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, 2010
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
o
|
|
|
|
Non-accelerated filer
x
|
|
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, 2010 there were 11,607,289
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 Except Share and Per Share Data)
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
22,407
|
|
$
|
24,632
|
|
Accounts receivable, net
|
|
52,116
|
|
39,936
|
|
Notes receivable, net
|
|
1,015
|
|
2,364
|
|
Inventories, net
|
|
114,175
|
|
97,266
|
|
Deferred income taxes
|
|
531
|
|
732
|
|
Prepaid expenses
|
|
12,441
|
|
9,375
|
|
Total current assets
|
|
202,685
|
|
174,305
|
|
Property, plant and equipment
|
|
152,453
|
|
144,635
|
|
Less accumulated depreciation
|
|
98,131
|
|
89,924
|
|
Net property, plant and equipment
|
|
54,322
|
|
54,711
|
|
Notes receivable, net
|
|
14
|
|
157
|
|
Deferred income taxes
|
|
863
|
|
446
|
|
Intangible assets
|
|
10,605
|
|
10,527
|
|
Pension assets
|
|
2,809
|
|
2,032
|
|
Other long-term assets
|
|
43
|
|
26
|
|
Total non-current assets
|
|
14,334
|
|
13,188
|
|
Total assets
|
|
$
|
271,341
|
|
$
|
242,204
|
|
|
|
|
|
|
|
Liabilities and shareholders
equity
|
|
|
|
|
|
Accounts payable
|
|
$
|
35,124
|
|
$
|
16,285
|
|
Notes payable to bank
|
|
5,351
|
|
1,364
|
|
Accrued expenses
|
|
22,641
|
|
17,777
|
|
Customer deposits
|
|
10,491
|
|
4,400
|
|
Accrued income taxes
|
|
1,273
|
|
1,535
|
|
Deferred income taxes
|
|
3,084
|
|
2,832
|
|
Current portion of long-term debt
|
|
577
|
|
563
|
|
Total current liabilities
|
|
78,541
|
|
44,756
|
|
Long-term debt
|
|
2,740
|
|
3,095
|
|
Accrued pension expense
|
|
21,315
|
|
22,082
|
|
Accrued postretirement benefits
|
|
2,308
|
|
2,472
|
|
Accrued income taxes
|
|
1,885
|
|
2,377
|
|
Deferred income taxes
|
|
4,151
|
|
4,030
|
|
Other liabilities
|
|
1,734
|
|
1,862
|
|
Total other liabilities
|
|
34,133
|
|
35,918
|
|
Common Stock - $0.01 par value
|
|
125
|
|
125
|
|
Additional paid-in capital
|
|
114,036
|
|
114,387
|
|
Retained earnings
|
|
51,771
|
|
59,103
|
|
Treasury shares 865,703 shares at September 30,
2010 and 939,240 shares at December 31, 2009
|
|
(11,022
|
)
|
(11,978
|
)
|
Accumulated other comprehensive income (loss)
|
|
3,757
|
|
(107
|
)
|
Total shareholders equity
|
|
158,667
|
|
161,530
|
|
Total liabilities and shareholders equity
|
|
$
|
271,341
|
|
$
|
242,204
|
|
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
71,931
|
|
$
|
50,064
|
|
$
|
174,999
|
|
$
|
157,440
|
|
Cost of sales
|
|
53,994
|
|
46,315
|
|
133,451
|
|
126,694
|
|
Gross profit
|
|
17,937
|
|
3,749
|
|
41,548
|
|
30,746
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
18,717
|
|
17,856
|
|
49,156
|
|
53,148
|
|
Other expense (income)
|
|
(741
|
)
|
304
|
|
(1,612
|
)
|
752
|
|
(Loss) from operations
|
|
(39
|
)
|
(14,411
|
)
|
(5,996
|
)
|
(23,154
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
103
|
|
232
|
|
334
|
|
1,705
|
|
Interest income
|
|
(18
|
)
|
(41
|
)
|
(87
|
)
|
(95
|
)
|
(Loss) before income taxes
|
|
(124
|
)
|
(14,602
|
)
|
(6,243
|
)
|
(24,764
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1,074
|
|
90
|
|
915
|
|
261
|
|
Net (loss)
|
|
$
|
(1,198
|
)
|
$
|
(14,692
|
)
|
$
|
(7,158
|
)
|
$
|
(25,025
|
)
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share:
|
|
$
|
(0.11
|
)
|
$
|
(1.29
|
)
|
$
|
(0.63
|
)
|
$
|
(2.20
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share:
|
|
$
|
(0.11
|
)
|
$
|
(1.29
|
)
|
$
|
(0.63
|
)
|
$
|
(2.20
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.005
|
|
$
|
0.005
|
|
$
|
0.015
|
|
$
|
0.02
|
|
See accompanying notes
4
Table of
Contents
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of
Cash Flows
(In Thousands)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
Net (loss)
|
|
$
|
(7,158
|
)
|
$
|
(25,025
|
)
|
Adjustments to reconcile net (loss) to net cash
provided by operating activities:
|
|
|
|
|
|
Non-cash inventory write-down
|
|
|
|
7,591
|
|
Impairment charge (recovery)
|
|
(25
|
)
|
|
|
Depreciation and amortization
|
|
5,330
|
|
6,471
|
|
Provision for deferred income taxes
|
|
856
|
|
(468
|
)
|
(Gain) loss on sale of assets
|
|
(960
|
)
|
105
|
|
(Gain) on purchase of Jones & Shipman
|
|
(647
|
)
|
|
|
Debt issuance amortization
|
|
234
|
|
1,243
|
|
Unrealized intercompany foreign currency
transaction loss (gain)
|
|
94
|
|
(215
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
(8,728
|
)
|
24,937
|
|
Notes receivable
|
|
1,513
|
|
229
|
|
Inventories
|
|
(11,049
|
)
|
24,669
|
|
Prepaids/other assets
|
|
(3,182
|
)
|
1,015
|
|
Accounts payable
|
|
15,395
|
|
(4,628
|
)
|
Accrued expenses/other liabilities
|
|
6,553
|
|
(10,316
|
)
|
Accrued postretirement benefits
|
|
(441
|
)
|
(154
|
)
|
Net cash (used in) provided by operating
activities
|
|
(2,215
|
)
|
25,454
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Capital expenditures
|
|
(2,154
|
)
|
(2,254
|
)
|
Proceeds from sale of assets
|
|
1,469
|
|
21
|
|
Purchase of Jones & Shipman
|
|
(2,949
|
)
|
|
|
Net cash (used in) investing activities
|
|
(3,634
|
)
|
(2,233
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Increase in short-term notes payable to bank
|
|
3,867
|
|
8,354
|
|
(Decrease) in long-term debt
|
|
(423
|
)
|
(24,406
|
)
|
Dividends paid
|
|
(174
|
)
|
(231
|
)
|
Debt issuance fees paid
|
|
(97
|
)
|
(706
|
)
|
Net cash provided by (used in) financing
activities
|
|
3,173
|
|
(16,989
|
)
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
451
|
|
693
|
|
Net (decrease) increase in cash
|
|
(2,225
|
)
|
6,925
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
24,632
|
|
18,430
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
22,407
|
|
$
|
25,355
|
|
See accompanying notes
5
Table
of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2010
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 and the nine month periods ended September 30,
2010 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2010. 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, 2009.
We operate in only one business segment industrial machine tools.
The
consolidated balance sheet at December 31, 2009 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 2009 consolidated financial statements have been reclassified to
conform to the September 30, 2010 presentation.
NOTE 2 SIGNIFICANT RECENT EVENTS
Unsolicited Tender Offer by Industrias Romi S.A.
On March 30, 2010, Industrias Romi S.A. (Romi),
through a wholly-owned subsidiary, commenced an unsolicited tender offer to
acquire the outstanding Common Shares of Stock of Hardinge Inc. for $8.00 per
share, subject to a number of terms and conditions contained in the tender
offer documents filed by Romi with the SEC (Romis Offer). Hardinge had previously received on February 4,
2010 an unsolicited acquisition proposal from Romi at the same price. On May 10, 2010, Romi increased their
offer to $10.00 per share (Romis Amended Offer). After multiple extensions, on July 15,
2010 Romi announced the expiration of their tender offer to acquire all of the
outstanding shares of Hardinge and did not further extend the offer. No shares of Hardinge stock were purchased
pursuant to the offer, and Romi indicated that all shares of Hardinge
previously tendered and not withdrawn were returned.
As noted in the Companys Schedule 14D-9 filings
with the SEC, our Board unanimously determined that Romis Offer and Romis
Amended Offer were not in the best interests of the Company and the Companys
shareholders and recommended that Company shareholders reject Romis Offers and
not tender their shares. The Schedule 14D-9 and the amendments thereto include
a complete discussion of the reasons and other material factors contributing to
the Board of Directors recommendations.
