ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview.
We supply high precision computer controlled metalcutting turning machines, grinding machines, vertical machining centers, and
repair parts
related to those machines. The Company also engineers and supplies high precision, standard and specialty workholding devices, and other machine tool accessories. We believe our products are known for
accuracy, reliability, durability and value. We are geographically diversified with manufacturing facilities in China, France, Germany, Switzerland, Taiwan, the United Kingdom ("U.K.") and the United
States ("U.S.") with sales to most industrialized countries. Approximately 67% of our 2013 sales were to customers outside of North America, 68% of our 2013 products sold were manufactured outside of
North America, and 66% of our employees were 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.
General
economic growth around the world in 2013 was slower than 2012, driven by the decelerating economy in China and uncertainties surrounding European financial and fiscal conditions.
The concerns over economic situations negatively impacted our customers' decision for capital spending. Consequently, 2013 order volumes decreased approximately $25 million from our organic
business, offset by orders from the Company's newly acquired businesses.
Metrics
on machine tool market activity watched by our management include world machine tool consumption (a proxy for shipments), as reported annually by Gardner Business Media in the
World Machine-Tool Output and Consumption Survey and metalcutting machine orders as reported by the Association of Manufacturing Technology ("AMT"), the primary industry group for U.S. machine tool
manufacturers. World machine tool consumption data as reported by the World Machine-Tool Output and Consumption Survey showed a decrease in machine tool consumption of 9% in 2013 compared to a
decrease of 2.5% in 2012. This report indicates that 2013 consumption in China, the world's largest market, decreased by 12% (in US dollars) after a 1% decrease in 2012. Consumption in Germany, the
world's third largest market, saw a 6% increase in consumption as measured in local currency in 2013 compared to no change in 2012. In the United Kingdom, machine tool consumption measured in local
currency decreased by 9% in 2013 and increased by 11% in 2012. In the U.S., 2013 machine tool consumption decreased by 9%, as compared to a 19% increase in 2012. In 2013, U.S. orders for metalcutting
machine tools reported by the AMT were $4.9 billion, down when compared to $5.7 billion reported in 2012. The AMT's statistics are reported on a voluntary basis from member companies.
The report includes metalcutting machines of all types and sizes, including segments in which we do not compete.
Other
closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that are prospective customers for our products. One such measurement
in the U.S. is the Purchasing Managers Index ("PMI"), 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 manufacturing activity levels in foreign countries is published by various economic data services in those countries.
Non-machine
sales, which include collets, chucks, accessories, repair parts and service revenue account for approximately 28% of overall sales and are an important part of our business
due to an installed base of thousands of machines, and the growing needs demanded by specialty workholding applications. In the past, sales of these products and services have not fluctuated on a
year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.
26
Table of Contents
Other
key performance indicators are geographic distribution of net sales ("sales") and net orders ("orders"), gross profit as a percent of 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.
We
are exposed to financial market risk resulting from changes in interest and foreign currency rates. Global economic 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 their respective currencies to be central to competitive pricing in all of our
markets. The major functional currencies of our subsidiaries are the British Pound Sterling ("GBP"), Chinese Renminbi ("CNY"), Euro ("EUR"), New Taiwanese Dollar ("TWD"), and Swiss Franc ("CHF").
Under U.S. generally accepted accounting principles, results of foreign subsidiaries are translated into U.S. Dollars ("USD") at the average exchange rate during the periods presented.
Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative data significantly. We also purchase computer controls and other components from suppliers
throughout the world, with purchase costs reflecting currency changes.
Below
is a summary of the percentage changes for the annual average rates of our functional currencies as compared to their respective USD equivalents:
|
|
|
|
|
|
|
|
|
|
2013 compared to 2012
|
|
2012 compared to 2011
|
|
|
|
increase / (decrease)
|
|
increase / (decrease)
|
|
CHF
|
|
|
1.2
|
%
|
|
(5.7
|
)%
|
CNY
|
|
|
2.6
|
%
|
|
2.4
|
%
|
EUR
|
|
|
3.3
|
%
|
|
(7.6
|
)%
|
GBP
|
|
|
(1.3
|
)%
|
|
(1.2
|
)%
|
TWD
|
|
|
(0.5
|
)%
|
|
(0.7
|
)%
|
The
fluctuations of the foreign currency exchange rates during 2013 resulted in favorable currency translation impact of approximately $2.3 million on new orders and
$2.9 million on sales, as compared to 2012. The fluctuations of the foreign currency exchange rates during 2012 resulted in unfavorable currency translation impact of approximately
$3.9 million on new orders and $4.8 million on sales, as compared to 2011.
27
Table of Contents
Results of Operations
Comparison of the years ended December 31, 2013 and 2012
The following table summarizes our financial data for 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
% of
Sales
|
|
2012
|
|
% of
Sales
|
|
$
Change
|
|
%
Change
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
329,459
|
|
|
|
|
$
|
334,413
|
|
|
|
|
$
|
(4,954
|
)
|
|
(1
|
)%
|
Gross profit
|
|
|
93,239
|
|
|
28.3
|
%
|
|
96,837
|
|
|
29.0
|
%
|
|
(3,598
|
)
|
|
(4
|
)%
|
Selling, general and administrative expenses
|
|
|
79,533
|
|
|
24.1
|
%
|
|
76,196
|
|
|
22.8
|
%
|
|
(3,337
|
)
|
|
(4
|
)%
|
Impairment charges
|
|
|
6,239
|
|
|
|
|
|
|
|
|
|
|
|
(6,239
|
)
|
|
NM
|
|
Other expense, net
|
|
|
471
|
|
|
|
|
|
559
|
|
|
|
|
|
88
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,996
|
|
|
2.1
|
%
|
|
20,082
|
|
|
6.0
|
%
|
|
(13,086
|
)
|
|
(65
|
)%
|
Interest expense, net
|
|
|
1,064
|
|
|
|
|
|
741
|
|
|
|
|
|
(323
|
)
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
|
5,932
|
|
|
|
|
|
19,341
|
|
|
|
|
|
(13,409
|
)
|
|
(69
|
)%
|
Income taxes
|
|
|
1,537
|
|
|
|
|
|
1,486
|
|
|
|
|
|
(51
|
)
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
4,395
|
|
|
1.3
|
%
|
|
17,855
|
|
|
5.3
|
%
|
|
(13,460
|
)
|
|
(75
|
)%
|
Income from discontinued operations and gain on disposal of operations, net of tax
|
|
|
5,532
|
|
|
|
|
|
|
|
|
|
|
|
5,532
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,927
|
|
|
3.0
|
%
|
$
|
17,855
|
|
|
5.3
|
%
|
$
|
(7,928
|
)
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
Sales for 2013 were $329.5 million, a decrease of $5.0 million compared to 2012 sales of $334.4 million. Foreign
currency
translation had a favorable impact of approximately $2.9 million when compared to 2012. Sales from the newly acquired businesses contributed $47.8 million in 2013. Excluding the sales
from the newly acquired businesses and the favorable foreign currency impact, sales decreased by $55.7 million, or 17%, when compared to 2012. The sales reduction was primarily a result of
unfavorable market conditions for capital spending on machine tools in our European and Asian markets.
The
following table presents 2013 and 2012 sales by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
Sales to Customers in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
109,457
|
|
$
|
83,547
|
|
$
|
25,910
|
|
|
31
|
%
|
Europe
|
|
|
100,126
|
|
|
121,008
|
|
|
(20,882
|
)
|
|
(17
|
)%
|
Asia
|
|
|
119,876
|
|
|
129,858
|
|
|
(9,982
|
)
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
329,459
|
|
$
|
334,413
|
|
$
|
(4,954
|
)
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
geographic mix of sales as a percentage of total sales is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Percentage
Point Change
|
Sales to Customers in:
|
|
|
|
|
|
|
|
|
North America
|
|
|
33.2
|
%
|
|
25.0
|
%
|
8.2 pts.
|
Europe
|
|
|
30.4
|
%
|
|
36.2
|
%
|
(5.8) pts.
|
Asia
|
|
|
36.4
|
%
|
|
38.8
|
%
|
(2.4) pts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Table of Contents
North America sales increased by $25.9 million or 31% for the year 2013 compared to 2012. Included in the North American results were $26.8 million
of sales from the newly acquired businesses. Excluding those sales, organic sales would have been down by $0.9 million or 1% when compared with 2012. This organic sales performance had the
benefit of a strong machine backlog at the end of 2012 for North American demand.
Europe
sales decreased $20.9 million or 17% for the year 2013 compared to 2012. Included in these sales were $10.0 million of sales from the newly acquired businesses. 2013
sales to this region were favorably influenced by foreign currency translation of approximately $1.0 million. Exclusive of the currency impact and sales from acquisitions, Europe sales
decreased by $31.9 million, or 26%, compared to 2012. The decrease is primarily attributable to continued economic uncertainty throughout most of Europe, especially for high end machine tools.
In addition, changes made in sales channel strategies for the UK, resulted in providing discounts to a new distribution partner, while at the same time, enabling a $5.9 million reduction in
selling expenses.
Asia
sales decreased by $10.0 million or 8% for the year 2013 compared to 2012. Sales in this region in 2013 were favorably influenced by foreign currency translation of
approximately $1.9 million. Sales from the newly acquired businesses contributed $11.0 million of sales. Exclusive of the impact of the newly acquired businesses and the impact of
currency, organic sales declined by $22.9 million or 18%, compared to 2012. This decline is primarily as result of a decelerating Chinese economy, in addition to
the non-recurrence of $16.0 million in sales for several large specialty multi-machine orders to the consumer electronics industry in 2012.
Machine
sales represented approximately 72% and 78% of sales in 2013 and 2012, respectively. Sales of non-machine products and services, primarily workholding, repair parts, and
accessories made up the balance.
Gross Profit:
Gross profit was $93.2 million or 28.3% of sales in 2013, compared to $96.8 million, or 29.0% of sales in 2012.
Included
in the reported gross profit was $1.9 million of inventory step-up charges related to the purchase accounting adjustments for the Usach and Forkardt acquisitions. Excluding those charges, gross
profit would have been $95.1 million or 28.9%, which is down by 0.1 points compared to 2012. The decrease in gross profit is primarily attributable to lower volume in our machine
business, which resulted in lower factory absorption offset by the increased volume in our workholding and accessories business.
Selling, General and Administrative Expense:
Selling, general and administrative ("SG&A") expense for the year 2013 was
$79.5 million, or
24.1% of sales, compared to $76.2 million, or 22.8% of sales in 2012. The 2013 increase in SG&A included expenses associated with the newly acquired businesses of $9.7 million in
addition to $2.2 million associated with due diligence and transaction costs for the Forkardt acquisition. Excluding those costs, the organic business reduced expenses by $8.6 million,
of which $5.9 million is related to the change in our sales distribution in the UK that was previously discussed. Excluding the due diligence and transaction costs, SG&A as a percent of sales
would have been 23.5%, or 0.7 points higher than 2012 performance. On an adjusted basis, the increase in SG&A as a percentage of sales for 2012 was primarily driven by reduced sales volume in our
machine business.
(Gain) loss on sale of assets:
In 2013, we recorded a gain of $0.1 million on sale of assets. In 2012, the Company reported a loss
on sale of
assets of $0.1 million.
Other Expense, net:
Other expense was $0.5 million in 2013 and $0.6 million in 2012. The expense in both years is primarily
related to
foreign currency losses.
Impairment charges:
As part of the company's review of goodwill and other intangible assets under Accounting Standards Codification
(ASC) 350, the
Company took a non-cash charge of
29
Table of Contents
$5.1 million
reducing the value of goodwill and the trade name associated with the purchase of Usach. In addition, in conjunction with the divestiture of the company's Forkardt Swiss business,
the Company took a $1.1 million non-cash charge associated with the Forkardt trade name.
Income from Operations:
Income from operations in 2013 was $7.0 million compared to $20.1 million in 2012. The decrease in
income from
operations was driven by lower organic sales volume, $6.2 million in impairment charges, and $4.1 million in acquisition and inventory step up costs.
Interest Expense, net:
Interest expense includes interest incurred on borrowings under our credit facilities, amortization of deferred
financing
costs associated with these facilities and related commitment fees. Interest expense for 2013 was $1.1 million compared to $0.9 million for 2012. The increase in interest expense for
2013 compared to 2012 is mainly attributable our higher average outstanding indebtedness related to the term loan associated with the Forkardt acquisition. Interest income was $0.1 million in
both 2013 and 2012.
Income from Continuing Operations before taxes:
Income from continuing operations before tax was $5.9 million in 2013 compared to
$19.3 million in 2012. The decrease in income from continuing operations before tax was driven by lower organic sales volume, $6.2 million in impairment charges, and $4.1 million
in acquisition and inventory step up costs.
Income Tax Expense:
Income tax expense was $1.5 million in 2013 and 2012. The effective tax rate was 25.9% in 2013 and 7.7% in
2012.
Generally, income tax expense represents tax expense on profits in certain of the Company's foreign subsidiaries. The effective tax rate in 2013 was unfavorably influenced by the previously
aforementioned impairment charges that did not provide a tax benefit. Excluding the impairment charge, the effective tax rate would have been 14.5%. In addition, in 2012, the Company recorded a
$2.7 million reduction of valuation allowances required on certain deferred tax assets as a
result of the acquisition of Usach. Excluding the valuation allowance adjustment, the effective tax rate in 2012 would have been 21.7%
We
continually assess all available positive and negative evidence in accordance with ASC Topic 740 to evaluate whether deferred tax assets are realizable. To the extent that it
is more likely than not that all or a portion of our deferred tax assets in a particular jurisdiction will not be realized, a valuation allowance is recorded. We currently maintain a valuation
allowance against all or a portion of our deferred tax assets in the U.S., Canada, U.K., Germany, and the Netherlands.
Income from Continuing Operations:
Income from continuing operations in 2013 was $4.4 million compared with $17.8 million in
2012. The
decrease was a result of lower organic sales volume, $6.2 million in impairment charges, and $4.1 million in acquisition and inventory step up costs, in addition to the non-recurrence of
the 2012 $2.7 million tax valuation adjustment.
Income from Discontinued Operations and Gain on Disposition, net of tax;
On December 31, 2013, we sold our Forkardt Swiss business
for
CHF 5.6 million, net of cash sold ($6.3 million equivalent) and recognized a gain of $4.9 million. Net income associated with the Forkardt Swiss business was
$0.6 million, net of tax, for the year ended December 31, 2013.
Net Income:
Net income for 2013 was $9.9 million or 3.0% of sales, compared to $17.9 million or 5.3% of sales in 2012. Basic
earnings
per share were $0.84 for 2013 and $1.53 for 2012. Diluted earnings per share were $0.83 for 2013 and $1.53 for 2012.
Business Segment InformationComparison of the years ended December 31, 2013 and 2012
In 2013, the Company changed its reportable business segment from one reportable segment to two reportable segments, Metalcutting
Machine Solutions and Aftermarket Tooling and Accessories.
30
Table of Contents
The
Company has recast its disclosures for all periods presented to conform to this segment presentation.
Metalcutting Machine Solutions Segment (MMS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
Sales
|
|
$
|
278,377
|
|
$
|
306,328
|
|
$
|
(27,951
|
)
|
|
(9
|
)%
|
Segment income
|
|
|
14,850
|
|
|
20,808
|
|
|
(5,958
|
)
|
|
(29
|
)%
|
MMS
sales declined by $28.0 million or 9% in 2013 when compared with 2012. The primary driver was softer demand for machine tool consumption in Europe and North America. This was
partially offset by $26.0 million of acquired grinding backlog from Usach in December of 2012 that was shipped to customers in 2013.
Segment
profitability in 2013 was $14.9 million, or $6.0 million below 2012 performance. The primary factor in reduced profitability was lower demand for Swiss and
Taiwanese made product which resulted lower utilization of our factories, and lower profitability. The impact of lower utilization was partially offset by income generated by sales from the Usach
acquisition.
Aftermarket Tooling and Accessories Segment (ATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
Sales
|
|
$
|
51,553
|
|
$
|
28,989
|
|
$
|
22,564
|
|
|
78
|
%
|
Segment income
|
|
|
5,689
|
|
|
5,128
|
|
|
561
|
|
|
11
|
%
|
ATA
sales were $51.6 million, an increase of $22.6 million when compared with 2012. Virtually all of the additional sales were generated from the newly acquired Forkardt
business in May of 2013.
Segment
profitability in 2013 was $5.7 million or 11% over prior year. The additional income was driven by the Forkardt sales volume, and was negatively influenced by unfavorable
product mix and supply chain disruption for Forkardt Europe as well as productivity investments in the U.S., which resulted in lower than expected profitability.
