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 September 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 September 30, 2009
there were 11,522,252 shares of
Common Stock of the Registrant outstanding.
Table
of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARDINGE INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In Thousands)
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
Unaudited
|
|
|
|
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
25,355
|
|
$
|
18,430
|
|
Accounts
receivable, net
|
|
35,641
|
|
60,110
|
|
Notes
receivable, net
|
|
1,063
|
|
994
|
|
Inventories,
net
|
|
115,400
|
|
144,957
|
|
Deferred
income taxes
|
|
407
|
|
398
|
|
Prepaid
expenses
|
|
10,439
|
|
10,964
|
|
Total
current assets
|
|
188,305
|
|
235,853
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
182,458
|
|
183,387
|
|
Less
accumulated depreciation
|
|
125,161
|
|
123,790
|
|
Net
property, plant and equipment
|
|
57,297
|
|
59,597
|
|
|
|
|
|
|
|
Notes
receivable, net
|
|
634
|
|
923
|
|
Deferred
income taxes
|
|
1,555
|
|
1,406
|
|
Intangible
assets
|
|
10,554
|
|
10,725
|
|
Other
long-term assets
|
|
627
|
|
1,321
|
|
Total
non-current assets
|
|
13,370
|
|
14,375
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
258,972
|
|
$
|
309,825
|
|
|
|
|
|
|
|
Liabilities
and shareholders equity
|
|
|
|
|
|
Accounts payable
|
|
$
|
15,703
|
|
$
|
20,059
|
|
Notes
payable to bank
|
|
8,354
|
|
|
|
Accrued
expenses
|
|
24,670
|
|
33,255
|
|
Accrued
income taxes
|
|
1,709
|
|
2,911
|
|
Deferred
income taxes
|
|
3,568
|
|
3,466
|
|
Current
portion of long-term debt
|
|
563
|
|
24,549
|
|
Total
current liabilities
|
|
54,567
|
|
84,240
|
|
|
|
|
|
|
|
Long-term
debt
|
|
3,234
|
|
3,572
|
|
Accrued
pension expense
|
|
43,435
|
|
44,962
|
|
Accrued
postretirement benefits
|
|
2,764
|
|
2,528
|
|
Accrued
income taxes
|
|
2,321
|
|
2,153
|
|
Other
liabilities
|
|
4,423
|
|
4,243
|
|
Total
other liabilities
|
|
56,177
|
|
57,458
|
|
|
|
|
|
|
|
Common
Stock - $0.01 par value
|
|
125
|
|
125
|
|
Additional
paid-in capital
|
|
114,429
|
|
114,841
|
|
Retained
earnings
|
|
67,444
|
|
92,700
|
|
Treasury
shares 950,740 shares at September 30, 2009 and 1,003,828 shares at
December 31, 2008
|
|
(12,133
|
)
|
(13,037
|
)
|
Accumulated
other comprehensive (loss)
|
|
(21,637
|
)
|
(26,502
|
)
|
Total
shareholders equity
|
|
148,228
|
|
168,127
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
258,972
|
|
$
|
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
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
50,064
|
|
$
|
86,614
|
|
$
|
157,440
|
|
$
|
268,778
|
|
Cost
of sales
|
|
46,315
|
|
68,536
|
|
126,694
|
|
195,262
|
|
Gross
profit
|
|
3,749
|
|
18,078
|
|
30,746
|
|
73,516
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
17,856
|
|
22,482
|
|
53,148
|
|
73,923
|
|
Other
expense (income)
|
|
304
|
|
150
|
|
752
|
|
2,129
|
|
Impairment
charge
|
|
|
|
2,720
|
|
|
|
2,720
|
|
(Loss)
income from operations
|
|
(14,411
|
)
|
(7,274
|
)
|
(23,154
|
)
|
(5,256
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
232
|
|
377
|
|
1,705
|
|
1,298
|
|
Interest
income
|
|
(41
|
)
|
(70
|
)
|
(95
|
)
|
(253
|
)
|
(Loss)
income before income taxes
|
|
(14,602
|
)
|
(7,581
|
)
|
(24,764
|
)
|
(6,301
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
90
|
|
757
|
|
261
|
|
2,319
|
|
Net
(loss) income
|
|
$
|
(14,692
|
)
|
$
|
(8,338
|
)
|
$
|
(25,025
|
)
|
$
|
(8,620
|
)
|
|
|
|
|
|
|
|
|
|
|
Per
share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share:
|
|
$
|
(1.29
|
)
|
$
|
(0.74
|
)
|
$
|
(2.20
|
)
|
$
|
(0.76
|
)
|
Weighted
average number of common shares outstanding (in thousands)
|
|
11,373
|
|
11,304
|
|
11,372
|
|
11,309
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(loss) earnings per share:
|
|
$
|
(1.29
|
)
|
$
|
(0.74
|
)
|
$
|
(2.20
|
)
|
$
|
(0.76
|
)
|
Weighted
average number of common shares outstanding (in thousands)
|
|
11,373
|
|
11,304
|
|
11,372
|
|
11,309
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends declared per share
|
|
$
|
0.005
|
|
$
|
0.05
|
|
$
|
0.02
|
|
$
|
0.15
|
|
See
accompanying notes.
4
Table
of Contents
HARDINGE
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In
Thousands)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(25,025
|
)
|
$
|
(8,620
|
)
|
Adjustments
to reconcile net (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Noncash
inventory write down
|
|
7,591
|
|
6,275
|
|
Impairment
charge
|
|
|
|
2,720
|
|
Depreciation
and amortization
|
|
6,471
|
|
7,456
|
|
Provision
for deferred income taxes
|
|
(468
|
)
|
1,100
|
|
Loss
(gain) on sale of asset
|
|
105
|
|
(23
|
)
|
Debt
issuance amortization
|
|
1,243
|
|
239
|
|
Unrealized
intercompany foreign currency transaction (gain) loss
|
|
(215
|
)
|
1,831
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable
|
|
24,937
|
|
494
|
|
Notes
receivable
|
|
229
|
|
1,049
|
|
Inventories
|
|
24,669
|
|
845
|
|
Prepaids/other
assets
|
|
1,015
|
|
(6,255
|
)
|
Accounts
payable
|
|
(4,628
|
)
|
(965
|
)
|
Accrued
expenses
|
|
(10,316
|
)
|
(1,959
|
)
|
Accrued
postretirement benefits
|
|
(154
|
)
|
(320
|
)
|
Net
cash provided by operating activities
|
|
25,454
|
|
3,867
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Capital
expenditures
|
|
(2,254
|
)
|
(3,356
|
)
|
Proceeds
from sale of asset
|
|
21
|
|
60
|
|
Net
cash (used in) investing activities
|
|
(2,233
|
)
|
(3,296
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Increase
(decrease) in short-term notes payable to bank
|
|
8,354
|
|
(2,458
|
)
|
(Decrease)
increase in long-term debt
|
|
(24,406
|
)
|
2,265
|
|
Net
purchases of treasury stock
|
|
|
|
(589
|
)
|
Dividends
paid
|
|
(231
|
)
|
(1,719
|
)
|
Debt
issuance fees paid
|
|
(706
|
)
|
(893
|
)
|
Net
cash (used in) financing activities
|
|
(16,989
|
)
|
(3,394
|
)
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
693
|
|
58
|
|
Net
increase (decrease) in cash
|
|
6,925
|
|
(2,765
|
)
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
18,430
|
|
16,003
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
25,355
|
|
$
|
13,238
|
|
See
accompanying notes.