Total 2010 year to date costs incurred for
professional services and expenses related to this unsolicited tender offer
initiated by Romi was $3.5 million.
Credit Facilities
On
July 12, 2010, our Taiwan subsidiary, Hardinge Machine Tools B.V., Taiwan
Branch, entered into a new unsecured credit facility replacing its existing
$5.0 million facility. The new facility provides a
6
Table of
Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE 2 SIGNIFICANT RECENT EVENTS (continued)
Credit Facilities (continued)
$10.0
million facility for working capital purposes and expires on May 31, 2011.
Interest is charged at the banks current base rate of 1.6% subject to change
by the bank based on market conditions. The new facility carries no commitment
fees on unused funds.
On
August 10, 2010, Kellenberger amended one of its credit agreements with a
bank. The amendment increases the total facility from CHF 7.0 million to CHF
9.0 million, the entire amount of which is available for guarantees,
documentary credit, and margin cover for foreign exchange trades. The amendment also increases the portion of
the facility that can be used for working capital from CHF 3.0 million to
CHF 5.0 million. The amendment increases the banks security in
Kellenbergers real estate in Biel Switzerland from CHF 3.0 million to CHF
5.0 million.
Assets
Held for Sale
During
2009, as part of restructuring our North American manufacturing operations, we
identified certain assets that would no longer be utilized in our manufacturing
operations and made them available for sale.
In September of 2010, the Company conducted an auction to sell
these and other identified assets. Total proceeds from the sale of these assets
were $1.2 million. The Company recognized a gain of $0.8 million on this sale
which is included in other income in the statement of operations.
NOTE 3INVENTORIES
Net
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,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
Finished products
|
|
$
|
50,835
|
|
$
|
51,314
|
|
Work-in-process
|
|
24,989
|
|
19,019
|
|
Raw materials and purchased components
|
|
38,351
|
|
26,933
|
|
Inventories, net
|
|
$
|
114,175
|
|
$
|
97,266
|
|
We
assess the valuation of our inventories and reduce the carrying value of those
inventories that are obsolete or in excess of our forecasted usage to their
estimated net realizable value. We
estimate the net realizable value of such inventories based on analyses and
assumptions including, but not limited to, historical usage, future demand, and
market requirements. We also review the
carrying value of our inventory compared to the estimated selling price less
costs to sell and adjust our inventory carrying value accordingly. Reductions
to the carrying value of inventories are recorded in cost of goods sold. If
future demand for our products is less favorable than our forecasts,
inventories may need to be reduced, which would result in additional expense.
7
Table of
Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE
4PROPERTY, PLANT AND EQUIPMENT
Components
of property, plant and equipment at September 30, 2010 and December 31,
2009 consisted of the following:
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Land, buildings and improvements
|
|
$
|
66,618
|
|
$
|
64,675
|
|
Machinery, equipment and fixtures
|
|
68,591
|
|
62,857
|
|
Office furniture, equipment and vehicles
|
|
17,244
|
|
17,103
|
|
|
|
152,453
|
|
144,635
|
|
Less accumulated depreciation and amortization
|
|
98,131
|
|
89,924
|
|
Property, plant and equipment, net
|
|
$
|
54,322
|
|
$
|
54,711
|
|
During
2009, as part of restructuring our North American manufacturing operations, we
ceased manufacturing operations involved in the non-critical parts production
in our Elmira, NY facility. In conjunction with this action, we identified
certain property, plant and equipment with an acquisition cost of $22.9 million
and net book value of $0.8 million that would no longer be utilized in our
manufacturing operations and made them available for sale. These assets were recorded on the balance
sheet at $0.2 million as of December 31, 2009 based on the lower of the
assets carrying value or fair value less estimated costs to sell, with a
related impairment charge of $0.6 million.
In
September of 2010, we changed our plan to sell some of these assets
identified in December 2009. In
conjunction with this change in plan, we have reclassified these assets from held
for sale to held and used. The assets reclassified to held and used had an
original acquisition cost of $4.7 million and a net book value of $0.05 million
at September 30, 2010. Upon returning these assets to held and used, we
measured them at the lower of their (a) carrying amount before they were
classified as held for sale, adjusted by any depreciation expense or
impairment losses that would have been recognized had the assets continuously
been classified as held for sale or (b) fair value at the date of the
subsequent decision not to sell, which resulted in a recovery of $0.03 million.
NOTE
5INTANGIBLE ASSETS
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.
Nonamortizable
intangible assets include $7.0 million representing the value of the name,
trademarks and copyrights associated with the former worldwide operations of
Bridgeport. We use the Bridgeport brand
name on all of our machining center lines, therefore, the asset has been
determined to have an indefinite useful life. These assets are reviewed
annually for impairment.
Amortizable
intangible assets of $3.6 million include the Bridgeport technical information,
Jones & Shipman trade name, patents, distribution agreements, customer
lists, 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.
8
Table of
Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE
6INCOME TAXES
We
continue to maintain a full valuation allowance on the tax benefits of our
U.S., U.K., German, Canadian and Dutch net 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 866.1% and 14.7% for the three and nine months ended September 30,
2010, 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 2007 to 2009 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 2004 to 2009 generally remain open
to routine examination by foreign taxing authorities, depending on the
jurisdiction.
At
September 30, 2010 and December 31, 2009, we had a $2.1 million and
$2.4 million liability recorded for uncertain income tax positions,
respectively, both of which included interest and penalties of $0.7 million. If
recognized, the uncertain tax benefits, with related penalties and interest at September 30,
2010 and December 31, 2009, would be recorded as a benefit to income tax
expense on the Consolidated Statement of Operations.
During
the quarter ended March 31, 2010, we recognized the settlement of an
uncertain tax position at one of our foreign subsidiaries, and recorded a
benefit to the tax provision of $0.1 million.
During
the quarter ended June 30, 2010, we determined, based on guidance issued
by foreign tax authorities, that it is more likely than not that $0.5 million
of our liability for uncertain tax positions should be reversed. In addition,
the corporate tax rate in Taiwan was reduced, and as a result we reduced our
net deferred tax assets there by $0.1 million.
During
the quarter ended September 30, 2010, we increased the liability for
uncertain tax positions at one of our foreign subsidiaries, and recorded a
charge to the tax provision of $0.4 million.
9
Table of
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2010
NOTE
7WARRANTIES
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, 2010 and 2009 is as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Balance at the beginning of period
|
|
$
|
2,452
|
|
$
|
2,534
|
|
$
|
2,436
|
|
$
|
2,872
|
|
Warranty settlement costs
|
|
(482
|
)
|
(670
|
)
|
(1,257
|
)
|
(1,928
|
)
|
Warranties Issued
|
|
1,090
|
|
775
|
|
2,629
|
|
2,110
|
|
Changes in accruals for pre-existing warranties
|
|
(329
|
)
|
(126
|
)
|
(1,012
|
)
|
(499
|
)
|
Other currency translation impact
|
|
147
|
|
87
|
|
82
|
|
45
|
|
Balance at the end of period
|
|
$
|
2,878
|
|
$
|
2,600
|
|
$
|
2,878
|
|
$
|
2,600
|
|
10
Table of
Contents
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 30, 2010
NOTE 8PENSION AND POST RETIREMENT PLANS
A summary of the components of net periodic pension costs for our
consolidated Company for the three and nine months ended September 30, 2010 and
2009 is presented below:
|
|
Pension Benefits
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
466
|
|
$
|
631
|
|
$
|
1,118
|
|
$
|
2,559
|
|
Interest cost
|
|
2,025
|
|
2,201
|
|
6,269
|
|
6,510
|
|
Expected return on plan assets
|
|
(2,363
|
)
|
(2,540
|
)
|
(7,026
|
)
|
(7,503
|
)
|
Amortization of prior service cost
|
|
(30
|
)
|
(26
|
)
|
(89
|
)
|
(77
|
)
|
Amortization of transition asset
|
|
(56
|
)
|
(58
|
)
|
(161
|
)
|
(168
|
)
|
Amortization of loss
|
|
218
|
|
396
|
|
638
|
|
1,142
|
|
Curtailment
|
|
|
|
70
|
|
|
|
70
|
|
Net periodic benefit cost
|
|
$
|
260
|
|
$
|
674
|
|
$
|
749
|
|
$
|
2,533
|
|
A summary of the components of net postretirement benefits costs for
our consolidated Company for the three and nine months ended September 30, 2010
and 2009 is presented below:
|
|
Postretirement Benefits
|
|
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Service cost
|
|
$
|
5
|
|
$
|
4
|
|
$
|
13
|
|
$
|
13
|
|
Interest cost
|
|
39
|
|
50
|
|
117
|
|
152
|
|
Amortization of prior service cost
|
|
(93
|
)
|
(126
|
)
|
(278
|
)
|
(379
|
)
|
Amortization of actuarial gain
|
|
|
|
(3
|
)
|
|
|
(11
|
)
|
Special termination benefits
|
|
|
|
|
|
|
|
376
|
|
Net periodic benefit (credit) cost
|
|
$
|
( 49
|
)
|
$
|
(75
|
)
|
$
|
(148
|
)
|
$
|
151
|
|
The expected contributions to be paid during the year ending December
31, 2010 to the domestic defined benefit plans are $0.6 million. Contributions to the domestic plans as of
September 30, 2010 and 2009 were $0.3
million and
$1.8 million, respectively. The
Company also provides defined benefit pension plans or defined contribution
pension plans for some of its foreign subsidiaries. The expected contributions to be paid during
the year ending December 31, 2010 to the foreign defined benefit plans are $2.2
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, 2010 and 2009, $1.5 million and $1.8 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.