Segment Summary 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMS
|
|
ATA
|
|
Inter Segment
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
278,377
|
|
$
|
51,553
|
|
$
|
(471
|
)
|
$
|
329,459
|
|
Segment income
|
|
|
14,850
|
|
|
5,689
|
|
|
|
|
|
20,539
|
|
Unallocated corporate expense
|
|
|
|
|
|
|
|
|
|
|
|
(3,075
|
)
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
(2,154
|
)
|
Acquisition inventory step up charges
|
|
|
|
|
|
|
|
|
|
|
|
(1,927
|
)
|
Impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
(6,239
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(1,064
|
)
|
Other unallocated expenses
|
|
|
|
|
|
|
|
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
5,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Table of Contents
Segment Summary 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMS
|
|
ATA
|
|
Inter Segment
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
306,328
|
|
$
|
28,989
|
|
$
|
(904
|
)
|
$
|
334,413
|
|
Segment income
|
|
|
20,808
|
|
|
5,128
|
|
|
|
|
|
25,936
|
|
Unallocated corporate expense
|
|
|
|
|
|
|
|
|
|
|
|
(5,419
|
)
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
(290
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
19,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the years ended December 31, 2012 and 2011
The following table summarizes certain financial data for 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
% of
Sales
|
|
2011
|
|
% of
Sales
|
|
$
Change
|
|
%
Change
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
334,413
|
|
|
|
|
$
|
341,573
|
|
|
|
|
$
|
(7,160
|
)
|
|
(2
|
)%
|
Gross profit
|
|
|
96,837
|
|
|
29.0
|
%
|
|
91,028
|
|
|
26.6
|
%
|
|
5,809
|
|
|
6
|
%
|
Selling, general and administrative expenses
|
|
|
76,196
|
|
|
22.8
|
%
|
|
73,599
|
|
|
21.5
|
%
|
|
2,597
|
|
|
4
|
%
|
Other expense
|
|
|
559
|
|
|
|
|
|
832
|
|
|
|
|
|
(273
|
)
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
20,082
|
|
|
6.0
|
%
|
|
16,597
|
|
|
4.9
|
%
|
|
3,485
|
|
|
21
|
%
|
Interest expense, net
|
|
|
741
|
|
|
|
|
|
238
|
|
|
|
|
|
503
|
|
|
211
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
|
19,341
|
|
|
|
|
|
16,359
|
|
|
|
|
|
2,982
|
|
|
18
|
%
|
Income taxes expense (benefit)
|
|
|
1,486
|
|
|
|
|
|
4,373
|
|
|
|
|
|
(2,887
|
)
|
|
(66
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,855
|
|
|
5.3
|
%
|
$
|
11,986
|
|
|
3.5
|
%
|
$
|
5,869
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
S
ales for 2012 were $334.4 million, a decrease of $7.2 million or 2%
compared to
2011 sales of $341.6 million. Foreign currency translation had an unfavorable impact of approximately $4.8 million when compared to 2011. Excluding the unfavorable foreign currency
impact, sales decreased by $2.4 million, or 1%, when compared to 2011.
The
following table presents 2012 and 2011 sales by region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
Sales to Customers in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
83,547
|
|
$
|
90,000
|
|
$
|
(6,453
|
)
|
|
(7
|
)%
|
Europe
|
|
|
121,008
|
|
|
104,825
|
|
|
16,183
|
|
|
15
|
%
|
Asia
|
|
|
129,858
|
|
|
146,748
|
|
|
(16,890
|
)
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
334,413
|
|
$
|
341,573
|
|
$
|
(7,160
|
)
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Table of Contents
The
geographic mix of sales as a percentage of total sales is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Percentage
Point Change
|
|
Sales to Customers in:
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
25.0
|
%
|
|
26.3
|
%
|
|
(1.3
|
)
|
Europe
|
|
|
36.2
|
%
|
|
30.7
|
%
|
|
5.5
|
|
Asia
|
|
|
38.8
|
%
|
|
43.0
|
%
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America sales decreased by $6.5 million or 7% for the year 2012 compared to 2011. The decrease in North America sales was primarily due to strong sales of grinding machines
in 2011 as compared to 2012. Additionally, 2011 sales in North America were driven by exceptionally strong fourth quarter activities as we met our customers' year-end delivery requirements.
Europe
sales increased $16.2 million or 15% for the year 2012 compared to 2011. 2012 sales to this region were unfavorably influenced by foreign currency translation of
approximately $6.6 million. Exclusive of the currency impact, Europe sales increased by $22.8 million, or 22%, compared to 2011. The increase is primarily attributable to strong demand
for machine tools in Germany and the United Kingdom, particularly for our grinding machines.
Asia
sales decreased by $16.9 million or 12% for the year 2012 compared to 2011. Sales in this region in 2012 were favorably influenced by foreign currency translation of
approximately $1.8 million. Exclusive of the impact of currency, Asia sales decreased by $18.7 million, or 13%, compared to 2011. This 13% decrease was the result of the decelerating
economy in China throughout 2012.
Machine
sales represented approximately 78% and 77% of sales in 2012 and 2011, respectively. Sales of non-machine products and services, primarily workholding, repair parts, and
accessories made up the balance.
Gross Profit:
Gross profit was $96.8 million or 29.0% of sales in 2012, compared to $91.0 million, or 26.6% of sales in 2011.
The
increase in gross profit and gross margin percentage is attributable to favorable product mix and improved pricing. In addition, lower raw material and component costs experienced in 2012 contributed
to the increase in gross profit and gross margin percentage.
Selling, General and Administrative Expense:
Selling, general and administrative ("SG&A") expense for
the year 2012 was $76.2 million, or 22.8% of sales, compared to $73.6 million, or 21.5% of sales in 2011. The 2012 increase in SG&A was attributable to charges of $0.4 million
related to the reorganization of operations in the United Kingdom, $0.3 million related to the acquisition of Usach, $0.2 million for environmental remediation costs, and
$0.8 million in higher agent related sales commissions, increased variable selling related costs and inflationary increases. The increase in SG&A as a percentage of sales for 2012 was partially
driven by reduced sales volume as well as the aforementioned increased costs.
Loss on sale of assets:
In 2012, we recorded a loss of $0.1 million on sale of assets. In 2011, the loss on sale of assets was not
material.
Other expense:
Other expense was $0.6 million and $0.8 million in 2012 and 2011, respectively. The expense in 2012 and 2011
is
primarily related to foreign currency losses.
Income from Operations:
Income from operations in 2012 was $20.1 million compared to $16.6 million in 2011. The increase in
income from
operations was driven by higher gross profit in 2012 as compared to 2011. Income from operations in 2012 included charges of $0.4 million related to the reorganization of operations in the
United Kingdom, $0.3 million related to the acquisition of Usach, and $0.2 million accrual for environmental remediation costs
33
Table of Contents
Interest Expense, net:
Interest expense includes interest incurred on borrowings under our credit facilities, amortization of deferred
financing
costs associated with these facilities and related commitment fees. Interest expense for 2012 was $0.9 million compared to $0.3 million for 2011. The increase in interest expense for
2012 compared to 2011 is mainly attributable to the full year 2012 impact of our long term financing entered into in December 2011 as well as our higher average outstanding indebtedness under our
working capital facilities. Interest income was $0.1 million in 2012 and in 2011.
Income Tax Expense:
Income tax expense in 2012 was $1.5 million compared to $4.4 million for 2011. The effective tax rate was
7.7% in
2012 and 26.7% in 2011. Generally, income tax expense represents tax expense on profits in certain of the Company's foreign subsidiaries. The decrease in the income tax expense in 2012 is primarily
driven by lower valuation allowances required on certain deferred tax assets as a result of the acquisition of Usach, as well as a change in the mix of earnings by jurisdiction as compared to 2011.
Net Income:
Net income for 2012 was $17.9 million or 5.3% of sales, compared to $12.0 million or 3.5%
of sales in 2011. Basic earnings per share were $1.53 for 2012 and $1.03 for 2011. Diluted earnings per share were $1.53 for 2012 and $1.02 for 2011.
Business Segment Information Comparison of the years ended December 31, 2012 and 2011
In 2013, the Company changed its reportable business segment from one reportable segment to two reportable segments, Metalcutting
Machine Solutions and Aftermarket Tooling and Accessories. The Company has recast its disclosures for all periods presented to conform to this segment presentation.
Metalcutting Machine Solutions Segment (MMS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
Sales
|
|
$
|
306,328
|
|
$
|
316,062
|
|
$
|
(9,734
|
)
|
|
(3
|
)%
|
Segment income
|
|
|
20,808
|
|
|
16,904
|
|
|
3,904
|
|
|
23
|
%
|
MMS
sales in 2012 were $306.3 million, compared with $316.1 million in 2011. The 3% decline in sales was primarily a result of a decelerating economy in China throughout
2012, partially offset by strengthening in Europe.
Segment
income of $20.8 million was $3.9 million or 23% improved over 2011. The primary factor was favorable product mix.
Aftermarket Tooling and Accessories Segment (ATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
2011
|
|
Change
|
|
% Change
|
|
|
|
(in thousands)
|
|
|
|
Sales
|
|
$
|
28,989
|
|
$
|
27,055
|
|
$
|
1,934
|
|
|
7
|
%
|
Segment income
|
|
|
5,128
|
|
|
4,243
|
|
|
885
|
|
|
21
|
%
|
ATA
sales were $29.0 million in 2012 compared with $27.1 million in 2011. The 7% increase was primarily in North America as a result of higher demand for our products due
to improved economic conditions.
Segment
income of $5.1 million improved by $0.9 million or 21%. The improvement came primarily from the leverage of higher sales volume.
34
Table of Contents
Segment Summary 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMS
|
|
ATA
|
|
Inter Segment
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
306,328
|
|
$
|
28,989
|
|
$
|
(904
|
)
|
$
|
334,413
|
|
Segment income
|
|
|
20,808
|
|
|
5,128
|
|
|
|
|
|
25,936
|
|
Unallocated corporate expense
|
|
|
|
|
|
|
|
|
|
|
|
(5,419
|
)
|
Acquisition related costs
|
|
|
|
|
|
|
|
|
|
|
|
(290
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before taxes
|
|
|
|
|
|
|
|
|
|
|
$
|
19,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Summary 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMS
|
|
ATA
|
|
Inter Segment
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
316,062
|
|
$
|
27,055
|
|
$
|
(1,544
|
)
|
$
|
341,573
|
|
Segment income
|
|
|
16,904
|
|
|
4,243
|
|
|
|
|
|
21,147
|
|
Unallocated corporate expense
|
|
|
|
|
|
|
|
|
|
|
|
(4,619
|
)
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
(238
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, before tax
|
|
|
|
|
|
|
|
|
|
|
$
|
16,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
The Company's principal capital requirements are to fund its operations, including working capital, to purchase and fund improvements
to its facilities, machines and equipment, and to fund acquisitions.
At
December 31, 2013, cash and cash equivalents were $34.7 million, compared to $26.9 million at December 31, 2012. The current ratio at December 31,
2013 was 2.62:1 compared to 2.36:1 at December 31, 2012.
35
Table of Contents
Cash Flows from Operating Activities:
The table below shows the changes in cash flows from operating activities by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
(in thousands)
|
|
Net income
|
|
$
|
9,927
|
|
$
|
17,855
|
|
$
|
(7,928
|
)
|
Impairment charges
|
|
|
6,239
|
|
|
|
|
|
6,239
|
|
Depreciation and amortization
|
|
|
9,560
|
|
|
7,451
|
|
|
2,109
|
|
Debt issuance amortization
|
|
|
83
|
|
|
78
|
|
|
5
|
|
(Benefit) provision for deferred taxes
|
|
|
(1,140
|
)
|
|
(2,601
|
)
|
|
1,461
|
|
(Gain) loss on sale of assets
|
|
|
(62
|
)
|
|
80
|
|
|
(142
|
)
|
Unrealized intercompany foreign currency transaction (gain) loss
|
|
|
(2,397
|
)
|
|
853
|
|
|
(3,250
|
)
|
Gain on sale of Forkardt Switzerland
|
|
|
(4,890
|
)
|
|
|
|
|
(4,890
|
)
|
Accounts receivable, net
|
|
|
(68
|
)
|
|
17,522
|
|
|
(17,590
|
)
|
Inventories, net
|
|
|
20,259
|
|
|
2,365
|
|
|
17,894
|
|
Other assets
|
|
|
1,663
|
|
|
4,486
|
|
|
(2,823
|
)
|
Accounts payable
|
|
|
(4,083
|
)
|
|
(11,538
|
)
|
|
7,455
|
|
Customer deposits
|
|
|
(899
|
)
|
|
(7,876
|
)
|
|
6,977
|
|
Accrued expenses
|
|
|
(8,373
|
)
|
|
(4,781
|
)
|
|
(3,592
|
)
|
Accrued postretirement benefits
|
|
|
9
|
|
|
(455
|
)
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
25,828
|
|
$
|
23,439
|
|
$
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
2013, $25.8 million cash was provided by operating activities. Cash was primarily provided by reduced inventory levels, and net income generation. In 2013, cash was used to
reduce accounts payable and accrued expenses which decreased due to slowing business activities as a result of lower order levels. Cash was also used in customer deposits which decreased as customer
orders were fulfilled and delivered.
In
2012, $23.4 million cash was provided by operating activities. Cash was primarily provided by collections on accounts receivables, reduced inventory levels, and releases of
restricted cash. In addition, improved year-over-year profit also contributed to the improved cash flow. In 2012, cash was used to reduce accounts payable and accrued expenses which decreased due to
slowing business activities as a result of lower order levels. Cash was also used in customer deposits which decreased as customer orders were fulfilled and delivered.
Cash Used In Investing Activities:
The table below shows the changes in cash flows from investing activities by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
(in thousands)
|
|
Capital expenditures
|
|
$
|
(3,871
|
)
|
$
|
(7,641
|
)
|
$
|
3,770
|
|
Proceeds from sale of assets
|
|
|
179
|
|
|
557
|
|
|
(378
|
)
|
Acquisitions of businesses, net of cash acquired
|
|
|
(34,250
|
)
|
|
(8,768
|
)
|
|
(25,482
|
)
|
Net proceeds from sale of business
|
|
|
6,255
|
|
|
|
|
|
6,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(31,687
|
)
|
$
|
(15,852
|
)
|
$
|
(15,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities was $31.7 million for 2013, compared to $15.9 million in 2012. During 2013, we used $34.3 million, net of cash acquired, to
fund the acquisition of Forkardt. This investment was partially offset by the $6.3 million, net of cash sold, generated from the Forkardt Swiss business divestiture. Capital expenditures for
2013 were $3.9 million compared to $7.6 million in 2012.
36
Table of Contents
Capital
expenditures in fiscal 2014 are expected to be in the $6.0 million to $7.0 million range for general maintenance capital spending.
Cash (Used in)/ Provided by Financing Activities:
The table below shows the changes in cash flows from financing activities by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
Change
|
|
|
|
(in thousands)
|
|
Proceeds from short-term notes payable to bank
|
|
$
|
47,733
|
|
$
|
51,626
|
|
$
|
(3,893
|
)
|
Repayments of short-term notes payable to bank
|
|
|
(59,025
|
)
|
|
(53,537
|
)
|
|
(5,488
|
)
|
Proceeds from long-term debt
|
|
|
33,821
|
|
|
1,268
|
|
|
32,553
|
|
Payments on long-term debt
|
|
|
(15,743
|
)
|
|
(1,562
|
)
|
|
(14,181
|
)
|
Net proceeds from sale of common stock
|
|
|
8,884
|
|
|
|
|
|
8,884
|
|
Dividends paid
|
|
|
(944
|
)
|
|
(931
|
)
|
|
(13
|
)
|
Debt issuance fees paid
|
|
|
(687
|
)
|
|
|
|
|
(687
|
)
|
Other financing activities
|
|
|
(299
|
)
|
|
(3
|
)
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
13,740
|
|
$
|
(3,139
|
)
|
$
|
16,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities was $13.7 million in 2013, compared to cash used in financing activities of $3.1 million in 2012. During 2013, the increase in cash
provided by financing activities was used to finance the acquisition of Forkardt.
At
December 31, 2013 and 2012, total debt outstanding, including notes payable, was $26.6 million and $20.0 million, respectively.
Credit Facilities and Financing Arrangements:
We maintain financing arrangements with several financial institutions. These financing arrangements are in the form of long term
loans, credit facilities, and lines of credit. The credit facilities allow us to borrow up to $76.6 million at December 31, 2013, of which $58.0 million can be borrowed for
working capital needs. As of December 31, 2013, $70.0 million was available for borrowing under these arrangements of which $56.8 million was available for working capital needs.
Total consolidated borrowings outstanding were $26.6 million at December 31, 2013 and $20.0 million at December 31, 2012. Details of these financing arrangements are
discussed below.
Long-term Debt
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") ($6.0 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, 1.75% at December 31, 2013 and
December 31, 2012, is based on the bank's one year fixed savings rate plus 0.4%. The principal amount outstanding was TWD 45.0 million ($1.5 million equivalent) at
December 31, 2013 and TWD 63.0 million ($2.2 million equivalent) at December 31, 2012.
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 in January 2014, provides up to 25.0 million in Chinese Yuan ("CNY") ($4.1 million equivalent) for plant construction and fixed assets acquisition
purposes. The interest rate, 7.38% at December 31, 2013 and December 31, 2012, is the bank base rate plus a 20% mark-up and is subject to adjustment annually. The principal amount
outstanding was CNY 9.0 million ($1.5 million
37
Table of Contents
equivalent)
at December 31, 2013 and CNY 21.0 million ($3.4 million equivalent) at December 31, 2012. The remaining outstanding principal of CNY 9.0 million
($1.5 million equivalent) is due in January 2014.
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 the real property and improvements owned by the subsidiary. At December 31, 2013, the Company was in compliance with the
covenants under the loan agreement.
In
May 2013, the Company and Hardinge Holdings GmbH, a direct wholly-owned subsidiary, entered into a term loan agreement with a bank pursuant to which the bank provided a
five-year $23.0 million secured term loan facility for the acquisition of Forkardt. The agreement calls for scheduled annual principal repayments of $1.2 million, $1.7 million,
$2.1 million, $2.1 million, and $2.5 million in 2014, 2015, 2016, 2017, and 2018 respectively. In October 2013, we amended the terms of Term Loan. The amendment reduced mandatory
principal payments associated with the sale of our common stock under the Company's stock offering program as described in Footnote 14 from 75% of net proceeds to 25% of net proceeds. This amendment
was retroactive for all sales of common stock under this stock offering program. In 2013, the Company made principal payments of $1.5 million with stock offering proceeds. The interest rate on
the term loan is determined from a pricing grid with the London Interbank Offered Rate ("LIBOR") and base rate options based on the Company's leverage ratio and was 2.44% at December 31, 2013.
LIBOR is the average interest rate estimated by leading banks in London that they would be charged when borrowing from other banks. The principal amount outstanding at December 31, 2013 was
$10.1 million.
