HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
4. Goodwill and Intangible Assets (Continued)
Summary
of the major components of intangible assets other than goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Gross amortizable intangible assets:
|
|
|
|
|
|
|
|
Land rights
|
|
$
|
2,784
|
|
$
|
2,746
|
|
Patents
|
|
|
3,006
|
|
|
2,965
|
|
Technical know-how, customer list, and other
|
|
|
12,392
|
|
|
5,785
|
|
|
|
|
|
|
|
Total gross amortizable intangible assets
|
|
|
18,182
|
|
|
11,496
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
Land rights
|
|
|
(116
|
)
|
|
(59
|
)
|
Patents
|
|
|
(2,807
|
)
|
|
(2,704
|
)
|
Technical know-how, customer list, and other
|
|
|
(3,870
|
)
|
|
(3,235
|
)
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
(6,793
|
)
|
|
(5,998
|
)
|
|
|
|
|
|
|
Amortizable intangible assets, net
|
|
|
11,389
|
|
|
5,498
|
|
|
|
|
|
|
|
Intangible asset not subject to amortization:
|
|
|
|
|
|
|
|
Assets associated with Bridgeport acquisition
(1)
|
|
|
7,595
|
|
|
7,267
|
|
Assets associated with Usach acquisition
(2)
|
|
|
2,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,435
|
|
|
7,267
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
21,824
|
|
$
|
12,765
|
|
|
|
|
|
|
|
-
(1)
-
Represents
the aggregate value of the trade 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. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has been determined to
have an indefinite useful life. The $0.3 million increase in the balance from 2011 was the impact of foreign currency exchange.
-
(2)
-
Represents
the value of the trade name associated with Usach Technologies, Inc. which the Company acquired in 2012. We use the Usach
trade name on all of our grinding machines and grinding systems manufactured by Usach. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has
been determined to have an indefinite useful life.
Amortization
expense related to these amortizable intangible assets was $0.8 million for 2012, 2011 and 2010 respectively. The aggregated amortization expense on existing
intangible assets for each of the next five years is approximately $1.5 million, $1.2 million, $1.1 million, $0.6 million and $0.5 million, respectively.
53
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
5. Financing Arrangements
We maintain financing arrangements with several financial institutions. These financing arrangements are in the form of long-term loans, credit facilities, or lines of
credit. In aggregate, these financing arrangements allow us to borrow up to $80.6 million at December 31, 2012, of which $58.6 million can be borrowed for working capital needs.
As of December 31, 2012, $54.3 million was available for borrowing under these arrangements of which $46.1 million was available for working capital needs. Total consolidated
borrowings outstanding were $20.0 million at December 31, 2012 and $21.5 million at December 31, 2011. Details of these financing arrangements are discussed below.
Long-term Debt
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Mortgage loans
|
|
$
|
5,119
|
|
$
|
5,878
|
|
Construction loan
|
|
|
3,370
|
|
|
2,690
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
8,489
|
|
|
8,568
|
|
Current portion
|
|
|
(2,873
|
)
|
|
(1,548
|
)
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
$
|
5,616
|
|
$
|
7,020
|
|
|
|
|
|
|
|
The
annual maturities of long-term debt for each of the five years after December 31, 2012, are as follows:
|
|
|
|
|
Year
|
|
Amounts
|
|
|
|
(in thousands)
|
|
2013
|
|
$
|
2,873
|
|
2014
|
|
|
2,392
|
|
2015
|
|
|
948
|
|
2016
|
|
|
638
|
|
2017
|
|
|
328
|
|
Thereafter
|
|
|
1,310
|
|
|
|
|
|
|
|
$
|
8,489
|
|
|
|
|
|
In
May 2006, Hardinge Taiwan Precision Machinery Limited, an indirectly wholly-owned subsidiary in Taiwan, entered into a mortgage loan with a local bank. The principal amount of the
loan is 180.0 million New Taiwanese Dollars ("TWD") ($6.2 million equivalent). The loan, which matures in June 2016, is secured by real property owned and requires quarterly principal
payment in the amount of TWD 4.5 million ($0.2 million equivalent). The loan interest rate, 1.745% at December 31, 2012 and 1.75% at December 31, 2011, is based on the
bank's one year fixed savings rate plus 0.4%. The principal amount outstanding was TWD 63.0 million ($2.2 million equivalent) at December 31, 2012 and TWD 81.0 million
($2.7 million equivalent) at December 31, 2011.
54
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
5. Financing Arrangements (Continued)
In
August 2011, Hardinge Precision Machinery (Jiaxing) Company Ltd.("Hardinge Jiaxing"), an indirectly wholly-owned subsidiary in China, entered into a loan agreement with a local
bank. This agreement, which expires on January 30, 2014, provides up to 25.0 million in Chinese Renminbi ("CNY") ($4.0 million equivalent) for plant construction and fixed assets
acquisition purposes. The interest rate, 7.38% at December 31, 2012 and 7.98% at December 31, 2011, is the bank base rate plus a 20% mark-up and is subject to adjustment
annually. The agreement calls for scheduled principal repayments in the amounts of CNY 6.0 million ($1.0 million equivalent), CNY 6.0 million ($1.0 million equivalent) and
CNY 9.0 million ($1.4 million equivalent) on January 20, 2013, July 20, 2013 and January 30, 2014, respectively. The principal amount outstanding was CNY
21.0 million ($3.4 million equivalent) at December 31, 2012 and CNY 17.0 million ($2.7 million equivalent) at December 31, 2011.
This
loan agreement contains financial covenants pursuant to which the subsidiary is required to continually maintain a ratio of total liabilities to total assets less than 0.65:1.00 and
a current ratio of more than 1.0:1.0. In addition, the subsidiary is not allowed to act as a guarantor to any third party. The loan agreement contains customary events of default and acceleration
clauses. Additionally, the loan is secured by substantially all of the real property and improvements owned by the subsidiary. At December 31, 2012, we were in compliance with the covenants
under the loan agreement.
In
December 2011, L. Kellenberger & Co. AG ("Kellenberger"), an indirectly wholly-owned subsidiary in Switzerland, entered into a credit facility with a local bank which
provides for borrowing of up to 3.0 million in Swiss Franc ("CHF") ($3.3 million equivalent). Upon entering into the facility, the subsidiary obtained a loan of
CHF 3.0 million ($3.3 million equivalent) with a five-year term maturing on December 23, 2016. Interest on the loan accrues at a fixed rate of 2.65%. Beginning
in June 2012, payments of principal on the loan in the amount of CHF 150,000 ($0.2 million equivalent) are due on June 30 and December 31 in each remaining year of the
term. The principal amount outstanding was CHF 2.7 million ($3.0 million equivalent) at December 31, 2012 and CHF 3.0 million ($3.2 million equivalent)
at December 31, 2011.
All
borrowings under this facility are secured by a mortgage on the subsidiary's facility in Romanshorn, Switzerland. The facility is also subject to a minimum equity covenant
requirement whereby the equity of the subsidiary must be at least 35% of the subsidiary's balance sheet total assets. At December 31, 2012, we were in compliance with the covenants under the
loan agreement.
Credit Facilities and Other Financing Arrangements
In December 2012, Hardinge Jiaxing entered into a secured credit facility with a local bank. This facility, which expires on
December 20, 2014 provides up to CNY 34.2 million (approximately $5.5 million) or its equivalent in other currencies for working capital and letter of credit purposes. Borrowings
under the credit facility are secured by real property owned by the subsidiary. The interest rate on the credit facility, currently at 6.6%, is based on the basic interest rate as published by the
People's Bank of China, plus a 10% mark-up. As of December 31, 2012, there were no borrowings outstanding under this facility.
55
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
5. Financing Arrangements (Continued)
In
June, 2012, Hardinge Machine Tools B.V., Taiwan Branch, an indirectly wholly-owned subsidiary in Taiwan, entered into a new unsecured credit facility. This facility, which
expires on May 30, 2013, provides up to $12.0 million, or its equivalent in other currencies, for working capital and export business purposes. This credit facility charges interest at
1.61% and is subject to change by the lender based on market conditions and carries no commitment fees on unused funds. This facility replaced the existing $12.0 million facility entered into
in July 2011, which expired on May 30, 2012. The principal amounts outstanding for these facilities were $9.0 million and $12.0 million at December 31, 2012 and 2011,
respectively, and were included in the notes payable to bank on the Consolidated Balance Sheets.
Kellenberger
maintains two separate credit facilities with a bank. The first facility, entered into in August 2009 and subsequently amended in December 2009 and August 2010, provides for
borrowing of up to CHF 7.5 million ($8.2 million equivalent) to be used for guarantees, documentary credit, or margin cover for foreign exchange hedging activity with maximum
terms of 12 months. The second facility, entered into in August 2009 and amended in June 2010, provides for borrowings of up to CHF 6.0 million ($6.6 million equivalent) to
be used for working capital purposes as a limit for cash credits in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months. The second facility is
secured by certain real property owned by the subsidiary. The interest rate charged on these two facilities, currently at London Interbank Offered Rate ("LIBOR") plus 1.188% for a 90-day
borrowing, is determined by the bank based on prevailing money and capital market conditions and the bank's risk assessment of the subsidiary. At December 31, 2012 and 2011, there were no
borrowings outstanding under these facilities.
