XNAS:HDNG Hardinge Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

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, 2012

 

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 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 o

 

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 o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company 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, 2012 there were 11,690,275 shares of Common Stock of the registrant outstanding.

 

 

 



Table of Contents

 

HARDINGE INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

 

Page

Part I

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2012 and December 31, 2011

3

 

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2012 and 2011

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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.

Mine Safety Disclosures

25

 

 

 

 

 

Item 5.

Other Information

25

 

 

 

 

 

Item 6.

Exhibits

26

 

 

 

 

 

Signatures

27

 

 

 

 

Certifications

 

 

2



Table of Contents

 

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,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

16,149

 

$

21,736

 

Restricted cash

 

4,627

 

4,575

 

Accounts receivable, net

 

54,287

 

65,909

 

Inventories, net

 

133,246

 

122,782

 

Other current assets

 

14,065

 

13,338

 

Total current assets

 

222,374

 

228,340

 

 

 

 

 

 

 

Property, plant and equipment, net

 

70,251

 

68,204

 

Intangible assets, net

 

12,507

 

12,765

 

Other non-current assets

 

2,402

 

2,360

 

Total non-current assets

 

85,160

 

83,329

 

Total assets

 

$

307,534

 

$

311,669

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Accounts payable

 

$

34,274

 

$

36,952

 

Notes payable to bank

 

13,020

 

12,969

 

Accrued expenses

 

27,114

 

25,103

 

Customer deposits

 

16,392

 

18,881

 

Accrued income taxes

 

2,278

 

3,480

 

Deferred income taxes

 

2,620

 

2,556

 

Current portion of long-term debt

 

2,493

 

1,548

 

Total current liabilities

 

98,191

 

101,489

 

 

 

 

 

 

 

Long-term debt

 

6,072

 

7,020

 

Pension and postretirement liabilities

 

43,294

 

49,310

 

Deferred income taxes

 

2,999

 

2,391

 

Other liabilities

 

3,432

 

4,436

 

Total non-current liabilities

 

55,797

 

63,157

 

 

 

 

 

 

 

Common stock ($0.01 par value, 12,472,992 issued)

 

125

 

125

 

Additional paid-in capital

 

114,254

 

114,369

 

Retained earnings

 

70,657

 

65,041

 

Treasury shares

 

(9,934

)

(10,379

)

Accumulated other comprehensive loss

 

(21,556

)

(22,133

)

Total shareholders’ equity

 

153,546

 

147,023

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

307,534

 

$

311,669

 

 

See accompanying notes to the consolidated financial statements

 

3



Table of Contents

 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

(In Thousands Except Per Share Data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

86,320

 

$

86,656

 

$

160,970

 

$

160,138

 

Cost of sales

 

62,314

 

63,353

 

115,741

 

117,759

 

Gross profit

 

24,006

 

23,303

 

45,229

 

42,379

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

19,081

 

18,993

 

36,714

 

35,666

 

(Gain) loss on sale of assets

 

(12

)

7

 

(14

)

(18

)

Other expense (income)

 

99

 

(72

)

303

 

105

 

Income from operations

 

4,838

 

4,375

 

8,226

 

6,626

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

269

 

93

 

409

 

171

 

Interest income

 

(27

)

(48

)

(51

)

(87

)

Income before income taxes

 

4,596

 

4,330

 

7,868

 

6,542

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

956

 

1,217

 

1,785

 

2,048

 

Net income

 

$

3,640

 

$

3,113

 

$

6,083

 

$

4,494

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share:

 

$

0.31

 

$

0.27

 

$

0.52

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share:

 

$

0.02

 

$

0.005

 

$

0.04

 

$

0.01

 

 

See accompanying notes to the consolidated financial statements

 

4



Table of Contents

 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,640

 

$

3,113

 

$

6,083

 

$

4,494

 

Other comprehensive (loss) income, net of tax

 

(4,231

)

7,714

 

577

 

9,535

 

Comprehensive (loss) income, net of tax

 

$

(591

)

$

10,827

 

$

6,660

 

$

14,029

 

