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 September 30, 2004

 

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 September 30, 2004 there were 8,843,139 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 September 30, 2004 and December 31, 2003.

 

 

 

 

 

 

 

Consolidated Statements of Operations and Retained Earnings for the three months ended September 30, 2004 and 2003 and for the nine months ended September 30, 2004 and 2003.

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003.

 

 

 

 

 

 

 

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 II

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

 

 

 

 

 

 

Certifications

 

 

2



 

PART I, ITEM 1

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(In Thousands)

 

 

 

Sept. 30,
2004

 

Dec. 31,
2003

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

4,360

 

$

4,739

 

Accounts receivable, net

 

53,533

 

44,660

 

Notes receivable, net

 

6,192

 

6,354

 

Inventories

 

93,915

 

87,064

 

Prepaid expenses

 

5,045

 

4,540

 

Total current assets

 

163,045

 

147,357

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Property, plant and equipment

 

165,594

 

162,926

 

Less accumulated depreciation

 

102,800

 

96,741

 

 

 

62,794

 

66,185

 

Other assets:

 

 

 

 

 

Notes receivable

 

6,920

 

7,733

 

Deferred income taxes

 

131

 

131

 

Intangible pension asset

 

3,915

 

3,900

 

Goodwill

 

18,180

 

18,314

 

Other

 

2,179

 

2,087

 

 

 

31,325

 

32,165

 

 

 

 

 

 

 

Total assets

 

$

257,164

 

$

245,707

 

 

See accompanying notes.

 

3



 

 

 

Sept. 30,
2004

 

Dec. 31,
2003

 

 

 

(Unaudited)

 

 

 

Liabilities and shareholders' equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

20,222

 

$

13,760

 

Notes payable to bank

 

5,015

 

624

 

Accrued expenses

 

14,107

 

18,224

 

Accrued income taxes

 

2,502

 

2,990

 

Deferred income taxes

 

3,708

 

3,477

 

Current portion long-term debt

 

4,885

 

5,002

 

Total current liabilities

 

50,439

 

44,077

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

21,435

 

17,675

 

Accrued pension plan expense

 

20,813

 

23,693

 

Deferred income taxes

 

3,253

 

3,163

 

Accrued postretirement benefits

 

5,904

 

5,864

 

Derivative financial instruments

 

4,627

 

6,194

 

Other liabilities

 

4,196

 

2,267

 

 

 

60,228

 

58,856

 

 

 

 

 

 

 

Equity of minority interest

 

5,205

 

3,688

 

 

 

 

 

 

 

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 September 30, 2004 and December 31, 2003

 

99

 

99

 

Additional paid-in capital

 

60,538

 

60,586

 

Retained earnings

 

96,158

 

94,150

 

Treasury shares - 1,076,853 at September 30, 2004 and 1,062,143 at December 31, 2003.

 

(13,960

)

(13,843

)

Accumulated other comprehensive loss

 

(356

)

(393

)

Deferred employee benefits

 

(1,187

)

(1,513

)

Total shareholders' equity

 

141,292

 

139,086

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

257,164

 

$

245,707

 

 

See accompanying notes.

 

4



 

HARDINGE INC AND SUBSIDIARIES

 

Consolidated Statements of Operations and Retained Earnings

(In Thousands, Except Per Share Data)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

54,606

 

$

43,993

 

$

159,853

 

$

132,389

 

Cost of sales

 

38,481

 

31,204

 

112,825

 

92,579

 

Gross profit

 

16,125

 

12,789

 

47,028

 

39,810

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

13,829

 

11,648

 

39,990

 

36,372

 

Income from operations

 

2,296

 

1,141

 

7,038

 

3,438

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

641

 

615

 

1,854

 

2,157

 

Interest (income)

 

(110

)

(97

)

(309

)

(339

)

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

 

1,765

 

623

 

5,493

 

1,620

 

Income taxes

 

765

 

13,718

 

1,790

 

13,951

 

Minority interest in (profit) of consolidated subsidiary

 

(600

)

(374

)

(1,518

)

(691

)

Profit in investment of equity company

 

 

 

39

 

 

 

75

 

Net income (loss)

 

400

 

(13,430

)

2,185

 

(12,947

)

 

 

 

 

 

 

 

 

 

 

Retained earnings at beginning of period

 

95,847

 

106,007

 

94,150

 

105,612

 

Less dividends declared

 

89

 

0

 

177

 

88

 

Retained earnings at end of period

 

$

96,158

 

$

92,577

 

$

96,158

 

$

92,577

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

.05

 

$

(1.54

)

$

.25

 

$

(1.49

)

Weighted average number of common shares outstanding

 

8,742

 

8,716

 

8,746

 

8,703

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

$

.05

 

$

(1.54

)

$

.25

 

$

(1.49

)

Weighted average number of common shares outstanding

 

8,785

 

8,716

 

8,792

 

8,703

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Declared

 

$

.01

 

$

.00

 

$

.02

 

$

.01

 

 

See accompanying notes.

