UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2011

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.)

 

 

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 ____

 

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes_X__  No___

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 in the Exchange Act.

 

Large accelerated filer _____                                             Accelerated filer     X  

Non-accelerated filer _                                        Smaller reporting company ___

 

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

 

As of June 30, 2011 there were 11,660,512 shares of Common Stock of the registrant outstanding.

 



 

HARDINGE INC. AND SUBSIDIARIES

 

INDEX

 

Part I

Financial Information

Page

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2011 and December 31, 2010

3

 

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

 

 

Item 2.

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

16

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

24

 

 

 

 

 

Item 4.

Controls and Procedures

24

 

 

 

 

Part II

Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

 

 

Item 1a.

Risk Factors

25

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

 

 

 

 

 

Item 3.

Defaults upon Senior Securities

25

 

 

 

 

 

Item 4.

(Removed and Reserved)

25

 

 

 

 

 

Item 5.

Other Information

25

 

 

 

 

 

Item 6.

Exhibits

26

 

 

 

 

 

Signatures

27

 

 

 

 

Certifications

28

 

2



 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(In Thousands Except Share and Per Share Data)

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 18,701

 

 

$

 

 30,945

 

 

Restricted cash

 

 

5,515

 

 

 

5,225

 

 

Accounts receivable, net

 

 

58,580

 

 

 

45,819

 

 

Notes receivable, net

 

 

4,329

 

 

 

1,753

 

 

Inventories, net

 

 

123,176

 

 

 

105,306

 

 

Deferred income taxes

 

 

1,505

 

 

 

1,364

 

 

Prepaid expenses

 

 

13,854

 

 

 

11,518

 

 

Total current assets

 

 

225,660

 

 

 

201,930

 

 

Property, plant and equipment, net

 

 

65,319

 

 

 

56,628

 

 

Deferred income taxes

 

 

750

 

 

 

451

 

 

Intangible assets, net

 

 

13,417

 

 

 

13,642

 

 

Pension assets

 

 

2,518

 

 

 

2,111

 

 

Other long-term assets

 

 

62

 

 

 

85

 

 

Total non-current assets

 

 

82,066

 

 

 

72,917

 

 

Total assets

 

$

 

 307,726

 

 

$

 

 274,847

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

 38,698

 

 

$

 

 33,533

 

 

Notes payable to bank

 

 

7,692

 

 

 

1,650

 

 

Accrued expenses

 

 

25,343

 

 

 

22,791

 

 

Customer deposits

 

 

17,086

 

 

 

10,468

 

 

Accrued income taxes

 

 

3,150

 

 

 

3,656

 

 

Deferred income taxes

 

 

3,161

 

 

 

2,546

 

 

Current portion of long-term debt

 

 

623

 

 

 

617

 

 

Total current liabilities

 

 

95,753

 

 

 

75,261

 

 

Long-term debt

 

 

2,490

 

 

 

2,777

 

 

Accrued pension liability

 

 

28,161

 

 

 

29,949

 

 

Accrued postretirement liability

 

 

2,164

 

 

 

2,274

 

 

Accrued income taxes

 

 

2,228

 

 

 

2,106

 

 

Deferred income taxes

 

 

2,705

 

 

 

2,516

 

 

Other liabilities

 

 

2,069

 

 

 

2,062

 

 

Total non-current liabilities

 

 

39,817

 

 

 

41,684

 

 

Common Stock - $0.01 par value, 12,472,992 issued

 

 

125

 

 

 

125

 

 

Additional paid-in capital

 

 

113,874

 

 

 

114,183

 

 

Retained earnings

 

 

58,015

 

 

 

53,637

 

 

Treasury shares – 812,480 shares at June 30, 2011 and 865,703 shares at December 31, 2010

 

 

(10,372

)

 

 

(11,022

)

 

Accumulated other comprehensive income

 

 

10,514

 

 

 

979

 

 

Total shareholders’ equity

 

 

172,156

 

 

 

157,902

 

 

Total liabilities and shareholders’ equity

 

$

 

 307,726

 

 

$

 

 274,847

 

 

 

See accompanying notes to the consolidated financial statements

 

3



 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

(In Thousands Except Per Share Data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(Unaudited)

 

(Unaudited)

 

Net sales

 

$

86,656

 

$

59,899

 

$

160,138

 

$

103,068

 

Cost of sales

 

63,353

 

45,228

 

117,759

 

79,458

 

Gross profit

 

23,303

 

14,671

 

42,379

 

23,610

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

18,993

 

16,041

 

35,666

 

30,439

 

Loss (gain) on sale of assets

 

7

 

44

 

(18)

 

(228)

 

Other (income) expense

 

(72)

 

(713)

 

105

 

(643)

 

Income (loss) from operations

 

4,375

 

(701)

 

6,626

 

(5,958)

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

93

 

121

 

171

 

231

 

Interest income

 

(48)

 

(35)

 

(87)

 

(70)

 

Income (loss) before income taxes

 

4,330

 

(787)

 

6,542

 

(6,119)

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

1,217

 

(13)

 

2,048

 

(159)

 

Net income (loss)

 

$

3,113

 

$

(774)

 

$

4,494

 

$

(5,960)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share:

 

$

0.27

 

$

(0.07)

 

$

0.39

 

$

(0.52)

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share:

 

$

0.27

 

$

(0.07)

 

$

0.39

 

$

(0.52)

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share:

 

$

0.005

 

$

0.005

 

$

0.01

 

$

0.01

 

 

 

See accompanying notes to the consolidated financial statements

 

4



 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(In Thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income (loss)

 

$

4,494

 

$

(5,960

)

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

 

 

 

 

 

Depreciation and amortization

 

3,896

 

3,609

 

Debt issuance amortization

 

52

 

165

 

Provision for deferred income taxes

 

(1,272)

 

515

 

(Gain) on sale of assets

 

(18)

 

(228)

 

Gain on purchase of Jones & Shipman

 

-

 

(626)

 

Unrealized intercompany foreign currency transaction loss

 

399

 

9

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(11,210)

 

3,088

 

Notes receivable

 

(2,467)

 

(497)

 

Inventories

 

(12,237)

 

(11,469)

 

Prepaids and other assets

 