 

See accompanying notes to the consolidated financial statements

 

5



Table of Contents

 

HARDINGE INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

(In Thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2012

 

2011

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net income

 

$

6,083

 

$

4,494

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,658

 

3,896

 

Debt issuance amortization

 

32

 

52

 

Provision for deferred income taxes

 

1,001

 

(1,272

)

Gain on sale of assets

 

(14

)

(18

)

Unrealized intercompany foreign currency transaction loss

 

290

 

399

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

11,685

 

(13,677

)

Inventories

 

(10,586

)

(12,237

)

Other assets

 

(540

)

(2,571

)

Accounts payable

 

(2,906

)

4,357

 

Customer deposits

 

(2,399

)

6,008

 

Accrued expenses

 

(5,732

)

317

 

Accrued postretirement benefits

 

(258

)

(287

)

Net cash provided by (used in) operating activities

 

314

 

(10,539

)

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Capital expenditures

 

(5,364

)

(9,002

)

Proceeds on sale of assets

 

22

 

864

 

Net cash used in investing activities

 

(5,342

)

(8,138

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from short-term notes payable to bank

 

35,584

 

7,760

 

Repayments of short-term notes payable to bank

 

(35,726

)

(1,768

)

Proceeds from long-term debt

 

475

 

 

Repayments of long-term debt

 

(465

)

(309

)

Dividends paid

 

(465

)

(116

)

Other financing activities

 

9

 

47

 

Net cash (used in) provided by financing activities

 

(588

)

5,614

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

29

 

819

 

Net decrease in cash

 

(5,587

)

(12,244

)

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

21,736

 

30,945

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

16,149

 

$

18,701

 

 

See accompanying notes to the consolidated financial statements

 

6



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2012

 

NOTE 1.  BASIS OF PRESENTATION

 

In these notes, the terms “Hardinge,” “Company,” “we,” “us,” or “our” mean Hardinge Inc. and its predecessors together with 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, 2011. 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.  Due to differing business conditions and some seasonality, our operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2012.

 

Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the current 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 consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Finished products

 

$

51,613

 

$

49,476

 

Work-in-process

 

34,381

 

28,549

 

Raw materials and purchased components

 

47,252

 

44,757

 

Inventories, net

 

$

133,246

 

$

122,782

 

 

7



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 3.  PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Land, buildings and improvements

 

$

80,530

 

$

73,657

 

Machinery, equipment and fixtures

 

69,040

 

68,303

 

Office furniture, equipment and vehicles

 

16,629

 

16,990

 

Construction in progress

 

4,631

 

9,212

 

 

 

170,830

 

168,162

 

Accumulated depreciation

 

(100,579

)

(99,958

)

Property, plant and equipment, net

 

$

70,251

 

$

68,204

 

 

NOTE 4.  INTANGIBLE ASSETS

 

The major components of intangible assets are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Gross amortizable intangible assets:

 

 

 

 

 

Land rights

 

$

2,730

 

$

2,746

 

Patents

 

2,978

 

2,965

 

Technical know-how and other

 

5,803

 

5,785

 

Total gross amortizable intangible assets

 

11,511

 

11,496

 

 

 

 

 

 

 

Accumulated amortization:

 

 

 

 

 

Land rights

 

(86

)

(59

)

Patents

 

(2,755

)

(2,704

)

Technical know-how and other

 

(3,547

)

(3,235

)

Total accumulated amortization

 

(6,388

)

(5,998

)

Amortizable intangible assets, net

 

5,123

 

5,498

 

 

 

 

 

 

 

Intangible asset not subject to amortization

 

7,384

 

7,267

 

Intangible assets, net

 

$

12,507

 

$

12,765

 

 

Amortization expense related to these amortizable intangible assets was $0.2 million for the three months ended June 30, 2012 and 2011, and was $0.4 million for the six months ended June 30, 2012 and 2011.

