FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2003

 

OR

 

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

 

For the transition period from          to            

 

Commission file number: 000-15760

 

Hardinge Inc.

(Exact name of Registrant as specified in its charter)

 

New York

 

16-0470200

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

Hardinge Inc.
One Hardinge Drive
Elmira, NY 14902

 

 

(Address of principal executive offices)  (Zip code)

 

 

 

 

 

(607) 734-2281

(Registrant’s telephone number including area code)

 

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2). Yes ý  No o

 

As of June 30, 2003 there were 8,857,349 shares of Common Stock of the Registrant outstanding.

 

 



 

HARDINGE INC. AND SUBSIDIARIES

 

INDEX

 

Part I

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2003 and December 31, 2002.

 

 

 

 

 

Consolidated Statements of Income and Retained Earnings for the three months ended June 30, 2003 and 2002 and the six months ended  June 30, 2003 and 2002.

 

 

 

 

 

Condensed Consolidated  Statements of  Cash Flows for the six months ended June 30, 2003 and 2002.

 

 

 

 

 

Notes to Consolidated Financial Statements.

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

Part I I

Other Information

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 2.

Changes in Securities

 

 

 

 

Item 3.

Default upon Senior Securities

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Signatures

 

2



 

PART I, ITEM 1

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(In Thousands)

 

 

 

June 30,
2003

 

Dec. 31,
2002

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

4,128

 

$

2,175

 

Accounts receivable, net

 

40,830

 

38,519

 

Notes receivable, net

 

6,494

 

6,333

 

Inventories

 

82,808

 

87,748

 

Deferred income taxes

 

4,320

 

4,243

 

Income tax receivables

 

 

 

5,795

 

Prepaid expenses

 

4,214

 

3,362

 

Total current assets

 

142,794

 

148,175

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Property, plant and equipment

 

158,334

 

156,815

 

Less accumulated depreciation

 

91,731

 

87,908

 

 

 

66,603

 

68,907

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Notes receivable

 

7,878

 

8,392

 

Deferred income taxes

 

9,585

 

9,268

 

Intangible pension asset

 

2,630

 

2,630

 

Goodwill

 

16,771

 

16,390

 

Other

 

2,494

 

2,523

 

 

 

39,358

 

39,203

 

 

 

 

 

 

 

Total assets

 

$

248,755

 

$

256,285

 

 

See accompanying notes.

 

3



 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets—Continued

(In Thousands)

 

 

 

June 30,
2003

 

Dec. 31,
2002

 

 

 

(Unaudited)

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

11,837

 

$

14,417

 

Notes payable to bank

 

1,915

 

5,351

 

Accrued expenses

 

12,431

 

13,995

 

Accrued income taxes

 

2,039

 

1,150

 

Deferred income taxes

 

3,705

 

3,273

 

Current portion long-term debt

 

6,205

 

6,125

 

Total current liabilities

 

38,132

 

44,311

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

25,098

 

30,526

 

Accrued pension plan expense

 

18,140

 

17,356

 

Deferred income taxes

 

2,505

 

2,525

 

Accrued postretirement benefits

 

5,776

 

5,838

 

Derivative financial instruments

 

5,292

 

5,257

 

Other liabilities

 

2,426

 

2,255

 

 

 

59,237

 

63,757

 

 

 

 

 

 

 

Equity of minority interest

 

2,748

 

2,431

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, Series A, par value $.01:

 

 

 

 

 

Authorized -  2,000,000; issued - none

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

Authorized shares - 20,000,000
Issued  shares  - 9,919,992 at June 30, 2003 and  December 31, 2002

 

99

 

99

 

Additional paid-in capital

 

60,657

 

61,139

 

Retained earnings

 

106,007

 

105,612

 

Treasury shares

 

(13,968

)

(15,068

)

Accumulated other comprehensive loss

 

(2,388

)

(4,562

)

Deferred employee benefits

 

(1,769

)

(1,434

)

Total shareholders’ equity

 

148,638

 

145,786

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

248,755

 

$

256,285

 

 

See accompanying notes.