 

5



 

HARDINGE INC AND SUBSIDARIES

 

Consolidated Statements of Cash Flows

(In Thousands)

 

 

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

 

 

(Unaudited)

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

2,185

 

$

(12,947

)

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

 

 

 

 

 

Depreciation and amortization

 

6,722

 

6,446

 

Provision for deferred income taxes

 

760

 

13,375

 

Funds provided by minority interest

 

1,612

 

663

 

Foreign currency transaction (gain) loss

 

(200

)

49

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(8,935

)

(3,731

)

Notes receivable

 

1,003

 

947

 

Income tax receivable

 

 

7,144

 

Inventories

 

(6,959

)

6,106

 

Other assets

 

(969

)

(2,912

)

Accounts payable

 

6,516

 

(1,775

)

Accrued expenses

 

(7,093

)

171

 

Investment in equity company

 

 

(76

)

Accrued postretirement benefits

 

40

 

 

Net cash (used in) provided by operating activities

 

(5,318

)

13,460

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(2,852

)

(1,181

)

Net cash (used in) investing activities

 

(2,852

)

(1,181

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Increase (decrease) in short-term debt

 

4,245

 

(2,341

)

Increase (decrease) in long-term debt

 

3,846

 

(8,670

)

Net (purchases) sale of treasury stock

 

(188

)

26

 

Dividends paid

 

(177

)

(88

)

Net cash provided by (used in) financing activities

 

7,726

 

(11,073

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

65

 

93

 

Net (decrease) increase in cash

 

(379

)

1,299

 

 

 

 

 

 

 

Cash at beginning of period

 

4,739

 

2,175

 

 

 

 

 

 

 

Cash at end of period

 

$

4,360

 

$

3,474

 

 

See accompanying notes.

 

6



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2004

 

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 the nine month period ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.  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, 2003.  The Company operates in only one business segment – industrial machine tools.

 

The consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

NOTE B—STOCK-BASED COMPENSATION

 

The Company grants restricted shares of common stock and stock options to certain officers, other key employees and directors.  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 Plans 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.  The Company amortizes compensation expense for restricted stock over the vesting period of the grant.  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.

 

7



 

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

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

Reported net income (loss)

 

$

400

 

$

(13,430

)

$

2,185

 

$

(12,947

)

Add: Stock-based employee compensation expense included in reported net income (loss)

 

109

 

142

 

349

 

426

 

 

 

509

 

(13,288

)

2,534

 

(12,521

)

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

 

(137

)

(172

)

(433

)

(514

)

Pro forma net income (loss)

 

$

372

 

$

(13,460

)

$

2,101

 

$

(13,035

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic and Diluted - as reported

 

$

.05

 

$

(1.54

)

$

.25

 

$

(1.49

)

Basic and Diluted - pro forma

 

$

.04

 

$

(1.54

)

$

.24

 

$

(1.50

)

 

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.  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.

 

The Company also sells extended warranties for some of its products.  These extended warranties usually cover a 12-24 month period that begins 0-12 months after time of sale.  Revenues for these extended warranties are recognized monthly as a portion of the warranty expires.  Deferred extended warranty revenue was $120,000 at September 30, 2004.

 

A reconciliation of the changes in the Company’s product warranty liability during the three and nine month periods ended September 30, 2004 and 2003 is as follows:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

Beginning balance

 

$

1,511

 

$

1,548

 

$

1,671

 

$

1,975

 

Provision for warranty

 

570

 

309

 

1,564

 

1,413

 

Warranties settlement costs

 

(591

)

(325

)

(1,733

)

(1,882

)

Other - currency translation impact

 

4

 

28

 

(8

)

54

 

Quarter end balance

 

$

1,494

 

$

1,560

 

$

1,494

 

$

1,560

 

 

8



 

NOTE D—INVENTORIES

 

Inventories are summarized as follows (dollars in thousands):

 

 

 

September 30,
2004

 

December 31,
2003

 

 

 

 

 

 

 

Finished products

 

$

38,312

 

$

33,217

 

Work-in-process

 

26,824

 

25,705

 

Raw materials and purchased components

 

28,779

 

28,142

 

 

 

$

93,915

 

$

87,064

 

 

 

NOTE E—INCOME TAXES

 

Statement of Financial Accounting Standards No.109 (SFAS 109) requires that a valuation allowance be 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 such matters as 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, and sales backlogs that will result in future profits.  It further states that 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, cumulative losses weigh heavily in the overall assessment.  As a result of the review undertaken at September 30, 2003, Hardinge, Inc. concluded that it was appropriate to establish a full valuation allowance for its U.S. net deferred tax assets.

 

Subsequent to September 30, 2003, Hardinge Inc. continued to maintain a full valuation allowance for its U.S. net deferred tax assets.  Hardinge Inc. expects to continue to record a full valuation allowance on these future tax benefits until an appropriate level of profitability is sustained in the U.S. operations.  Additionally, until an appropriate level of profitability is reached, the Company does not expect to recognize any significant U. S. tax benefits in future results of operations.