Kellenberger
also maintains a credit agreement with another bank. This agreement, entered into in October 2009, provided a credit facility of up to CHF 7.0 million
($7.6 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($3.3 million equivalent) of
the facility was available for working capital purposes. The facility was secured by the subsidiary's certain real property up to CHF 3.0 million ($3.3 million equivalent). This
agreement was amended in August 2010. The amendment increased the total funds available under the facility to CHF 9.0 million ($9.8 million equivalent), increased the funds
available for working capital purposes to CHF $5.0 million ($5.5 million equivalent) and increased the secured amounts to CHF 4.0 million ($4.4 million equivalent).
The amended agreement terminates on September 1, 2013 and reverts to its pre-amendment terms. The interest rate, currently at LIBOR plus 2.5% for a 90-day borrowing, is
determined by the bank based on the prevailing money and capital market conditions and the bank's assessment of the subsidiary. It carries no commitment fees on unused funds. At December 31,
2012 and 2011, there were no borrowings outstanding under this facility.
The
above Kellenberger credit facilities are subject to a minimum equity covenant requirement where the minimum equity for the subsidary must be at least 35% of its balance sheet total
assets. At December 31, 2012 and 2011, we were in compliance with the required covenant.
In December 2009, we entered into a $10.0 million revolving credit facility with a bank. This facility is subject to annual
renewal requirement. In December 2011, we modified the existing facility and increased the facility from $10.0 million to $25.0 million, reduced the interest rate from the daily
56
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
5. Financing Arrangements (Continued)
one-month
LIBOR plus 5.00% per annum to daily one-month LIBOR plus 3.50% per annum and extended the maturity date of the facility from March 31, 2012 to March 31,
2013. In December, 2012, we extended the maturity date of the facility to March 31, 2014 and reduced the interest rate from the daily one-month LIBOR plus 3.50% per annum to daily
one-month LIBOR plus 2.75% per annum. This credit facility is secured by substantially all of our U.S. assets (exclusive of real property), a negative pledge on our worldwide headquarters
in Elmira, NY, and a pledge of 65% of our investment in Hardinge Holdings GmbH. The credit facility is guaranteed by one of our wholly-owned subsidiaries, which is the owner of the real
property comprising our world headquarters. The credit facility does not include any financial covenants. The principal amounts outstanding under this facility was $2.5 million at
December 31, 2012. There were no borrowings outstanding under this facility at December 31, 2011.
In
December, 2012, Usach Technologies, Inc., a directly wholly-owned domestic subsidiary, entered into a variable rate revolving credit facility with a bank that provides up to
$2.0 million in financing for working capital needs. This credit facility matures on December 20, 2013. The interest rate is based on the daily prime rate as published in the Wall Street
Journal with a minimum interest rate of 4.0%. This
credit facility requires that the subsidiary maintain minimum tangible capital funds of not less than $1.5 million. Tangible capital funds are defined as net worth plus liabilities subordinated
to the bank less any intangible assets. At December 31, 2012, there were no borrowings outstanding and we were in compliance with the minimum tangible capital requirement.
We
also 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 16.0%. The
agreement is negotiated annually, requires no commitment fee and is payable on demand. There were no borrowings outstanding under this line of credit at December 31, 2012. The principal amount
outstanding was $0.5 million at December 31, 2011.
We
maintain a standby letter of credit for potential liabilities pertaining to self-insured workers compensation exposure. The amount of the letter of credit was
$1.0 million at December 31, 2012. It expires on March 15, 2013. In total, we had various outstanding letters of credit totaling $15.6 million and $12.9 million at
December 31, 2012 and 2011, respectively.
6. Income Taxes
The Company's pre-tax income (loss) for domestic and foreign sources is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Domestic
|
|
$
|
(4,142
|
)
|
$
|
(3,483
|
)
|
$
|
(8,467
|
)
|
Foreign
|
|
|
23,483
|
|
|
19,842
|
|
|
5,401
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,341
|
|
$
|
16,359
|
|
$
|
(3,066
|
)
|
|
|
|
|
|
|
|
|
57
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
6. Income Taxes (Continued)
Significant components of income tax expense (benefit) attributable to continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Foreign
|
|
|
4,736
|
|
|
5,086
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
4,736
|
|
|
5,086
|
|
|
3,645
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
|
(2,720
|
)
|
|
|
|
|
(100
|
)
|
Foreign
|
|
|
(530
|
)
|
|
(713
|
)
|
|
(1,377
|
)
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(3,250
|
)
|
|
(713
|
)
|
|
(1,477
|
)
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,486
|
|
$
|
4,373
|
|
$
|
2,168
|
|
|
|
|
|
|
|
|
|
The
following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Federal income taxes at statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
(35.0
|
)%
|
Taxes on foreign income which differ from the U.S. statutory rate
|
|
|
(18.1
|
)
|
|
(19.8
|
)
|
|
(48.6
|
)
|
Effect of change in the enacted rate
|
|
|
(1.3
|
)
|
|
(0.5
|
)
|
|
2.0
|
|
Change in valuation allowance
|
|
|
(46.0
|
)
|
|
10.6
|
|
|
141.5
|
|
U.S. taxation of international operations
|
|
|
37.3
|
|
|
0.0
|
|
|
0.0
|
|
Change in estimated liabilities
|
|
|
0.4
|
|
|
1.3
|
|
|
5.3
|
|
Other
|
|
|
0.4
|
|
|
0.1
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
7.7
|
%
|
|
26.7
|
%
|
|
70.7
|
%
|
|
|
|
|
|
|
|
|
58
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
6. Income Taxes (Continued)
Significant
components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Federal, state, and foreign net operating losses
|
|
$
|
31,568
|
|
$
|
34,386
|
|
State tax credit carryforwards
|
|
|
6,915
|
|
|
6,888
|
|
Postretirement benefits
|
|
|
862
|
|
|
899
|
|
Deferred employee benefits
|
|
|
2,214
|
|
|
2,428
|
|
Accrued pension
|
|
|
15,097
|
|
|
13,918
|
|
Inventory valuation
|
|
|
2,281
|
|
|
2,014
|
|
Foreign tax credit carryforwards
|
|
|
2,677
|
|
|
4,197
|
|
Other
|
|
|
3,608
|
|
|
3,265
|
|
|
|
|
|
|
|
|
|
|
65,222
|
|
|
67,995
|
|
Less valuation allowance
|
|
|
(57,698
|
)
|
|
(62,672
|
)
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,524
|
|
|
5,323
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Tax over book depreciation
|
|
|
(4,428
|
)
|
|
(4,082
|
)
|
Inventory valuation
|
|
|
(2,323
|
)
|
|
(2,388
|
)
|
Intangible assets
|
|
|
(3,069
|
)
|
|
|
|
Other
|
|
|
(1,367
|
)
|
|
(1,275
|
)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(11,187
|
)
|
|
(7,745
|
)
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(3,663
|
)
|
$
|
(2,422
|
)
|
|
|
|
|
|
|
Current
deferred tax assets of $2.2 million and $1.6 million for 2012 and 2011, respectively, are reported in other current assets on the Consolidated Balance Sheets.
Non-current deferred tax assets of $0.6 million and $0.9 million for 2012 and 2011, respectively, are reported in other non-current assets on the Consolidated Balance Sheets.
In
2012, the valuation allowance decreased by $5.0 million. $2.7 million of the decrease is due to changes in the Company's existing U.S. valuation allowance as a result of its
acquisition of Usach Technologies, Inc. which resulted in an income tax benefit. The remaining decrease of $2.3 million was due to operational results in the U.S., U.K., Germany, Switzerland,
Canada, France, and the
Netherlands, offset by an increase in minimum pension liabilities in the U.S. and other items recorded in other comprehensive income (loss).
In
2011, the valuation allowance increased by $9.1 million. $2.4 million of the increase was due to operational results in the U.S., U.K., Germany, and the Netherlands, and an increase
of $6.7 million due to the net increase in minimum pension liabilities in the U.S. and the U.K., and other items recorded in other comprehensive income (loss).
At
December 31, 2012, we have U.S. federal and state net operating loss carryforwards of $61.5 million and $28.6 million, respectively, which expire from 2023 through 2031. If
certain substantial changes in the Company's ownership occur, there would be an annual limitation on the amount of the
59
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
6. Income Taxes (Continued)
carryforwards
that can be utilized. The U.S. net operating loss includes approximately $2.1 million of the net operating loss carryforwards for which a benefit will be recorded in additional paid in
capital on the Consolidated Balance Sheets when realized. In addition, we have state investment tax credits of $6.9 million which have no expiration date. We also have foreign net operating loss
carryforwards of $44.7 million, of which $14.6 million will expire between 2017 through 2032, and of which $ 30.1 million have no expiration date.
