UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

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

 

(I.R.S. Employer

incorporation or organization)

 

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  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer  (as defined by Exchange Act Rule 12b-2).

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

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

As of June 30, 2007 there were 11,449,137 shares of Common Stock of the Registrant outstanding.

 




 

HARDINGE INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

Page

 

Part I

 

Financial Information

 

 

 

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2007 and December 31, 2006.

 

3

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006 and for the six months ended June 30, 2007 and 2006.

 

5

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006.

 

6

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements.

 

7

 

 

 

 

 

 

 

 

 

 

Item 2.

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

 

18

 

 

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

 

25

 

 

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

25

 

 

 

 

 

 

 

 

Part II

 

Other Information

 

25

 

 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

 

 

 

 

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

 

 

 

 

 

 

 

 

 

 

Item 3.

Default upon Senior Securities

 

25

 

 

 

 

 

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

26

 

 

 

 

 

 

 

 

 

 

Item 5.

Other Information

 

26

 

 

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

26

 

 

 

 

 

 

 

 

 

 

Signatures

 

 

27

 

 

 

 

 

 

 

 

 

 

Certifications

 

 

 

 

2




PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HARDINGE INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(In Thousands)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

9,962

 

$

6,762

 

Accounts receivable, net

 

74,435

 

73,149

 

Notes receivable, net

 

3,389

 

4,930

 

Inventories, net

 

152,468

 

132,834

 

Deferred income tax

 

743

 

747

 

Prepaid expenses

 

9,961

 

9,216

 

Total current assets

 

250,958

 

227,638

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

Property, plant and equipment

 

177,741

 

176,754

 

Less accumulated depreciation

 

116,565

 

112,702

 

Net property, plant and equipment

 

61,176

 

64,052

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

Notes receivable, net

 

1,683

 

1,983

 

Deferred income taxes

 

101

 

246

 

Other intangible assets

 

11,524

 

11,849

 

Goodwill

 

21,879

 

19,110

 

Other long-term assets

 

1,941

 

5,782

 

 

 

37,128

 

38,970

 

 

 

 

 

 

 

Total assets

 

$

349,262

 

$

330,660

 

 

See accompanying notes.

3




HARDINGE INC. AND SUBSIDIARIES

Consolidated Balance Sheets - Continued
(In Thousands, Except Share Data)

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

32,189

 

$

31,462

 

Notes payable to bank

 

4,047

 

4,525

 

Accrued expenses

 

24,732

 

22,542

 

Accrued income taxes

 

4,764

 

3,640

 

Deferred income taxes

 

3,016

 

2,717

 

Current portion of long-term debt

 

5,757

 

5,758

 

Total current liabilities

 

74,505

 

70,644

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

Long-term debt

 

15,657

 

67,578

 

Accrued pension expense

 

26,978

 

26,814

 

Deferred income taxes

 

1,761

 

1,673

 

Accrued postretirement benefits

 

2,199

 

2,414

 

Other liabilities

 

4,577

 

4,428

 

 

 

51,172

 

102,907

 

Shareholders’ equity:

 

 

 

 

 

Preferred stock, Series A, par value $.01 per share; Authorized 2,000,000;
issued - none

 

 

 

 

 

Common stock, $.01 par value:

 

 

 

 

 

Authorized shares - 20,000,000;

 

 

 

 

 

Issued shares — 12,472,992 at June 30, 2007 and 9,919,992 at December 31, 2006

 

125

 

99

 

Additional paid-in capital

 

115,016

 

59,741

 

Retained earnings

 

126,367

 

116,438

 

Treasury shares — 1,023,855 at June 30, 2007 and 1,083,117 shares
at December 31, 2006.

 

(13,070

)

(13,916

)

Accumulated other comprehensive loss

 

(4,853

)

(5,253

)

Total shareholders’ equity

 

223,585

 

157,109

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

349,262

 

$

330,660

 

 

See accompanying notes.

4




HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(In Thousands, Except Per Share Data)

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

89,710

 

$

78,518

 

$

176,676

 

$

153,954

 

Cost of sales

 

60,423

 

54,932

 

119,409

 

107,465

 

Gross profit

 

29,287

 

23,586

 

57,267

 

46,489

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

20,634

 

18,279

 

39,626

 

37,540

 

Income from operations

 

8,653

 

5,307

 

17,641

 

8,949

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

714

 

1,311

 

2,083

 

2,457

 

Interest (income)

 

(55

)

(58

)

(108

)

(180

)

Income before income taxes

 

7,994

 

4,054

 

15,666

 

6,672

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

2,011

 

1,047

 

4,358

 

1,718

 

Net income

 

$

5,983

 

$

3,007

 

$

11,308

 

$

4,954

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

$

0.57

 

$

0.34

 

$

1.19

 

$

0.57

 

Weighted average number of common shares outstanding (in thousands)

 

10,502

 

8,765

 

9,522

 

8,766

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

$

0.57

 

$

0.34

 

$

1.18

 

$

0.56

 

Weighted average number of common shares outstanding (in thousands)

 

10,575

 

8,807

 

9,595

 

8,801

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

 

$

0.05

 

$

0.03

 

$

0.10

 

$

0.06

 

 

See accompanying notes.

5




HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(In Thousands)

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net income

 

$

11,308

 

$

4,954

 

Adjustments to reconcile net income to net provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,972

 

4,731

 

Provision for deferred income taxes

 

548

 

127

 

Unrealized foreign currency transaction (gain)

 

(1,188

)

(319

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(491

)

2,402

 

Notes receivable

 

1,877

 

855

 

Inventories

 

(19,022

)

(4,376

)

Prepaids/other assets

 

1,092

 

(4,478

)

Accounts payable

 

512

 

835

 

Accrued expenses

 

2,763

 

(4,150

)

Accrued postretirement benefits

 

(215

)

(205

)

Net cash provided by operating activities

 

2,156

 

376

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(1,524

)

(1,967

)

Purchase of Bridgeport kneemill technical information

 

 

(5,000

)

Purchase of minority interest in Hardinge Taiwan

 

 

(110

)

Purchase of U-Sung Co., Ltd.