 

The difference in the three and nine months ended September 30, 2004 tax rates is due to changes in forecasted pre-tax results and taxes thereon for the year.  Each quarter, the Company estimates its full year tax rate based upon its most recent forecast of full year anticipated results and adjusts year to date tax expense to reflect its full year anticipated tax rate.

 

9



 

NOTE F—EARNINGS (LOSS) PER SHARE AND WEIGHTED AVERAGE SHARES OUTSTANDING

 

Earnings (loss) per share are computed in accordance with Statement of Financial Accounting Standards No. 128 Earnings per Share.  Basic earnings (loss) per share are computed using the weighted average number of shares of common stock outstanding during the period.  For diluted earnings (loss) 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 (loss) per share computations required by Statement No. 128:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Numerator: (dollars in thousands)

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

400

 

$

(13,430

)

$

2,185

 

$

(12,947

)

Numerator for basic earnings (loss) per share

 

400

 

(13,430

)

2,185

 

(12,947

)

Numerator for diluted earnings (loss) per share

 

400

 

(13,430

)

2,185

 

(12,947

)

 

 

 

 

 

 

 

 

 

 

Denominator: (shares in thousands)

 

 

 

 

 

 

 

 

 

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

 

8,742

 

8,716

 

8,746

 

8,703

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

Restricted stock and stock options

 

43

 

 

46

 

 

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

 

8,785

 

8,716

 

8,792

 

8,703

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

.05

 

$

(1.54

)

$

.25

 

$

(1.49

)

Diluted earnings (loss) per share

 

$

.05

 

$

(1.54

)

$

.25

 

$

(1.49

)

 

 

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.

 

The Company has a cross-currency swap agreement and an interest rate swap agreement related to their term loan accounted for as an investment hedge and a cash flow hedge, respectively.  The fair market values of the currency swap and interest rate swap are liabilities on the Company’s balance sheet.  Also, the Company regularly enters into foreign currency contracts to manage its exposure to fluctuations in foreign currency exchange rates on purchases of materials used in production and cash settlements of intercompany sales.  Gains or losses from these contracts are recognized in the income statement when the contract is settled.

 

10



 

NOTE H—REPORTING COMPREHENSIVE INCOME (LOSS)

 

During the three and nine months ended September 30, 2004 and 2003, the components of total comprehensive income (loss) consisted of the following (dollars in thousands):

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net Income (Loss)

 

$

400

 

$

(13,430

)

$

2,185

 

$

(12,947

)

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

534

 

1,947

 

(560

)

4,531

 

Foreign currency translation - pension

 

2

 

 

 

(3

)

 

 

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

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

63

 

183

 

644

 

185

 

Net investment hedges

 

(196

)

(643

)

(44

)

(1,055

)

Other comprehensive income

 

403

 

1,487

 

37

 

3,661

 

Total Comprehensive Income (Loss)

 

$

803

 

$

(11,943

)

$

2,222

 

$

(9,286

)

 

Accumulated balances of the components of other comprehensive income (loss) consisted of the following at September 30, 2004 and December 31, 2003  (dollars in thousands):

 

 

 

Accumulated balances

 

 

 

Sept. 30,

 

Dec. 31,

 

 

 

2004

 

2003

 

Accumulated Other Comprehensive Income (Loss):

 

 

 

 

 

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

 

$

(9,055

)

$

(9,052

)

Foreign currency translation adjustments

 

11,947

 

12,507

 

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

 

 

 

 

 

Cash flow hedges, (net of tax of $633 and $659, respectively)

 

(252

)

(896

)

Net investment hedges, (net of tax of $715 and $714, respectively)

 

(2,996

)

(2,952

)

Accumulated Other Comprehensive (Loss)

 

$

(356

)

$

(393

)

 

NOTE I—GOODWILL AND OTHER INTANGIBLE ASSETS

 

In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.  Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001.  Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

 

The Company adopted Statements of Financial Accounting Standards 142 on January 1, 2002.  The Company completed the transitional impairment testing of goodwill during the second quarter of 2002 and the subsequent annual impairment testing during the fourth quarter of 2002 and 2003.  In all cases, the Company determined that there was no goodwill impairment.

 

11



 

The total carrying amount of goodwill was $18,180,000 as of September 30, 2004 and $18,314,000 as of December 31, 2003.  This entire asset resulted from the December 2000 acquisition of HTT Hauser Tripet Tschudin AG.  The asset value of this goodwill decreased by $134,000, during the first nine months of 2004, with the entire change caused by the decreased dollar value of the Swiss franc, the functional currency of the Company’s HTT subsidiary, whose balance sheet includes this goodwill.

 

NOTE J—PENSION AND POST RETIREMENT PLANS

 

The Company accounts for the pension plans and postretirement benefits in accordance with Financial Accounting Standards Board Statements No. 87 and 106.  The following disclosures related to the pension and postretirement benefits are presented in accordance with Financial Accounting Standards Board Statement No. 132, as revised.