At
the end of 2012, the undistributed earnings of our foreign subsidiaries, which amounted to approximately $119.1 million, are considered to be indefinitely reinvested and, accordingly,
no provision for taxes has been provided thereon. Given the complexities of the foreign tax credit calculations, it is not practicable to compute the tax liability that would be due upon distribution
of those earnings in the form of dividends or liquidation or sale of our foreign subsidiaries.
We
had been granted a tax holiday in China which expired in 2011. For 2011, our tax rate for our Chinese subsidiary was 24% and our tax rate in China was 25% in 2012.
A
reconciliation of the beginning and ending amount of uncertain tax positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
2,333
|
|
$
|
2,127
|
|
$
|
2,443
|
|
Additions for tax positions related to the current year
|
|
|
|
|
|
592
|
|
|
|
|
Additions for tax positions of prior years
|
|
|
235
|
|
|
170
|
|
|
836
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
(83
|
)
|
|
(575
|
)
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(54
|
)
|
|
(23
|
)
|
|
(91
|
)
|
Settlements
|
|
|
|
|
|
(450
|
)
|
|
(486
|
)
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,514
|
|
$
|
2,333
|
|
$
|
2,127
|
|
|
|
|
|
|
|
|
|
If
recognized, essentially all of the uncertain tax positions and related interest at December 31, 2012 would be recorded as a benefit to income tax expense on the
Consolidated Statements of Operations. It is reasonably possible that certain of our uncertain tax positions pertaining to our foreign operations may change within the next 12 months due to
audit settlements and statute of limitations expirations. We estimate the change in uncertain tax positions for these items to be between $0.1 million and $0.9 million.
We
record interest and penalties related to uncertain tax positions as income tax expense in the Consolidated Statements of Operations. The net increase in interest and net reduction in
penalties were immaterial for 2012 and 2011. Accrued interest related to the uncertain tax positions was $0.7 million and $0.5 million at December 31, 2012 and 2011, respectively. Accrued
penalties related to uncertain tax positions were $0.2 million and $0.2 million at December 31, 2012 and 2011, respectively. The accrued interest and penalties are reported in other liabilities
on the Consolidated Balance Sheets.
The
tax years 2011 and 2012 remain open to examination by the U.S. federal taxing authorities. The tax years 2008 through 2012 remain open to examination by the U.S. state taxing
authorities. For
60
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
6. Income Taxes (Continued)
our
other major jurisdictions (Switzerland, U.K., Taiwan, Germany, Netherlands and China); the tax years between 2006 and 2012 generally remain open to routine examination by foreign taxing
authorities, depending on the jurisdiction.
7. Warranty
A reconciliation of the changes in our product warranty accrual is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
3,800
|
|
$
|
3,298
|
|
Warranty settlement costs
|
|
|
(2,486
|
)
|
|
(2,689
|
)
|
Warranties issued
|
|
|
3,140
|
|
|
4,096
|
|
Changes in accruals for pre-existing warranties
|
|
|
(1,126
|
)
|
|
(842
|
)
|
Currency translation impact
|
|
|
104
|
|
|
(63
|
)
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,432
|
|
$
|
3,800
|
|
|
|
|
|
|
|
8. Industry Segment and Foreign Operations
Summary of domestic and foreign operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
Year Ended
December 31, 2011
|
|
2010
|
|
|
|
North
America
|
|
Europe
|
|
Asia
|
|
North
America
|
|
Europe
|
|
Asia
|
|
North
America
|
|
Europe
|
|
Asia
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
(in thousands)
|
|
Domestic Sales
|
|
$
|
61,458
|
|
$
|
119,665
|
|
$
|
166,968
|
|
$
|
68,005
|
|
$
|
106,471
|
|
$
|
150,721
|
|
$
|
54,715
|
|
$
|
78,194
|
|
$
|
125,115
|
|
Export Sales
|
|
|
12,058
|
|
|
40,516
|
|
|
42,705
|
|
|
5,682
|
|
|
49,084
|
|
|
52,520
|
|
|
7,755
|
|
|
22,719
|
|
|
17,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Sales
|
|
|
73,516
|
|
|
160,181
|
|
|
209,673
|
|
|
73,687
|
|
|
155,555
|
|
|
203,241
|
|
|
62,470
|
|
|
100,913
|
|
|
142,219
|
|
Less Inter-area eliminations
|
|
|
11,514
|
|
|
32,223
|
|
|
65,220
|
|
|
7,653
|
|
|
36,219
|
|
|
47,038
|
|
|
9,391
|
|
|
20,728
|
|
|
18,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
62,002
|
|
$
|
127,958
|
|
$
|
144,453
|
|
$
|
66,034
|
|
$
|
119,336
|
|
$
|
156,203
|
|
$
|
53,079
|
|
$
|
80,185
|
|
$
|
123,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets
|
|
$
|
70,502
|
|
$
|
129,201
|
|
$
|
95,630
|
|
$
|
60,383
|
|
$
|
129,919
|
|
$
|
108,602
|
|
$
|
51,470
|
|
$
|
119,461
|
|
$
|
90,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
attributable to European and Asian operations are based on those sales generated by subsidiaries located in Europe and Asia.
Inter-area
sales are accounted for at prices comparable to normal, unaffiliated customer sales, reduced by estimated costs not incurred on these sales.
We
have no single customer who accounted for more than 10% of our consolidated sales in 2012 or 2011. In 2010, a customer who is a supplier to the consumer electronics industry accounted
for 10.7% of our consolidated sales.
61
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
8. Industry Segment and Foreign Operations (Continued)
Machine
sales accounted for approximately 78% of 2012 sales, 77% of 2011 sales and 75% of 2010 sales. Sales of non-machine products and services, primarily workholding,
repair parts and accessories made up the balance.
Summary
of sales to external customers by country is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
% of
Total
|
|
2011
|
|
% of
Total
|
|
2010
|
|
% of
Total
|
|
|
|
(dollar amount in thousands)
|
|
United States
|
|
$
|
79,013
|
|
|
23.6
|
%
|
$
|
84,673
|
|
|
24.8
|
%
|
$
|
54,426
|
|
|
21.2
|
%
|
China
|
|
|
102,538
|
|
|
30.7
|
%
|
|
111,670
|
|
|
32.7
|
%
|
|
102,092
|
|
|
39.7
|
%
|
Germany
|
|
|
39,595
|
|
|
11.8
|
%
|
|
26,483
|
|
|
7.8
|
%
|
|
25,267
|
|
|
9.8
|
%
|
England
|
|
|
28,328
|
|
|
8.5
|
%
|
|
24,420
|
|
|
7.1
|
%
|
|
15,983
|
|
|
6.2
|
%
|
Other foreign
|
|
|
84,939
|
|
|
25.4
|
%
|
|
94,327
|
|
|
27.6
|
%
|
|
59,239
|
|
|
23.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign
|
|
|
255,400
|
|
|
76.4
|
%
|
|
256,900
|
|
|
75.2
|
%
|
|
202,581
|
|
|
78.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
334,413
|
|
|
100.0
|
%
|
$
|
341,573
|
|
|
100.0
|
%
|
$
|
257,007
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
of net property, plant and equipment by country is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
% of
Total
|
|
2011
|
|
% of
Total
|
|
2010
|
|
% of
Total
|
|
|
|
(dollar amount in thousands)
|
|
United States
|
|
$
|
14,210
|
|
|
20.0
|
%
|
$
|
14,550
|
|
|
21.3
|
%
|
$
|
15,336
|
|
|
27.1
|
%
|
Switzerland
|
|
|
38,122
|
|
|
53.7
|
%
|
|
36,540
|
|
|
53.6
|
%
|
|
30,675
|
|
|
54.2
|
%
|
China
|
|
|
9,737
|
|
|
13.7
|
%
|
|
8,019
|
|
|
11.8
|
%
|
|
915
|
|
|
1.6
|
%
|
Taiwan
|
|
|
8,243
|
|
|
11.6
|
%
|
|
8,039
|
|
|
11.8
|
%
|
|
8,438
|
|
|
14.9
|
%
|
Other foreign
|
|
|
723
|
|
|
1.0
|
%
|
|
1,056
|
|
|
1.5
|
%
|
|
1,264
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreign
|
|
|
56,825
|
|
|
80.0
|
%
|
|
53,654
|
|
|
78.7
|
%
|
|
41,292
|
|
|
72.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,035
|
|
|
100.0
|
%
|
$
|
68,204
|
|
|
100.0
|
%
|
$
|
56,628
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Employee Benefits
Pension and Postretirement Plans
We provide a qualified defined benefit pension plan covering all eligible domestic employees hired before March 1, 2004. The
plan bases benefits upon both years of service and earnings through June 15, 2009. Our policy is to fund at least an amount necessary to satisfy the minimum funding requirements of ERISA. For
our foreign plans, contributions are made on a monthly basis and are governed by their governmental regulations. Each foreign plan requires employee and employer contributions except Hardinge Taiwan,
which requires only employer contributions. In 2010, we permanently froze the accrual of benefits under the domestic plan and one of our foreign plans.
