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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K


(Mark One)

 

 

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                                    to                                     

Commission File Number 0-15760



HARDINGE INC.
(Exact name of registrant as specified in its charter)

New York   16-0470200
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)

One Hardinge Drive, Elmira, New York

 

14902-1507
(Address of principal executive offices)   (Zip Code)

(607) 734-2281
(Registrant's telephone number, including area code)



Securities pursuant to section 12(b) of the Act: None

Securities pursuant to section 12(g) of the Act:

Common Stock, $0.01 par value per share
Preferred stock purchase rights
  NASDAQ Global Select Market
(Name of exchange on which registered)

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d). Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ý

         Indicate by check mark whether the registrant: (1) is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o   Accelerated filer o   Non-accelerated filer ý
(Do not check if a smaller reporting company)
  Smaller reporting company o

         Indicate by check mark whether registrant is a shell company (as defined by Exchange Act Rule 12b-2). Yes o    No ý

         The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2009 was $47.6 million, based on the closing price of common stock on the NASDAQ Global Select Market on June 30, 2009.

         There were 11,610,789 shares of Hardinge stock outstanding as of February 28, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of Hardinge Inc.'s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the Commission on or about March 31, 2010 are incorporated by reference to Part III of this Form 10-K.

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PART I

ITEM 1.—BUSINESS

General

        Hardinge Inc.'s principal executive office is located within Chemung County at One Hardinge Drive, Elmira, New York 14902-1507.

        Our website, www.hardinge.com, provides links to all of the Company's filings with the Securities and Exchange Commission. A copy of the 10-K is available on the website or can be obtained free of charge by contacting the Investor Relations Department at our principal executive office. Alternatively, such reports may be accessed at the Internet address of the SEC, which is www.sec.gov, or at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information about the operation of the SEC's Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

        We are a global designer, manufacturer and distributor of machine tools, specializing in precision computer numerically controlled metal-cutting machines. The Company has the following direct and indirect wholly owned subsidiaries:

Canadian Hardinge Machine Tools, Ltd
Hardinge Technology Systems, Inc.
Hardinge Holdings GmbH
Hardinge Holdings B.V.
Hardinge GmbH
Hardinge Machine Tools, Ltd.
Hardinge Machine Tools B.V.
L. Kellenberger & Co. AG
Hardinge China, Limited
Hardinge Machine (Shanghai) Co., Ltd.
Hardinge Taiwan Precision Machinery Limited
Hardinge Machine Tools B.V., Taiwan Branch ("Hardinge Taiwan")
  Toronto, Ontario, Canada
Elmira, New York
St. Gallen, Switzerland
Amsterdam, Netherlands
Krefeld, Germany
Leicester, England
Raamsdonksveer, Netherlands
St. Gallen, Switzerland
Hong Kong, People's Republic of China
Shanghai, People's Republic of China
Nan Tou City, Taiwan, Republic of China
Nan Tou City, Taiwan, Republic of China

        We have manufacturing facilities located in Chemung County, New York; St. Gallen, Switzerland; Biel, Switzerland; Nan Tou City, Taiwan; and Shanghai, People's Republic of China. We manufacture the majority of the products we sell.

        Unless otherwise mentioned or unless the context requires otherwise, all references to "Hardinge," "we," "us," "our," "the Company" or similar references mean Hardinge Inc. and its predecessors together with its subsidiaries.

Products

        We supply high precision computer controlled metal-cutting turning machines, grinding machines, vertical machining centers, and accessories related to those machines. We believe our products are known for accuracy, reliability, durability and value.

        We have been a manufacturer of industrial-use high precision and general precision turning machine tools since 1890. 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

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leader in the field of producing machines capable of consistently and cost-effectively producing parts to very close dimensions.

        Grinding is 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. The grinding machines of our Kellenberger subsidiary 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. The grinding machines of Kellenberger, which are manufactured in both computer and manually controlled models, are generally purchased by the same type of customers as other Hardinge equipment and further our ability to be a primary source for our customers.

        Our Kellenberger precision grinding technology is complemented by the Hauser and Tschudin grinding brands. Hauser machines are jig grinders used to make demanding contour components, primarily for tool and mold-making applications. Tschudin product technology is focused on the specialized grinding of cylindrical parts when the customer requires high volume production. Our Tschudin machines are generally equipped with automatic loading and unloading mechanisms for the part being machined. These loading and unloading mechanisms significantly reduce the level of involvement a machine operator has to perform in the production process.

        Machining centers cut material differently than a turning machine. These machines 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 addressing a range of sizes, speeds and powers.

        Our machines are generally computer controlled and use commands from an integrated computer to control the movement of cutting tools, grinding wheels, part positioning, and in the case of turning and grinding machines, the rotation speeds of the part being shaped. The computer control enables the operator to program operations such as part rotation, tooling selection and tooling movement for a specific part and then store that program in memory for future use. The machines are able to produce parts while left unattended when connected to automatic bar-feeding, robotics equipment, or other material handling devices designed to supply raw materials and remove machined parts from the machine.

        New products are critical to our growth plans. We gain access to new products through internal product development, acquisitions, joint ventures, license agreements and partnerships. Products are introduced each year to both broaden our product offering and to take advantage of new technologies available to us. These technologies generally allow our machines to run at higher speeds and with more power, thus increasing their efficiency. Customers routinely replace old machines with newer machines that can produce parts faster and with less time to set up the machine when converting from one type of part to another. Generally, our machines can be used to produce parts from all of the standard ferrous and non-ferrous metals, as well as plastics, composites and exotic materials.

        During 2008, we discontinued product lines which targeted the less demanding manufacturing applications. Products in this category, which were referred to as baseline machines, were typically sold on price and delivery, with minimal technical differentiation from a multitude of producers around the world, and were used in less demanding applications. This strategic change allowed us to focus our efforts on products and solutions for companies making parts from hard to machine materials with hard to sustain close tolerances and hard to achieve surface finishes and which also may be hard to hold in the machine. We believe that with our high precision and super precision lathes, our grinding machines, and our rugged machining centers, combined with our accessory products and our technical expertise,

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we are uniquely qualified to be the supplier of choice for customers manufacturing to demanding specifications.

        On many of our machines, multiple options are available which allow customers to customize their machines to their specific operating performance and cost objectives. We produce machines for stock with popular option combinations for immediate delivery, as well as design and produce machines to specific customer requirements. In addition to our machines, we provide the necessary tooling, accessories and support services to assist customers in maximizing their return on investment.

        The sale of repair parts is important to our business. Certain parts on machines wear over time or break through misuse. Customers will buy parts from us throughout the life of the machine, which is generally measured in multiple years. There are thousands of machines in operation in the world for which we provide those repair parts and in many cases the parts are available exclusively from us.

        In addition, we offer an extensive line of accessories including workholding, toolholding and other industrial support products, which may be used on both our machines and those produced by others. We consider our Company to be a worldwide leader in the design and manufacture of workholding devices for turning equipment. In addition to our traditional products, we are expanding our range of industrial products that are utilized on milling machines. With our growth in milling over the last few years, milling accessories and industrial products fit well in our product offering.

        A key component in milling accessory growth is our family of rotary indexing systems and high-speed direct-drive rotary table indexers, which are available in single, dual, triple and quad spindle configurations. These indexing systems and indexers are ideal for difficult, high-precision machining or jig grinding applications that require 4 or 5-axis interpolated machining, or for parts that require extremely accurate angular positioning. These products are workhorses for high speed and high accuracy contouring applications. Many of these products can be used as a standalone unit with Hardinge controls, or integrated as a true 4th axis.

        We offer various warranties on our equipment and consider post-sale support to be a critical element of our business. Warranties on machines typically extend for twelve months after purchase. Services provided include operation and maintenance training, in-field maintenance, and in-field repair. We offer these post sales support services on a paid basis throughout the life of the machine. In territories covered by distributors, this support and service is offered through the distributor.

Sales, Markets and Distribution

        We sell our products in most of the industrialized countries of the world through a combination of distributors, agents and manufacturers' representatives. In certain areas of the United States, China, Germany, and the United Kingdom, we have also used a direct sales force. Generally, our distributors have an exclusive right to sell our products in a defined geographic area. Our distributors operate as independent businesses and purchase products from us at discounted prices for their customers, while agents and representatives sell products on our behalf and receive commissions on sales. Our discount schedule is adjusted to reflect the level of pre and post sales support offered by our distributors. Our direct sales personnel earn a fixed salary plus commission. Sales through distributors are made only on standard commercial open account terms or through letters of credit. Distributors generally take title to products upon shipment from our facilities and do not have any special return privileges.

        In February 2010, our United States sales channels were restructured from a joint distributor network and direct sales force to a new group of distributors. These new distributors have exclusive sales, service, and support responsibilities for Hardinge machines and repair parts in virtually all of the United States, with the exception of kneemills and workholding accessories, where they will operate on a non-exclusive basis. Additionally, this new distributor network will act as agents for our grinding products working with our direct technical team.

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        Our non-machine products are sold in the United States mainly through direct telephone orders to a toll-free telephone number and via our web site. In most cases, we are able to package and ship in-stock tooling and repair parts within 24 hours of receiving orders. We can package and ship items with heavy demand within a few hours. In other parts of the world, these products are sold on either a direct sales basis or through distributor arrangements.

        We promote recognition of our products in the marketplace through advertising in trade publications, web presences, email newsletters, and participation in industry trade shows. In addition, we market our non-machine products through publication of general catalogues and other targeted catalogues, which we distribute to existing and prospective customers. We have a substantial presence on the internet at www.hardinge.com where customers can obtain information about our products and place orders for workholding, rotary, and kneemill products.

        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 us include aerospace, automotive, computer, communications, consumer-electronics, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment and transportation.

        One customer in the automotive industry accounted for 6.8% of our consolidated sales in 2009. No single customer accounted for more than 5% of consolidated sales in 2008. While valuing our relationship with each customer, we do not believe that the loss of any single customer, or any few customers, would have an adverse material effect on our business.

        Hardinge Inc. operates in a single business segment, industrial machine tools.

Competitive Conditions

        In our industry, the barriers to entry for competition vary based on the level of product performance required. For the products with the highest performance in terms of accuracy and productivity, the barriers are generally technical in nature. For basic products, often the barriers are not technical; they are tied to effective sales, distribution and support required by customers. Another significant barrier in the global machine tool industry is the high level of working capital that is required to operate the business.

        We compete in the various segments of the machine tool market within the products of turning, milling, grinding and workholding. We compete with numerous vendors in each market segment we serve. The primary competitive factors in the marketplace for our machine tools are reliability, price, delivery time, service and technological characteristics. Our management considers our segment of the industry to be extremely competitive. There are many manufacturers of machine tools in the world. They can be categorized by the size of material their products can machine and the precision level they can achieve. For our high precision, multi-tasking turning and milling equipment, competition comes primarily from companies such as Mori-Seiki, Mazak, Nakamura Tome, and Okuma, which are based in Japan, and DMG, which is based in Germany. Competition in our more standard turning and milling equipment comes to some degree from those companies as well as Hyundai-Kia and Doosan, which are based in South Korea, and Haas which is based in the U.S., as well as several smaller Taiwanese and Korean companies. Our cylindrical grinding machines compete primarily with Studer, a Swiss Company, Voumard, also based in Switzerland, and Toyoda and Shigiya, which are based in Japan. Our Hauser jig grinding machines compete primarily with Moore, which is based in the U.S., and some Japanese suppliers. Our accessories products compete with many smaller companies.

        The overall number of our competitors providing product solutions serving our market segments may increase. Also, the composition of competitors may change as we broaden our product offerings and the geographic markets we serve. As we expand into new market segments, we will face

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competition not only from our existing competitors but from other competitors as well, including existing companies with strong technological, marketing and sales positions in those markets. In addition, several of our competitors may have greater resources, including financial, technical and engineering resources, than we do.

Sources and Availability of Components

        We produce certain of our lathes, knee-mills, and related products at our Elmira, New York plant. The Kellenberger grinding machines and related products are manufactured at our St. Gallen, Switzerland plant and Hauser and Tschudin products are produced at our Biel, Switzerland facility. We produce machining centers and lathes at both Hardinge Taiwan in Nan Tou, Taiwan and Hardinge Machine (Shanghai) Co., Ltd. in Shanghai, China. We manufacture products from various raw materials, including cast iron, sheet metal, and bar steel. We purchase a number of components, sub-assemblies and assemblies from outside suppliers, including the computer and electronic components for our computer controlled lathes, grinding machines, and machining centers. There are multiple suppliers for virtually all of our raw material, components, sub-assemblies and assemblies and historically, we have not experienced a serious supply interruption.

        During the second half of 2009, we announced strategic changes within our Elmira, NY manufacturing facility. Historically, this facility was vertically integrated with machining operations converting parts from raw castings to finished goods, the costs of which have proven to be prohibitive at current volumes. As a result, we implemented initiatives to move towards a more variable cost business model, outsourcing many of the non-critical components and subassemblies for machines currently made in the Elmira facility.

        A major component of our computer controlled machines is the computer and related electronics package. We purchase these components for our lathes and machining centers primarily from Fanuc Limited, a large Japanese electronics company and Heidenhain, a German control supplier. We utilize controls from Siemens, another German control manufacturer, on certain machine models in our line of machining centers. We also offer Heidenhain and Fanuc controls on our grinding machines. While we believe that design changes could be made to our machines to allow sourcing from several other existing suppliers, and we occasionally do so for special orders, a disruption in the supply of the computer controls from one of our suppliers could cause us to experience a substantial disruption of our operations, depending on the circumstances at the time. We purchase parts from these suppliers under normal trade terms. There are no agreements with these suppliers to purchase minimum volumes per year.

Research and Development

        Our ongoing research and development program involves creating new products, modifying existing products to meet market demands, and redesigning existing products, both to add new functionality and to reduce the cost of manufacturing. The research and development departments throughout the world are staffed with experienced design engineers with varying levels of education, from technical through doctoral degrees.

        The worldwide cost of research and development, all of which has been charged to cost of goods sold, amounted to $9.3 million, $9.8 million and $10.6 million, in 2009, 2008, and 2007, respectively.

Patents

        Although Hardinge Inc. holds several patents with respect to certain of its products, we do not believe that our business is dependent to any material extent upon any single patent or group of patents.

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Seasonal Trends and Working Capital Requirements

        Hardinge's business, and that of the machine tool industry in general, is cyclical. It is not subject to significant seasonal trends. However, our quarterly results are subject to fluctuation based on the timing of our shipments of machine tools, which are largely dependent upon customer delivery requirements. Traditionally, we have experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at our U.S. and European customers' plants and our policy of closing our U.S. and Switzerland facilities for two weeks during the third quarter. While not reflective of 2009 and 2008, due to the economic crisis (discussed further in Item 1A—Risk Factors), our third-quarter net sales, income from operations and net income typically have been the lowest of any quarter during the year.

        The ability to deliver products within a short period of time is an important competitive criterion. We must have inventory on hand to meet customers' delivery expectations, which for standard machines are typically from immediate to eight weeks delivery. Meeting this requirement is especially difficult with products made in Taiwan, where delivery is extended due to ocean travel times, depending on the location of the customer. This creates a need to have inventory of finished machines available in our major markets to serve our customers in a timely manner.

        We deliver many of our machine products within one to two months after the order. Some orders, especially multiple machine orders, are delivered on a turnkey basis with the machine or group of machines configured to make certain parts for the customer. This type of order often includes the addition of material handling equipment, tooling and specific programming. In those cases the customer usually observes and inspects the parts being made on the machine at our facility before it is shipped and the timing of the sale is dependent upon the customer's schedule and acceptance. Therefore, sales from quarter-to-quarter can vary depending upon the timing of those customers' acceptances and the significance of those orders.

        We feel it is important, where practical, to provide readily available workholding and replacement parts for the machines we sell and we carry inventory at levels sufficient to meet these customer requirements.

Governmental Regulations

        We believe that our current operations and our current uses of property, plant and equipment conform in all material respects to applicable laws and regulations.

Governmental Contracts

        No material portion of our business is subject to government contracts.

Environmental Matters

        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 liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Activities at properties we own or previously owned and on adjacent areas have resulted in environmental impacts.

        In particular, our Elmira, New York manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency ("EPA") because of groundwater contamination. The Kentucky Avenue Wellfield Site (the "Site") encompasses an area which includes sections of the Town of

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Horseheads and the Village of Elmira Heights in Chemung County, New York. 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.

        A substantial portion of the Pond is located on our property. Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the PRPs") have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study ("RI/FS") by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the U.S. Environmental Protection Agency, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis. The cost of the RI/FS was estimated to be approximately $0.84 million. We estimate our portion of the study to be $0.12 million for which we have established a reserve of $0.13 million. As of December 31, 2009 we have incurred total expenses of $0.10 million with respect to the study and other activities relating to the Site. In February 2010, we incurred an additional $0.02 million; thus our remaining reserve balance is $0.01 million.

        The PRPs developed a Draft RI/FS with their consultants and, following EPA comments, submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan. The PRPs commenced field work in the spring of 2008 and submitted a Draft Site Characterization Report to EPA in the fall. The PRPs currently are performing Risk Assessments in accordance with the Remedial Investigation portion of the RI/FS.

        Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the site. Environmental sampling on our property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond and found no evidence that our operations or property have or are contributing to the contamination. Other than as described above, we have not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate. We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

        Although we believe, based upon information currently available, that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to Hardinge.

Employees

        As of December 31, 2009 Hardinge Inc. employed 1,138 persons, 385 of whom were located in the United States. None of our U.S. employees are covered by collective bargaining agreements. Management believes that relations with its employees are good.

Foreign Operations and Export Sales

        Information related to foreign and domestic operations and sales is included in Note 7 to the Consolidated Financial Statements contained in this Annual Report. Our strategy has been to diversify our sales and operations geographically so that the impact of economic trends in different regions can be balanced.

        The risks associated with conducting business on an international basis are discussed further in Item 1A-Risk Factors.

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Item 1A.—RISK FACTORS

        The various risks related to the Company's business include the risks described below. The business, financial condition or results of operations of Hardinge Inc. could be materially adversely affected by any of these risks. The risks and uncertainties described below or elsewhere in the Form 10-K are not the only ones to which we are exposed. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations. If any of the matters included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.

Our customers' activity levels and spending for our products and services have been impacted by the current global economic conditions, especially deterioration in the credit markets.

        Many of our customers finance their purchases of our products through cash flow from operations, the incurrence of debt or from the proceeds received in connection with an issuance of equity. Commencing in the fourth quarter of 2008, the global financial markets have experienced significant losses due to failures of many dominant financial institutions. During late 2008 and early 2009, the governments of the United States and several foreign countries instituted bailout plans to assist many banks and others impacted by the economic crisis. This crisis has resulted in, among other things, a significant decline in the credit markets and the availability of credit, the impact of which is still being experienced today. Additionally, many of our customers' equity values have substantially declined. The combination of a reduction in borrowing bases under asset based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in our customers' spending for our products and may impact the ability of our customers to pay amounts owed to us. In addition, this crisis and economic uncertainty has resulted in an overall decrease in consumer and business spending, which negatively impacted the need our customers have for our products. Slow or negative growth in the global economy may materially and adversely affect our business, financial condition and results of operations for the foreseeable future.