(2,571)

 

(2,503)

 

Accounts payable

 

4,357

 

13,900

 

Customer deposits

 

6,008

 

3,842

 

Accrued expenses

 

317

 

(1,384)

 

Accrued postretirement benefits

 

(287)

 

(296)

 

Net cash (used in) provided by operating activities

 

(10,539)

 

2,165

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(9,002)

 

(1,077)

 

Proceeds from sale of assets

 

864

 

282

 

Purchase of Jones & Shipman

 

-

 

(2,903)

 

Net cash (used in) investing activities

 

(8,138)

 

(3,698)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from short-term notes payable to bank

 

5,992

 

2,113

 

Decrease in long-term debt

 

(309)

 

(282)

 

Proceeds from (repurchase of) equity, net

 

72

 

-

 

Debt issuance fees paid

 

(25)

 

(100)

 

Dividends paid

 

(116)

 

(116)

 

Net cash provided by financing activities

 

5,614

 

1,615

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

819

 

(466)

 

Net (decrease) increase in cash

 

(12,244)

 

(384)

 

 

 

 

 

 

 

Cash at beginning of period

 

30,945

 

20,419

 

 

 

 

 

 

 

Cash at end of period

 

$

18,701

 

$

20,035

 

 

See accompanying notes to the consolidated financial statements

 

5



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2011

 

 

NOTE 1.  BASIS OF PRESENTATION

 

In these notes, the terms “Hardinge,” “Company,” “we,” “us,” or “our” mean Hardinge Inc. and its subsidiaries.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed.  Actual amounts could differ from our estimates.  In our opinion, we made all adjustments that are necessary for a fair presentation, and those adjustments are of a normal recurring nature unless otherwise noted. Our operating results for the three and six months periods ended June 30, 2011 are not necessarily indicative of the results that may be expected in subsequent quarters or the full year ended December 31, 2011.

 

We operate in one business segment – industrial machine tools. Certain amounts in the December 31, 2010 consolidated financial statements have been reclassified to conform to the June 30, 2011 presentation.

 

 

NOTE 2.  NET INVENTORIES

 

Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market.  Elements of the cost include materials, labor and overhead.

 

Net inventories consisted of the following:

 

 

 

 

June 30,

 

 

 

December 31,

 

 

 

 

2011

 

 

 

2010

 

 

(in thousands)

Raw materials and purchased components

$

 

41,019

 

$

 

34,113

 

Work-in-process

 

 

32,767

 

 

 

22,834

 

Finished products

 

 

49,390

 

 

 

48,359

 

Inventory, net

$

 

123,176

 

$

 

105,306

 

 

6



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 3.  PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Land, buildings and improvements

 

$

74,319

 

$

68,871

 

Machinery, equipment and fixtures

 

70,774

 

69,882

 

Office furniture, equipment and vehicles

 

17,930

 

17,389

 

Construction in progress

 

7,354

 

567

 

 

 

170,377

 

156,709

 

Less accumulated depreciation and amortization

 

105,058

 

100,081

 

Property, plant and equipment, net

 

$

65,319

 

$

56,628

 

 

 

NOTE 4.  INTANGIBLE ASSETS

 

Total net intangible assets were $13.4 million at June 30, 2011 and $13.6 million at December 31, 2010.

 

At June 30, 2011, the intangible assets not subject to amortization were valued at $7.6 million, representing the value of the name, trademarks, and copyrights associated with the former worldwide operations of Bridgeport. At June 30, 2011 the amortizable intangible assets were valued at $5.8 million, representing the value of the Jones & Shipman trade name, Bridgeport technical information, patents, customer lists, land use rights, and other items.

 

 

NOTE 5.  INCOME TAXES

 

We continue to maintain a full valuation allowance on the net deferred tax assets in our subsidiaries in the United States, the United Kingdom, Germany, and Canada, related to tax loss carryforwards in those jurisdictions and other deferred tax assets of those entities.

 

Each quarter, we estimate our full year effective tax rate for jurisdictions not subject to valuation allowances based upon our most recent forecast of full year anticipated results and adjust year-to-date tax expense to reflect our full year anticipated tax rate.  The rate is an estimate based upon projected results for the year, estimated annual permanent differences, the statutory tax rates in the various jurisdictions in which we operate, and the non-recognition of tax benefits for entities with full valuation allowances.  The overall effective tax rates were 28.1% and 31.3% for the three months and six months periods ended June 30, 2011, respectively.  The effective tax rate for the three and six months ended June 30, 2011 differ from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded.

 

The tax years 2007 to 2010 remain open to examination by United States taxing authorities. Tax years between 2005 and 2010 generally remain open to routine examinations by foreign taxing authorities in our other major jurisdictions, including Switzerland, United Kingdom, Taiwan, Germany, Canada, and China.

 

7



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 5.  INCOME TAXES

(Continued)

 

At June 30, 2011 and December 31, 2010, we had a $2.3 million and $2.1 million liability, respectively, recorded for uncertain income tax positions, both of which included interest and penalties of approximately $0.9 million.  If recognized, the uncertain tax benefits, with related penalties and interest at June 30, 2011 and December 31, 2010, would be recorded as a benefit to income tax expense on the consolidated statement of operations.

 

 

NOTE 6.  WARRANTIES

 

A reconciliation of the changes in our product warranty accrual is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

(in thousands)

 

Balance at the beginning of period

 

$

3,666

 

$

2,304

 

$

3,297

 

$

2,470

 

Warranties issued

 

1,177

 

1,346

 

2,195

 

1,872

 

Warranty settlement costs

 

(560)

 

(551)

 

(1,182)

 

(830)

 

Changes in accruals for pre-existing warranties

 

(445)

 

(297)

 

(501)

 

(683)

 

Currency translation adjustment

 

157

 

(36)

 

186

 

(63)

 

Balance at the end of period

 

$

3,995

 

$

2,766

 

$

3,995

 

$

2,766

 

 

Warranty liabilities are reported as accrued expenses on our consolidated balance sheet.

 

 

NOTE 7.  PENSION AND POST RETIREMENT PLANS

 

A summary of the components of net periodic pension costs for our consolidated Company for the three and six months ended June 30, 2011 and 2010 is presented below.