 

A summary of the components of net periodic pension costs for the consolidated company for the three and nine months ended September 30, 2004 and 2003 is presented below:

 

 

 

Pension Benefits

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

Service cost

 

$

660

 

$

681

 

$

1,979

 

$

2,046

 

Interest cost

 

1,672

 

1,648

 

5,012

 

4,951

 

Expected return on plan assets

 

(1,925

)

(1,903

)

(5,770

)

(5,722

)

Amortization of prior service cost

 

42

 

98

 

126

 

293

 

Amortization of transition (asset) obligation

 

(98

)

(65

)

(293

)

(195

)

Amortization of (gain) loss

 

36

 

26

 

106

 

81

 

Net periodic benefit cost

 

$

387

 

$

485

 

$

1,160

 

$

1,454

 

 

A summary of the components of net postretirement benefits costs for the consolidated company for the three and nine months ended September 30, 2004 and 2003 is presented below:

 

 

 

Postretirement Benefits

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(dollars in thousands)

 

Service cost

 

$

20

 

$

22

 

$

59

 

$

64

 

Interest cost

 

95

 

90

 

285

 

272

 

Amortization of prior service cost

 

(6

)

(6

)

(18

)

(18

)

Net periodic benefit cost

 

$

109

 

$

106

 

$

326

 

$

318

 

 

Hardinge Inc. previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $2,666,000 to its U. S. defined benefit plan in 2004.  As of September 30, 2004, the Company had made contributions of $3,769,747 to its domestic plan and will not make any more

 

12



 

contributions in 2004.  The additional $1,100,000 contribution will mean that no more contributions for the 2004 plan year will be made until September 2005.  This voluntary contribution was made to insure the fund continues to exceed the IRS funded gateway current liability percentage and will result in lower contributions in future years.  Hardinge expects to contribute $1,199,000 to its foreign defined benefit plans in 2004.  As of September 30, 2004, $839,000 of contributions has been made to the foreign plans.

 

In January 2004, the FASB issued Financial Staff Position (“FSP”) No. 106-1 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act 2003.”  The Medicare Prescription Drug, Improvement and Modernization Act (the “Act”) introduced a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.  Under FSP No. 106-1, a plan sponsor may elect to defer recognizing the effects of the Act until authoritative guidance on the accounting for the federal subsidy is issued.  In May 2004, the FASB issued FSP 106-2, which addresses the accounting and disclosure implications that are expected to arise as a result of the Act.  Under FSP 106-2, the effect of the Federal subsidy shall be accounted for as an actuarial experience gain.  During the third quarter of 2004, in accordance with FSP 106-2, the Company began accounting for the effect of the federal subsidy under the Act and found that there was no impact to the financial statements as the Company does not expect to qualify for the subsidy as set forth in the Act due to the Company’s cost caps on the amount it pays for retiree medical benefits.

 

NOTE K—SUBSEQUENT EVENT

 

On November 3, 2004, Hardinge Inc. purchased the intellectual property rights and certain assets associated with Bridgeport Machine Tool worldwide operations from Bridgeport International, a portfolio company of American Capital Strategies Ltd.

 

Hardinge acquired the name, trademarks, copyrights, designs, patents, know-how, and all other intangibles associated with Bridgeport’s machine tool business throughout the world, with the exception of the Bridgeport knee mill business which Hardinge has the rights to under a previous licensing agreement signed in September, 2002.  Hardinge is also acquiring certain operating assets.  Hardinge will provide uninterrupted sales, service and support to Bridgeport’s customers from offices in Leicester, England and Raamsdonksveer, Holland, formerly owned by Bridgeport.  The total consideration for all of the above was $7,250,000, most of which will be recorded as intangible assets, and was paid in cash funded by the Company’s revolving loan agreement.  The Company will be revisiting the allocation of the purchase price in the fourth quarter to be sure it has been allocated properly among intangible assets & goodwill.  In addition Hardinge acquired finished goods (CNC machining centers) for $4,100,000 to enable uninterrupted service to the marketplace and to fill existing customer orders.

 

13



 

PART I, ITEM 2

 

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

 

Overview

 

The Company’s primary business is manufacturing high-precision computer controlled metal-cutting and grinding machines and related accessories. The Company isgeographically diversified with manufacturing facilities in the U.S., Switzerland, Taiwan, and China and with sales to most industrialized countries. Over 60% of its sales are to customers outside North America, and approximately half of its employees are outside of North America.

 

The Company’s machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. The U.S. market activity metric most closely watched by management has been metal-cutting machine orders as reported by the Association of Manufacturing Technology (AMT), the primary industry group for U.S. machine tool manufacturers. Similar information regarding machine tool consumption in foreign countries is published in various trade journals.

 

Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that might purchase the Company’s products.  One such measurement is the PMI (formerly called the Purchasing Manager’s Index), as reported by the Institute for Supply Management. Another is capacity utilization, as reported by the Federal Reserve Board.