In
November 2013, the Company and Hardinge Holdings GmbH entered into a replacement term note agreement with the same bank pursuant to which the bank converted
$10.8 million of the outstanding principal on the term loan to CHF 3.8 million ($4.1 million equivalent) and EUR 5.0 million ($6.7 million equivalent)
borrowings. The agreement calls for scheduled annual principal repayments in CHF and EUR. The scheduled annual principal repayments in CHF are as follows: CHF 0.4 million
($0.4 million equivalent) in 2014, CHF 0.6 million ($0.6 million equivalent) in 2015, and CHF 0.6 million ($0.7 million equivalent) in 2016. The
scheduled annual principal repayments in EUR are as follows: EUR 0.5 million ($0.7 million equivalent) in 2014, EUR 0.7 million ($1.0 million equivalent) in 2015, EUR
0.9 million ($1.2 million equivalent) in 2016 and 2017, and EUR 1.9 million ($2.6 million equivalent) in 2018. Additionally, the Company is required to pay a portion of the
proceeds of the sale of Forkardt Switzerland against the CHF portion of the loan. The Company made a CHF 2.2 million ($2.4 million equivalent) principal payment in January, 2014,
to fulfill this obligation. The interest rate on the CHF and EUR portion of the term loan is determined from a pricing grid with the Swiss franc LIBOR ("CHF LIBOR") or the Euro Interbank Offered Rate
("EURIBOR") and base rate options based on the Company's leverage ratio and was 2.27% and 2.48% at December 31, 2013, respectively. The principal amounts outstanding at December 31, 2013
were CHF 3.7 million ($4.2 million equivalent), and EUR 4.9 million ($6.7 million equivalent).
The
term loan is secured by (i) liens on all of the Company's U.S. assets (exclusive of real property); (ii) a pledge of 65% of the Company's investment in
Holdings GmbH; (iii) a negative pledge on the Company's headquarters in Elmira, New York; (iv) liens on all of the personal property assets of Usach, Forkardt Inc.
(Formerly Cherry Acquisition Corporation) and Hardinge Technology Systems Inc., a wholly-owned subsidiary and owner of the real property comprising the Company's world headquarters in Elmira,
New York ("Technology"); and (v) negative pledges on the intellectual property of the Revolving Credit Borrowers and Technology.
38
Table of Contents
The
loan agreement contains financial covenants requiring a minimum fixed charge coverage ratio of not less than 1.15 to 1.00 (tested quarterly on a rolling four-quarter basis), a
maximum consolidated total leverage ratio of 3.0 to 1.0 (tested quarterly on a rolling four-quarter basis), and maximum annual consolidated capital expenditures of $10.0 million. The loan
agreement also contains such other representations, affirmative and negative covenants, prepayment provisions and events of default that are customary for these types of transactions. At
December 31, 2013, the Company was in compliance with the covenants under the loan agreement.
In
July 2013, Hardinge Holdings GmbH, a direct wholly-owned subsidiary, and Kellenberger & Co. AG, an indirect wholly-owned subsidiary of the Company, entered into a
credit facility agreement with a bank whereby the bank made available a CHF 2.6 million ($2.9 million equivalent) mortgage loan facility. This facility is to be used by
Kellenberger and replaces an existing mortgage loan that Kellenberger maintained with the same bank. Interest on the facility accrues at a fixed rate of 2.50% per annum, compared to 2.65% fixed
interest rate on the previous mortgage loan. Principal payments of CHF 0.2 million ($0.2 million equivalent) are due in June and December in each year of the term, with the
remaining outstanding balance of principal and accrued interest due in full at the final maturity in December 2016. The principal amount outstanding was CHF 2.4 million
($2.7 million equivalent) at December 31, 2013. The principal amount outstanding on the previous mortgage loan was CHF 2.7 million ($3.0 million equivalent) at
December 31, 2012.
The
terms of the credit facility contains customary representations, affirmative, negative and financial covenants and events of default. The credit facility is secured by a mortgage on
the subsidiary's facility in Romanshorn, Switzerland. The facility is 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, 2013, the Company was 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 in December
2014, provides up to CNY 34.2 million ($5.6 million equivalent) or its equivalent in other currencies for working capital and letter of credit purposes. Borrowings for working capital
purposes are limited to CNY 20.0 million ($3.3 million equivalent). Borrowings under the credit facility are secured by real property owned by the subsidiary. The interest rate on the
credit facility, currently at 6.60%, 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, 2013, there were no borrowings
outstanding under this facility.
In
July, 2013, 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 in June 2014, 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 1.54% and
is subject to change by the lender based on market conditions and carries no commitment fees on unused funds. This facility replaced the $12.0 million facility entered into in June 2012, which
expired on May 30, 2013. There was no principal amount outstanding under this facility at December 31, 2013. The principal amount outstanding at December 31, 2012 was
$9.0 million, which was included in the notes payable to bank on the Consolidated Balance Sheets.
In
July 2013, Hardinge Holdings GmbH, a direct wholly-owned subsidiary, and Kellenberger, an indirect wholly-owned subsidiary, entered into a credit facilities agreement with a
bank whereby the bank made available a CHF 18.0 million ($20.2 million equivalent) multi-currency revolving working capital facility. This facility matures in July 2018.
39
Table of Contents
The facility is to be used by Hardinge Holdings GmbH and its subsidiaries (the "Holdings Group") for general corporate and working capital purposes,
including standby letters of credit and standby letters of guarantee. In addition to Swiss Francs, loan proceeds available under the facility can be drawn upon in Euros, British Pounds Sterling and
United States Dollars. Under the terms of the facility, the maximum amount of borrowings available to the Holdings Group (on an aggregate basis) for working capital purposes shall not exceed
CHF 8.0 million ($9.0 million equivalent) or its equivalent in Optional Currencies, as applicable. The interest rate on the borrowings drawn in the form of fixed term advances
(excluding Euro-based fixed term advances) is calculated based on the applicable LIBOR. With respect to fixed term advances in Euros, the interest rate on borrowings is calculated based on the
applicable EURIBOR, plus an applicable margin, (initially set at 2.25% per annum) that is determined by the bank based on the financial performance of the Holdings Group.
The
terms of the credit facilities contain customary representations, affirmative, negative and financial covenants and events of default. The credit facilities are secured by mortgage
notes in an aggregate amount of CHF 9.2 million ($10.2 million equivalent) on two buildings owned by Kellenberger. In addition to the mortgage notes provided by Kellenberger,
Holdings serves as a guarantor with respect to this facility. The facility is also subject to a minimum equity covenant requirement whereby the equity of both the Holdings Group and Kellenberger must
be at least 35% of the subsidiary's balance sheet total assets. At December 31, 2013, the Company was in compliance with the covenants under the loan agreement
This
facility replaces two separate credit facilities that Kellenberger previously maintained with the same Swiss bank. The first facility had provided 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 had provided 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. At December 31, 2012 there were no borrowings outstanding under these facilities.
Kellenberger
also maintains a credit agreement with another bank. This agreement, entered into in October 2009, provides a credit facility of up to CHF 7.0 million
($7.8 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($3.4 million equivalent) is
available for working capital purposes. The facility is secured by the subsidiary's certain real property up to CHF 3.0 million ($3.4 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 agreement
was again amended in May, 2013 and reverted to the terms in place prior to the August 2010 amendment. The interest rate, currently at LIBOR plus 2.50% 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. This facility is subject to annual renewal and carries no commitment fees on unused funds. At
December 31, 2013 and 2012, 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, 2013, the Company was in compliance with the required covenant.
In December 2009, we entered into a $10.0 million revolving credit facility with a bank. This facility was subject to an annual
renewal requirement. In December 2011, the Company modified the existing facility and increased the facility from $10.0 million to $25.0 million, reduced the interest rate
40
Table of Contents
from
the daily 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. In May, 2013 the Company, Usach, a direct wholly-owned subsidiary of the Company, and Forkardt, amended and restated the existing $25.0 million revolving credit agreement. The
amendment added Usach and Forkardt as additional borrowers and extended the maturity of the credit facility from March, 2014 to May, 2018. The interest rate on the term loan is determined from a
pricing grid with LIBOR and base rate options, based on the Company's leverage ratio and was 2.44% at December 31, 2013.
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. There were no borrowings outstanding under this facility at December 31, 2013. The principal amount outstanding under
this facility was $2.5 million at December 31, 2012
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 16.0%. 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, 2013 or December 31, 2012.
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 $0.9 million at
December 31, 2013 and $1.0 million at December 31, 2012. It expires in March, 2014. In total, we had various outstanding letters of credit totaling $9.9 million and
$15.6 million at December 31, 2013 and 2012, respectively.
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 $3.4 million, $3.0 million and $2.5 million, during the years ended December 31, 2013, 2012, and 2011,
respectively.
The
following table shows our future commitments in effect as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
Thereafter
|
|
Total
|
|
|
|
(in thousands)
|
|
Long-term debt
|
|
$
|
7,850
|
|
$
|
4,222
|
|
$
|
6,270
|
|
$
|
3,281
|
|
$
|
5,012
|
|
$
|
|
|
$
|
26,635
|
|
Operating lease obligations
|
|
|
2,481
|
|
|
1,493
|
|
|
960
|
|
|
550
|
|
|
181
|
|
|
89
|
|
|
5,754
|
|
Purchase commitments
|
|
|
19,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,749
|
|
Standby letters of credit
|
|
|
9,722
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,866
|
|
We
have not included the liabilities for uncertain tax positions in the above table as we cannot make a reliable estimate of the period of cash settlement. We have not included pension
obligations in the above table as we cannot make a reliable estimate of the timing of employer contributions. In 2014, we expect to make approximately $2.6 million contributions to our foreign
defined benefit pension plans and $0.2 million contributions to our domestic supplemental retirement plans. We expect to make no cash contributions to our qualified domestic defined benefit
pension plan in 2014.
We
believe that the current available funds and credit facilities, along with internally generated funds, will provide sufficient financial resources for ongoing operations throughout
2014.
41
Table of Contents
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Market Risk
The following information has been provided in accordance with the Securities and Exchange Commission's requirements for disclosure of
exposures to market risk arising from certain market risk sensitive instruments.
Our
earnings are affected by changes in short-term interest rates as a result of our floating interest rate debt. If market interest rates on debt subject to floating interest rates were
to have increased by 2% over the actual rates paid in that year, interest expense would have increased by $0.6 million in 2013 and $0.5 million in 2012. These amounts are determined by
considering the impact of hypothetical interest rates on the Company's outstanding borrowings.
Our
operations include manufacturing and sales activities in foreign jurisdictions. We currently manufacture our products in China, France, Germany, Switzerland, Taiwan, the United
Kingdom, and the United States using production components purchased internationally, and we sell our products in those markets as well as other worldwide markets. Our subsidiaries in China, France,
Germany, Switzerland, Taiwan, and the United Kingdom sell products in local currency to customers in those countries. These subsidiaries also transact business in currencies other than their
functional currency outside of their home country. As a result of these sales in various currencies and in various countries of the world, our financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in
exchange rates between the USD, GBP, CHF, EUR, TWD, CNY and JPY. As a result of having sales, purchases and certain intercompany transactions denominated in currencies other than the functional
currencies of our subsidiaries, we are exposed to the effect of currency exchange rate changes on our cash flows, earnings and balance sheet. To mitigate this currency risk, we enter into currency
forward exchange contracts to hedge significant non-functional currency denominated transactions for periods consistent with the terms of the underlying transactions. Contracts generally have
maturities that do not exceed one year.
Discussion of Critical Accounting Policies
The preparation of our financial statements requires the application of a number of accounting policies which are described in the
notes to the financial statements. These policies require the use of assumptions or estimates, which, if interpreted differently under different conditions or circumstances, could result in material
changes to the reported results. Following is a discussion of those accounting policies, which were reviewed with our audit committee, and which we feel are most susceptible to such interpretation.
Accounts Receivable.
We assess the collectability of our trade accounts receivable using a combination of methods. We review large
individual
accounts for evidence of circumstances that suggest a collection problem might exist. Such situations include, but are not limited to, the customer's past history of payments, its current financial
condition as evidenced by credit ratings, financial statements or other sources, and recent collection activities. We provide a reserve for losses based on current payment trends in the economies
where we hold concentrations of receivables and provide a reserve for what we believe to be the most likely risk of collectability. In order to make these allowances, we rely on assumptions regarding
economic conditions, equipment resale values, and the likelihood that previous performance will be indicative of future results.
Inventories.
We use a number of assumptions and estimates in determining the value of our inventory. An allowance is provided for the
value of
inventory quantities of specific items that are
42
Table of Contents
deemed
to be excessive based on an annual review of past usage and anticipated future usage. While we feel this is the most appropriate methodology for determining excess quantities, the possibility
exists that customers will change their buying habits in the future should their own requirements change. Changes in metalcutting technology can render certain products obsolete or reduce their market
value. We continually evaluate changes in technology and adjust our products and inventory carrying values accordingly, either by write-off or by price reductions. Changes in market conditions and
realizable selling prices for our machines could reduce the value of our inventory. We continually evaluate the carrying value of our machine inventory against the estimated selling price, less
related costs to sell and adjust our inventory carrying values accordingly. However, the possibility exists that a future technological development, currently unanticipated, might affect the
marketability of specific products produced by the Company.
We
include in the cost of our inventories a component to cover the estimated cost of manufacturing overhead activities associated with production of our products.
We
believe that being able to offer immediate delivery on many of our products is critical to our competitive success. Likewise, we believe that maintaining an inventory of service
parts, with a particular emphasis on purchased parts, is especially important to support our policy of maintaining serviceability of our products. Consequently, we maintain significant inventories of
repair parts on many of our machine models, some of which are no longer in production. Our ability to accurately determine which parts are needed to maintain this serviceability is critical to our
success in managing this element of our business.
Goodwill and Intangible Assets.
We have acquired other machine tool companies and, in certain instances, the assets of machine tool
companies. When
doing so, we have estimated the fair value of the assets acquired, and have used traditional models for establishing purchase price based on EBITDA (earnings before interest, taxes, depreciation and
amortization) multiples and present value of future cash flows. Consequently, the value of goodwill and purchased intangible assets on our balance sheet has been affected by the use of numerous
estimates of the value of assets purchased and of future business opportunity. We review goodwill and indefinite lived intangible assets for impairment at least annually or when indictors of
impairment are present.
Net Deferred Tax Assets.
We regularly review the recent results and projected future results of our operations, as well as other
relevant factors, to
reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.
Retirement Plans.
We sponsor various defined benefit pension plans, defined contribution plans, and one postretirement benefit plan, all
as described
in Footnote 10 to the Consolidated Financial Statements. The calculation of our plan expenses and liabilities require the use of a number of critical accounting estimates. Changes in the assumptions
can result in different plan expense and liability amounts, and actual experience can differ from the assumptions. We believe that the most critical assumptions are the discount rate and the expected
rate of return on plan assets.
We
annually review the discount rate to be used for retirement plan liabilities. In the U.S., we use bond pricing models based on high grade U.S. corporate bonds constructed to match the
projected liability benefit payments. We discounted our future plan liabilities for our U.S. plan using a rate of 5.24% and 4.31% at our plan measurement date of December 31, 2013 and 2012,
respectively. We discounted our future plan liabilities for our foreign plans using rates appropriate for each country, which resulted in a blended rate of 2.75% and 2.34% at their measurement dates
of December 31, 2013 and 2012, respectively. A change in the discount rate can have a significant effect on retirement plan obligations. For example, a decrease of one percent would increase
U.S. pension obligations by approximately $13.2 million. Conversely, an increase of one percent would decrease U.S. pension obligations by approximately $11.0 million. A decrease of one
percent in the discount rate would
43
Table of Contents
increase
the Swiss pension obligations by approximately $14.3 million. Conversely, an increase of one percent would decrease the Swiss pension obligations by approximately $12.3 million.
A
change in the discount rate can also have an effect on retirement plan expense. For example, a decrease of one percent would increase U.S. pension expense by less than
$0.1 million. Conversely, an increase of one percent would decrease U.S. pension expense by approximately $0.1 million. A decrease of one percent would increase the Swiss pension expense
by approximately $1.2 million. Conversely, an increase of one percent would decrease the Swiss pension expense by approximately $0.7 million.
The
expected rate of return on plan assets varies based on the investment mix of each particular plan and reflects the long-term average rate of return expected on funds invested or to
be invested in each pension plan to provide for the benefits included in the pension liability. We review our expected rate of return annually based upon information available to us at that time,
including 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. For our domestic plans, the expected rate of return during fiscal 2014 is 7.50%, lower by 0.25% from the 7.75% rate used for fiscal 2013. For
our foreign plans, we used rates of return appropriate for each country which resulted in a blended expected rate of return of 3.91% for both fiscal 2014 and for fiscal 2013. A change in the expected
return on plan assets can also have a significant effect on retirement plan expense. For example, a decrease of one percent would increase U.S. pension expense by approximately $0.8 million.
Conversely, an increase of one percent would decrease U.S. pension expense by approximately $0.8 million. A decrease of one percent would increase the Swiss pension expense by approximately
$0.9 million. Conversely, an increase of one percent would decrease the Swiss pension expense by approximately $0.9 million.
New Accounting Standards
Refer to Footnote 19 to the consolidated financial statements under Item 8 of this Annual Report on Form 10-K for a
discussion of accounting standards we recently adopted or will be required to adopt.
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 Company's 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 Company's entry into new product and geographic markets, the Company's 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
44
Table of Contents
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.
ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
of Hardinge Inc. and Subsidiaries
We
have audited the accompanying consolidated balance sheets of Hardinge Inc. and Subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of
operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement
schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hardinge Inc. and Subsidiaries at
December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hardinge Inc. and Subsidiaries' internal control over
financial reporting as of December 31, 2013, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (1992 framework) and our report dated March 13, 2014 expressed an adverse opinion thereon.