Domestic
employees hired on or after March 1, 2004 have retirement benefits under our 401(k) defined contribution plan. After one year of service, we will contribute 4% of an
employee's pay and
62
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
will
further match 25% of the first 4% that the employee contributes. The June 15, 2009 suspension of the 25% company match as well as the 4% company contribution to the 401(k) plan was
rescinded on January 1, 2011. We made contributions of $1.4 million and $0.1 million in 2012 and 2011, respectively. In conjunction with the permanent freeze of benefit accruals under the
domestic defined benefit pension plan, employees that were actively participating in the domestic defined benefit pension plan became eligible to receive company contributions in the 401(k) plan.
Additionally, upon reaching age 50, employees who were age 40 or older as of January 1, 2011 and were participants in the domestic defined benefit pension plan are provided enhanced
employer contributions in the 401(k) plan to compensate for the loss of future benefit accruals under the defined benefit pension plan. We recognized $1.6 million and $1.5 million of expense for the
domestic defined contribution plan in 2012 and 2011, respectively. Employees may contribute additional funds to the plan for which there is no required company match. All employer and employee
contributions are invested at the direction of the employees in a number of investment alternatives, one being Hardinge Inc. common stock.
As
a result of the permanent freeze to the accrual of benefits under the domestic plan and one of our foreign plans, we realized a net curtailment gain of $0.3 million in 2010. In
2012, we recognized a $3.2 million prior service credit in two of our foreign pension plans as a result of a plan amendment that changed the interest rates used to convert lump sums to annuity
payments. This change is consistent with the lower interest rate environment in the jurisdiction which these two pension plans exist.
We
provide a contributory retiree health plan covering all eligible domestic employees who retired at normal retirement age prior to January 1, 1993 and all retirees who have or
will retire at normal retirement age after January 1, 1993 with at least 10 years of active service. Employees who elect early retirement on or after reaching age 55 are eligible for the
plan benefits if they have 15 years of active service at retirement. Benefit obligations and funding policies are at the discretion of management. We also provide a non-contributory
life insurance plan to retirees who meet the same eligibility criteria as required for retiree health insurance. Because the amount of liability relative to this plan is insignificant, it is combined
with the health plan for purposes of this disclosure.
In
2009 and 2008, we offered a Voluntary Early Retirement Program ("VERP") to eligible employees. Employees were eligible to participate in the VERP if the sum of their current age and
length of service equaled 94 years. The VERP covers post-retirement health care costs for 60 months or until Medicare coverage begins, whichever occurs first. Through
December 31, 2012, we have recognized $1.1 million in costs for the 2009 and 2008 VERP, of which $0.2 million and $0.4 million are included within the postretirement
benefit obligation at December 31, 2012 and December 31, 2011, respectively.
Increases
in the cost of the retiree health plan are paid by the participants with the exception of premium costs for eligible employees who retired under a VERP. For each VERP retiree,
we pay the premium in excess of a scheduled amount until they reach Medicare eligibility or for a period not to exceed five years at which point the retiree assumes responsibility for any premium
increases.
The
discount rate for determining benefit obligations in the postretirement benefits plan was 4.21% and 4.92% at December 31, 2012 and 2011, respectively. The change in the
discount rate increased the accumulated postretirement benefit obligation as of December 31, 2012 by $0.2 million.
63
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
A summary of the pension and postretirement benefits plans' funded status and amounts recognized in our Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement
Benefits
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Change in benefit obligation
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
201,168
|
|
$
|
190,353
|
|
$
|
2,429
|
|
$
|
2,734
|
|
Service cost
|
|
|
1,246
|
|
|
1,449
|
|
|
18
|
|
|
18
|
|
Interest cost
|
|
|
8,159
|
|
|
8,583
|
|
|
111
|
|
|
138
|
|
Plan participants' contributions
|
|
|
1,524
|
|
|
1,530
|
|
|
422
|
|
|
464
|
|
Actuarial loss (gain)
|
|
|
18,917
|
|
|
10,580
|
|
|
30
|
|
|
(94
|
)
|
Foreign currency impact
|
|
|
2,931
|
|
|
(596
|
)
|
|
|
|
|
|
|
Benefits and administrative expenses paid
|
|
|
(6,949
|
)
|
|
(10,560
|
)
|
|
(698
|
)
|
|
(831
|
)
|
Plan amendment and other changes
|
|
|
(3,216
|
)
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
$
|
223,780
|
|
$
|
201,168
|
|
$
|
2,312
|
|
$
|
2,429
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
155,840
|
|
$
|
163,205
|
|
$
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
15,879
|
|
|
(2,413
|
)
|
|
|
|
|
|
|
Employer contribution
|
|
|
7,816
|
|
|
4,429
|
|
|
276
|
|
|
367
|
|
Plan participants' contributions
|
|
|
1,524
|
|
|
1,530
|
|
|
422
|
|
|
464
|
|
Foreign currency impact
|
|
|
2,583
|
|
|
(351
|
)
|
|
|
|
|
|
|
Benefits and administrative expenses paid
|
|
|
(6,949
|
)
|
|
(10,560
|
)
|
|
(698
|
)
|
|
(831
|
)
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
$
|
176,693
|
|
$
|
155,840
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plans
|
|
$
|
(47,087
|
)
|
$
|
(45,328
|
)
|
$
|
(2,312
|
)
|
$
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
1,451
|
|
$
|
1,345
|
|
$
|
|
|
$
|
|
|
Current liabilities
|
|
|
(232
|
)
|
|
(208
|
)
|
|
(306
|
)
|
|
(358
|
)
|
Non-current liabilities
|
|
|
(48,306
|
)
|
|
(46,465
|
)
|
|
(2,006
|
)
|
|
(2,071
|
)
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(47,087
|
)
|
$
|
(45,328
|
)
|
$
|
(2,312
|
)
|
$
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other Comprehensive Income (Loss) consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
|
$
|
(74,652
|
)
|
$
|
(63,708
|
)
|
$
|
277
|
|
$
|
314
|
|
Transition asset
|
|
|
1,106
|
|
|
1,349
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
3,552
|
|
|
301
|
|
|
254
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income
|
|
|
(69,994
|
)
|
|
(62,058
|
)
|
|
531
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated contributions in excess of net periodic benefit cost
|
|
|
22,907
|
|
|
16,730
|
|
|
(2,843
|
)
|
|
(3,350
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deficit recognized in Consolidated Balance Sheets
|
|
$
|
(47,087
|
)
|
$
|
(45,328
|
)
|
$
|
(2,312
|
)
|
$
|
(2,429
|
)
|
|
|
|
|
|
|
|
|
|
|
64
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
The
projected benefit obligations for the foreign pension plans included in the amounts above were $104.3 million and $92.9 million at December 31, 2012 and 2011,
respectively. The plan assets for the foreign pension plans included above were $94.8 million and $82.4 million at December 31, 2012 and 2011, respectively.
The
accumulated benefit obligations for the foreign and domestic pension plans were $218.6 million and $196.0 million at December 31, 2012 and 2011, respectively.
The
following information is presented for pension plans where the projected benefit obligations exceeded the fair value of plan assets (all plans except one Swiss plan in 2012 and
2011):
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Projected benefit obligations
|
|
$
|
216,861
|
|
$
|
195,308
|
|
Fair value of plan assets
|
|
|
168,322
|
|
|
148,634
|
|
|
|
|
|
|
|
Excess of projected benefit obligations over plan assets
|
|
$
|
48,539
|
|
$
|
46,674
|
|
|
|
|
|
|
|
The
following information is presented for pension plans where the accumulated benefit obligations exceeded the fair value of plan assets (all plans except Taiwan and one Swiss plan in
2012 and 2011):
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Accumulated benefit obligations
|
|
$
|
211,047
|
|
$
|
189,684
|
|
Fair value of plan assets
|
|
|
167,241
|
|
|
147,640
|
|
|
|
|
|
|
|
Excess of accumulated benefit obligations over plan assets
|
|
$
|
43,806
|
|
$
|
42,044
|
|
|
|
|
|
|
|
65
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
A
summary of the components of net periodic pension cost and postretirement benefit costs for the consolidated company is presented below. The pension cost includes an executive
supplemental pension plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Service cost
|
|
$
|
1,246
|
|
$
|
1,449
|
|
$
|
1,313
|
|
$
|
18
|
|
$
|
18
|
|
$
|
17
|
|
Interest cost
|
|
|
8,159
|
|
|
8,583
|
|
|
8,584
|
|
|
111
|
|
|
138
|
|
|
156
|
|
Expected return on plan assets
|
|
|
(9,495
|
)
|
|
(10,089
|
)
|
|
(9,430
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
|
(54
|
)
|
|
(58
|
)
|
|
(120
|
)
|
|
(353
|
)
|
|
(353
|
)
|
|
(370
|
)
|
Amortization of transition asset
|
|
|
(269
|
)
|
|
(284
|
)
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
Settlement/curtailment (gain) loss
|
|
|
|
|
|
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of loss (gain)
|
|
|
2,417
|
|
|
1,794
|
|
|
866
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,004
|
|
$
|
1,395
|
|
$
|
655
|
|
$
|
(231
|
)
|
$
|
(197
|
)
|
$
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of the changes in pension and postretirement benefits recognized in other comprehensive loss is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Net loss (gain) arising during period
|
|
$
|
12,533
|
|
$
|
23,082
|
|
$
|
9,598
|
|
$
|
30
|
|
$
|
(94
|
)
|
$
|
36
|
|
Amortization of transition asset (obligation)
|
|
|
269
|
|
|
284
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
|
54
|
|
|
58
|
|
|
509
|
|
|
353
|
|
|
353
|
|
|
370
|
|
Other (gain) loss
|
|
|
(3,216
|
)
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of (loss) gain
|
|
|
(2,417
|
)
|
|
(1,794
|
)
|
|
(722
|
)
|
|
7
|
|
|
|
|
|
|
|
Foreign currency exchange impact
|
|
|
713
|
|
|
(321
|
)
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive loss
|
|
|
7,936
|
|
|
21,493
|
|
|
10,291
|
|
|
390
|
|
|
259
|
|
|
406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized in net periodic benefit cost and other comprehensive loss
|
|
$
|
9,940
|
|
$
|
22,888
|
|
$
|
10,946
|
|
$
|
159
|
|
$
|
62
|
|
$
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net periodic benefit cost for the foreign pension plans included in the amounts above was $1.9 million, $1.8 million, and $1.7 million, for the years ended
December 31, 2012, 2011, and 2010, respectively.