5
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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 nine month period ended
September 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
September 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 is 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)
September 30,
2009
NOTE 3 SIGNIFICANT RECENT EVENTS
On March 16,
2009, we entered into a new financing arrangement with a bank, which provided
the Company a $10 million term loan (term loan) due March 16, 2010
secured by substantially all of the Companys U.S. assets (exclusive of real
property), 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.
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.
On August 20, 2009,
our Swiss subsidiary Kellenberger, AG entered into two new credit facilities
with a bank. These new agreements
provide Kellenberger with a CHF 5.0 million ($4.8 million equivalent) working
capital facility secured by substantially all of the Companys real estate in
St. Gallen, Switzerland and a CHF 7.5 million ($7.2 million equivalent)
unsecured credit facility to provide for guarantees, documentary credit, and margin
cover for foreign exchange trades. The two new facilities replaced a CHF 7.5
million ($7.2 million equivalent) credit facility with the same bank that
provided CHF 3 million ($2.9 million equivalent) for working capital and up to
CHF 7.5 million ($7.2 million equivalent) for guarantees, documentary credit
and margin cover for foreign exchange trades.
There were no borrowings on these facilities at September 30, 2009.
The credit facilities contain a minimum equity ratio covenant.
At September 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 September 30, 2009 and December 31, 2008 were $12.1
million and $28.1 million, respectively.
The reduction in debt was funded with cash flow from operations. The Company had access of up to $32.7 million
at September 30, 2009 and availability of $14.5 million net of current
borrowings and letters of credit, of which $8.3 million is available for
working capital purposes.
In response to the global
economic recession and the weakness in the machine tool industry, the Company
is continually assessing and implementing cost reduction initiatives. During
2009, the Company has implemented the following cost reduction actions:
In February 2009,
the Company implemented a Voluntary Early Retirement Program (VERP). The VERP
was offered 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 further cost reduction initiatives as a result
of 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 the accrual of benefits for active employees
under the U.S. defined
7
Table
of Contents
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30,
2009
NOTE 3 SIGNIFICANT RECENT EVENTS (continued)
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 the closure of its Exeter,
England facility, which was used primarily for back office support operations,
and consolidated the operation into its Leicester, England facility. The
consolidation with the Leicester facility provides operational efficiencies, as
well as cost savings. In conjunction with the closure, the Company reduced
staff by 7 employees through involuntary lay-offs and early retirements. The
Company ceased operational activities in Exeter and exited the facility in September 2009. The Company recorded a charge of $0.8 million
and $1.0 million in SG&A for these severance related and restructuring
expenses in the quarter and nine months ended September 30, 2009,
respectively.
In August 2009, in
our Switzerland based operations, the Company announced an involuntary lay-off
reducing the workforce by approximately 65 employees, effective near the end of
the year, which is after the statutorily mandated notification period. The Company recorded a $0.2 million charge
for severance related expenses in the quarter ended September 30, 2009. We
anticipate that we will record an additional charge for severance related
expenses of approximately $0.1 million in the fourth quarter of 2009.
In July 2009, the
Company implemented additional involuntary lay-offs in North America. On August 6, 2009 the Company announced
strategic changes within the Elmira, NY manufacturing facility. Historically,
this facility has been a vertically integrated operation converting raw
material to parts and components and ultimately finished goods, the costs of
which have proven to be prohibitive at todays volumes. During the third
quarter, the Company began moving towards a variable cost business model,
outsourcing many of the non-critical components and subassemblies for machines
currently manufactured in the Elmira facility. As a result of this strategic
change, the Company will be closing significant sections of the Elmira
manufacturing operation involved in parts production. These changes will reduce
the Elmira workforce by approximately 112 employees by December 31, 2009.
During the third quarter of 2009, the Elmira workforce was reduced by 82
employees. The Company recorded a charge
for severance related expenses of $1.6 million in the quarter ended September 30,
2009. The Company also recorded a charge of $5.0 million for inventory
write-downs during the third quarter of 2009 as a result of these strategic
actions. The Company intends to identify certain Elmira-based machinery and
equipment as available for sale in the fourth quarter of 2009, and will record
an impairment charge at that time, which is not expected to exceed $2.5
million.
8
Table of Contents
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30,
2009
NOTE 4STOCK-BASED COMPENSATION
All of our equity-based
payments to employees, including grants of employee stock options are
recognized in our statement of operations based on the grant date fair value of
the award.
We did not issue any new
stock options during the first nine months of 2009 or 2008. We issued 46,000
stock options in December of 2008. During the three months and nine months
ended September 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 the revised FASB standard, 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 nine month periods ended September 30, 2009 and 2008 is as
follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Shares
and units at beginning of period
|
|
183,000
|
|
143,733
|
|
179,483
|
|
177,000
|
|
Shares/Units
granted
|
|
|
|
|
|
26,000
|
|
42,000
|
|
Shares
vested
|
|
|
|
|
|
(20,883
|
)
|
(33,750
|
)
|
Shares
cancelled or forfeited
|
|
(10,000
|
)
|
|
|
(11,600
|
)
|
(41,517
|
)
|
Shares
and units at end of period
|
|
173,000
|
|
143,733
|
|
173,000
|
|
143,733
|
|
The value of the
restricted stock awarded in the nine months ended September 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 nine
months ended September 30, 2009 was $0.1 million and $0.3 million,
respectively. Total share-based compensation expense for the three months and
nine months ended September 30, 2008 was $0.1 million and $0.3 million,
respectively. At September 30, 2009, the compensation cost not yet
recognized on these shares was $1.0 million, which will be amortized over a
weighted average term of 2.3 years.