Effective
June 15, 2009, the Company suspended future accrual of benefits under its U.S.
defined benefit pension plan (which was closed to new participants in 2004) and
also suspended Company contributions to the 401(k) program as of the same date.
11
Table of
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2010
NOTE 8PENSION AND POST RETIREMENT PLANS (continued)
Effective
September 30, 2010, the Company froze benefit accruals under the defined
benefit pension plan at its UK based subsidiary, Hardinge Machine Tools,
Ltd. The impact of the plan curtailment was not material. Employees
impacted by this action are eligible to participate in Hardinge Machine Tools,
Ltd defined contribution retirement plan which, for this group, will provide
for matching contributions up to 8% of an employees salary.
NOTE 9 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. These derivatives do not qualify for hedge accounting treatment. 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 $24.3 million and $12.4 million
at September 30, 2010 and December 31, 2009, 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, 2010, the fair
value of the foreign currency forwards was a $0.05 million asset, which was
included in prepaid expenses and the liability which was included in accrued
expenses was not material. At December 31, 2009, the fair value of the foreign
currency forwards was a $0.06 million asset, which was included in prepaid
expenses and a $0.03 million liability which was included in accrued expenses.
The (gain) recognized for derivative instruments in the statement of operations
for the three and nine month periods ended September 30, 2010 of ($0.36)
million and ($0.04) million, respectively, was included in other (income)
expense. 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) million and $0.37 million, respectively, was included in other (income)
expense.
NOTE 10FAIR VALUE
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.
12
Table of
Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2010
NOTE 10FAIR VALUE (continued)
The
following table presents the fair values and classification of our financial
assets and liabilities measured on a recurring basis:
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
(in thousands)
|
|
|
|
Classification
|
|
As of September 30, 2010
|
|
Foreign currency forwards
|
|
Prepaid
expenses
|
|
$
|
47
|
|
$
|
|
|
$
|
47
|
|
$
|
|
|
Foreign currency forwards
|
|
Accrued
expenses
|
|
$
|
2
|
|
$
|
|
|
$
|
2
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
Foreign currency forwards
|
|
Prepaid
expenses
|
|
$
|
63
|
|
$
|
|
|
$
|
63
|
|
$
|
|
|
Foreign currency forwards
|
|
Accrued
expenses
|
|
$
|
33
|
|
$
|
|
|
$
|
33
|
|
$
|
|
|
Foreign currency derivative
assets and liabilities are valued by reference to similar financial
instruments, adjusted for credit risk, restrictions and other terms specific to
the contracts. We have elected not to measure any additional financial
instruments and other items at fair value.
The carrying amounts of cash
and cash equivalents, trade receivables and trade payables approximate fair
value because of the short maturity of these financial instruments. At September 30, 2010 and December 31, 2009,
the carrying value of notes receivable approximated their fair value. The fair value of our variable interest rate
debt is approximately equal to its carrying value, as the underlying interest
rate is variable. In conjunction with
the Jones & Shipman asset acquisition, trade names and other intangible
assets of £0.2 million (approximately $0.3 million) are valued using an income
approach (level 3). Other than the Jones & Shipman intangible assets, we
did not have any significant non-recurring measurements of nonfinancial assets
and nonfinancial liabilities.
NOTE 11COMMITMENTS AND CONTINGENCIES
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 (the Site)
encompasses an area 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 Site. The EPA documented the release and threatened
release of hazardous substances into the environment at the 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. Hardinge, 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
(thePRPs) have agreed to voluntarily
13
Table of
Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2010
NOTE
11COMMITMENTS AND CONTINGENCIES (continued)
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 $0.84 million. We estimated our portion of the
study to be $0.12 million for which we established a reserve of $0.13 million.
As of September 30, 2010, we have incurred total expenses of $0.12 million with
respect to the study and other activities relating to the Site, thus the
remaining reserve balance at September 30, 2010 was $0.01 million.
The
PRPs developed a Draft RI/FS with their consultants and, following EPA
comments, submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA
approved the RI/FS Work Plan. The PRPs
commenced field work in the spring of 2008 and submitted a Draft Site
Characterization Report to EPA in the fall.
The PRPs currently are performing Risk Assessments in accordance with
the Remedial Investigation portion of the RI/FS.
Until
receipt of this Special Notice, Hardinge had never been named as a PRP at the
Site nor had we received any requests for information from the EPA concerning
the site. Environmental sampling on our property
within this Site under supervision of regulatory authorities had identified
off-site sources for such groundwater contamination and sediment contamination
in the Pond and 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 Hardinge.
During
2008 and 2009, the Company offered a Voluntary Early Retirement Program (VERP)
to employees whose sum of current age and length of service equaled 94. The
VERP covers post-retirement health care costs for 60 months or until Medicare
coverage begins, whichever occurs first.
The Company also incurred various restructuring related charges in 2009
due to workforce reductions in Europe, the closure of our Exeter England
facility, and the reduction in our U.S. workforce due the strategic changes
within the Elmira, NY manufacturing facility. During the three and nine month
period ended September 30, 2010, respectively, we utilized $0.2 million and
$1.9 million of the restructuring reserves. At September 30, 2010, the
remaining liability on our balance sheet associated with all of these
restructuring related charges was $1.2 million. The VERP, which is the
post-retirement health care benefit, is $1.1 million of this liability and will
be relieved through April 2014. The remaining $0.1 million liability is
severance related and will be paid out during the balance of 2010.
14
Table of
Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2010
NOTE
12STOCK-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 2010 or
2009. Expense related to stock options was not material for the three months
and nine months ended September 30, 2010 and 2009. 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
period ended September 30, 2010 and 2009 is as follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Shares and units at beginning of period
|
|
251,340
|
|
183,000
|
|
184,500
|
|
179,483
|
|
Shares/Units granted
|
|
|
|
|
|
70,340
|
|
26,000
|
|
Shares vested
|
|
|
|
|
|
(3,500
|
)
|
(20,883
|
)
|
Shares cancelled, forfeited or exercised
|
|
(3,500
|
)
|
(10,000
|
)
|
(3,500
|
)
|
(11,600
|
)
|
Shares and units at end of period
|
|
247,840
|
|
173,000
|
|
247,840
|
|
173,000
|
|
The
fair value of the restricted stock shares/units awarded in the nine months
ended September 30, 2010 and 2009 was $0.4 million and $0.1 million,
respectively. Total share-based compensation expense relating to restricted
stock for the three months and nine months ended September 30, 2010 was $0.1
million and $0.4 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. At September
30, 2010, the compensation cost not yet recognized on these shares was $1.0
million, which will be amortized over a weighted average term of 1.7 years.
15
Table of
Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE
13EARNINGS PER SHARE
We
calculate earnings per share using the two-class method. Basic earnings
per common share is computed by dividing net (loss) income applicable to common
shareholders by the weighted average number of common shares outstanding for
the period. Net (loss) income applicable to common shareholders represents net
(loss) income reduced by the allocation of earnings to participating
securities. Losses are not allocated to participating securities. Diluted
earnings per common share are calculated by adjusting the weighted average
outstanding shares to assume conversion of all potentially dilutive stock
options.
Unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are
included in the earnings allocation in the earnings per share calculation under
the two-class method. Recipients of restricted stock are entitled to
receive non-forfeitable dividends during the vesting period, therefore, meeting
the definition of a participating security.