 

4



 

HARDINGE INC AND SUBSIDIARIES

 

Consolidated Statements of Income and Retained Earnings (Unaudited)

(In Thousands, Except Per Share Data)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

47,494

 

$

44,062

 

$

88,396

 

$

87,815

 

Cost of sales

 

33,270

 

30,343

 

61,375

 

61,513

 

Gross profit

 

14,224

 

13,719

 

27,021

 

26,302

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

12,600

 

12,075

 

24,724

 

23,803

 

Income from operations

 

1,624

 

1,644

 

2,297

 

2,499

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

731

 

1,020

 

1,542

 

1,900

 

Interest (income)

 

(134

)

(111

)

(242

)

(229

)

Income before income taxes and minority interest in consolidated subsidiary and investment of equity company

 

1,027

 

735

 

997

 

828

 

Income  taxes

 

239

 

515

 

233

 

375

 

Minority interest in (profit) of consolidated subsidiary

 

(224

)

(86

)

(317

)

(226

)

Profit in investment of equity company

 

16

 

8

 

36

 

4

 

Net income

 

580

 

142

 

483

 

231

 

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

105,515

 

104,048

 

105,612

 

104,480

 

Less dividends declared

 

88

 

259

 

88

 

780

 

Retained earnings at end of period

 

$

106,007

 

$

103,931

 

$

106,007

 

$

103,931

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.07

 

$

.02

 

$

.06

 

$

.03

 

Weighted average number of common shares outstanding

 

8,708

 

8,693

 

8,698

 

8,674

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

.07

 

$

.02

 

$

.06

 

$

.03

 

Weighted average number of common shares outstanding

 

8,716

 

8,700

 

8,716

 

8,691

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared

 

$

.01

 

$

.03

 

$

.01

 

$

.09

 

 

See accompanying notes.

 

5



 

HARDINGE INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In Thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2003

 

2002

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

12,034

 

$

10,528

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Capital expenditures

 

(866

)

(970

)

Net cash (used in) investing activities

 

(866

)

(970

)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

(Decrease) increase in short-term notes payable to bank

 

(3,492

)

2,766

 

(Decrease) in long-term debt

 

(5,679

)

(12,836

)

(Purchase) of treasury stock

 

 

 

(99

)

Dividends paid

 

(88

)

(780

)

Net cash (used in) financing activities

 

(9,259

)

(10,949

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

44

 

140

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

$

1,953

 

$

(1,251

)

 

See accompanying  notes

 

6



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2003

 

NOTE A—BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three month period and six month period ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report for the year ended December 31, 2002.  The Company operates in only one business segment – industrial machine tools.

 

Certain amounts in the June 30, 2002 consolidated financial statements have been reclassified to conform with the June 30, 2003 presentation.

 

NOTE B—STOCK-BASED COMPENSATION

 

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-Based Compensation.  SFAS No. 148, which is effective for years ended after December 15, 2002, provides alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company’s adoption of SFAS No. 148 in 2002 enhanced stock-based employee compensation disclosures and had no effect on the method of accounting followed by the Company.

 

The Company grants restricted shares of common stock and stock options to certain officers and other key employees.  The Company accounts for restricted share grants and stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees.  The stock options issued under the 1996 and 2002 Incentive Stock Plan expire 10 years from the date of grant and are exercisable one-third after the first year, two-thirds after the second year, and 100 percent exercisable after the third year.

 

In accordance with the provisions of Statement of Financial Accounting Standard No. 123 the Company has elected to continue applying the provisions of Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans.  Accordingly, the Company does not recognize compensation expense for stock options when the stock option price at the grant date is equal to or greater than the fair market value of the stock at that date.

 

A summary of the stock option activity under the Incentive Stock Plan is as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Shares at beginning of period

 

236,000

 

100,500

 

236,000

 

100,500

 

Shares granted

 

5,250

 

54,250

 

5,250

 

54,250

 

Shares canceled and forfeited

 

 

(3,750

)

 

(3,750

)

Shares at end of period

 

241,250

 

151,000

 

241,250

 

151,000

 

 

7



 

The following illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Reported net income

 

$

580

 

$

142

 

$

483

 

$

231

 

Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects

 

29

 

12

 

58

 

24

 

Pro forma net income

 

$

551

 

$

130

 

$

425

 

$

207

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic and Diluted – as reported

 

$

.07

 

$

.02

 

$

.06

 

$

.03

 

Basic and Diluted – pro forma

 

$

.06

 

$

.01

 

$

.05

 

$

.02

 

 

NOTE C—WARRANTIES

 

The Company offers warranties for its products.  The specific terms and conditions of those warranties vary depending upon the product sold and the country in which the Company sold the product.  The Company generally provides a basic limited warranty, including parts and labor for a period of one year for most of its machine products.  The Company estimates the costs that may be incurred under its basic limited warranty, based largely upon actual warranty repair cost history, and records a liability in the amount of such costs in the month that product revenue is recognized.  The resulting accrual balance is reviewed during the year.  Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.