 

 

(5,071

)

Purchase of Canadian entity net of cash acquired

 

(232

)

 

Net cash (used in) investing activities

 

(1,756

)

(12,148

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

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

 

(205

)

5,921

 

(Decrease) increase in long-term debt

 

(52,134

)

6,298

 

Net Proceeds from issuance of common stock

 

55,946

 

 

Net sales (purchases) of treasury stock

 

62

 

(332

)

Dividends paid

 

(1,017

)

(531

)

Net cash provided by financing activities

 

2,652

 

11,356

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

148

 

363

 

Net increase (decrease) in cash

 

3,200

 

(53

)

 

 

 

 

 

 

Cash at beginning of period

 

6,762

 

6,552

 

 

 

 

 

 

 

Cash at end of period

 

$

9,962

 

$

6,499

 

 

See accompanying notes.

 

6




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2007

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 six month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2006.  The Company operates in only one business segment — industrial machine tools.

              The consolidated balance sheet at December 31, 2006 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

              On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R), which requires all equity-based payments to employees, including grants of employee stock options, to be recognized in the statement of earnings based on the grant date fair value of the award.

              The Company did not issue any new stock options during 2007 or 2006. All previously awarded stock option grants were fully vested at the date of the adoption of SFAS 123R, thus, the Company did not recognize any share-based compensation expense in 2007 or 2006, related to stock options.

               The Company does recognize share-based compensation expense in relation to restricted stock awards issued prior to January 1, 2006 and thereafter. A summary of the restricted stock activity under the Incentive Stock Plan is as follows:

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Shares at beginning of period

 

166,500

 

146,250

 

143,000

 

193,750

 

Shares granted

 

 

 

49,500

 

3,000

 

Shares vested

 

 

 

(26,000

)

(28,734

)

Intrinsic value of shares vested (in millions)

 

 

 

$0.4

 

$0.5

 

Shares cancelled, forfeited or exercised

 

(2,000

)

 

(2,000

)

(21,766

)

Shares at end of period

 

164,500

 

146,250

 

164,500

 

146,250

 

 

The Company amortizes compensation expense for restricted stock over the vesting period of the grant. Total share-based compensation expense on restricted stock for the three months and six months ended June 30, 2007 was $80,910 and $139,499, respectively. Total share-based compensation expense on restricted stock for the three months and six months ended June 30, 2006 was $61,948 and $57,444, respectively. There were a total of 164,500 shares of restricted stock outstanding at June 30, 2007. The compensation cost not yet recognized on these restricted shares as of June 30, 2007 was $1.3 million, which will be amortized over a weighted average term of 3.7 years.

7




 

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

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Options at beginning of period

 

99,518

 

175,619

 

136,119

 

184,288

 

Options granted

 

 

 

 

 

Options cancelled, forfeited or exercised

 

(12,518

)

(13,500

)

(49,119

)

(22,169

)

Weighted average price per share

 

$

9.55

 

$

18.66

 

$

13.92

 

$

15.52

 

Options at end of period

 

87,000

 

162,119

 

87,000

 

162,119

 

Weighted average price per share

 

$

11.71

 

$

13.37

 

$

11.71

 

$

13.37

 

 

              The following characteristics apply to the Plan stock options that are fully vested, as of June 30, 2007:

Number of options outstanding that are currently exercisable

 

87,000

 

Weighted-average exercise price of options currently exercisable

 

$

11.71

 

Aggregate intrinsic value of options currently exercisable (in millions)

 

$

1.9

 

Weighted-average contractual term of currently exercisable

 

5.82 yrs.

 

 

8




 

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 on a prorated basis until the warranty expires.

              These liabilities are reported as accrued expenses on the Company’s consolidated balance sheet.

              A reconciliation of the changes in the Company’s product warranty liability during the three month and six month periods ended June 30, 2007 and 2006 is as follows:

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,933

 

$

1,661

 

$

1,957

 

$

1,503

 

Provision for warranties

 

764

 

505

 

1,127

 

994

 

Warranties settlement costs

 

(626

)

(427

)

(1,020

)

(770

)

Other — currency translation impact

 

(10

)

70

 

(3

)

82

 

Quarter end balance

 

$

2,061

 

$

1,809

 

$

2,061

 

$

1,809

 

 

9




 

NOTE D—INVENTORIES

             Inventories are summarized as follows:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(dollars in thousands)

 

Finished products

 

$

74,265

 

$

61,389

 

Work-in-process

 

31,094

 

32,061

 

Raw materials and purchased components

 

47,109

 

39,384

 

 

 

$

152,468

 

$

132,834

 

 

NOTE E—INCOME TAXES

             Hardinge continues to maintain a full valuation allowance on the tax benefits of its U.S. and Canadian net deferred tax assets and the Company expects to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in the U.S. and Canada is sustained.  Additionally, until an appropriate level of profitability is reached, the Company does not expect to recognize any significant tax benefits in future results of operations. The Company also maintains a valuation allowance on its U.K. deferred tax asset for minimum pension liabilities.

            Each quarter, the Company estimates its full year tax rate for jurisdictions not subject to valuation allowances 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. The effective tax rate was 30.6% for the first quarter and 25.2% for the second quarter of 2007. The difference was due to the change in the mix of earnings by country.