Changes in general economic conditions and the cyclical nature of our business could harm our operating results.

        Our business is cyclical in nature, following the strength and weakness of the manufacturing economies in the geographic markets we serve. As a result of this cyclicality, we have experienced, and in the future, we can be expected to experience, significant fluctuations in sales and operating income, which may affect our business, operating results, financial condition and the market price of our common shares.

        The following factors, among others, significantly influence demand for our products:

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Our competitive position and prospects for growth may be diminished if we are unable to develop and introduce new and enhanced products on a timely basis that are accepted in the market.

        The machine tool industry is subject to technological change, rapidly evolving industry standards, changing customer requirements and improvements in and expansion of product offerings, especially with respect to computer-controlled products. Our ability to anticipate changes in technology, industry standards, customer requirements and product offerings by competitors, and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, will be significant factors in our ability to compete and grow. Moreover, if technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would be materially adversely affected. Developments by others may render our products or technologies obsolete or noncompetitive. Failure to effectively introduce new products or product enhancements on a timely basis could materially adversely affect our business, operating results and financial condition.

We rely on a single supplier or a limited number of suppliers to obtain certain components, sub-assemblies, assemblies and products. The loss of any of these suppliers may cause us to incur additional costs, result in delays in manufacturing and delivering our products or cause us to carry excess or obsolete inventory.

        Some components, sub-assemblies or assemblies we use in the manufacturing of our products are purchased from a single supplier or a limited number of suppliers. For example, a large Japanese company and two European companies supply the computer and related electronics package used in our CNC machines. In addition, some of the products we sell are purchased by us from a single supplier. Our purchases from these suppliers are generally not made pursuant to long-term contracts and are subject to additional risks associated with purchasing products internationally, including risks associated with potential import restrictions and exchange rate fluctuations, as well as changes in tax laws, tariffs and freight rates. Although we believe that our relationships with these suppliers are good, there can be no assurance that we will be able to obtain these products from these suppliers on satisfactory terms indefinitely. The present economic environment could also pose the risk of one of these key suppliers going out of business, or cause delays in delivery times when business conditions begin to rebound from the current historical low volumes.

        We believe that design changes could be made to our machines to allow sourcing of components, sub-assemblies, assemblies or products from several other suppliers; however, a disruption in the supply from any of our suppliers could cause us to experience a material adverse effect on our operations.

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

        We manufacture a substantial portion of our products overseas and sell our products throughout the world. In 2009, approximately 70% of our products were sold in countries outside of North America. In addition, a majority of our employees are located outside of the United States. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition, results of operations and cash flows. These factors include:

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        Moreover, international conflicts are creating many economic and political uncertainties that are affecting the global economy. Escalation of existing international conflicts or the occurrence of new international conflicts could severely affect our operations and demand for our products.

We may face trade barriers that could have a material adverse effect on our results of operations and result in a loss of customers or suppliers.

        Trade barriers established by the United States or other countries may interfere with our ability to offer our products in those markets. We manufacture a substantial portion of our products overseas and sell our products throughout the world. We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation or exportation of our products or supplies, any of which could have a material adverse effect on our results of operations and financial condition. Competition and trade barriers in those countries could require us to reduce prices, increase spending on marketing or product development, withdraw or not enter certain markets or otherwise take actions adverse to us.

        In addition, our subsidiaries may require future equity-related financing, and any capital contributions to certain of our subsidiaries may require the approval of the relevant authorities in the jurisdiction in which the subsidiary is incorporated. Those approvals may be required from the investment commissions or similar agencies of the particular jurisdiction and relate to any initial or additional equity investment by foreign entities in local corporations.

        In all jurisdictions in which we operate, we are also subject to the laws and regulations that govern foreign investment and foreign trade, which may limit our ability to repatriate cash as dividends or otherwise.

Our business is highly competitive, and increased competition could reduce our sales, earnings and profitability.

        The markets in which our machines and other products are sold are extremely competitive and highly fragmented. In marketing our products, we compete primarily with other businesses on quality, reliability, price, value, delivery time, service and technological characteristics. We compete with a

A-11



number of U.S., European and Asian competitors, many of which are larger, have greater financial and other resources and are supported by governmental or financial institution subsidies. Increased competition could force us to lower our prices or to offer additional product features or services at a higher cost to us, which could reduce our earnings.

        The greater financial resources or the lower amount of debt of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product innovations that could put us at a disadvantage. If we are unable to compete successfully against other manufacturers in our marketplace, we could lose customers, and our sales may decline. There can also be no assurance that customers will continue to regard our products favorably, that we will be able to develop new products that appeal to customers, that we will be able to improve or maintain our profit margins on sales to our customers or that we will be able to continue to compete successfully in our core markets. While we believe our product lines compete effectively in their markets, we may not continue to do so.

Acquisitions could disrupt our operations and harm our operating results.

        We may elect to increase our product offerings and the markets we serve through acquisitions of other companies, product lines, technologies and personnel. Acquisitions involve numerous risks, including the following:

        Acquisitions may also cause us to:

        Acquisitions are inherently risky, and no assurance can be given that our future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. Failure to manage and successfully integrate acquisitions we make could harm our business and

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operating results in a material way. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products, technologies, facilities and personnel to an inability to do so. Even when an acquired business has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.

If we are unable to access additional capital on favorable terms, our liquidity, business and results of operations could be adversely affected.

        The ability to raise financial capital, either in public or private markets or through commercial banks, is critical to our current business and future growth. Our business is generally working capital intensive requiring a long cash-out to cash-in cycle. In addition, we will rely on the availability of longer-term debt financing or equity financing to make investments in new opportunities. Our access to the financial markets could be adversely impacted by various factors including the following:

We are subject to significant foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations.

        Our international operations generate sales in a number of foreign currencies including Swiss Francs, Chinese Renminbi, British Pound Sterling, Canadian Dollars, New Taiwanese Dollars, and Euros. Therefore, our results of operations and financial condition are affected by fluctuations in exchange rates between these currencies and the U.S. dollar. In addition, our purchases of components in Yen, Euros, New Taiwan Dollars, Swiss Francs, and Chinese Renminbi are affected by inter-currency fluctuations in exchange rates.

        We prepare our financial statements in U.S. Dollars in accordance with U.S. GAAP, but a sizable portion of our revenue and operating expenses are in foreign currencies. As a result, we are subject to significant risks, including:

        Changes in exchange rates will result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside of the United States and the amount of our invested equity. Although we may seek to decrease our currency exposure by engaging in hedges against significant transactions and balance sheet currency exposures where we deem it appropriate, we do not hedge against translation risks. We cannot assure you that any efforts to minimize our risk to currency movements will be successful. To the extent we sell our products in markets other than the market in which they are manufactured, currency fluctuations may result in our products becoming too expensive for customers in those markets.

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Prices of some raw materials, especially steel and iron, fluctuate, which can adversely affect our sales, costs, and profitability.

        We manufacture products with a relatively high iron castings or steel content, commodities for which worldwide prices fluctuate. The availability of and prices for these and other raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs, and anticipated or perceived shortages. In some cases, those cost increases can be passed on to customers in the form of price increases; in other cases, they cannot. If raw material prices increase and we are not able to charge our customers higher prices to compensate, it would adversely affect our business, results of operations and financial condition.

Our quarterly results may fluctuate based on customer delivery requirements.

        Our quarterly results are subject to significant fluctuation based on the timing of our shipments of machine tools, which are largely dependent upon customer delivery requirements. With individual machines priced as high as $1,500,000 and several machines frequently sold together as a package, a request by a customer to delay shipment at quarter end could significantly affect our quarterly results. Historically, we have experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at our customers' plants and our policy of closing our U.S. and Swiss facilities for two weeks in July or August. As a result, exclusive of the impact of the economic downturn experienced during 2008 and 2009, our third-quarter net sales, income from operations, and net income typically have been the lowest of any quarter during the year.

Our expenditures for post-retirement pension obligations could be materially higher than we have predicted if our underlying assumptions prove to be incorrect or we are required to use different assumptions.

        We provide defined benefit pension plans to eligible employees. Our pension expense, the funding status of our plans and related charges in other comprehensive income, and our required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the rate at which future obligations are discounted to a present value, or the discount rate.

        Our market-related value of assets recognizes asset losses and gains over a five-year period, which we believe is consistent with the long-term nature of our pension obligations. As a result, the effect of changes in the market value of assets on our pension expense may be experienced in future years rather than fully reflected in the expense for the year immediately following the year in which the fluctuations actually occurred.

        For the year ended December 31, 2009, the value of our Pension Plan Assets increased by $25.0 million due to increases in market value of the underlying assets as the world markets began to recover from the impacts the global economic recession had on the world financial markets and related investment valuations at the end of 2008. The future investment performance of our pension plan assets could significantly impact the plan assets and future growth of the plan assets. Should the assets earn a return less than the assumed rate of return over time, it is likely that future pension expenses and funding requirements would increase. Investment earnings in excess of the assumed rate of return may reduce future pension expenses and funding requirements.

        For our domestic and foreign plans, we use bond pricing models based on high grade corporate bonds in each market constructed to match the projected liability benefit payments to select the discount rates used to determine the present value of the projected and accumulated benefit obligation at the end of each year. A change in the discount rate would impact the funded status of our plans. An increase to the discount rate would reduce the pension liability and future pension expense and conversely, a lower discount rate would raise pension liability and the future pension expense.

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        To develop the expected long-term rate of return on assets assumption, for our domestic and foreign plans, we consider 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 is then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption.

        For pension accounting purposes in our U.S. based plan, which is the largest of our plans, the rate of return assumed on the market-related value of plan assets for determining pension expense was 8.00% for 2009 and 8.50% for 2008. The discount rate used for determining the obligation was 6.27% at December 31, 2009 compared to 6.60% at December 31, 2008.

        In our Swiss subsidiary, we have two defined benefit plans, which when taken as a whole are about as large as the U.S. defined benefit plan. The rate of return assumed on the market-related value of plan assets for determining pension expense on plan assets was 5.00% for 2009 and 5.25% for 2008. The discount rate used for determining the obligation was 3.5% at December 31, 2009 compared to 2.75% at December 31, 2008.

        Based on current guidelines, assumptions and estimates, including stock market prices and interest rates, we anticipate that we may be required to make a cash contribution of approximately $0.6 million to our U.S. pension plan in 2010 and approximately $2.2 million to the foreign plans in 2010. If our current assumptions and estimates are not correct, a contribution in years beyond 2010 may be more or less than the projected 2010 contribution.

        In addition, we cannot predict whether changing market or economic conditions, regulatory changes or other factors will increase our pension expenses or our funding obligations, diverting funds we would otherwise apply to other uses. At December 31, 2009, the excess of consolidated projected benefit obligations over plan assets was $20.2 million and the excess of consolidated accumulated benefit obligations over plan assets was $14.3 million.

        Employees hired by our U.S. operating company on or after March 1, 2004 are no longer eligible for the defined benefit plan. The United Kingdom's defined benefit plan was closed to new entrants in April 2005. These employees are provided a defined contribution plan instead.

        In May 2009, the Company announced that future accrual of benefits under its U.S. defined benefit pension plan would be suspended as of June 15, 2009 and Company contributions to the 401(k) program would be suspended as of the same date.

If we are unable to attract and retain skilled employees to work at our manufacturing facilities our operations and growth prospects would be adversely impacted.

        We conduct substantially all of our manufacturing operations in relatively small urban areas, with the exception of our Shanghai facility. Our continued success depends on our ability to attract and retain a skilled labor force at these locations. If we are not able to attract and retain the personnel we require, we may be unable to develop, manufacture and market our products and expand our operations in a manner that best exploits market opportunities and capitalizes on our investment in our business. This would materially adversely affect our business, operating results and financial condition.

Due to future technological changes, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excessive.

        The technology within our products change and generally new versions of machines are brought to market in three to five year cycles. The phasing out of an old product involves both estimating the amount of inventory to hold to satisfy the final demand for those machines as well as to satisfy future repair part needs. Based on changing customer demand and expectations of delivery times for repair

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parts, we may find that we have either obsolete or excess inventory on hand. Because of unforeseen changes in technology, market demand, or competition, we may have to write off unusable inventory at some time in the future, which may adversely affect our results of operations and financial condition. In 2009, we recorded a $5.0 million inventory write-down related to the strategic decision to cease manufacturing of non-critical parts and certain machine models in our Elmira, NY facility. In 2008, we recorded $7.6 million in inventory write-downs associated with discontinued product lines and the review of other expected inventory usage patterns.

Major changes in the economic situation of our customer base could require us to write off significant parts of our receivables from customers.

        In difficult economic periods, our customers lose work and find it difficult if not impossible to pay for products purchased from us. Although appropriate credit reviews are done at the time of sale, rapidly changing economic conditions can have sudden impacts on customers' ability to pay. We run the risk of bad debt on existing time payment contracts and open accounts. If we write off significant parts of our customer accounts or notes receivable because of unforeseen changes in their business condition, it would adversely affect our results of operations, financial condition, and cash flows.

If we suffer loss to our factories, facilities or distribution system due to catastrophe, our operations could be seriously harmed.

        Our factories, facilities and distribution system are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made disasters. In particular, several of our facilities could be subject to a catastrophic loss caused by earthquake due to their locations. Our facilities in Southeast Asia are located in areas with above average seismic activity. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility.

We rely in part on independent distributors and the loss of these distributors could adversely affect our business.

        In addition to our direct sales force, we depend on the services of independent distributors and agents to sell our products and provide service and aftermarket support to our customers. We support an extensive distributor and agent network worldwide. In 2009, approximately 70% of our sales were through distributors and agents. In December 2009, we reorganized our U.S. distribution from a joint distributor network and direct sales force to a new group of distributors. Rather than serving as passive conduits for delivery of product, many of our distributors are active participants in the sale and support of our products. Many of the distributors with whom we transact business offer competitive products and services to our customers. In addition, the distribution agreements we have are typically cancelable by the distributor after a relatively short notice period. The loss of a substantial number of our distributors or an increase in the distributors' sales of our competitors' products to our customers could reduce our sales and profits.

We rely on estimated forecasts of our customers' needs and inaccuracies in such forecasts could adversely affect our business.

        We generally sell our products pursuant to individual purchase orders instead of long-term purchase commitments. Therefore, we rely on estimated demand forecasts, based upon input from our customers and the general economic environment, to determine how much material to purchase and product to manufacture. Because our sales are based on purchase orders, our customers may cancel, delay or otherwise modify their purchase commitments with little or no consequence to them and with little or no notice to us. For these reasons, we generally have limited visibility regarding our customers' actual product needs. The quantities or timing required by our customers for our products could vary

A-16



significantly. Whether in response to changes affecting the industry or a customer's specific business pressures, any cancellation, delay or other modification in our customers' orders could significantly reduce our revenue, cause our operating results to fluctuate from period to period and make it more difficult for us to predict our revenue. In the event of a cancellation or reduction of a customer order, we may not have enough time to reduce inventory purchases or labor hired to minimize the effect of the lost revenue on our business. During 2009 and 2008, orders and related sales were impacted by order cancellations of $7.3 million and $8.8 million, respectively, primarily due to the global economic conditions.

We could face potential product liability claims relating to products we manufacture, which could result in us having to expend significant time and expense to defend these claims and to pay material settlement amounts.

        We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage; however, we may not be able to obtain such insurance on acceptable terms in the future, if at all, or obtain insurance that will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations or prospects. In addition, we believe our business depends on the strong brand reputation we have developed. In the event that our reputation is damaged, we may face difficulty in maintaining our pricing positions with respect to some of our products, which would reduce our sales and profitability.

Current employment laws or changes in employment laws could increase our costs and may adversely affect our business.

        Various federal, state and foreign labor laws govern the relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers' compensation rates, citizenship requirements and costs to terminate or layoff employees. Significant additional government-imposed increases in the following areas could materially affect our business, financial condition, operating results or cash flow:

We are subject to environmental laws that could impose significant costs on us and the failure to comply with such laws could subject us to sanctions and material fines and expenses.

        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 liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Activities at properties we own or previously owned and on adjacent areas have resulted in environmental impacts.

        In particular, our Elmira, New York manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United

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States Environmental Protection Agency ("EPA") because of groundwater contamination. The Kentucky Avenue Wellfield Site (the "Site") encompasses an area which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, New York. In February 2006, 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.

        A substantial portion of the Pond is located on our property. Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the PRPs") have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study ("RI/FS") by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the U.S. Environmental Protection Agency, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis. The cost of the RI/FS was estimated to be approximately $0.84 million. We estimate our portion of the study to be $0.12 million for which we have established a reserve of $0.13 million. As of December 31, 2009 we have incurred total expenses of $0.10 million with respect to the study and other activities relating to the Site. In February 2010, we incurred an additional $0.02 million; thus our remaining reserve balance is $0.01 million.

        The PRPs developed a Draft RI/FS with their consultants and, following EPA comments, submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan. The PRPs commenced field work in the spring of 2008 and submitted a Draft Site Characterization Report to EPA in the fall. The PRPs currently are performing Risk Assessments in accordance with the Remedial Investigation portion of the RI/FS.

        Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the site. Environmental sampling on our property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond and found no evidence that our operations or property have or are contributing to the contamination. Other than as described above, we have not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate. We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

        Although we believe, based upon information currently available, that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to Hardinge.

The loss of current members of our senior management team and other key personnel may adversely affect our operating results.

        The loss of senior management and other key personnel could impair our ability to carry out our business plan. We believe our future success will depend in part on our ability to attract and retain highly skilled and qualified personnel. The loss of senior management and other key personnel may adversely affect our operating results as we incur costs to replace the departing personnel and potentially lose opportunities in the transition of important job functions.

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If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.

        Effective internal controls are necessary for us to provide reliable financial reports, to prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain an effective system of internal controls may not be successful, and we may be unable to maintain adequate controls over our financial processes and reporting in the future. Ineffective internal controls subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common stock.

Anti-takeover provisions in our charter documents, in our Rights Agreement and under New York law may discourage a third party from acquiring us.

        Certain provisions of our certificate of incorporation and bylaws may have the effect of discouraging a third party from making a proposal to acquire us and, as a result, may inhibit a change in control of the Company under circumstances that could give the shareholders the opportunity to realize a premium over the then-prevailing market price of our common shares. These include:

        A Staggered Board of Directors.    Our certificate of incorporation and bylaws provide that our Board of Directors, currently consisting of seven members, is divided into three classes of directors, with each class consisting of two or three directors, and with the classes serving staggered three-year terms. This classification of the directors has the effect of making it more difficult for shareholders, including those holding a majority of our outstanding shares, to force an immediate change in the composition of our Board of Directors.

        Removal of Directors and Filling of Vacancies.    Our certificate of incorporation provides that a member of our Board of Directors may be removed only for cause and upon the affirmative vote of the holders of 75% of the securities entitled to vote at an election of directors. Newly created directorships and Board of Director vacancies resulting from death, removal or other causes may be filled only by a majority vote of the then remaining directors. Accordingly, it is more difficult for shareholders, including those holding a majority of our outstanding shares, to force an immediate change in the composition of our Board of Directors.