 

A reconciliation of the changes in the Company’s product warranty liability during the three month period and six month period ended June 30, 2003 and 2002 was as follows:   (dollars in thousands)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Beginning balance

 

$

1,699

 

$

2,245

 

$

1,975

 

$

2,294

 

Warranties issued

 

454

 

461

 

1,104

 

926

 

Warranties settlement costs

 

(607

)

(527

)

(1,557

)

(1,026

)

Other – currency translation impact

 

2

 

145

 

26

 

130

 

Balance at June 30,

 

$

1,548

 

$

2,324

 

$

1,548

 

$

2,324

 

 

NOTE D—INVENTORIES

 

Inventories are summarized as follows (dollars in thousands):

 

 

 

June 30,
2003

 

December 31,
2002

 

 

 

 

 

 

 

Finished products

 

$

31,322

 

$

30,045

 

Work-in-process

 

26,482

 

30,180

 

Raw materials and purchased components

 

25,004

 

27,523

 

 

 

$

82,808

 

$

87,748

 

 

8



 

NOTE E—INCOME TAXES

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of June 30, 2003, the Company has recorded a U.S. net deferred tax asset of approximately $13,795,000. The future realization of these tax benefits is dependent upon generating sufficient taxable income of $36,400,000 (based on the deferred tax asset and current tax rates) in the U.S. during the 20 year carryforward period. The Company has concluded that it is more likely than not that this deferred tax asset will be fully utilized.

 

The Company has reviewed all available positive and negative evidence, as required by Statement of Financial Accounting Standards No. 109 (SFAS 109), including the 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., and determined that no deferred tax valuation allowance is appropriate at this time; other than the prior valuation allowance of $4,518,000 pertaining to state investment tax credits expiring at various dates through the year 2012, for which no benefit was recognized in the financial statements. The Company will continue to review these factors under SFAS 109 on a quarterly basis.

 

NOTE F—EARNINGS PER SHARE AND WEIGHTED AVERAGE SHARES OUTSTANDING

 

Earnings per share are computed in accordance with Statement of Financial Accounting Standards No. 128 Earnings per Share.   Basic earnings per share are computed using the weighted average number of  shares of common stock outstanding during the period.  For diluted earnings per share, the weighted average number of shares includes common stock equivalents related primarily to restricted stock.

 

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations required by Statement No. 128:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(dollars in thousands)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

580

 

$

142

 

$

483

 

$

231

 

Numerator for basic earnings per share

 

580

 

142

 

483

 

231

 

Numerator for diluted earnings per share

 

580

 

142

 

483

 

231

 

Denominator:

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share -weighted average shares  (in thousands)

 

8,708

 

8,693

 

8,698

 

8,674

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

Restricted stock and stock options  (in thousands)

 

8

 

7

 

8

 

17

 

Denominator for diluted earnings per share -adjusted weighted average shares  (in thousands)

 

8,716

 

8,700

 

8,716

 

8,691

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

.07

 

$

.02

 

$

.06

 

$

.03

 

Diluted earnings per share

 

$

.07

 

$

.02

 

$

.06

 

$

.03

 

 

9



 

NOTE G— DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company follows the provision of Financial Accounting Standards Board  Statement No. 133,  Accounting for Derivative Instruments and Hedging Activities.  The statement requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.

 

NOTE H—REPORTING COMPREHENSIVE INCOME (LOSS)

 

During the three and six months ended June 30, 2003 and 2002, the components of total comprehensive income (loss) consisted of the following  (dollars in thousands):

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Net Income

 

$

580

 

$

142

 

$

483

 

$

231

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

Foreign currency  translation adjustments

 

798

 

8,002

 

2,584

 

7,187

 

Unrealized gain (loss) on derivatives, net of tax:

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

(53

)

(399

)

2

 

(134

)

Net investment hedges

 

48

 

(2,133

)

(412

)

(2,136

)

Other comprehensive income

 

793

 

5,470

 

2,174

 

4,917

 

Total Comprehensive Income

 

$

1,373

 

$

5,612

 

$

2,657

 

$

5,148

 

 

Accumulated balances of the components of other comprehensive (loss) income consisted of the following at June 30, 2003 and December 31, 2002  (dollars in thousands):

 

 

 

Accumulated balances

 

 

 

June 30,
2003

 

Dec. 31,
2002

 

Other Comprehensive (Loss) Income:

 

 

 

 

 

Pension liability (net of tax of $3,133)

 

$

(5,112

)

$

(5,112

)

Foreign currency  translation adjustments

 

4,839

 

2,255

 

Unrealized gain (loss) on derivatives, net of tax:

 

 

 

 

 

Cash flow hedges, (net of tax of $781 and $782, respectively)

 

(1,418

)

(1,420

)

Net investment hedges, (net of tax of $456 and $241, respectively)

 

(697

)

(285

)

Other Comprehensive Income (Loss)

 

$

(2,388

)

$

(4,562

)

 

10



 

NOTE I—GOODWILL AND OTHER INTANGIBLE ASSETS

 

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001.  Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements.  Other intangible assets will continue to be amortized over their useful lives.