9
Table
of Contents
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30,
2009
NOTE 5EARNINGS PER SHARE AND
WEIGHTED AVERAGE SHARES OUTSTANDING
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:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(in thousands except for per share data)
|
|
Net
(loss)
|
|
$
|
(14,692
|
)
|
$
|
(8,338
|
)
|
$
|
(25,025
|
)
|
$
|
(8,620
|
)
|
Numerator
for basic (loss) per share
|
|
(14,692
|
)
|
(8,338
|
)
|
(25,025
|
)
|
(8,620
|
)
|
Numerator
for diluted (loss) per share
|
|
(14,692
|
)
|
(8,338
|
)
|
(25,025
|
)
|
(8,620
|
)
|
Denominator
for basic (loss) per share-weighted average shares (in thousands)
|
|
11,373
|
|
11,304
|
|
11,372
|
|
11,309
|
|
Effect
of diluted securities:
|
|
|
|
|
|
|
|
|
|
Restricted
stock and stock options (in thousands)
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted (loss) earnings per share-adjusted weighted average shares (in
thousands)
|
|
11,373
|
|
11,304
|
|
11,372
|
|
11,309
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) per share
|
|
$
|
(1.29
|
)
|
$
|
(0.74
|
)
|
$
|
(2.20
|
)
|
$
|
(0.76
|
)
|
Diluted
(loss) per share
|
|
$
|
(1.29
|
)
|
$
|
(0.74
|
)
|
$
|
(2.20
|
)
|
$
|
(0.76
|
)
|
There
is no dilutive effect of the restrictive stock and stock options for the three
month periods and the nine month periods ended September 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:
|
|
September 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
Finished
products
|
|
$
|
63,025
|
|
$
|
74,287
|
|
Work-in-process
|
|
23,693
|
|
32,827
|
|
Raw
materials and purchased components
|
|
28,682
|
|
37,843
|
|
Inventories,
net
|
|
$
|
115,400
|
|
$
|
144,957
|
|
10
Table
of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
NOTE 7GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill and other
separately recognized intangible assets with indefinite lives are not
amortized, but rather reviewed at least annually for impairment or 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 are amortized over
their estimated useful lives and are also subject to review for impairment.
At September 30,
2009, we do not have any amounts recorded as goodwill on our balance sheet.
During 2008, we conducted impairment testing and concluded that the implied
fair value of our remaining goodwill and a portion of our intangible assets
were $0. Therefore, we recorded a goodwill impairment charge of $23.8 million
as well as $0.6 million impairment on other intangible assets in 2008.
Other intangible assets
include $6.8 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. Amortizable intangible assets of $3.7 million
include the Bridgeport technical information, patents, distribution agreements,
and other items. These assets are tested for impairment when indicators of
impairment are present. 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.
A reconciliation of the
changes in our product warranty accrual during the three and nine month periods
ended September 30, 2009 and 2008 is as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Balance
at the beginning of period
|
|
$
|
2,534
|
|
$
|
2,725
|
|
$
|
2,872
|
|
$
|
2,469
|
|
Warranty
settlement costs
|
|
(670
|
)
|
(935
|
)
|
(1,928
|
)
|
(1,967
|
)
|
Warranties
Issued
|
|
775
|
|
969
|
|
2,110
|
|
2,702
|
|
Changes
in accruals for pre-existing warranties
|
|
(126
|
)
|
59
|
|
(499
|
)
|
(570
|
)
|
Other
currency translation impact
|
|
87
|
|
(163
|
)
|
45
|
|
21
|
|
Balance
at the end of period
|
|
$
|
2,600
|
|
$
|
2,655
|
|
$
|
2,600
|
|
$
|
2,655
|
|
11
Table
of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
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 .6 % and 1.1% for
the three months and nine months ended September 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 2006 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 September 30,
2009 and December 31, 2008, we had a $2.4 million and $2.2 million
liability recorded for uncertain income tax positions, respectively, which
included interest and penalties of $0.7 million and $0.6 million, respectively.
If recognized, the liability with related penalties and interest at September 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 more likely than not that $0.47 million of
its deferred tax assets can be used to generate refund claims, and thus that portion
of the existing valuation allowance has been released.
12
Table
of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2009
NOTE
10PENSION AND POST RETIREMENT PLANS
A summary of the
components of net periodic pension costs for the consolidated company for the
three and nine months ended September 30, 2009 and 2008 is presented
below:
|
|
Pension Benefits
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
606
|
|
$
|
851
|
|
$
|
2,559
|
|
$
|
2,566
|
|
Interest
cost
|
|
2,170
|
|
2,329
|
|
6,510
|
|
6,858
|
|
Expected
return on plan assets
|
|
(2,501
|
)
|
(2,837
|
)
|
(7,503
|
)
|
(8,381
|
)
|
Amortization
of prior service cost
|
|
(26
|
)
|
(13
|
)
|
(77
|
)
|
(38
|
)
|
Amortization
of transition asset
|
|
(56
|
)
|
(90
|
)
|
(168
|
)
|
(270
|
)
|
Amortization
of loss
|
|
381
|
|
(6
|
)
|
1,142
|
|
64
|
|
Curtailment
|
|
70
|
|
|
|
70
|
|
|
|
Net
periodic benefit cost
|
|
$
|
644
|
|
$
|
234
|
|
$
|
2,533
|
|
$
|
799
|
|
A summary of the
components of net post-retirement benefits costs for the consolidated company
for the three and nine months ended September 30, 2009 and 2008 is
presented below:
|
|
Post-retirement Benefits
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
4
|
|
$
|
7
|
|
$
|
13
|
|
$
|
20
|
|
Interest
cost
|
|
51
|
|
37
|
|
152
|
|
113
|
|
Amortization
of prior service cost
|
|
(126
|
)
|
(126
|
)
|
(379
|
)
|
(379
|
)
|
Amortization
of actuarial gain
|
|
(4
|
)
|
|
|
(11
|
)
|
|
|
Special
termination benefits
|
|
|
|
|
|
376
|
|
|
|
Net
periodic benefit (credit) cost
|
|
$
|
(75
|
)
|
$
|
(82
|
)
|
$
|
151
|
|
$
|
(246
|
)
|
The expected
contributions to be paid during the year ending December 31, 2009 to the
domestic defined benefit plan are $1.8 million.
Contributions to the domestic plans as of September 30, 2009 and
2008 were $1.8
million and $5.8 million,
respectively. The Company also provides defined
benefit pension plans or defined contribution pension plans for some of its
foreign subsidiaries. The expected
contributions to be paid during the year ending December 31, 2009 to the
foreign defined benefit plans are $2.5
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 September 30, 2009 and 2008, $1.8
million and $3.1 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.