        Supermajority Voting Provisions for Certain Business Combinations.    Our certificate of incorporation requires the affirmative vote of at least 75% of all of the securities entitled to vote and at least 75% of shareholders who are not Major Shareholders (defined as 10% beneficial holders) in order to effect certain mergers, sales of assets or other business combinations involving the Company. These provisions could have the effect of delaying, deferring or preventing a change of control of the Company.

        Also, on February 17, 2010, the Board of Directors adopted a Share Purchase Rights Plan. The Rights Agreement imposes a significant penalty upon any person or group which acquires 20% or more of the outstanding common stock of the Company without the approval of the Board of Directors. Although, the Rights Agreement should not interfere with any merger or other business combination approved by the Board of Directors, the existence of our Rights Agreement could have the effect of delaying or preventing a third party from making an acquisition proposal for us and may inhibit a change in control that some, or a majority, of our shareholders might believe to be in their best interest or that could give our shareholders the opportunity to realize a premium over the then-prevailing market prices for their shares.

        In addition, as a New York corporation we are subject to provisions of the New York Business Corporation Law which may make it more difficult for a third party to acquire and exercise control over us pursuant to a tender offer or request or invitation for tenders. These provisions could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.

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Item 1B.—UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.—PROPERTIES

        Pertinent information concerning the principal properties of the Company and its subsidiaries is as follows:

Location   Type of Facility   Acreage (Land)
Square Footage
(Building)
 
Owned Properties:            

Horseheads, New York

 

Manufacturing, Engineering, Turnkey Systems, Marketing, Sales, Demonstration, Service, and Administration

 

 

80 acres
515,000 sq. ft.

 

St. Gallen, Switzerland

 

Manufacturing, Engineering, Turnkey Systems, Marketing, Sales, Demonstration, Service, and Administration

 

 

8 acres
162,924 sq. ft.

 

Nan Tou, Taiwan

 

Manufacturing, Engineering, Marketing, Sales, Demonstration, Service, and Administration

 

 

3 acres
123,204 sq. ft.

 

Biel, Switzerland

 

Manufacturing, Engineering, and Turnkey Systems

 

 

4 acres
41,500 sq. ft.

 

 

Location   Type of Facility   Square Footage   Lease
Expiration
Date
 
Leased Properties:                  

Shanghai, People's Republic of China

 

Product Assembly, Marketing, Engineering, Turnkey Systems, Sales, Service, Demonstration, and Administration

 

 

68,620 sq. ft.

 

 

2/29/12

 

Leicester, England

 

Sales, Marketing, Engineering, Turnkey Systems, Demonstration, Service, and Administration

 

 

30,172 sq. ft.

 

 

1/31/15

 

Biel, Switzerland

 

Sales, Marketing, Engineering, Turnkey Systems, Demonstration, Service, and Administration

 

 

19,375 sq. ft.

 

 

6/30/10

 

Krefeld, Germany

 

Sales, Service, Demonstration, and Administration

 

 

14,402 sq. ft.

 

 

3/31/20

 

St. Gallen, Switzerland

 

Manufacturing

 

 

14,208 sq. ft.

 

 

8/01/11

 

Raamsdonksveer, Netherlands

 

Sales, Service, and Demonstration

 

 

10,226 sq. ft.

 

 

9/15/11

 

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ITEM 3.—LEGAL PROCEEDINGS

        The Company is from time to time involved in routine litigation incidental to its operations. None of the litigation in which we are currently involved, individually or in the aggregate, is anticipated to be material to our financial condition, results of operations, or cash flows.

        On October 28, 2008, a putative class-action lawsuit was filed in the United States District Court for the Western District of New York against the Company and certain former officers. This complaint, as amended, alleged that during the period from January 16, 2007 to February 21, 2008 the defendants made misleading statements and/or omissions relating to our business and operating results in violation of the Federal securities laws. On May 29, 2009, the Company filed a motion to dismiss the complaint. By a decision and order dated February 2, 2010, the Court dismissed the class action lawsuit. The plaintiff did not file a notice to appeal the Court's dismissal of the lawsuit, and the time to appeal has expired.

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PART II

ITEM 5.—MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The following table reflects the highest and lowest values at which the stock traded in each quarter of the last two years. Hardinge Inc. common stock trades on The NASDAQ Global Select Market under the symbol "HDNG." The table also includes dividends per share, by quarter.

 
  2009   2008  
 
  Values   Values  
 
  High   Low   Dividends   High   Low   Dividends  

Quarter Ended

                                     
 

March 31,

  $ 5.64   $ 2.60   $ 0.01   $ 18.90   $ 11.95   $ 0.05  
 

June 30,

    6.00     2.75     0.005     18.25     12.28     0.05  
 

September 30,

    6.65     3.83     0.005     17.45     11.29     0.05  
 

December 31,

    6.19     4.54     0.005     13.77     3.37     0.01  

        At March 9, 2010, there were 2,170 holders of common stock. This number includes both record holders and individual participants in security position listings.

Issuer Purchases of Equity Securities

        There were no issuer repurchases of our common stock for the quarter ended December 31, 2009.

Share Repurchase Program

        At the February 19, 2008 Board of Directors meeting, the Board approved a share repurchase program for up to $10.0 million of our common stock to be purchased through February 28, 2010. As of December 31, 2009, we have repurchased 45,500 shares of our common stock at an average price of $12.72.

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Performance Graph

        The graph below compares the five-year cumulative total return for Hardinge Inc. Common Stock with the comparable returns for the NASDAQ Stock Market (U.S.) Index and a group of eight peer issuers. Our peer group includes Circor International Inc., Flow International Corp., Hurco Companies Inc., Kadant Inc., Kaydon Corp., Magnetek Inc., NN Inc., and Sun Hydraulics Corp. Cumulative total return represents the change in stock price and the amount of dividends received during the indicated period, assuming reinvestment of dividends. The graph assumes an investment of $100 on December 31, 2004. The stock performance shown in the graph is included in response to SEC requirements and is not intended to forecast or to be indicative of future performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Hardinge Inc., The NASDAQ Composite Index
And A Peer Group

GRAPHIC


*
$100 invested on 12/31/04 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.
  12/04   12/05   12/06   12/07   12/08   12/09  

Hardinge, Inc

    100.00     131.11     115.04     129.29     31.55     43.19  

NASDAQ Composite

    100.00     101.33     114.01     123.71     73.11     105.61  

Peer Group

    100.00     105.57     135.05     167.50     91.84     101.20  

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ITEM 6.—SELECTED FINANCIAL DATA

        The following selected financial data is derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes and other information included herein (dollar amounts in thousands except per share data).

 
  2009   2008   2007   2006   2005  

STATEMENT OF OPERATIONS DATA

                               

Net sales

  $ 214,071   $ 345,006   $ 356,322   $ 326,621   $ 289,925  

Cost of sales

    173,275     252,741     248,911     226,470     199,642  
                       

Gross profit

    40,796     92,265     107,411     100,151     90,283  

Selling, general and administrative expense

    68,556     97,796     84,520     77,054     74,723  

Loss (gain) on sale of assets

    240     (54 )   (1,372 )        

Impairment charges(1)

    1,650     24,351              
                       

Operating (loss) income

    (29,650 )   (29,828 )   24,263     23,097     15,560  

Interest expense

    1,926     1,714     3,051     5,294     4,284  

Interest (income)

    (114 )   (285 )   (224 )   (713 )   (569 )
                       

(Loss) income before income taxes

    (31,462 )   (31,257 )   21,436     18,516     11,845  

Income taxes

    1,847     3,048     6,510     4,566     2,373  
                       

Net (loss) income

    (33,309 )   (34,305 )   14,926     13,950     9,472  

Net income attributable to non-controlling interest

                    (2,466 )
                       

Net (loss) income attributable to shareholders of Hardinge Inc.(1)

  $ (33,309 ) $ (34,305 ) $ 14,926   $ 13,950   $ 7,006  
                       

PER SHARE DATA:

                               
 

Average common shares used in basic computation

    11,372     11,309     10,442     8,686     8,649  

Basic (loss) earnings per share(2)

  $ (2.93 ) $ (3.04 ) $ 1.41   $ 1.58   $ 0.79  
                       

Weighted average number of

                               
 

Common shares outstanding—diluted

    11,372     11,309     10,482     8,720     8,692  

Diluted (loss) earnings per share(2)

  $ (2.93 ) $ (3.04 ) $ 1.40   $ 1.57   $ 0.79  
                       

Cash dividends declared per share

  $ 0.025   $ 0.16   $ 0.20   $ 0.14   $ 0.12  
                       

BALANCE SHEET DATA

                               

Working capital

  $ 129,549   $ 151,613   $ 189,464   $ 156,994   $ 126,421  

Total assets

    242,204     309,825     361,828     330,660     300,276  

Total debt

    5,022     28,121     27,819     77,861     67,114  

Hardinge Shareholders' equity

    161,530     168,127     255,145     157,109     138,993  

(1)
2009 results include a non-cash charge for impairment of $1.7 million associated with certain machinery and equipment formerly utilized in the manufacture of non-critical parts in our Elmira, NY facility. 2008 results include a non-cash charge for impairment of goodwill and intangible assets of $24.3 million due to the diminished value of goodwill and intangible assets in our Canadian, English, and Swiss entities.

(2)
We adopted the provisions of ASC 260 on January 1, 2009, which establishes that unvested share-based payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of these provisions resulted in an increase in (loss) per share of $0.01 in 2008, and a reduction in income per share of $0.02 in 2007, $0.01 in 2006 and $0.01 in 2005. Diluted (loss) per share was impacted by an increase in (loss) per share of $0.01 in 2008, and a reduction in income per share of $0.01 in 2007 and $0.01 in 2006.

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ITEM 7.—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Overview.    Our primary business is designing, manufacturing, and distributing high-precision computer controlled metal-cutting turning, grinding and milling machines and related accessories. We are geographically diversified with manufacturing facilities in the U.S., Switzerland, Taiwan, and China and with sales to most industrialized countries. Approximately 70% of our 2009 sales were to customers outside of North America, 69% of our 2009 products sold were manufactured outside of North America, and 66% of our employees 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.

        The global economic recession, which began in 2008, continued to impact the industries in which we conduct business throughout 2009. The reduced availability of credit has impacted our customers' ability to obtain financing. As a result, we continued to experience order cancellations and low levels of incoming orders and related sales activity during the year. Due to these conditions, management continually assessed and implemented cost reduction initiatives throughout the Company to preserve cash flow.

        Beginning in late 2008, and during 2009, the Company implemented a series of actions in response to the continued weakness in the machine tool industry. These actions included: a Voluntary Early Retirement Program (VERP) covering post-retirement health care costs for 60 months or until Medicare coverage begins, whichever occurs first; voluntary and involuntary lay-offs as well as workforce reductions at our U.S. and European operations; a pay reduction for all U.S. based salaried employees, including a reduction for corporate officers in the amount of 10%; a reduction to the Board of Directors' cash compensation of 10%; suspension of the accrual of benefits for active employees under the U.S. defined benefit pension plan (which was closed to new participants in 2004), and suspension of Company contributions to the 401(k) program as of June 15, 2009; furloughs of employees and reduced work schedules. The Company also closed its Exeter, England facility, which was used primarily for back office support operations, and consolidated the operations into its Leicester, England facility. The consolidation with the Leicester facility provides operational efficiencies, as well as cost savings.

        During the second half of 2009, the Company announced strategic changes within the Elmira, NY manufacturing facility. Historically, this facility was vertically integrated with machining operations converting parts from raw castings to finished goods, the costs of which have proven to be prohibitive at 2009 volumes. As a result, the Company implemented initiatives to move towards a more variable cost business model, outsourcing many of the non-critical components and subassemblies for machines currently made in the Elmira facility. In conjunction with the decision to outsource non-critical components, significant sections of the Elmira manufacturing operation involved in parts production have been shut down. Along with this shut down, we identified assets with a historical cost of $37.9 million and a net book value of $1.9 million that will no longer be used in its operations, of which assets with a historical cost of $15.0 million and a net book value of $1.1 million were determined to have no value and were disposed of resulting in a $1.1 million impairment charge. We reclassified assets with a historical cost of $22.9 million and a net book value of $0.8 million as available for sale with a value of $0.2 million and thus recorded an impairment charge of $0.6 million during 2009. This charge was determined by an analysis of current book value and the related assets fair value, if any, less costs to sell.

        Total severance related charges for all of the actions taken by the Company for the year ended December 31, 2009 were $4.3 million. These charges were recorded in SG&A in our Statement of Operations. At December 31, 2009, the remaining liability associated with the severance related charges

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was $3.1 million. The Company recorded a charge of $5.0 million for inventory write-downs during 2009 as a result of these strategic actions, which was recorded in cost of goods sold in our Statement of Operations.

        The U.S. market activity metrics most closely watched by our management are: reporting of metal-cutting machine orders as reported by the Association of Manufacturing Technology (AMT), the primary industry group for U.S. machine tool manufacturers; and machine tool consumption as reported annually by Gardner Publications in the Metalworking Insiders Report. In 2009, industry-wide orders for metal-cutting machine tools reported by the AMT declined 60.4% versus 2008. The 2009 decrease was primarily related to the sharp decline in world-wide order activity brought on by the global economic conditions. In 2008 orders decreased by 0.3% over 2007. The AMT's statistics are reported on a voluntary basis from member companies. The report includes metal-cutting machines of all types and sizes, including segments in which we do not compete.

        World machine tool consumption data (domestic production plus imports, less exports) as reported by the Metalworking Insiders Report, an annual report on machine-tool output and consumption, shows a decrease in consumption of 33% in 2009 due to the worldwide economic conditions. This report indicates that consumption in China, the world's largest market, remained stable over the course of 2009 versus 2008, and increased by 11% in 2008 versus 2007. Consumption in Germany, the world's second largest market, decreased by 41% in 2009 versus 2008 as measured in local currencies, and increased 25% in 2008 compared to 2007. In the United Kingdom, machine tool consumption measured in pound sterling decreased by 40% in 2009 versus 2008 and increased by 16% in 2008 versus 2007. Machine tool consumption in the U.S. decreased by 51% in 2009 versus 2008 and increased by 15% in 2008 compared to 2007.

        Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that might purchase our products. One such measurement is the PMI (formerly called the Purchasing Manager's Index), as reported by the Institute for Supply Management. Another measurement is capacity utilization of U.S. manufacturing plants, as reported by the Federal Reserve Board. Similar information regarding machine tool consumption in foreign countries is published in various trade journals.

        Non-machine sales, which include collets, accessories, repair parts, and service revenue, have typically accounted for approximately 26% of overall sales and are an important part of our business, especially in the U.S. where Hardinge has an installed base of thousands of machines. Sales of these products do not vary on a year-to-year basis as significantly as capital goods, but demand does typically track the direction of the related machine metrics.

        Other key performance indicators are geographic distribution of net sales and orders, gross profit as a percent of net sales, income from operations, working capital changes, and debt level trends. In an industry where constant product technology development has led to an average model life of three to five years, effectiveness of technological innovation and development of new products are also key performance indicators.

        We are exposed to financial market risk resulting from changes in interest and foreign currency rates. The current global recessionary conditions and related disruptions within the financial markets have also increased our exposure to the possible liquidity and credit risks of our counterparties. We believe we have sufficient liquidity to fund our foreseeable business needs, including cash and cash equivalents, cash flows from operations, and our bank financing arrangements.

        We monitor the third-party depository institutions that hold our cash and equivalents. Our emphasis is primarily on safety of principal. Our cash and equivalents are diversified among counterparties to minimize exposure to any one of these entities.

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        We are also subject to credit risks relating to the ability of counterparties of hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance has been considered in the fair value measurements of our foreign currency forward exchange contracts.

        We also expect that some of our customers and vendors may experience difficulty in maintaining the liquidity required to buy inventory or raw materials. We continue to monitor our customers' financial condition in order to mitigate our accounts receivable collectability risks.

        Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan which causes the worldwide valuation of the Japanese Yen, Euro, Swiss Franc, South Korean Won, and New Taiwanese Dollar to be central to competitive pricing in all of our markets. Also, we translate the results of our Swiss, Taiwanese, Chinese, British, German, Dutch and Canadian subsidiaries into U.S. Dollars for consolidation and reporting purposes. Period to period changes in the exchange rate between their local currency and the U.S. Dollar may affect comparative data significantly. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.

        In March 2009, after using cash on hand generated from operating results to reduce the outstanding obligations under our $100.0 million multi-currency secured credit facility to $8.0 million, the facility was terminated. We took a non-cash charge of $1.0 million in the first quarter of 2009 related to the unamortized deferred financing costs in connection with this termination.

        On March 16, 2009, we entered into an agreement with a bank for a 366 day $10.0 million term loan due on March 16, 2010. This term loan replaced the $100.0 million multi-currency secured credit facility.

        In December 2009, we replaced the $10.0 million term loan due March 16, 2010 with a $10.0 million revolving credit facility due March 31, 2011. Simultaneous with closing the new credit agreement, the Company used cash on hand generated from operating results to repay the $8.4 million that was outstanding under the $10.0 million term loan. There are no amounts outstanding under this credit facility as of December 31, 2009.

        During August 2009, we entered into two new credit facilities at our Swiss subsidiary. These new facilities provide a working capital line of credit up to CHF 5.0 million ($4.8 million equivalent) and up to CHF 7.5 million ($7.2 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades.

        In October 2009, we entered into a new CHF 7.0 million ($6.8 million equivalent) credit facility in our Swiss subsidiary. This new facility provides a working capital line of credit up to CHF 3.0 million ($2.9 million equivalent) and up to CHF 7.0 million ($6.8 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades. Additionally, in October 2009, we entered into a NT$100.0 million ($3.1 million equivalent) unsecured credit facility in our Taiwanese subsidiary. This new facility is for working capital purposes.

        Refer to Liquidity and Capital Resources for further details on all of the above credit facilities.

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Results of Operations

2009 Compared to 2008

        The following table summarizes certain financial data for year 2009 and 2008:

 
  2009   2008   Change   % Change  
 
  (dollars in thousands)
 

Orders

  $ 175,039   $ 341,174   $ (166,135 )   (49 )%

Net sales

    214,071     345,006     (130,935 )   (38 )%

Gross profit

    40,796     92,265     (51,469 )   (56 )%

Selling, general and administrative expenses

    68,556     97,796     (29,240 )   (30 )%

Impairment charges

    1,650     24,351     (22,701 )   (93 )%

(Loss) from operations

    (29,650 )   (29,828 )   178      

Net (loss)

    (33,309 )   (34,305 )   996     (3 )%

Diluted (loss) per share

  $ (2.93 ) $ (3.04 ) $ 0.11        

Weighted average shares outstanding (in thousands)

    11,372     11,309     63        

Gross profit as % of net sales

    19.1 %   26.7 %   (7.6) pts        

Selling, general and administrative expenses as % of net sales

    32.0 %   28.3 %   3.7  pts        

(Loss) from operations as % of net sales

    (13.9 )%   (8.6 )%   (5.3) pts        

Net (loss) as % of net sales

    (15.6 )%   (9.9 )%   (5.7) pts        

        Orders.    Orders, net of cancellations for 2009 were $175.0 million, a decrease of $166.1 million or 49% compared to 2008 orders of $341.2 million. Order cancellations for 2009 and 2008 were $7.3 million and $8.8 million, respectively. The year over year decrease in orders, and the order cancellation activity is directly related to the global economic recession and related financial crisis which has affected all of the regions and product lines in which we conduct business, and is generally consistent with overall industry statistics. The following table presents 2009 and 2008 new orders by region:

Orders from Customers in:
  2009   2008   Change   % Change  
 
  (dollars in thousands)
   
 

North America

  $ 52,547   $ 103,249   $ (50,702 )   (49 )%

Europe

    50,254     156,320     (106,066 )   (68 )%

Asia & Other

    72,238     81,605     (9,367 )   (11 )%
                     
 

Total

  $ 175,039   $ 341,174   $ (166,135 )   (49 )%
                     

        Currency exchange rates had an unfavorable impact on new orders of approximately $2.8 million for the year 2009 compared to 2008. Without the currency impact, new orders for the year would have decreased $163.3 million or 48% compared to 2008.