 

The Company adopted Financial Accounting Standards No. 142 on January 1, 2002.  The Company completed the transitional impairment testing of goodwill during the second quarter of 2002 and the first subsequent annual impairment testing during the fourth quarter of 2002.  In both cases, the Company determined that there was no goodwill impairment.  The Company will perform another annual impairment test by October 1, 2003.

 

The total carrying amount of goodwill as of June 30, 2003 was $16,771,000.  This entire asset resulted from the December 2000 acquisition of HTT Hauser Tripet Tschudin AG.  The asset value of this goodwill increased by $381,000, or 2%, during the first six months of 2003, with the entire change caused by the increased dollar value of the Swiss franc, the functional currency of the Company’s HTT subsidiary, whose balance sheet includes this goodwill.

 

The total carrying amount of intangible assets subject to amortization, as of December 31, 2002, was $849,000, which derived from patents and one non-compete agreement.  The Company’s intangible asset amortization expense for fiscal 2002 was $216,000.  The estimated intangible amortization expense for each of the next five years is approximately $200,000, which will vary depending upon additional amortizable intangible assets.

 

NOTE J—NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires the recognition of expense when the liability is incurred and not as a result of an entity’s commitment to an exit plan.  The statement is effective for exit or disposal activities initiated after December 31, 2002.  The adoption of SFAS No. 146 in the first quarter of 2003 did not have an impact on the Company’s financial results.

 

In November, 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.  The Interpretation requires certain guarantees to be recorded at fair value, which is different from prior accounting principles generally accepted in the United States.  The Interpretation also requires a guarantor to make new disclosures. The Company adopted this Interpretation with the Form 10-K issued for the period ended December 31, 2002 and has provided the stipulated additional disclosures.

 

In December  2002, The Financial Accounting Standards Board issued Statement of  Financial Accounting Standards No. 148, Accounting for Stock-based compensation-Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-based Compensation. SFAS No. 148, which is effective for years ended after December 15, 2002, provides alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company’s adoption of SFAS 148 in 2002 enhanced disclosures  about stock-based employee compensation and had no effect on the method of accounting followed by the

 

11



 

Company, as the Company continues to follow the provisions of APB Opinion No. 25.

 

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”).  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  The Company does not expect FIN 46 to have a material effect on its consolidated financial statements.

 

In April, 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement requires reporting of derivative contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. The statement is effective for contracts entered into after June 30, 2003. The Company expects that Statement No. 149 will have no impact upon its financial statements.

 

On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement No. 150 is effective for all financial instruments created or modified after May 31, 2003. The Company has implemented Statement No. 150, which has had no impact on the consolidated financial statements of the Company.

 

12



 

PART I, ITEM 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following are management’s comments relating to Hardinge’s results of operations for the three month and six month periods ended June 30, 2003 and 2002 and in the Company’s financial condition at June 30, 2003.

 

Quarterly Information

 

The following table sets forth certain quarterly financial data for each of the periods indicated.

 

 

 

Three Months Ended

 

 

 

March 31,
2003

 

June 30,
2003

 

 

 

(in thousands, except per share data)

 

Net Sales

 

$

40,902

 

$

47,494

 

Gross Profit

 

12,797

 

14,224

 

Income from operations

 

673

 

1,624

 

Net (loss) income

 

(97

)

580

 

Diluted earnings (loss) per share

 

(.01

)

.07

 

Weighted average shares outstanding

 

8,700

 

8,716

 

 

 

 

Three Months Ended

 

 

 

March 31,
2002

 

June 30,
2002

 

Sept. 30,
2002

 

Dec. 31,
2002

 

 

 

(in thousands, except per share data)

 

Net Sales

 

$

43,753

 

$

44,062

 

$

39,268

 

$

41,931

 

Gross Profit

 

12,583

 

13,719

 

11,308

 

14,001

 

Income (loss) from operations

 

855

 

1,644

 

(346

)

3,010

 

Net income (loss)

 

89

 

142

 

(216

)

1,985

 

Diluted earnings (loss) per share

 

.01

 

.02

 

(.02

)

.23

 

Weighted average shares outstanding

 

8,667

 

8,700

 

8,719

 

8,721

 

 

Results of Operations

 

Net Sales.   Net sales for the quarter ended June 30, 2003 were $47,494,000, an increase of $3,432,000, or 7.8%, as compared to net sales of $44,062,000 during the second quarter of 2002. For the six months ended June 30, 2003, net sales were $88,396,000, which was $581,000, or 0.7%, above the net sales of $87,815,000 during the first six months of 2002. In both cases, these 2003 sales included the significant favorable impacts of stronger European currencies on the translation of foreign sales into U.S. Dollars. When measured at constant exchange rates, second quarter, 2003 sales were only 0.2% above the second quarter of 2002 and June 30, 2003 year-to-date sales were 7.4% below the first half of 2002.