 

Intangible asset not subject to amortization represents the aggregate value of the trade name, trademarks and copyrights associated with the former worldwide operations of Bridgeport. We use the Bridgeport brand name on all of our machining center lines; therefore, the asset has been determined to have an indefinite useful life. The $0.1 million increase in the value of the assets from 2011 was the result of foreign currency exchange.

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 5.  INCOME TAXES

 

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

 

Each quarter, we estimate our full year 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 result 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 20.8% and 22.7% for the three and six months ended June 30, 2012, respectively.

 

The tax years 2008 to 2011 remain open to examination by United States taxing authorities, and for the other jurisdictions, in which we have business operations, including Switzerland, United Kingdom, Taiwan, Germany, and China, the tax years between 2006 and 2011 generally remain open to routine examination by foreign taxing authorities, subject to the specific requirements of each jurisdiction.

 

The increase to the accrued liability associated with uncertain tax positions in the three and six months ended June 30, 2012 was not material.  At June 30, 2012 and December 31, 2011, we had a $2.4 million and $2.3 million liability recorded for the respective periods with respect to uncertain income tax positions, which included related interest and penalties of $0.8 million at June 30, 2012, and $0.7 million at December 31, 2011.  If recognized, the uncertain tax benefits, with related penalties and interest, would be recorded as a benefit to income tax expense on the Consolidated Statements of Operations.

 

NOTE 6.  WARRANTIES

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

(in thousands)

 

Balance at the beginning of period

 

$

3,432

 

$

3,666

 

$

3,800

 

$

3,297

 

Warranties issued

 

832

 

1,177

 

1,494

 

2,195

 

Warranty settlement costs

 

(481

)

(560

)

(1,274

)

(1,182

)

Changes in accruals for pre-existing warranties

 

(207

)

(445

)

(551

)

(501

)

Currency translation adjustment

 

(99

)

157

 

8

 

186

 

Balance at the end of period

 

$

3,477

 

$

3,995

 

$

3,477

 

$

3,995

 

 

Warranty liabilities are reported as accrued expenses on our Consolidated Balance Sheets.

 

9



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 7.  PENSION AND POST RETIREMENT PLANS

 

A summary of the components of net periodic pension benefit costs for the three and six months ended June 30, 2012 and 2011 is presented below.

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

(in thousands)

 

Service cost

 

$

310

 

$

404

 

$

627

 

$

781

 

Interest cost

 

2,037

 

2,157

 

4,085

 

4,271

 

Expected return on plan assets

 

(2,371

)

(2,538

)

(4,756

)

(5,017

)

Amortization of prior service cost

 

(13

)

(20

)

(27

)

(37

)

Amortization of transition asset

 

(67

)

(72

)

(135

)

(139

)

Amortization of loss

 

602

 

455

 

1,213

 

884

 

Net periodic benefit cost

 

$

498

 

$

386

 

$

1,007

 

$

743

 

 

A summary of the components of net postretirement benefits costs for the three and six months ended June 30, 2012 and 2011 is presented below.

 

 

 

Post Retirement Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

(in thousands)

 

Service cost

 

$

4

 

$

4

 

$

8

 

$

9

 

Interest cost

 

28

 

35

 

56

 

69

 

Amortization of prior service cost

 

(88

)

(88

)

(176

)

(176

)

Amortization of loss

 

(2

)

 

(4

)

 

Net periodic benefit (credit) cost

 

$

(58

)

$

(49

)

$

(116

)

$

(98

)

 

The Company provides defined benefit plans to eligible domestic and foreign employees. Contributions to the domestic plans for the six months ended June 30, 2012 and June 30, 2011 were $4.8 million and $1.1 million, respectively. Contributions to the foreign plans for the six months ended June 30, 2012 and June 30, 2011 were $1.2 million and $1.2 million, respectively. The expected contributions to be paid during the year ending December 31, 2012 to the domestic and foreign defined benefit plans are $6.0 million and $2.2 million, respectively.

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 8.  FAIR VALUE AND DERIVATIVE INSTRUMENTS

 

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 accounts for risk premiums that a market participant would require.