        North American orders decreased $50.7 million or 49% compared to the prior year. The decline in North American orders can be attributed to the global economic recession and related financial crisis. Decreases were noted across all of our product lines.

        European orders decreased by $106.1 million or 68% for the year 2009 compared to 2008. Decreases were noted across all of our product lines and all of the countries within Europe, and as with North America, were primarily the result of the global economic recession and related financial crisis. The decrease over 2008 was also driven by unfavorable foreign currency translation on European orders of approximately $3.1 million for the year.

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        Asia & Other order activity decreased $9.4 million or 11% compared to 2008. The decrease was noted across all of our product lines and countries, with the exception of China. Our China market experienced an increase of $5.0 million or 8.9% for the year 2009 compared to 2008. The increase in order activity in China was attributed to two large orders totaling approximately $5.6 million from the computer, communications and consumer-electronics industry. The impact of foreign currency translation on Asia and Other orders for the year ended December 31, 2009 compared to the same periods in the prior year was not material.

        Net Sales.    Net sales for 2009 were $214.1 million, a $130.9 million or a 38% decline compared to 2008 net sales of $345.0 million. Net sales for the year were down in all regions and countries with the exception of China, which was flat compared to 2008. On a full year basis, net sales were unfavorably impacted by approximately $5.9 million related to foreign currency translation. Without the currency impact, sales for the year would have declined $125.0 million or 36% compared to 2008. 2009 sales benefited from $96.9 million in order backlog at December 31, 2008, which was generated before the financial crisis began. The following table presents 2009 and 2008 sales by region:

Sales to Customers in:
  2009   2008   Change   % Change  
 
  (dollars in thousands)
 

North America

  $ 64,327   $ 108,501   $ (44,174 )   (41 )%

Europe

    87,304     158,947     (71,643 )   (45 )%

Asia & Other

    62,440     77,558     (15,118 )   (19 )%
                     
 

Total

  $ 214,071   $ 345,006   $ (130,935 )   (38 )%
                     

        The geographic mix of sales as a percentage of total net sales is shown in the table below:

Sales to Customers in:
  2009   2008   Percentage
Point
Change
 

North America

    30.0 %   31.4 %   (1.4 )

Europe

    40.8 %   46.1 %   (5.3 )

Asia & Other

    29.2 %   22.5 %   6.7  
                 
 

Total

    100.0 %   100.0 %      
                 

        Machine sales represented approximately 74% of 2009 and 2008 net sales. Sales of non-machine products and services, primarily workholding, repair parts, and accessories made up the balance.

        Gross Profit.    Gross profit was $40.8 million or 19.1% of net sales in 2009, compared to $92.3 million, or 26.7% of net sales in 2008. The reduction in gross profit due to the $130.9 million reduced sales volume was $35.0 million. 2009 gross profit was also negatively impacted by approximately $11.9 million as a result of significantly reduced margins as we discounted machines to reduce inventory levels, sometimes below cost, as well as approximately $4.6 million related to lower capacity utilization in the U.S. and Taiwan. 2009 gross profit was negatively impacted by a $0.5 million year over year increase in inventory write-down charges. This increase in the inventory write-down charge over 2008 is primarily due to the discontinuance of production of non-critical manufacturing parts and certain machines in our Elmira, NY facility, as well as lower of cost or market write-downs on machines due to competitive pressures related to the worldwide economic crisis offset by 2008 charges related to the discontinuance of certain product lines. The decrease over 2008 was also negatively impacted by foreign currency translation of approximately $1.5 million for the year.

        Selling, General, and Administrative Expense.    Selling, general and administrative ("SG&A") expense for the year 2009 was $68.6 million, or 32.0% of net sales, compared to $97.8 million, or 28.3% of net sales, in 2008. 2009 SG&A expense was negatively impacted by $4.3 million related to severance

A-29



expense and early retirement costs associated with the discontinuance of manufacturing non-critical parts and certain machine models in the Elmira, NY facility as well as workforce reductions in Europe. 2008 SG&A expense was negatively impacted by $2.3 million related to severance expense in the U.S. and Europe and $1.0 million related to a U.S. voluntary early retirement program. In addition to the severance, and early retirement costs, 2008 SG&A expense included approximately $1.9 million due to foreign currency transaction losses associated with our New Taiwanese Dollar—U.S. Dollar exposure. Severance expense for both 2009 and 2008 was a result of workforce reduction programs we implemented in all of our subsidiaries with the exception of China as a result of the global economic crisis. Excluding these costs, SG&A for the year ended December 31, 2009 was $64.3 million or 30.0% of sales, a decrease of $28.3 million or 30.6% compared to the same period in 2008. This decrease was driven by the impact of lower commissions and strategic actions taken by the Company to manage operating expenses as a result of the current order and sales activity levels. We had a favorable foreign currency translation impact of approximately $3.0 million for the year 2009, as compared to 2008.

        Impairment Charge.    We recorded non-cash impairment charges of $1.7 million in 2009 related to machinery and equipment and $24.4 million in 2008 related to goodwill and intangible assets. In December 2009, as a result of the Company's decision to outsource non-critical components, significant sections of the Elmira manufacturing operation involved in parts production were shut down. In conjunction with this shut down, we identified assets with a historical cost of $37.9 million and a net book value of $1.9 million that will no longer be used in its operations, of which assets with a historical cost of $15.0 million and a net book value of $1.1 million were determined to have no value and disposed of resulting in a $1.1 million impairment charge. We reclassified assets with a historical cost of $22.9 million and a net book value of $0.8 million as available for sale at $0.2 million and recorded an impairment charge of $0.6 million during 2009. This charge was determined by an analysis of current book value and the related assets fair value, if any, less costs to sell. In October of 2008, based on a comprehensive market evaluation, the Company determined that its model of doing business in Canada did not provide adequate returns, which triggered a review of the goodwill. The Company recorded a non-cash charge of $2.7 million in 2008, to reflect the diminished value of goodwill of $2.1 million and $0.6 million of intangible assets associated with our Canadian operation. Our 2008 annual impairment testing for recorded goodwill and indefinite lived intangible assets determined that all of our goodwill was impaired, thus we recorded a $21.7 million impairment charge.

        (Loss) from Operations.    Loss from operations in 2009 was ($29.7) million compared to ($29.8) million in 2008. The 2009 loss can primarily be attributed to the $130.9 million reduction in net sales compared to 2008. These decreases were primarily the result of the global economic crisis. While the Company aggressively reacted to this severe business downturn through restructuring activities in North America and Europe, the full impact of the reduction was not eliminated during 2009. As a result of the restructuring activities we recorded an inventory write-down of $5.0 million resulting from discontinued production of non-critical manufacturing parts and certain machines in our Elmira, NY facility, a severance charge of $4.3 million and $1.7 million due to impairment of machinery and equipment in the Elmira, NY facility. Additionally, during the last half of 2009, the Company, like many machine tool manufacturers, began discounting machines in order to liquidate inventory resulting in machines being sold at below costs in some cases. Also as a result of this discounting we recorded a lower of cost or market charge of $1.5 million for machines remaining in inventory.

        The 2008 loss was due to: the goodwill and intangible asset impairment charges of $24.4 million; $7.6 million in impairment charges associated with the discontinuance of certain product lines and other expected inventory usage patterns; and $3.2 million related to severance charges associated with our restructuring activities.

        (Loss) Gain on Sale of Assets.    The 2009 loss on sale of assets is related to asset disposals in North America and Europe as a result of the Company's restructuring activities.

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        Interest Expense & Interest Income.    Interest expense includes interest payments under our credit facilities and amortization of deferred financing costs associated with our credit facility. Interest expense for the year 2009 was $1.9 million compared to $1.7 million for 2008. The increase is attributable to $1.0 million of unamortized deferred financing costs related to the termination of the multi-currency credit facility in 2009, offset by lower levels of borrowing in the current year. Interest income was $0.1 million in 2009 compared to $0.3 million in 2008.

        Income Tax Expense.    Income tax expense in 2009 was $1.8 million compared to $3.0 million for 2008. The effective tax rate was 5.9% in 2009 and 9.8% in 2008. The decrease in the effective tax rate from 2008 was due primarily to the non-recurring goodwill impairment charges, which were non-deductible, resulting in a significant negative impact of 16.0% in 2008. Other items that negatively affected the 2009 tax rate included an increase in our valuation allowance due to not recording a tax benefit on losses in the U.S., U.K., German, Canadian, and Netherlands operations, a net increase in our liability for uncertain tax benefits due to foreign tax positions and liabilities, as well as a change in the mix of profits by country. The income tax expense fundamentally represents tax expense on profits in certain of the Company's foreign subsidiaries.

        We continue to maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, Canadian, and Dutch deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

        In 2009, the valuation allowance increased by $8.4 million. This was due to an increase of $11.2 million due to not recording a tax benefit on losses in the U.S., U.K., Germany, Canada, and the Netherlands, a decrease of $3.3 million due to the decrease in minimum pension liabilities in the U.S. and the U.K. (recorded in Other Comprehensive Income), and an increase of $0.5 million due to derecognition of uncertain tax positions.

        We regularly review recent results and projected future results of operations, as well as other relevant factors, to reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.

        Net (Loss) Income.    Net loss for 2009 was ($33.3) million or (15.6%) of net sales, compared to ($34.3) million net loss, or (9.9%) of net sales in 2008. Basic and diluted loss per share for 2009 were ($2.93) compared to basic and diluted loss per share of ($3.04) in 2008.

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Results of Operations

2008 Compared to 2007

        The following table summarizes certain financial data for 2008 and 2007:

 
  2008   2007   Change   % Change  
 
  (dollars in thousands)
 

Orders

  $ 341,174   $ 360,540   $ (19,366 )   (5 )%

Net sales

    345,006     356,322     (11,316 )   (3 )%

Gross profit

    92,265     107,411     (15,146 )   (14 )%

Selling, general and administrative expenses

    97,796     84,520     13,276     16 %

Impairment charges

    24,351         24,351      

(Loss) income from operations

    (29,828 )   24,263     (54,091 )   (223 )%

Net (loss) income

    (34,305 )   14,926     (49,231 )   (330 )%

Diluted (loss) earnings per share

  $ (3.04 ) $ 1.40   $ (4.44 )   (317 )%

Weighted average shares outstanding (in thousands)

    11,309     10,482     827     8 %

Gross profit as % of net sales

    26.7 %   30.1 %   (3.4) pts        

Selling, general and administrative expenses as % of net sales

    28.3 %   23.7 %   4.6   pts        

(Loss) income from operations as % of net sales

    (8.6 )%   6.8 %   (15.4) pts        

Net (loss) income as % of net sales

    (9.9 )%   4.2 %   (14.1) pts        

        Net Sales.    Net sales for 2008 were $345.0 million, an $11.3 million or 3% decline compared to 2007 net sales of $356.3 million. Net sales for the year increased in Asia and Other offset by declines in Europe and North America. On a full year basis, net sales were favorably impacted by approximately $14.5 million in foreign currency translation. Without the currency impact, sales for the year would have declined $25.8 million or 7% compared to 2007.

        The following table presents 2008 and 2007 sales by region:

Sales to Customers in:
  2008   2007   Change   % Change  
 
  (dollars in thousands)
 

North America

  $ 108,501   $ 121,520   $ (13,019 )   (11 )%

Europe

    158,947     165,144     (6,197 )   (4 )%

Asia & Other

    77,558     69,658     7,900     11 %
                     
 

Total

  $ 345,006   $ 356,322   $ (11,316 )   (3 )%
                     

        The decline in net sales for the year was primarily the result of the global economic and financial crisis which began late in the third quarter of 2008. For the year, net sales declined in Milling and Turning Products 7% and 20%, respectively, which was offset by a 19% increase in Grinding Products, with 'Asia and Other' representing the strongest overall market. For 2008, approximately 69% of total net sales were to customers outside of North America.

        The geographic mix of sales as a percentage of total net sales is shown in the table below:

Sales to Customers in:
  2008   2007   Percentage
Point
Change
 

North America

    31.4 %   34.1 %   (2.7 )

Europe

    46.1 %   46.4 %   (0.3 )

Asia & Other

    22.5 %   19.5 %   3.0  
                 
 

Total

    100.0 %   100.0 %      
                 

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        Machine sales represented 74.4% of 2008 net sales, as compared to 74.8% of 2007 net sales. Sales of non-machine products and services, primarily workholding, repair parts, and accessories made up the balance.

        Orders.    The Company's new orders declined 5% to $341.2 million in 2008 compared to $360.5 million in 2007. On a full year basis, new orders were favorably impacted by approximately $16.7 million in foreign currency translation. Without the currency impact, new orders for the year would have declined $36.1 million or 10% compared to 2007. The following table presents 2008 and 2007 new orders by region:

Orders from Customers in:
  2008   2007   Change   % Change  
 
  (dollars in thousands)
   
 

North America

  $ 103,249   $ 117,532   $ (14,283 )   (12 )%

Europe

    156,320     170,916     (14,596 )   (9 )%

Asia & Other

    81,605     72,092     9,513     13 %
                     
 

Total

  $ 341,174   $ 360,540   $ (19,366 )   (5 )%
                     

        The decline in net orders for the year was driven by reduced levels of business activity and $9.0 million in order cancellations primarily the result of the global economic and financial crisis which began late in the third quarter of 2008.

        North American orders were down 12% compared to the prior year. North American orders averaged in excess of $28.0 million per quarter through September 30, 2008 with the fourth quarter declining to $18.1 million, a $9.9 million or 35% decrease. The decline in North American orders can be attributed to the economic and financial crisis.

        European orders for the full year decreased $14.6 million or 9% for 2008. European orders averaged over $44.9 million in new orders through September 30, 2008 with the fourth quarter declining to $21.1 million, a $23.8 million or 53% decrease. At $156.3 million, European orders, particularly from Germany, United Kingdom, Switzerland, and Italy, accounted for nearly half of our total order activity during 2008.

        Asia and Other order activity for the full year increased 13% despite the reduction in fourth quarter activity. New orders averaged over $24.5 million in new orders through September 30, 2008 with the fourth quarter declining to $7.3 million, a $17.2 million or 70% decrease. The growth in 2008 was primarily in China which had new orders in excess of $53.8 million, or 66% of the total region's orders.

        Gross Profit.    Gross profit was $92.3 million or 26.7% of net sales in 2008, compared to $107.4 million, or 30.1% of net sales in 2007. The reduction in gross profit can be attributed to $8.8 million in reduced sales volume, a $4.7 million year over year increase in inventory obsolescence reserves (the obsolescence reserve increase is primarily due to the discontinuance of certain product lines during 2008), approximately $3.9 million in reduced margin due to product and channel mix as well as the impact of discounts on discontinued product lines and approximately $3.0 million related to lower capacity utilization in the U.S. and Taiwan. These increases were offset by approximately $4.6 million related to the foreign currency translation.

        Selling, General, and Administrative Expense.    Selling, general and administrative ("SG&A") expense for the year 2008 was $97.8 million, or 28.3% of net sales, compared to $84.5 million, or 23.7% of net sales, in 2007. SG&A expense as a percentage of net sales increased over 2007 as a result of $2.3 million related to severance expense in the U.S. and Europe, $1.4 million due to increased sales and marketing efforts, including trade shows, and $1.0 million related to a voluntary early retirement program offered in the U.S. during the fourth quarter of 2008. In addition to the severance, marketing,

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and early retirement costs, 2008 SG&A expense increased by approximately $3.6 million due to foreign currency transaction losses which were primarily related to our New Taiwanese Dollar—U.S. Dollar exposure and approximately $3.3 million related to foreign currency translation.

        Impairment Charge.    We recorded non-cash impairment charges of $24.4 million related to goodwill and intangible assets during 2008. $2.7 million of this charge was related to our Canadian operations. During the third quarter, as a result of changes to the Company's planned product strategy and method of delivering support to our Canadian customers, as well as an analysis of historical cash flows, we determined that the goodwill and intangible assets associated with the Canadian operations were impaired and recorded a non-cash charge, to reflect the diminished value of goodwill of $2.1 million and $0.6 million of intangible assets. During the fourth quarter of 2008, we performed our annual impairment testing for recorded goodwill and indefinite lived intangible assets. As a result of the current projected business levels and market cap of the company and industry peers, it was determined that the $21.7 million in goodwill was impaired.

        (Loss)/Income from Operations.    Loss from operations in 2008 was ($29.9) million compared to income of $22.9 million in 2007. This $52.8 million change was primarily due to: the 2008 goodwill and intangible asset impairment charges of $24.4 million; $7.6 million in impairment charges associated with the discontinuance of certain product lines and other expected inventory usage patterns; $3.2 million related to severance charges associated with our restructuring activities, and a net change of $3.6 million in currency transaction losses, in addition to the dramatic worldwide decline in business in the fourth quarter of 2008.

        Gain on Sale of Assets.    During 2007, we sold a facility in Exeter, England as part of integrating the Bridgeport operation into the existing business, and recorded a $1.4 million gain as a result of the sale.

        Interest Expense & Interest Income.    Interest expense includes interest payments under our credit facility and amortization of deferred financing costs associated with our credit facility.

        Interest expense for the year 2008 was $1.7 million, a decrease of $1.4 million, or 45% from 2007. The decrease is the result of overall lower interest rates during 2008 as well as lower average borrowings due to the use of our 2007 stock offering proceeds to pay down debt. Interest income was $0.3 million in 2008 compared to $0.2 million in 2007.

        Income Tax Expense.    Income tax expense in 2008 was $3.0 million compared to $6.5 million in 2007. The effective tax rate was 9.8% in 2008 and 30.4% in 2007. The 2008 effective rate was negatively impacted by a significant amount of the goodwill impairment charges, which were non-deductible, resulting in a negative impact of 16.0%. Other changes from 2007 include an increase in our valuation allowance due to not recording a tax benefit on losses in the U.S., U.K., German, and Canadian operations. In addition, we experienced a net increase in 2008 in our liability for uncertain tax benefits due to foreign tax positions and settlements, as well as a change in the mix of profits by country. The income tax expense fundamentally represents tax expense on profits in certain of the Company's foreign subsidiaries.

        We continue to maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, and Canadian deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

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        In 2008, the valuation allowance increased by $20.0 million. This was due to an increase of $7.2 million due to not recording a tax benefit on losses in the U.S., Canada, U.K., and Germany, an increase of $10.7 million due to the increase in minimum pension liabilities in the U.S. and the U.K. (and other items also recorded in Other Comprehensive Income), an increase of $2.2 million for state tax credits, and a decrease of $.1 million due a reduction and a reversal of tax assets in accordance with ASC Topic 740.