The
computation of earnings per share is as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands except per share data)
|
|
Net (loss)
|
|
$
|
(1,198
|
)
|
$
|
(14,692
|
)
|
$
|
(7,158
|
)
|
$
|
(25,025
|
)
|
Earnings allocated to participating stock awards
|
|
1
|
|
1
|
|
3
|
|
3
|
|
Net (loss) applicable to common shareholders
|
|
$
|
(1,199
|
)
|
$
|
(14,693
|
)
|
$
|
(7,161
|
)
|
$
|
(25,028
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted calculations
|
|
|
|
|
|
|
|
|
|
Average common shares used in basic and diluted
computation
|
|
11,409
|
|
11,373
|
|
11,409
|
|
11,372
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic (loss) per share
|
|
$
|
(0.11
|
)
|
$
|
(1.29
|
)
|
$
|
(0.63
|
)
|
$
|
(2.20
|
)
|
Diluted (loss) per share
|
|
$
|
(0.11
|
)
|
$
|
(1.29
|
)
|
$
|
(0.63
|
)
|
$
|
(2.20
|
)
|
There is no dilutive effect of the restrictive stock
and stock options for the three months and the nine months ended September 30,
2010 and 2009 since the impact would be anti-dilutive. 161,419 and 141,380
shares would have been included in the diluted earnings per share calculations
for the three and nine months ended September 30, 2010, respectively, had
the impact of including these diluted securities not been anti-dilutive. 65,441
and 46,199 shares would have been included in the diluted earnings per share
calculations for the three and nine months ended September 30, 2009,
respectively, had the impact of including these diluted securities not been
anti-dilutive. All restricted shares are subject to forfeiture and restrictions
on transfer. Unconditional vesting occurs upon the completion of a specified
period ranging from three to eight years from the date of grant. Stock options
vest over a three year period and are exercisable over ten years.
16
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE
14REPORTING COMPREHENSIVE INCOME (LOSS)
The
components of Other Comprehensive Income (Loss) for the three months and nine
months ended September 30, 2010 and 2009 are as follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Net (Loss)
|
|
$
|
(1,198
|
)
|
$
|
(14,692
|
)
|
$
|
(7,158
|
)
|
$
|
(25,025
|
)
|
Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
Retirement plan-related adjustments (net of tax of
$173 and $61 in 2010 and $73 and ($23) in 2009)
|
|
(992
|
)
|
(489
|
)
|
(401
|
)
|
(357
|
)
|
Foreign currency translation adjustments
|
|
9,766
|
|
4,464
|
|
4,265
|
|
5,222
|
|
Other Comprehensive Income (Loss)
|
|
8,774
|
|
3,975
|
|
3,864
|
|
4,865
|
|
Total Comprehensive Income (Loss)
|
|
$
|
7,576
|
|
$
|
(10,717
|
)
|
$
|
(3,294
|
)
|
$
|
(20,160
|
)
|
Accumulated
balances of the components of Other Comprehensive Income (Loss) consisted of
the following at September 30, 2010 and December 31, 2009:
|
|
Accumulated balances at
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
Accumulated Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plan- related adjustments (net of tax
of $5,334 in 2010 and $5,273 in 2009)
|
|
$
|
(23,816
|
)
|
$
|
(23,415
|
)
|
Foreign currency translation adjustments
|
|
31,481
|
|
27,216
|
|
Net investment hedges (net of tax of $715 in 2010
and 2009)
|
|
(3,908
|
)
|
(3,908
|
)
|
Accumulated Other Comprehensive Income (Loss)
|
|
$
|
3 ,757
|
|
$
|
(107
|
)
|
17
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE
15ACQUISITION OF THE ASSETS OF JONES AND SHIPMAN
On
April 7, 2010, Kellenberger & Co. AG (Kellenberger), an indirect
wholly owned subsidiary of Hardinge Inc. completed the acquisition of certain
assets of Jones and Shipman Precision Limited (J&S), a UK based
manufacturer of grinding and super-abrasive machines and machining systems, for
£2.0 million ($3.0 million equivalent) from Precision Technologies Group
Limited. In conjunction with this asset acquisition, Kellenberger established
Jones & Shipman Grinding Limited, a new UK based wholly owned subsidiary.
The results of operations of this acquisition have been included in the
consolidated financial statements from the date of acquisition. The Company
expensed acquisition related costs of $0.3 million during the nine months ended
September 30, 2010 and recorded it in SG&A expense on the Consolidated
Statement of Operations.
The
acquisition agreement contains provisions for a contingent purchase price
payment based on sales through March 31, 2014. The contingent purchase price payment is
5.42% of sales in excess of £36.4 million (approximately $54.5 million), with a
maximum payment of £0.3 million (approximately $0.45 million). Based on the companys current forecasted
revenue over this period, the fair value of this contingent purchase price is
£0.2 (approximately $0.3 million). This
contingent liability is recorded on the balance sheet within accrued expenses.
The
following table summarizes the allocation of the preliminary purchase price to
the fair value of the assets acquired and liabilities assumed on the date of
acquisition:
Assets acquired:
|
|
|
|
Accounts receivable, net
|
|
$
|
2,778
|
|
Inventory
|
|
3,731
|
|
Property, plant and equipment, net
|
|
452
|
|
Other assets
|
|
294
|
|
Tradename and other intangible assets
|
|
312
|
|
Total assets acquired
|
|
$
|
7,567
|
|
|
|
|
|
Liabilities assumed:
|
|
|
|
Accounts payable, accrued expenses and other
liabilities
|
|
3,961
|
|
|
|
|
|
Net assets acquired
|
|
$
|
3,606
|
|
The
assets acquired and liabilities assumed are measured at fair value. Acquired inventory is valued based on one of
the following methods: for acquired
finished goods inventory, the value is based on the expected sales price less
an allowance for direct selling costs and profits thereon; for acquired work in
process the value is based on the expected sales price less an allowance for
costs to complete the manufacturing process, direct selling costs and profits
thereon; and for acquired raw materials, the value is based on the on current
market price. Acquired property, plant and equipment are valued based upon our
estimate of replacement cost less an allowance for age and condition at the
time of acquisition. The weighted average life of these intangible assets is
6.6 years. Other assets, accounts
payable, accrued expenses and other liabilities are expected to be settled at
face value; therefore face value is assumed to approximate fair value. The fair value of the net assets acquired
exceeded the purchase price; accordingly, a gain of £0.4 million (approximately
$0.6 million) was recorded during the second quarter of 2010 within other
expense (income) in the Consolidated Statement of Operations. The Company
continues to finalize the purchase price allocation. There were no significant
changes or measurement period adjustments during the third quarter of 2010.
18
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
September 30, 2010
NOTE 16NEW ACCOUNTING STANDARDS
In October 2009, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update
No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable
Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force (ASU
2009-13). ASU 2009-13 addresses the accounting for sales arrangements that
include multiple products or services by revising the criteria for when
deliverables may be accounted for separately rather than as a combined unit.
Specifically, this guidance establishes a selling price hierarchy for
determining the selling price of a deliverable, which is necessary to
separately account for each product or service. This hierarchy provides more
options for establishing selling price than existing guidance. ASU 2009-13 is
required to be applied prospectively to new or materially modified revenue
arrangements in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. We do not expect adoption of this standard to have a
material impact on our consolidated results of operations and financial
condition.
In
January 2010, the FASB issued an amendment to ASC Topic 820 Fair Value
Measurements and Disclosures. The amendment requires new disclosures on the
transfers of assets and liabilities between Level 1 (quoted prices in active
market for identical assets or liabilities) and Level 2 (significant other
observable inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the guidance
requires a roll forward of activities on purchases, sales, issuance, and
settlements of the assets and liabilities measured using significant
unobservable inputs (Level 3 fair value measurements). We have applied the new
disclosure requirements as of January 1, 2010, except for the disclosure
on the roll forward activities for Level 3 fair value measurements, which is
effective for fiscal years beginning after December 15, 2010. Other than
requiring additional disclosures, adoption of this new guidance did not and
will not have a material impact on our consolidated financial statements.
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, 2009.
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 Switzerland, Taiwan, United States, China, and
United Kingdom, and with sales to most industrialized countries. Approximately 70% o
f our 2009
sales were to customers outside of North America,
69% of our 2009 products sold were manufactured outside of North America, and
66% of our employees in 2009 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 as compared to
industry measures of market activity levels.
While
general economic conditions around the world appear to be improving, the global
economic recession, which began in 2008, continues to have an impact on
industries in several of the regions in which we conduct business. The reduced
availability of credit continues to impact our customers ability to obtain
financing. As a result, we continue to
experience lower levels of incoming orders and related sales activity in
several regions in which we conduct business.
While Europe and North America are showing some signs of recovery, order
levels are currently running at about 50% of early 2008. Excluding the large
order from a supplier in the consumer electronic industry, order volumes in the
Asia and Other market have returned to early 2008 levels, as those economies
rebound to normalized levels.