            On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48,  “Accounting for Uncertainty in Income Taxes: An interpretation of FASB Statement No. 109” (“FIN 48”).  As a result of the adoption of FIN 48 and recognition of the cumulative effect of adoption of a new accounting principle, the Company recorded a $0.4 million increase in the liability for uncertain income tax benefits, with an offsetting reduction in retained earnings.  This adjustment reflects the net difference between related balance sheet accounts before applying FIN 48, and then as measured pursuant to the provisions of FIN 48.  In addition, the Company derecognized $1.46 million of deferred tax assets, for which a full valuation allowance had previously been provided.  The valuation allowance was also reduced by $1.46 million as part of the adoption of FIN 48.  As of June 30, 2007, the total liability for uncertain income tax benefits was $0.5 million.  If recognized, essentially all of the uncertain tax benefits and related interest would be recorded as a benefit to income tax expense on the Consolidated Statement of Operations.

             Additionally, the adoption of FIN 48 resulted in the accrual for uncertain tax positions being reclassified from accrued income taxes to other liabilities in the Company’s Consolidated Balance Sheet. The adoption of FIN 48 did not have a significant impact on the Consolidated Statement of Operations for the three months or six months ended June 30, 2007.

              The Company records interest and penalties on tax reserves as income tax expense in the financial statements.  For the three month and six month periods ended June 30, 2007 there was no expense recorded. The Company currently does not have a liability for tax penalties.  As of June 30, 2007, there was $0.1 million of accrued interest related to uncertain tax positions included in the liability for uncertain tax positions.

10




 

              The tax years 2003 to 2006 remain open to examination by United States taxing authorities, and for the Company’s other major jurisdictions (Switzerland, UK, Taiwan, Germany, Canada, and China), the tax years 2001 to 2006 generally remain open to routine examination by foreign taxing authorities.

On April 1, 2007, legislation was enacted in New York State that changed the apportionment methodology for corporate income from a “three factor formula” comprised of payroll, property and sales, to one which uses only sales.  The law also provides for a lowering of the general corporation income tax rate.  These changes are fully effective for the tax year 2007 and thereafter.  As a result of this significant change in expected state income tax rates to the Company, the Company has reduced its net deferred tax assets by $3.1 million.  Concurrently with this action, the Company has also reduced its valuation allowance by $3.1 million due to this item.  Both items were recorded in the quarter ended June 30, 2007.

NOTE F— DERIVATIVE FINANCIAL INSTRUMENTS

             The Company accounts for derivative financial instruments in accordance with Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.  The statement requires the Company to recognize all its derivative instruments on the balance sheet at fair value.  Derivatives that are not qualifying hedges must be adjusted to fair value through income.  If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.  The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.

11




NOTE G—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 and stock options.

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

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Net income

 

$

5,983

 

$

3,007

 

$

11,308

 

$

4,954

 

Numerator for basic earnings per share

 

5,983

 

3,007

 

11,308

 

4,954

 

Numerator for diluted earnings per share

 

5,983

 

3,007

 

11,308

 

4,954

 

Denominator:

 

 

 

 

 

 

 

 

 

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

 

10,502

 

8,765

 

9,522

 

8,766

 

Effect of diluted securities:

 

 

 

 

 

 

 

 

 

Restricted stock and stock options (in thousands)

 

73

 

42

 

73

 

35

 

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

 

10,575

 

8,807

 

9,595

 

8,801

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.57

 

$

0.34

 

$

1.19

 

$

0.57

 

Diluted earnings per share

 

$

0.57

 

$

0.34

 

$

1.18

 

$

0.56

 

 

12




 

NOTE H—REPORTING COMPREHENSIVE INCOME (LOSS)

            During the three and six month periods ended June 30, 2007 and 2006, the components of total comprehensive income (loss) consisted of the following:

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Net Income

 

$

5,983

 

$

3,007

 

$

11,308

 

$

4,954

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

202

 

6,614

 

368

 

7,910

 

Pension liability adjustment, net of tax

 

(6

)

(366

)

(67

)

(421

)

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

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

8

 

(47

)

36

 

(58

)

Net investment hedges

 

57

 

(783

)

63

 

(891

)

Other comprehensive income

 

261

 

5,418

 

400

 

6,540

 

Total Comprehensive Income

 

$

6,244

 

$

8,425

 

$

11,708

 

$

11,494

 

 

              Accumulated balances of the components of other comprehensive (loss) income consisted of the following at June 30, 2007 and December 31, 2006:

 

 

Accumulated balances

 

 

 

June 30,

 

Dec. 31,

 

 

 

2007

 

2006

 

Accumulated Other Comprehensive (Loss) Income:

 

 

 

 

 

Minimum pension liability (net of tax of $4,032 and $4,041, respectively)

 

$

(6,258

)

$

(6,191

)

Implementation of SFAS 158 on Retirement related plans (net of tax of $1,181 and $1,181, respectively)

 

(11,944

)

(11,944

)

Foreign currency translation adjustments

 

16,028

 

15,660

 

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

 

 

 

 

 

Cash flow hedges, (net of tax of $634 and $642, respectively)

 

623

 

587

 

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

 

(3,302

)

(3,365

)

 Accumulated Other Comprehensive (Loss)

 

$

(4,853

)

$

(5,253

)

 

NOTE  I—GOODWILL AND OTHER INTANGIBLE ASSETS

          The Company accounts for goodwill and intangibles in accordance with Statements of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible Assets.  SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. The statement requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives are amortized over their estimated useful lives.

           The total carrying amount of goodwill was $21.9 million as of June 30, 2007 and $19.1 million as of December 31, 2006.  The majority of this asset resulted from the acquisition of HTT Hauser Tripet Tschudin AG in 2000.  The acquisition of the European sales and service operations of Bridgeport in 2004

13




 

added $0.5 million to goodwill.  The acquisition of a Canadian entity, for which the purchase price allocation is preliminary, in the second quarter of 2007 added $2.8 million to goodwill. The Company will complete a valuation of potential intangibles acquired from the Canadian entity that may require adjustment to goodwill as appropriate. The purchase price of the Canadian entity was approximately $2.3 million and the assumption of certain liabilities. The results of this entity are included in the Company’s results of operations since the acquisition date of April 30, 2007. The asset value of the goodwill decreased by $0.2 million and $0.05 million, respectively, during the three month and six month periods ended June 30, 2007 due to the decreased dollar value of the functional currency of the Company’s subsidiaries whose balance sheets include the goodwill.