        As specified in SFAS 109, the Company regularly reviews recent results and projected future results of its operations, as well as other relevant factors, to reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.

        Net (Loss) Income.    Net loss for 2008 was ($34.3) million or (9.9%) of net sales, compared to $14.9 million net income, or 4.2% of net sales in 2007. Basic and diluted loss per share for 2008 were ($3.04), compared to basic and diluted earnings per share of $1.41 and $1.40 in 2007. Earnings per share were impacted by the increase in average shares outstanding as a result of our stock offering in April 2007.

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, 2009, cash and cash equivalents were $24.6 million, compared to $18.4 million at December 31, 2008. The current ratio at December 31, 2009 was 3.89:1 compared to 2.80:1 at December 31, 2008.

        As shown in the Consolidated Statements of Cash Flows, cash provided by operating activities was $32.8 million in 2009 compared to $10.7 million in 2008. This represents an increase in cash provided by operations of $22.1 million.

        The table below shows the changes in cash flows from operating activities by component:

 
  Cash Flows from Operating Activities  
 
  2009   2008   Change in
Cash Flow
 
 
  (dollars in thousands)
 

Cash provided by/(used in):

                   

Net (loss)

  $ (33,309 ) $ (34,305 ) $ 996  

Non-cash inventory write downs

    8,127     7,560     567  

Impairment charge

    1,650     24,351     (22,701 )

Depreciation and amortization

    8,504     9,439     (935 )

Debt issuance amortization

    1,341     421     920  

Provision for deferred taxes

    347     1,278     (931 )

Loss (gain) on sale of assets

    240     (54 )   294  

Accounts receivable

    21,009     8,503     12,506  

Notes receivable

    (580 )   1,512     (2,092 )

Inventories

    41,474     2,909     38,565  

Prepaids/Other assets

    1,459     (3,437 )   4,896  

Accounts payable

    (3,574 )   (6,036 )   2,462  

Accrued expenses/accrued post-retirement benefits

    (13,754 )   (3,082 )   (10,672 )

Other

    (140 )   1,673     (1,813 )
               

Cash provided by operating activities

  $ 32,794   $ 10,732   $ 22,062  
               

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        In 2009, $32.8 million cash was provided by operating activities. Cash provided by operations was used to fund the net loss adjusted for non-cash expenses which included depreciation and amortization and inventory write downs. Cash was provided by changes in accounts receivable, inventories, and prepaid and other assets. Cash was used for accrued expenses which were primarily driven by decreases in customer deposits and accounts payable which decreased as a result of reduced purchasing activity driven by the economic downturn. The decrease in accounts receivable is due to lower sales levels during the end of 2008 and 2009. The decrease in inventory levels is due to special customer incentive programs, decreased production levels, and concentrated inventory reduction efforts.

        In 2008, cash was provided primarily by adding non-cash expenses including depreciation and amortization, inventory write down, impairment charge and provision for deferred taxes to the net loss. Cash was also provided by changes in accounts receivable, notes receivable, inventories, and other operating activities. Cash was used for prepaid and other assets, accrued expenses which were primarily driven by decreases in customer deposits and accounts payable which decreased as a result of reduced purchasing activity driven by the economic downturn. The decrease in accounts receivable is due to lower sales levels during the fourth quarter of 2008. The decrease in inventory levels is due to special customer incentive programs, decreased production levels, and concentrated inventory reduction efforts.

        The table below shows the changes in cash flows from investing activities by component:

 
  Cash Flow from Investing Activities  
 
  2009   2008   Change in
Cash Flow
 
 
  (dollars in thousands)
 

Cash (used in)/provided by:

                   

Capital expenditures

  $ (3,178 ) $ (4,693 ) $ 1,515  

Proceeds from sale of assets

    125     106     19  

Purchase of technical information

    (142 )   (175 )   33  
               

Cash (used in) provided by investing activities

  $ (3,195 ) $ (4,762 ) $ 1,567  
               

        Cash used in investing activities was $3.2 million for 2009, compared to $4.8 million in 2008. Capital expenditures for 2009 and 2008 were $3.2 million and $4.7 million, respectively. Capital expenditures in 2009 and 2008 included investment in manufacturing equipment and upgrades to information technology infrastructure.

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        Cash (used in)/provided by financing activities for 2009 and 2008 are summarized in the table below:

 
  Cash Flow from Financing Activities  
 
  2009   2008   Change in
Cash Flow
 
 
  (dollars in thousands)
 

Cash (used in)/ provided by:

                   

(Repayments) borrowings on long-term debt

  $ (24,545 ) $ 3,129   $ (27,674 )

Borrowings on short term notes payable

    11,357     49,010     (37,653 )

Repayments on short term notes payable

    (10,038 )   (51,810 )   41,772  

Net (purchases) of treasury stock

        (585 )   585  

Debt issuance fees paid

    (739 )   (993 )   254  

Payments of dividends

    (288 )   (1,833 )   1,545  
               

Cash (used in) financing activities

  $ (24,253 ) $ (3,082 ) $ (21,171 )
               

        Cash flow used in financing activities was $24.3 million for 2009, compared to $3.1 million for 2008. During 2009, we used $24.0 million generated from operations to repay the multi-currency debt facility. We borrowed $8.4 million on a 366 day term loan in March 2009 which was repaid in December 2009. In addition, we borrowed $3.0 million and repaid $1.7 million for general operational needs under our short term credit facility in 2009. In 2008, we borrowed $49.0 million and repaid $51.8 million under our short term credit facility. Dividend payments decreased by $1.5 million in 2009 as a result of decreasing the quarterly dividend payout to $0.01 per share for March 2009 and to $0.005 per share for June, September and December of 2009. During 2009, we also paid fees of $0.7 million related to the term loan facility compared to $1.0 million related to the term loan facility and the multi-currency debt facility during the same period of 2008.

        There were no shares of stock purchased under our Stock Repurchase Program during 2009. During 2008, we used $0.6 million to purchase stock through this program. Under the Stock Repurchase Program, we repurchased 45,500 shares of stock at an average price of $12.72 per share.

        At December 31, 2009 debt outstanding, including notes payable was $5.0 million compared to $28.1 million on December 31, 2008.

        In June 2008, we entered into a five-year $100.0 million multi-currency secured credit facility ("Credit Facility"). The Credit Facility replaced a $70.0 million revolving credit and a term loan agreement which was due to mature January 2011 as well as several other credit facilities in place in our foreign subsidiaries. The Credit Facility was secured by substantially all of the Company's and its domestic subsidiaries' assets, other than real estate, and a pledge of (i) 100% of the Company's investments in its domestic subsidiaries and (ii) 662/3% of the Company's investment in Hardinge Holdings GmbH the parent corporation of our significant foreign subsidiaries. In addition, if certain conditions were met, Hardinge Holdings GmbH may have been required to pledge its investment in certain of its material foreign subsidiaries. The obligations of the Company and Hardinge Holdings were also guaranteed by all of the Company's domestic subsidiaries and, under certain conditions, by certain of the Company's material foreign subsidiaries. Interest was based on London Interbank Offered Rates plus a spread which varied depending on the Company's debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. A variable commitment fee of 0.20% to 0.375%, based on the Company's debt to EBITDA ratio, was payable on the unused portion of the Credit Facility. At December 31, 2008, borrowings under this agreement were $24.0 million.

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        In March 2009, after using cash on hand generated from operating results to reduce the outstanding obligations under our $100.0 million multi-currency secured credit facility to $8.0 million, the facility was terminated. We recorded a non-cash charge of $1.0 million in the first quarter of 2009 related to the unamortized deferred financing costs in connection with this termination.

        In March 2009, we entered into an agreement with a bank for a 366 day $10.0 million term loan due on March 16, 2010. This term loan replaced the $100.0 million multi-currency secured credit facility. The term loan was secured by substantially all of the Company's U.S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 662/3% of the Company's investment in Hardinge Holdings GmbH. Interest was based on one-month London Interbank Offered Rates ("LIBOR") plus 5.0%. The interest rate increased by 1.0% to LIBOR plus 6.0% on September 30, 2009, with a minimum interest rate of 5.5% at all times.

        In December 2009, we replaced the $10.0 million term loan due March 16, 2010 with a $10.0 million revolving credit facility due March 31, 2011. This new credit facility is secured by substantially all of the Company's U. S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 65% of the Company's investment in Hardinge Holdings GmbH. The credit facility is guaranteed by Hardinge Technology Systems, Inc., a wholly-owned subsidiary of the Company and owner of the real property comprising the Company's world headquarters in Elmira, New York. The credit facility's interest is based on the one-month LIBOR with a minimum interest rate of 5.5%. The new credit facility does not include any financial covenants. Simultaneous with closing the new credit agreement, the Company used cash on hand generated from operating results to repay the $8.4 million that was outstanding under the $10.0 million term loan. There are no amounts outstanding under this credit facility as of December 31, 2009.

        We have a $3.0 million unsecured short-term line of credit from a bank with interest based on the prime rate with a floor of 5.0% and a ceiling of 16%. There was no balance outstanding at December 31, 2009 or 2008 on this line. The agreement is negotiated annually and requires no commitment fee. It is payable on demand.

        In December 2008, our Kellenberger AG ("Kellenberger") subsidiary replaced their existing credit facilities and loan agreements with two new unsecured loan facilities with banks providing for borrowing of up to CHF 11.5 million ($10.8 million equivalent). These lines provided for interest at competitive short-term interest rates and carried no commitment fees on unused funds. At December 31, 2008 there were no borrowings under these facilities. These credit facilities were terminated and replaced with the new credit facilities discussed below in 2009.

        In August 2009, Kellenberger entered into two Credit Agreements with a bank. The first Credit Facility provides for borrowing of up to CHF 7.5 million ($7.2 million equivalent) which can be used for guarantees, documentary credit, or margin cover for foreign exchange hedging activity conducted with the bank with maximum terms of 12 months. The interest rate, which is currently 1.2% per annum, is determined by the bank based on prevailing money and capital market conditions and the bank's risk assessment of Kellenberger. The second Credit Facility is a working capital facility which can provide for borrowing of up to CHF 5.0 million ($4.8 million equivalent), and can be used as a limit for cash credits in the form of fixed advances in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months. The interest rate, which is currently LIBOR plus 1.5% or 1.8% for a 90 day borrowing, is determined by the bank based on prevailing money and capital market conditions and the bank's risk assessment of Kellenberger. Both credit facilities are secured by the real property owned by Kellenberger. The agreements are also subject to a minimum equity covenant requirement where the minimum equity for Kellenberger must be at least 35% of its balance sheet total assets. Indebtedness under both agreements is payable upon demand. At December 31, 2009, we were in compliance with the required minimum equity ratios.

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        In October 2009, Kellenberger entered into another Credit Agreement with a bank. This new agreement provides Kellenberger a CHF 7.0 million ($6.8 million equivalent) facility, that provides for up to CHF 7.0 million ($6.8 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($2.9 million equivalent) of the facility can be used for working capital. This facility is secured by the Company's real estate in Biel Switzerland up to CHF 3.0 million ($2.9 million equivalent). This new facility replaced a CHF 4.0 million ($3.9 million equivalent) credit facility with the same bank that provided up to CHF 4.0 million ($3.9 million equivalent) for similar borrowings. This new credit facility charges interest at the current rate of 5.75% subject to change by the bank based on market conditions. It carries no commitment fees on unused funds. The credit facility contains a minimum equity ratio covenant. At December 31, 2009, we were in compliance with the required minimum equity ratios.

        In June 2006, our Taiwan subsidiary negotiated a mortgage loan with a bank secured by the real property owned by the Taiwan subsidiary which initially provided borrowings of NTD 153.0 million ($4.7 million equivalent). At December 31, 2009 borrowings under this agreement were NTD 117.0 million ($3.7 million equivalent). Principal on the mortgage loan is repaid quarterly in the amount of NTD 4.5 million ($0.1 million equivalent).

        In October 2009, Hardinge Taiwan entered into an unsecured credit facility with a bank. This agreement provides a working capital facility of NTD 100.0 million ($3.1 million equivalent). This credit facility charges interest at the banks current base rate of 2.5% subject to change by the bank based on market conditions. It carries no commitment fees on unused funds. At December 31, 2009 the balance outstanding under this facility was NTD 43.6 million ($1.4 million equivalent).

        We maintain a standby letter of credit for potential liabilities pertaining to self-insured workers compensation exposure. The amount of the letter of credit was $1.6 at December 31, 2009. It was reduced to $1.3 million on January 14, 2010 and expires on March 15, 2011. In total, we had various outstanding letters of credit totaling $7.2 million and $9.1 million at December 31, 2009 and 2008, respectively.

        The Company had total credit availability of up to $38.6 million at December 31, 2009. The unused amount available for working capital borrowings was $20.8 million. Total consolidated outstanding borrowings at December 31, 2009 and 2008 were $5.0 million and $28.1 million, respectively. Interest expense in 2009, 2008, and 2007 totaled $1.9 million, $1.7 million, and $3.1 million, respectively.

        We conduct some of our manufacturing, sales and service operations from leased space, with lease terms up to 10 years, and use certain data processing equipment under lease agreements expiring at various dates. Rent expense under these leases totaled $1.9 million, $2.5 million, and $2.0 million, during the years ended December 31, 2009, 2008, and 2007, respectively.

        The following table shows our future commitments in effect as of December 31, 2009 (in thousands):

 
  2010   2011   2012   2013   2014   There-
after
  Total  

Notes payable and debt payments

  $ 1,925   $ 563   $ 563   $ 563   $ 563   $ 843   $ 5,020  

Operating lease obligations

    1,305     1,010     658     589     482     1,304     5,348  

Purchase commitments

    8,840                         8,840  

Standby letters of credit

    7,247                         7,247  

        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

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the above table. In 2010, we anticipate making $2.9 million contributions to our domestic and foreign defined benefit pension plans and $0.4 million contributions to our domestic post-retirement plan.

        We believe that the currently available funds and credit facilities, along with internally generated funds, will provide sufficient financial resources for ongoing operations throughout 2010.

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 $0.3 million in 2009 and $0.6 million in 2008. These amounts are determined by considering the impact of hypothetical interest rates on the Company's borrowing cost.

        Our operations include manufacturing and sales activities in foreign jurisdictions. We currently manufacture our products in the United States, Switzerland, Taiwan and China using production components purchased internationally, and we sell our products in those markets as well as other worldwide markets. Our subsidiaries in the U.K., Germany, the Netherlands, Switzerland and Canada 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. Our Taiwanese subsidiary sells products to foreign purchasers in U.S. dollars. 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 U.S. Dollar, Canadian Dollar, British Pound Sterling, Swiss Franc, Euro, New Taiwanese Dollar, Chinese Renminbi and Japanese Yen. 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 and Notes Receivable.    We assess the collectibility of our trade accounts and notes 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

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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. On a case by case basis, we offer long-term customer financing in the form of notes receivable at some of our foreign operations. 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 uncollectibility. 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 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 metal-cutting 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, including some 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.

        Intangible Assets.    We have acquired other machine tool companies or assets of companies. When doing so, we have used outside specialists to assist in determining the value of 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 other purchased intangible assets on our balance sheet have been affected by the use of numerous estimates of the value of assets purchased and of future business opportunity. During 2008, the Company recorded non-cash impairment charges of $24.4 million. See Note 4 to the Company's consolidated financial statements for additional information on these non-cash charges.

        Net Deferred Tax Assets.    We annually 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. We continue to record a valuation allowance against deferred tax assets in the U.S., U.K., Germany, Canada, and the Netherlands.

A-41


        Retirement Plans.    We sponsor various defined benefit pension plans, defined contribution plans, and one postretirement benefit plan, all as described in Note 8 of 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, using bond pricing models based on high grade 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 6.27% and 6.60% at our plan measurement date of December 31, 2009 and 2008, respectively. We discounted our future plan liabilities for our foreign plans using rates appropriate for each country, which resulted in a blended rate of 3.84% and 3.13% at their measurement dates of December 31, 2009 and 2008, 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 $11.3 million. An increase of one percent would decrease U.S. pension obligations by approximately $9.4 million. A decrease of one percent in the discount rate would increase the Kellenberger pension obligations by approximately $9.4 million. An increase of one percent would decrease the Kellenberger pension obligations by approximately $6.5 million.

        A change in the discount rate 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. An increase of one percent would increase U.S. pension expense by approximately $0.2 million. A decrease of one percent would increase the Kellenberger pension expense by approximately $1.0 million. An increase of one percent would decrease the Kellenberger pension expense by approximately $0.6 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 of each asset class was then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption. We used an expected rate of return of 8.00% and 8.50% at our measurement dates of December 31, 2009 and 2008, respectively, for our domestic plan. We used rates of return appropriate for each country for our foreign plans which resulted in a blended expected rate of return of 5.14% and 5.24% at their measurement dates of December 31, 2009 and 2008, respectively. 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 Kellenberger pension expense by approximately $0.7 million. Conversely, an increase of one percent would decrease the Kellenberger pension expense by approximately $0.7 million.

New Accounting Standards

        In December 2007, the Financial Accounting Standards Board ("FASB") issued new guidance, on "Non-controlling Interests in Consolidated Financial Statements. ASC Topic 810 requires that ownership interests in subsidiaries held by parties other than the parent be presented separately within equity in the consolidated balance sheet. ASC Topic 810 also requires that the consolidated net income attributable to the parent and to the non-controlling interests be identified and displayed on the face of

A-42



the consolidated income statement. We adopted the provisions of ASC Topic 810 January 1, 2009. The impact of adoption was not material to our consolidated financial statements.

        In June 2008, the FASB updated ASC Topic 260 to clarify that unvested share-based payment awards with non-forfeitable rights to dividends or dividend equivalents are considered participating securities and should be included in the calculation of earnings per share pursuant to the two-class method. The standard was effective for financial statements issued for periods beginning after December 15, 2008 with early adoption prohibited. All prior period earnings per share data presented have been adjusted to comply with the provisions of ASC 260. The adoption of the two-class method increased the basic (loss) per share by $0.01 for year ended December 31, 2008 and reduced the basic earnings per share by $0.02 for the year ended December 31, 2007. Diluted (loss) per share increased by $0.01 for the year ended December 31, 2008 and the diluted earnings per share was reduced by $0.01 for the year ended December 31, 2007.

        In December 2008, the FASB issued changes to "Employer's Disclosures about Postretirement Benefit Plan Assets." ASC Topic 715-20 provides guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. Required disclosures address: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and significant concentrations of risk within plan assets. These changes become effective for 2009, and are not required for earlier periods presented for comparative purposes. We adopted ASC Topic 715-20 in the year ended December 31, 2009 and the required disclosures can be found in our Notes 8 and 9 to our consolidated financial statements.

        In April 2009, the FASB issued guidance now codified as FASB ASC Topic 820, "Fair Value Measurements and Disclosures," which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This guidance also includes provisions for identifying circumstances that indicate a transaction is not orderly. The provisions of this guidance are effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We adopted the provisions of this guidance during the year ended December 31, 2009 and its impact on our consolidated financial position, cash flows, and results of operations was not significant.