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

(in thousands)

 

Service cost

 

$

404

 

$

318

 

$

781

 

$

652

 

Interest cost

 

2,157

 

2,105

 

4,271

 

4,244

 

Expected return on plan assets

 

(2,538)

 

(2,313)

 

(5,017)

 

(4,663)

 

Amortization of prior service cost

 

(20)

 

(29)

 

(37)

 

(59)

 

Amortization of transition asset

 

(72)

 

(51)

 

(139)

 

(105)

 

Amortization of loss

 

455

 

205

 

884

 

420

 

Net periodic benefit cost

 

$

386

 

$

235

 

$

743

 

$

489

 

 

8



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 7.  PENSION AND POST RETIREMENT PLANS

(Continued)

 

A summary of the components of net postretirement benefits costs for our consolidated Company for the three and six months ended June 30, 2011 and 2010 is presented below.

 

 

 

Post Retirement Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

 

2011

 

2010

 

 

 

(in thousands)

 

 

(in thousands)

 

Service cost

 

$

4

 

$

4

 

 

$

9

 

$

8

 

Interest cost

 

35

 

39

 

 

69

 

78

 

Amortization of prior service cost

 

(88)

 

(93)

 

 

(176)

 

(185)

 

Net periodic benefit (credit) cost

 

$

(49)

 

$

(50)

 

 

$

(98)

 

$

(99)

 

 

The expected contributions to be paid during the year ending December 31, 2011 to the domestic defined benefit plans are $1.9 million.  Contributions to the domestic plans were $1.1 million and $0.1 million, respectively, during the six months ended June 30, 2011 and 2010.  The Company also provides defined benefit pension plans for some of its foreign subsidiaries.  The expected contributions to be paid during the year ending December 31, 2011 to the foreign defined benefit plans are $2.3 million.  For each of the Company’s foreign plans, contributions are made on a monthly or quarterly basis and are determined by applicable governmental regulations.  Contributions to the foreign plans were $1.2 million and $1.0 million, respectively, during the six months ended June 30, 2011 and 2010. Each of the foreign plans requires employee and employer contributions, except for Taiwan, to which only employer contributions are made.

 

 

NOTE 8.  DERIVATIVE INSTRUMENTS & FAIR VALUE

 

The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, notes receivable, accounts payable, notes payable to bank, and variable interest rate debt approximate their fair values either due to the short period to maturity of the instruments or due to the nature of underlying assets or liabilities.

 

Derivative Instruments

 

We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on monetary assets and liabilities denominated in currencies other than the applicable functional currency as well as on forecasted transactions denominated in currencies other than the applicable functional currency. These contracts are considered derivative instruments and are recorded as either assets or liabilities which are measured at fair value using internal models based on observable market inputs such as spot and forward rates. For contracts that are designated and qualify as cash flow hedges, the unrealized gains or losses on the contracts are reported as a component of other comprehensive income (“OCI”) and are reclassified from accumulated other comprehensive income (“AOCI”) into earnings on the consolidated statement of operations when the hedged transaction affects earnings.  As of June 30, 2011, the net impact of existing gains or losses expected to be reclassified from AOCI into earnings in the next 12 months is not material.  For contracts that are not designated as hedges, the gains and losses on the contract are recognized in current earnings as other (income) expense.

 

9



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 8.  DERIVATIVE INSTRUMENTS & FAIR VALUE

(Continued)

 

Notional amounts of the derivative financial instruments not qualifying or designated as hedges were $36.0 million at June 30, 2011 and $20.0 million at December 31, 2010.  Gains and (losses) related to those derivative financial instruments were $0.2 million and $(0.2) million, respectively, for the three and six months ended June 30, 2011.  Gains and (losses) related to those derivative financial instruments were $(0.2) million and $(0.3) million, respectively, for the three and six months ended June 30, 2010. The gains and losses were recorded in our consolidated statement of operations.

 

Derivative financial instruments qualifying and designated as hedges are as follows:

 

 

 

June 30, 2011

 

December 31, 2010

 

 

 

Notional
Amount

 

Unrealized
Gain (Loss)

 

Notional
Amount

 

Unrealized
Gain (Loss)

 

 

 

(in thousands)

 

Foreign currency forwards

 

$

37,446

 

$

238

 

$

2,161

 

$

(90

)

 

Fair Value

 

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

 

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

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

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

 

The following table presents the fair values and classification of our financial instruments measured on a recurring basis:

 

 

 

As of June 30, 2011

 

 

 

  Classification

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

(in thousands)

 

Foreign currency forwards designated as hedges

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

147

 

$

-

 

$

147

 

$

-

 

 

 

Accrued expenses

 

$

385

 

$

-

 

$

385

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency forwards not designated as hedges

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

185

 

$

-

 

$

185

 

$

-

 

 

 

Accrued expenses

 

$

244

 

$

-

 

$

244

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010

 

 

 

  Classification

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

(in thousands)

 

Foreign currency forwards designated as hedges

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

-

 

$

-

 

$

-

 

$

-

 

 

 

Accrued expenses

 

$

90

 

$

-

 

$

90

 

$

-

 

Foreign currency forwards not designated as hedges

 

 

 

 

 

 

 

 

 

Prepaid expenses

 

$

254

 

$

-

 

$

254

 

$

-

 

 

 

Accrued expenses

 

$

16

 

$

-

 

$

16

 

$

-

 

 

10



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 9.  COMMITMENTS AND CONTINGENCIES

 

Certain environmental laws can impose joint and several liabilities for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal.  Hazardous substances and adverse environmental effects have been identified with respect to properties we own or previously owned and on adjacent areas.

 

In particular, our Elmira, New York manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of Hazardous Waste Sites (the “Site”) designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination.

 

In February 2006, we received a Special Notice Concerning a Remedial Investigation/Feasibility Study (“RI/FS”) for the Koppers Pond (the “Pond”) portion of the Site.  The Notice stated that the EPA had documented the release and threatened release of hazardous substances into the environment at the Site, including releases into and in the vicinity of the Pond. The hazardous substances included metals and polychlorinated biphenyls.

 

A substantial portion of the Pond is located on our property.  Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the “PRPs”) have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006; the EPA approved and executed the Order that day.