            Other intangible assets include $6.6 million representing the value of the name, trademarks and copyrights associated with the former worldwide operations of Bridgeport, which were acquired in 2004.  The Company uses this strong brand name on all of its machining center lines, and therefore, the asset has been determined to have an indefinite useful life. The asset will be reviewed annually for impairment under the provisions of SFAS 142.

           Other net intangible assets also include $4.3 million for the technical information of the Bridgeport knee-mill purchased in January 2006, which is being amortized over ten years and $0.6 million for patents and  non-competition agreements.

NOTE  J—PENSION AND POST RETIREMENT PLANS

                          The Company accounts for the pension plans and postretirement benefits in accordance with Statements of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of SFAS No. 87, 106 and 132.  The following disclosures related to the pension and postretirement benefits are presented in accordance with Statements of Financial Accounting Standards No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits as revised.

           A summary of the components of net periodic pension costs for the consolidated company for the three and six months ended June 30, 2007 and 2006 is presented below:

 

 

Pension Benefits

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Service cost

 

$

1,029

 

$

822

 

$

2,063

 

$

1,644

 

Interest cost

 

2,023

 

1,893

 

4,048

 

3,787

 

Expected return on plan assets

 

(2,425

)

(2,236

)

(4,862

)

(4,471

)

Amortization of prior service cost

 

(21

)

(32

)

(56

)

(65

)

Amortization of transition asset

 

(105

)

(92

)

(197

)

(184

)

Amortization of loss

 

297

 

346

 

595

 

691

 

Net periodic benefit cost

 

$

798

 

$

701

 

$

1,591

 

$

1,402

 

 

14




 

          A summary of the components of net postretirement benefits costs for the consolidated company for the three and six months ended June 30, 2007 and 2006 is presented below:

 

 

Postretirement Benefits

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in thousands)

 

(dollars in thousands)

 

Service cost

 

$

9

 

$

8

 

$

16

 

$

16

 

Interest cost

 

36

 

39

 

72

 

78

 

Amortization of prior service cost

 

(127

)

(126

)

(253

)

(253

)

Amortization of loss

 

1

 

10

 

3

 

21

 

Net periodic (benefit) cost

 

$

(81

)

$

(69

)

$

(162

)

$

(138

)

 

              The expected contributions to be paid during the year ending December 31, 2007 to the domestic defined benefit plan are $1.5 million.  Contributions to the domestic plan as of June 30, 2007 and 2006 were $0.5 million and $0.9 million, respectively.  The Company also provides defined benefit pension plans or defined contribution pension plans for some of its foreign subsidiaries.  The expected contributions to be paid during the year ending December 31, 2007 to the foreign defined benefit plans are $2.2 million.  For each of the Company’s foreign plans, contributions are made on a monthly basis and are determined by applicable governmental regulations.  As of June 30, 2007 and 2006, $1.2 million and $1.1 million of  contributions have been made to the foreign plans, respectively. Also, each of the foreign plans requires employee and employer contributions, except for Taiwan, which has only employer contributions.

NOTE  K—COMMITMENTS AND CONTINGENCIES

             The Company’s operations are subject to extensive federal and state legislation and regulation relating to environmental matters.

             Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal.  Activities at properties owned by the Company and on adjacent areas have resulted in environmental impacts.

              In particular, the Company’s New York manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination.  The Kentucky Avenue Wellfield site encompasses an area of approximately three square miles which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, New York. In February 2006, the Company received a Special Notice Concerning a Remedial Investigation/Feasibility Study for the Koppers Pond portion of the Kentucky Avenue Wellfield site.  The EPA has documented the release and threatened release of hazardous substances into the environment at the Kentucky Avenue Well Field Superfund site, including releases into and in the vicinity of the Koppers Pond (the “Pond”).  The hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.

15




 

              A substantial portion of the Pond is located on the Company’s property.  The Company, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006.  On September 29, 2006, the Director of Emergency and Remedial Response Division of the U.S. Environmental Protection Agency, Region II, approved and executed the Agreement on behalf of the EPA.  The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis.  The cost of the RI/FS has been estimated to be between $0.3 million and $0.8 million.  In the quarter ended March 31 2007, the Company established a reserve of $35,715 (our minimum portion of the RI/FS study). The PRPs are currently developing the RI with the consultants that they have retained.

               Until receipt of this notice, the Company had never been named as a potentially responsible party at the site or received any requests for information from the EPA concerning the site.  Environmental sampling on the Company’s property within this site under supervision of regulatory authorities has identified off-site sources for such groundwater contamination and sediment contamination in the Pond and has found no evidence that the Company’s property is contributing to the contamination. Since the RI/FS has not commenced, the Company has not established, other than as described above, a reserve for any potential costs relating to this site, as it is too early in the process to determine the Company’s responsibility as well as to estimate any potential costs to remediate. The Company did notify all appropriate insurance carriers and is actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

NOTE  L—STOCK OFFERING

On April 25, 2007, the Company completed its public offering of 2,553,000 shares of common stock, including a 330,000 share over-allotment option exercised in full by the underwriters, with net proceeds of approximately $55.9 million after deducting underwriting discounts and commissions, and offering expenses.  Hardinge used these funds to repay indebtedness under its U.S. overdraft and revolving line of credit facilities.  On June 30, 2007, Hardinge had 11,449,137 shares of common stock outstanding.