        In April 2009, the FASB issued guidance now codified as FASB ASC Topic 825, "Financial Instruments," which amends previous Topic 825 guidance to require disclosures about the fair value of financial instruments for interim periods of publicly traded companies as well as in annual financial statements. This guidance also amends previous guidance in FASB ASC Topic 270, "Interim Reporting," to require those disclosures in summarized financial information at interim reporting periods. We adopted the provisions of this guidance during the year ended December 31, 2009 and its impact on our disclosures was not significant.

        In May 2009, the FASB issued authoritative guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This guidance, which was incorporated into ASC Topic 855, "Subsequent Events," was effective in 2009. The Company adopted ASC Topic 855 during the year ended December 31, 2009. We have evaluated subsequent events through the date our consolidated financial statements were issued, noting no events that require adjustment of, or disclosure in, the consolidated financial statements except for the matters disclosed in Note 19 to our consolidated financial statements.

        In June 2009, the FASB issued authoritative guidance establishing two levels of U.S. generally accepted accounting principles ("GAAP")—authoritative and nonauthoritative—and making the Accounting Standards Codification ("ASC") the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission. This guidance,

A-43



which was incorporated into ASC Topic 105, "Generally Accepted Accounting Principles," was effective in 2009. The adoption changed certain disclosure references to U.S. GAAP, but did not have any other impact on our consolidated financial statements.

        In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We do not expect adoption of this standard to have a material impact on our consolidated results of operations and financial condition.

        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 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 7A.—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information required by this item is incorporated herein by reference to the section entitled "Market Risk" in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition, of this Form 10-K.

A-44


ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HARDINGE INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
December 31, 2009

Audited Consolidated Financial Statements

   

Report of Independent Registered Public Accounting Firm

 
A-46

Consolidated Balance Sheets

  A-47

Consolidated Statements of Operations

  A-48

Consolidated Statements of Cash Flows

  A-49

Consolidated Statements of Shareholders' Equity

  A-50

Notes to Consolidated Financial Statements

  A-51

Schedule II—Valuation and Qualifying Accounts is included in Item 15(a) of this report.

        All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.

A-45


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, 2009 and 2008, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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.

        As discussed in Notes 1 and 6 to the consolidated financial statements, the Company changed its method of accounting for uncertainty in income taxes with the adoption of the guidance originally issued in FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109" (codified in FASB ASC Topic 740, "Income Taxes") on January 1, 2007, and as discussed in Note 18 to the consolidated financial statements, the Company retrospectively adjusted the consolidated financial statements as a result of the Company's adoption of FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" (codified in FASB ASC Topic 260 "Earnings per Share") on January 1, 2009.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hardinge Inc.'s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2010 expressed an unqualified opinion thereon.

    /s/ Ernst & Young LLP

Buffalo, New York
March 15, 2010

A-46



HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  December 31,  
 
  2009   2008  
 
  (In Thousands Except Share and
Per Share Data)

 

Assets

             
 

Cash and cash equivalents

  $ 24,632   $ 18,430  
 

Accounts receivable, net

    39,936     60,110  
 

Notes receivable, net

    2,364     994  
 

Inventories, net

    97,266     144,957  
 

Deferred income taxes

    732     398  
 

Prepaid expenses

    9,375     10,964  
           

Total current assets

    174,305     235,853  
 

Property, plant and equipment

   
144,635
   
183,387
 
 

Less accumulated depreciation

    89,924     123,790  
           

Net property, plant and equipment

    54,711     59,597  
 

Notes receivable, net

   
157
   
923
 
 

Deferred income taxes

    446     1,406  
 

Intangible assets

    10,527     10,725  
 

Pension assets

    2,032     437  
 

Other long-term assets

    26     884  
           

Total non-current assets

    13,188     14,375  
           

Total assets

  $ 242,204   $ 309,825  
           

Liabilities and shareholders' equity

             
 

Accounts payable

  $ 16,285   $ 20,059  
 

Notes payable to bank

    1,364      
 

Accrued expenses

    22,177     33,255  
 

Accrued income taxes

    1,535     2,911  
 

Deferred income taxes

    2,832     3,466  
 

Current portion of long-term debt

    563     24,549  
           

Total current liabilities

    44,756     84,240  
 

Long-term debt

   
3,095
   
3,572
 
 

Accrued pension liability

    22,082     47,442  
 

Accrued postretirement benefits

    2,472     2,528  
 

Accrued income taxes

    2,377     2,153  
 

Deferred income taxes

    4,030      
 

Other liabilities

    1,862     1,763  
           

Total non-current liabilities

    35,918     57,458  
 

Common Stock—$0.01 par value

   
125
   
125
 
 

Additional paid-in capital

    114,387     114,841  
 

Retained earnings

    59,103     92,700  
 

Treasury shares—939,240 shares at December 31, 2009 and 1,003,828 shares at December 31, 2008

    (11,978 )   (13,037 )
 

Accumulated other comprehensive (loss)

    (107 )   (26,502 )
           

Total shareholders' equity

    161,530     168,127  
           

Total liabilities and shareholders' equity

  $ 242,204   $ 309,825  
           

See accompanying notes to the consolidated financial statements.

A-47



HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 
  Year Ended December 31,  
 
  2009   2008   2007  
 
  (In Thousands Except Per Share Data)
 

Net sales

  $ 214,071   $ 345,006   $ 356,322  

Cost of sales

    173,275     252,741     248,911  
               

Gross profit

    40,796     92,265     107,411  

Selling, general and administrative expense

    68,556     97,796     84,520  

Loss (gain) on sale of assets

    240     (54 )   (1,372 )

Impairment charge

    1,650     24,351      
               

(Loss) income from operations

    (29,650 )   (29,828 )   24,263  

Interest expense

    1,926     1,714     3,051  

Interest (income)

    (114 )   (285 )   (224 )
               

(Loss) income before income taxes

    (31,462 )   (31,257 )   21,436  

Income taxes

    1,847     3,048     6,510  
               

Net (loss) income

  $ (33,309 ) $ (34,305 ) $ 14,926  
               

Per share data:

                   

Basic (loss) earnings per share

 
$

(2.93

)

$

(3.04

)

$

1.41
 
               

Diluted (loss) earnings per share

  $ (2.93 ) $ (3.04 ) $ 1.40  
               

Cash dividends declared per share

  $ 0.025   $ 0.16   $ 0.20  
               

See accompanying notes to the consolidated financial statements.

A-48



HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
  Year Ended December 31,  
 
  2009   2008   2007  
 
  (In Thousands)
 

Operating activities

                   

Net (loss) income

  $ (33,309 ) $ (34,305 ) $ 14,926  

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

                   
 

Non-cash—inventory write down

    8,127     7,560      
 

Impairment charge

    1,650     24,351      
 

Depreciation and amortization

    8,504     9,439     9,446  
 

Debt issuance amortization

    1,341     421     288  
 

Provision for deferred income taxes

    347     1,278     250  
 

Loss (gain) on sale of assets

    240     (54 )   (1,372 )
 

Unrealized intercompany foreign currency transaction (gain) loss

    (140 )   1,673     (1,062 )
 

Changes in operating assets and liabilities:

                   
   

Accounts receivable

    21,009     8,503     5,560  
   

Notes receivable

    (580 )   1,512     2,495  
   

Inventories

    41,474     2,909     (21,448 )
   

Prepaids/other assets

    1,459     (3,437 )   2,401  
   

Accounts payable

    (3,574 )   (6,036 )   (4,857 )
   

Accrued expenses

    (12,744 )   (3,162 )   1,262  
   

Accrued postretirement benefits

    (1,010 )   80     (432 )
               

Net cash provided by operating activities

    32,794     10,732     7,457  

Investing activities

                   

Capital expenditures

    (3,178 )   (4,693 )   (5,582 )

Proceeds on sale of assets

    125     106     3,629  

Purchase of Canadian entity net of cash acquired

            (240 )

Purchase of technical information

    (142 )   (175 )    
               

Net cash (used in) investing activities

    (3,195 )   (4,762 )   (2,193 )

Financing activities

                   

Borrowings under short-term notes payable to bank

    11,357     49,010     84,484  

Repayments of short-term notes payable to bank

    (10,038 )   (51,810 )   (86,026 )

(Decrease) increase in long-term debt

    (24,545 )   3,129     (48,724 )

Net proceeds from issuance of common stock

            55,946  

Net (purchases) of treasury stock

        (585 )   (89 )

Debt issuance fees paid

    (739 )   (993 )   (152 )

Dividends paid

    (288 )   (1,833 )   (2,164 )
               

Net cash (used in) provided by financing activities

    (24,253 )   (3,082 )   3,275  

Effect of exchange rate changes on cash

    856     (461 )   702  
               

Net increase in cash

    6,202     2,427     9,241  

Cash and cash equivalents at beginning of year

    18,430     16,003     6,762  
               

Cash and cash equivalents at end of year

  $ 24,632   $ 18,430   $ 16,003  
               

See accompanying notes to the consolidated financial statements.

A-49



HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(Dollars in thousands)

 
  Common
Stock
  Additional
Paid-in
Capital
  Retained
Earnings
  Treasury
Stock
  Accumulated
Other
Comp.
Income
(Loss)
  Total
Shareholders'
Equity
 

Balance at December 31, 2006

  $ 99   $ 59,741   $ 116,438   $ (13,916 ) $ (5,253 ) $ 157,109  

Comprehensive Income

                                     

Net income

                14,926                 14,926  
 

Other comprehensive income (loss)

                                     
   

Postretirement plans

                            20,469     20,469  
   

Foreign currency translation adjustment

                            9,229     9,229  
   

Unrealized gain on cash flow hedge

                            67     67  
   

Unrealized (loss) on net investment hedge

                            (278 )   (278 )
   

Comprehensive income

                                  44,413  
   

Dividends declared

                (2,164 )               (2,164 )

Adoption of FIN48

                (362 )               (362 )

Secondary Equity Offering

    26     55,920                       55,946  

Shares issued pursuant to long-term incentive plan

          (847 )         847           0  

Shares forfeited pursuant to long-term incentive plan

          65           (105 )         (40 )

Amortization (long-term incentive plan)

          333                       333  

Net purchase of treasury stock

          (241 )         151           (90 )
   

Balance at December 31, 2007

  $ 125   $ 114,971   $ 128,838   $ (13,023 ) $ 24,234   $ 255,145  
   

Comprehensive Income (Loss)

                                     

Net (loss)

                (34,305 )               (34,305 )
 

Other comprehensive income (loss)

                                     
   

Postretirement plans

                            (46,767 )   (46,767 )
   

Foreign currency translation adjustment

                            (3,050 )   (3,050 )
   

Unrealized (loss) on cash flow hedge

                            (654 )   (654 )
   

Unrealized (loss) on net investment hedge

                            (265 )   (265 )
   

Comprehensive (loss)

                                  (85,041 )
   

Dividends declared

                (1,833 )               (1,833 )

Shares issued pursuant to long-term incentive plan

          (1,225 )         1,225           0  

Shares forfeited pursuant to long-term incentive plan

          381           (622 )         (241 )

Amortization (long-term incentive plan)

          682                       682  

Net purchase of treasury stock

          32           (617 )         (585 )
   

Balance at December 31, 2008

  $ 125   $ 114,841   $ 92,700   $ (13,037 ) $ (26,502 ) $ 168,127  
   

Comprehensive Income (Loss)

                                     

Net (loss)

                (33,309 )               (33,309 )
 

Other comprehensive income (loss)

                                     
   

Postretirement plans

                            21,018     21,018  
   

Foreign currency translation adjustment

                            5,377     5,377  
   

Comprehensive (loss)

                            0     (6,914 )
   

Dividends declared

                (288 )               (288 )

Shares issued pursuant to long-term incentive plan

          (530 )         530           0  

Shares forfeited pursuant to long-term incentive plan

          64           (64 )         0  

Amortization (long-term incentive plan)

          438           0           438  

Net purchase of treasury stock

          (426 )         593           167  
   

Balance at December 31, 2009

  $ 125   $ 114,387   $ 59,103   $ (11,978 ) $ (107 ) $ 161,530  
   

See accompanying notes to the consolidated financial statements.

A-50



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2009

1. Significant Accounting Policies

Nature of Business

        Hardinge Inc. (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. Sales are to customers in North America, Europe, and 'Asia and Other.' 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, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment, telecommunications, and transportation.

FASB Accounting Standards Codification

        Effective in 2009, the Financial Accounting Standards Board (FASB) has defined a new hierarchy for U.S. generally accepted accounting principles ("GAAP") and established the FASB Accounting Standards Codification (ASC) as the sole source for authoritative guidance to be applied by non-governmental entities. Adoption of the ASC changes the manner in which GAAP guidance is referenced, but it does not have any impact on our financial position or results of operations.

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.

Recent Developments

        The global economic recession, which began in 2008, continued to impact the industries in which we conduct business throughout 2009. The reduced availability of credit has impacted our customers' ability to obtain financing. As a result, we continued to experience order cancellations and low levels of incoming orders and related sales activity during the year. Due to these conditions, management continually assessed and implemented cost reduction initiatives throughout the Company to preserve cash flow. During 2009, we successfully negotiated new credit facilities in the US, Switzerland and Taiwan providing the liquidity needed for working capital when we rebound from this current economic downturn. Management believes the actions taken during the second half of 2008 and throughout 2009 will provide the required cash flow to enable us to meet our financial commitments throughout 2010.

Reclassifications

        Certain prior year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no impact on our results of operations, financial position, or changes in shareholders' equity.

Use of Estimates

        The accompanying consolidated financial statements have been prepared in accordance with 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.

A-51



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

1. Significant Accounting Policies (Continued)

Cash and Cash Equivalents

        Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of purchase. The fair value of the Company's cash and cash equivalents approximates carrying amounts due to the short maturities.

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 limited due to the large number of customers comprising our customer base. We consider 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 $2.7 million and $1.9 million at December 31, 2009 and 2008, 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.

Notes Receivable

        In the past, we provided long-term financing for the purchase of our equipment by qualified end-user customers in North America. In 2002, we replaced the internal program by offering lease programs from selected established equipment lease financing companies in the U.S. and Canada. Before that change, customer financing was generally offered for a term of up to seven years, with the Company retaining a security interest in the purchased equipment and filing appropriate liens. We also have notes receivable in our Asian subsidiaries. These notes are fully guaranteed by local financial institutions and are generally for periods of less than one year. The amount of notes receivable outstanding was $2.5 million and $1.9 million at December 31, 2009, and December 31, 2008, respectively. These amounts are net of bad debt allowances of $2.2 million and $1.8 million at December 31, 2009 and 2008, respectively. In the event of a customer default and foreclosure, it is our practice to recondition and resell the equipment. It has been our experience that such equipment resales have realized most, but not all, of the remaining contract value. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments on notes.

Prepaid Expenses and Other Current Assets

        Prepaid expenses and other current assets consist of prepaid insurance, prepaid real estate taxes, prepaid software license agreements, prepaid income taxes and security deposits on certain inventory purchases. Prepayments are expensed on a straight-line basis over the corresponding life of the underlying asset.

A-52



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

1. Significant Accounting Policies (Continued)

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 materials, labor and overhead.

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 on the straight-line and accelerated methods over the assets' estimated useful lives. The depreciable lives of our fixed assets vary according to their estimated useful lives and generally are: 40 years for buildings, 12 years for machinery, 10 years for patterns, tools, jigs, and furniture and fixtures, and 5 years for office and computer equipment. Depreciation expense was $7.2 million, $8.1 million, and $8.3 million for 2009, 2008 and 2007, respectively.

Goodwill and Intangibles

        Goodwill and other separately recognized intangible assets with indefinite lives are not subject to amortization, but are reviewed at least annually for impairment or are reviewed for impairment between annual tests if an event occurs or circumstances change that more likely than not would indicate the carrying amount may be impaired. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment.

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.

Income Taxes

        We account for income taxes using the liability method where deferred tax assets and liabilities are recognized based on differences between financial reporting and tax bases of assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In addition, the amount of any future tax benefits is reduced by a valuation allowance until it is more likely than not those benefits will be realized.

        The Company recorded a full valuation allowance for its U.S. net deferred tax assets. A valuation allowance is established when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company's current and past performance, the market conditions in which the company operates, the utilization of past tax credits, the length of carryback and carryforward periods, sales backlogs, etc. that will result in future profits. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Therefore,

A-53



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

1. Significant Accounting Policies (Continued)


cumulative losses weigh heavily in the overall assessment and were a major consideration in our decision to establish a valuation allowance.

        We continue to maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, Canadian, and Dutch deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

        The determination of our provision for income taxes 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, 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 our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Accordingly, these substantial judgment items impacted the effective tax rate for 2009.

        On January 1, 2007, the Company adopted ASC 740, and thus accounts for its uncertain tax positions in accordance with the provisions of ASC 740 guidance. Refer to Note 6, Income Taxes, for information related to the effect of the adoption of the accounting for the Company's uncertain tax positions.

Revenue Recognition

        Revenue from product sales is generally recognized upon shipment, provided persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectibility is reasonably assured, and the title and risk of loss have passed to the customer. Sales are recorded net of discounts, customer sales incentives, and returns. Discounts and customer sales incentives are typically negotiated as part of the sales terms at the time of sale and are recorded 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 compliance with standard operating specifications as listed in our promotional literature. On an exception basis, where larger multiple machine installations are delivered which require run-offs and customer acceptance at their facility, revenue is recognized in the period of customer acceptance.

        Revenue from extended warranties are deferred and recognized on a pro-rata basis across the term of the warranty contract.

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

A-54



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

1. Significant Accounting Policies (Continued)


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 cost 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 year. 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 in the month that product revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.

        We also sell extended warranties for some of our products. These extended warranties usually cover a 12-24 month period that begins up to 12 months after time of sale. Revenues for these extended warranties are recognized monthly as a portion of the warranty expires.

        These liabilities are reported in accrued expenses on our consolidated balance sheet.

        A reconciliation of the changes in our product warranty accrual during the year ended December 31, 2009 and 2008 is as follows:

 
  Year Ended December 31,  
 
  2009   2008  
 
  (in thousands)
 

Balance at beginning of period

  $ 2,872   $ 2,469  

Warranty settlement costs

    (2,541 )   (3,129 )

Warranties issued

    2,817     3,785  

Changes in accruals for pre-existing warranties

    (760 )   (345 )

Other—currency translation impact

    48     92  
           

Balance at end of period

  $ 2,436   $ 2,872  
           

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 $9.3 million, $9.8 million, and $10.6 million, in 2009, 2008, and 2007, 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

A-55



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

1. Significant Accounting Policies (Continued)


Other Comprehensive Income (loss). Gains and losses resulting from foreign currency denominated transactions are included as a component of selling, general and administrative expense in our Consolidated Statement of Operations.

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. The carrying values for our financial instruments approximate fair value. See Note 9 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 and designate these forward contracts as fair value hedges. 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 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 required service period.

Comprehensive Income

        Comprehensive income consists of net income, postretirement plan adjustments, foreign currency translation adjustments and unrealized gains or losses on hedging, net of tax, and is presented in the Consolidated Statements of Shareholders' Equity.

Earnings Per Share

        Basic earnings per common share is computed by dividing net (loss) income available to common shareholders by the weighted average number of common shares outstanding for the period. Net (loss) income available to common shareholders represents net (loss) income reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive stock options.

        Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the earnings allocation in the earnings per share calculation under the two-class method. Recipients of restricted stock are entitled to receive non-forfeitable dividends during the vesting period, therefore, meeting the definition of a participating security.

A-56



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

2. 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 cost include materials, labor and overhead and are as follows:

 
  December 31,  
 
  2009   2008  
 
  (in thousands)
 

Finished products

  $ 51,314   $ 74,287  

Work-in-process

    19,019     32,827  

Raw materials and purchased components

    26,933     37,843  
           

  $ 97,266   $ 144,957  
           

        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.

Reserve for Excess and Obsolete Inventory

 
  Years Ended December 31,  
 
  2009   2008   2007  
 
  (in thousands)
 

Balance at Beginning of Period

  $ 17,215   $ 14,085   $ 13,456  
 

Additions to provision

    11,365     11,317     3,434  
 

Less deductions

    4,421     8,187     2,805  
               

Balance at End of Period

  $ 24,159   $ 17,215   $ 14,085  
               

        During 2009, we recognized a non-cash charge of $8.1 million for the impairment of inventory. $5.0 million of this charge resulted from the discontinued production of non-critical manufacturing parts and certain machines in our Elmira, NY facility. $1.5 million of this charge was related to lower of cost or market write-downs on machines reflecting the current competitive market conditions and $1.6 million was related to excess and obsolescence reserve requirements.

        During 2008, we conducted a comprehensive evaluation of our operations, products, and worldwide markets. As a result of this strategic review, we decided to focus on products which were in the higher end of the product spectrum. As a result of this change, we discontinued certain product lines which targeted less demanding manufacturing applications. Additionally, due to the actions taken to reposition our product mix, as well as a review of other expected inventory usage patterns, we recognized a non-cash charge of approximately $7.6 million in 2008 for the impairment of inventory.

A-57



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

3. Property, Plant and Equipment

        Components of property, plant and equipment at December 31 consisted of the following:

 
  December 31,  
 
  2009   2008  
 
  (in thousands)
 

Land, buildings and improvements

  $ 64,675   $ 63,957  

Machinery, equipment and fixtures

    65,292     96,750  

Office furniture, equipment and vehicles

    14,668     22,680  
           

    144,635     183,387  

Less accumulated depreciation and amortization

    89,924     123,790  
           

Property, plant and equipment, net

  $ 54,711   $ 59,597  
           

        During 2009, as part of restructuring our North American manufacturing operations, we began moving towards a variable cost business model, outsourcing many of our non-critical components and subassemblies for machines currently manufactured in the Elmira, NY facility. As a result, we ceased manufacturing operations involved in the non-critical parts production in Elmira, NY in December 2009. In conjunction with this action, we identified certain property, plant and equipment with an acquisition cost of $22.9 million and net book value of $0.8 million that would no longer be utilized in our manufacturing operations and have made them available for sale. These assets were recorded on the balance sheet at $0.2 million as of December 31, 2009 based on the lower of the assets carrying value or fair value less estimated costs to sell, with a related impairment charge of $0.6 million. We expect that these assets will be sold during 2010.

        In addition to the assets that were classified as available for sale, we identified certain property, plant and equipment with an acquisition cost of $15.0 million and a net book value of $1.1 million that would no longer be utilized in our manufacturing operations and disposed of them. As of December 31, 2009 we recorded an impairment charge of $1.1 million related to these assets.

4. Goodwill and Intangibles

        Goodwill and other separately recognized intangible assets with indefinite lives are not amortized, but rather reviewed at least annually for impairment or reviewed for impairment between annual tests if an event occurs or circumstances change that more likely than not would indicate the carrying amount may be impaired. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment.

        During the third quarter of 2008, due to recurring losses at our Canadian entity, we performed a discounted cash flow analysis which indicated that the goodwill and intangible assets related to our Canadian entity were impaired. Accordingly, the Company recorded a non-cash charge of $2.1 million to reflect the impairment of the goodwill, as well as $0.6 million impairment charge on other intangible assets.

        During the fourth quarter of 2008 we conducted our annual impairment testing. As a result of the global economic conditions and the dramatic decreases in our equity value and the equity value of our industry peers, we determined that the carrying value of reporting units with goodwill exceeded their

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

4. Goodwill and Intangibles (Continued)


fair value, indicating that goodwill was potentially impaired. As a result, we initiated the second step of the goodwill impairment test which involves calculating the implied fair value of our goodwill by allocating the fair value of the related reporting unit to all of the reporting unit's assets and liabilities other than goodwill and comparing it to the carrying amount of goodwill. We determined that the implied fair value of our remaining goodwill was $0.0 which resulted in a further $21.6 million impairment charge in 2008.

        At December 31, 2009 and 2008, we do not have any amounts recorded as goodwill on our balance sheet. The major components of intangible assets are as follows:

 
  December 31,  
 
  2009   2008  
 
  (in thousands)
 

Amortizable intangible assets:

             

Technical information, patents, and other items

  $ 8,961   $ 8,961  

Nonamortizable intangible assets:

             

Trade name, trademarks & copyrights

    6,849     6,500  
           

    15,810     15,461  

Less accumulated amortization

    (5,283 )   (4,736 )
           

Intangible Assets, net

  $ 10,527   $ 10,725  
           

        Nonamortizable intangible assets represent the value of the name, trademarks and copyrights associated with the former worldwide operations of Bridgeport, which were acquired in 2004. The Company uses this recognized brand name on all of its machining center lines, and therefore, the asset has been determined to have an indefinite useful life.

        Amortization of intangible assets for the years ended December 31, 2009 and 2008 was $0.7 million and $0.9 million. The estimated amortization expense on existing intangible assets for each of the next five years is approximately $0.8 million, $0.6 million, $0.6 million, $0.6 million, and $0.6 million, respectively. The estimated weighted average useful life of these amortizing intangible assets is 6 years.

A-59



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

5. Financing Arrangements

        Long-term debt consists of:

 
  December 31,  
 
  2009   2008  
 
  (in thousands)
 

Note payable under revolving credit facility, with an effective interest rate of 2.22% at December 31, 2008

  $   $ 24,000  

Real estate secured loan payable under terms of loan agreement, with interest rates of 1.57% at December 31, 2009 and 1.48% at December 31, 2008. 

    3,658     4,121  
           

    3,658     28,121  

Less: current portion

    (563 )   (24,549 )
           

  $ 3,095   $ 3,572  
           

        Maturities of long-term debt under the long-term financing agreements in place are as follows for the years ended December 31, (in thousands):

2010

  $ 563  

2011

    563  

2012

    563  

2013

    563  

2014

    563  

Thereafter

    843  

        In June 2008, we entered into a five-year $100.0 million multi-currency secured credit facility ("Credit Facility"). The Credit Facility replaced a $70.0 million revolving credit and a term loan agreement which was due to mature January 2011 as well as several other credit facilities in place in our foreign subsidiaries. The Credit Facility was secured by substantially all of the Company's and its domestic subsidiaries' assets, other than real estate, and a pledge of (i) 100% of the Company's investments in its domestic subsidiaries and (ii) 662/3% of the Company's investment in Hardinge Holdings GmbH. In addition, if certain conditions were met, Hardinge Holdings GmbH may have been required to pledge its investment in certain of its material foreign subsidiaries. The obligations of the Company and Hardinge Holdings GmbH were also guaranteed by all of the Company's domestic subsidiaries and, under certain conditions, by certain of the Company's material foreign subsidiaries. Interest was based on London Interbank Offered Rates plus a spread which varies depending on the Company's debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. A variable commitment fee of 0.20% to 0.375%, based on the Company's debt to EBITDA ratio, was payable on the unused portion of the Credit Facility. We had the option, subject to certain conditions, to increase the facility by $50.0 million. At December 31, 2008, borrowings under this agreement were $24.0 million which we classified as current portion of long-term debt outstanding as a result of our not being in compliance with our required debt covenants.

        In March 2009, after using cash on hand generated from operating results to reduce the outstanding obligations under the $100.0 million multi-currency secured credit facility to $8.0 million,

A-60



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

5. Financing Arrangements (Continued)


the credit facility was terminated. We recorded a non-cash charge of $1.0 million in the first quarter of 2009 related to the unamortized deferred financing costs in connection with this termination.

        In March 2009, we entered into an agreement with a bank for a 366 day $10.0 million term loan due on March 16, 2010. This term loan replaced the $100.0 million multi-currency secured credit facility. The term loan was secured by substantially all of the Company's U.S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 662/3% of the Company's investment in Hardinge Holdings GmbH. Interest was based on one-month London Interbank Offered Rates ("LIBOR") plus 5.0%. The interest rate increased by 1.0% to LIBOR plus 6.0% on September 30, 2009, with a minimum interest rate of 5.5% at all times.

        In December 2009, we replaced the $10.0 million term loan due March 16, 2010 with a $10.0 million revolving credit facility due March 31, 2011. This new credit facility is secured by substantially all of the Company's U.S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 65% of the Company's investment in Hardinge Holdings GmbH. The credit facility is guaranteed by Hardinge Technology Systems, Inc., a wholly-owned subsidiary of the Company and owner of the real property comprising the Company's world headquarters in Elmira, New York. The credit facility's interest is based on the one-month LIBOR with a minimum interest rate of 5.5%. The new credit facility does not include any financial covenants but does contain other customary representations, affirmative and negative covenants, and events of default. Simultaneous with closing the new credit agreement, the Company used cash on hand generated from operating results to pay the $8.4 million term loan. There are no amounts outstanding under this credit facility as of December 31, 2009.

        We have a $3.0 million unsecured short-term line of credit from a bank with interest based on the prime rate with a floor of 5.0% and a ceiling of 16%. There was no balance outstanding at December 31, 2009 or 2008 on this line. The agreement is negotiated annually and requires no commitment fee. It is payable on demand.

        In December 2008, our Kellenberger AG ("Kellenberger") subsidiary replaced their existing credit facilities and loan agreements with two new unsecured loan facilities with banks providing for borrowing of up to CHF 11.5 million ($10.8 million equivalent). These lines provided for interest at competitive short-term interest rates and carried no commitment fees on unused funds. At December 31, 2008 there were no borrowings under these facilities. These credit facilities were terminated and replaced with the new credit facilities discussed below in 2009.

        In August 2009, Kellenberger entered into two Credit Agreements with a bank. The first Credit Facility provides for borrowing of up to CHF 7.5 million ($7.2 million equivalent) which can be used for guarantees, documentary credit, or margin cover for foreign exchange hedging activity conducted with the bank with maximum terms of 12 months. The interest rate, which is currently 1.2% per annum, is determined by the bank based on prevailing money and capital market conditions and the bank's risk assessment of the borrower. The second Credit Facility is a working capital facility which can provide for borrowing of up to CHF 5.0 million ($4.8 million equivalent), can be used as a limit for cash credits in the form of fixed advances in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months. The interest rate, which is currently LIBOR plus 1.5% or 1.8% for a 90 day borrowing, is determined by the bank based on prevailing money and capital

A-61



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

5. Financing Arrangements (Continued)


market conditions and the bank's risk assessment of the borrower. Both credit facilities are secured by the real property owned by Kellenberger. The agreements are also subject to a minimum equity covenant requirement where the minimum equity must be at least 35% of the balance sheet total assets. Indebtedness under both agreements is payable upon demand. At December 31, 2009, there were no borrowings under these facilities. At December 31, 2009, we were in compliance with the required minimum equity ratios.

        In October 2009, Kellenberger entered into a Credit Agreement with a bank. This new agreement provides Kellenberger a CHF 7.0 million ($6.8 million equivalent) facility, that provides for up to CHF 7.0 million ($6.8 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($2.9 million equivalent) of the facility can be used for working capital. This facility is secured by the Company's real estate in Biel Switzerland up to CHF 3.0 million ($2.9 million equivalent). This new facility replaced a CHF 4.0 million ($3.9 million equivalent) credit facility with the same bank that provided up to CHF 4.0 million ($3.9 million equivalent) for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 0.5 million ($0.5 million equivalent) of this facility could be used for working capital. This new credit facility charges interest at the current rate of 5.75% subject to change by the bank based on market conditions. It carries no commitment fees on unused funds. The credit facility contains a minimum equity ratio covenant. At December 31, 2009, we were in compliance with the required minimum equity ratios. There were no borrowings under this facility at December 31, 2009.

        In June 2006, our Taiwan subsidiary negotiated a mortgage loan with a bank secured by the real property owned by the Taiwan subsidiary which initially provided borrowings of NTD 153.0 million ($4.7 million equivalent). At December 31, 2009 borrowings under this agreement were NTD 117.0 million ($3.7 million equivalent). Principal on the mortgage loan is repaid quarterly in the amount of NTD 4.5 million, ($0.1 million equivalent).

        In October 2009, Hardinge Machine Tools B.V., Taiwan Branch entered into an unsecured credit facility with a bank. This agreement provides a working capital facility of NTD 100.0 million ($3.1 million equivalent). This credit facility charges interest at the banks current base rate of 2.5% subject to change by the bank based on market conditions. It carries no commitment fees on unused funds. At December 31, 2009 the balance outstanding under this facility was NTD 43.6 million ($1.4 million equivalent).

        We maintain a standby letter of credit for potential liabilities pertaining to self-insured workers compensation exposure. The amount of the letter of credit was $1.6 at December 31, 2009. It was reduced to $1.3 million on January 14, 2010 and expires on March 15, 2011. In total, we had various letters of credit totaling $7.2 million and $9.1 million at December 31, 2009 and 2008, respectively.

        The Company had total credit availability of up to $38.6 million at December 31, 2009. The unused amount available for working capital borrowings was $20.8 million. Total consolidated outstanding borrowings at December 31, 2009 and 2008 were $5.0 million and $28.1 million, respectively. Interest expense in 2009, 2008, and 2007 totaled $1.9 million, $1.7 million, and $3.1 million, respectively.

A-62



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

6. Income Taxes

        The Company's pre-tax income for domestic and foreign sources is as follows:

 
  Year Ended December 31,  
 
  2009   2008   2007  
 
  (in thousands)
 

Domestic

  $ (23,465 ) $ (16,712 ) $ (4,081 )

Foreign

    (7,997 )   (14,545 )   25,517  
               
 

Total

  $ (31,462 ) $ (31,257 ) $ 21,436  
               

        Significant components of the Company's deferred tax assets and liabilities are as follows:

 
  December 31,  
 
  2009   2008  
 
  (in thousands)
 

Deferred tax assets:

             
 

Federal, state, and foreign net operating losses

  $ 26,714   $ 20,778  
 

State tax credit carryforwards

    6,712     6,683  
 

Postretirement benefits

    1,079     1,072  
 

Deferred employee benefits

    2,366     1,894  
 

Accrued pension

    6,259     13,424  
 

Inventory valuation

    334     582  
 

Other

    5,479     2,016  
           

    48,943     46,449  
 

Less valuation allowance

    (46,448 )   (38,001 )
           
   

Total deferred tax assets

    2,495     8,448  
           

Deferred tax liabilities:

             
 

Tax over book depreciation

    (4,405 )   (3,978 )
 

Inventory valuation

    (2,562 )   (3,118 )
 

Other

    (1,212 )   (3,014 )
           
   

Total deferred tax liabilities

    (8,179 )   (10,110 )
           
   

Net deferred tax liabilities

  $ (5,684 ) $ (1,662 )
           

        We continue to maintain a full valuation allowance on the tax benefits of our U.S., U.K., German, Canadian and Dutch net deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

        In 2009, the valuation allowance increased by $8.4 million. This was due to an increase of $11.2 million due to not recording a tax benefit on losses in the U.S., U.K., Germany, Canada, and the Netherlands, a decrease of $3.3 million due to the decrease in minimum pension liabilities in the U.S. and the U.K. (recorded in Other Comprehensive Income), and an increase of $0.5 million due to a derecognition of uncertain tax positions.

A-63



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

6. Income Taxes (Continued)

        In 2008, the valuation allowance increased by $20.0 million. This was due to an increase of $7.2 million due to not recording a tax benefit on losses in the U.S., Canada, U.K., and Germany, an increase of $10.7 million due to the increase in minimum pension liabilities in the U.S. and the U.K. (recorded in Other Comprehensive Income), an increase of $2.2 million for state tax credits, and a decrease of $.1 million due a reduction and a reversal of tax assets in accordance with FIN 48.

        At December 31, 2009 and 2008, we had state investment tax credits of $6.7 million and $6.6 million, respectively, expiring at various dates through the year 2017. In addition, we have U.S. and state net operating loss carryforwards of $52.2 million and $100.9 million, respectively, which expire from 2023 through 2029. We also have foreign net operating loss carryforwards of $26.6 million. The U.S. net operating loss includes approximately $1.5 million of the net operating loss carryforward for which a benefit will be recorded in Additional Paid in Capital when realized.

        Significant components of income tax expense (benefit) attributable to continuing operations are as follows:

 
  Year Ended December 31,  
 
  2009   2008   2007  
 
  (in thousands)
 

Current:

                   
 

Federal and state

  $   $   $ 92  
 

Foreign

    1,313     3,463     6,337  
               
   

Total current

    1,313     3,463     6,429  
               

Deferred:

                   
 

Federal and state

    100     (634 )    
 

Foreign

    434     219     81  
               
   

Total deferred

    534     (415 )   81  
               

  $ 1,847   $ 3,048   $ 6,510  
               

        There were tax refunds of $1.4 million in 2009, and none in 2008 or 2007. Income tax payments primarily related to foreign locations totaled $2.5 million, $5.6 million, and $5.9 million, in 2009, 2008, and 2007, respectively.

A-64



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

6. Income Taxes (Continued)

        The following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the Consolidated Statements of Income:

 
  2009   2008   2007  

Federal income taxes at statutory rate

    (35.0 )%   (35.0 )%   35.0 %

Taxes on foreign income which differ from the U.S. statutory rate

    1.4     4.0     (11.8 )

Effect of change in the enacted rate in Swiss jurisdiction

    0.8     (1.0 )   (0.5 )

Increase in valuation allowance

    34.8     29.7     4.5  

Recognition of state tax credits

        (7.1 )    

Change in estimated liabilities

    4.1     3.3     3.0  

Tax effect of goodwill impairment

        16.0      

Other

    (0.2 )   (0.1 )   0.2  
               

    5.9 %   9.8 %   30.4 %
               

        At the end of 2009, we concluded that we no longer plan to indefinitely reinvest all of our non-U.S. subsidiaries' earnings outside the U.S. due to capital overseas in excess of current and projected future needs. As a result, we recorded a deferred tax liability of $0.45 million at the end of 2009 to reflect the net additional U.S. tax due upon the ultimate repatriation of approximately $2.0 million of the previously undistributed earnings of our non-U.S. subsidiaries. Because of our tax loss carryforwards in the U.S., we reduced the deferred tax asset related to this item, and decreased our valuation allowance by a corresponding amount, resulting in a deferred tax liability of $0.1 million.

        The remaining undistributed earnings of the foreign subsidiaries, which amounted to approximately $119.6 million at December 31, 2009, are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.

        We had been granted a tax holiday in China. For 2009, our tax rate for our Chinese subsidiary was 20%, and our tax rate in China will be phased in until ultimately reaching a rate of 25% in 2012.