13
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 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 nine months
ended September 30, 2009 and 2008 consisted of the following:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(dollars in thousands)
|
|
(dollars in thousands)
|
|
Net
(Loss) Income
|
|
$
|
(14,692
|
)
|
$
|
(8,338
|
)
|
$
|
(25,025
|
)
|
$
|
(8,620
|
)
|
Other
Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
4,464
|
|
(15,920
|
)
|
5,222
|
|
(1,288
|
)
|
Pension
liability adjustment, net of tax
|
|
(489
|
)
|
259
|
|
(357
|
)
|
56
|
|
Unrealized
(loss) on derivatives, net of tax:
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
(654
|
)
|
Other
comprehensive income (loss)
|
|
3,975
|
|
(15,661
|
)
|
4,865
|
|
(1,886
|
)
|
Total
Comprehensive Income (Loss)
|
|
$
|
(10,717
|
)
|
$
|
(23,999
|
)
|
$
|
(20,160
|
)
|
$
|
(10,506
|
)
|
Accumulated balances of
the components of other comprehensive (loss) consisted of the following at September 30,
2009 and December 31, 2008:
|
|
Accumulated balances
|
|
|
|
September 30,
|
|
Dec. 31,
|
|
|
|
2009
|
|
2008
|
|
Accumulated
Other Comprehensive (Loss):
|
|
|
|
|
|
Impact
of SFAS 158 and 87 on retirement related plans (net of tax of
$8,549 and $8,571 in 2009 and 2008, respectively)
|
|
$
|
(44,790
|
)
|
$
|
(44,433
|
)
|
Foreign
currency translation adjustments
|
|
23,153
|
|
17,931
|
|
Accumulated
Other Comprehensive (Loss)
|
|
$
|
(21,637
|
)
|
$
|
(26,502
|
)
|
14
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30,
2009
NOTE
12 DERIVATIVE FINANCIAL INSTRUMENTS
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 $17.3 million and $22.1 million at September 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 September 30,
2009, the fair value of the foreign currency forwards was a $0.2 million asset,
which was included in prepaid expenses and a $0.01 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 nine month periods ended September 30,
2009 of ($0.03) and $0.4 million, respectively, was included in other (income)
expense.
NOTE
13FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined 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. We are using the
following fair value hierarchy definition:
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 September 30, 2009:
|
|
Classification
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
(in thousands)
|
|
Foreign
currency forwards
|
|
Prepaid expenses
|
|
$
|
184
|
|
$
|
|
|
$
|
184
|
|
$
|
|
|
Foreign
currency forwards
|
|
Accrued expenses
|
|
$
|
13
|
|
$
|
|
|
$
|
13
|
|
$
|
|
|
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. 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)
September 30,
2009
NOTE
13FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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.
As of September 30,
2009, we do not have any significant non-recurring measurements of nonfinancial
assets and nonfinancial liabilities.
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 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.
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 September 30,
2009 we have incurred expenses of $0.1 million, thus the remaining reserve
balance at September 30, 2009 was $0.01 million. The PRPs developed a
Draft RI/FS
16
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30,
2009
NOTE 14COMMITMENTS AND
CONTINGENCIES (continued)
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
fieldwork 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 worked with the EPA and the DEC
to respond to comments and to clarify and resolve technical issues. Throughout
the summer and fall of 2009, the PRPs continued to address technical issues and
risk assessments with the EPA and DEC, all in accordance with the Work Plan.
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.
In May 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 September 30, 2009 the liability on our balance sheet
for this reserve was $0.5 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.
In June 2009, the
Company announced the closure of its Exeter, England facility, which was used
primarily for back office support operations, and consolidated the operation
into its Leicester, England facility. In conjunction with the closure, the
Company reduced staff by 7 employees through involuntary lay-offs and early retirements.
The Company recorded a charge of $0.8 million and $1.0 million in SG&A for
these severance related and restructuring expenses in the quarter and nine
months ended September 30, 2009, respectively.
17
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30,
2009
NOTE
14COMMITMENTS AND CONTINGENCIES (continued)
In August 2009, in
our Switzerland based operations, the Company announced an involuntary lay-off
reducing the workforce by approximately 65 employees, effective near the end of
the year, which is after the statutorily mandated notification period. The Company recorded a $0.2 million charge
for severance related expenses in the quarter ended September 30, 2009. We
anticipate that we will record an additional charge for severance related
expenses of approximately $0.1 million in the fourth quarter of 2009.
In July 2009, the
Company implemented additional involuntary lay-offs in North America. On August 6,
2009 the Company announced strategic changes within the Elmira, NY
manufacturing facility. Historically, this facility has been a vertically
integrated operation converting raw material to parts and components and
ultimately finished goods, the costs of which have proven to be prohibitive at
todays volumes. During the third
quarter, the Company began moving towards a variable cost business model,
outsourcing many of the non-critical components and subassemblies for machines
currently manufactured in the Elmira facility. As a result of this strategic
change, the Company will be closing significant sections of the Elmira
manufacturing operation involved in parts production. These changes will reduce
the Elmira workforce by approximately 112 employees by December 31,
2009. During the third quarter of 2009,
the Elmira workforce was reduced by 82 employees. The Company recorded a charge for severance
related expenses of $1.6 million in the quarter ended September 30, 2009.
Total severance related
charges for all of the items discussed above for the three and nine months
ended September 30, 2009 were $2.6 million and $4.1 million, respectively.
These charges were recorded in SG&A in our Statement of Operations. At September 30, 2009, the remaining
liability associated with all of the severance related charges was $3.7
million. The Company also recorded a charge of $5.0 million for inventory
write-downs during the third quarter of 2009 as a result of these strategic
actions. The Company intends to identify certain Elmira-based machinery and
equipment related to parts manufacturing as available for sale in the fourth
quarter of 2009, and will record an impairment charge at that time, which is not
expected to exceed $2.5 million.
NOTE
15SUBSEQUENT EVENTS
On October 30, 2009,
our Swiss subsidiary Kellenberger, entered into a new credit facility with a
bank. This new agreement provides
Kellenberger a CHF 7.0 million ($6.8 million equivalent) facility that provides
for up to CHF 3.0 million ($2.9 million equivalent) working capital facility
and up to CHF 7.0 million ($6.8 million equivalent) for guarantees, documentary
credit and margin cover for foreign exchange trades. This facility is secured by the Companys
real estate in Biel Switzerland up to CHF 3.0 million ($2.9 million
equivalent). This new facility replaced a CHF 4.0 million ($3.9 million
equivalent) credit facility with the same bank that provided up to CHF 4.0
million ($3.9 million equivalent) for guarantees, documentary credit and margin
cover for foreign exchange trades and of which up to CHF 0.5 million ($0.5
million equivalent) of this facility could be used for working capital. This
new credit facility charges interest at competitive short-term interest rates
and carries no commitment fees on unused funds. The credit facility contains a
minimum equity ratio covenant.
On October 30, 2009,
our Taiwanese subsidiary, entered into a new unsecured credit facility with a
bank. This new agreement provides a NT $100.0
million ($3.1 million equivalent) facility for working capital purposes. This
new credit facility charges interest at competitive short-term interest rates
and carries no commitment fees on unused funds.