 

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

 

 

 

June 30, 2012

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

16,149

 

$

16,149

 

$

 

$

 

Restricted cash

 

4,627

 

4,627

 

 

 

Notes payable to bank

 

(13,020

)

 

(13,020

)

 

Variable interest rate debt

 

(8,566

)

 

(8,566

)

 

Foreign currency forward contracts, net

 

(139

)

 

(139

)

 

 

 

 

December 31, 2011

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

(in thousands)

 

Cash and cash equivalents

 

$

21,736

 

$

21,736

 

$

 

$

 

Restricted cash

 

4,575

 

4,575

 

 

 

Notes payable to bank

 

(12,969

)

 

(12,969

)

 

Variable interest rate debt

 

(8,568

)

 

(8,568

)

 

Foreign currency forward contracts, net

 

(1,053

)

 

(1,053

)

 

 

The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets.  The fair value of notes payable to bank and variable interest rate debt are based on the present value of expected future cash flows. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates.

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

Derivative Instruments

 

We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on assets and liabilities denominated in foreign currencies as well as on forecasted transactions denominated in foreign currencies. These contracts are considered derivative instruments and are recognized as either assets or liabilities and measured at fair value. For contracts that are designated and qualify as cash flow hedges, the gain or loss on the contracts is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into “Other expense” line item on the Consolidated Statements of Operations when the hedged transaction affects earnings.  During the three month ended June 30, 2012, the amount of net loss on these contracts was immaterial, compared to a net loss of $0.2 million recorded in OCI for the three months ended June 30, 2011. During the six months ended June 30, 2012, we recorded a net gain of $0.4 million into OCI related to these contracts, compared to a net loss of $0.1 million for the six months ended June 30, 2011.  As of June 30, 2012, we do not expect that a material amount of the gain or loss will be reclassified from AOCI into other income or expense in the next 12 months.  For contracts that are not designated as hedges, the gain and loss on the contract is recognized in current earnings as “Other expense” in the Consolidated Statements of Operations.

 

As of June 30, 2012 and December 31, 2011, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $36.6 million and $47.6 million, respectively. During the three months ended June 30, 2012, the loss related to this type of derivative financial instruments was immaterial.  During the three months ended June 30, 2011, we recorded a gain of $0.2 million related to this type of derivative financial instruments. During the six months ended June 30, 2012 and 2011, we recorded a gain of $0.2 million and a loss of $0.2 million, respectively, related to this type of derivative financial instruments. The gains and losses were recorded in the “Other expense” line item on the Consolidated Statements of Operations.

 

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

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Notional
Amount

 

Unrealized
Loss

 

Notional
Amount

 

Unrealized
Loss

 

 

 

(in thousands)

 

Foreign currency forwards

 

$

40,348

 

$

148

 

$

48,802

 

$

1,017

 

 

The following table presents the fair value on our Consolidated Balance Sheets of the foreign currency forward contracts:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Foreign currency forwards designated as hedges:

 

 

 

 

 

Other current assets

 

$

110

 

$

334

 

Accrued expenses

 

(258

)

(1,351

)

Foreign currency forwards not designated as hedges:

 

 

 

 

 

Other current assets

 

143

 

315

 

Accrued expenses

 

(134

)

(351

)

Foreign currency forwards, net

 

$

(139

)

$

(1,053

)

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 9.  COMMITMENTS AND CONTINGENCIES

 

Our operations are subject to extensive federal, state, local and foreign laws and regulations relating to environmental matters.

 

Certain environmental laws can impose joint and several 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 real property we own and on adjacent parcels of real property.

 

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

 

A substantial portion of the Pond is located on our property. 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., 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 on 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.

 

In May 2008, the EPA approved the RI/FS Work Plan. The PRPs commenced field work in the spring of 2008 and on September 7, 2011 submitted the draft Remedial Investigation Report to the EPA. The PRPs are continuing to address EPA comments and to perform the tasks required by the RI/FS Work Plan and Administrative Settlement Agreement.