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, and machine tool consumption in the Metalworking Insiders Report
published annually by Gardner Publications. Other closely followed U.S. market
indicators
are tracked to determine activity levels in
U.S. manufacturing plants that might purchase our products. One such measurement is
the PMI
(formerly called the Purchasing Managers Index), as reported by the Institute
for Supply Management
. Another measurement is
capacity
utilization of U.S. manufacturing plants, as reported by the Federal Reserve
Board.
Similar information
regarding machine tool consumption in foreign countries is published in various
trade journals.
Non-machine sales, which include collets,
accessories, repair parts, and service revenue, have typically accounted for
approximately 26% of overall sales and are an important part of our business,
especially in the U.S. where Hardinge has an installed base of thousands of
machines. Sales of these products do not
vary on a year-to-year basis as significantly as capital goods, but demand does
typically track the direction of the related machine metrics.
Other
key performance indicators are geographic distribution of net
sales and
orders, gross profit as a percent of net sales,
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.
20
Table of
Contents
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 cash
equivalents. Our emphasis is primarily on safety of principal. Our cash and
cash 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 has 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 reported results
for
several
reasons. Our primary competitors, particularly for
the most technologically advanced products, are now largely manufacturers in
Japan, Germany, Switzerland, Korea, and Taiwan which causes the
worldwide valuation of the Japanese Y
en
,
Euro
, Swiss Franc, South
Korean Won, and New Taiwanese Dollar
to be central to
competitive pricing in all of our markets
.
Also,
we
translate the results of our Swiss, Taiwanese, Chinese, British, German,
Dutch and Canadian subsidiaries into U.S. Dollars for consolidation and
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.
In
June 2010, our Swiss subsidiary, L. Kellenbergrer & Co. AG (Kellenberger)
entered into a new
working capital credit facility with a bank to provide up to
CHF 6.0 million ($6.1 million equivalent) which can be used as a limit for cash
credits in the form of fixed advances in CHF and/or in any other freely
convertible foreign currencies with maximum terms of up to 36 months. The interest rate, which is currently LIBOR
plus 1.5% for a 90 day borrowing, is determined by
the bank
based on prevailing money and
capital market conditions and the banks risk assessment of Kellenberger. The
credit facility is secured by the real property owned by Kellenberger. This new facility replaced a CHF 5.0 million
($5.1 million equivalent) credit facility with substantially the same terms.
In
July 2010, our Taiwan subsidiary, Hardinge Machine Tools B.V., Taiwan
Branch entered into a new unsecured credit facility replacing its existing $5.0
million facility. This new credit facility provides a $10.0 million facility
for working capital purposes and expires on May 31, 2011. Interest is charged at the banks current
base rate of 1.6% subject to change by the bank based on market conditions.
This new credit facility carries no commitment fees on unused funds.
In
August 2010, Kellenberger amended its Master Credit Agreement with a bank.
The amendment increases the total facility from CHF 7.0 million to CHF
9.0 million, the entire amount of which is available for guarantees,
documentary credit, and margin cover for foreign exchange trades. The amendment also increases the portion of
the facility that can be used for working capital from CHF 3.0 million to
CHF 5.0 million. The amendment increases the banks security in
Kellenbergers real estate in Biel Switzerland from CHF 3.0 million to CHF
5.0 million.
Refer
to Liquidity and Capital Resources for further details on the Companys credit
facilities.
21
Table of Contents
Results of Operations
Summarized
selected financial data for the three months and nine months ended September 30,
2010 and 2009:
|
|
Three months ended
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
September 30,
|
|
$
|
|
%
|
|
September 30,
|
|
$
|
|
%
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
Change
|
|
|
|
(in thousands, except per share data)
|
|
Orders
|
|
$
|
70,563
|
|
$
|
46,738
|
|
$
|
23,825
|
|
51
|
%
|
$
|
213,714
|
|
$
|
124,111
|
|
$
|
89,603
|
|
72
|
%
|
Net sales
|
|
71,931
|
|
50,064
|
|
21,867
|
|
44
|
%
|
174,999
|
|
157,440
|
|
17,559
|
|
11
|
%
|
Gross profit
|
|
17,937
|
|
3,749
|
|
14,188
|
|
378
|
%
|
41,548
|
|
30,746
|
|
10,802
|
|
35
|
%
|
% of net sales
|
|
24.9
|
%
|
7.5
|
%
|
17.4
|
pts.
|
|
|
23.7
|
%
|
19.5
|
%
|
4.2
|
pts
|
|
|
Selling, general and administrative expenses
|
|
18,717
|
|
17,856
|
|
861
|
|
5
|
%
|
49,156
|
|
53,148
|
|
(3,992
|
)
|
(8
|
)%
|
% of net sales
|
|
26.0
|
%
|
35.7
|
%
|
(9.7
|
)pts.
|
|
|
28.1
|
%
|
33.8
|
%
|
(5.7
|
)pts.
|
|
|
Other expense (income)
|
|
(741
|
)
|
304
|
|
(1,045
|
)
|
(344
|
)%
|
(1,612
|
)
|
752
|
|
(2,364
|
)
|
(314
|
)%
|
% of net sales
|
|
(1.0
|
)%
|
0.6
|
%
|
(1.6
|
)pts.
|
|
|
(0.9
|
)%
|
0.5
|
%
|
(1.4
|
)pts.
|
|
|
(Loss) income from operations
|
|
(39
|
)
|
(14,411
|
)
|
14,372
|
|
(100
|
)%
|
(5,996
|
)
|
(23,154
|
)
|
17,158
|
|
(74
|
)%
|
% of net sales
|
|
(0.1
|
)%
|
(28.8
|
)%
|
28.7
|
pts.
|
|
|
(3.4
|
)%
|
(14.7
|
)%
|
11.3
|
pts.
|
|
|
Net (loss)
|
|
(1,198
|
)
|
(14,692
|
)
|
13,494
|
|
(92
|
)%
|
(7,158
|
)
|
(25,025
|
)
|
17,867
|
|
(71
|
)%
|
% of net sales
|
|
(1.7
|
)%
|
(29.3
|
)%
|
27.6
|
pts.
|
|
|
(4.1
|
)%
|
(15.9
|
)%
|
11.8
|
pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) per share
|
|
$
|
(0.11
|
)
|
$
|
(1.29
|
)
|
$
|
1.18
|
|
|
|
$
|
(0.63
|
)
|
$
|
(2.20
|
)
|
$
|
1.57
|
|
|
|
Weighted average shares outstanding (in thousands)
|
|
11,409
|
|
11,373
|
|
36
|
|
|
|
11,409
|
|
11,372
|
|
37
|
|
|
|
Reconciliation of Net (Loss) Income to EBITDA
|
|
Three months ended
|
|
|
|
Nine months ended
|
|
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
|
|
2010
|
|
2009
|
|
$ Change
|
|
2010
|
|
2009
|
|
$ Change
|
|
|
|
(dollars in thousands)
|
|
GAAP Net (Loss) Income
|
|
$
|
(1,198
|
)
|
$
|
(14,692
|
)
|
$
|
13,494
|
|
$
|
(7,158
|
)
|
$
|
(25,025
|
)
|
$
|
17,867
|
|
Plus: Interest expense net
of
interest income
|
|
85
|
|
191
|
|
(106
|
)
|
247
|
|
1,610
|
|
(1,363
|
)
|
Taxes
|
|
1,074
|
|
90
|
|
984
|
|
915
|
|
261
|
|
654
|
|
Depreciation and
amortization
|
|
1,737
|
|
2,076
|
|
(339
|
)
|
5,330
|
|
6,471
|
|
(1,141
|
)
|
EBITDA (1)
|
|
$
|
1,698
|
|
$
|
(12,335
|
)
|
$
|
14,033
|
|
$
|
(666
|
)
|
$
|
(16,683
|
)
|
$
|
16,017
|
|
(1) EBITDA, a non-GAAP financial measure, is defined as earnings before
interest, taxes, depreciation and amortization. EBITDA is used by management to
internally measure our operating and management performance and by investors as
a supplemental financial measure to evaluate the performance of our business
that, when viewed with our GAAP results and the accompanying reconciliation, we
believe provides additional information that is useful to gain an understanding
of the factors and trends affecting our business.