 

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

 

The Company recorded a deferred tax charge in September 2003. As explained in the Company’s Form 10-K report for the year ended December 31, 2003, this charge was made consistent with the specific requirements of Statement of Financial Accounting Standards No. 109 and established a valuation allowance offsetting the Company’s entire U.S. deferred tax asset.  Furthermore, no tax benefit can be recorded in the financial statements on net operating losses of the U.S. Company in the current year, even though they can be carried forward against future profits.  The Company’s management continues to believe that ultimately these deferred tax assets and currently generated net operating loss carryforwards will be fully utilized as credits against tax expense on future taxable income well before the assets would expire, since the Company’s U. S. operations earned $10,000,000 average annual pretax profit in the years 1990-2000 and the current tax law provides a lengthy carry-forward period, which for the Company’s current deferred tax assets extends until 2021-2024; however the recovery of these tax assets is currently not certain.

 

The Company’s management believes currency exchange rate changes are significant to reported results for several reasons. The Company’s primary competitors are now largely manufacturers in Japan, Germany, Switzerland, Taiwan, and Korea, which causes the worldwide valuation of the Yen, Euro, Swiss Franc, Taiwanese Dollar and Korean Won to be central to competitive pricing in all of the Company’s markets.  Also, the Company translates the results of its Swiss, Taiwanese, Chinese, English, German 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.  The Company also purchases computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.

 

In the past two years, pension liabilities have represented another significant uncertainty for the Company. The Company provides defined benefit pension plans for eligible employees in the U.S.,

 

14



 

Switzerland, England, and Taiwan. Recent declines in interest rates used to calculate the present value of future pension obligations and negative U.S. and UK equity market investment returns in 2002 have resulted in deferred pension charges to equity of $3,940,000 in 2003 and $5,112,000 in 2002.  These non-cash charges were recorded in “other comprehensive income” in the equity section of the consolidated balance sheets.  The underlying economic causes for these charges reflect a risk of increased future pension expense. As discussed later, further large pension charges driven by declines in interest rates or lower than assumed investment returns may require the Company to negotiate changes to its current borrowing arrangements.

 

Results of Operations

 

Summarized selected financial data for the three and nine month periods ended September 30, 2004 and 2003:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2004

 

2003

 

Change

 

%
Change

 

2004

 

2003

 

Change

 

%
Change

 

 

 

(dollars in thousands, except per share data)

 

Net Sales

 

$

54,606

 

$

43,993

 

$

10,613

 

24.1

%

$

159,853

 

$

132,389

 

$

27,464

 

20.7

%

Gross Profit

 

16,125

 

12,789

 

3,336

 

26.1

%

47,028

 

39,810

 

7,218

 

18.1

%

Income from operations

 

2,296

 

1,141

 

1,155

 

101.2

%

7,038

 

3,438

 

3,600

 

104.7

%

Profit before taxes

 

1,765

 

623

 

1,142

 

183.3

%

5,493

 

1,620

 

3,873

 

239.1

%

Net income (loss)

 

400

 

(13,430

)

13,830

 

103.0

%

2,185

 

(12,947

)

15,132

 

116.9

%

Diluted earnings (loss) per share

 

$

.05

 

$

(1.54

)

$

1.59

 

 

 

$

.25

 

$

(1.49

)

$

1.74

 

 

 

Weighted average shares outstanding

 

8,785

 

8,716

 

 

 

 

 

8,792

 

8,703

 

 

 

 

 

Gross Profit as % of sales

 

29.5

%

29.1

%

.4

%

 

 

29.4

%

30.1

%

.7

%

 

 

Profit before taxes as % of sales

 

3.2

%

1.4

%

1.8

%

 

 

3.4

%

1.2

%

2.2

%

 

 

Net income (loss) as % of sales

 

.7

%

-30.5

%

31.2

%

 

 

1.4

%

-9.8

%

11.2

%

 

 

 

Net Sales.  Net sales of $54,606,000 in the third quarter of 2004 were 24.1% above net sales of $43,993,000 for the same three months of 2003.  Sales for the nine months ended September 30, 2004 totaled $159,853,000, a 20.7% increase over sales of $132,389,000 for the nine months ended September 30, 2003.  The table below summarizes the Company’s September 30, 2004 quarter to date and year to date sales by geographical region, with comparisons to the same periods in 2003:

 

 

 

Three months ended
September 30,
(dollars in
 thousands)

 

Nine months ended
September 30,
(dollars in thousands)

 

Sales to Customers in:

 

2004

 

2003

 

% Change

 

2004

 

2003

 

% Change

 

North America

 

$

21,496

 

$

20,487

 

4.9

%

$

63,047

 

$

56,832

 

10.9

%

Europe

 

21,659

 

16,576

 

30.7

%

64,203

 

53,279

 

20.5

%

Asia & Other

 

11,451

 

6,930

 

65.2

%

32,603

 

22,278

 

46.4

%

 

 

$

54,606

 

$

43,993

 

24.1

%

$

159,853

 

$

132,389

 

20.7

%

 

Quarterly sales and year to date sales increased in each area of the world, with the largest percentage increase coming in Asia.  Comparisons for sales in Asia do reflect some impacts of the slowdown in commerce in China during 2003 related to the SARS outbreak.  During that period, travel to complete

 

15



 

orders and to finalize arrangements for shipments, such as customers’ approvals of machines prior to shipment, were delayed.   The Company’s expanding manufacturing base in Asia continues to help capture additional share in this expanding market, and is expected to continue to generate year over year improvements.  Sales to customers in Europe increased 30.7% in the third quarter and 20.5% year to date compared to the same periods last year.  Activity has returned to a more normal level after a depressed 2003.