18
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30,
2009
NOTE
16NEW ACCOUNTING STANDARDS
In June 2009, the
Financial Accounting Standards Board (FASB) issued authoritative guidance
establishing two levels of U.S. generally accepted accounting principles (GAAP)
authoritative and nonauthoritative and making the Accounting Standards
Codification (ASC) the source of authoritative, nongovernmental GAAP, except
for rules and interpretive releases of the Securities and Exchange
Commission. This guidance, which was incorporated into ASC Topic
105, Generally Accepted Accounting Principles, was effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The adoption changed certain disclosure references to U.S.
GAAP, but did not have any other impact on the Companys Consolidated Financial
Statements.
In May 2009,
the FASB issued authoritative guidance establishing general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued. This guidance, which was
incorporated into ASC Topic 855, Subsequent Events, was effective for interim
or annual financial periods ending after June 15, 2009
.
The Company adopted ASC Topic 855 in the
second quarter of 2009. The Company has
evaluated subsequent events through November 5, 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 consolidated financial
statements as a result of our subsequent events evaluation. Disclosures
required by ASC Topic 850 are included in Note 15.
In
December 2008, the FASB issued changes to Employers Disclosures about
Postretirement Benefit Plan Assets. ASC
Topic 715-20 provides 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. These changes become effective 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 standard.
19
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, as amended.
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 September 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.
Beginning in late 2008
and during the first nine months of 2009, the Company has implemented a series
of actions in response to the continued weakness in the machine tool industry. These actions included: a Voluntary Early
Retirement Program (VERP) covering post-retirement health care costs for 60
months or until Medicare coverage begins, whichever occurs first; voluntary and
involuntary lay-offs as well as workforce reductions at our U.S. and European
operations; a pay reduction for all U.S. based salaried employees, including
corporate officers of 10%; a reduction to the Board of Directors cash
compensation of 10%; suspension of the accrual of benefits for active employees
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; furloughs of employees and reduced work
schedules. The Company closed its
Exeter, England facility, which was used primarily for back office support
operations, and consolidated the operations into its Leicester, England
facility. The consolidation with the Leicester facility provides operational
efficiencies, as well as cost savings.
In August of 2009,
the Company announced strategic changes within the Elmira, NY manufacturing
facility. Historically, this facility has long been a vertically integrated
operation with machining operations converting parts from raw castings to
finished goods, the costs of which proven to be prohibitive at todays volumes.
During the third quarter, the Company began moving towards a more variable cost
business model, outsourcing many of the components and subassemblies for
machines currently made in the Elmira facility. The Company will be closing
significant sections of the Elmira manufacturing operation involved in parts
production with this change.
Total severance related
charges for all of the items discussed above for the three and nine months
ended September 30, 2009 were $2.6 million and $4.1 million, respectively.
These charges were recorded in SG&A in our Statement of Operations. At September 30, 2009, the remaining
liability associated with the severance related charges was $3.7 million. The
Company also recorded a charge of $5.0 million for inventory write-downs during
the third quarter ended September 30, 2009 as a result of these strategic
20
Table
of Contents
actions. This charge was
recorded in cost of goods sold in our Statement of Operations. The Company
intends to identify certain Elmira-based machinery and equipment as available
for sale in the fourth quarter of 2009, and will record an impairment charge at
that time, which is not expected to exceed $2.5 million.
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 collectability risks.
Foreign currency
exchange rate changes can be significant to our reported financial results for
several reasons. Our primary competitors are now largely manufacturers in
Japan, Germany, Switzerland, Korea and Taiwan which causes the worldwide
valuation of the Japanese Yen, Euro, Swiss Franc, Korean Won, and New Taiwanese
Dollar 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.
During March 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. During August 2009,
we entered into two new credit facilities at our Swiss subsidiary. These new facilities provide a working
capital line of credit up to CHF 5.0 million ($4.8 million equivalent) and up
to CHF 7.5 million ($7.2 million equivalent) for guarantees, documentary credit
and margin cover for foreign exchange trades.
These two new facilities replaced a CHF 7.5 million ($7.2 million
equivalent) facility with the same bank that provided up to CHF 3 million ($2.9
million equivalent) for working capital and up to CHF 7.5 million ($7.2 million
equivalent) for guarantees, documentary credit and margin cover for foreign
exchange trades. Refer to Liquidity and
Capital Resources for further details.
21
Table
of Contents
On October 30,
2009, we entered into a new CHF 7.0 million ($6.8 million equivalent) credit
facility in our Swiss subsidiary. This
new facility provides a working capital line of credit up to CHF 3.0 million
($2.9 million equivalent) and up to CHF 7.0 million ($6.8 million equivalent)
for guarantees, documentary credit and margin cover for foreign exchange
trades. This facility replaced a CHF 4.0
million ($3.9 million equivalent) with the same bank that provided up to CHF
0.5 million ($.05 million equivalent) for working capital and up to CHF 4.0
million ($3.9 million equivalent) for guarantees, documentary credit and margin
cover for foreign exchange trades.
Additionally, on October 30, 2009, we entered into a NT $100.0
million ($3.1 million equivalent) unsecured credit facility in our Taiwanese
subsidiary. This new facility is for
working capital purposes. Refer to Liquidity
and Capital Resources for further details.
Results of Operations
Summarized selected
financial data for the three months and nine months ended September 30,
2009 and 2008:
|
|
Three months ended
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
September 30,
|
|
$
|
|
%
|
|
September 30,
|
|
$
|
|
%
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
Change
|
|
|
|
(in thousands, except per share
data)
|
|
Orders
|
|
$
|
46,738
|
|
$
|
92,149
|
|
$
|
(45,411
|
)
|
(49
|
)%
|
$
|
124,111
|
|
$
|
294,626
|
|
$
|
(170,515
|
)
|
(58
|
)%
|
Net sales
|
|
50,064
|
|
86,614
|
|
(36,550
|
)
|
(42
|
)%
|
157,440
|
|
268,778
|
|
(111,338
|
)
|
(41
|
)%
|
Gross profit
|
|
3,749
|
|
18,078
|
|
(14,329
|
)
|
(79
|
)%
|
30,746
|
|
73,516
|
|
(42,770
|
)
|
(58
|
%)
|
Selling, general and administrative expenses
|
|
17,856
|
|
22,482
|
|
(4,626
|
)
|
(21
|
)%
|
53,148
|
|
73,923
|
|
(20,775
|
)
|
(28
|
)%
|
Other expense (income)
|
|
304
|
|
150
|
|
154
|
|
103
|
%
|
752
|
|
2,129
|
|
(1,377
|
)
|
(65
|
)%
|
(Loss) income from operations
|
|
(14,411
|
)
|
(7,274
|
)
|
(7,137
|
)
|
98
|
%
|
(23,154
|
)
|
(5,256
|
)
|
(17,898
|
)
|
(341
|
)%
|
Net (loss) income
|
|
(14,692
|
)
|
(8,338
|
)
|
(6,354
|
)
|
76
|
%
|
(25,025
|
)
|
(8,620
|
)
|
(16,405
|
)
|
190
|
%
|
Diluted (loss) earnings per share
|
|
$
|
(1.29
|
)
|
$
|
(0.74
|
)
|
$
|
(0.55
|
)
|
|
|
$
|
(2.20
|
)
|
$
|
(0.76
|
)
|
$
|
(1.44
|
)
|
|
|
Weighted average shares outstanding (in thousands)
|
|
11,373
|
|
11,304
|
|
69
|
|
|
|
11,372
|
|
11,309
|
|
63
|
|
|
|
Gross profit as % of net sales
|
|
7.5
|
%
|
20.9
|
%
|
(13.4)
|
pts.