22
Table of Contents
Orders
: The table
below summarizes orders by geographical region for the three months and nine
months ended September 30, 2010 compared to the same periods in 2009:
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
Orders from
|
|
September 30,
|
|
%
|
|
September 30,
|
|
%
|
|
Customers in:
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
North America
|
|
$
|
15,462
|
|
$
|
11,433
|
|
35
|
%
|
$
|
48,052
|
|
$
|
34,979
|
|
37
|
%
|
Europe
|
|
22,366
|
|
12,891
|
|
74
|
%
|
58,591
|
|
38,238
|
|
53
|
%
|
Asia & Other
|
|
32,735
|
|
22,414
|
|
46
|
%
|
107,071
|
|
50,894
|
|
110
|
%
|
|
|
$
|
70,563
|
|
$
|
46,738
|
|
51
|
%
|
$
|
213,714
|
|
$
|
124,111
|
|
72
|
%
|
Orders,
net of cancellations, for the quarter ended September 30, 2010 were $70.6
million, an increase of $23.8 million or 51% compared to the same quarter in
2009. Orders, net of cancellations, for
the nine months ended September 30, 2010 were $213.7 million, an increase
of $124.1 million or 72% compared to the nine months ended September 30,
2009. Worldwide demand for machine tools continued to improve during the third
quarter of 2010 as reflected in the increases in orders for all of our major
markets compared to 2009. Asia and Other represents 50% of the Companys total
orders through the first nine months of 2010 driven by a $29.1 million order
from a China-based supplier to the consumer electronics industry. Currency
exchange rates impact on orders for the quarter was not material. Currency exchange rates had a favorable
impact on new orders of approximately $1.6 million for the nine months ended September 30,
2010 compared to the same period in 2009.
North
American orders increased by $4.0 million or 35% for the third quarter of 2010
compared to the same quarter in 2009.
North American orders for the nine months ended September 30, 2010
increased by $13.1 million or 37% compared to the same period in 2009. The year
over year increase was driven by strong machine orders in 2010 which were up
$8.9 million or 63% over 2009. The
increase in machine orders can be attributed to the global economy rebounding
from the recessionary conditions as well as a successful transition to our new
U.S. distributor based model.
European
orders increased by $9.5 million or 74% for the third quarter of 2010 compared
to the same quarter in 2009. European
orders for the nine months ended September 30, 2010 increased by $20.4
million or 53% compared to the same period in 2009. The increase in orders for
the quarter was driven by strong machine order activity in Germany, Switzerland,
and Russia. The increase for the nine
months ended September 30, 2010 was primarily driven by strong machine
order activity in Turkey, as well as the addition of Jones & Shipman
to our product line. The impact of foreign currency translation on orders for
the three month and nine month periods ended September 30, 2010 compared
to the same periods in the prior year was unfavorable by $0.3 million and
favorable by $0.9 million, respectively.
Asia &
Other orders increased by $10.3 million or 46% and $56.2 million or 110%, for
the respective three month and nine month periods ended September 30, 2010
compared to the same periods in 2009. The increases were driven by $4.1 million
in orders for the third quarter and $29.1 million in orders year to date 2010
from a China-based supplier to the consumer electronics industry. Orders also
increased during the third quarter due to several multi-machine orders from
technology and automotive companies in China. Foreign currency translation on
Asian and Other orders for the three and nine month periods ended September 30,
2010 compared to the same periods in the prior year had a favorable impact of
$0.2 million and $0.6 million, respectively.
23
Table of Contents
Net Sales
. The table below summarizes net sales by
geographical region for the three and nine month periods ended September 30,
2010 compared to the same periods in 2009:
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
Net Sales to
|
|
September 30,
|
|
%
|
|
September 30,
|
|
%
|
|
Customers in:
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
North America
|
|
$
|
12,877
|
|
$
|
15,704
|
|
(18
|
)%
|
$
|
43,124
|
|
$
|
46,373
|
|
(7
|
)%
|
Europe
|
|
18,230
|
|
18,581
|
|
(2
|
)%
|
44,161
|
|
66,647
|
|
(34
|
)%
|
Asia & Other
|
|
40,824
|
|
15,779
|
|
159
|
%
|
87,714
|
|
44,420
|
|
97
|
%
|
|
|
$
|
71,931
|
|
$
|
50,064
|
|
44
|
%
|
$
|
174,999
|
|
$
|
157,440
|
|
11
|
%
|
Net sales for the quarter ended September 30, 2010 were $71.9
million, an increase of $21.9 million or 44% compared to the same quarter in
2009. Net sales for the nine months
ended September 30, 2010 were $175.0 million, an increase of $17.6 million
or 11% compared to the same period in 2009.
The quarter and year to date increases were driven by $13.5 million and
$20.6 million in sales to a China-based supplier to the consumer electronics
industry, respectively. Sales in the first nine months of 2010 were negatively
influenced by delivery difficulties within the machine tool industry supply
chain which struggled to respond to the sudden and extraordinary demand growth
in Asian markets. Currency exchange rates for the three and nine month periods
ended September 30, 2010 compared to the same periods in the prior year
were favorable by $0.4 million and $1.8 million, respectively.
North
American sales decreased by $2.8 million or 18% for the three months ended September 30,
2010 and decreased $3.2 million or 7% for the nine months ended September 30,
2010 compared to the same periods in 2009.
The quarter and year-to-date decreases are a result of the lagging
effects of the global economic recession and were in all of our product lines
with the exception of workholding, which is experiencing increases on both a
quarter and year to date basis as productivity begins to return to more
normalized levels.
European
sales for the three months ended September 30, 2010 were relatively flat
compared to the same quarter in 2009. European sales decreased $22.5 million or
34% for the nine month period ended September 30, 2010 compared to the
same period in 2009. Sales for the
quarter, while flat compared to 2009, remain below historical levels as the
effect of the global economic recession continues to impact the region. The year to date decrease in 2010 sales
activity compared to 2009 is attributable to the favorable impact in 2009 of
sales out of machine order backlog that were received before the market
collapse in 2008 as well as the lingering effects of the global economic
recession. Currency exchange rates had a favorable impact on sales of $0.6
million for the nine months ended September 30, 2010 compared to the same
period for 2009 and was immaterial for the quarter.
Asia &
Other net sales increased by $25.0 million or 159% for the third quarter of
2010 compared to the same quarter in 2009.
Net sales increased by $43.3 million or 97% for the nine month period
ended September 30, 2010 compared to the same period in 2009. These
increases were primarily driven by strong sales in China which increased $21.4
million or 161% and $34.7 million or 93% for the three and nine month periods
ended September 30, 2010, respectively, compared to the same periods in
2009. Sales to a China-based supplier to the consumer electronics industry
contributed approximately $13.5 million and $20.6 million for the respective
three and nine month periods ended September 30, 2010. The impact of
foreign currency translation on sales for the three and nine months ended September 30,
2010 compared to the corresponding periods in the prior year was a favorable
$0.4 million and $1.2 million, respectively.
Under
U.S. generally accepted accounting standards, results of foreign subsidiaries
are translated into U.S. Dollars at the average exchange rate during the
periods presented. For the nine months of 2010, the U.S. Dollar weakened by 2%
against the New Taiwanese Dollar and by 6% against the Canadian Dollar, while
it strengthened by 5% against the Euro and by 3% against the British Pound
Sterling compared to the average rates during the same period in 2009. The U.S.
Dollar remained relatively flat against the Swiss
24
Table of Contents
Franc
and Chinese Renminbi. The net of these foreign
currencies relative to the U.S. Dollar was a favorable impact of approximately
$0.4 million and $1.8 million on net sales for the three and nine months ended September 30,
2010, respectively, compared to the same periods in 2009.
Net sales of machines accounted for approximately 78% and 75% of
consolidated net sales for the three and nine month periods ended September 30,
2010 and 2009. 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,
2010 was $17.9 million, an increase of $14.2 million or 378% when compared to
the same period in 2009. Gross profit for the nine months ended September 30,
2010 was $41.5 million, an increase of $10.8 million or 35% when compared to
the nine months ended September 30, 2009. The increased gross profit is
attributable to the increased sales volumes and product mix, offset by the
impact of lower manufacturing volumes against fixed manufacturing expenses. 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 2009 market
conditions, which forced many manufacturers and distributors to cut prices to
reduce inventories. Excluding these 2009 non-recurring charges, gross profit
for the three and nine months ended September 30, 2010 increased by $8.1
million and $4.7 million, respectively, or 82% and 13%, respectively, compared
to the same periods in 2009. Gross margin
for the three and nine month periods ended September 30, 2010 was 24.9%
and 23.7%, respectively, compared to 7.5% and 19.5% for the same periods in
2009. Excluding the above mentioned charges, gross margin percentage for the
three and nine months ended September 30, 2009 would have been 19.7% and
23.4%, respectively.
Selling, General and Administrative
Expenses & Other.