 

The PRPs also signed a PRP Member Agreement to share the cost of the RI/FS Study on a per capita basis.  The cost of the RI/FS was estimated to be approximately $0.84 million. We estimated our portion of the study to be $0.12 million for which we established a reserve. As of June 30, 2011, we have spent $0.12 million with respect to the study and other activities relating to the Site.

 

The PRPs, with their consultants, developed and submitted a Draft RI/FS to the EPA.  Following EPA comments, the PRPs submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan.  The PRPs have been performing the required tasks in accordance with the RI and as of June 30, 2011had completed and submitted the Risk Assessments to EPA and had begun to address EPA’s comments hereto.

 

Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the site.  Environmental sampling on our property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and contamination in the Pond, and had found no evidence that our operations or property have contributed or are contributing to the contamination. Other than as described above, we have not established a reserve for any potential costs relating to this Site, as the issue whether remediation is necessary, and if so to what extent and cost, has yet to be determined.

 

We have notified all appropriate insurance carriers, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

 

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

 

11



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 10.  STOCK-BASED COMPENSATION

 

On May 3, 2011, our shareholders approved the 2011 Incentive Stock Plan (the “Plan”).  The Plan’s purpose is to enhance the profitability and value of the Company for the benefit of its shareholders by attracting, retaining and motivating officers and other key employees who make important contributions to the success of the Company.  The Plan reserves 750,000 shares of the Company’s Common Stock (as such amount may be adjusted in accordance with the terms of the Plan, the “Authorized Plan Amount”) to be issued for grants of several different types of incentives including incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock incentives and performance share incentives.  Any shares of Common Stock granted under options or stock appreciation rights shall be counted against the Authorized Plan Amount on a one-for-one basis and any shares of Common Stock granted as awards other than options or stock appreciation rights shall be counted against the Authorized Plan Amount as two (2) shares of Common Stock for every one (1) share of Common Stock subject to such award.  Authorized and issued shares of Common Stock or previously issued shares of Common Stock purchased by the Company for purposes of the Plan may be issued under the Plan.

 

Our 2002 Incentive Stock Plan authorized various long-term incentives (the “2002 Plan”).  As of June 30, 2011, no future grants have been made or will in the future be made under the 2002 Plan.  However, all outstanding awards and grants under the 2002 Plan will remain in effect until the end of the corresponding terms of such awards and grants.

 

All of our stock-based compensation to employees is recorded as selling, general and administrative expenses in our statement of operations based on the fair value at the grant date of the award.

 

During the six months ended June 30, 2011 and 2010, we did not issue any new stock options. Expenses related to stock options were not material for the three months and six months ended June 30, 2011 and 2010.

 

During the six months ended June 30, 2011 and 2010, we granted 54,000 and 70,340 restricted stock/units awards (the “RSA”), respectively. The total deferred compensation expenses associated with these awards, which were measured based on the fair value at the grant date, were $0.7 million and $0.4 million, respectively, which were being amortized over the specific service period three years.

 

During the six months ended June 30, 2011, we granted 54,000 performance share incentives (the “PSI”). We did not grant any PSIs during the same period in 2010. The total deferred compensation expenses associated with these PSI awards, which were measured based on the fair value at the grant date, were $0.7 million, which were being realized into earnings based on passage of time and achievement of performance criteria.

 

Stock-based compensation expenses related to the RSAs and PSIs were $0.1 million and $0.1 million for the three months ended June 30, 2011 and 2010, respectively; and $0.3 million and $0.3 million for the six months ended June 30, 2011 and 2010, respectively.

 

Unrecognized compensation and the expected weighted-average recognition periods as of June 30, 2011 and December 31, 2010, are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Unrecognized compensation cost

 

$

1,224

 

 

$

821

 

 

Expected weighted-average recognition period for unrecognized compensation cost, in years

 

1.8

 

 

1.4

 

 

 

12



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 11.  EARNINGS PER SHARE

 

The computation of earnings per share is as follows:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands except per share data)

 

Basic earnings (loss) per share computation:

 

 

 

 

 

 

 

 

 

Net earnings (loss) 

 

$

3,113

 

$

(774)

 

$

4,494

 

$

(5,960)

 

Earnings allocated to participating awards

 

49

 

1

 

70

 

2

 

Net earnings (loss) applicable to common shareholders

 

$

3,064

 

$

(775)

 

$

4,424

 

$

(5,962)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

11,467

 

11,409

 

11,459

 

11,409

 

Basic earnings (loss) per share

 

$

  0.27

 

$

    (0.07)

 

$

  0.39

 

$

    (0.52)

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share computation:

 

 

 

 

 

 

 

 

 

Net earnings (loss) 

 

$

3,113

 

$

(774)

 

$

4,494

 

$

  (5,960)

 

Earnings allocated to participating awards

 

49

 

1

 

70

 

2

 

Net earnings (loss) applicable to common shareholders

 

$

3,064

 

$

(775)

 

$

4,424

 

$

  (5,962)

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

11,467

 

11,409

 

11,459

 

11,409

 

Assumed exercise of stock options

 

28

 

-

 

27

 

-

 

Assumed satisfaction of restricted stock award  conditions

 

-

 

-

 

-

 

-

 

Assumed satisfaction of performance share incentive conditions

 

-

 

-

 

-

 

-

 

Weighted average common shares outstanding

 

11,495

 

11,409

 

11,486

 

11,409

 

Diluted earnings (loss) per share

 

$

  0.27

 

$

    (0.07)

 

$

  0.39

 

$

    (0.52)

 

 

 

For the three months ended June 30, 2011 and 2010, 213,536 and 152,203 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive. For the six months ended June 30, 2011 and 2010, 209,721 and 131,361 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

 

13



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 12.  COMPREHENSIVE INCOME (LOSS)

 

Total comprehensive income (loss), net of tax, for the three and six month ended June 30, 2011 and 2010 are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

(in thousands)

 

Net income (loss)

 

$

3,113

 

$

(774)

 

$

4,494

 

$

(5,960)

 

Foreign currency translation adjustments

 

8,921

 

(3,019)

 

10,789

 

(5,501)

 

Retirement plans related adjustments(1) 

 

(1,027)

 

189

 

(1,167)

 

591

 

Unrealized loss on cash flow hedges(2) 

 

(180)

 

-

 

(87)

 

-

 

Other comprehensive income (loss)

 

7,714

 

(2,830)

 

9,535

 

(4,910)

 

Total comprehensive income (loss)

 

$

10,827

 

$

(3,604)

 

$

14,029

 

$

(10,870)

 

 

(1)          Tax effects on retirement plans related adjustments, in thousands, were $253 and $59 for three months ended June 30, 2011 and 2010, respectively, and $264 and $112 for six months ended June 30, 2011 and 2010, respectively.