 

Sales to customers in North America were $19,746,000 in the second quarter of 2003, an increase of $1,856,000, or 10.4%, from sales of $17,890,000 in the second quarter of 2002. For the first six months of 2003, sales in North America were $36,345,000, which was $2,006,000, or 5.2%, below the sales of $38,351,000 in the first half of 2002.  Reasons for the second quarter improvement included sales of Bridgeport machines and repair parts as well as higher sales from the Company’s core business and the liquidation of several unneeded used and demonstration machines.

 

13



 

Sales to European customers were $18,737,000 in the quarter ended June 30, 2003, a decrease of $755,000, or 3.9%, as compared to sales of $19,492,000 during the second quarter of 2002. For the first six months of 2003, sales in Europe were $36,703,000, which was $1,503,000, or 3.9%, below the sales of $38,206,000 in the first half of 2002. The positive impact of exchange rate changes, as described previously, was most pronounced in Europe; sales in the three and six month periods ended June 30, 2003 declined by 18% and 17%, respectively, as compared to the same periods of 2002, when viewed in constant dollars. These reduced sales reflect the substantial industry-wide decline in European machine tool demand.

 

Other international sales, primarily to customers in Asia, were $9,011,000 in the second quarter of 2003, which was an increase of $2,331,000, or 34.9%, over sales of $6,680,000 in the second quarter of 2002. For the first six months of 2003, sales in Asia and Other were $15,348,000, which was $4,090,000, or 36.3%, above the sales of $11,258,000 in the first half of 2002. These sales increases were largely due to strong shipments to customers in China. Asia sales would have been higher in the second quarter of 2003 if not for SARS, which caused some sales to be delayed because customers were not able to travel to the U.S. for acceptance testing.

 

The market force changes described above changed the global mix of Hardinge revenues. Sales to customers in Asia and Other represent 19.0% of all second quarter 2003 sales, as compared to 15.2% of sales in the second quarter of 2002. Sales in North America accounted for 41.6% of second quarter 2003 sales, as compared to 40.6% in 2002. Europe represented 39.4% of second quarter sales in 2003 and 44.2% in 2002.

 

For the first six months of 2003, 41.1% of the Company’s sales were to customers in North America, with 41.5% to Europe and 17.4% to the remainder of the world.  In the first six months of 2002, 43.7% of sales were to North America, with 43.5% to Europe and 12.8% to the remainder of the world.

 

Machine sales accounted for 66.1% of revenues for the second quarter of both 2003 and 2002. For the first half of 2003, machine sales accounted for 64.7% of revenues, as compared to 65.9% in the first half of 2002. Sales of non-machine products and services made up the balance.

 

The Company’s new orders were $45,220,000 in the second quarter of 2003, as compared to $39,877,000 in the second quarter of 2002. This increase of $5,343,000, or 13.4%, however, included the impact of the previously mentioned dollar exchange rate changes, which contributed approximately $2,744,000 of the dollar value of the orders recorded by the Company’s European subsidiaries. When measured at constant currency rates, orders were 6.5% higher in the second quarter of 2003 than the same three months of 2002.

 

For the first six months of 2003, new orders were $86,024,000, or 8.6% above the $79,228,000 new order rate for the first half of 2002. When viewed at constant currency rates, these orders increased by $1,189,000, or 1.5%, as compared to the first half of 2002.

 

The Company’s North American orders rose despite a continuing decline in industry-wide orders. The Association for Manufacturing Technology, the machine tool industry’s primary trade group, has reported that, for the first five months of 2003, metal-cutting machinery orders from U.S. customers were down 27% from the very depressed level of the same period in 2002. U.S. orders for traditional Hardinge products were better than the overall industry experience and the Company also benefited from new orders for Bridgeport machines and repair parts.

 

Orders from European customers were dramatically affected by the positive impact of exchange rates upon the conversion of foreign orders into U.S. dollars. Viewed in constant dollars, the Company’s European orders increased by only 0.2% in the second quarter of 2003 as compared to the second quarter of 2002. For year-to-date orders viewed in constant dollars, European orders declined by 9%.

 

Orders during the second quarter from Asian customers were significantly reduced by the impact of SARS. The Company believes that this region is now returning to normal and anticipates that orders will

 

14



 

return to the levels that the Company has experienced during the prior several quarters.