We
expect to recognize $3.2 million of net loss, $0.3 million credit related to transition assets and $0.4 million of net prior service credit as components of net
periodic pension cost in 2013 for our defined benefit pension plans. We expect to recognize $0.3 million of net prior service credit as a component of net periodic postretirement benefit cost
in 2013.
66
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
Actuarial assumptions used to determine pension costs and other postretirement benefit costs include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Assumptions at January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the domestic plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.11
|
%
|
|
5.93
|
%
|
|
4.92
|
%
|
|
5.50
|
%
|
Expected return on plan assets
|
|
|
7.75
|
%
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
For the foreign plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
3.01
|
%
|
|
3.09
|
%
|
|
|
|
|
|
|
Weighted average expected return on plan assets
|
|
|
4.07
|
%
|
|
4.24
|
%
|
|
|
|
|
|
|
Weighted average rate of compensation increase
|
|
|
2.51
|
%
|
|
2.51
|
%
|
|
|
|
|
|
|
Actuarial
assumptions used to determine pension obligations and other postretirement benefit obligations include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Assumptions at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the domestic plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.31
|
%
|
|
5.11
|
%
|
|
4.21
|
%
|
|
4.92
|
%
|
For the foreign pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
2.34
|
%
|
|
3.01
|
%
|
|
|
|
|
|
|
Weighted average rate of compensation increase
|
|
|
2.51
|
%
|
|
2.51
|
%
|
|
|
|
|
|
|
For
our domestic and foreign plans (except for the Taiwan plan), discount rates used to determine the benefit obligations are based on the yields on high grade corporate bonds in each
market with maturities matching the projected benefit payments. The discount rate for the Taiwan plan is based on the yield on long-dated government bonds plus a spread. To develop the
expected long-term rate of return on assets assumption, for our domestic and foreign plans, we
considered the current level of expected returns on risk free investments (primarily government bonds) in each market, the historical level of the risk premium associated with the other asset classes
in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the asset allocation to develop the
expected long-term rate of return on assets assumption.
Investment Policies and Strategies
For the domestic defined benefit pension plan, the plan targets an asset allocation of approximately 55% equity securities, 36% debt
securities and 9% other. For the foreign defined benefit pension plans, the plans target blended asset allocation of 41% equity securities, 45% debt securities and 14% other.
67
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
Given
the relatively long horizon of our aggregate obligation, our investment strategy is to improve and maintain the funded status of our domestic and foreign plans over time without
exposure to excessive asset value volatility. We manage this risk primarily by maintaining actual asset allocations between equity and fixed income securities for the plans within a specified range of
its target asset allocation. In addition, we ensure that diversification across various investment subcategories within each plan are also maintained within specified ranges.
Our
domestic and foreign pension assets are managed by outside investment managers and held in trust by third-party custodians. The selection and oversight of these outside service
providers is the responsibility of management, investment committees, plan trustees and their advisors. The selection of specific securities is at the discretion of the investment manager and is
subject to the provisions set forth by written investment management agreements, related policy guidelines and applicable governmental regulations regarding permissible investments and risk control
practices.
Cash flows
Contributions
Our funding policy is to contribute to our defined benefit pension plans when pension laws and economics either require or encourage
funding. The domestic plan is the largest of all our defined benefit pension plans. The contributions to this plan for the years ended December 31, 2012 and December 31, 2011 totaled
$5.3 million and $2.0 million, respectively.
During
2012, Congress enacted the Moving Ahead for Progress in the 21st Century Act ("MAP-21"). In the short-term, MAP-21 will increase the
discount rates used to determine funding liabilities, resulting in significantly lower pension contributions. As a result of MAP-21, no contributions are expected to be made to our
domestic defined benefit pension plan during the year ending December 31, 2013. We also provide defined benefit pension plans or defined contribution retirement plans for our foreign
subsidiaries. The expected contributions to be paid during the year ending December 31, 2013 to the foreign defined benefit pension plans are $2.5 million. For each of our foreign plans,
contributions are made on a monthly basis and are determined by their governmental regulations. Also, each of the foreign plans requires employee and employer contributions, except for Taiwan, which
has only employer contributions.
68
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
9. Employee Benefits (Continued)
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
(in thousands)
|
|
2013
|
|
$
|
9,025
|
|
$
|
306
|
|
2014
|
|
|
9,175
|
|
|
153
|
|
2015
|
|
|
9,683
|
|
|
142
|
|
2016
|
|
|
9,831
|
|
|
145
|
|
2017
|
|
|
10,400
|
|
|
148
|
|
Years 2018 - 2022
|
|
|
58,555
|
|
|
756
|
|
Foreign Operations
We also have employees in certain foreign countries that are covered by defined contribution retirement plans and other employee
benefit plans. Related obligations and costs charged to operations for these plans are not material. The foreign entities with defined benefit pension plans are included in the consolidated pension
plans described earlier within this footnote.
10. Fair Value of Financial Instruments
Fair value is defined as the price that would be received upon sale of 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 1Quoted
prices in active markets for identical assets and liabilities.
Level 2Observable
inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3Inputs
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.
69
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
10. Fair Value of Financial Instruments (Continued)
The
following table presents our financial instruments measured or disclosed at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
26,855
|
|
$
|
26,855
|
|
$
|
|
|
$
|
|
|
Restricted cash
|
|
|
2,634
|
|
|
2,634
|
|
|
|
|
|
|
|
Notes payable to bank
|
|
|
(11,500
|
)
|
|
|
|
|
(11,500
|
)
|
|
|
|
Variable interest rate debt
|
|
|
(8,489
|
)
|
|
|
|
|
(8,489
|
)
|
|
|
|
Contingent purchase price payment
|
|
|
(7,484
|
)
|
|
|
|
|
|
|
|
(7,484
|
)
|
Foreign currency forward contracts, net
|
|
|
(205
|
)
|
|
|
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
21,736
|
|
$
|
21,736
|
|
$
|
|
|
$
|
|
|
Restricted cash
|
|
|
4,575
|
|
|
4,575
|
|
|
|
|
|
|
|
Notes payable to bank
|
|
|
(12,969
|
)
|
|
|
|
|
(12,969
|
)
|
|
|
|
Variable interest rate debt
|
|
|
(8,568
|
)
|
|
|
|
|
(8,568
|
)
|
|
|
|
Contingent purchase price payment
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
(468
|
)
|
Foreign currency forward contracts, net
|
|
|
(1,053
|
)
|
|
|
|
|
(1,053
|
)
|
|
|
|
The
fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. The fair value of notes payable to bank and variable
interest rate debt are based on the present value of expected future cash flows. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank
and variable interest rate debt approximates their respective carrying amounts. The contingent purchase price payment represents the contingent liabilities associated with the earn-out
provisions from the 2012 acquisition of Usach Technologies, Inc. and 2010 acquisition of Jones Shipman (refer to Footnote 17 for a detailed discussion of these acquisitions) . The fair value of
the contingent purchase price payment is based on the present value of the estimated aggregated payment amount. The fair value of foreign currency forward contracts is measured using internal models
based on observable market inputs such as spot and forward rates. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments to be active.
As of December 31, 2012 and December 31, 2011, there were no significant transfers in and out of Level 1 and Level 2.