 

16




NOTE  M—NEW ACCOUNTING STANDARDS

 On January 1, 2007, the Company adopted FIN 48.  FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Refer to Note E, Income Taxes, for information related to the effect of adoption of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in applying generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies whenever an entity is measuring fair value under other accounting pronouncements that require or permit fair value measurement. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 157 on its consolidated results of operations and financial condition.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (SFAS 159). This Statement allows all entities a one-time election to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value (the “fair value option”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of SFAS 159 on its consolidated results of operations and financial condition.

In March 2007, the FASB ratified Emerging Issues Task Force (EITF) issue No. 06-10 “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). EITF 06-10 requires that an employer recognize a liability for the postretirement benefit obligation related to a collateral assignment arrangement—in accordance with SFAS 106 (if deemed part of a postretirement plan) or APB 12 (if not part of a plan). The consensus is applicable if, based on the substantive agreement with the employee, the employer has agreed to (a) maintain a life insurance policy during the postretirement period or (b) provide a death benefit. The EITF also reached a consensus that an employer should recognize and measure the associated asset on the basis of the terms of the collateral assignment arrangement. This pronouncement is effective for fiscal years beginning after December 15, 2007. The Company is currently assessing the impact of this EITF Issue.

In June 2007, the FASB issued EITF Issue No. 06-11 “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11).” This issue relates to the accounting for income tax benefits related to the payment of dividends on equity-classified employee share-based payment awards declared in fiscal years beginning after September 15, 2007. The Company is currently evaluating the impact of EITF 06-11 on its consolidated results of operations and financial condition.

17




PART I - ITEM 2

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

Overview.   The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed financial statements, the accompanying condensed financial notes (“Notes”) appearing elsewhere in this report and our annual report on Form 10-K for the year ended December 31, 2006.

Our primary business is designing, manufacturing and distributing high precision computer controlled metal cutting turning, grinding and milling machines and related accessories. We are geographically diversified with manufacturing facilities in the U.S and Switzerland and assembly operations in Taiwan, China and the United Kingdom, with sales to most industrialized countries. Approximately 66% of our net sales are to customers outside North America and approximately 57% of our employees are located outside of North America.

Our machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. Our management believes that a key performance indicator is our order level compared to industry measures of market activity.

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

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

Foreign currency exchange rate changes can be significant to our reported financial results for several reasons. Our primary competitors, particularly for the most technologically advanced products are now, largely, manufacturers in Japan, Germany, and Switzerland, which causes the worldwide valuation of the Japanese yen, Euro, and Swiss franc to be central to competitive pricing in all of our markets. Also, we translate the financial results of our Swiss, Taiwanese, Chinese, English, German and Canadian subsidiaries into U.S. dollars for consolidation and financial reporting purposes. Period to period changes in the exchange rate between their local currency and the U.S. dollar may significantly affect comparative data. We also purchase computer controls and other components from suppliers throughout the world, and our purchase costs reflect these foreign currency exchange rate changes.

18




 

In January 2006, we executed our option to purchase the technical information of the Bridgeport knee-mill machine tools, related accessories and spare parts from BPT IP, LLC (“BPT”). BPT had granted us the exclusive right to manufacture and sell certain versions of the knee-mill machine tool, accessories and spare parts under Alliance Agreements dated October 29, 2002 and November 3, 2004. Per the Alliance Agreements, we agreed to pay BPT royalties based on a percentage of net sales attributable to the products, accessories and spare parts. Royalty expense under this agreement was $1.3 million in 2005. The purchase price for the technical information was $5.0 million and it is being amortized over a ten-year period. The technical information purchased includes, but is not limited to, blueprints, designs, schematics, drawings, specifications, computer source and object codes, customer lists and proprietary rights and assets of a similar nature. Subsequent to this purchase, no further royalties were earned by BPT.

Results of Operations

  Summarized selected financial data for the three and six months ended June 30, 2007 and 2006:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2007

 

2006

 

Change

 

%
Change

 

2007

 

2006

 

Change

 

%
Change

 

 

 

(dollars in thousands, except per share data)

 

Orders

 

$

86,008

 

$

92,383

 

$

(6,375

)

(6.9

)%

$

181,576

 

$

169,113

 

$

12,463

 

7.4

%

Net sales

 

89,710

 

78,518

 

11,192

 

14.3

%

176,676

 

153,954

 

22,722

 

14.8

%

Gross profit

 

29,287

 

23,586

 

5,701

 

24.2

%

57,267

 

46,489

 

10,778

 

23.2

%

Selling, general and administrative expenses

 

20,634

 

18,279

 

2,355

 

12.9

%

39,626

 

37,540

 

2,086

 

5.6

%

Income from operations

 

8,653

 

5,307

 

3,346

 

63.0

%

17,641

 

8,949

 

8,692

 

97.1

%

Net income

 

5,983

 

3,007

 

2,976

 

99.0

%

11,308

 

4,954

 

6,354

 

128.3

%

Diluted earnings per share

 

$

0.57

 

$

0.34

 

$

0.23

 

67.6

%

$

1.18

 

$

0.56

 

$

0.62

 

110.7

%

Weighted average shares outstanding (in thousands)

 

10,575

 

8,807

 

1,768

 

20.0

%

9,595

 

8,801

 

794

 

9.0

%

Gross profit as % of net sales

 

32.6

%

30.0

%

2.6 pts

 

 

 

32.4

%

30.2

%

2.2 pts

 

 

 

Selling, general and administrative expenses as % of sales

 

23.0

%

23.3

%

(0.3) pts

 

 

 

22.4

%

24.4

%

(2.0) pts

 

 

 

Income from operations as % of net sales

 

9.65

%

6.76

%

2.89 pts.

 

 

 

9.98

%

5.81

%

4.17 pts.