/s/
Ernst & Young LLP
Rochester,
New York
March 13, 2014
46
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
|
|
(In Thousands Except Share
and Per Share Data)
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,722
|
|
$
|
26,855
|
|
Restricted cash
|
|
|
4,124
|
|
|
2,634
|
|
Accounts receivable, net
|
|
|
57,137
|
|
|
51,871
|
|
Inventories, net
|
|
|
114,064
|
|
|
128,240
|
|
Other current assets
|
|
|
11,486
|
|
|
12,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
221,533
|
|
|
222,180
|
|
Property, plant and equipment, net
|
|
|
74,656
|
|
|
71,035
|
|
Goodwill
|
|
|
9,864
|
|
|
8,497
|
|
Other intangible assets, net
|
|
|
32,063
|
|
|
21,584
|
|
Other non-current assets
|
|
|
5,852
|
|
|
2,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
122,435
|
|
|
103,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
343,968
|
|
$
|
325,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
24,418
|
|
$
|
27,779
|
|
Notes payable to bank
|
|
|
|
|
|
11,500
|
|
Accrued expenses
|
|
|
26,325
|
|
|
29,027
|
|
Customer deposits
|
|
|
15,166
|
|
|
15,720
|
|
Accrued income taxes
|
|
|
830
|
|
|
3,952
|
|
Deferred income taxes
|
|
|
2,569
|
|
|
2,980
|
|
Contingent consideration
|
|
|
7,500
|
|
|
280
|
|
Current portion of long-term debt
|
|
|
7,850
|
|
|
2,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
84,658
|
|
|
94,111
|
|
Long-term debt
|
|
|
18,785
|
|
|
5,616
|
|
Pension and postretirement liabilities
|
|
|
28,188
|
|
|
50,312
|
|
Deferred income taxes
|
|
|
4,968
|
|
|
3,431
|
|
Other liabilities
|
|
|
3,775
|
|
|
10,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current liabilities
|
|
|
55,716
|
|
|
70,336
|
|
Common stock ($0.01 par value, 12,472,992 issued)
|
|
|
125
|
|
|
125
|
|
Additional paid-in capital
|
|
|
114,951
|
|
|
114,072
|
|
Retained earnings
|
|
|
90,937
|
|
|
81,961
|
|
Treasury shares
|
|
|
(806
|
)
|
|
(9,442
|
)
|
Accumulated other comprehensive loss
|
|
|
(1,613
|
)
|
|
(25,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
203,594
|
|
|
161,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
343,968
|
|
$
|
325,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
47
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In Thousands Except Per
Share Data)
|
|
Sales
|
|
$
|
329,459
|
|
$
|
334,413
|
|
$
|
341,573
|
|
Cost of sales
|
|
|
236,220
|
|
|
237,576
|
|
|
250,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
93,239
|
|
|
96,837
|
|
|
91,028
|
|
Selling, general and administrative expense
|
|
|
79,533
|
|
|
76,196
|
|
|
73,599
|
|
Impairment charge
|
|
|
6,239
|
|
|
|
|
|
|
|
Other expense
|
|
|
471
|
|
|
559
|
|
|
832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,996
|
|
|
20,082
|
|
|
16,597
|
|
Interest expense
|
|
|
1,128
|
|
|
859
|
|
|
339
|
|
Interest income
|
|
|
(64
|
)
|
|
(118
|
)
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
5,932
|
|
|
19,341
|
|
|
16,359
|
|
Income taxes
|
|
|
1,537
|
|
|
1,486
|
|
|
4,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
4,395
|
|
$
|
17,855
|
|
$
|
11,986
|
|
Income from discontinued operations, net of tax
|
|
|
642
|
|
|
|
|
|
|
|
Gain from disposal of discontinued operation, net of tax
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,927
|
|
$
|
17,855
|
|
$
|
11,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.37
|
|
$
|
1.53
|
|
$
|
1.03
|
|
Discontinued operations
|
|
|
0.06
|
|
|
|
|
|
|
|
Disposal of discontinued operations
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.37
|
|
$
|
1.53
|
|
$
|
1.02
|
|
Discontinued operations
|
|
|
0.05
|
|
|
|
|
|
|
|
Disposal of discontinued operations
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.83
|
|
$
|
1.53
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
48
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In Thousands)
|
|
Net income
|
|
$
|
9,927
|
|
$
|
17,855
|
|
$
|
11,986
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1,745
|
|
|
3,803
|
|
|
(1,436
|
)
|
Retirement plans related adjustment
|
|
|
23,689
|
|
|
(8,326
|
)
|
|
(21,750
|
)
|
Unrealized gain (loss) on cash flow hedges
|
|
|
77
|
|
|
651
|
|
|
(533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before tax
|
|
|
25,511
|
|
|
(3,872
|
)
|
|
(23,719
|
)
|
Income tax expense (benefit)
|
|
|
1,615
|
|
|
(496
|
)
|
|
(607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax
|
|
|
23,896
|
|
|
(3,376
|
)
|
|
(23,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
33,823
|
|
$
|
14,479
|
|
$
|
(11,126
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
49
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In Thousands)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,927
|
|
$
|
17,855
|
|
$
|
11,986
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
|
|
6,239
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,560
|
|
|
7,451
|
|
|
7,736
|
|
Debt issuance amortization
|
|
|
83
|
|
|
78
|
|
|
124
|
|
Benefit for deferred income taxes
|
|
|
(1,140
|
)
|
|
(2,601
|
)
|
|
(361
|
)
|
(Gain) loss on sale of assets
|
|
|
(62
|
)
|
|
80
|
|
|
46
|
|
Unrealized intercompany foreign currency transaction (gain) loss
|
|
|
(2,397
|
)
|
|
853
|
|
|
(862
|
)
|
Gain on disposal of discontinued operations
|
|
|
(4,890
|
)
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(68
|
)
|
|
17,522
|
|
|
(18,589
|
)
|
Inventories, net
|
|
|
20,259
|
|
|
2,365
|
|
|
(18,123
|
)
|
Other assets
|
|
|
1,663
|
|
|
4,486
|
|
|
444
|
|
Accounts payable
|
|
|
(4,083
|
)
|
|
(11,538
|
)
|
|
3,990
|
|
Customer deposits
|
|
|
(899
|
)
|
|
(7,876
|
)
|
|
8,469
|
|
Accrued expenses
|
|
|
(8,373
|
)
|
|
(4,781
|
)
|
|
(1,277
|
)
|
Accrued postretirement benefits
|
|
|
9
|
|
|
(455
|
)
|
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
25,828
|
|
|
23,439
|
|
|
(7,132
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(3,871
|
)
|
|
(7,641
|
)
|
|
(19,217
|
)
|
Proceeds from sale of assets
|
|
|
179
|
|
|
557
|
|
|
900
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(34,250
|
)
|
|
(8,768
|
)
|
|
|
|
Net proceeds from disposal of business
|
|
|
6,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(31,687
|
)
|
|
(15,852
|
)
|
|
(18,317
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term notes payable to bank
|
|
|
47,733
|
|
|
51,626
|
|
|
29,987
|
|
Repayments of short-term notes payable to bank
|
|
|
(59,025
|
)
|
|
(53,537
|
)
|
|
(18,299
|
)
|
Proceeds from long-term debt
|
|
|
33,821
|
|
|
1,268
|
|
|
6,011
|
|
Repayments on long-term debt
|
|
|
(15,743
|
)
|
|
(1,562
|
)
|
|
(614
|
)
|
Net proceeds from sale of common stock
|
|
|
8,884
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(944
|
)
|
|
(931
|
)
|
|
(581
|
)
|
Debt issuance fees paid
|
|
|
(687
|
)
|
|
|
|
|
|
|
Other
|
|
|
(299
|
)
|
|
(3
|
)
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
13,740
|
|
|
(3,139
|
)
|
|
16,463
|
|
Effect of exchange rate changes on cash
|
|
|
(14
|
)
|
|
671
|
|
|
(223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
7,867
|
|
|
5,119
|
|
|
(9,209
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
26,855
|
|
|
21,736
|
|
|
30,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
34,722
|
|
$
|
26,855
|
|
$
|
21,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
50
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Total
Shareholders'
Equity
|
|
|
|
(In Thousands)
|
|
Balance at December 31, 2010
|
|
$
|
125
|
|
$
|
114,183
|
|
$
|
53,637
|
|
$
|
(11,022
|
)
|
$
|
979
|
|
$
|
157,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
11,986
|
|
|
|
|
|
|
|
|
11,986
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,112
|
)
|
|
(23,112
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
(582
|
)
|
Shares issued pursuant to long-term incentive plan
|
|
|
|
|
|
(497
|
)
|
|
|
|
|
497
|
|
|
|
|
|
|
|
Shares forfeited pursuant to long-term incentive plan
|
|
|
|
|
|
47
|
|
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
Amortization (long-term incentive plan)
|
|
|
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
776
|
|
Net issuance of treasury stock
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
193
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
125
|
|
$
|
114,369
|
|
$
|
65,041
|
|
$
|
(10,379
|
)
|
$
|
(22,133
|
)
|
$
|
147,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
17,855
|
|
|
|
|
|
|
|
|
17,855
|
|
Other comprehensive loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,376
|
)
|
|
(3,376
|
)
|
Dividends declared
|
|
|
|
|
|
|
|
|
(935
|
)
|
|
|
|
|
|
|
|
(935
|
)
|
Shares issued pursuant to long-term incentive plan
|
|
|
|
|
|
(843
|
)
|
|
|
|
|
843
|
|
|
|
|
|
|
|
Amortization (long-term incentive plan)
|
|
|
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
662
|
|
Net issuance of treasury stock
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
94
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
125
|
|
$
|
114,072
|
|
$
|
81,961
|
|
$
|
(9,442
|
)
|
$
|
(25,509
|
)
|
$
|
161,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
9,927
|
|
|
|
|
|
|
|
|
9,927
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,896
|
|
|
23,896
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
(951
|
)
|
|
|
|
|
|
|
|
(951
|
)
|
Shares issued pursuant to long-term incentive plan
|
|
|
|
|
|
(530
|
)
|
|
|
|
|
530
|
|
|
|
|
|
|
|
Common shares issued
|
|
|
|
|
|
838
|
|
|
|
|
|
8,040
|
|
|
|
|
|
8,878
|
|
Amortization (long-term incentive plan)
|
|
|
|
|
|
621
|
|
|
|
|
|
|
|
|
|
|
|
621
|
|
Net issuance of treasury stock
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
66
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
125
|
|
$
|
114,951
|
|
$
|
90,937
|
|
$
|
(806
|
)
|
$
|
(1,613
|
)
|
$
|
203,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
51
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2013
1. Significant Accounting Policies
Nature of Business
Hardinge Inc. ("Hardinge", "we", "us" or "the Company") is a machine tool manufacturer, which designs and manufactures
computer-numerically controlled cutting lathes, machining centers, grinding machines, collets, chucks, index fixtures and other industrial products. We sell our products to customers in North America,
Europe and Asia. A substantial portion of our sales are to small and medium-sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and
indirectly served by the Company include: aerospace, automotive, communications, computer, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment and
transportation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current-year presentation.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
("GAAP") which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents are highly liquid financial instruments with an original maturity of three months or less at the date of purchase.
Restricted Cash
Occasionally, we are required to maintain cash deposits with certain banks with respect to contractual obligations as collateral for
customer deposits or foreign exchange forward contracts. Additionally, restricted cash includes amounts due under mandatory principal reduction provisions associated with certain term debt agreements.
As of December 31, 2013 and 2012, the amount of restricted cash was approximately $4.1 million and $2.6 million, respectively.
Accounts Receivable
We perform periodic credit evaluations of the financial condition of our customers. No collateral is required for sales made on open
account terms. Letters of credit from major banks back the majority of sales in the Asian region. Concentrations of credit risk with respect to accounts receivable are generally limited due to the
large number of customers comprising our customer base. We consider
52
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
1. Significant Accounting Policies (Continued)
trade
accounts receivable to be past due when in excess of 30 days past terms, and charge off uncollectible balances when all collection efforts have been exhausted.
We
maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts was
$1.2 million and $2.3 million at December 31, 2013 and 2012, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances would result in additional expense to the Company.
Other Current Assets
Other current assets consist of prepaid insurance, prepaid real estate taxes, prepaid software license agreements, prepaid income taxes
and deposits on certain inventory purchases. When applicable, prepayments are expensed on a straight-line basis over the corresponding life of the underlying asset.
Inventories
Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost
include raw materials, purchased components, labor and overhead.
We
assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable
value. We estimate the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. 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.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major additions, renewals or improvements that extend the useful lives of assets
are capitalized. Maintenance and repairs are expensed to operations as incurred. Depreciation expense is computed using the straight-line and accelerated methods, generally over the following
estimated useful lives of the assets:
|
|
|
Buildings
|
|
40 years
|
Machinery
|
|
12 years
|
Patterns, tools, jigs and furniture and fixtures
|
|
10 years
|
Office and computer equipment
|
|
5 years
|
Goodwill and Intangible Assets
In accordance with Financial Accounting Standards Board ("FASB") Accounting Standard Update ("ASU") Topic 350,
IntangiblesGoodwill and Other
("ASC 350"), goodwill and intangible assets with
53
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
1. Significant Accounting Policies (Continued)
indefinite
lives are not amortized but are tested for impairment annually or when events indicate that an impairment could exist. Goodwill impairment is deemed to exist if the carrying value of a
reporting unit exceeds its estimated fair value. Our reporting units are determined based upon whether discrete financial information is available and reviewed regularly, whether those units
constitute a business, and the extent of economic similarities between those reporting units for purposes of aggregation. Our reporting units identified under ASC 350-20-35-33 are at the component
level, or one level below the
reporting segment level as defined under ASC 280-10-50-10 "Segment ReportingDisclosure." We have three reporting units.
Goodwill
is evaluated for potential impairment by assessing a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive
environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel and overall financial
performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a two-step
impairment test.
In
accordance with ASC 350-20-35-3, the measurement of impairment of goodwill consists of two steps. In the first step, we compare the fair value of each reporting unit to its carrying
value. As part of the impairment analysis, we determine the fair value of each of its reporting units with goodwill using the income approach and market approach. If the carrying value of the
reporting unit exceeds its fair value, we proceed to the second step of the analysis to determine the amount of the impairment.
Intangible
assets with indefinite lives are assessed for impairment using an income approach if the carrying value of the indefinite lived intangible asset exceeds its fair value. An
impairment charge is recognized for such excess.
Future
impairment indicators, such as declines in forecasted cash flows, may cause additional significant impairment charges. Impairment charges could be based on such factors as our
stock price, forecasted cash flows, assumptions used, control premiums or other variables.
Impairment of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. To assess whether impairment exists, we use undiscounted cash flows and measure any impairment loss using discounted cash flows. Assets to be held for sale are reported
at the lower of their carrying amount or fair value less costs to sell and are no longer depreciated.
Accrued Expenses
Accrued Expenses include $15.3 million and $16.6 million in compensation related expenses at December 31, 2013 and
2012, respectively.
Income Taxes
Deferred income tax assets and liabilities are recognized for the income tax consequences attributable to operating loss carryforwards,
tax credit carryforwards, and differences between the
54
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
1. Significant Accounting Policies (Continued)
financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which temporary differences are expected to be reversed.
A
valuation allowance is established when it is more likely than not that all or a portion of deferred tax assets are not expected to be realized. The Company assesses all available
positive and negative evidence to determine whether a valuation allowance is needed. Positive and negative evidence to be considered includes scheduled reversals of deferred tax liabilities, projected
future taxable income, tax-planning strategies, and results of recent operations. Supporting a conclusion that a valuation allowance is not necessary is difficult when there is negative evidence such
as cumulative losses in recent years.
We
maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until
an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, Dutch, and Canadian deferred tax assets related to tax loss carryforwards in
those jurisdictions, as well as all other deferred tax assets of those entities.
The
calculation of our tax liabilities requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes
reflects a combination of income earned and taxed in the U.S. and the various states, as well as federal and provincial jurisdictions in Switzerland, U.K., Canada, Germany, France, the Netherlands,
China and Taiwan. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation
allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.
The
Company accounts for uncertain tax positions using a more likely than not recognition threshold in accordance with ASC 740. The evaluation of uncertain tax positions is based on
factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new
audit activity and changes in facts or circumstances related to a tax position. Interest and penalties related to uncertain tax positions are included as a component of income tax expense.
Revenue Recognition
Revenue from product sales is generally recognized upon shipment, provided persuasive evidence of an arrangement exists, the sales
price is fixed or determinable, collectability is reasonably assured, and the title and risk of loss have passed to the customer. Sales are recorded net of discounts, customer sales incentives and
returns. Discounts and customer sales incentives are typically negotiated as part of the sales terms at the time of sale and are recorded as a reduction of revenue. The Company does not routinely
permit customers to return machines. In the rare case that a machine return is permitted, a restocking fee is typically charged. Returns of spare parts and workholding products are limited to a period
of 90 days subsequent to purchase, excluding special orders which are not eligible for return. An estimate of returns, which is not significant, is recorded as a reduction of revenue and is
based on historical experience. Transfer of ownership and risk of loss are generally not contingent upon contractual customer acceptance. Prior to shipment, each machine is tested to ensure the
machine's
55
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
1. Significant Accounting Policies (Continued)
compliance
with standard operating specifications as listed in our promotional literature. On an exception basis, where larger multiple machine installations are delivered which require run-offs and
customer acceptance at their facility, revenue is recognized in the period of customer acceptance.
Sales Tax/VAT
We collect and remit taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue
producing transactions between the Company and its customers. These taxes may include sales, use and value-added taxes. We report the collection of these taxes on a net basis (excluded from revenues).
Shipping and Handling Costs
Shipping and handling costs are recorded as part of cost of goods sold.
Warranties
We offer warranties for our products. The specific terms and conditions of those warranties vary depending upon the product sold and
the country in which we sold the product. We generally provide a basic limited warranty for a period of one to two years. We estimate the costs that may be incurred under our basic limited warranty,
based largely upon actual warranty repair cost history and record a liability for such costs when 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 after the basic warranty expires. Revenue from
extended warranties are deferred and recognized on a straight-line basis across the term of the warranty contract.