As
described in Footnote 17, the Company completed an acquisition in 2012. The fair value measurements for the acquired intangible assets were calculated using discounted cash flow
analyses which rely upon significant unobservable Level 3 inputs which include the following:
|
|
|
Unobservable inputs
|
|
Range
|
Discount rate
|
|
20.5% - 22.0%
|
Royalty rate
|
|
2.5%
|
Long term growth rate
|
|
3.0%
|
70
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
10. Fair Value of Financial Instruments (Continued)
The following table presents the fair value on our Consolidated Balance Sheets of the foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Foreign currency forwards designated as hedges:
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
191
|
|
$
|
334
|
|
Accrued expenses
|
|
|
(213
|
)
|
|
(1,351
|
)
|
Foreign currency forwards not designated as hedges:
|
|
|
|
|
|
|
|
Other current assets
|
|
|
284
|
|
|
315
|
|
Accrued expenses
|
|
|
(467
|
)
|
|
(351
|
)
|
|
|
|
|
|
|
Foreign currency forwards, net
|
|
$
|
(205
|
)
|
$
|
(1,053
|
)
|
|
|
|
|
|
|
During
2011, we did not have any significant nonrecurring measurements of nonfinancial assets and nonfinancial liabilities.
Pension Plan Assets
The fair values and classification of our defined benefit plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Growth funds
(1)
|
|
$
|
44,879
|
|
$
|
43,616
|
|
$
|
1,263
|
|
$
|
|
|
Income funds
(2)
|
|
|
28,473
|
|
|
27,428
|
|
|
1,045
|
|
|
|
|
Growth and income funds
(3)
|
|
|
73,186
|
|
|
|
|
|
73,186
|
|
|
|
|
Hedge funds
(4)
|
|
|
22,615
|
|
|
|
|
|
|
|
|
22,615
|
|
Real estate funds
|
|
|
3,300
|
|
|
714
|
|
|
2,586
|
|
|
|
|
Other assets
|
|
|
2,199
|
|
|
1,081
|
|
|
1,118
|
|
|
|
|
Cash and cash equivalents
|
|
|
2,041
|
|
|
2,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,693
|
|
$
|
74,880
|
|
$
|
79,198
|
|
$
|
22,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Growth funds
(1)
|
|
$
|
38,523
|
|
$
|
37,434
|
|
$
|
1,089
|
|
$
|
|
|
Income funds
(2)
|
|
|
23,172
|
|
|
22,266
|
|
|
906
|
|
|
|
|
Growth and income funds
(3)
|
|
|
64,588
|
|
|
|
|
|
64,588
|
|
|
|
|
Hedge funds
(4)
|
|
|
22,523
|
|
|
|
|
|
|
|
|
22,523
|
|
Real estate funds
|
|
|
3,119
|
|
|
950
|
|
|
2,169
|
|
|
|
|
Other assets
|
|
|
619
|
|
|
|
|
|
619
|
|
|
|
|
Cash and cash equivalents
|
|
|
3,296
|
|
|
3,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
155,840
|
|
$
|
63,946
|
|
$
|
69,371
|
|
$
|
22,523
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Growth
funds represent a type of fund containing a diversified portfolio of domestic and international equities with a goal of capital
appreciation.
71
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
10. Fair Value of Financial Instruments (Continued)
-
(2)
-
Income
funds represent a type of fund with an emphasis on current income as opposed to capital appreciation. Such funds may contain a variety
of domestic and international government and corporate debt obligations, preferred stock, money market instruments and dividend-paying stocks.
-
(3)
-
Growth
and Income funds represent a type of fund containing a combination of growth and income securities.
-
(4)
-
Hedge
funds represent a managed portfolio of investments that use advanced investment strategies such as leveraged, long, short and derivative
positions in both domestic and international markets with the goal of generating high returns. These funds are subject to quarterly redemptions and advanced notification requirements, as well as the
right to delay redemption until sufficient fund liquidity exists.
A
summary of the changes in the fair value of the defined benefit plans assets classified within Level 3 of the valuation hierarchy is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
22,523
|
|
$
|
23,710
|
|
Unrealized gain (loss)
|
|
|
930
|
|
|
(559
|
)
|
Realized gain (loss)
|
|
|
448
|
|
|
(253
|
)
|
Purchases
|
|
|
3,000
|
|
|
7,000
|
|
Sales/settlements
|
|
|
(4,286
|
)
|
|
(7,375
|
)
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
22,615
|
|
$
|
22,523
|
|
|
|
|
|
|
|
Most
of our defined benefit pension plan's Level 1 assets are debt and equity investments that are traded in active markets, either domestically or internationally. They are
measured at fair value using closing prices from active markets. The Level 2 assets are typically investments in pooled funds, which are measured based on the value of their underlying assets
that are publicly traded with observable values. The fair value of our Level 3 plan assets are measured by compiling the portfolio holdings and independently valuing the securities in those
portfolios.
11. Derivative Financial Instruments
We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on monetary assets and liabilities denominated in currencies other than the functional
currency as well as on forecasted transactions denominated in currencies other than the functional currency of our subsidiary with the exposure. Generally these contracts have a term of less than one
year and are considered derivative instruments. The valuations of these derivatives are measured at fair value using internal models based on observable market inputs such as spot and forward rates,
and are recorded as either assets or liabilities. We use a group of highly rated domestic and international banks in order to mitigate counterparty risk on our forward contracts.
For
contracts that are designated and qualify as cash flow hedges, the unrealized gains or losses on the contracts are reported as a component of other comprehensive income ("OCI") and
are reclassified
72
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
11. Derivative Financial Instruments (Continued)
from
accumulated other comprehensive income ("AOCI") into earnings on the Consolidated Statements of Operations when the hedged transaction affects earnings. We affect the sales line where the
underlying exposure is a sales order and cost of sales line where the underlying exposure is a purchase order. As of December 31, 2012, we expect immaterial amount of the unrealized gain or
loss on these contracts to be reclassified from AOCI into earnings over the next 12 months. During 2012, we reclassified $0.2 million and $0.7 million from AOCI to the
Consolidated Statements of Operations as an increase in sales and cost of goods sold, respectively. The amounts reclassified from AOCI to sales and cost of goods sold for the year ended
December 31, 2011 and 2010 were not material. For contracts that are not designated as hedges, the gains and losses on the contracts are recognized in current earnings as other (income)
expense.
Notional
amounts of the derivative financial instruments not qualifying or designated as hedges were $60.5 million at December 31, 2012 and $47.6 million at
December 31, 2011. The net gain realized related to this type of derivative financial instruments was immaterial in 2012. We realized losses of $1.9 million and gains of
$1.4 million related to this type of derivative financial instruments in 2011 and 2010, respectively. The gains and losses were recorded in other expense (income) on the Consolidated Statement
of Operations.
Derivative
financial instruments qualifying and designated as hedges are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
Notional
Amount
|
|
Unrealized
Loss
|
|
Notional
Amount
|
|
Unrealized
Loss
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Foreign currency forward contracts
|
|
$
|
49,750
|
|
$
|
22
|
|
$
|
48,802
|
|
$
|
1,017
|
|
12. Commitments and Contingencies
The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary
course of business. Management believes the outcome of these lawsuits will not have a material effect on our financial position or results of operations.
Our
operations are subject to extensive federal, state, local and foreign laws and regulations relating to environmental matters. Certain environmental laws can impose joint and several
liabilities 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. Hazardous
substances and adverse environmental effects have been identified with respect to real property we own and on adjacent parcels of real property.
In
particular, our Elmira, NY 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, NY. In February 2006, the Company 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
73
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
12. Commitments and Contingencies (Continued)
in
the vicinity of the Pond. The hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.
Until
receipt of this Special Notice in February 2006, the Company had never been named as a potentially responsible party ("PRP") at the Site nor had the Company 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 contributed or are contributing to the contamination. 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.
A
substantial portion of the Pond is located on our property. The Company, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung,
CBS Corporation and Toshiba America, Inc., the PRPs, have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study ("RI/FS") by signing an Administrative Settlement
Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the EPA, 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
EPA approved the RI/FS Work Plan in May of 2008. On September 7, 2011, the PRPs submitted the draft Remedial Investigation Report to the EPA and on January 10, 2013,
the draft Feasibility Study. The draft Feasibility Study identified alternative remedial actions with estimated life-cycle costs ranging from $0.7 million to $3.4 million. We
estimate that our portion of the potential costs range from $0.1 million to $0.5 million.
Based
on the current estimated costs of the various remedial alternatives now under consideration by the EPA, we have recorded a reserve of $0.2 million for the Company's share of
remediation expenses at the Pond. This reserve is reported as an accrued expense on the Consolidated Balance Sheets.
We
believe, based upon information currently available that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation. Though
the foregoing reflects the Company's current assessment as it relates to environmental remediation obligations, 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 the Company.
We
lease space for some of our manufacturing, sales and service operations with lease terms up to 10 years and use certain office equipment and automobiles under lease agreements
expiring at various dates. Rent expense under these leases totaled $3.0 million, $2.5 million and $2.1 million, during the years ended December 31, 2012, 2011, and 2010,
respectively.