 

(2)          Tax effects on unrealized gain (loss) on cash flow hedges, in thousands, were $62 and $-0- for three months ended June 30, 2011 and 2010, respectively, and $62 and $-0- for six months ended June 30, 2011 and 2010, respectively.

 

Balances of the components of accumulated other comprehensive income (loss), net of accumulated tax effect, are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Foreign currency translation adjustments

 

$

44,604

 

$

 33,815

 

Retirement plans related adjustments

 

(33,913)

 

(32,746)

 

Unrealized loss on cash flow hedges

 

(177)

 

(90)

 

Accumulated other comprehensive income

 

$

 10,514

 

$

 979

 

 

14



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2011

 

NOTE 13.  NEW ACCOUNTING STANDARDS

 

On January 1, 2011, we adopted Accounting Standards Update No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. The adoption of this standard did not have material impact on our consolidated results of operations and financial condition.

 

 

NOTE 14.  SUBSEQUENT EVENTS

 

On July 26, 2011, our subsidiary in Taiwan entered into a new unsecured credit facility agreement replacing the existing $10.0 million facility.  This new agreement provides a $12.0 million facility, or its equivalent in other currencies, for working capital, raw material purchases, and export business purposes.  This new credit facility charges interest at the bank’s current base rate of 2.75%, which is subject to change by the bank based on market conditions. It carries no commitment fees on unused funds.  This credit facility matures on May 30, 2012.

 

15



 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview.  The following Management’s Discussion and Analysis (“MD&A”) contains information that the Company believes is necessary to an understanding of the Company’s financial condition and associated matters, including the Company’s liquidity, capital resources and results of operations.  The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements, the accompanying notes to the financial statements (“Notes”) appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Our primary business is designing, manufacturing, and distributing high-precision computer controlled metal-cutting turning machines, grinding machines, vertical machining centers, and related accessories. We are geographically diversified with manufacturing facilities in Switzerland, Taiwan, the United States, China, and the United Kingdom, with sales to most industrialized countries.  Approximately 77% of our 2010 sales were to customers outside of North America, 78% of our 2010 products sold were manufactured outside of North America, and 69% of our employees in 2010 were 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 as compared to industry measurement of market activity.

 

During the six months ended June 30, 2011, global economic conditions continued to improve as compared to the same period in 2010.  As a result, we experienced higher levels of incoming orders and higher sales activity in almost all of the regions in which we conduct business.

 

Metrics on machine tool market activity monitored by our management include world machine tool consumption (domestic production plus imports, less exports) as reported annually by Gardner Publications in the Metalworking Insiders Report and 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 are among the set of prospective customers for our products. One such measurement is the Purchasing Manager’s Index (“PMI”), as reported by the Institute for Supply Management.  Another measurement is capacity utilization of U.S. manufacturing plants, as reported by the Federal Reserve Board. Similar information regarding machine tool consumption in foreign countries is published by trade associations in those countries.

 

Non-machine sales, which include collets, accessories, repair parts, and services, have typically accounted for approximately 24% of overall sales and are an important part of our business, especially in the U.S. where Hardinge has an installed base of thousands of machines.  In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.

 

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

 

16



 

We are exposed to financial market risk resulting from changes in interest and foreign currency rates. The current global economic conditions, though improved from prior periods, have increased our exposure to the possible liquidity and credit risks of our counterparties.

 

We believe we have sufficient liquidity to fund our foreseeable business needs, including cash and cash equivalents, cash flows from operations, and our bank financing arrangements.

 

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

 

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

 

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

 

Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are, in alphabetical order, British Pound Sterling (“GBP”), Chinese Renminbi (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“TWD”), and Swiss Franc (“CHF”).  Under U.S. generally accepted accounting principles, results of foreign subsidiaries are translated into U.S. Dollars (“USD”) at the average exchange rate during the periods presented. Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative data significantly. During the second quarter of 2011, as compared to the respective average values of those functional currencies in the second quarter of 2010, the value of USD decreased by a range of 5% to 27%. On a year to date basis, the value of USD decreased by a range of 4% to 20%, as compared to the respective year to date average values of those of functional currencies in the same period of 2010.  The weaker USD resulted in favorable currency translation impact of approximately $7.0 million on orders and approximately $7.7 million on net sales in the three months ended June 30, 2011, and approximately $10.5 million on orders and approximately $10.8 million on net sales in the six months ended June 30, 2011. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.

 

17



 

Results of Operations

 

Summarized selected financial data for the three months ended June 30, 2011 and 2010:

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

 

2011

 

2010

 

$ Change

 

% Change

 

 

(in thousands except per share amounts)

 

 

Orders

 

$

108,145

 

$

85,664

 

$

22,481

 

26%

Net sales

 

86,656

 

59,899

 

26,757

 

45%

Gross profit

 

23,303

 

14,671

 

8,632

 

59%

% of net sales

 

26.9%

 

24.5%

 

2.4 pts

 

 

Selling, general and administrative expenses

 

18,993

 

16,041

 

2,952

 

18%

% of net sales

 

21.9%

 

26.8%

 

(4.9) pts

 

 

Loss on sale of assets

 

7

 

44

 

(37)

 

(84)%

Other income

 

(72)

 

(713)

 

641

 

(90)%

Income (loss) from operations

 

4,375

 

(701)

 

5,076

 

(724)%

% of net sales

 

5.0%

 

(1.2)%

 

6.2 pts

 

 

Income (loss) before income taxes

 

4,330

 

(787)

 

5,117

 

(650)%

Net income (loss)

 

3,113

 

(774)

 

3,887

 