|
|
|
19.5
|
%
|
27.4
|
%
|
(7.9)
|
pts
|
|
|
Selling, general and administrative expenses as % of
sales
|
|
35.7
|
%
|
26.0
|
%
|
9.7
|
pts.
|
|
|
33.8
|
%
|
27.5
|
%
|
6.3
|
pts.
|
|
|
Other expense (income) as % of net sales
|
|
0.6
|
%
|
0.2
|
%
|
0.4
|
pts.
|
|
|
0.5
|
%
|
0.8
|
%
|
(0.3)
|
pts.
|
|
|
(Loss) income from operations as % of net sales
|
|
(28.8
|
)%
|
(8.4
|
)%
|
(20.4)
|
pts.
|
|
|
(14.7
|
)%
|
(2.0
|
)%
|
(12.7)
|
pts.
|
|
|
Net (loss) income as % of net sales
|
|
(29.3
|
)%
|
(9.6
|
)%
|
(19.7)
|
pts.
|
|
|
(15.9
|
)%
|
(3.2
|
)%
|
(12.7)
|
pts.
|
|
|
22
Table
of Contents
Orders
: The table
below summarizes orders by geographical region for the three months and nine
months ended September 30, 2009 compared to the same period in 2008:
|
|
Three Months Ended
September 30,
|
|
%
|
|
Nine Months Ended
September 30,
|
|
%
|
|
Orders
from
Customers in:
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
North
America
|
|
$
|
11,433
|
|
$
|
27,659
|
|
(59
|
)%
|
$
|
34,979
|
|
$
|
85,118
|
|
(59
|
)%
|
Europe
|
|
12,891
|
|
35,723
|
|
(64
|
)%
|
38,238
|
|
135,189
|
|
(72
|
)%
|
Asia &
Other
|
|
22,414
|
|
28,767
|
|
(22
|
)%
|
50,894
|
|
74,319
|
|
(32
|
)%
|
|
|
$
|
46,738
|
|
$
|
92,149
|
|
(49
|
)%
|
$
|
124,111
|
|
$
|
294,626
|
|
(58
|
)%
|
Orders, net of
cancellations, for the three months ended September 30, 2009 were $46.7
million, a decrease of $45.4 million or 49% compared to the three months ended September 30,
2008. Orders, net of cancellations, for
the nine months ended September 30, 2009 were $124.1 million, a decrease
of $170.5 million or 58% compared to the nine months ended September 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, and
is generally in line with overall industry statistics. Currency exchange rates
had an unfavorable impact on new orders of approximately $0.8 million for the
three months and $4.1 million for the nine months ended September 30, 2009
compared to the same period in 2008. Cancellations related to current economic
conditions for the three and nine months ended September 30, 2009 were
$1.6 million and $8.9 million, respectively.
North American orders
decreased by $16.2 million or 59% for the three months ended September 30,
2009 and $50.1 million or 59% for the nine months ended September 30, 2009
compared to the same periods in 2008 primarily due to the global economic
recession and related financial crisis.
Decreases were noted across all of our product lines.
European orders decreased
by $22.8 million or 64% for the three months ended September 30, 2009 and
$97.0 million or 72% for the nine months ended September 30, 2009 compared
to the same periods in 2008. Decreases were noted across all of our product
lines and all of the countries within Europe. Unfavorable foreign currency
translation impact on European orders of approximately $0.7 million and $4.2
million for the three and nine months ended September 30, 2009,
respectively, also caused some of the decrease.
Asia & Other
orders decreased by $6.4 million or 22% for the three months ended September 30,
2009 and $23.4 million or 32% for the nine months ended September 30, 2009
compared to the same periods in 2008. The decrease was noted in Grinding, and
Turning and Milling. Our China market,
which had a strong second quarter with a $4.0 million or 29% increase over the
prior year, experienced a decrease of $2.8 million or 14% for the three months
ended September 30, 2009 and $3.6 million or 8% for the nine months ended September 30,
2009 compared to the same periods in 2008.
The second quarter increase in order activity in China was attributed to
two large orders in June totaling approximately $5.6 million in the
computer and consumer electronics industry. The impact of foreign currency
translation on Asia and Other orders for the three and nine months ended September 30,
2009 compared to the same periods in the prior year was not material.
23
Table
of Contents
Net Sales
. The table
below summarizes net sales by geographical region for the three and nine months
ended September 30, 2009 compared to the same periods in 2008:
|
|
Three Months Ended
September 30,
|
|
%
|
|
Nine Months Ended
September 30,
|
|
%
|
|
Net
Sales to
Customers in:
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
North
America
|
|
$
|
15,704
|
|
$
|
25,501
|
|
(38
|
)%
|
$
|
46,373
|
|
$
|
84,606
|
|
(45
|
)%
|
Europe
|
|
18,581
|
|
41,610
|
|
(55
|
)%
|
66,647
|
|
123,926
|
|
(46
|
)%
|
Asia &
Other
|
|
15,779
|
|
19,503
|
|
(19
|
)%
|
44,420
|
|
60,246
|
|
(26
|
)%
|
|
|
$
|
50,064
|
|
$
|
86,614
|
|
(42
|
)%
|
$
|
157,440
|
|
$
|
268,778
|
|
(41
|
)%
|
Net sales for the three
months ended September 30, 2009 were $50.1 million, a decrease of $36.6
million or 42% compared to the same period in 2008. Net sales for the nine months ended September 30,
2009 were $157.4 million, a decrease of $111.3 million or 41% compared to the
same period in 2008. As with our order activity, the decreases in sales were
primarily the result of the global economic recession and the related financial
crisis. We experienced these decreases in all of the regions in which the
Company conducts business for both the three and nine month periods ended September 30,
2009 compared to the same periods in the prior year with sales in Grinding
decreasing by 32% and 28% and sales in Turning and Milling decreasing by 46%
and 48%, respectively. Currency exchange rates also had an unfavorable impact
on sales of approximately $0.8 million for the three months ended September 30,
2009 compared to the same period in 2008 and approximately $8.5 million for the
nine months ended September 30, 2009, compared to the same period in 2008.
North American net sales decreased by $9.8 million or 38% for the three
months ended September 30, 2009 and $38.2 million or 45% for the nine
month period ended September 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.