74
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
12. Commitments and Contingencies (Continued)
At
December 31, 2012, future minimum payments under non-cancelable operating leases are as follows:
|
|
|
|
|
Year
|
|
Amounts
|
|
|
|
(in thousands)
|
|
2013
|
|
$
|
2,312
|
|
2014
|
|
|
1,385
|
|
2015
|
|
|
550
|
|
2016
|
|
|
297
|
|
2017
|
|
|
224
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,768
|
|
|
|
|
|
The
Company has entered into written employment contracts with its executive officers. The currently effective term of the employment agreements is one year and the agreements contain an
automatic, successive one-year extension unless either party provides the other with 60 days prior notice of termination. In the case of a change in control, as defined in the
employment contracts, the term of each officer's employment will be automatically extended for a period of two years following the date of the change in control. These employment contracts also
provide for severance payments in the event of specified termination of employment, the amount of which is increased upon certain termination events to the extent such events occur within a twelve
month period following a change in control.
13. Shareholders' Equity
Common Shares Outstanding
As of December 31, 2012, the Company has 20,000,000 common shares of stock authorized and 12,472,992 shares issued. On
December 31, 2012, 2011 and 2010, we had 11,732,714, 11,659,012 and 11,607,289 shares of common stock outstanding, respectively.
Treasury Shares
The number of shares of common stock in treasury was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Balance at beginning of period
|
|
|
813,980
|
|
|
865,703
|
|
|
939,240
|
|
Shares distributed/exercised
|
|
|
(113,439
|
)
|
|
(72,171
|
)
|
|
(77,037
|
)
|
Shares purchased
|
|
|
39,737
|
|
|
15,448
|
|
|
|
|
Shares forfeited
|
|
|
|
|
|
5,000
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
740,278
|
|
|
813,980
|
|
|
865,703
|
|
|
|
|
|
|
|
|
|
75
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
14. Earnings Per Share
We calculate earnings per share using the two class method. Details of the calculations of earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands
except per share data)
|
|
Basic earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
17,855
|
|
$
|
11,986
|
|
$
|
(5,234
|
)
|
Earnings allocated to participating securities
|
|
|
(125
|
)
|
|
(162
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Net earnings (loss) applicable to common shareholders
|
|
$
|
17,730
|
|
$
|
11,824
|
|
$
|
(5,238
|
)
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
11,557
|
|
|
11,463
|
|
|
11,409
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
1.53
|
|
$
|
1.03
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share calculation:
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
17,855
|
|
$
|
11,986
|
|
$
|
(5,234
|
)
|
Earnings allocated to participating securities
|
|
|
(125
|
)
|
|
(162
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Net earnings (loss) applicable to common shareholders
|
|
$
|
17,730
|
|
$
|
11,824
|
|
$
|
(5,238
|
)
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
11,557
|
|
|
11,463
|
|
|
11,409
|
|
Assumed exercise of stock options
|
|
|
24
|
|
|
25
|
|
|
|
|
Assumed satisfaction of restricted stock conditions
|
|
|
15
|
|
|
1
|
|
|
|
|
Assumed satisfaction of performance share conditions
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average diluted shares outstanding
|
|
|
11,596
|
|
|
11,548
|
|
|
11,409
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
1.53
|
|
$
|
1.02
|
|
$
|
(0.46
|
)
|
|
|
|
|
|
|
|
|
145,262,
161,299 and 150,262 shares of certain stock-based awards were excluded from the calculation of diluted earnings per share for 2012, 2011 and 2010, respectively, as they were
anti-dilutive.
15. Stock Based Compensation
On May 3, 2011, our shareholders approved the 2011 Incentive Stock Plan (the "Plan"). The Plan's purpose is to enhance the profitability and value of the Company for the benefit
of its shareholders by attracting, retaining, and motivating officers and other key employees who make important contributions to the success of the Company. The Plan reserves 750,000 shares of the
Company's Common Stock (as such amount may be adjusted in accordance with the terms of the Plan, the "Authorized Plan Amount") to be issued for grants of several different types of incentives
including incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock incentives, and performance share incentives. Any shares of Common Stock granted
under options or stock appreciation rights shall be counted against the Authorized Plan Amount on a one-for-one basis and any shares of Common Stock granted as awards other
than options or stock appreciation rights shall be counted against the Authorized Plan Amount as two (2) shares of Common Stock for every one (1) share of Common Stock subject to such
award. Authorized and issued shares of Common Stock
76
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
15. Stock Based Compensation (Continued)
or
previously issued shares of Common Stock purchased by the Company for purposes of the Plan may be issued under the Plan.
Our
2002 Incentive Stock Plan authorized various long-term incentives (the "2002 Plan"). Subsequent to May 3, 2011, no grants have or will be made under the 2002 Plan.
However, all outstanding awards and grants under the 2002 Plan will remain in effect until the end of the corresponding terms of such awards and grants.
All
of our stock-based compensation to employees is recorded as selling, general and administrative expenses in our Consolidated Statements of Operations based on the fair value at the
grant date of the award. These non-cash compensation costs were included in the depreciation and amortization amounts in the Consolidated Statements of Cash Flows.
A
summary of stock-based compensation expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
(in thousands)
|
|
Restricted stock/unit awards ("RSA")
|
|
$
|
421
|
|
$
|
553
|
|
$
|
539
|
|
Performance share incentives ("PSI")
|
|
|
241
|
|
|
191
|
|
|
|
|
Stock options
|
|
|
|
|
|
32
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
$
|
662
|
|
$
|
776
|
|
$
|
574
|
|
|
|
|
|
|
|
|
|
Restricted
stock/unit awards, performance share incentives and stock options are the only award types currently outstanding. Restricted stock/unit awards and performance share incentives
are discussed below. Stock option activity is not significant.
We award restricted stock/units (the "RSA") to employees. RSAs vest at the end of the service period and are subject to forfeiture as
well as transfer restrictions. During the
vesting period, the RSAs are held by the Company and the recipients are entitled to exercise rights pertaining to such shares, including the right to vote such shares. Recipients of RSAs awarded under
the 2002 Plan have non-forfeitable rights to receive cash dividends as any other common stock holders.
The
RSAs are valued based on the closing market price of our common stock on the date of the grant. The total deferred compensation associated with the RSAs awarded in 2012, 2011 and
2010 was $0.6 million, $0.5 million and $0.4 million, respectively. The deferred compensation is being amortized on a straight-line basis over the specified service
period, which ranges from three to six years for all outstanding RSAs.
77
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
15. Stock Based Compensation (Continued)
All
outstanding RSAs are unvested. A summary of the RSA activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
Outstanding at beginning of period
|
|
|
264,640
|
|
|
247,840
|
|
|
184,500
|
|
Awarded
|
|
|
70,500
|
|
|
63,800
|
|
|
70,340
|
|
Vested
|
|
|
(111,300
|
)
|
|
(42,000
|
)
|
|
(3,500
|
)
|
Cancelled or forfeited
|
|
|
(11,500
|
)
|
|
(5,000
|
)
|
|
(3,500
|
)
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
212,340
|
|
|
264,640
|
|
|
247,840
|
|
|
|
|
|
|
|
|
|
Unamortized deferred compensation cost (in millions)
|
|
$
|
0.9
|
|
$
|
0.9
|
|
$
|
0.8
|
|
We award performance share incentives ("PSI") to employees. PSIs are expressed as shares of the Company's common stock. They are earned
only if the Company meets specific performance targets over the specified performance period. During this period, PSI recipients have no voting rights. When we declare dividends, such dividends are
deemed to be paid to the recipients. We withhold and accumulate the deemed dividends until such point that the PSIs are earned. If the PSIs are not earned, the accrued dividends are forfeited. The
payment of PSIs can be in cash, or in the Company's common stock, or a combination of the two, at the discretion of the Company. The PSIs were first awarded to employees in 2011.
All
outstanding PSIs are unvested. A summary of the PSI activity is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2012
|
|
2011
|
|
Outstanding at beginning of period
|
|
|
54,000
|
|
|
|
|
Awarded
|
|
|
52,500
|
|
|
54,000
|
|
Cancelled or forfeited
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
102,500
|
|
|
54,000
|
|
|
|
|
|
|
|
The
PSIs are valued based on the closing market price of our common stock on the date of the grant. The total deferred compensation associated with the PSIs awarded in 2012 and 2011 was
$0.5 million and $0.7 million, respectively. The deferred compensation is being recognized into earnings based on the passage of time and achievement of performance targets. The
performance period of the 2012 awards starts on January 1, 2013, and, as such, we did not record any 2012 expense associated with this grant.
78
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
16. Accumulated Other Comprehensive Loss
Balances of the components of accumulated other comprehensive loss, net of accumulated tax effect, are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Foreign currency translation adjustments
|
|
$
|
36,830
|
|
$
|
32,340
|
|
Retirement plans related adjustments
|
|
|
(62,375
|
)
|
|
(53,969
|
)
|
Unrealized loss on cash flow hedges
|
|
|
36
|
|
|
(504
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(25,509
|
)
|
$
|
(22,133
|
)
|
|
|
|
|
|
|
17. Acquisitions
Acquisition of Usach Technologies, Inc.
On December 20, 2012, the Company acquired 100% of the issued and outstanding capital stock of Usach Technologies, Inc.