 

Machine sales represented 69.1% of revenues in the third quarter of 2004 compared to 67.0% during the third quarter of 2003.  Machine sales represented 68.5% of revenues in the nine months ended September 30, 2004 compared to 66.7% during the same period of 2003.  Sales of non-machine products and services, primarily repair parts and accessories, made up the balance.

 

Orders and Backlog:     The table below summarizes the Company’s orders by geographical region for the three and nine months ended September 30, 2004 compared to the same periods in 2003:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

Orders from Customers in:

 

2004

 

2003

 

%
Change

 

2004

 

2003

 

%
Change

 

North America

 

$

25,221

 

$

22,867

 

10.3

%

$

72,296

 

$

64,136

 

12.7

%

Europe

 

22,587

 

16,360

 

38.1

%

62,225

 

47,145

 

32.0

%

Asia & Other

 

13,663

 

11,485

 

19.0

%

36,928

 

25,455

 

45.1

%

 

 

$

61,471

 

$

50,712

 

21.2

%

$

171,449

 

$

136,736

 

25.4

%

 

Orders throughout the world are growing due to new products introduced by the Company in late 2003 and early 2004 and also due to the improved economic climate.  The increased North American orders reflect the general increase in manufacturing activity in the U.S.  The increase in European orders reflects an increase in business activity in Europe resulting in increased orders in all of the Company’s product lines.  Orders in Asia continued to grow in 2004, due to increased demand in China and expanded marketing efforts in other areas of Asia.

 

The Company’s consolidated backlog was $54,279,000 at September 30, 2004. This was 33.4% above the September 30, 2003 backlog of $40,700,000, and 27.0% above the December 31, 2003 backlog of $42,747,000.

 

The Company’s third quarter 2004 gross margin was 29.5% of sales, compared to 29.1% in the same quarter of 2003.  Year to date 2004 gross margin was 29.4% versus 30.1% in the same period of 2003.  The year to year margin percentages comparisons have been affected by product mix.  Margins on non-machine products and services, which includes repair parts, service, and consumable accessories, generally tend to be higher than margins on machines.  When the company experiences higher growth in machine sales versus non-machines, the overall gross margin percentage tends to be lower.  Product mix within the machine category can have an impact also as the Company typically achieves better margins on its complex, high dollar machines, versus its more standard machine lines.

 

Selling, General and Administrative Expenses.   Selling, general and administrative (SG&A) expenses were $13,829,000 or 25.3% of net sales during the three months ended September 30, 2004 compared to $11,648,000, or 26.5% of net sales, during the third quarter of 2003. For the first nine months of 2004, SG&A was $39,990,000, or 25.0% of net sales compared to $36,372,000, or 27.5% of net sales, during the same period of 2003.   The increase in expenses for the quarterly and year to date comparisons reflect higher volume based expenses such as commissions to agents and increased promotional expenses, such as the biennial IMTS show which took place in Chicago in September.  The third quarter amount also includes approximately $250,000 of incremental expenses from temporary help and audit fees due to the work the company is performing to document, evaluate, and test its internal controls in compliance with section 404 of the Sarbanes Oxley act.  The Company anticipates spending a similar amount on such services in the fourth quarter.

 

16



 

Income from Operations.  For the quarter ended September 30, 2004, income from operations was $2,296,000, or 4.2% of sales, compared to $1,141,000, or 2.6% of sales, in the third quarter of 2003. For the first nine months of 2004, income from operations was $7,038,000, or 4.4% of sales, compared to $3,438,000, or 2.6% of sales, for the same period of 2003.  The year on year improvements have occurred as costs have not increased at the same pace as sales.

 

Interest Expense & Interest Income.  Interest expense for the quarters ended September 30, 2004 and 2003 was $641,000 and $615,000, respectively.  Interest expense was $1,854,000 for the first nine months of 2004 compared to $2,157,000 for the first nine months of 2003.  The year to date comparison decrease reflects lower borrowing levels in the earlier half of 2004.  There was no significant change in interest income from year to year.

 

Income Taxes/Benefits.   The third quarter 2004 provision for income taxes was $765,000, or 43.3% of pre-tax income, compared to $13,718,000 tax expense in the third quarter of 2003.  Third quarter 2003 income tax expense included a charge of $13,694,000 to provide a 100% valuation allowance for the Company’s U.S. deferred tax assets in accordance with FAS 109.  For the first nine months of 2004, income tax expense was $1,790,000, or 32.6% of pre-tax income, compared to $13,951,000 tax expense for the first nine months of 2003.  The difference in the three and nine months ended September 30, 2004 tax rates is due to changes in forecasted pre-tax results and taxes thereon for the year.  Each quarter, the Company estimates its full year tax rate based upon its most recent forecast of full year anticipated results and adjusts year to date tax expense to reflect its full year anticipated tax rate.  Consistent with accounting for taxes under FAS109, no tax benefits were recorded as a result of the pre-tax loss of the U.S. operations for the third quarter or first nine months of 2004 or 2003, which, if booked, would have partially offset the taxes accrued for pre-tax earnings from profitable foreign subsidiaries.  The impact of losses in the U.S. combined with taxable earnings on other jurisdictions can create unusual consolidated tax rates and will result in rates different than the U.S. statutory rate.