Net sales to customers in Europe decreased by $23.0 million or 55% for
the three months ended September 30, 2009 and $57.3 million or 46% for the
nine month period ended September 30, 2009 compared to the same periods in
2008. Sales in Grinding decreased by 38% and 26% for the three and nine month
periods ended September 30 2009. Turning and Milling sales decreased by
70% and 63% for the three and nine month periods ended September 30, 2009,
compared to the same periods in the prior year.
Currency exchange rates also had an unfavorable impact on sales of
approximately $0.6 million for the three months ended September 30, 2009
compared to the same period in 2008 and approximately $7.9 million for the nine
months ended September 30, 2009 compared to the same period in 2008.
Net sales to customers in Asia & Other decreased by $3.7
million or 19% for the three months ended September 30, 2009 and $15.8
million or 26% for the nine month period ended September 30, 2009 compared
to the same periods in 2008. Sales in Grinding decreased by 49% and 40% for the
three and nine month periods ended September 30, 2009. Turning and Milling
decreased by 11% and 20% for the three and nine month periods ended September 30,
2009, compared to the same periods in the prior year. Currency exchange rates also had unfavorable
impacts on sales of approximately $0.2 million for the three months ended September 30,
2009 compared to the same period in 2008 and approximately $0.6 million for the
nine months ended September 30, 2009 compared to the same period in 2008.
Results of foreign
subsidiaries are translated into U.S. Dollars at the average exchange rate
during the periods presented. For the third quarter of 2009, the U.S. Dollar
strengthened by 13% against the British Pound Sterling, and by 5% against the
New Taiwanese Dollar, the Canadian Dollar, and the Euro compared to the average
rates during the same period in 2008. The U. S. Dollar weakened by 1% against
the Swiss Franc, and remained stable against the Chinese Renminbi. The net effect of these foreign currency rate
changes relative to the U.S. Dollar was an unfavorable impact of approximately
$0.8 million and $8.5 million on net sales for the three and nine months ended September 30,
2009, respectively, compared to the
24
Table
of Contents
same periods in 2008.
Net sales of machines
accounted for approximately 75% of consolidated net sales for the three and
nine months ended September 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 September 30,
2009 was $3.7 million, a decrease of $14.3 million or 79% compared to the three
months ended September 30, 2008. Gross profit for the nine months
ended September 30, 2009 was $30.7 million, a decrease of $42.8 million or
58% compared to the nine months ended September 30, 2008. The
decreased gross profit is primarily due to the $36.6 million and $111.3 million
reduction in sales for the three and nine month periods ended September 30,
2009, respectively, compared to the same periods in 2008. Gross profit
for the three and nine months ended September 30, 2009 was negatively
impacted by an inventory charge of $5.0 million related to the strategic
decision to cease manufacturing non-critical parts and certain machine models
in our Elmira, NY facility. Additionally, gross margin was negatively impacted by
$1.1 million lower of cost or market write-downs taken on machines as a result
of the current market conditions, which have forced many manufacturers and
distributors to cut prices to reduce inventories. Gross profit for the three
and nine month periods ended September 30, 2008 was negatively impacted by
an inventory charge of $6.3 million related to the discontinuance of baseline
machines and certain other machine models.
Selling, General
and Administrative Expenses & Other.
Selling, general and administrative (SG&A) expenses were $17.9
million, or 35.7% of net sales for the three months ended September 30,
2009, a decrease of $4.6 million or 21% compared to $22.5 million or 26.0% of
net sales for the three months ended September 30, 2008. SG&A expenses
were $53.1 million, or 33.8% of net sales for the nine months ended September 30,
2009, a decrease of $20.8 million or 28% compared to $73.9 million or 27.5% of
net sales for the nine months ended September 30, 2008.
SG&A for the three months ended September 30, 2009 includes
$2.6 million primarily related to severance costs associated with the
discontinuance of manufacturing non-critical parts and certain machine models
in our Elmira, NY facility as well as workforce reductions in Europe. SG&A
for the three months ended September 30, 2009 excluding these costs was
$15.3 million or 30.5% of sales, a decrease of $7.2 million or 32% compared to
the same period in 2008. This decrease
was 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 $0.5 million compared to the same period in 2008.
SG&A for the nine months ended September 30, 2009 includes
$4.1 million primarily related to severance costs. During 2009, in addition to the workforce
impact related to the discontinuance of manufacturing non-critical parts and
certain machine models in our Elmira, NY facility, we have implemented
workforce reduction programs in all of our subsidiaries with the exception of
China as a result of the global economic crisis. SG&A for the nine months ended September 30,
2009 excluding these costs was $49.0 million or 31.1% of sales, a decrease of
$24.9 million or 34% compared to the same period in 2008. This decrease was 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.
We had a favorable foreign currency translation impact of approximately $3.3
million for the nine months ended September 30, 2009, as compared to the
same period in 2008.
Impairment Charge.
There was no
impairment charge for the three or nine month period ended September 30,
2009, compared to a non-cash $2.7 million impairment charge in the third
quarter of 2008. In October of 2008, based on a comprehensive market
evaluation, the Company determined that its model of doing business in Canada
did not provide adequate returns. As a
result of this conclusion, the Company closed its facility in Mississauga,
Ontario on October 28, 2008. Changes to the Companys planned product
strategy and method of delivering support to our Canadian customers, as well as
a third quarter analysis of historical cash flows, triggered a review of the
goodwill. The Company recorded a non-cash charge of $2.7 million in the third
quarter of 2008, to reflect the diminished value of goodwill of $2.1 million
and $0.6 million of intangible assets associated with our Canadian operation.
25
Table
of Contents
Other Expense (Income).
Other expense was $0.3 million for the three months
ended September 30, 2009 compared to $0.2 million expense for the same
period of the prior year. Other expense was $0.8 million for the nine months
ended September 30, 2009 compared to $2.1 million expense in the same
period of the prior year. The improvement over the nine months ended September 30,
2008 is primarily related to realized and unrealized foreign exchange gains and
losses.
(Loss) from Operations
. Loss from
operations was $14.4 million, or (28.8)% of net sales for the three months
ended September 30, 2009 compared to a net loss of $7.3 million in the
same period of the prior year. Loss from
operations was $23.2 million, or (14.7)% of net sales for the nine months ended
September 30, 2009 compared to a net loss of $5.3 million in the same
period of the prior year.
Interest Expense & Interest Income
.
Net interest expense was $0.2 million and $1.6 million for the three and
nine months ended September 30, 2009 compared to $0.3 million and $1.0
million for the same periods in 2008. The increase for the nine 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 $0.09 million and $0.26 million for the three and nine
months ended September 30, 2009, compared to $0.8 million and $2.3 million
for the three and nine months ended September 30, 2008. The effective tax rate was .6% and 1.1% for
the three and nine months ended September 30, 2009, compared to 10.0% and
36.8% 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,
and the discrete items described in Note 9.