 

 

 

Net income as % of net sales

 

6.7

%

3.8

%

2.9 pts

 

 

 

6.4

%

3.2

%

3.2 pts

 

 

 

 

            Orders:   The table below summarizes orders by geographical region for the three and six months ended June 30, 2007 compared to the same periods in 2006:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

(dollars in thousands)

 

Orders from Customers in:

 

2007

 

2006

 

%
Change

 

2007

 

2006

 

%
Change

 

North America

 

$

25,014

 

$

34,075

 

(27

)%

$

59,009

 

$

63,182

 

(7

)%

Europe

 

40,455

 

32,000

 

26

%

85,808

 

64,605

 

33

%

Asia & Other

 

20,539

 

26,308

 

(22

)%

36,759

 

41,326

 

(11

)%

 

 

$

86,008

 

$

92,383

 

(7

)%

$

181,576

 

$

169,113

 

7

%

 

19




 

Orders for the three months ended June 30, 2007 were $86.0 million, a decrease of $6.4 million or 7% compared to the three months ended June 30, 2006.  Orders for the six months ended June 30, 2007 were $181.6 million, an increase of $12.5 million or 7% compared to the six months ended June 30, 2006.

The decrease in North American orders was due to weakened market demand for machine tools and from changes in our distribution network to strengthen our long-term competitive position. The changes in the distribution network negatively impacted North American order trends by approximately $3.0 million in the current quarter and $5.0 million on a year to date basis.

European orders were driven primarily by continued strong market demand for machine tools, throughout the region, especially orders for the our grinding product lines.

Asia & Other orders decreased by approximately $9.0 million due to unique orders in 2006 for high end grinding applications that did not reoccur in 2007. Orders in China increased by 27%  for the three and six month periods ended June 30, 2007 compared to the same periods in 2006.

Net Sales.  The table below summarizes net sales by geographical region for the three and six months ended June 30, 2007 compared to the same periods in 2006:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

(dollars in thousands)

 

Net Sales to Customers in:

 

2007

 

2006

 

%
Change

 

2007

 

2006

 

%
Change

 

North America

 

$

32,813

 

$

28,246

 

16

%

$

60,593

 

$

57,427

 

6

%

Europe

 

38,381

 

31,687

 

21

%

79,644

 

60,908

 

31

%

Asia & Other

 

18,516

 

18,585

 

 

36,439

 

35,619

 

2

%

 

 

$

89,710

 

$

78,518

 

14

%

176,676

 

153,954

 

15

%

 

Net sales for the three months ended June 30, 2007 were $89.7 million; an increase of $11.2 million or 14% compared to the three months ended June 30, 2006.  Net sales for the six months ended June 30, 2007 were $176.7 million; an increase of $22.7 million or 15% compared to the six months ended June 30, 2006.

The increase in North American net sales was primarily due to lathe products, despite the fact that North American net sales were negatively impacted by approximately $3.0 million and $5.0 million, respectively, for the three and six month periods ended June 30, 2007 resulting from the termination of several distributors due to the realignment in the company’s sales channel.

Net sales in Europe increased as a result of strong machine tool market growth that resulted in significant growth in the our grinding product line.

Net sales to customers in Asia & Other were flat. Net sales in Asia increased approximately 25%. Net sales in Other decreased 65% in the current quarter and 48% on a year to date basis, due to lower shipment levels of specialty grinders.

Under U.S. accounting standards, results of foreign subsidiaries are translated into U.S. dollars at the average exchange rate during the periods presented. For the second quarter of 2007, the U.S. dollar strengthened by 3% against the New Taiwanese dollar, while it weakened by 2% against the Canadian dollar, 2% against the Swiss Franc, 8% against the British Pound Sterling, 7% against the Euro, and 4% against the Chinese Renminbi compared to the average rates during the same period in 2006.  The net of these foreign currencies relative to the U.S. dollar was a favorable impact of $1.7 million and $5.0 million on net sales for the three and six months ended June 30, 2007 compared to the same periods in 2006.

20




 

 Net sales of machines accounted for 74% of consolidated net sales for 2007 compared to 71% of consolidated net sales for 2006. Sales of non-machine products and services consist of workholding, repair parts, service and accessories.

Gross Profit.  Gross profit for the three months ended June 30, 2007 was $29.3 million, an increase of $5.7 million or 24% compared to the three months ended June 30, 2006.  Gross profit for the six months ended June 30, 2007 was $57.3 million, an increase of $10.8 million or 23% compared to the six months ended June 30, 2006.  The increased gross profit is primarily due to the increased sales levels discussed above, and improved product mix. Additionally, the strengthening of foreign currencies relative to the U.S. dollar had a favorable impact of $0.6 million and $1.5 million on gross profit for the three and six months ended June 30, 2007 compared to the same periods in 2006. Gross profit percentage for the three and six months ended June 30, 2007 was 32.6% and 32.4% of net sales, compared to 30.0% and 30.2% of net sales for the three and six months ended June 30, 2006.  The increase in gross profit percentage resulted from changes in channel and product mix.

Selling, General and Administrative Expenses.  Selling, general and administrative (SG&A) expenses were $20.6 million, or 23.0% of net sales for the three months ended June 30, 2007, an increase of $2.3 million or 13% compared to $18.3 million or 23.3% of net sales for the three months ended June 30, 2006.  SG&A expenses were $39.6 million or 22.4% of net sales for the six months ended June 30, 2007, compared to $37.5 million or 24.4% of net sales for the six months ended June 30, 2006.  The increase of $2.1 million in SG&A for the six months ended June 30, 2007 compared to the same period for 2006 is primarily attributable to the strengthening of foreign currencies relative to the U.S. dollar, which had an unfavorable effect of $1.2 million.

Income from Operations.   Income from operations was $8.7 million, or 9.6% of net sales for the three months ended June 30, 2007, compared to $5.3 million or 6.8% of net sales for the three months ended June 30, 2006.  Income from operations was $17.6 million or 10.0% of net sales for the six months ended June 30, 2007, compared to $8.9 million or 5.8 % of net sales for the six months ended June 30, 2006.