("Usach"), an Illinois based manufacturer of high precision grinding machines and systems, for $18.3 million. The purchase price was comprised of $11.3 million in cash and an
earn-out provision valued at $7.0 million. The earn-out is based on the future economic performance of Usach as measured against certain minimum thresholds of earnings
from operations before interest, taxes, depreciation and amortization through 2015. The maximum contractual earn-out is $7.5 million. The contingent liability associated with the
earn-out is recorded in other liabilities on the Consolidated Balance Sheets. The results of operations of Usach have been included in the consolidated financial statements from the date
of acquisition. We expensed acquisition related costs of $0.3 million in 2012 and recorded it in selling, general and administrative expense in the Consolidated Statements of Operations. The
acquisition of Usach is not considered significant to the Company's consolidated financial position and results of operations.
The
purchase price has been assigned to the assets acquired and the liabilities assumed based on their fair values. The identifiable intangible assets acquired, which primarily consist
of customer relationships, trade name and technical know-how, were valued using an income approach. The weighted average life of the identifiable intangible assets acquired was estimated
at 16.4 years at the time of acquisition. The excess purchase price over the fair value of the assets acquired and the liabilities assumed was recorded as goodwill, which is not deductable for
tax purposes. At December 31, 2012, the purchase price allocation is preliminary pending the finalization of the fair value of the net assets acquired.
79
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
17. Acquisitions (Continued)
The preliminary allocation of purchase price to the assets acquired and liabilities assumed is as follows:
|
|
|
|
|
|
|
December 20,
2012
|
|
|
|
(in thousands)
|
|
Assets Acquired
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,482
|
|
Accounts receivable, net
|
|
|
2,170
|
|
Inventory, net
|
|
|
5,167
|
|
Other current assets
|
|
|
788
|
|
Property, plant and equipment
|
|
|
62
|
|
Trade name, customer list, and other intangible assets
|
|
|
9,400
|
|
|
|
|
|
Total assets acquired
|
|
|
20,069
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
6,803
|
|
Other non-current liabilities
|
|
|
3,513
|
|
|
|
|
|
Net assets acquired
|
|
|
9,753
|
|
|
|
|
|
Purchase price, including cash received
|
|
|
18,250
|
|
|
|
|
|
Goodwill
|
|
$
|
8,497
|
|
|
|
|
|
Acquisition of the Assets of Jones & Shipman
On April 7, 2010, the Company acquired certain assets of Jones and Shipman Precision Limited, a UK based manufacturer of
grinding and super-abrasive machines and machining systems, for GBP 2.0 million ($3.2 million equivalent) and established Jones & Shipman Grinding Limited ("J&S"), a
UK based wholly-owned subsidiary. The results of operations of J&S have been included in the consolidated financial statements from the date of acquisition. We expensed acquisition related
costs of $0.3 million in 2010 and recorded it in selling, general and administrative expense in the Consolidated Statements of Operations. The acquisition of J&S is not considered significant
to the Company's consolidated financial position and results of operations.
The
acquisition agreement contains provisions for a contingent purchase price payment based on sales target through March 31, 2014 with a maximum payment of GBP 0.3 million
($0.5 million equivalent). Based on the Company's forecasted revenue over this period, the fair value of this contingent purchase price was GBP 0.3 million ($0.5 million
equivalent) as of December 31, 2012 and 2011, respectively. This contingent liability is recorded in accrued expense on the Consolidated Balance Sheets.
The
purchase price has been assigned to the assets acquired and the liabilities assumed based on their fair values. The weighted average life of the identifiable intangible assets
acquired was estimated at 6.6 years at the time of acquisition. The fair value of the net assets acquired exceeded the purchase price; accordingly, a gain of GBP 0.4 million
(approximately $0.6 million) was recorded in 2010 within other expense (income) in the Consolidated Statement of Operations.
80
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
17. Acquisitions (Continued)
The
allocation of purchase price to the fair value of the assets acquired and liabilities assumed as of December 31, 2010 is as follows:
|
|
|
|
|
|
|
December 31,
2010
|
|
|
|
(in thousands)
|
|
Assets Acquired
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,778
|
|
Inventory
|
|
|
3,712
|
|
Property, plant and equipment
|
|
|
452
|
|
Other assets
|
|
|
399
|
|
Trade name and other intangible assets
|
|
|
346
|
|
|
|
|
|
Total assets acquired
|
|
$
|
7,687
|
|
|
|
|
|
Liabilities Assumed
|
|
|
|
|
Account payable, accrued expenses and other liabilities
|
|
|
4,026
|
|
|
|
|
|
Net assets acquired
|
|
$
|
3,661
|
|
|
|
|
|
18. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2012 and 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(in thousands, except per share data)
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
74,650
|
|
$
|
86,320
|
|
$
|
82,883
|
|
$
|
90,560
|
|
Gross profit
|
|
|
21,189
|
|
|
23,972
|
|
|
23,994
|
|
|
27,682
|
|
Income from operations
|
|
|
3,388
|
|
|
4,838
|
|
|
5,311
|
|
|
6,545
|
|
Net income
|
|
|
2,443
|
|
|
3,640
|
|
|
4,020
|
|
|
7,752
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,524
|
|
|
11,562
|
|
|
11,567
|
|
|
11,574
|
|
Earnings per share
|
|
$
|
0.21
|
|
$
|
0.31
|
|
$
|
0.35
|
|
$
|
0.67
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,557
|
|
|
11,600
|
|
|
11,606
|
|
|
11,619
|
|
Earnings per share
|
|
$
|
0.21
|
|
$
|
0.31
|
|
$
|
0.34
|
|
$
|
0.66
|
|
81
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
18. Quarterly Financial Information (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(in thousands, except per share data)
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
73,482
|
|
$
|
86,656
|
|
$
|
90,389
|
|
$
|
91,046
|
|
Gross profit
|
|
|
19,076
|
|
|
23,303
|
|
|
25,549
|
|
|
23,100
|
|
Income from operations
|
|
|
2,251
|
|
|
4,375
|
|
|
6,327
|
|
|
3,644
|
|
Net income
|
|
|
1,381
|
|
|
3,113
|
|
|
4,250
|
|
|
3,242
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,450
|
|
|
11,467
|
|
|
11,467
|
|
|
11,467
|
|
Earnings per share
|
|
$
|
0.12
|
|
$
|
0.27
|
|
$
|
0.37
|
|
$
|
0.28
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,476
|
|
|
11,495
|
|
|
11,533
|
|
|
11,552
|
|
Earnings per share
|
|
$
|
0.12
|
|
$
|
0.27
|
|
$
|
0.36
|
|
$
|
0.28
|
|
Due
to the changes in outstanding shares from quarter to quarter, the total earnings per share of the four quarters may not necessarily equal the earnings per share for the year.
19. New Accounting Standards
In May 2011, Financial Accounting Standards Board (the "FASB") issued authoritative guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and
IFRS. This pronouncement changes certain fair value measurement guidance and expands certain disclosure requirements. We adopted this pronouncement on January 1, 2012. The adoption of this
pronouncement did not have a material effect on our consolidated results of operations and financial condition.
In
June 2011, the FASB issued authoritative guidance that requires companies to present items of net income, items of other comprehensive income and total comprehensive income either in
a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part
of the statement of changes in stockholder's equity. We adopted this pronouncement on January 1, 2012. Except for the new presentation requirement, the adoption of this pronouncement did not
have a material effect on our consolidated results of operations and financial condition.
In
December 2011, the FASB issued authoritative guidance to defer the changes related to the presentation of reclassification adjustments of items out of accumulated other comprehensive
income. This is to allow the FASB time to consider whether such adjustments should be presented on the face of the financial statements for all periods presented. We adopted this pronouncement on
January 1, 2012. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition.
In
February 2013, the FASB issued authoritative guidance that requires companies to report, in one place, information about reclassification of items out of accumulated other
comprehensive income. We will adopt this pronouncement on January 1, 2013. We do not expect that adoption of this
82
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HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2012
19. New Accounting Standards (Continued)
pronouncement
will have a material effect on our consolidated results of operations and financial condition.
In
December 2011, the FASB issued authoritative guidance on the presentation of netting assets and liabilities as a single amount in the balance sheet. This pronouncement amends and
expands current disclosure requirements on offsetting and requires companies to disclose information about offsetting and related arrangements. This pronouncement is effective for our fiscal year that
begins January 1, 2013 and is to be applied retrospectively. We do not expect that adoption of this pronouncement will have a material effect on our consolidated results of operations and
financial condition.
In
July 2012, the FASB issued amendment to its guidance on testing indefinitely-lived intangible assets for impairment. This pronouncement provides an option for companies to use a
qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. This pronouncement is effective for annual and interim impairment tests performed for
fiscal years beginning after September 15, 2012, with early adoption permitted. We adopted this pronouncement in 2012. The adoption of this pronouncement did not have a material effect on our
consolidated results of operations and financial condition.
In
September 2011, the FASB issued amended accounting guidance relating to testing goodwill for impairment. The amendments provide the option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the
two-step impairment test is unnecessary. We adopted this pronouncement in 2012. The adoption of this pronouncement did not have a material effect on our consolidated results of operations
and financial condition.
83
Table of Contents