(502)%

% of net sales

 

3.6%

 

(1.3)%

 

4.9 pts

 

 

Basic & diluted earnings (loss) per share

 

$

0.27

 

$

(0.07)

 

$

0.34

 

 

Weighted average shares outstanding

 

11,467

 

11,409

 

58

 

 

 

Summarized selected financial data for the six months ended June 30, 2011 and 2010:

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

 

2011

 

2010

 

$ Change

 

% Change

 

 

(in thousands except per share amounts)

 

 

Orders

 

$

221,903

 

$

143,151

 

$

78,752

 

55%

Net sales

 

160,138

 

103,068

 

57,070

 

55%

Gross profit

 

42,379

 

23,610

 

18,769

 

79%

% of net sales

 

26.5%

 

22.9%

 

3.6 pts

 

 

Selling, general and administrative expenses

 

35,666

 

30,439

 

5,227

 

17%

% of net sales

 

22.3%

 

29.5%

 

(7.2) pts

 

 

Gain on sale of assets

 

(18)

 

(228)

 

210

 

(92)%

Other expenses (income)

 

105

 

(643)

 

748

 

(116)%

Income (loss) from operations

 

6,626

 

(5,958)

 

12,584

 

(211)%

% of net sales

 

4.1%

 

(5.8)%

 

9.9 pts

 

 

Income (loss) before income taxes

 

6,542

 

(6,119)

 

12,661

 

(207)%

Net income (loss)

 

4,494

 

(5,960)

 

10,454

 

(175)%

% of net sales

 

2.8%

 

(5.8)%

 

8.6 pts

 

 

Basic & diluted earnings (loss) per share

 

$

0.39

 

$

(0.52)

 

$

0.91

 

 

Weighted average shares outstanding

 

11,459

 

11,409

 

50

 

 

 

18



 

Reconciliation of Net Income to EBITDA

 

 

 

Three months ended

 

Six months ended

 

 

June 30,

 

June 30,

 

 

2011

 

2010

 

$ Change

 

2011

 

2010

 

$ Change

 

 

(in thousands)

GAAP net income (loss)

 

$

3,113

 

$

(774)

 

$

3,887 

 

$

4,494

 

$

(5,960)

 

$

10,454 

Plus:

Interest expense, net

 

45

 

86

 

(41) 

 

84

 

161

 

(77) 

 

Income tax expense (benefit)

 

1,217

 

(13)

 

1,230 

 

2,048

 

(159)

 

2,207 

 

Depreciation and amortization

 

1,980

 

1,804

 

176 

 

3,896

 

3,609

 

287 

EBITDA (1)

 

$

6,355

 

$

1,103

 

$

5,252 

 

$

10,522

 

$

(2,349)

 

$

12,871 

 

(1)          EBITDA, a non-GAAP financial measure, is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business.

 

Orders:   Comparison of orders by geographical region for the three months ended June 30, 2011 and 2010 is summarized below:

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

 

2011

 

2010

 

$

Change    

 

% Change

 

 

(in thousands)

 

 

North America

 

$

29,403

 

$

19,770

 

$

9,633    

 

49%

Europe

 

34,338

 

17,798

 

16,540    

 

93%

Asia & Other

 

44,404

 

48,096

 

(3,692)    

 

(8)%

 

 

$

108,145

 

$

85,664

 

$

22,481    

 

26%

 

Comparison of orders by geographical region for the six months ended June 30, 2011 and 2010 is summarized below:

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

 

 

2011

 

2010

 

$

Change    

 

% Change

 

 

(in thousands)

 

 

North America

 

$

52,621

 

$

32,591

 

$

20,030    

 

61%

Europe

 

63,755

 

36,225

 

27,530    

 

76%

Asia & Other

 

105,527

 

74,335

 

31,192    

 

42%

 

 

$

221,903

 

$

143,151

 

$

78,752    

 

55%

 

Orders for the three months ended June 30, 2011 were $108.1 million, an increase of $22.5 million or 26% compared to the same quarter in 2010. Orders for the six months ended June 30, 2011 were $221.9 million, an increase of $78.8 million or 55% compared to the same period in 2010. Worldwide machine tools demand has continued to improve for the past several months as the global economy recovers from the recent recessionary conditions.  Further, certain countries in Asia, particularly China, have maintained strong economic growth which also led to increased demand for machine tools. This increased demand contributed to the improved order levels in all of our major markets and product lines. In addition, favorable foreign currency impact added approximately $7.0 million and $10.5 million to the overall increase for the three and six months ended June 30, 2011, respectively, compared to the same periods in 2010.

 

19



 

North American orders increased by $9.6 million, or 49%, and $20.0 million, or 61%, for the respective three and six months ended June 30, 2011 compared to the same periods in 2010.  The increase was driven by strong orders in the U.S. as our distribution partners continued to gain traction in the market place with our product lines.

 

European orders increased by $16.5 million, or 93%, and $27.5 million, or 76%, for the respective three and six months ended June 30, 2011 compared to the same periods in 2010.  The increase in orders for the quarter compared to the same period in 2010 was driven by improving economic conditions in the region as well as the current year impact of the Jones & Shipman acquisition as we continue to integrate Jones & Shipman into our European operation.  In addition, favorable foreign currency impact contributed approximately $5.5 million and $7.4 million to the European increase for the three and six months ended June 30, 2011, respectively, when compared to the same periods in 2010.

 

Asia & Other orders represented 41% and 48%, respectively, of the total orders for the three and six months ended June 30, 2011. Compared to the same period in 2010, Asia & Other orders for the three months ended June 30, 2011 decreased by $3.7 million, or 8%.  The second quarter 2010 orders included $23.7 million of orders from a China-based supplier to the consumer electronics industry.  Excluding orders received from this supplier, Asia & Other orders increased by $20.0 million, or 82%. When compared to the same six months period in 2010, Asia & Other orders increased by $31.2 million, or 42%. Excluding orders from the China-based customer, orders increased by $45.9 million, or 94%. The increase was driven by strong demand for machine tools in Asia, particularly in China. In addition, favorable foreign currency impact contributed approximately $1.5 million and $3.1 million to the Asia & Other increase for the three and six months ended June 30, 2011, respectively, when compared to the same periods in 2010.