Selling, general and administrative
(SG&A) expenses were $18.7 million, or 26.0% of net sales, for the three
months ended September 30, 2010, an increase of $0.8 million or 5%
compared to $17.9 million, or 35.7% of net sales for the three months ended September 30,
2009. SG&A expenses were $49.2 million, or 28.1% of net sales, for the nine
months ended September 30, 2010, a decrease of $3.9 million or 8% compared
to $53.1 million, or 33.8% of net sales for the nine months ended September 30,
2009.
The
third quarter of 2010 SG&A included charges of $1.5 million for
professional services costs related to an unsuccessful unsolicited tender offer
and $0.6 million associated with the settlement of a tax audit in a foreign
subsidiary. The third quarter of 2009 SG&A included $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. Exclusive of these charges, SG&A
for the third quarter of 2010 and 2009 would have been $16.6 million (23.1% of
sales) and $15.3 million (30.5% of sales), respectively, an increase of $1.4
million or 9% compared to the third quarter of 2009. This increase was driven
by the impact of the Jones & Shipman acquisition and increased
commissions offset by the favorable effects of the strategic actions taken by
the Company to reduce operating expenses since late 2008.
SG&A
for the nine months ended September 30, 2010 includes charges of $3.5
million for professional services costs related to the unsolicited tender
offer, $0.6 million associated with the settlement of a tax audit in a foreign
subsidiary, and $0.3 million related to Jones and Shipman acquisition
costs. SG&A for the nine months
ended September 30, 2009 included $4.1 million primarily related to
severance costs mentioned above. Exclusive of these charges, SG&A for the
nine months ended September 30, 2010 and 2009 would have been $44.8
million (25.6% of sales) and $49.0 million (31.2% of sales), respectively, a
decrease of $4.3 million or 9% compared to the nine months ended September 30,
2009. This decrease was driven by the favorable effects of the strategic
actions taken by the Company to reduce operating expenses since late 2008
offset by the impact of the Jones & Shipman acquisition and increased
commissions.
Foreign
currency translation was not material for the quarter, but had an unfavorable
impact of approximately $0.6 million for the nine months ended September 30,
2010 compared to the same period of
25
Table of Contents
2009.
Other (Income) Expense.
Other income was $0.7
million for the quarter ended September 30, 2010 compared to expense of
$0.3 million for the same period in the prior year, an improvement of $1.0
million. The 2010 third quarter gain is
primarily related to a $0.8 million gain on the sale of certain assets held for
sale at the Companys Elmira, New York manufacturing facility. Other income was
$1.6 million for the nine months ended September 30, 2010 compared to
expense of $0.8 million for the same period in the prior year. Year to date 2010 other income includes $0.8
million from the sale of certain assets held for sale at the Companys Elmira,
New York manufacturing facility and $0.6 million associated with the gain on
the purchase of Jones & Shipman in the second quarter.
(Loss) from Operations
. Loss from operations was ($0.04) million or
(0.1%) of net sales for the three months ended September 30, 2010 compared
to a loss of ($14.4) million or (28.8%) of net sales for the same period of the
prior year. Loss from operations was ($6.0) million or (3.4%) of net sales for
the nine months ended September 30, 2010 compared to a loss of ($23.2)
million or (14.7%) of net sales for the same period of 2009.
Interest Expense & Interest
Income
. Net
interest expense was $0.1 million and $0.2 million for the three and nine
months ended September 30, 2010 compared to $0.2 million and $1.6 million
for the same periods in 2009. The decrease for 2010 compared to 2009 is attributed
to the $1.0 million of unamortized deferred financing costs related to the
termination of the multi-currency credit facility which was expensed in 2009.
Income Taxes.
The provision for income taxes was $1.1
million and $0.9 million for the three and nine months ended September30, 2010
compared to a tax provision of $0.1 million and $0.3 million for the three and
nine months ended September 30, 2009. The effective tax rate was
866.1% and 14.7% for the three and nine months ended September 30, 2010
compared to 0.6% and 1.1% for the same periods in 2009.
This
difference was driven by the non-recognition of tax benefits for certain
entities in a loss position for which a full valuation allowance has been
recorded (U.S., U.K., Germany, Canada, and the Netherlands), and by the mix of
earnings by country, and discrete items as described in Note 6.
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 2010
effective income tax rate to be in the range of (20%) to 10%, inclusive of the
effects of the valuation allowances described above.
We
maintain a full valuation allowance on the tax benefits of our U.S., U.K.,
German, Canadian, and Dutch net deferred tax assets related to tax loss
carryforwards in those jurisdictions, as well as all other deferred tax assets
of those entities.
The
effective tax rate for the nine month period ended September 30, 2010 of 14.7%
differs from the U.S. statutory rate primarily due to no tax benefit being
recorded for certain entities in a loss position for which a full valuation
allowance has been recorded.
Net (Loss).
Net loss for the three months ended September 30,
2010 was ($1.2) million, or (1.7%) of net sales, compared to a net loss of
($14.7) million, or (29.3%) of net sales, for the three months ended September 30,
2009. Net loss for the nine months ended September 30, 2010 was ($7.2)
million, or (4.1%) of net sales, compared to a net loss of ($25.0) million, or
(15.9%) of net sales, for the nine months ended September 30, 2009. Basic and diluted loss per share for the
three months and nine months ended September 30, 2010 were ($0.11) and
($0.63), respectively, compared to basic and diluted loss of ($1.29) and
($2.20), respectively, for the three and nine months ended September 30,
2009.
26
Table of
Contents
Liquidity
and Capital Resources
At September 30, 2010, cash and cash equivalents were $22.4
million compared to $24.6 million at December 31, 2009.
Cash Flow (Used In) Provided By Operating
Activities and Investing Activities:
Cash
flow (used in) provided by operating and investing activities for the nine
months ended September 30, 2010 compared to the same period in 2009 are
summarized in the table below:
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
Net cash (used in) provided by operating
activities
|
|
$
|
(2,215
|
)
|
$
|
25,454
|
|
Cash flow used in investing activities
|
|
$
|
(3,634
|
)
|
$
|
(2,233
|
)
|
Capital expenditures (included in investing
activities)
|
|
$
|
(2,154
|
)
|
$
|
(2,254
|
)
|
Net cash used in operating activities was $2.2 million for the nine
months ended September 30, 2010 compared to net cash provided by operating
activities of $25.5 million for the same period in 2009, a decrease of $27.7
million. Cash provided by operating activities in 2009 was driven by dramatic
decreases in accounts receivable as a result of lower sales levels providing
$24.9 million in cash flow. As sales levels rebounded in 2010, accounts
receivable balances increased and used $8.7 million of cash during the nine
months ended September 30, 2010. As a result of new order volumes during
the nine months ended September 30, 2010, our raw material and parts
purchase activity increased, resulting in a cash use of $11.0 million compared
to $24.7 million in cash provided by the reduction of inventory during the
first nine months of 2009. The inventory
reduction during 2009 was the result of the economic downturn and active
working capital management. During the nine months ended September 30,
2010, accounts payable increased by $15.4 million, primarily due to increased
inventory related activity. During the first nine months of 2009, accounts
payable decreased by $4.6 million as we curtailed our spending activity due to
the economic downturn. During the first
nine months of 2010, accrued expenses/other liabilities increased by $6.6
million, primarily due to increases in customer deposits, which is related to
order activity. During the first nine
months of 2009, accrued expenses/other liabilities decreased by $10.3 million
primarily due to decreases in customer deposits, which was related to reduced
order activity levels.
Net
cash used in investing activities was $3.6 million for the nine months ended September 30,
2010 compared to $2.2 million for the same period in 2009. During 2010, we used
$2.9 million to purchase Jones & Shipman and $2.2 million for capital
expenditures which included modest investment in manufacturing equipment.
Proceeds of $1.5 million from the sale of assets were primarily related to the
sale of certain machinery and equipment at our Elmira, NY manufacturing
facility.
Cash Flow Provided by
(Used In) Financing Activities:
Cash flow provided by (used in) financing activities for the nine
months ended September 30, 2010 and 2009 are summarized in the table
below:
|
|
Nine months ended
September 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(in thousands)
|
|
Borrowings of short-term notes payable
|
|
$
|
3,867
|
|
$
|
8,354
|
|
(Repayments) of long-term debt
|
|
(423
|
)
|
(24,406
|
)
|
Payments of dividends
|
|
(174
|
)
|
(231
|
)
|
Payments of debt issuance fees
|
|
(97
|
)
|
(706
|
)
|
Net cash provided by (used in) financing
activities
|
|
$
|
3,173
|
|
$
|
(16,989
|
)
|
27
Table of Contents
Cash
flow provided by financing activities was $3.2 million for the nine months
ended September 30, 2010 compared to cash flow used in financing
activities of $17.0 million for the same period in 2009. During the nine months
ended September 30, 2009, we used $24.0 million to repay and terminate our
multi-currency debt facility. Dividend
payments during the nine months of 2010 decreased over the same period in 2009
as a result of our decreasing the quarterly dividend payout to $0.005 per share
in June 2009. During the first nine
months of 2010, we paid fees of $0.1 million related to the revolving credit
facility compared to $0.7 million paid for the term loan and the multi-currency
debt facility during the same period of 2009.