 

Until receipt of this Special Notice in February 2006, the Company had never been named as a PRP at the Site nor had the Company received any requests for information from the EPA concerning the Site. Environmental sampling on our property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond, and found no evidence that our operations or property have contributed or are contributing to the contamination. We have not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate. We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

 

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

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 10.  STOCK BASED COMPENSATION

 

All of our stock based compensation to employees is recorded as selling, general and administrative expenses in our Consolidated Statements of Operations based on the fair value at the grant date of the award. These non-cash compensation costs were included in the depreciation and amortization amounts in the Consolidated Statements of Cash Flows.

 

A summary of stock based compensation expense is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands)

 

(in thousands)

 

Restricted stock/unit awards (“RSA”)

 

$

118

 

$

110

 

$

241

 

$

236

 

Performance share incentives (“PSI”)

 

66

 

34

 

101

 

34

 

Stock options

 

 

9

 

 

18

 

 

 

$

184

 

$

153

 

$

342

 

$

288

 

 

During the six months ended June 30, 2012 and 2011, we granted 18,000 and 54,000 RSAs, respectively. The total deferred compensation expense associated with these awards, which were measured based on the fair value at the grant date, were $0.2 million and $0.7 million, respectively. The deferred compensation is being amortized on a straight-line basis over the specified service period. Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs as of June 30, 2012 and December 31, 2011, are as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Unrecognized compensation cost, in thousands

 

$

768

 

$

851

 

 

 

 

 

 

 

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

 

1.6

 

1.2

 

 

During the six months ended June 30, 2012, we did not grant any PSIs. During the six months ended June 30, 2011, we granted 54,000 PSIs. The total deferred compensation expenses associated with the 2011 PSI awards, which were measured based on the fair value at the grant date, were $0.7 million, which are being realized into earnings based on passage of time and achievement of performance criteria. All outstanding PSIs are unvested.

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 11.  EARNINGS PER SHARE

 

Details of the computation of earnings per share are as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

(in thousands except per share data)

 

Basic earnings per share computation:

 

 

 

 

 

 

 

 

 

Net income

 

$

3,640

 

$

3,113

 

$

6,083

 

$

4,494

 

Less income allocated to participating awards

 

23

 

49

 

48

 

70

 

Net income applicable to common shareholders

 

$

3,617

 

$

3,064

 

$

6,035

 

$

4,424

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

11,562

 

11,467

 

11,543

 

11,459

 

Basic earnings per share

 

$

0.31

 

$

0.27

 

$

0.52

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share computation:

 

 

 

 

 

 

 

 

 

Net income

 

$

3,640

 

$

3,113

 

$

6,083

 

$

4,494

 

Less income allocated to participating awards

 

23

 

49

 

48

 

70

 

Net income applicable to common shareholders

 

$

3,617

 

$

3,064

 

$

6,035

 

$

4,424

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

11,562

 

11,467

 

11,543

 

11,459

 

Assumed exercise of stock options

 

24

 

28

 

24

 

27

 

Assumed satisfaction of RSA conditions

 

14

 

 

11

 

 

Weighted average common shares outstanding

 

11,600

 

11,495

 

11,578

 

11,486

 

Diluted earnings per share

 

$

0.31

 

$

0.27

 

$

0.52

 

$

0.39

 

 

For the three months ended June 30, 2012 and 2011, 136,910 and 213,536 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, 2012 and 2011, 157,385 and 209,721 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

 

NOTE 12.  NEW ACCOUNTING STANDARDS

 

In May 2011, the FASB issued authoritative guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. This pronouncement changes certain fair value measurement guidance and expands certain disclosure requirements. We adopted this pronouncement on January 1, 2012. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition.

 

In June 2011, the FASB issued authoritative guidance that requires companies to present items of net income, items of other comprehensive income and total comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity.  We adopted this pronouncement on January 1, 2012. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition.

 

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Table of Contents

 

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”) 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, 2011.

 

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 Switzerland, Taiwan, the United States (“U.S.”), China, and the United Kingdom (“U.K.”) with sales to most industrialized countries. Approximately 74% of our 2011 sales were to customers outside of North America, 82% of our 2011 products sold were manufactured outside of North America, and 70% of our employees were outside of North America.