 

Net Sales:   Comparison of sales by geographical region for the three months ended June 30, 2011 and 2010 is summarized below:

 

 

 

Three Months Ended
June 30,

 

 

 

 

 

 

 

2011

 

2010

 

$

Change    

 

% Change

 

 

(in thousands)

 

 

North America

 

$

18,529

 

$

18,698

 

$

(169)    

 

(1)%

Europe

 

25,267

 

13,512

 

11,755    

 

87%

Asia & Other

 

42,860

 

27,689

 

15,171    

 

55%

 

 

$

86,656

 

$

59,899

 

$

26,757    

 

45%

 

Comparison of sales by geographical region for the six months ended June 30, 2011 and 2010 is summarized below:

 

 

 

Six Months Ended
June 30,

 

 

 

 

 

 

2011

 

2010

 

$

Change    

 

%Change

 

 

(in thousands)

 

 

North America

 

$

35,743

 

$

30,247

 

$

5,496    

 

18%

Europe

 

45,082

 

25,930

 

19,152    

 

74%

Asia & Other

 

79,313

 

46,891

 

32,422    

 

69%

 

 

$

160,138

 

$

103,068

 

$

57,070    

 

55%

 

Net sales for the three months ended June 30, 2011 were $86.7 million, an increase of $26.8 million or 45% compared to the same period in 2010. Net sales for the six months ended June 30, 2011 were $160.1 million, an increase of $57.0 million or 55% compared to the same period in 2010. The increases were driven by higher demand for machine tools as the global economy rebounded from the recent economic crisis as well as continued economic growth in Asia, particularly in China.  The increased sales levels were noted in almost all of our regions particularly in Asia & Other which was primarily driven by sales activity in China. In addition, favorable foreign currency impact contributed approximately $7.7 million and $10.8 million to the overall increase for the three and six months ended June 30, 2011,

 

20



 

respectively, when compared to the same periods in 2010.

 

North American net sales were flat for the three months ended June 30, 2011 compared to the same period in 2010.  In the six months ended June 30, 2011, North America sales increased by $5.5 million, or 18%, compared to the same period in 2010.  The increase was primarily driven by the impact of our new distribution partners.  Sales during the six months ended June 30, 2010 were low because our new distribution partner did not enter into the market until the end of the first quarter 2010.

 

European net sales increased by $11.8 million, or 87%, and $19.2 million, or 74%, for the respective three and six month periods ended June 30, 2011 compared to the same periods in 2010.  The increases, as in our other regions, were driven by higher demand for machine tools as the European economy rebounded from the recession. Further, the current year impact of our Jones & Shipman acquisition contributed $0.9 million and $3.1 million to the increases for the three and six months ended June 30, 2011, respectively.  In addition, favorable foreign currency impact contributed approximately $6.5 million and $8.7 million to the European increase for the three and six months ended June 30, 2011, respectively, when compared to the same periods in 2010.

 

Asia & Other net sales increased by $15.2 million, or 55%, and $32.4 million, or 69%, for the respective three and six month periods ended June 30, 2011 compared to the same periods in 2010. The increase was driven by strong demand for machine tools in Asia, particularly in China which increased by $23.6 million, or 63% during the six month period ended June 30, 2011 compared to the same period in 2010.  Sales to a China-based supplier to the consumer electronics industry were approximately $7.8 million and approximately $15.3 million, an increase of $2.2 million and $8.1 million, respectively, for the three and six months ended June 30, 2011 as compared to the same periods in 2010.  In addition, favorable foreign currency impact contributed approximately $1.2 million and $2.1 million to the Asia & Other increase for the three and six months ended June 30, 2011, respectively, when compared to the same periods in 2010.

 

Gross Profit.  Gross profit for the three months ended June 30, 2011 was $23.3 million, an increase of $8.6 million, or 58.8%, when compared to the same period in 2010. Gross profit for the six months ended June 30, 2011 was $42.4 million, an increase of $18.8 million, or 79.5%, when compared to the six months ended June 30, 2010. The increased gross profit is primarily attributable to the increase in sales volumes and product mix as well as higher manufacturing volumes against fixed manufacturing cost.  Gross margin rates for the three and six month period ended June 30, 2011 were 26.9% and 26.5%, respectively, compared to 24.5% and 22.9% for the same periods in 2010.

 

Selling, General and Administrative Expenses.  Selling, general and administrative (SG&A) expenses were $19.0 million, or 21.9% of net sales for the three months ended June 30, 2011, an increase of $3.0 million, or 18.4%, compared to $16.0 million, or 26.8% of net sales for the three months ended June 30, 2010. SG&A expenses were $35.7 million, or 22.3% of net sales for the six months ended June 30, 2011, an increase of $5.3 million or 17.2%, compared to $30.4 million, or 29.5% of net sales for the six months ended June 30, 2010. The increase in SG&A expenses is primarily attributable to increases sales activities as a result of improved global business conditions. SG&A expense as a percentage of sales decreased by 4.9 percentage points and 7.2 percentage points, respectively, for the quarter and six months ended June 30, 2011 as compared to the same periods in 2010. The decrease is reflective of increasing sales volume and the impact associated with the successful transformational changes to our business model and continued focus on cost control. SG&A expenses for the three months and six months ended June 30, 2010 included charges of $1.2 million and $2.1 million, respectively, for professional service expenses related to the unsolicited tender offer initiated by Industrias Romi S.A. These charges did not recur in 2011. Foreign currency translation had unfavorable impact of approximately $2.9 million and $4.3 million for the three and six months ended June 30, 2011, respectively.

 

Other (Income) Expense.  Other income was $0.1 million for the three months ended June 30, 2011 compared to $0.7 million for the same period in 2010.  Other expense for the six months ended June 30, 2011 was $0.1 million compared to income of $0.6 million during the same period in 2010.

 

21



 

Income (Loss) From Operations:  Income from operations was $4.4 million for the three months ended June 30, 2011 compared to a loss of $0.7 million for the same period in 2010. Income from operations was $6.6 million for the six months ended June 30, 2011 compared to a loss of $6.0 million for the same period in 2010.