 

The Company’s June 30, 2003 backlog of $34,176,000 was 19.2% below the June 30, 2002 backlog of $42,313,000 and 6.8% below the $36,681,000 backlog at March 31, 2003.

 

Gross Profit.   Expressed as a percentage of net sales, gross margin was 29.9% for the three months ended June 30, 2003, as compared to 31.1% in the second quarter of 2002. For the first six months of 2003, gross margin was 30.6% of net sales as compared to 30.0% in the first half of 2002. The lower gross margin in the second quarter of 2003 was largely due to lower utilization of the Company’s manufacturing operations, competitive pricing pressures and the sale of lower margin surplus machines.

 

Selling, General and Administrative Expenses.   Selling, general and administrative (“SG&A”) expenses were $12,600,000, or 26.5% of sales, during the second quarter of 2003, which was $525,000, or 4.3%, above the SG&A of $12,075,000, or 27.4% of sales, during the second quarter of 2002. The impact of translating foreign operations into U.S. dollars, due to the exchange rate changes discussed previously, caused SG&A to increase by approximately $743,000.  Excluding those currency changes, SG&A declined by approximately $218,000, or 1.8%, due to cost cutting efforts taken throughout 2002 which were partially offset by higher pension and health care costs in the U.S.

 

For the first six months of 2003, SG&A was $24,724,000, or 28.0% of sales, which was $921,000, or 3.9%, above the SG&A of $23,803,000, or 27.1% of sales, during the first half of 2002. The foreign currency translation impact was approximately $1,511,000; excluding those currency impacts, SG&A declined by approximately $590,000, or 2.5%, for the reasons cited previously.

 

Income from Operations.   For the quarter ended June 30, 2003, income from operations was $1,624,000, or 3.4% of sales, as compared to $1,644,000, or 3.7% of sales, in the second quarter of 2002. For the first six months of 2003, income from operations was $2,297,000, or 2.6% of sales, as compared to $2,499,000, or 2.8% of sales, in the first half of 2002.

 

Interest Expense and Income.   Interest expense was $731,000 in the second quarter of 2003, a decrease of  $289,000, or 28.3%, as compared to $1,020,000 in the second quarter of 2002. For the first six months of 2003, interest expense was $1,542,000, or 18.8% below the $1,900,000 incurred in the first half of 2002. In both cases, the primary reason was decreased borrowing levels. Interest income was $134,000 during the second quarter of 2003, as compared to $111,000 in the second quarter of 2002, and $242,000 in the first six months of 2003 as compared to $229,000 in the first half of 2002.

 

Income Taxes.   The second quarter 2003 provision for income taxes was $239,000, or 23.2% of pre-tax income, as compared to $515,000,or 70.0% of pre-tax income, in the second quarter of 2002. For the first half of 2003, income tax expense was $233,000, or 23.4% of pre-tax income, as compared to $375,000, or 45.3% of pre-tax income, in the first six months of 2002. The Company’s 2002 quarterly consolidated effective tax rates were strongly influenced by the projected full-year mix of taxable income, as actual and forecast profits in countries with lower relative tax rates were offset by taxable losses in the United States and other countries with relatively higher tax rates.

 

These income tax expenses included tax benefits of $258,000 for the second quarter of 2003 and $789,000 for the six months ended June 30, 2003 from a net operating loss carryforward generated by the Company’s U.S. operations. The future realization of these tax benefits is dependent upon generating sufficient taxable income in the U.S. during the 20 year carryforward period. The Company concluded that it is more likely than not that the Company’s deferred tax asset, including the $789,000 generated in the first half of 2003, will be fully utilized. As of June 30, 2003, the Company has a U.S. deferred tax asset of $13,795,000.

 

The Company has reviewed all available positive and negative evidence, as required by Statement of Financial Accounting Standards No. 109, (SFAS 109) including the 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. and determined that no valuation allowance is appropriate at this time.  The Company will continue to review these factors under SFAS 109 on a quarterly basis.

 

15



 

Minority Interest in (Profit) of Consolidated Subsidiary.   The Company has a 51% interest in Hardinge Taiwan Precision Machinery Limited, an entity which is recorded as a consolidated subsidiary. For the quarter ended June 30, 2003 and 2002, respectively, reductions in net income of $224,000 and $86,000 represented the minority stockholders’ 49% share in the joint venture’s net income. This reduction was $317,000 in the first six months of 2003, as compared to $226,000 in the first half of 2002.

 

Profit in Investment of Equity Company.   During the second quarter of 2003, Hardinge EMAG GmbH contributed $16,000 of profit from Hardinge’s 50% interest in this joint venture, as compared to $8,000 in the second quarter of 2002. For the first half of 2003, this investment contributed $36,000 to net income, as compared to $4,000 in the first half of 2002.