These
liabilities are reported in accrued expenses on our Consolidated Balance Sheets.
Research and Development Costs
The costs associated with research and development programs for new products and significant product improvements are expensed as
incurred as a component of cost of goods sold. Research and development expenses totaled $12.5 million, $12.3 million and $12.7 million in 2013, 2012 and 2011, respectively.
Foreign Currency Translation and Re-measurement
The functional currency of our foreign subsidiaries is their local currency. Net assets are translated at month end exchange rates
while income, expense and cash flow items are translated at average exchange rates for the applicable period. Translation adjustments are recorded within accumulated other comprehensive income (loss).
Gains and losses resulting from foreign currency denominated transactions are included as a component of other income and expense in our Consolidated Statement of Operations.
56
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
1. Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
Financial instruments consist primarily of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, notes
payable, long-term debt and foreign currency forwards. See Footnote 11 for additional disclosure.
Derivative Financial Instruments
As a multinational company, we are exposed to market risk from changes in foreign currency exchange rates that could affect our results
of operations and financial condition. To manage this risk, we enter into derivative instruments namely in the form of foreign currency forwards. Our derivative instruments are held to hedge economic
exposures, such as fluctuations in foreign currency exchange rates on balance sheet exposures of both trade and intercompany assets and liabilities. We hedge this exposure with contracts settling in
less than a year. These derivatives do not qualify for hedge accounting treatment. Gains or losses resulting from the changes in the fair value of these hedging contracts are recognized immediately in
earnings. We have some forward contracts to hedge certain customer orders and vendor firm commitments. These contracts which are for less than two years have maturity dates in alignment with our
contractual payment requirements. These derivatives qualify for hedge accounting treatment and are designated as cash flow hedges. Unrealized gains or losses resulting from the changes in the fair
value of these hedging contracts are charged to other comprehensive income (loss). Gains or losses on any ineffective portion of the contracts are recognized in earnings.
Stock-Based Compensation
We account for stock-based compensation based on the estimated fair value of the award as of the grant date and recognize as expense
the value of the award over the requisite service period.
Earnings Per Share
We calculate earnings per share using the two-class method. Basic earnings per common share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common shares outstanding for the period. Net income (loss) available to common shareholders represents net income (loss) 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
stock-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 issued prior to 2011 are entitled to receive non-forfeitable dividends during the vesting period, therefore, meeting the definition of a participating security.
57
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
2. Acquisitions
Acquisition of Forkardt
On May 9, 2013, Forkardt, Inc. ("Forkardt", formerly Cherry Acquisition Corporation) and Hardinge Holdings GmbH,
direct wholly owned subsidiaries of the Company, and Hardinge GmbH, an indirect wholly owned subsidiary of the Company, acquired the Forkardt operations from Illinois Tool Works for
$34.3 million, net of cash acquired. The acquisition of Forkardt will strengthen and expand our leadership position in specialty workholding solutions around the world. The acquisition, which
was funded through $24.3 million in bank debt and $10.0 million in cash, has been included in the Aftermarket Tooling and Accessories business segment. Forkardt is a leading global
provider of high-precision, specialty workholding devices with headquarters in Traverse City, Michigan. Forkardt has operations in the U.S., France, Germany, and Switzerland. The results of operations
of Forkardt have been included in the consolidated financial statements from the date of acquisition. For the year ended December 31, 2013, we recognized $27.8 million in sales and net
income of $0.6 million related to Forkardt which includes $1.0 million of inventory step up charges associated with acquisition purchase accounting. These amounts include sales of
$6.1 million and net income of $0.6 million associated with the Forkardt Swiss business which was divested on December 31, 2013. Results associated with the Forkardt Swiss
business have been reported as discontinued operations in
the Consolidated Statement of Operations. We expensed acquisition related costs of $2.2 million for the year ended December 31, 2013 and reported them in selling, general and
administration expenses in the Consolidated Statements of Operations.
The
purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their fair values. The identifiable intangible assets acquired, which
primarily consist of customer relationships of $4.3 million, trade name of $5.3 million and technical know-how of $5.0 million, were valued using an income approach. The weighted
average life of the acquired identifiable intangible assets subject to amortization was estimated at 17.3 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, of which $0.4 million is deductible for tax purposes. At December 31, 2013, the purchase price allocation is
preliminary, pending the finalization of the working capital adjustments.
58
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
2. Acquisitions (Continued)
The
preliminary allocation of purchase price to the assets acquired and liabilities assumed is as follows:
|
|
|
|
|
|
|
May 9, 2013
|
|
|
|
(in thousands)
|
|
Assets Acquired
|
|
|
|
|
Accounts receivable
|
|
$
|
5,521
|
|
Inventory
|
|
|
5,357
|
|
Other current assets
|
|
|
1,180
|
|
Property, plant and equipment
|
|
|
6,271
|
|
Other non-current assets
|
|
|
105
|
|
Trade name, customer list, and other intangible assets
|
|
|
14,614
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
33,048
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
3,342
|
|
Other non-current liabilities
|
|
|
1,134
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
28,572
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
34,250
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
5,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of Forkardt, Switzerland operations
On December 31, 2013, the Company divested of its Forkardt operations in Switzerland for CHF 5.6 million, net of
cash sold ($6.3 million equivalent). The sale is subject to working capital adjustments. The Forkardt Swiss business had net assets of $1.2 million as of the sale date. Income from
discontinued operations includes income before tax of $0.8 million (tax expense of
$0.2 million) and a gain from the sale of the discontinued operations of $4.9 million (with no tax expense).
Supplemental Pro Forma Information
The following table illustrates the unaudited pro forma effect on the Company's consolidated operating results as if the Forkardt
acquisition and related financing occurred on January 1, 2012.
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Sales
|
|
$
|
342,919
|
|
$
|
371,176
|
|
Net income from continuing operations
|
|
|
7,909
|
|
|
18,956
|
|
Diluted earnings per share from continuing operations
|
|
$
|
0.66
|
|
$
|
1.62
|
|
The
above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what our results of operations would have been had we
completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies
resulting from the acquisition.
59
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
2. Acquisitions (Continued)
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 acquisition of Usach is included in the Company's Metalcutting Machine
Solutions business segment. The purchase price was comprised of $11.3 million in cash and an earn-out provision valued at $7.5 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. As of December 31, 2013, the Company has finalized the purchase price allocation.
The
final 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
|
|
|
2,514
|
|
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
|
|
|
20,413
|
|
Liabilities Assumed
|
|
|
|
|
Accounts payable and other current liabilities
|
|
|
6,807
|
|
Other non-current liabilities
|
|
|
3,513
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
10,093
|
|
|
|
|
|
|
|
|
|
|
Purchase price, including cash received
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
8,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
3. Net Inventories
Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of the cost include materials, labor and overhead.
Net
inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
|
|
(in thousands)
|
|
Finished products
|
|
$
|
53,427
|
|
$
|
56,596
|
|
Work-in-process
|
|
|
28,591
|
|
|
32,708
|
|
Raw materials and purchased components
|
|
|
32,046
|
|
|
38,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
114,064
|
|
$
|
128,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Land, buildings and improvements
|
|
$
|
85,849
|
|
$
|
83,032
|
|
Machinery, equipment and fixtures
|
|
|
79,597
|
|
|
73,169
|
|
Office furniture, equipment and vehicles
|
|
|
18,116
|
|
|
18,058
|
|
Construction in progress
|
|
|
217
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,779
|
|
|
174,584
|
|
Accumulated depreciation
|
|
|
(109,123
|
)
|
|
(103,549
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
74,656
|
|
$
|
71,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
expense was $7.4 million, $6.0 million, and $6.1 million for 2013, 2012 and 2011, respectively.
5. Goodwill and Intangible Assets
The Company has two reportable business segments, Metalcutting Machine Solutions (MMS) and Aftermarket Tooling and Accessories (ATA).
61
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
5. Goodwill and Intangible Assets (Continued)
Detail
and activity of goodwill by segment is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
MMS
|
|
ATA
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2011
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Acquisition of Usach
|
|
|
8,497
|
|
|
|
|
|
8,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
|
8,497
|
|
|
|
|
|
8,497
|
|
Acquisition of Forkardt
|
|
|
|
|
|
5,678
|
|
|
5,678
|
|
Impairment loss
|
|
|
(3,809
|
)
|
|
|
|
|
(3,809
|
)
|
Disposal of Forkardt Switzerland
|
|
|
|
|
|
(662
|
)
|
|
(662
|
)
|
Other adjustments
|
|
|
160
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
4,848
|
|
$
|
5,016
|
|
$
|
9,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
gross carrying value of goodwill for the years ended December 31, 2013 and 2012 was $38.1 million and $32.3 million, respectively. Accumulated impairment losses
were $27.6 million and $23.8 million, respectively.
The
major components of intangible assets other than goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
December 31,
2012
|
|
|
|
(in thousands)
|
|
Gross amortizable intangible assets:
|
|
|
|
|
|
|
|
Land rights
|
|
$
|
2,865
|
|
$
|
2,784
|
|
Patents
|
|
|
3,030
|
|
|
3,006
|
|
Technical know-how, customer list, and other
|
|
|
21,375
|
|
|
12,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amortizable intangible assets
|
|
|
27,270
|
|
|
17,942
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
Land rights
|
|
|
(177
|
)
|
|
(116
|
)
|
Patents
|
|
|
(2,884
|
)
|
|
(2,807
|
)
|
Technical know-how, customer list, and other
|
|
|
(5,220
|
)
|
|
(3,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
(8,281
|
)
|
|
(6,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets, net
|
|
|
18,989
|
|
|
11,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite lived intangible assets:
|
|
|
|
|
|
|
|
Assets associated with Bridgeport acquisition
(1)
|
|
|
7,354
|
|
|
7,595
|
|
Usach trade name
(2)
|
|
|
1,550
|
|
|
2,840
|
|
Forkardt trade name
(3)
|
|
|
4,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,074
|
|
|
10,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets other than goodwill, net
|
|
$
|
32,063
|
|
$
|
21,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(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
62
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
5. Goodwill and Intangible Assets (Continued)
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.
-
(2)
-
Represents
the value of the trade name associated with Usach which the Company acquired in 2012. We use the Usach trade name on all of the
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.
-
(3)
-
Represents
the value of the trade name associated with Forkardt which the Company acquired in 2013. We use the Forkardt trade name on all of
the products manufactured by Forkardt. 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 $1.5 million for 2013 and $0.8 million for 2012 and 2011 respectively. The aggregated amortization
expense on existing intangible assets for each of the next five years is approximately $1.7 million, $1.7 million, $1.1 million, $1.1 million and $0.9 million,
respectively.
As
of December 31, the remaining weighted average amortization period of our amortizable intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
|
(in years)
|
|
Land rights
|
|
|
46.9
|
|
|
47.9
|
|
Patents
|
|
|
2.8
|
|
|
3.0
|
|
Technical know-how, customer list, and other
|
|
|
15.4
|
|
|
14.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average amortization period
|
|
|
19.7
|
|
|
23.1
|
|
As
part of the annual impairment test as of December 31, 2013, the fair values of the Company's reporting units for goodwill impairment testing were estimated using the expected
present value of future cash flows, recent industry transaction multiples and using estimates, judgments and assumptions
that management believed were appropriate in the circumstances. The estimates and judgments used in the assessment included multiples of EBITDA, the weighted average cost of capital and the terminal
growth rate. The Company performed a Step 1 analysis for each of the reporting units having a goodwill balance. For the Company's Usach reporting unit, which is part of the Company's MMS business
segment and had a goodwill balance of $8.7 million, it was determined that its carrying value exceeded its fair value. As a result a step 2 analysis was performed and an impairment charge of
$3.8 million was recognized in the impairment charge caption in the Consolidated Statement of Operations for the year ended December 31, 2013. The Company performed further analysis of
the reporting units' long-lived assets and determined that impairments of these assets were not present.
The
Company's ATA reporting unit has a goodwill balance of $5.0 million as of December 31, 2013. The Company performed a Step 1 analysis for the reporting unit and
determined its carrying value was less than its fair value.
The
Company also performed an annual impairment test of its indefinite lived intangible assets as of December 31, 2013. The fair value of the indefinite lived intangible assets
were calculated using a discounted cash flow analysis. As a result of this impairment test, it was determined that the fair value
63
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
5. Goodwill and Intangible Assets (Continued)
of
the Company's Usach trade name and Forkardt's trade name were less than their carrying values resulting in impairment charges of $1.3 million and $1.1 million, respectively, which
were recognized in the impairment charge caption in the Consolidated Statement of Operations for the year ended December 31, 2013.
See
Footnote 11 for a discussion of the fair value measures used in determining these impairment charges.
6. Financing Arrangements
We maintain financing arrangements with several financial institutions. These financing arrangements are in the form of long term loans, credit facilities, and lines of credit. The
credit facilities allow us to borrow up to $76.6 million at December 31, 2013, of which $58.0 million can be borrowed for working capital needs. As of December 31, 2013,
$70.0 million was available for borrowing under these arrangements of which $56.8 million was available for working capital needs. Total consolidated borrowings outstanding were
$26.6 million at December 31, 2013 and $20.0 million at December 31, 2012. Details of these financing arrangements are discussed below.
Long-term Debt
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Mortgage loans
|
|
$
|
4,191
|
|
$
|
5,119
|
|
Construction loan
|
|
|
1,486
|
|
|
3,370
|
|
Term loan
|
|
|
20,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
26,635
|
|
|
8,489
|
|
Current portion
|
|
|
(7,850
|
)
|
|
(2,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, less current portion
|
|
$
|
18,785
|
|
$
|
5,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
annual maturities of long-term debt for each of the five years after December 31, 2013, are as follows:
|
|
|
|
|
Year
|
|
Amounts
|
|
|
|
(in thousands)
|
|
2014
|
|
$
|
7,850
|
|
2015
|
|
|
4,222
|
|
2016
|
|
|
6,270
|
|
2017
|
|
|
3,281
|
|
2018
|
|
|
5,012
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
6. Financing Arrangements (Continued)
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") ($6.0 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, 1.75% at December 31, 2013 and December 31, 2012, is based on the bank's one
year fixed savings rate plus 0.4%. The principal amount outstanding was TWD 45.0 million ($1.5 million equivalent) at December 31, 2013 and TWD 63.0 million
($2.2 million equivalent) at December 31, 2012.
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 in January 2014, provides up to 25.0 million in Chinese Yuan ("CNY") ($4.1 million equivalent) for plant construction and fixed assets acquisition
purposes. The interest rate, 7.38% at December 31, 2013 and December 31, 2012, is the bank base rate plus a 20% mark-up and is subject to adjustment annually. The principal amount
outstanding was CNY 9.0 million ($1.5 million equivalent) at December 31, 2013 and CNY 21.0 million ($3.4 million equivalent) at December 31, 2012. The
remaining outstanding principal of CNY 9.0 million ($1.5 million equivalent) is due in January 2014.
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 the real property and improvements owned by the subsidiary. At December 31, 2013, the Company was in compliance with the
covenants under the loan agreement.
In
May 2013, the Company and Hardinge Holdings GmbH, a direct wholly-owned subsidiary, entered into a term loan agreement with a bank pursuant to which the bank provided a
five-year $23.0 million secured term loan facility for the acquisition of Forkardt. The agreement calls for scheduled annual principal repayments of $1.2 million, $1.7 million,
$2.1 million, $2.1 million, and $2.5 million in 2014, 2015,
2016, 2017, and 2018 respectively. In October 2013, we amended the terms of Term Loan. The amendment reduced mandatory principal payments associated with the sale of our common stock under the
Company's stock offering program as described in Footnote 14 from 75% of net proceeds to 25% of net proceeds. This amendment was retroactive for all sales of common stock under this stock offering
program. In 2013, the Company made principal payments of $1.5 million with stock offering proceeds. The interest rate on the term loan is determined from a pricing grid with the London
Interbank Offered Rate ("LIBOR") and base rate options based on the Company's leverage ratio and was 2.44% at December 31, 2013. LIBOR is the average interest rate estimated by leading banks in
London that they would be charged when borrowing from other banks. The principal amount outstanding at December 31, 2013 was $10.1 million.
In
November 2013, the Company and Hardinge Holdings GmbH entered into a replacement term note agreement with the same bank pursuant to which the bank converted
$10.8 million of the outstanding principal on the term loan to CHF 3.8 million ($4.1 million equivalent) and EUR 5.0 million ($6.7 million equivalent)
borrowings. The agreement calls for scheduled annual principal repayments in CHF and EUR. The scheduled annual principal repayments in CHF are as follows:
65
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
6. Financing Arrangements (Continued)
CHF 0.4 million
($0.4 million equivalent) in 2014, CHF 0.6 million ($0.6 million equivalent) in 2015, and CHF 0.6 million ($0.7 million
equivalent) in 2016. The scheduled annual principal repayments in EUR are as follows: EUR 0.5 million ($0.7 million equivalent) in 2014, EUR 0.7 million ($1.0 million
equivalent) in 2015, EUR 0.9 million ($1.2 million equivalent) in 2016 and 2017, and EUR 1.9 million ($2.6 million equivalent) in 2018. Additionally, the Company is
required to pay a portion of the proceeds of the sale of Forkardt Switzerland against the CHF portion of the loan. The Company made a CHF 2.2 million ($2.4 million equivalent)
principal payment in January, 2014, to fulfill this obligation. The interest rate on the CHF and EUR portion of the term loan is determined from a pricing grid with the Swiss franc LIBOR ("CHF LIBOR")
or the Euro Interbank Offered Rate ("EURIBOR") and base rate options based on the Company's leverage ratio and was 2.27% and 2.48% at December 31, 2013, respectively. The principal amounts
outstanding at December 31, 2013 were CHF 3.7 million ($4.2 million equivalent), and EUR 4.9 million ($6.7 million equivalent).