Interest Expense & Interest Income.   Net interest expense was $0.7 million and $2.0 million for the three months and six months ended June 30, 2007 compared to $1.3 million and $2.3 million for the same periods in 2006. The decrease for the second quarter of 2007 compared to the second quarter of 2006  was primarily due to the reduction of long-term debt resulting from the sale of $55.9 million of common stock as previously disclosed in filings with the Securities and Exchange Commission.

Income Taxes.  The provision for income taxes was $2.0 million and $4.4 million for the three and six months ended June 30, 2007, compared to $1.0 million and $1.7 million for the three and six months ended June 30, 2006.  The effective tax rate was 25.2% and 27.8% for the three and six months ended June 30, 2007, compared to 25.8% and 25.7% for the same periods in 2006. Each quarter, an estimate of the full year tax rate is developed based upon anticipated annual results and an adjustment is made, if required, to the year-to-date income tax expense to reflect the full year anticipated effective tax rate. The Company expects the 2007 effective tax rate to be in the range of 26% to 28%.

In 2003, the Company recorded a valuation allowance for the full value of the deferred tax assets of our U.S. operations.  Consistent with accounting for taxes under FAS109, no tax expense (benefits) were recorded as a result of the pre-tax income (loss) of the U.S. operations for 2007 or 2006 to offset the taxes accrued for pre-tax earnings from profitable foreign subsidiaries.

Net Income.  Net income for the three months ended June 30, 2007 was $6.0 million, or 6.7% of net sales, compared to $3.0 million, or 3.8% of net sales for the three months ended June 30, 2006.  Net income for the six months ended June 30, 2007 was $11.3 million or 6.4% of net sales, compared to $5.0 million or 3.2% of net sales for the six months ended June 30, 2006.  Basic and diluted earnings per share for the three months ended June 30, 2007 were $0.57 compared to $0.34 for the three months ended June 30, 2006. Basic and diluted earnings per share for the six months ended June 30, 2007 were $1.19 and $1.18,

21




respectively, compared to $0.57 and $0.56, respectively, for the six months ended June 30, 2006. Earnings per share were impacted by our issuance of 2,553,000 shares on April 25, 2007. There were 1.8 million more weighted average shares outstanding at June 30, 2007, following the Company’s secondary stock offering.

Liquidity and Capital Resources

At June 30, 2007 cash and cash equivalents were $10.0 million compared to $6.8 million at December 31, 2006.  The current ratio at June 30, 2007 was 3.37:1 compared to 3.22:1 at December 31, 2006.

Cash Flow Provided By (Used In) Operating Activities and Investing Activities:

Cash flow provided by (used in) operating and investing activities for the six months ended June 30, 2007 compared to the same period in 2006 are summarized in the table below:

 

Six months ended
June 30,
(dollars in thousands)

 

 

 

2007

 

2006

 

Net cash provided by operating activities

 

$

2,156

 

$

376

 

Cash flow (used in) investing activities

 

$

(1,756

)

$

(12,148

)

Capital expenditures (included in investing activities)

 

$

(1,524

)

$

(1,967

)

 

Net cash provided by operating activities was $2.2 million for the six months ended June 30, 2007 compared to $0.4 million for the same period in 2006. This represents an increase in cash provided by operating activities of $1.8 million.

Net cash used in investing activities was $1.8 million for the six months ended June 30, 2007 compared to $12.1 million for the same period in 2006.  Investing activities for the six months ended June 30, 2007 were primarily related to capital expenditures for routine maintenance. The Company completed the acquisition of a Canadian distributor for $0.3 million in the second quarter of 2007 for a total purchase price of $2.3 million and the assumption of certain liabilities. The higher investing activities in 2006 were primarily related to the $5.1 million payment for the purchase of U-Sung Co., Ltd., which owned the land and building previously leased by Hardinge Taiwan; the purchase of the technical information of the Bridgeport knee-mill machine tool business for $5.0 million; payment of $0.1 million on the purchase of the 49% interest in Hardinge Taiwan acquired in the fourth quarter of 2005, and capital expenditures of $1.9 million.

Cash Flow Provided by Financing Activities:

Cash flow provided by financing activities for the six months ended June 30, 2007 and 2006, are summarized in the table below:

 

Six months ended
 June 30,
(dollars in thousands)

 

 

 

2007

 

2006

 

(Repayments)/borrowings of long-term debt

 

$

(52, 134)

 

$

6,298

 

(Repayments)/borrowings of short-term notes payable

 

(205

)

5,921

 

Net proceeds from offering

 

55,946

 

 

Net sales/(purchases) of treasury stock

 

62

 

(332

)

Payments of dividends

 

(1,017

)

(531

)

Net cash provided by financing activities

 

$

2,652

 

$

11,356

 

 

22




 

Cash flow provided by financing activities was $2.7 million for the six months ended June 30, 2007 compared to $11.4 million for the same period in 2006.  The Company received net proceeds of $55.9 million from its public offering which was used to repay indebtedness under its U.S. overdraft and revolving debt outstanding, including notes payable. Debt outstanding, including notes payable was $25.5 million on June 30, 2007 compared to $80.0 million on June 30, 2006.

Credit Facilities:

The Company maintains a revolving loan agreement with a group of U.S. banks.  This agreement, which expires in January 2011, provides for borrowings of up to $70.0 million, secured by substantially all of the Company’s domestic assets, other than real estate, and by a pledge of 65% of its investment in its major subsidiaries.  Interest charged on this debt is based on London Interbank Offered Rates plus a spread which varies depending on the Company’s Debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio.  A variable commitment fee of 0.15% to 0.375%, based on the Company’s debt to EBITDA ratio, is payable on the unused portion of the revolving loan facility.  At June 30, 2007, there were no borrowings under this agreement.