 

Net Income.   Net income for the second quarter of 2003 was $580,000, or $.07 per share, as compared to $142,000, or $.02 per share, in the second quarter of 2002. For the first six months of 2003, net income was $483,000, or $.06 per share, as compared to $231,000, or $.03 per share, in the first half of 2002. Improvements reflected the increased sales and other factors as described previously.

 

Liquidity and Capital Resources

 

Operating activities for the six months ended June 30, 2003 generated cash of $12,034,000, as compared to generating $10,528,000 during the first six months of 2002, for an increase in cash generation of $1,506,000. Lower reductions in accrued expenses caused $2,777,000 of increased cash generation, as the reduction of $319,000 in the first six months of 2003 was less than the $3,096,000 during the first half of 2002. Inventory reductions contributed $6,141,000 to June 30, 2003 year-to-date cash generation, as compared to the $3,974,000 contributed by inventory reductions in the first half of 2002, representing $2,167,000 of the change. Reduced notes receivable contributed another $1,629,000 of increased cash generation, as the $877,000 decline in the first half of 2003 compared to a $752,000 increase in the first half of 2002. Reductions in income taxes receivable generated $7,144,000 of cash the first half of 2003 as compared to $5,795,000 in the first half of 2002, for a $1,349,000 increase in cash generation. The largest offsetting decrease in cash generation was in accounts payable, as a $2,739,000 decrease in the first half of 2003 compared to a $530,000 decrease in the first half of 2002, for a decline of $2,209,000 in cash generation. Another offsetting decrease was in deferred taxes, which had a $29,000 increase in the first half of 2003 as compared to a $1,635,000 decrease in the first half of 2002, for a $1,664,000 decrease in cash generation. Accounts receivable, which had a $1,423,000 increase in the first half of 2003 as compared to a $149,000 decrease in the first half of 2002, caused $1,572,000 of decrease in cash generation.  Depreciation and amortization, which was $4,276,000 in the first half of 2003 as compared to $5,020,000 in the first half of 2002, resulting in a $744,000 decrease in operating cash flow.

 

Capital expenditures used cash of $866,000 during the first six months of 2003, compared to using $970,000 during the first half of 2002. As a matter of Corporate policy, adopted in 2002, capital expenditures have been minimized and the Company does not now foresee a change to that policy.

 

Financing activities used $9,259,000 in the six months of 2003, as compared to usage of $10,949,000 during the first half of 2002, for a net change of $1,690,000, with debt reduction the primary financing usage. Dividend payments were $88,000 in the first half of 2003 as compared to $780,000 during the first half of 2002.  In May of 2002, the Company replaced it’s quarterly dividend policy with a policy of dividend consideration semi-annually.

 

Hardinge’s current ratio was 3.74:1 at June 30, 2003, as compared to 3.34:1 at December 31, 2002.

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of June 30, 2003, the Company has recorded a U.S. net deferred tax asset of approximately $13,795,000.  The future realization of these tax benefits is dependent upon generating sufficient taxable income in the U.S. during the 20 year carryforward period and the Company has concluded that it is more likely than not that this deferred tax asset, including the $789,000 generated in the first half of 2003, will be fully utilized.

 

16



 

Hardinge maintains various borrowing arrangements. These include a revolving loan agreement with a group of U.S. banks which provides for borrowing of up to $30,000,000 secured by substantially all of the Company’s domestic assets other than real estate and by a pledge of two-thirds of its investment in its Canadian, British and Swiss subsidiaries. The Company also maintains a $1,000,000 term loan and a $7,000,000 credit line with another U.S. bank. The Company has a loan agreement with a Swiss bank, providing for borrowing of up to 7,500,000 Swiss Francs, or $5,548,000 at the June 30, 2003 exchange rate, secured by the real property owned by Kellenberger AG, a wholly owned subsidiary of the Company. The Company also maintains a mortgage loan with a Swiss bank, which provide for borrowing up to 7,275,000 Swiss Francs, or $5,381,000 at the June 30, 2003 exchange rate, secured by the real property owned by HTT AG, another wholly owned subsidiary of the Company. These facilities, along with other short-term credit agreements and a $20,600,000 term loan, provide for immediate access for up to $78,642,000. Outstanding borrowings under these arrangements totaled $33,218,000, or 42.2% of the full borrowing capacity, at June 30, 2003. The Company believes that the currently available funds and credit facilities, along with internally generated funds, will provide sufficient financial resources for ongoing operations.