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 1.7% favorable impact on the effective tax rate.
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.
The effective tax rate
for the nine month period ended September 30, 2009 of 1.1% 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 September 30, 2009 was $14.7 million, or (29.3%) of
net sales, compared to a net loss of $8.3 million, or (9.6%) of net sales for
the three months ended September 30, 2008. Net loss was $25.0 million or
(15.9%) of net sales for the nine months ended September 30, 2009 compared
to a net loss of $8.6 million or (3.2%) of net sales for the nine months ended September 30,
2008. Basic and diluted (loss) per share
for the three months ended September 30, 2009 were ($1.29) compared to
basic and diluted (loss) of ($0.74) for the three months ended September 30,
2008. Basic and diluted (loss) per share for the nine months ended September 30,
2009 were ($2.20) compared to ($0.76) for the nine months ended September 30,
2008.
26
Table
of Contents
Liquidity and Capital Resources
At September 30,
2009 cash and cash equivalents were $25.4 million compared to $18.4 million at December 31,
2008. The $7.0 million increase in cash
was driven by cash flow generated by operating activities of $25.5 million,
offset by a $16.8 million net decrease in outstanding debt and payment of debt
issuance fees as well as $2.3 million capital expenditures. The cash flow from
operating activities was generated as a result of net working capital
reductions driven by global economic business conditions.
Cash
Flow Provided By (Used In) Operating Activities and Investing Activities:
Cash flow provided
by (used in) operating and investing activities for the nine months ended September 30,
2009 compared to the same period in 2008 are summarized in the table below:
|
|
Nine months ended
September 30,
|
|
|
|
(dollars in thousands)
|
|
|
|
2009
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$
|
25,454
|
|
$
|
3,867
|
|
Cash
flow used in investing activities
|
|
$
|
(2,233
|
)
|
$
|
(3,296
|
)
|
Capital
expenditures (included in investing activities)
|
|
$
|
(2,254
|
)
|
$
|
(3,356
|
)
|
Net
cash provided by operating activities was $25.5 million for the nine months
ended September 30, 2009 compared to $3.9 million for the same period in
2008, an increase of $21.6 million. In response to the reduced sales levels, we
have cut manufacturing production, 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 $24.9
million and $24.7 million, respectively. Reducing cash provided by operating
activities were decreases in accrued expenses of $10.3 million, driven by
reductions in customer prepayments, and decreases in accounts payable of $4.6
million related to spending cuts and reductions in material purchases.
Net cash used in
investing activities was $2.2 million for the nine months ended September 30,
2009 compared to $3.3 million for the same period in 2008. Capital expenditures
for the nine months ended September 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 nine months ended September 30,
2009 and 2008, are summarized in the table below:
|
|
Nine months ended
September 30,
(dollars in thousands)
|
|
|
|
2009
|
|
2008
|
|
Borrowings
(repayments) of short-term notes payable
|
|
$
|
8,354
|
|
$
|
(2,458
|
)
|
(Repayments)
borrowings of long-term debt
|
|
(24,406
|
)
|
2,265
|
|
Net
purchases of treasury stock
|
|
|
|
(589
|
)
|
Payments
of dividends
|
|
(231
|
)
|
(1,719
|
)
|
Payments
of debt issuance fees
|
|
(706
|
)
|
(893
|
)
|
Net
cash (used in) financing activities
|
|
$
|
(16,989
|
)
|
$
|
(3,394
|
)
|
Cash flow used in
financing activities was $17.0 million for the nine months ended September 30,
2009 compared to $3.4 million for the same period in 2008. During the nine
months ended September 30, 2009, we used $24.0 million to repay the
multi-currency debt facility. We borrowed $8.4 million on the new term
loan. Dividend payments during the first
nine months of 2009 decreased by $1.5 million over the
27
Table
of Contents
same period in 2008 as a
result of our decreasing the quarterly dividend payout to $0.01 per share for March 2009
and to $0.005 per share for June and September 2009. During the first nine 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 nine months
of 2009. During the nine months ended September 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 September 30, 2009 compared
to
$
28.1 million on December 31,
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 U.S. assets (exclusive of real property), 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 September 30, 2009. We are 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.
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 September 30, 2009 or December 31,
2008.
On August 20, 2009,
our Swiss subsidiary Kellenberger, entered into two new credit facilities with
a bank. These new facilities provide
Kellenberger a CHF 5.0 million ($4.8 million equivalent) working capital
facility secured by the Companys real estate in St. Gallen Switzerland and a
CHF 7.5 million ($7.2 million equivalent) unsecured credit facility which
provides guarantees, documentary credit and margin cover for foreign exchange
trades. The two new facilities replaced a CHF 7.5 million ($7.2 million
equivalent) credit facility with the same bank. Kellenberger also has an
unsecured credit facility with a bank for CHF 4.0 million ($3.9 million) for
guarantees and up to CHF 0.5 million ($0.5 million equivalent) of this facility
can be used for working capital advances. At September 30, 2009, these facilities
provide credit lines of up to CHF 16.5 million ($15.9 million equivalent) of
which CHF 5.5 million ($5.3 million equivalent) is available for working
capital needs. These lines charge interest at competitive short-term interest
rates and carry no commitment fees on unused funds. At September 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 September 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 ($0.1 million equivalent).
28
Table
of Contents
At
September 30, 2009, our only financial covenant requirements are with our
Kellenberger facilities. These facilities contain a minimum equity rratio. We
were in compliance with the covenants at September 30, 2009.
The Company had access of
up to $32.7 million in credit facilities at September 30, 2009 and
availability of $14.5 million net of current borrowings and letters of credit
of which $8.3 million is available for working capital purposes. Total
consolidated outstanding borrowings at September 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, as
amended.
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 nine 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 September 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 September 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.
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 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 10-K/A 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
None
30
Table
of Contents
Item 5.
Other Information
None
Item
6. Exhibits
31.1
|
-
|
Chief Executive Officer
Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
-
|
Chief Financial Officer
Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32
|
-
|
Certification of Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
31
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.
November 5,
2009
|
|
By:
|
/s/ Richard L.
Simons
|
Date
|
|
|
Richard L.
Simons
|
|
|
|
President and
CEO
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
November 5,
2009
|
|
By:
|
/s/ Edward J.
Gaio
|
Date
|
|
|
Edward J. Gaio.
|
|
|
|
Vice President
and CFO
|
|
|
|
(Principal Financial
Officer)
|
|
|
|
|
|
|
|
|
November 5,
2009
|
|
By:
|
/s/ Douglas J.
Malone
|
Date
|
|
|
Douglas J.
Malone
|
|
|
|
Corporate
Controller and Chief Accounting Officer
|
|
|
|
(Principal
Accounting Officer)
|
32
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