The Company also has a term loan, maturing in January 2011, with substantially the same security and financial covenants as provided under the revolving loan agreement described above.  At June 30, 2007, the balance of the term loan was $14.9 million with quarterly principal payments of $1.3 million from 2007 through December 2010.

The Company maintains an $8.0 million unsecured short-term line of credit from a bank with interest based on current prime.  At June 30, 2007 borrowings under this line of credit were $4.0 million.

The Company’s Swiss subsidiaries maintain unsecured overdraft facilities with commercial banks, providing borrowing up to 16.2 million Swiss francs, which is equivalent to approximately $13.2 million at June 30, 2007.  The borrowing limits on these facilities are reduced 0.1 million Swiss francs or approximately $0.1 million per quarter. At June 30, 2007, there were no borrowings under the overdraft facilities.  The Company’s Swiss subsidiaries also have loan agreements with a Swiss bank, which are secured by the real property owned by the Swiss subsidiaries which provide for borrowings up to 11.3 million Swiss francs, which is equivalent to approximately $9.2 million at June 30, 2007. The borrowing limits on these facilities are reduced 0.3 million Swiss francs or approximately $0.2 million per year.  At June 30, 2007, there were no borrowings under the mortgage facilities.

The Company’s U.K. subsidiary maintains an overdraft facility with a bank, providing borrowings up to 0.4 million pounds sterling, which is equivalent to approximately $0.7 million at June 30, 2007.  At June 30, 2007, there were no borrowings under this facility.  The Company’s U.K. subsidiary also has mortgage debt in the amount of 0.8 million pounds sterling, which is equivalent to approximately $1.6 million at June 30, 2007.  Principal on the mortgage loan is repaid monthly in the amount of approximately 6 thousand pounds sterling, which is equivalent to approximately $11.7 thousand.

The Company’s Taiwan subsidiary has mortgage debt in the amount of 166.5 million New Taiwanese dollars which is equivalent to approximately $4.9 million. This credit facility is secured by the real property owned by the Taiwan subsidiary. Principal on the mortgage loan is repaid quarterly in the amount of 4.5 million New Taiwan dollars, which is equivalent to approximately $0.1 million.

Certain of these debt agreements require, among other things, that the company maintain specified levels of tangible net worth, working capital, and specified ratios of debt to EBITDA, and EBITDA minus capital expenditures to fixed charges.   The Company was in compliance with all financial covenants at June 30, 2007.

In aggregate, these and other borrowing agreements provide for borrowing availability of up to $122.5 million, of which $25.5 million was borrowed at June 30, 2007.  The Company believes that the currently available funds and credit facilities, along with internally generated funds, will provide sufficient financial

 

23




 

resources for ongoing operations.

On April 25, 2007, the Company completed a stock offering which resulted in the sale of 2,553,000 shares of common stock for net proceeds of approximately $55.9 million after deducting underwriting discounts and commissions, and estimated offering expenses.  Hardinge used the net proceeds to repay indebtedness under its U.S. overdraft and revolving line of credit facilities.

Our contractual obligations and commercial commitments have not changed materially, including the impact from FIN 48, from the disclosures in our 2006 Form 10K.

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.

 

24




 

PART I.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

There have been no material changes to our market risk exposures during the first six months of 2007.  For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2006 Annual Report on Form 10-K.

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 June 30, 2007 and has concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007.  There were no changes in the Company’s internal control over financial reporting during the second quarter of 2007.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

None

Item 1.a.  Risk Factors

There is no change to the risk factors disclosed in the Company’s 2006 Annual Report on Form 10K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information about issuer repurchases of our common stock by month for the quarter ended June 30, 2007:

 

Issuer Purchases of Equity Securities

 

Period

 

 

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

April 1 – April 30, 2007

 

 

$

 

May 1 – May 31, 2007

 

489

 

$

27.75

 

June 1 – June 30, 2007

 

2,983

 

$

26.90

 

Total

 

3,472

 

 

 

 

The above shares were repurchased as part of the Company’s Incentive Compensation Plan to satisfy tax withholding obligations or payment for the exercise of stock options.

Item 3.  Default upon Senior Securities

None

 

25




 

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

The 2007 Annual Meeting of Shareholders of Hardinge Inc. was held on May 8, 2007.   A total of 8,266,417 of the Company’s shares were present or represented by proxy at the meeting. This represents approximately 93% of the Company’s shares outstanding. The three Class I directors below were elected to serve a three-year term.

 

Class I Directors

 

 

 

 

Votes For

 

 

Votes Withheld/Against

J. Patrick Ervin

 

8,091,046

 

175,371

Mitchell I. Quain

 

8,125,943

 

140,474

Kyle H. Seymour

 

8,138,096

 

128,321

 

Daniel J. Burke, Douglas A. Greenlee. J. Philip Hunter and John J. Perrotti, continue as directors of the Company.   The election of Ernst & Young LLP as the Company’s independent registered public accountants for the year 2007 was ratified with 8,159,689 shares voted in favor, 27,365 shares voted against and 79,363 shares abstained.

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

Item 5.  Other Information

None

Item 6.  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 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.

 

26




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 9, 2007

 

 

 

By:

/s/ J. Patrick Ervin

 

Date

 

J. Patrick Ervin

 

 

Chairman of the Board, President/CEO

 

 

August 9, 2007

 

 

 

By:

/s/ Charles R. Trego, Jr.

 

Date

 

Charles R. Trego, Jr.

 

 

Senior Vice President/CFO

 

 

(Principal Financial Officer)

 

 

August 9, 2007

 

 

 

By:

/s/ Edward J. Gaio

 

Date

 

Edward J. Gaio.

 

 

Corporate Controller

 

 

(Principal Accounting Officer)

 

27