 

New Accounting Standards

 

In June 2002, The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires the recognition of expense when the liability is incurred and not as a result of an entity’s commitment to an exit plan and is effective with exit or disposal activities after December 31, 2002. The Company adopted SFAS No. 146 in the first quarter of 2003, which had no impact on the Company’s financial results.

 

In November, 2002, the Financial Accounting Standards Board issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation requires certain guarantees to be recorded at fair value, which is different from prior Generally Accepted Accounting Principles (GAAP). The Interpretation also requires a guarantor to make certain new disclosures. The Company adopted this Interpretation with the Form 10-K issued for the period ended December 31, 2002 and has provided the stipulated additional disclosures regarding warranties.

 

In December  2002, The Financial Accounting Standards Board issued Statement of  Financial Accounting Standards No. 148, Accounting for Stock-based compensation-Transition and Disclosure, an amendment of SFAS No. 123, Accounting for Stock-based Compensation. SFAS No. 148, which is effective for years ending after December 15, 2002, provides alternative methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires prominent disclosure about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company’s adoption of SFAS 148 in 2002 enhanced disclosures about stock-based employee compensation and had no effect on the method of accounting followed by the Company, as the Company continues to follow the provisions of APB Opinion No. 25.

 

In January, 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003.  The provisions of FIN 46 must be

 

17



 

applied for the first interim or annual period beginning after June 15, 2003.  The Company has implemented FIN 46, which has had no impact on the consolidated financial statements of the Company.

 

In April, 2003, the FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement requires reporting of derivative contracts as either freestanding derivative instruments subject to Statement 133 in its entirety, or as hybrid instruments with debt host contracts and embedded derivative features. The statement is effective for contracts entered into after June 30, 2003. The Company expects that Statement No. 149 will have no impact upon its financial statements.

 

On May 15, 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Statement No. 150 is effective for all financial instruments created or modified after May 31, 2003. The Company has implemented Statement No. 150, which has had no impact on the consolidated financial statements of the Company.

 

 

This report contains statements of a forward-looking nature relating to the financial performance of Hardinge Inc.   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, the company’s ability to generate sufficient U.S. taxable income to realize deferred tax assets, 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.

 

18



 

PART I.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

ITEM . 4.  CONTROLS AND PROCEDURES

 

The Chief Executive Officer and the Chief Financial Officer of Hardinge have, as of June 30, 2003, evaluated the disclosure controls and procedures of the Company and have found those controls to be effective.

 

There have been no significant changes in internal controls or other factors that could significantly affect internal controls subsequent to their review.

 

Part II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

None

 

Item 2.  Changes in Securities

None

 

Item 3.  Default upon Senior Securities

None

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

The 2003 Annual Meeting of Shareholders of Hardinge Inc. was held on May 6, 2003.  A total of 7,995,757 of the Company’s shares were present or represented by proxy at the meeting.  This represents approximately 90% of the Company’s shares outstanding.

 

The two Class III directors named below were elected to serve a three-year term.

 

Class III Directors

 

Votes For

 

Votes Withheld

 

 

 

 

 

 

 

Douglas A. Greenlee

 

7,891,620

 

104,137

 

Richard L. Simons

 

7,898,178

 

97,579

 

 

J. Patrick Ervin, E. Martin Gibson, Daniel J. Burke, Richard J. Cole, J. Philip Hunter, and Albert W. Moore continue as Directors of the Company.  James L. Flynn retired from the Board effective May 6, 2003.

 

The election of Ernst & Young LLP as the Company’s independent accountants for the year 2003 was ratified with 7,881,335 shares voting for, 95,397 shares voting against and 19,025 shares abstaining.

 

No other matters were presented for a vote at the meeting.

 

Item 5.  Other Information

None

 

19



 

Item 6.  Exhibits and Reports on Form 8-K

 

A.     Exhibits

 

31.1                           Chief Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Chief Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32                                    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

B.      Reports on 8-K

 

Current Report on Form 8-K, filed August 8, 2003 in connection with an August 1, 2003 press release announcing second quarter 2003 results and the appointment of a new member to the Board of Directors.

 

20



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Hardinge Inc.

 

 

August 13, 2003

 

By:

/s/ J. Patrick Ervin

 

Date

 

J. Patrick Ervin

 

 

 

Chairman of the Board, President/CEO

 

 

 

 

 

 

 

 

 

August 13, 2003

 

By:

/s/ Richard L. Simons

 

Date

 

Richard  L. Simons

 

 

 

Executive Vice President/CFO
(Principal Financial Officer)

 

 

 

 

 

 

 

 

 

August 13, 2003

 

By:

/s/ Richard B. Hendrick

 

Date

 

Richard  B. Hendrick

 

 

 

Vice President and Controller
(Principal Accounting Officer)

 

 

21