The
term loan is secured by (i) liens on all of the Company's U.S. assets (exclusive of real property); (ii) a pledge of 65% of the Company's investment in
Holdings GmbH; (iii) a negative pledge on the Company's headquarters in Elmira, New York; (iv) liens on all of the personal property assets of Usach, Forkardt Inc.
(Formerly Cherry Acquisition Corporation) and Hardinge Technology Systems Inc., a wholly-owned subsidiary and owner of the real property comprising the Company's world headquarters in Elmira,
New York ("Technology"); and (v) negative pledges on the intellectual property of the Revolving Credit Borrowers and Technology.
The
loan agreement contains financial covenants requiring a minimum fixed charge coverage ratio of not less than 1.15 to 1.00 (tested quarterly on a rolling four-quarter basis), a
maximum consolidated
total leverage ratio of 3.0 to 1.0 (tested quarterly on a rolling four-quarter basis), and maximum annual consolidated capital expenditures of $10.0 million. The loan agreement also contains
such other representations, affirmative and negative covenants, prepayment provisions and events of default that are customary for these types of transactions. At December 31, 2013, the Company
was in compliance with the covenants under the loan agreement.
In
July 2013, Hardinge Holdings GmbH, a direct wholly-owned subsidiary, and Kellenberger & Co. AG, an indirect wholly-owned subsidiary of the Company, entered into a
credit facility agreement with a bank whereby the bank made available a CHF 2.6 million ($2.9 million equivalent) mortgage loan facility. This facility is to be used by
Kellenberger and replaces an existing mortgage loan that Kellenberger maintained with the same bank. Interest on the facility accrues at a fixed rate of 2.50% per annum, compared to 2.65% fixed
interest rate on the previous mortgage loan. Principal payments of CHF 0.2 million ($0.2 million equivalent) are due in June and December in each year of the term, with the
remaining outstanding balance of principal and accrued interest due in full at the final maturity in December 2016. The principal amount outstanding was CHF 2.4 million
($2.7 million equivalent) at December 31, 2013. The principal amount outstanding on the previous mortgage loan was CHF 2.7 million ($3.0 million equivalent) at
December 31, 2012.
The
terms of the credit facility contains customary representations, affirmative, negative and financial covenants and events of default. The credit facility is secured by a mortgage on
the subsidiary's facility in Romanshorn, Switzerland. The facility is subject to a minimum equity covenant requirement whereby the equity of the subsidiary must be at least 35% of the subsidiary's
balance sheet
66
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
6. Financing Arrangements (Continued)
total
assets. At December 31, 2013, the Company was 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 in December
2014, provides up to CNY 34.2 million ($5.6 million equivalent) or its equivalent in other currencies for working capital and letter of credit purposes. Borrowings for working capital
purposes are limited to CNY 20.0 million ($3.3 million equivalent). Borrowings under the credit facility are secured by real property owned by the subsidiary. The interest rate on the
credit facility, currently at 6.60%, 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, 2013, there were no borrowings
outstanding under this facility.
In
July, 2013, 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 in June 2014, 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 1.54% and
is subject to change by the lender based on market conditions and carries no commitment fees on unused funds. This facility replaced the $12.0 million facility entered into in June 2012, which
expired on May 30, 2013. There was no principal amount outstanding under this facility at December 31, 2013. The principal amount outstanding at December 31, 2012 was
$9.0 million, which was included in the notes payable to bank on the Consolidated Balance Sheets.
In
July 2013, Hardinge Holdings GmbH, a direct wholly-owned subsidiary, and Kellenberger, an indirect wholly-owned subsidiary, entered into a credit facilities agreement with a
bank whereby the bank made available a CHF 18.0 million ($20.2 million equivalent) multi-currency revolving working capital facility. This facility matures in July 2018.
The
facility is to be used by Hardinge Holdings GmbH and its subsidiaries (the "Holdings Group") for general corporate and working capital purposes, including standby letters of
credit and standby letters of guarantee. In addition to Swiss Francs, loan proceeds available under the facility can be drawn upon in Euros, British Pounds Sterling and United States Dollars. Under
the terms of the facility, the maximum amount of borrowings available to the Holdings Group (on an aggregate basis) for working capital purposes shall not exceed CHF 8.0 million
($9.0 million equivalent) or its equivalent in Optional Currencies, as applicable. The interest rate on the borrowings drawn in the form of fixed term advances (excluding Euro-based fixed term
advances) is calculated based on the applicable LIBOR. With respect to fixed term advances in Euros, the interest rate on borrowings is calculated based on the applicable EURIBOR, plus an applicable
margin, (initially set at 2.25% per annum) that is determined by the bank based on the financial performance of the Holdings Group.
The
terms of the credit facilities contain customary representations, affirmative, negative and financial covenants and events of default. The credit facilities are secured by mortgage
notes in an aggregate amount of CHF 9.2 million ($10.2 million equivalent) on two buildings owned by Kellenberger. In addition to the mortgage notes provided by Kellenberger,
Holdings serves as a
67
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
6. Financing Arrangements (Continued)
guarantor
with respect to this facility. The facility is also subject to a minimum equity covenant requirement whereby the equity of both the Holdings Group and Kellenberger must be at least 35% of
the subsidiary's balance sheet total assets. At December 31, 2013, the Company was in compliance with the covenants under the loan agreement
This
facility replaces two separate credit facilities that Kellenberger previously maintained with the same Swiss bank. The first facility had provided 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 had provided 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. At December 31, 2012 there were no borrowings outstanding under these facilities.
Kellenberger
also maintains a credit agreement with another bank. This agreement, entered into in October 2009, provides a credit facility of up to CHF 7.0 million
($7.8 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($3.4 million equivalent) is
available for working capital purposes. The facility is secured by the subsidiary's certain real property up to CHF 3.0 million ($3.4 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 agreement
was again amended in May, 2013 and reverted to the terms in place prior to the August 2010 amendment. The interest rate, currently at LIBOR plus 2.50% 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. This facility is subject to annual renewal and carries no commitment fees on unused funds. At
December 31, 2013 and 2012, 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, 2013, the Company was in compliance with the required covenant.
In December 2009, the Company entered into a $10.0 million revolving credit facility with a bank. This facility was subject to
an annual renewal requirement. In December 2011, the Company modified the existing facility and increased the facility from $10.0 million to $25.0 million, reduced the interest rate from
the daily 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. In May, 2013 the Company, Usach, a direct wholly-owned subsidiary of the Company, and Forkardt, amended and restated the existing $25.0 million revolving credit agreement. The
amendment added Usach and Forkardt as additional borrowers and extended the maturity of the credit facility from March, 2014 to May, 2018. The interest rate on the term loan is determined from a
68
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
6. Financing Arrangements (Continued)
pricing
grid with LIBOR and base rate options, based on the Company's leverage ratio and was 2.44% at December 31, 2013.
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. There were no borrowings outstanding under this facility at December 31, 2013. The principal amount outstanding under
this facility was $2.5 million at December 31, 2012
The
Company has 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, 2013 or December 31, 2012.
The
Company maintains a standby letter of credit for potential liabilities pertaining to self-insured workers compensation exposure. The amount of the letter of credit was
$0.9 million at December 31, 2013 and $1.0 million at December 31, 2012. It expires in March, 2014. In total, we had various outstanding letters of credit totaling
$9.9 million and $15.6 million at December 31, 2013 and 2012, respectively.
Deferred
financing costs of $0.7 million were incurred in 2013. These costs, which were associated with our financing arrangements above, are recorded in other non-current assets
on the consolidated balance sheets and are being amortized over the term of the related debt using the straight line method which approximates the effective interest method. Deferred financing costs
incurred in 2012 were not material.
Interest
paid in 2013, 2012 and 2011 totaled $1.0 million, $0.9 million and $0.4 million, respectively.
7. Income Taxes
The Company's pre-tax income (loss) from continuing operations for domestic and foreign sources is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Domestic
|
|
$
|
(950
|
)
|
$
|
(4,142
|
)
|
$
|
(3,483
|
)
|
Foreign
|
|
|
6,882
|
|
|
23,483
|
|
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,932
|
|
$
|
19,341
|
|
$
|
16,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
7. Income Taxes (Continued)
Significant
components of income tax expense (benefit) attributable to continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
$
|
(2
|
)
|
$
|
|
|
$
|
|
|
Foreign
|
|
|
1,929
|
|
|
4,736
|
|
|
5,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,927
|
|
|
4,736
|
|
|
5,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal and state
|
|
|
(410
|
)
|
|
(2,720
|
)
|
|
|
|
Foreign
|
|
|
20
|
|
|
(530
|
)
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(390
|
)
|
|
(3,250
|
)
|
|
(713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,537
|
|
$
|
1,486
|
|
$
|
4,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Federal income taxes at statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Taxes on foreign income which differ from the U.S. statutory rate
|
|
|
(2.1
|
)
|
|
(18.1
|
)
|
|
(19.8
|
)
|
Effect of change in the enacted rate
|
|
|
3.1
|
|
|
(1.3
|
)
|
|
(0.5
|
)
|
Change in valuation allowance
|
|
|
(63.4
|
)
|
|
(46.0
|
)
|
|
10.6
|
|
U.S. taxation of international operations
|
|
|
12.0
|
|
|
37.3
|
|
|
|
|
Change in estimated liabilities
|
|
|
0.1
|
|
|
0.4
|
|
|
1.3
|
|
Non-Deductible Items
|
|
|
41.3
|
|
|
|
|
|
|
|
Other
|
|
|
(0.1
|
)
|
|
0.4
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.9
|
%
|
|
7.7
|
%
|
|
26.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
7. Income Taxes (Continued)
Significant
components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Federal, state, and foreign net operating losses
|
|
$
|
26,622
|
|
$
|
31,568
|
|
State tax credit carryforwards
|
|
|
6,933
|
|
|
6,915
|
|
Postretirement benefits
|
|
|
649
|
|
|
862
|
|
Deferred employee benefits
|
|
|
1,937
|
|
|
2,214
|
|
Accrued pension
|
|
|
7,411
|
|
|
15,097
|
|
Inventory valuation
|
|
|
3,037
|
|
|
2,281
|
|
Foreign tax credit carryforwards
|
|
|
4,502
|
|
|
2,677
|
|
Other
|
|
|
3,262
|
|
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,353
|
|
|
65,222
|
|
Less valuation allowance
|
|
|
(49,297
|
)
|
|
(57,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,056
|
|
|
7,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Tax over book depreciation
|
|
|
(4,499
|
)
|
|
(4,428
|
)
|
Inventory valuation
|
|
|
(2,291
|
)
|
|
(2,323
|
)
|
Intangible assets
|
|
|
(1,831
|
)
|
|
(3,069
|
)
|
Other
|
|
|
(1,059
|
)
|
|
(1,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(9,680
|
)
|
|
(11,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(4,624
|
)
|
$
|
(3,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
deferred tax assets of $2.1 million and $2.2 million for 2013 and 2012, respectively, are reported in other current assets on the Consolidated Balance Sheets.
Non-current deferred tax assets of $0.8 million and $0.6 million for 2013 and 2012, respectively, are reported in other non-current assets on the Consolidated Balance Sheets.
In
2013, the valuation allowance decreased by $8.4 million. The valuation allowance decreased by $9.5 million due to operational results and a decrease in minimum pension
liabilities in the U.S. and other items recorded in other comprehensive income (loss), and this decrease was offset by $1.1 million of valuation allowance established on deferred tax assets
arising from the acquisition of Forkardt.
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. 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).
At
December 31, 2013, we have U.S. federal and state net operating loss carryforwards of $44.1 million and $36.3 million, respectively, which expire from 2023
through 2031. If certain substantial
71
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
7. Income Taxes (Continued)
changes
in the Company's ownership occur, there would be an annual limitation on the amount of the carryforwards that can be utilized. The U.S. net operating loss includes approximately
$2.2 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. We have Foreign Tax
Credit Carryforwards of $4.5 million which expire between 2020 and 2023. 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 $40.3 million, of which $6.4 million will expire between 2018 through 2033, and of which $ 33.8 million have no expiration date.
At
the end of 2013, the undistributed earnings of our foreign subsidiaries, which amounted to approximately $121.3 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 and 2013.
A
reconciliation of the beginning and ending amount of uncertain tax positions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
2,514
|
|
$
|
2,333
|
|
$
|
2,127
|
|
Additions for acquired subsidiaries
|
|
|
267
|
|
|
|
|
|
|
|
Additions for tax positions related to the current year
|
|
|
|
|
|
|
|
|
592
|
|
Additions for tax positions of prior years
|
|
|
150
|
|
|
235
|
|
|
170
|
|
Reductions for tax positions of prior years
|
|
|
|
|
|
|
|
|
(83
|
)
|
Reductions for tax positions related to the current year
|
|
|
(57
|
)
|
|
|
|
|
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(131
|
)
|
|
(54
|
)
|
|
(23
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
2,743
|
|
$
|
2,514
|
|
$
|
2,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If
recognized, essentially all of the uncertain tax positions and related interest at December 31, 2013 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 a benefit to income tax expense between $0.4 million and
$1.1 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 not significant for 2013 and 2012. Accrued interest related to the uncertain tax positions was $0.8 million and $0.7 million at December 31, 2013 and 2012,
respectively. Accrued penalties related to
uncertain tax positions were $0.2 million and $0.2 million at December 31, 2013 and 2012, respectively. The accrued interest and penalties are reported in other liabilities on the
Consolidated Balance Sheets.
72
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
7. Income Taxes (Continued)
The tax years 2011, 2012, and 2013 remain open to examination by the U.S. federal taxing authorities. The tax years 2009 through 2013 remain open to examination by the U.S. state taxing
authorities. For our other major jurisdictions (Switzerland, U.K., Taiwan, Germany, Netherlands and China); the tax years between 2007 and 2013 generally remain open to routine examination by foreign
taxing authorities, depending on the jurisdiction.
Taxes
paid in 2013, 2012 and 2011 totaled $5.2 million, $4.1 million and $4.9 million, respectively.
8. Warranty
A reconciliation of the changes in our product warranty accrual is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
3,432
|
|
$
|
3,800
|
|
Warranty settlement costs
|
|
|
(2,639
|
)
|
|
(2,486
|
)
|
Warranties issued
|
|
|
3,323
|
|
|
3,140
|
|
Changes in accruals for pre-existing warranties
|
|
|
(671
|
)
|
|
(1,126
|
)
|
Currency translation impact
|
|
|
31
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
3,476
|
|
$
|
3,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Segment Information
The Company operates through segments for which separate financial information is available, and for which operating results are evaluated regularly by the Company's chief operating
decision maker in determining resource allocation and assessing performance. In 2013, the Company changed its reportable business segment from one reportable segment to two reportable segments,
Metalcutting Machine Solutions (MMS) and Aftermarket Tooling and Accessories (ATA). The Company has recast its segment information disclosure for all periods presented to conform to this segment
presentation.
The
Company has two reportable business segments, Metalcutting Machine Solutions and Aftermarket Tooling and Accessories which are described below:
Metalcutting Machine Solutions (MMS)
This segment includes operations related to grinding, turning, and milling, as discussed below, and related repair parts. The products
are considered to be capital goods with sales prices ranging from approximately sixty thousand dollars for some high volume products to around $1.5 million for some lower volume grinding
machines or other specialty built turnkey systems of multiple machines. Sales are subject to economic cycles and, because they are most often purchased to add manufacturing capacity, the cycles can be
severe with customers delaying purchases during down cycles and then aggressively requiring machine deliveries during up cycles. Machines are purchased to a lesser extent during down cycles as our
customers are looking for productivity improvements or they have new products that require new machining capabilities.
73
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
9. Segment Information (Continued)
We
engineer and sell high precision computer controlled metalcutting turning machines, vertical machining centers, horizontal machining centers, grinding machines, and repair parts
related to those machines.
-
-
Turning Machines
or lathes are power-driven machines used to remove
material from either bar stock or a rough-formed part by moving multiple cutting tools against the surface of a part rotating at very high speeds in a spindle mechanism. The multi-directional movement
of the cutting tools allows the part to be shaped to the desired dimensions. On parts produced by our machines, those dimensions are often measured in millionths of an inch. We consider Hardinge to be
a leader in the field of producing machines capable of consistently and cost-effectively producing parts to very close dimensions.
-
-
Machining centers
are designed to remove material from stationary,
prismatic or box-like parts of various shapes with rotating tools that are capable of milling, drilling, tapping, reaming and routing. Machining centers have mechanisms that automatically change tools
based on commands from a built-in computer control without the assistance of an operator. Machining centers are generally purchased by the same customers who purchase other Hardinge equipment. We
supply a broad line of machining centers under our Bridgeport brand name addressing a range of sizes, speeds, and powers.
-
-
Grinding machines
are used in a machining process in which a part's
surface is shaped to closer tolerances with a rotating abrasive wheel or tool. Grinding machines can be used to finish parts of various shapes and sizes. Our Kellenberger and Usach grinding machines
are used to grind the inside and outside diameters of cylindrical parts. Such grinding machines are typically used to provide a more exact finish on a part that has been partially completed on a
lathe. Our Hauser jig grinding machines are used to make demanding contour components, primarily for tool and mold-making applications. Our Jones & Shipman brand represents a line of high
quality grinders (surface, creepfeed, and cylindrical) machines used by a wide range of industries.
Aftermarket Tooling and Accessories (ATA)
This segment includes products that are purchased by manufacturers throughout the lives of their machines. The prices of units are
relatively low per piece with prices ranging from fifty dollars on high volume collets to twenty thousand dollars or more for specialty chucks, and they typically are considered to be a fairly
consumable, but durable, product. Our products are used on all types and brands of machine tools, not limited to our own. Sales levels are affected by manufacturing cycles, but not to the severity of
the capital goods lines. While customers may not purchase large dollar machines during a down cycle, their factories are operating with their existing equipment and accessories are still needed as
they wear out or they are needed for a change in production requirements.