 

In October 2004, Congress passed the American Job Creation Act of 2004, which includes some tax relief provisions.  The Company is currently assessing the effects of the act.

 

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 September 30, 2004 and 2003, respectively, reductions in net income of $600,000 and $374,000 represented the minority stockholders’ 49% share in the joint venture’s net income. The elimination of minority interest for the nine months ended September 30, 2004 and 2003, respectively was $1,518,000 and $691,000.  This operation has accounted for a large part of Hardinge’s sales increase on a year to year basis and has generated increasing profits for the Company.

 

Profit In Investment of Equity Company.  The Company was 50% owner of Hardinge EMAG GmbH, until the Company sold this investment in December 2003. The Company’s 50% share of that joint venture’s profits contributed $39,000 and $75,000 to the Company’s consolidated results in the third quarter and first nine months of 2003, respectively.

 

Net Income/(Loss).  Net income for the third quarter of 2004 was $400,000, or $.05 per basic and diluted share, and $2,185,000 or $.25 per basic and diluted share for the nine months ended September 30, 2004.  In the period ended September 30, 2003, the Company recorded a net loss of ($13,430,000), or ($1.54) per basic and diluted share for the quarter and a net loss of ($12,947,000), or ($1.49) per basic and diluted share year to date.  The $13,694,000 charge for the higher tax provision for the valuation allowance for U. S. deferred tax assets contributed to the net loss of ($13,430,000) for the quarter ended September 30, 2003.

 

17



 

Liquidity and Capital Resources

 

The Company’s current ratio at September 30, 2004 was 3.23:1, compared to 3.34:1 at December 31, 2003.

 

As shown in the consolidated statements of cash flows, the Company used cash of $5,318,000 in its operating activities during the first nine months of 2004, compared to generating cash of $13,460,000 from operating activities in the first nine months of 2003.

 

During the first nine months of 2004, cash was impacted by increases in accounts receivable of $8,935,000, increases in inventories of $6,959,000, and decreases in accrued expenses of $7,093,000.  These uses of cash were partially offset by an increase in accounts payable of $6,516,000.  The accounts receivable increase results from the high shipment level in the second and third quarters of 2004 with a large percentage of the third quarter shipments occurring in September.  Worldwide inventory increased during the period as production was increased to reflect current and anticipated order rates.  Accrued expenses decreased due to year to date pension payments made by the Company and decreases in the amounts the Company holds for prepayments from deposits from customers, primarily on international orders that shipped in the first half of the year.  The largest changes that occurred in the comparable period of 2003 included a decrease in inventory of $6,106,000 as production levels were decreasing at that time and a refund of U.S. taxes of $7,144,000 based on returns filed for the year ended December 31, 2002.

 

Cash used in investing activities increased by $1,671,000 between the first nine months of 2003 and 2004, with the entire amount reflecting capital expenditures. The Company is expanding its manufacturing capacity in China and continues to upgrade its accessory manufacturing in the U.S.  For the nine months ended September 30, 2004, total capital expenditures were $2,852,000.  Total 2004 capital expenditures are projected to be in the range of $3,000,000 to $4,000,000 and are expected to be financed through operations or available bank borrowings.

 

Cash provided by financing activities was $7,726,000 for the first nine months of 2004 compared to cash used of $11,073,000 for the same period in 2003.  Debt increased $8,091,000 during the first nine months of 2004, due partially to the Company making total contributions of $3,770,000 to its domestic pension plan.  Also, annual tax payments were made in the third quarter of 2004 for the Company’s Swiss operations totaling $1,000,000.  The rest of the 2004 increase in debt was used to fund working capital growth as inventory and receivables reflect higher production levels and higher shipment levels.  In the first nine months of 2003, the cash generated from operations allowed the Company to reduce debt by $11,011,000.

 

Hardinge maintains various borrowing arrangements.  These include a revolving loan agreement with a group of U.S. banks, which expires in October 2005, providing for borrowings 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 and European subsidiaries. At September 30, 2004, borrowings under this agreement totaled $10,000,000.  The Company also has a term loan with substantially the same security and financial covenants as provided under the revolving loan agreement described above.  The balance on this term loan as of September 30, 2004 was $14,600,000.  This loan provides for quarterly payments of $1,200,000 through March 2007.  An additional loan agreement with another U.S. bank provides for borrowings up to $8,000,000, of which $3,120,000 was borrowed at September 30, 2004.