        On January 1, 2007, we adopted the provisions of FIN 48, as subsequently codified in ASC Topic 740, "Income Taxes." As a result of the adoption of and recognition of the cumulative effect of adoption of the new accounting principle, the Company recorded a $0.4 million increase in the liability for uncertain income tax benefits, with an offsetting reduction in retained earnings. This adjustment reflects the net difference between related balance sheet accounts before and then as measured pursuant to the provisions of uncertain income tax benefit. In addition, we derecognized $1.46 million of deferred tax assets, for which a full valuation allowance had previously been provided. The valuation allowance was also reduced by $1.46 million as part of the adoption. Additionally, the adoption resulted in the accrual for uncertain tax positions being reclassified from accrued income taxes to other liabilities in our Consolidated Balance Sheet.

A-65



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

6. Income Taxes (Continued)

        A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 
  Year Ended
December 31,
 
 
  2009   2008  
 
  (in thousands)
 

Balance at beginning of period

  $ 2,192   $ 1,086  

Additions for tax positions related to the current year

    24     677  

Additions for tax positions of prior years

    318     748  

Reductions for tax positions of prior years

        (132 )

Reductions due to lapse of applicable statute of limitations

    (52 )   (155 )

Settlements

    (39 )   (32 )
           

Balance at end of period

  $ 2,443   $ 2,192  
           

        If recognized, essentially all of the uncertain tax benefits and related interest at December 31, 2009 would be recorded as a benefit to income tax expense on the Consolidated Statement of Operations.

        We record interest and penalties on tax reserves as income tax expense in the financial statements. For the year ended December 31, 2009 interest expense of $0.2 million was recorded and penalties of $.04 million were recorded, and there was $0.5 million of accrued interest and $0.3 million of accrued penalties related to uncertain tax positions included in the liability for uncertain tax positions at December 31, 2009.

        For the year ended December 31, 2008, we recognized $0.1 million of deferred tax assets that had previously been reversed, due to the lapse of applicable statutes of limitations. We determined that the deferred tax assets should be subject to a full valuation allowance, and the valuation allowance was also increased by $0.1 million.

        The tax years 2006 to 2009 remain open to examination by United States taxing authorities, and for our other major jurisdictions (Switzerland, U.K., Taiwan, Germany, Canada, and China), the tax years between 2004 to 2009 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.

A-66



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

7. Industry Segment and Foreign Operations

        We operate in one business segment—industrial machine tools.

        Domestic and foreign operations consist of:

 
  Year ended December 31,  
 
  2009   2008   2007  
 
  North
America
  Europe   Asia/
Other
  North
America
  Europe   Asia/
Other
  North
America
  Europe   Asia/
Other
 
 
  (in thousands)
 

Sales

                                                       

Domestic

  $ 65,940   $ 88,365   $ 58,854   $ 114,207   $ 150,672   $ 62,193   $ 120,755   $ 158,349   $ 52,413  

Export

    7,669     18,648     8,902     17,773     37,094     30,411     25,931     39,269     41,908  
                                       

    73,609     107,013     67,756     131,980     187,766     92,604     146,686     197,618     94,321  

Less inter-area eliminations

    7,558     15,685     11,064     18,336     20,810     28,198     23,641     17,967     40,695  
                                       

Total Net Sales

  $ 66,051   $ 91,328   $ 56,692   $ 113,644   $ 166,956   $ 64,406   $ 123,045   $ 179,651   $ 53,626  
                                       

Identifiable Assets

  $ 65,457   $ 111,378   $ 65,369   $ 112,755   $ 142,826   $ 54,244   $ 135,595   $ 172,564   $ 53,669  
                                       

        Sales attributable to European Operations and Asian Operations are based on those sales generated by subsidiaries located in Europe and Asia.

        Inter-area sales are accounted for at prices comparable to normal, unaffiliated customer sales, reduced by estimated costs not incurred on these sales.

        One customer in the automotive industry accounted for 6.8% of our net sales in 2009 and no single customer accounted for more than 5% of consolidated sales in 2008 and 2007.

        Machine sales accounted for approximately 74% of 2009, 2008, and 2007 net sales. Sales of non-machine products and services, primarily workholding, repair parts, and accessories made up the balance.

Revenues from external customers by country:

 
  Year Ended December 31,  
 
  2009   % of
Total
  2008   % of
Total
  2007   % of
Total
 
 
  (in thousands)
 

U.S. Sales

  $ 60,550     28.3 % $ 99,193     28.8 % $ 113,423     31.8 %

China

    51,667     24.1 %   51,503     14.9 %   43,455     12.3 %

Germany

    40,349     18.8 %   51,850     15.0 %   45,295     12.7 %

England

    15,973     7.5 %   26,595     7.7 %   35,312     9.9 %

Other Foreign

    45,532     21.3 %   115,865     33.6 %   118,837     33.3 %
                           

Total Foreign

    153,521     71.7 %   245,813     71.2 %   242,899     68.2 %
                           

Total Sales

  $ 214,071     100.0 % $ 345,006     100.0 % $ 356,322     100.0 %
                           

A-67



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

7. Industry Segment and Foreign Operations (Continued)

Total Property, Plant and Equipment by country:

 
  Year Ended December 31,  
 
  2009   % of
Total
  2008   % of
Total
  2007   % of
Total
 
 
  (in thousands)
 

U.S. 

  $ 16,691     30.5 % $ 19,748     33.1 % $ 21,569     35.0 %

Switzerland

    28,660     52.4 %   30,077     50.5 %   29,306     47.6 %

Taiwan

    7,564     13.8 %   7,638     12.8 %   7,791     12.7 %

Other Foreign

    1,796     3.3 %   2,134     3.6 %   2,865     4.7 %
                           

Total Foreign

    38,020           39,849           39,962        
                           

Total PP&E

  $ 54,711     100.0 % $ 59,597     100.0 % $ 61,531     100.0 %
                           

8. 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. Our policy is to fund at least an amount necessary to satisfy the minimum funding requirements of ERISA. For each of our foreign plans, contributions are made on a monthly basis and are governed by their governmental regulations. Also, each of these foreign plans requires employee and employer contributions except Hardinge Taiwan, which requires only employer contributions. Effective June 15, 2009, we suspended future accrual of benefits under the U.S. defined benefit pension plan (which was closed to new participants in 2004).

        Domestic employees hired after March 1, 2004 have retirement benefits under our 401(k) defined contribution plan. After one year of service, we will contribute 4% of the employee's pay and will further match, at a rate of 25%, the employee's contributions up to 4% of their salary. Those employees, as well as domestic employees hired prior to March 1, 2004, are eligible to contribute additional funds to the plan for which there is no required Company match. We made contributions of $0.1 million and $0.3 million in 2009 and 2008, respectively. Effective June 15, 2009, we suspended Company contributions to the 401(k) program.

        As a result of our 2009 restructuring activities in North America and Europe, we realized a reduction of participants in our defined benefit pension and post-retirement plans. Accordingly, we recognized settlement and curtailment losses of $0.6 in our defined benefit pension plans and a curtailment gain of $0.6 in our post-retirement plan.

        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 will retire at normal retirement age after January 1, 1993 with at least 10 years of active service. Employees who elect early retirement on or after reaching age 55 are eligible for the plan benefits if they have 15 years of active service at retirement. Benefit obligations and funding policies are at the discretion of management. We also provide a non-contributory life insurance plan to retirees who meet the same eligibility criteria as

A-68



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)


required for retiree health insurance. Because the amount of liability relative to this plan is insignificant, it is combined with the health plan for purposes of this disclosure.

        In 2009 and 2008, we offered a Voluntary Early Retirement Program (VERP) to eligible employees. Employees were eligible to participate in the VERP if the sum of their current age and length of service equaled 94 years. The VERP covers post-retirement health care costs for 60 months or until Medicare coverage begins, whichever occurs first.

        Increases in the cost of the retiree health plan are paid by the participants with the exception of premium costs for eligible employees who retired under a voluntary early retirement program. We pay the premium in excess of a scheduled amount for these retirees until they reach Medicare eligibility or for a period not to exceed five years at which point the retirees assume responsibility for any premium increases.

        The discount rate for determining benefit obligations in the Postretirement Benefits Plan was 5.80% and 6.50% at December 31, 2009 and 2008, respectively. The change in the discount rate increased the accumulated postretirement benefit obligation as of December 31, 2009 by $0.1 million.

        A summary of the components of net periodic pension cost and postretirement benefit costs for the consolidated company is presented below. The prior year schedules have been restated to include a domestic executive supplemental pension plan.

 
  Pension Benefits
Year Ended December 31,
  Postretirement Benefits
Year Ended December 31,
 
 
  2009   2008   2007   2009   2008   2007  
 
  (in thousands)
  (in thousands)
 

Service cost

  $ 2,401   $ 3,468   $ 4,271   $ 17   $ 26   $ 31  

Interest cost

    8,592     8,948     8,306     203     150     144  

Expected return on plan assets

    (9,927 )   (11,042 )   (9,904 )            

Amortization of prior service cost

    (145 )   (105 )   (44 )   (505 )   (505 )   (505 )

Amortization of transition asset

    (228 )   (355 )   (372 )            

Special termination benefits

        582         376     725      

Settlement/Curtailment loss (gain)

    622     296     130     (634 )        

Amortization of loss

    1,657     91     1,028     (15 )       7  
                           

Net periodic benefit cost

  $ 2,972   $ 1,883   $ 3,415   $ (558 ) $ 396   $ (323 )
                           

        The net periodic benefit cost for the foreign pension plans included in the amounts above was $2.8 million, $0.3 million, and $0.8 million, for the years ended December 31, 2009, 2008, and 2007, respectively.

A-69



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)

        A summary of the changes in pension and postretirement benefits recognized in Other Comprehensive (Income) Loss is presented below.

 
  Pension Benefits
Year Ended December 31,
  Postretirement Benefits
Year Ended December 31,
 
 
  2009   2008   2009   2008  
 
  (in thousands)
  (in thousands)
 

Accumulated Other Comprehensive Loss (Income) at beginning of period

  $ 55,545   $ 4,317   $ (2,540 ) $ (2,789 )

Net loss (gain) arising during period

    (24,320 )   53,688     (50 )   (256 )

Amortization of transition asset

    221     180          

Amortization of prior service cost

    397     (779 )   989     505  

Amortization of gain (loss)

    (2,623 )   (1,256 )   15      

Foreign currency exchange impact

    1,054     (605 )        
                   

Total recognized in other comprehensive (income) loss

    (25,271 )   51,228     954     249  
                   

Accumulated Other Comprehensive Loss (Income) at end of period

  $ 30,274   $ 55,545   $ (1,586 ) $ (2,540 )
                   

        We expect to recognize $0.9 million of net loss, $0.2 million credit of transition asset obligation and $0.1 million of net prior service cost credit as components of net periodic pension cost in 2010 for our defined benefit pension plans. We expect to recognize $0.4 million of net prior service credit as components of net periodic postretirement benefit cost in 2010.

A-70



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)

        A summary of the Pension and Postretirement Plans' funded status and amounts recognized in our consolidated balance sheets is as follows:

 
  Pension Benefits
December 31,
  Postretirement Benefits
December 31,
 
 
  2009   2008   2009   2008  
 
  (in thousands)
  (in thousands)
 

Change in benefit obligation:

                         

Benefit obligation at beginning of period

  $ 182,413   $ 170,236   $ 2,898   $ 2,369  

Service cost

    2,401     3,468     17     26  

Interest cost

    8,592     8,948     203     150  

Plan participants' contributions

    1,834     1,889     732     653  

Actuarial (gain) loss

    (1,921 )   8,046     (50 )   (256 )

Foreign currency impact

    3,606     (67 )        

Special termination benefits/curtailment

    (7,539 )   (1,367 )   226     726  

Benefits and administrative expenses paid

    (17,737 )   (8,740 )   (1,108 )   (770 )
                   

Benefit obligation at end of period

    171,649     182,413     2,918     2,898  
                   

Change in plan assets:

                         

Fair value of plan assets at beginning of period

    135,273     165,537          

Actual return on plan assets

    24,951     (34,700 )        

Employer contribution

    4,408     9,825     376     117  

Plan participants' contributions

    1,834     1,889     732     653  

Foreign currency impact

    2,736     1,462          

Benefits and administrative expenses paid

    (17,737 )   (8,740 )   (1,108 )   (770 )
                   

Fair value of plan assets at end of period

    151,465     135,273          
                   

Reconciliation of funded status:

                         

Funded status

    (20,184 )   (47,140 )   (2,918 )   (2,898 )

Unrecognized net loss (gain)

    32,866     58,761     (256 )   (221 )

Unrecognized transition (asset)

    (1,639 )   (1,888 )        

Unrecognized prior service cost

    (953 )   (1,328 )   (1,330 )   (2,319 )
                   

Net amount recognized

  $ 10,090   $ 8,405   $ (4,504 ) $ (5,438 )
                   

 

 
  Pension Benefits
December 31,
  Postretirement Benefits
December 31,
 
 
  2009   2008   2009   2008  
 
  (in thousands)
  (in thousands)
 

Amounts recognized in the balance sheet consist of:

                         

Prepaid benefit cost

  $ 2,032   $ 436   $   $  

Accrued benefit liability

    (22,216 )   (47,576 )   (2,918 )   (2,898 )

Accumulated other comprehensive (income) loss

    30,274     55,545     (1,586 )   (2,540 )
                   

Net amount recognized

  $ 10,090   $ 8,405   $ (4,504 ) $ (5,438 )
                   

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)

        The projected benefit obligation for the foreign pension plans included in the amounts above was $79.3 million and $89.0 million at December 31, 2009 and 2008, respectively. The plan assets for the foreign pension plans included above was $75.8 million and $71.1 million at December 31, 2009 and 2008, respectively.

        The accumulated benefit obligation is $165.8 million and $169.5 million at December 31, 2009 and 2008, respectively.

        The following information is presented for pension plans where the projected benefit obligations exceeded the fair value of plan assets (all plans except Kellenberger Stiftung in 2009 and 2008):

 
  Pension Benefits
December 31,
 
 
  2009   2008  
 
  (in thousands)
 

Projected benefit obligations

  $ 167,439   $ 177,249  

Plan assets

    145,223     129,673  
           

Excess of projected benefit obligations over plan assets

  $ 22,216   $ 47,576  
           

        The following information is presented for pension plans where the accumulated benefit obligations exceeded the fair value of plan assets (all plans except Hardinge Taiwan, Kellenberger Pensionskasse and Kellenberger Stiftung in 2009 and all plans except Hardinge Taiwan and Kellenberger Stiftung in 2008):

 
  Pension Benefits
December 31,
 
 
  2009   2008  
 
  (in thousands)
 

Accumulated benefit obligations

  $ 105,471   $ 168,891  

Plan assets

    85,189     134,613  
           

Excess of accumulated benefit obligations over plan assets

  $ 20,282   $ 34,278  
           

A-72



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)

        Actuarial assumptions used to determine pension costs and other postretirement benefit costs include:

 
  Pension Benefits   Postretirement Benefits
 
  2009   2008   2009   2008

For the domestic pension plan and the domestic post-retirement benefit plan:

                     

Assumptions at January 1

                     

Discount rate

    6.60 %   6.77 %   6.50 % 6.56%

Expected return on plan assets

    8.00 %   8.50 %   N/A   N/A

Rate of compensation increase

    3.50 %   3.50 %   N/A   N/A

For domestic post-retirement benefit plan:

                     

Weighted average assumptions at April 1,

                     

Discount rate

                7.65 %  

For the foreign pension plans:

                     

Weighted average assumptions at January 1,

                     

Discount rate

    3.40 %   3.75 %        

Expected return on plan assets

    5.14 %   5.24 %        

Rate of compensation increase

    2.76 %   2.72 %        

        Actuarial assumptions used to determine pension obligations and other postretirement obligations include:

 
  Pension Benefits   Postretirement Benefits  
 
  2009   2008   2009   2008  

For the domestic pension plan and the domestic post-retirement benefit plan:

                         

Assumptions as of December 31,

                         

Discount rate

    6.27 %   6.60 %   5.80 %   6.50 %

Rate of compensation increase

    N/A     3.50 %   N/A     N/A  

For the foreign pension plans:

                         

Weighted average assumptions as of December 31,

                         

Discount rate

    3.84 %   3.13 %            

Rate of compensation increase

    2.83 %   2.65 %            

        For our domestic and foreign plans, we used bond pricing models based on high grade corporate bonds in each market constructed to match the projected liability benefit payments to select the discount rates.

        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

A-73



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)


government bonds) in each market, the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption.

Investment Policies and Strategies

        For the domestic defined benefit plan, the plan targets an asset allocation of approximately 55% equity securities, 36% debt securities, and 9% other. For the foreign defined benefit plans, the plans target blended asset allocation of 41% equity securities, 45% debt securities, and 14% 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 and related policy guidelines and applicable governmental regulations regarding permissible investments and risk control practices.

        Our funding policy is to contribute to defined benefit plans when pension laws and economics either require or encourage funding. Of our defined benefit plans, the U.S. plan covering the parent company is the largest. The contributions to the U.S. defined benefit plan for the year ended December 31, 2009 totaled $1.7 million.

Cash flows

Contributions

        The expected contributions to be paid during the year ending December 31, 2010 to the domestic defined benefit plan are approximately $0.6 million. We also provide defined benefit pension plans or defined contribution pension plans for our foreign subsidiaries. The expected contributions to be paid during the year ending December 31, 2010 to the foreign defined benefit plans are $2.2 million. For each of our foreign plans, contributions are made on a monthly basis and are determined by their governmental regulations. Also, each of the foreign plans requires employee and employer contributions, except for Taiwan, which has only employer contributions.

A-74



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

8. Employee Benefits (Continued)

Estimated Future Benefit Payments

        The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 
  Pension Benefits   Postretirement Benefits  
 
  (in thousands)
 

2010

  $ 8,468   $ 446  

2011

    8,218     451  

2012

    8,144     379  

2013

    9,073     328  

2014

    9,108     179  

Years 2015-2019

    51,891     836  

Retirement Savings Plan

        We maintain a 401(k) plan that covers all eligible domestic employees subject to minimum employment period requirements. In addition to the contribution provisions described previously for employees hired after March 1, 2004, provisions of the plan allow employees to defer from 1% up to 100% of their pre-tax salary to the plan. Those contributions may be invested at the option of the employees in a number of investment alternatives, one being Hardinge Inc. common stock. Effective June 15, 2009, we suspended all Company contributions to the plan.

Foreign Operations

        Hardinge also has employees in certain foreign countries that are covered by defined contribution pension plans and other employee benefit plans. Related obligations and costs charged to operations for these are not material. The foreign entities with defined benefit plans are included in the consolidated pension plan described earlier within this Employee Benefits Note. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. We are using the following fair value hierarchy definition:

9. Fair Value of Financial Instruments

Level
1— Quoted prices in active markets for identical assets and liabilities.

Level
2— Observable inputs other than quoted prices in active markets for similar assets and liabilities.

Level
3— Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.

A-75



HARDINGE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DECEMBER 31, 2009

9. Fair Value of Financial Instruments (Continued)

        The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis as of December 31, 2009:

 
  Classification   Total   Level 1   Level 2   Level 3