Debt outstanding, including notes payable was $8.7 million on September 30,
2010 compared to
$
5.0 million on December 31,
2009.
Credit Facilities:
We
have a $10.0 million revolving credit facility due March 31, 2011. This
credit facility is secured by substantially all of the Companys U. S. assets
(exclusive of real property), a negative pledge on the Companys headquarters
in Elmira, New York and a pledge of 65% of the Companys investment in Hardinge
Holdings GmbH. The credit facility is guaranteed by Hardinge Technology Systems, Inc.,
a wholly-owned subsidiary of the Company and owner of the real property
comprising the Companys headquarters in Elmira, New York. The credit facilitys interest is based on
the one-month LIBOR with a minimum interest rate of 5.5%. The credit facility
does not include any financial covenants.
There are no amounts outstanding under this credit facility as of September 30,
2010 and as of December 31, 2009.
We
have a $3.0 million unsecured short-term line of credit from a bank with
interest based on the prime rate with a floor of 5.0% and a ceiling of 16%.
There was no balance outstanding at September 30, 2010 and as of December 31,
2009 on this line. The credit agreement is negotiated annually and requires no
commitment fee. It is payable on demand.
At
our Swiss subsidiary, Kellenberger, we have two credit agreements with a bank.
The first facility provides for borrowing of up to CHF 7.5 million ($7.6
million equivalent) which can be used
for guarantees, documentary credit, or margin cover
for foreign exchange hedging activity conducted with
the bank
with maximum terms of
12 months. The interest rate, which is currently 1.5% per annum, is determined
by
the bank
based on prevailing money and capital market conditions and the
banks risk assessment of Kellenberger.
The second credit facility is
a working capital facility which can provide for borrowing of up to CHF 6.0
million ($6.1 million
equivalent), and
can be used as a limit for cash credits in the form of
fixed advances in CHF and/or in any other freely convertible foreign currencies
with maximum terms of up to 36 months.
The interest rate, which is currently LIBOR plus 1.5% for a 90 day
borrowing, is determined by
the bank
based on prevailing money and capital market
conditions and the banks risk assessment of Kellenberger. The credit facility
is secured by real property owned by Kellenberger.
The above two facilities are
also subject to a minimum equity covenant requirement where the minimum equity
for Kellenberger must be at least 35% of its balance sheet total assets.
Indebtedness under both facilities is payable
upon demand. At September 30, 2010
and December 31, 2009, we were in compliance with the required minimum
equity ratios. At September 30, 2010 and December 31, 2009, there
were no borrowings under the working capital facility.
At
our Swiss subsidiary, Kellenberger, we also had a credit agreement with a bank
that provided a CHF 7.0 million ($7.1 million equivalent) facility, which
provided for up to CHF 7.0 million ($7.1 million equivalent) for guarantees,
documentary credit and margin cover for foreign exchange trades and of which up
to CHF 3.0 million ($3.1 million equivalent) of the facility could be used for
working capital. On August 10, 2010, the credit facility was amended to
increase the available credit to CHF 9.0 million ($9.2 million equivalent). It
provides for the entire CHF 9.0 million ($9.2 million equivalent) to be available
for guarantees, documentary credit and margin cover for foreign exchange trades
and of which up to CHF 5.0
28
Table of Contents
million
($5.1 million equivalent) of the facility can be used for working capital. The
amendment terminates on September 1, 2013 and the credit agreement reverts
to its original terms. This facility is secured by the Companys real estate in
Biel, Switzerland up to CHF 5.0 million ($5.1 million equivalent). This credit
facility charges interest at the current rate of 5.75% subject to change by the
bank based on market conditions. It carries no commitment fees on unused funds.
The credit facility contains a minimum equity ratio covenant. At September 30, 2010 and December 31,
2009, we were in compliance with the required minimum equity ratios and there
were no borrowings under the working capital facility.
At
our Taiwan subsidiary, Hardinge Taiwan Precision Machinery Limited, we have 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 (NTD) which was equivalent to approximately $5.5 million. At September 30,
2010 and December 31, 2009 borrowings under this agreement were $3.3
million and $3.7 million, respectively. Principal on the mortgage loan is
repaid quarterly in the amount of NTD 4.5 million ($0.1 million equivalent).
At
our Taiwan subsidiary, Hardinge Machine Tools B.V., Taiwan Branch, we had an
unsecured credit facility with a bank.
This agreement provided a working capital facility of NTD 100.0 million
($3.2 million equivalent). On March 19, 2010, the credit facility was
amended to change the facility from an NTD based facility to a USD based
facility and increase the available credit to $5.0 million. On July 12,
2010, this credit agreement was replaced with a new agreement that provides a
$10.0 million facility for working capital purposes. The credit facility
charges interest at the banks current base rate of 1.6% subject to change by
the bank based on market conditions. This new credit facility matures on May 31,
2011. It carries no commitment fees on unused funds. At September 30, 2010 and December 31,
2009 the balance outstanding under these facilities was $5.4 million and NTD
43.6 million ($1.4 million equivalent), respectively.
Under
our current credit facilities, the Company has total credit availability of up
to $49.2 million at September 30, 2010 of which $34.2 million is available
for working capital needs. Of the $34.2 million working capital capacity under
these credit facilities, $27.5 million was available at September 30,
2010. Total consolidated outstanding borrowings at September 30, 2010 and December 31,
2009 were $8.7 million and $5.0 million, respectively.
We
believe that the currently available funds and credit facilities, along with
internally generated funds, will provide sufficient financial resources for
ongoing operations throughout 2010.
Our
contractual obligations and commercial commitments have not changed materially,
including the impact from FIN 48, from the disclosures in our Form 10-K
for the year ended December 31, 2009.
29
Table of Contents
Certain statements in this report, other than purely
historical information, including estimates, projections, statements relating
to our business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words believes, project, expects, anticipates, estimates,
intends, strategy, plan, may, will, would, will be, will
continue, will likely result, and similar expressions. Forward-looking
statements are based on current expectations and assumptions that are subject
to risks and uncertainties which may cause actual results to differ materially
from the forward-looking statements. Accordingly, there can be no assurance
that our expectations will be realized. Such statements are based upon
information known to management at this time. The Company cautions that such
statements necessarily involve uncertainties and risk and deal with matters
beyond the Companys ability to control, and in many cases the Company cannot
predict what factors would cause actual results to differ materially from those
indicated. Among the many factors that could cause actual results to differ
from those set forth in the forward-looking statements are fluctuations in the
machine tool business cycles, changes in general economic conditions in the
U.S. or internationally, the mix of products sold and the profit margins
thereon, the relative success of the Companys entry into new product and
geographic markets, the Companys ability to manage its operating costs,
actions taken by customers such as order cancellations or reduced bookings by
customers or distributors, competitors actions such as price discounting or
new product introductions, governmental regulations and environmental matters,
changes in the availability and cost of materials and supplies, the
implementation of new technologies and currency fluctuations. Any
forward-looking statement should be considered in light of these factors. The
Company undertakes no obligation to revise its forward-looking statements if
unanticipated events alter their accuracy.
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 2010. For a discussion of
our exposure to market risk, refer to Item 7A, Quantitative and Qualitative
Disclosures About Market Risks, contained in our 2009 Annual Report on Form 10-K.
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, 2010, 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 have been no changes in
the Companys internal control over
financial reporting during the quarter ended September 30, 2010
that has materially affected or is reasonably likely to materially
affect our internal control over financial reporting, as defined
in Rule 13a-15(f) under the Exchange Act.
30
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1.a. Risk
Factors
There
is no change to the risk factors disclosed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2009.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
None
Item 3. Default upon Senior
Securities
None
Item 4. (Removed and Reserved)
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.
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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.
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Hardinge
Inc.
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November 5,
2010
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By:
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/s/
Richard L. Simons
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Date
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Richard
L. Simons
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President
and CEO
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(Principal
Executive Officer)
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November 5,
2010
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By:
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/s/
Edward J. Gaio
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Date
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Edward
J. Gaio.
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Vice
President and CFO
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(Principal
Financial Officer)
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November 5,
2010
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By:
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/s/
Douglas J. Malone
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Date
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Douglas
J. Malone
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Corporate
Controller and Chief Accounting Officer
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|
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(Principal
Accounting Officer)
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32
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