 

The Company’s Swiss subsidiaries maintain unsecured overdraft facilities with commercial banks, providing borrowing up to 9,500,000 Swiss Francs or approximately $7,617,000, and borrowings under these facilities were $1,896,000 at September 30, 2004.  The Company’s Swiss subsidiaries also have loan agreements with a Swiss bank which provide for borrowings up to 7,500,000 Swiss Francs, or approximately $6,014,000.  These facilities, which are secured by the real property owned by the two Swiss subsidiaries did not have any borrowings at September 30, 2004.

 

These and other borrowing agreements provide for borrowing availability of up to $68,406,000, of which $31,335,000, or 45.8%, was borrowed as of September 30, 2004.

 

18



 

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, actions taken by customers such as order cancellations or reduced bookings by customers or distributors, competitors’ actions such as price discounting or new product introductions, governmental regulations and environmental matters, changes in the availability and cost of materials and supplies, the implementation of new technologies and currency fluctuations.  Any forward-looking statement should be considered in light of these factors.  The company undertakes no obligation to revise its forward-looking statements if unanticipated events alter their accuracy.

 

PART I.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

All quantitative and qualitative disclosures about market risk were disclosed in the Company’s 2003 10K and there have been no changes in those disclosures.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2004 and has concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2004.  There were no material changes in the Company’s internal control over financial reporting during the third quarter of 2004.

 

19



 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

None

 

Item 2.  Changes in Securities

 

The following tables provides information about issuer repurchases of our common stock by month for the quarter ended September 30, 2004:

 

Issuer Purchases of Equity Securities

 

Period

 

Total
Number of Shares
Purchased

 

Average
Price Paid
per Share

 

July 1 - July 31, 2004

 

4,000

 

$

12.30

 

August 1 - August 31, 2004

 

60

 

$

12.19

 

September 1 - September 30, 2004

 

0

 

 

 

Total

 

4,060

 

 

 

 

The above shares were repurchased as part of the Company’s Incentive Compensation Plan to satisfy tax withholding obligations due to the vesting of restricted stock and the exercise of stock options.

 

Item 3.  Default upon Senior Securities

 

None

 

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

 

None

 

Item 5.  Other Information

 

Hardinge’s (the “Company”) independent auditor, Ernst & Young LLP (“E&Y”) has recently notified the Audit Committee of the Company’s Board of Directors that certain non-audit work performed by an E&Y affiliate in Taiwan for a subsidiary of the Company has raised concerns regarding E&Y’s independence with respect to its performance of audit services for the Company.

 

E&Y disclosed that, during fiscal years 2001, 2002, 2003 and 2004, its affiliate in Taiwan held employment tax related funds of a de minimis amount and made payment of such funds to the applicable tax authority for several employees of a subsidiary of the Company in Taiwan.  Custody of the assets of an audit client are not permitted under the auditor independence rules set forth in Regulation S-X promulgated by the SEC.  The actions by the E&Y affiliate in Taiwan that are not permitted under the SEC rules and regulations have been discontinued.  The Audit Committee of the Board of Directors of the Company met on November 2, 2004 to consider the impact of this matter on the independence of E&Y as external auditor for the Company.  Both the Audit Committee and E&Y have considered the impact that the holding and paying of these funds may have had on E&Y’s independence with respect to the Company and have each independently concluded that there has been no impairment of E&Y’s independence.  In making this determination, the Audit Committee considered the de minimis amount of funds involved, the ministerial nature of the actions, the minimal fees associated with this service which amounted to approximately $300 per year, and that E&Y was in no way acting as management in performing this function. The Audit Committee and E&Y continue to evaluate and review matters relevant to the maintenance of E&Y’s independence.

 

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Item 6.  Exhibits and Reports on Form 8-K

 

  A.          Exhibits

 

10.1         Asset Purchase Agreement dated November 3, 2004 by and between BPT IP LLC and Hardinge Inc.

 

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

 

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

 

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

 

  B.          Reports on Form 8-K:

 

Current Report on Form 8-K, filed August 2, 2004 in connection with a July 29, 2004 press release announcing the Company’s 2004 second quarter results and the declaration of a dividend payment.

 

Current Report on Form 8-K, filed October 4, 2004 to disclose that the Board of Directors amended the Corporations By-Laws on September 28, 2004.

 

Current Report on Form 8-K, filed November 5, 2004 in connection with a November 3, 2004 press release announcing that the Company has purchased the intellectual property rights associated with Bridgeport’s worldwide operations from Bridgeport International, a portfolio company of American Strategies Ltd.

 

Current Report on Form 8-K, filed November 5, 2004 in connection with a November 4, 2004 press release announcing the Company’s 2004 third quarter results.

 

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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.

 

 

 

 

 

 

November 9, 2004

 

By:

/s/ J. Patrick Ervin

 

Date

 

J. Patrick Ervin

 

 

Chairman of the Board, President/CEO

 

 

 

 

 

 

November 9, 2004

 

By:

/s/ Richard L. Simons

 

Date

 

Richard L. Simons

 

 

Executive Vice President/CFO

 

 

(Principal Financial Officer)

 

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