The
two primary product groups are collets and chucks. Collets are cone-shaped metal sleeves used for holding circular or rod like pieces in a lathe or other machine that provide
effective part holding and accurate part location during machining operations. Chucks are a specialized clamping device used to hold an object with radial symmetry, especially a cylindrical object. It
is most commonly used to hold a rotating tool or a rotating work piece. Some of our specialty chucks can also hold
74
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
9. Segment Information (Continued)
irregularly
shaped objects that lack radial symmetry. While our products are known for accuracy and durability, they are consumable in nature.
We
measure segment income for internal reporting purposes by excluding corporate expenses, interest income, interest expense, and income taxes. Corporate expenses consist primarily of
executive employment costs, certain professional fees, and costs associated with our global headquarters. Financial results of our reportable segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MMS
|
|
ATA
|
|
Inter Segment
Eliminations
|
|
Total
|
|
|
|
(in thousands)
|
|
For the year ended December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
278,377
|
|
$
|
51,553
|
|
$
|
(471
|
)
|
$
|
329,459
|
|
Depreciation & Amortization
|
|
|
6,897
|
|
|
1,985
|
|
|
|
|
|
8,882
|
|
Segment income
|
|
|
14,850
|
|
|
5,689
|
|
|
|
|
|
20,539
|
|
Capital expenditures
|
|
|
2,376
|
|
|
1,491
|
|
|
|
|
|
3,867
|
|
Segment assets
(1)
|
|
|
249,999
|
|
|
53,209
|
|
|
|
|
|
303,208
|
|
For the year ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
306,328
|
|
$
|
28,989
|
|
$
|
(904
|
)
|
$
|
334,413
|
|
Depreciation & amortization
|
|
|
6,041
|
|
|
706
|
|
|
|
|
|
6,747
|
|
Segment income
|
|
|
20,808
|
|
|
5,128
|
|
|
|
|
|
25,936
|
|
Capital expenditures
|
|
|
15,732
|
|
|
636
|
|
|
|
|
|
16,368
|
|
Segment assets
(1)
|
|
|
275,894
|
|
|
18,315
|
|
|
|
|
|
294,209
|
|
For the year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
316,062
|
|
$
|
27,055
|
|
$
|
(1,544
|
)
|
$
|
341,573
|
|
Depreciation & amortization
|
|
|
6,088
|
|
|
750
|
|
|
|
|
|
6,838
|
|
Segment income
|
|
|
16,904
|
|
|
4,243
|
|
|
|
|
|
21,147
|
|
Capital expenditures
|
|
|
18,886
|
|
|
331
|
|
|
|
|
|
19,217
|
|
Segment assets
(1)
|
|
|
266,983
|
|
|
18,699
|
|
|
|
|
|
285,682
|
|
-
(1)
-
Segment
assets primarily consist of restricted cash, accounts receivable, inventories, prepaid and other assets, property, plant and
equipment, and intangible assets. Unallocated assets primarily include, cash and cash equivalents, corporate property, plant and equipment, deferred income taxes, and other non-current assets.
75
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
9. Segment Information (Continued)
A
reconciliation of segment income to consolidated income from operations before taxes follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Segment income
|
|
$
|
20,539
|
|
$
|
25,936
|
|
$
|
21,147
|
|
Unallocated corporate expense
|
|
|
(3,075
|
)
|
|
(5,419
|
)
|
|
(4,619
|
)
|
Acquisition related inventory step-up charge
|
|
|
(1,927
|
)
|
|
|
|
|
|
|
Acquisition related expenses
|
|
|
(2,154
|
)
|
|
(290
|
)
|
|
|
|
Impairment charges
|
|
|
(6,239
|
)
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(1,064
|
)
|
|
(741
|
)
|
|
(238
|
)
|
Other unallocated expense
|
|
|
(148
|
)
|
|
(145
|
)
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
5,932
|
|
$
|
19,341
|
|
$
|
16,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of segment assets to consolidated total assets follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(In Thousands)
|
|
Total segment assets
|
|
$
|
303,208
|
|
$
|
294,209
|
|
Unallocated assets
|
|
|
40,760
|
|
|
31,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
343,968
|
|
$
|
325,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
assets include cash of $34.7 million, $26.9 million and $21.7 million for December 31, 2013, 2012 and 2011, respectively.
76
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
9. Segment Information (Continued)
We have no single customer who accounted for more than 10% of our consolidated sales in 2013, 2012 or 2011. We sell our products throughout the world and we attribute sales to countries
based on the country where our products are shipped to. Information concerning our principal geographic areas is follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
Sales
|
|
Long-lived
Assets
(1)
|
|
Sales
|
|
Long-lived
Assets
(1)
|
|
Sales
|
|
Long-lived
Assets
(1)
|
|
|
|
(in thousands)
|
|
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
105,764
|
|
$
|
49,132
|
|
$
|
79,013
|
|
$
|
33,564
|
|
$
|
84,673
|
|
$
|
16,811
|
|
Other
|
|
|
3,693
|
|
|
|
|
|
4,533
|
|
|
|
|
|
5,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
|
109,457
|
|
|
49,132
|
|
|
83,546
|
|
|
33,564
|
|
|
90,000
|
|
|
16,811
|
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Switzerland
|
|
|
6,063
|
|
|
37,055
|
|
|
9,622
|
|
|
38,121
|
|
|
10,117
|
|
|
36,540
|
|
England
|
|
|
21,090
|
|
|
645
|
|
|
28,328
|
|
|
739
|
|
|
24,421
|
|
|
1,082
|
|
Germany
|
|
|
40,277
|
|
|
1,943
|
|
|
39,595
|
|
|
267
|
|
|
26,483
|
|
|
299
|
|
Other
|
|
|
32,696
|
|
|
143
|
|
|
43,463
|
|
|
10
|
|
|
43,804
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Europe
|
|
|
100,126
|
|
|
39,786
|
|
|
121,008
|
|
|
39,137
|
|
|
104,825
|
|
|
37,946
|
|
Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
96,532
|
|
|
12,468
|
|
|
102,550
|
|
|
12,405
|
|
|
111,684
|
|
|
10,705
|
|
Taiwan
|
|
|
4,541
|
|
|
15,197
|
|
|
5,474
|
|
|
16,010
|
|
|
11,454
|
|
|
15,507
|
|
Other
|
|
|
18,803
|
|
|
|
|
|
21,835
|
|
|
|
|
|
23,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia
|
|
|
119,876
|
|
|
27,665
|
|
|
129,859
|
|
|
28,415
|
|
|
146,748
|
|
|
26,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total
|
|
$
|
329,459
|
|
$
|
116,583
|
|
$
|
344,413
|
|
$
|
101,116
|
|
$
|
341,573
|
|
$
|
80,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Long-lived
assets consist of property, plant and equipment, goodwill and other intangible assets
10. 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 employer contributions. Additionally, one of our Swiss plans
requires employee 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 the completion of one year of service, we will
contribute 4% of an employee's pay and will further match 25% of the first 4% that the employee contributes. For employees participating in our domestic 401(k) plan, we made contributions of
$1.6 million and
77
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
10. Employee Benefits (Continued)
$1.4 million
in 2013 and 2012, 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 $1.8 million and $1.6 million of expense for the domestic defined contribution plan in 2013 and 2012, 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.
In
2013, as a result of significant lump sum payments made in two of our foreign plans, we recognized a $0.2 million settlement charge which is reflected in the net periodic
benefit cost. 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.
As
a result of our acquisition of the Forkardt operations from Illinois Tool Works in May 2013, we have assumed the benefit obligations of their defined benefit and postretirement
medical plans. These obligations included a Termination Indemnity Plan in France and a Postretirement Medical Plan in the US.
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. Increases in the cost of the retiree health
plan are paid by the participants. 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.
The
discount rate for determining benefit obligations in the postretirement benefits plans was 5.13% and 4.21% at December 31, 2013 and 2012, respectively. The change in the
discount rate decreased the accumulated postretirement benefit obligation as of December 31, 2013 by $0.2 million.
78
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
10. 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,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Change in benefit obligation
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$
|
223,780
|
|
$
|
201,168
|
|
$
|
2,312
|
|
$
|
2,429
|
|
Service cost
|
|
|
1,401
|
|
|
1,246
|
|
|
18
|
|
|
18
|
|
Interest cost
|
|
|
7,380
|
|
|
8,159
|
|
|
92
|
|
|
111
|
|
Plan participants' contributions
|
|
|
1,567
|
|
|
1,524
|
|
|
375
|
|
|
422
|
|
Actuarial loss (gain)
|
|
|
(12,208
|
)
|
|
18,917
|
|
|
(452
|
)
|
|
30
|
|
Foreign currency impact
|
|
|
2,463
|
|
|
2,931
|
|
|
|
|
|
|
|
Benefits and administrative expenses paid
|
|
|
(7,760
|
)
|
|
(6,949
|
)
|
|
(604
|
)
|
|
(698
|
)
|
Settlements
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
311
|
|
|
|
|
|
28
|
|
|
|
|
Plan amendment and other changes
|
|
|
|
|
|
(3,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
$
|
216,306
|
|
$
|
223,780
|
|
$
|
1,769
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
$
|
176,693
|
|
$
|
155,840
|
|
$
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
18,233
|
|
|
15,879
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
2,732
|
|
|
7,816
|
|
|
229
|
|
|
276
|
|
Plan participants' contributions
|
|
|
1,567
|
|
|
1,524
|
|
|
375
|
|
|
422
|
|
Foreign currency impact
|
|
|
2,592
|
|
|
2,583
|
|
|
|
|
|
|
|
Benefits and administrative expenses paid
|
|
|
(7,760
|
)
|
|
(6,949
|
)
|
|
(604
|
)
|
|
(698
|
)
|
Settlements
|
|
|
(628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
$
|
193,429
|
|
$
|
176,693
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plans
|
|
$
|
(22,877
|
)
|
$
|
(47,087
|
)
|
$
|
(1,769
|
)
|
$
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
$
|
4,023
|
|
$
|
1,451
|
|
$
|
|
|
$
|
|
|
Current liabilities
|
|
|
(232
|
)
|
|
(232
|
)
|
|
(131
|
)
|
|
(306
|
)
|
Non-current liabilities
|
|
|
(26,668
|
)
|
|
(48,306
|
)
|
|
(1,638
|
)
|
|
(2,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(22,877
|
)
|
$
|
(47,087
|
)
|
$
|
(1,769
|
)
|
$
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated Other Comprehensive Income (Loss) consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain
|
|
$
|
(50,580
|
)
|
$
|
(74,652
|
)
|
$
|
724
|
|
$
|
277
|
|
Transition asset
|
|
|
850
|
|
|
1,106
|
|
|
|
|
|
|
|
Prior service credit
|
|
|
3,232
|
|
|
3,552
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income
|
|
$
|
(46,498
|
)
|
$
|
(69,994
|
)
|
$
|
724
|
|
$
|
531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated contributions in excess of net periodic benefit cost
|
|
|
23,621
|
|
|
22,907
|
|
|
(2,493
|
)
|
|
(2,843
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deficit recognized in Consolidated Balance Sheets
|
|
$
|
(22,877
|
)
|
$
|
(47,087
|
)
|
$
|
(1,769
|
)
|
$
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
10. Employee Benefits (Continued)
The
projected benefit obligations for the foreign pension plans included in the amounts above were $106.7 million and $104.3 million at December 31, 2013 and 2012,
respectively. The plan assets for the foreign pension plans included above were $105.8 million and $94.8 million at December 31, 2013 and 2012, respectively.
The
accumulated benefit obligations for the foreign and domestic pension plans were $212.2 million and $218.6 million at December 31, 2013 and 2012, respectively.
The
following information is presented for pension plans where the projected benefit obligations exceeded the fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Projected benefit obligations
|
|
$
|
128,638
|
|
$
|
216,861
|
|
Fair value of plan assets
|
|
|
101,738
|
|
|
168,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of projected benefit obligations over plan assets
|
|
$
|
26,900
|
|
$
|
48,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following information is presented for pension plans where the accumulated benefit obligations exceeded the fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Accumulated benefit obligations
|
|
$
|
127,692
|
|
$
|
211,047
|
|
Fair value of plan assets
|
|
|
101,145
|
|
|
167,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of accumulated benefit obligations over plan assets
|
|
$
|
26,547
|
|
$
|
43,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
summary of the components of net periodic benefit cost for the 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,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Service cost
|
|
$
|
1,401
|
|
$
|
1,246
|
|
$
|
1,449
|
|
$
|
18
|
|
$
|
18
|
|
$
|
18
|
|
Interest cost
|
|
|
7,380
|
|
|
8,159
|
|
|
8,583
|
|
|
92
|
|
|
111
|
|
|
138
|
|
Expected return on plan assets
|
|
|
(9,464
|
)
|
|
(9,495
|
)
|
|
(10,089
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
|
(393
|
)
|
|
(54
|
)
|
|
(58
|
)
|
|
(254
|
)
|
|
(353
|
)
|
|
(353
|
)
|
Amortization of transition asset
|
|
|
(272
|
)
|
|
(269
|
)
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
Settlement loss
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of (gain) loss
|
|
|
3,223
|
|
|
2,417
|
|
|
1,794
|
|
|
(5
|
)
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,104
|
|
$
|
2,004
|
|
$
|
1,395
|
|
$
|
(149
|
)
|
$
|
(231
|
)
|
$
|
(197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
10. Employee Benefits (Continued)
A
summary of the changes in pension and postretirement benefits recognized in other comprehensive (income) loss is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
Year Ended
December 31,
|
|
Year Ended
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Net (gain) loss arising during period
|
|
$
|
(20,977
|
)
|
$
|
12,533
|
|
$
|
23,082
|
|
$
|
(452
|
)
|
$
|
30
|
|
$
|
(94
|
)
|
Amortization of transition asset
|
|
|
272
|
|
|
269
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
|
393
|
|
|
54
|
|
|
58
|
|
|
254
|
|
|
353
|
|
|
353
|
|
Other (gain) loss
|
|
|
|
|
|
(3,216
|
)
|
|
184
|
|
|
|
|
|
|
|
|
|
|
Amortization of (loss)
|
|
|
(3,452
|
)
|
|
(2,417
|
)
|
|
(1,794
|
)
|
|
5
|
|
|
7
|
|
|
|
|
Foreign currency exchange impact
|
|
|
268
|
|
|
713
|
|
|
(321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other Comprehensive (income) loss
|
|
$
|
(23,496
|
)
|
$
|
7,936
|
|
$
|
21,493
|
|
$
|
(193
|
)
|
|
390
|
|
|
259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recognized in net periodic benefit cost and other comprehensive (income) loss
|
|
$
|
(21,392
|
)
|
$
|
9,940
|
|
$
|
22,888
|
|
$
|
(342
|
)
|
$
|
159
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
net periodic benefit cost for the foreign pension plans included in the amounts above was $1.4 million, $1.9 million, and $1.8 million, for the years ended
December 31, 2013, 2012, and 2011, respectively.
We
expect to recognize $1.7 million of net loss, $0.3 million of net transition assets and $0.4 million of net prior service credit as components of net periodic
benefit cost in 2014 for our defined benefit pension plans. We expect to recognize $0.1 million of net gain as a component of net periodic benefit cost for our postretirement benefits plans in
2014.
Actuarial
assumptions used to determine pension costs and other postretirement benefit costs include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2013
|
|
2012
|
|
2011
|
|
Assumptions at January 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the domestic plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.31
|
%
|
|
5.11
|
%
|
|
5.93
|
%
|
|
4.21
|
%
|
|
4.92
|
%
|
|
5.50
|
%
|
Expected return on plan assets
|
|
|
7.75
|
%
|
|
7.75
|
%
|
|
8.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
For the foreign plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
2.34
|
%
|
|
3.01
|
%
|
|
3.09
|
%
|
|
|
|
|
|
|
|
|
|
Weighted average expected return on plan assets
|
|
|
3.91
|
%
|
|
4.07
|
%
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
Weighted average rate of compensation increase
|
|
|
2.51
|
%
|
|
2.51
|
%
|
|
2.51
|
%
|
|
|
|
|
|
|
|
|
|
81
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
10. Employee Benefits (Continued)
Actuarial
assumptions used to determine pension obligations and other postretirement benefit obligations include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Postretirement
Benefits
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Assumptions at December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the domestic plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.24
|
%
|
|
4.31
|
%
|
|
5.13
|
%
|
|
4.21
|
%
|
For the foreign pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
2.75
|
%
|
|
2.34
|
%
|
|
|
|
|
|
|
Weighted average rate of compensation increase
|
|
|
1.76
|
%
|
|
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 qualified 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 37% equity securities, 45% debt securities and 18% other.
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.
82
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
10. Employee Benefits (Continued)
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 qualified domestic plan is the largest of all our defined benefit pension plans. No contributions were made to this plan for the year ended December 31, 2013 and
$5.3 million was contributed for the year ended December 31, 2012.
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 for our domestic defined benefit pension plan, resulting in significantly lower pension contributions. As a result of MAP-21, minimal contributions are expected to be made to our
domestic defined benefit pension plan during the year ending December 31, 2014.
We
also provide defined benefit pension plans or defined contribution retirement plans for our foreign subsidiaries. Each of our foreign defined benefit pension plans requires employer
contributions. Additionally, one of our Switzerland plans requires employee contributions. The expected Company contributions to be paid during the year ending December 31, 2014 to the foreign
defined benefit pension plans are $2.6 million.
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)
|
|
2014
|
|
$
|
9,130
|
|
$
|
131
|
|
2015
|
|
|
9,797
|
|
|
125
|
|
2016
|
|
|
9,738
|
|
|
127
|
|
2017
|
|
|
10,413
|
|
|
130
|
|
2018
|
|
|
11,077
|
|
|
131
|
|
Years 2019 - 2023
|
|
|
61,125
|
|
|
646
|
|
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.
83
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
11. 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.