 

Income Taxes:  The provision for income taxes was $1.2 million and $2.0 million for the three and six months ended June 30, 2011, compared to a tax benefit of $0.01 million and $0.2 million for the three and six months ended June 30, 2010. The effective tax rates were 28.1% and 31.3% for the three months and six months ended June 30, 2011, compared to (1.7)% and (2.6)% for the same periods in 2010.

 

This difference was driven by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded (U.S., U.K., Germany, and Canada), and by the mix of earnings by country.

 

Each quarter, an estimate of the full year tax rate for jurisdictions not subject to a full valuation allowance 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.

 

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

 

The effective tax rate for the three and six months ended June 30, 2011 differ from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded.

 

Net Income (Loss):  Net income for the three months ended June 30, 2011 was $3.1 million, or 3.6% of net sales, compared to a net loss of $0.8 million, or (1.3)% of net sales, for the three months ended June 30, 2010. Net income for the six months ended June 30, 2011 was $4.5 million, or 2.8% of net sales, compared to a net loss of $6.0 million, or (5.8)% of net sales, for the six months ended June 30, 2010. The increase in net income was attributed to higher gross profits due to higher net sales as well as effective cost control in SG&A expenses.  Earnings per share, both basic and diluted, for the three and six months ended June 30, 2011 were $0.27 and $0.39, respectively, compared to loss per share of $0.07 and $0.52, respectively,  for the same periods ended June 30, 2010.

 

Summary of Cash Flows for the six months ended June 30, 2011 and 2010:

 

 

 

Six Months Ended
June 30,

 

 

2011

 

2010

 

 

(in thousands)

Net cash (used in) provided by operating activities

 

$

 (10,539)

 

$

2,165   

Net cash (used in) investing activities

 

(8,138)

 

(3,698)   

Net cash provided by financing activities

 

5,614

 

1,615   

Effect of exchange rate changes on cash

 

819

 

(466)   

(Decrease) increase in cash and cash equivalent

 

$

 (12,244)

 

$

(384)   

 

 

 

 

 

Capital expenditures (included in investing activities)

 

$

 (9,002)

 

$

(1,077)   

 

During the six months ended June 30, 2011, we used $10.5 million net cash in operating activities. Primarily, cash was used for inventory purchases which increased due to higher demand for our products and related increase in production levels. Cash was also used to fund account and notes receivables, and prepaids and other assets as business activity levels increased.  The outflow of cash was offset by cash

 

22



 

provided by accounts payables and accrued expenses which increased due to higher production levels and higher customer deposits related to order activity.

 

During the six months ended June 30, 2010, we generated $2.2 million net cash from operating activities, primarily as a result of continued effort to manage and improve working capital during the economic down-turn. During this period, raw material and parts purchase activity increased as a result of higher new order volumes, resulting in a cash use of $11.5 million.  The outflow of cash was offset by $16.4 million cash provided by accounts payable and accrued expenses/other liabilities which increased due to higher production activity and customer deposits. A decrease in accounts receivable balances contributed to $3.1 million in cash.

 

Net cash used in investing activities was $8.1 million for the six months ended June 30, 2011 compared to $3.7 million for the same period in 2010. The majority of the cash used in 2011 was related to investment in facilities and equipment in Switzerland and China. In 2010, we used $2.9 million to purchase Jones & Shipman.

 

Cash flow provided by financing activities was $5.6 million for the six months ended June 30, 2011 compared to $1.6 million for the same period in 2010. The increase was due to additional borrowings under our existing credit facilities to facilitate hedging of foreign currency exposures and to fund working capital needs.

 

Liquidity and Capital Resources

 

Our liquidity requirements primarily include funding for operations, including working capital requirements, and funding for capital investments and acquisitions.  We expect to meet these requirements in the long term through cash provided by operating activities and cash available under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and changes in working capital needs.  During the six months ended June 30, 2011, cash flows from financing activities and available cash were sufficient to fund our investment activities, primarily capital expenditures for property, plant and equipment and other productive assets.  We had additional borrowing capacity of $26.8 million at June 30, 2011, and $31.4 million at December 31, 2010, available under various credit facilities maintained by the Company and certain subsidiaries.

 

We assess on an ongoing basis our portfolio of operations, as well as our financial and capital structures, to ensure we have sufficient capital and liquidity to meet our strategic objectives.  As part of this process, from time to time we evaluate and pursue acquisition opportunities that we believe will enhance our strategic position.

 

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Accordingly, there can be no assurance that our expectations will be realized. Such statements are based upon information known to management at this time. The Company cautions that such statements necessarily involve uncertainties and risk and deal with matters beyond the Company’s ability to control, and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are fluctuations in the machine tool business cycles, changes in general economic conditions in the U.S. or internationally, the mix of products sold and the profit margins thereon, the relative success of the Company’s entry into new product and geographic markets, the Company’s ability to manage its operating costs, actions taken by customers such as order cancellations or reduced

 

23



 

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

 

 

ITEM 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 2011.  For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2010 Annual Report on Form 10-K.

 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2011, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, and determined that these controls and procedures were effective.

 

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2011 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

 

24



 

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 Annual Report on Form 10-K for the year ended December 31, 2010.

 

 

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

None

 

Item 3.  Default upon Senior Securities

None

 

Item 4.  (Removed and Reserved)

 

Item 5.  Other Information

None

 

25



 

PART II.  OTHER INFORMATION

 

 

Item 6.  Exhibits

 

The following exhibits are submitted electronically and filed with this report:

 

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.

 

 

The following exhibits are submitted electronically and furnished with this report:

 

101.INS

-

XBRL Instance Document

 

 

 

101.SCH

-

XBRL Taxonomy Schema Document

 

 

 

101.CAL

-

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

-

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

-

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

-

XBRL Taxonomy Extension Definition Linkbase Document

 

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 5, 2011

 

By:

/s/ Richard L. Simons

 

Date

 

Richard L. Simons

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

August 5, 2011

 

By:

/s/ Edward J. Gaio

 

Date

 

Edward J. Gaio.

 

 

Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

August 5, 2011

 

By:

/s/ Douglas J. Malone

 

Date

 

Douglas J. Malone

 

 

Corporate Controller and Chief Accounting Officer

 

 

(Principal Accounting Officer)

 

27