interest rate of 5.5% at all times. Prior to the closing of the term
loan, we used cash on hand generated from operating results to reduce the
outstanding obligations under the multi-currency credit facility to $8.0
million. Borrowings were $8.4 million on the term loan at June 30, 2009.
The Company is currently evaluating long-term financing alternatives to replace
the term loan with a flexible credit facility that could adjust to working
capital needs as business volumes dictate.
In March 2009, we
terminated the five-year $100.0 million multi-currency secured credit facility,
which we entered into in June, 2008. The Company took a non-cash charge of $1.0
million in the first quarter of 2009 related to the unamortized deferred
financing costs in connection with this termination.
28
Table
of Contents
We have a $3.0 million
unsecured short-term line of credit from a bank with interest based on the
prime rate. There was no balance outstanding at June 30, 2009 or December 31,
2008.
In December 2008,
our Kellenberger AG (Kellenberger) subsidiary replaced their existing credit
facilities and loan agreements with two new unsecured loan facilities with
banks providing for borrowing of up to 11.5 million Swiss Francs, which is
equivalent to approximately $10.6 million at June 30, 2009. These lines
provide for interest at competitive short-term interest rates and carry no
commitment fees on unused funds. At June 30, 2009 there were no borrowings
under these facilities.
In June 2006, our
Taiwan subsidiary negotiated a mortgage loan with a bank secured by the real
property owned by the Taiwan subsidiary which initially provided borrowings of
180.0 million New Taiwanese Dollars which was equivalent to approximately $5.5
million. At June 30, 2009 and December 31, 2008 borrowings under this
agreement were $3.8 million and $4.1 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.
At
June 30, 2009, our only covenant requirement was with the Kellenberger
facility which contained a minimum equity specified ratio. We were in compliance
with that covenant at June 30, 2009.
The Company had access of
up to $27.4 million at June 30, 2009 and availability of $8.6 million net
of current borrowings and letters of credit.
Total consolidated outstanding borrowings at June 30, 2009 and December 31,
2008 were $12.2 million and $28.1 million, respectively.
Our contractual
obligations and commercial commitments have not changed materially, including
the impact from FIN 48, from the disclosures in our 2008 Form 10K.
This
report contains forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended). Such statements are based on
managements current expectations that involve risks and uncertainties. Any
statements that are not statements of historical fact or that are about future
events may be deemed to be forward-looking statements. For example, words such
as may, will, should, estimates, predicts, potential, continue, strategy,
believes, anticipates, plans, expects, intends, and similar
expressions are intended to identify forward-looking statements. The companys
actual results or outcomes and the timing of certain events may differ
significantly from those discussed in any forward-looking statements. The
company undertakes no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events, or otherwise.
29
Table
of Contents
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 six months of 2009. For a
discussion of our exposure to market risk, refer to Item 7A, Quantitative and
Qualitative Disclosures About Market Risks, contained in our 2008 Annual Report
on Form 10-K, as amended.
ITEM
4. CONTROLS AND PROCEDURES
Management of the Company, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as of June 30, 2009, as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, and determined that these controls and procedures were
effective.
There
has been no changes in the Companys internal control over
financial reporting during the quarter ended June 30, 2009 that
has materially affected or is reasonably likely to materially affect
our internal control over financial reporting, as defined
in Rule 13a-15(f) under the Exchange Act.
30
Table
of Contents
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
On October 28, 2008,
a putative class-action lawsuit was filed in the United States District Court
for the Western District of New York against the Company and certain of our
officers and former officers. This
complaint, as amended, alleges that during the period from January 16,
2007 to February 21, 2008 the defendants made misleading statements and/or
omissions relating to our business and operating results in violation of the
Federal securities laws. On May 29,
2009, the Company filed a motion to dismiss the complaint
.
While the Company believes the lawsuit to be
without merit and intends to vigorously defend itself, the impact of the
lawsuit on the Company cannot be assessed at this time.
Item
1.a. Risk Factors
There is no change to
risks factors disclosed in the Companys Annual Report on Form 10K for the
year ended December 31, 2008.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.
Default upon Senior Securities
None
Item 4.
Submission of Matters to a Vote of Security Holders
The 2009 Annual Meeting
of Shareholders of Hardinge Inc. was held on May 5, 2009. A total of 9,954,557 of the Companys shares
were present or represented by proxy at the meeting. This represents
approximately 86% of the Companys shares outstanding. The two Class III
directors below were elected to serve a three-year term and Richard L. Simons
was elected to fill the vacancy created by a resignation and will serve through
the remainder of that term which expires at the 2010 Annual Meeting.
|
|
Votes For
|
|
Votes Withheld/Against
|
|
Class III Directors
|
|
|
|
|
|
Douglas
A. Greenlee
|
|
9,742,686
|
|
211,871
|
|
John
J. Perrotti
|
|
9,741,641
|
|
212,916
|
|
|
|
|
|
|
|
Class I Director
|
|
|
|
|
|
Richard
L. Simons
|
|
9,756,863
|
|
197,694
|
|
Daniel J. Burke, J.
Philip Hunter, Mitchell I. Quain, and Kyle Seymour continued as directors of
the Company. The election of Ernst &
Young LLP as the Companys independent registered public accountants for the
year 2009 was ratified with 9,891,522 shares voted in favor, 39,611 shares
voted against and 23,424 shares abstained.
No other matters were
presented for a vote at the meeting.
Item 5.
Other Information
None
31
Table
of Contents
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.
|
32
Table
of Contents
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.
August 6,
2009
|
|
By:
|
/s/ Richard L.
Simons
|
Date
|
|
|
Richard L.
Simons
|
|
|
|
President and
CEO
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
August 6,
2009
|
|
By:
|
/s/ Edward J.
Gaio
|
Date
|
|
|
Edward J. Gaio.
|
|
|
|
Vice President and
CFO
|
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
|
August 6,
2009
|
|
By:
|
/s/ Douglas J.
Malone
|
Date
|
|
|
Douglas J.
Malone
|
|
|
|
Corporate
Controller and Chief Accounting Officer
|
|
|
|
(Principal Accounting
Officer)
|
33
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