The
following table presents our financial instruments measured or disclosed at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
34,722
|
|
$
|
34,722
|
|
$
|
|
|
$
|
|
|
Restricted cash
|
|
|
4,124
|
|
|
4,124
|
|
|
|
|
|
|
|
Notes payable to bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate debt
|
|
|
(26,635
|
)
|
|
|
|
|
(26,635
|
)
|
|
|
|
Contingent purchase price payment
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
|
(7,500
|
)
|
Foreign currency forward contracts, net
|
|
|
(587
|
)
|
|
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
(7,280
|
)
|
|
|
|
|
|
|
|
(7,280
|
)
|
Foreign currency forward contracts, net
|
|
|
(205
|
)
|
|
|
|
|
(205
|
)
|
|
|
|
The
fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. 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 in 2013
represents the contingent liabilities associated with the earn-out provisions from the 2012 acquisition of Usach. The contingent purchase price payment in 2012 represents the contingent liabilities
associated with the earn-out provisions from the 2012 acquisition of Usach and 2010 acquisition of Jones & Shipman. 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
84
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
11. Fair Value of Financial Instruments (Continued)
ability
to enter into forward contracts, we consider the markets for our fair value instruments to be active. As of December 31, 2013 and December 31, 2012, there were no significant
transfers in and out of Level 1 and Level 2.
As
described in Footnote 2, the Company completed acquisitions in 2013 and 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
|
|
19.0% - 22.0%
|
Royalty rate
|
|
2.0% - 3.0%
|
Long term growth rate
|
|
3.0%
|
The
following table presents the fair value on our Consolidated Balance Sheets of the foreign currency forward contracts:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Foreign currency forwards designated as hedges:
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
144
|
|
$
|
191
|
|
Accrued expenses
|
|
|
(249
|
)
|
|
(213
|
)
|
Foreign currency forwards not designated as hedges:
|
|
|
|
|
|
|
|
Other current assets
|
|
|
141
|
|
|
284
|
|
Accrued expenses
|
|
|
(623
|
)
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards, net
|
|
$
|
(587
|
)
|
$
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company applied fair value principles during the goodwill impairment tests performed during 2013. Step one of the goodwill impairment test consisted of determining a fair value for
each of the Company's reporting units. The fair value for the Company's reporting units cannot be determined using readily available quoted Level 1 or Level 2 inputs that are observable
or available from active markets. Therefore, the Company used valuation models to estimate the fair values of its reporting units, which use Level 3 inputs. To estimate the fair values of
reporting units, the Company uses significant estimates and judgmental factors. The key estimates and factors used in the valuation models include revenue growth rates and profit margins based on
internal forecasts, terminal value, WACC, and earnings multiples. As a result of the goodwill impairment test performed during 2013, the Company recognized goodwill impairment charges (See Footnote 5
for the results of the Company's goodwill impairment tests).
During
2013, the Company also recognized impairments to intangible assets associated with trade names. The impairment charges were calculated by determining the fair value of these
assets. The fair value measurements were calculated using discounted cash flow analyses which rely upon unobservable inputs classified as Level 3 inputs. The key estimates and factors used in
the valuation models, for which the Company used significant estimates and judgmental factors, include revenue growth rates
85
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
11. Fair Value of Financial Instruments (Continued)
based
on internal forecasts, royalty rates and discounts rates (See Footnote 5 for more disclosure regarding the impairment of intangible assets).
Pension Plan Assets
The fair values and classification of our defined benefit plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
(in thousands)
|
|
Growth funds
(1)
|
|
$
|
49,408
|
|
$
|
49,408
|
|
$
|
|
|
$
|
|
|
Income funds
(2)
|
|
|
23,925
|
|
|
23,925
|
|
|
|
|
|
|
|
Growth and income funds
(3)
|
|
|
83,759
|
|
|
|
|
|
83,759
|
|
|
|
|
Hedge funds
(4)
|
|
|
25,624
|
|
|
|
|
|
|
|
|
25,624
|
|
Real estate funds
|
|
|
3,279
|
|
|
731
|
|
|
2,548
|
|
|
|
|
Other assets
|
|
|
1,040
|
|
|
594
|
|
|
446
|
|
|
|
|
Cash and cash equivalents
|
|
|
6,394
|
|
|
6,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
193,429
|
|
$
|
81,052
|
|
$
|
86,753
|
|
$
|
25,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Growth
funds represent a type of fund containing a diversified portfolio of domestic and international equities with a goal of capital
appreciation.
-
(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.
86
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
11. Fair Value of Financial Instruments (Continued)
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,
|
|
|
|
2013
|
|
2012
|
|
|
|
(in thousands)
|
|
Balance at beginning of period
|
|
$
|
22,615
|
|
$
|
22,523
|
|
Unrealized gain (loss)
|
|
|
3,067
|
|
|
930
|
|
Realized gain (loss)
|
|
|
13
|
|
|
448
|
|
Purchases
|
|
|
|
|
|
3,000
|
|
Sales/settlements
|
|
|
(71
|
)
|
|
(4,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
25,624
|
|
$
|
22,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
12. 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 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, 2013, we expect an immaterial amount of the
unrealized gain or
loss on these contracts to be reclassified from AOCI into earnings over the next 12 months. During 2013, we reclassified an immaterial amount from AOCI to the Consolidated Statements of
Operations to sales and cost of goods sold, respectively. During 2012, we reclassified $0.2 million and $0.7 million from AOCI to the Consolidated Statement of Operations as an increase
in sales and cost of goods sold, respectively. The amount reclassified from AOCI to sales and cost of goods sold for the year ended December 31, 2011, was 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.
87
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
12. Derivative Financial Instruments (Continued)
Notional
amounts of the derivative financial instruments not qualifying or designated as hedges were $45.5 million at December 31, 2013 and $60.5 million at
December 31, 2012. The net loss realized related to this type of derivative financial instruments was $1.8 million for the year ended December 31, 2013 and immaterial for the year
ended December 31, 2012. We realized losses of $1.9 million related to this type of derivative financial instruments in 2011. 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, 2013
|
|
December 31, 2012
|
|
|
|
Notional
Amount
|
|
Unrealized
Loss
|
|
Notional
Amount
|
|
Unrealized
Loss
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Foreign currency forward contracts
|
|
$
|
37,040
|
|
$
|
234
|
|
$
|
49,750
|
|
$
|
22
|
|
13. Commitments and Contingencies
The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary course of business. Management believes the outcome of these lawsuits will not have a
material effect on our financial position or results of operations.
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 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
88
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
13. Commitments and Contingencies (Continued)
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 as of December 31, 2013. 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 $3.2 million, $3.0 million and $2.5 million, during the years ended December 31, 2013, 2012, and 2011,
respectively.
89
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
13. Commitments and Contingencies (Continued)
At
December 31, 2013, future minimum payments under non-cancelable operating leases are as follows:
|
|
|
|
|
Year
|
|
Amounts
|
|
|
|
(in thousands)
|
|
2014
|
|
$
|
2,481
|
|
2015
|
|
|
1,493
|
|
2016
|
|
|
960
|
|
2017
|
|
|
550
|
|
2018
|
|
|
181
|
|
Thereafter
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company has entered into written employment contracts with its executive officers. The current 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.
14. Shareholders' Equity
Our common stock has a par value of $0.01 per share. At December 31, 2013 and 2012, there were 20,000,000 shares of common stock authorized.
On
August 9, 2013, the Company entered into a sales agreement (the "Agreement") with an independent sales agent ("Agent"), under which the Company may, from time to time, sell
shares of its common stock, par value $0.01 per share (the "Shares"), having an aggregate offering price of up to $25.0 million through the Agent. Under the Agreement, the Agent may sell the
Shares by methods deemed to be an "at-the-market" offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the NASDAQ Global
Select Market, on any other existing trading market for the common stock or to or through a market maker. In addition, with the prior consent of the Company, the Agent may sell the Shares by any other
method permitted by law, including in privately negotiated transactions.
The
Agreement will terminate upon the earlier of (i) sale of the Shares under the Agreement having an aggregate offering price of $25.0 million and (ii) the
termination of the Agreement as permitted therein. The Agreement may be terminated by the Agent or the Company at any time upon 10 days notice to the other party, or by the Agent at any time in
certain circumstances, including the occurrence of a material adverse change in the Company.
As
of December 31, 2013, we have sold 610,389 shares under this Agreement of which all shares were from shares of common stock held by the Company in treasury. The aggregated net
proceeds from the sales of Shares were $8.9 million.
90
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
14. Shareholders' Equity (Continued)
As
of December 31, 2013, the Company has 20,000,000 common shares of stock authorized and 12,472,992 shares issued. On December 31, 2013, 2012 and 2011, we had 12,397,867,
11,732,714 and 11,659,012 shares of common stock outstanding, respectively.
The
number of shares of common stock in treasury was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Balance at beginning of period
|
|
|
740,278
|
|
|
813,980
|
|
|
865,703
|
|
Shares issued under stock offering program
|
|
|
(610,389
|
)
|
|
|
|
|
|
|
Shares distributed/exercised
|
|
|
(79,530
|
)
|
|
(113,439
|
)
|
|
(72,171
|
)
|
Shares purchased
|
|
|
24,766
|
|
|
39,737
|
|
|
15,448
|
|
Shares forfeited
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
75,125
|
|
|
740,278
|
|
|
813,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Earnings Per Share
We calculate earnings per share using the two class method. The following table presents the basis of the earnings per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands except per share data)
|
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
4,395
|
|
$
|
17,855
|
|
$
|
11,986
|
|
Earnings from discontinued operation
|
|
|
642
|
|
|
|
|
|
|
|
Gain on disposal of discontinued operations
|
|
|
4,890
|
|
|
|
|
|
|
|
Earnings allocated to participating securities
|
|
|
(3
|
)
|
|
(125
|
)
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings applicable to common shareholders
|
|
$
|
9,924
|
|
$
|
17,730
|
|
$
|
11,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
11,801
|
|
|
|
|
|
|
|
Denominator for basic earnings per shareweighted average shares
|
|
|
|
|
|
11,557
|
|
|
11,463
|
|
Assumed exercise of stock options
|
|
|
28
|
|
|
24
|
|
|
25
|
|
Assumed satisfaction of restricted stock conditions
|
|
|
62
|
|
|
15
|
|
|
1
|
|
Assumed satisfaction of performance share conditions
|
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per shareadjusted weighted average shares
|
|
|
11,891
|
|
|
11,596
|
|
|
11,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of certain stock-based awards totaling 52,125, 145,262, and 161,299 were excluded from the calculation of diluted earnings per share for 2013, 2012 and 2011, respectively, as they were
anti-dilutive.
91
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
16. 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 or previously issued shares of Common Stock purchased by the Company for purposes of the Plan may be issued under the Plan.
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,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Restricted stock/unit awards ("RSA")
|
|
$
|
363
|
|
$
|
421
|
|
$
|
553
|
|
Performance share incentives ("PSI")
|
|
|
258
|
|
|
241
|
|
|
191
|
|
Stock options
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
621
|
|
$
|
662
|
|
$
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 2013, 2012 and
2011 was $0.6 million, $0.6 million and $0.5 million, respectively. The deferred compensation is being amortized on a straight-line basis over four years for all outstanding RSAs.
92
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
16. Stock Based Compensation (Continued)
All
outstanding RSAs are unvested. A summary of the RSA activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
RSAs outstanding at beginning of period
|
|
|
212,340
|
|
|
264,640
|
|
|
247,840
|
|
Awarded
|
|
|
45,375
|
|
|
70,500
|
|
|
63,800
|
|
Vested
|
|
|
(91,840
|
)
|
|
(111,300
|
)
|
|
(42,000
|
)
|
Cancelled or forfeited
|
|
|
|
|
|
(11,500
|
)
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSAs outstanding at end of period
|
|
|
165,875
|
|
|
212,340
|
|
|
264,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized deferred compensation cost (in millions)
|
|
$
|
1.2
|
|
$
|
0.9
|
|
$
|
0.9
|
|
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,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
PSIs outstanding at beginning of period
|
|
|
102,500
|
|
|
54,000
|
|
|
|
|
Awarded
|
|
|
3,375
|
|
|
52,500
|
|
|
54,000
|
|
Cancelled or forfeited
|
|
|
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PSIs outstanding at end of period
|
|
|
105,875
|
|
|
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 2013 and 2012 was
$0.1 million and $0.5 million, respectively. The deferred compensation is being recognized into earnings based on the passage of time and achievement of performance targets.
93
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
17. Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive income (loss) ("AOCI") by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
|
|
|
Foreign
currency
translation
adjustment
|
|
Retirement
plan related
adjustment
|
|
Unrealized
gain (loss) on
cash flow
hedges
|
|
Accumulated
other
comprehensive
loss
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2012, net of tax
|
|
$
|
36,830
|
|
$
|
(62,375
|
)
|
$
|
36
|
|
$
|
(25,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income before reclassifications
|
|
|
1,745
|
|
|
26,222
|
|
|
71
|
|
|
28,038
|
|
Less income reclassified from AOCI
|
|
|
|
|
|
2,533
|
|
|
(6
|
)
|
|
2,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income
|
|
|
1,745
|
|
|
23,689
|
|
|
77
|
|
|
25,511
|
|
Income tax (expense) benefit
|
|
|
(106
|
)
|
|
(1,527
|
)
|
|
18
|
|
|
(1,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013, net of tax
|
|
$
|
38,469
|
|
$
|
(40,213
|
)
|
$
|
131
|
|
$
|
(1,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details
about reclassification out of AOCI for the year ended December 31, 2013 are as follows:
|
|
|
|
|
|
|
|
Year Ended December 31, 2013
|
Details of AOCI components
|
|
Amount
reclassified
from AOCI
|
|
Affected line item on the
Consolidated Statement
of Operations
|
|
|
(in thousands)
|
Unrealized gain (loss) on cash flow hedges:
|
|
|
|
|
|
|
|
$
|
(20
|
)
|
Sales
|
|
|
|
14
|
|
Other expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Total before tax
|
|
|
|
1
|
|
Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5
|
)
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement plan related adjustment:
|
|
|
|
|
|
Amortization of prior service cost
|
|
$
|
(647
|
)
|
(a)
|
Amortization of transition asset
|
|
|
(272
|
)
|
(a)
|
Amortization of actuarial loss
|
|
|
3,452
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,533
|
|
Total before tax
|
|
|
|
(221
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,312
|
|
Net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
These
AOCI components are included in the computation of net period pension and post retirement costs. See Footnote 10Pension and
Post Retirement Plans for details.
94
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
18. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2013 and 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(in thousands, except per share data)
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
(1)
|
|
$
|
67,219
|
|
$
|
79,355
|
|
$
|
79,783
|
|
$
|
103,102
|
|
Gross profit
(1)
|
|
|
18,972
|
|
|
22,767
|
|
|
22,042
|
|
|
29,458
|
|
Income from continuing operations
(1)
|
|
|
452
|
|
|
2,691
|
|
|
2,541
|
|
|
1,312
|
|
Income from discontinued operations, net of tax
|
|
|
|
|
|
201
|
|
|
284
|
|
|
157
|
|
Gain on disposal of discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
4,890
|
|
Net income
|
|
|
40
|
|
|
2,265
|
|
|
1,479
|
|
|
6,143
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,660
|
|
|
11,663
|
|
|
11,721
|
|
|
12,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
|
|
$
|
0.17
|
|
$
|
0.10
|
|
$
|
0.09
|
|
Income from discontinued operations
|
|
|
|
|
|
0.02
|
|
|
0.03
|
|
|
0.01
|
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per share
(2)
|
|
$
|
|
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
11,743
|
|
|
11,754
|
|
|
11,813
|
|
|
12,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
|
|
$
|
0.17
|
|
$
|
0.10
|
|
$
|
0.09
|
|
Income from discontinued operations
|
|
|
|
|
|
0.02
|
|
|
0.03
|
|
|
0.01
|
|
Gain on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per share
(2)
|
|
$
|
|
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
18. Quarterly Financial Information (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
-
(1)
-
The
2013 second and third quarter sales, gross profit and income from continuing operations have been recast from their original reported
amounts to reflect the effects of discontinued operations.
-
(2)
-
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 December 2011, Financial Accounting Standards Board (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. We adopted this
pronouncement on January 1, 2013. 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 adopted this pronouncement on January 1, 2013. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial
condition other than additional disclosure provided in Footnote 17Changes in Accumulated Other Comprehensive Income (Loss).
20. Subsequent Events
Subsequent to December 31, 2013, we sold 166,247 shares of our common stock under the "at-the-market" stock offering program as described in Footnote 14 for aggregate net proceeds
of $2.3 million. As of March 12, 2014, 776,636 shares have been sold under this program for aggregate net proceeds of $11.3 million, of which 703,509 of the shares sold were
issued from treasury.
Under
the terms of our $23.0 million term loan, we are required to make mandatory principal payments associated with the sale of our common stock under our stock offering program
equal to 25%
96
Table of Contents
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2013
20. Subsequent Events (Continued)
of
the net proceeds. In 2014 as a result of sales of our common stock, we made additional principal payments of $1.3 million. Additionally, we are required to make mandatory principal payments
associated with any asset sales, subject to certain exceptions. As a result of the sale of our Forkardt Swiss business, in January 2014 we made an additional principal payment of
CHF 2.2 million ($2.4 million equivalent) on the term loan.
On
January 7, 2014, Hardinge Jiaxing amended its secured credit facility with a local bank. The amendment increased the total availability under facility from CNY
34.2 million (approximately $5.6 million) to CNY 59.0 million (approximately $9.7 million) or its equivalent in other currencies. The facility, which expires on
December 20, 2014, is available for working capital and letter of credit purposes. Borrowings for working capital purposes are limited to CNY 39.0 million (approximately
$6.4 million). The facility is secured by real property owned by the subsidiary. The interest rate on the credit facility, currently at 6.60% is based on the basic interest rate as published by
the People's Bank of China, plus a 10% mark-up.
97
Table of Contents