 

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

 

Metrics on machine tool market activity monitored by our management include world machine tool consumption (which is considered, in certain respects, to be a proxy for shipments), 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 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 service revenue, have typically accounted for approximately 23% of overall sales and are an important part of our business due to an existing 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 (“sales”) and net orders (“orders”), gross profit as a percent of sales, income from operations, working capital changes, and debt level trends.  Constant product technology development in our industry has led to an average model life of three-to-five years and consequently, effectiveness of technological innovation and development of new products are also key performance indicators.

 

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

 

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

 

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Table of Contents

 

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

 

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

 

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 predominantly manufacturers based in Japan, Germany, Switzerland, Korea, and Taiwan. The concentration of our competitors in these countries causes the worldwide valuation of their respective currencies to be integral to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are the 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 may affect comparative data significantly. During the second quarter of 2012, as compared to the respective average values of these functional currencies in the same period in 2011, the value of USD increased by 11% against EUR, 8% against CHF, 3% against GBP, and 3% against TWD, and decreased by 3% against CNY. On a year to date basis, the value of USD increased by 8% against EUR, 3% against CHF, 2% against GBP, and 2% against TWD, and decreased by 3% against CNY. The change in foreign currency exchange rates resulted in unfavorable currency translation impact of approximately $2.0 million on orders and approximately $2.1 million on sales in the three months ended June 30, 2012, compared to the same period in 2011.  For the six months ended June 30, 2012, the change in foreign currency exchange rates resulted in unfavorable currency translation impact of approximately $1.3 million on orders and approximately $1.3 million on sales, as compared to the same period in 2011. We also purchase computer controls and other components from suppliers throughout the world. Consequently, our purchase costs associated with these components may be affected by fluctuations in the value of currencies.

 

18



Table of Contents

 

Results of Operations

 

Summarized selected financial data for the three and six months ended June 30, 2012 and 2011:

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

June 30,

 

 

 

2012

 

2011

 

$
Change

 

%
Change

 

 

 

2012

 

2011

 

$
Change

 

%
Change

 

 

 

(in thousands, except per share data)

 

Orders

 

$

80,342

 

$

108,145

 

$

(27,803

)

(26

)%

 

 

$

161,704

 

$

221,903

 

$

(60,199

)

(27

)%

Sales

 

86,320

 

86,656

 

(336

)

(0

)%

 

 

160,970

 

160,138

 

832

 

1

%

Gross profit

 

24,006

 

23,303

 

703

 

3

%

 

 

45,229

 

42,379

 

2,850

 

7

%

% of sales

 

27.8

%

26.9

%

0.9 pts.

 

 

 

 

 

28.1

%

26.5

%

1.6 pts.

 

 

 

Selling, general & administrative expenses

 

19,081

 

18,993

 

88

 

1

%

 

 

36,714

 

35,666

 

1,048

 

3

%

% of sales

 

22.1

%

21.9

%

0.2 pts.

 

 

 

 

 

22.8

%

22.3

%

0.5 pts.

 

 

 

Other expense (income)

 

99

 

(72

)

171

 

(238

)%

 

 

303

 

105

 

198

 

189

%

Income from operations

 

4,838

 

4,375

 

463

 

11

%

 

 

8,226

 

6,626

 

1,600

 

24

%

% of sales

 

5.6

%

5.0

%

0.6 pts.

 

 

 

 

 

5.1

%

4.1

%

1.0 pts.

 

 

 

Net income

 

3,640

 

3,113

 

527

 

17

%

 

 

6,083

 

4,494

 

1,589

 

35

%

% of sales

 

4.2

%

3.6

%

0.6 pts.

 

 

 

 

 

3.8

%

2.8

%

1.0 pts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

0.31

 

0.27

 

0.04

 

 

 

 

 

0.52

 

0.39

 

0.13

 

 

 

Weighted average shares outstanding - basic

 

11,562

 

11,467

 

95

 

 

 

 

 

11,543

 

11,459

 

84

 

 

 

Weighted average shares outstanding - diluted

 

11,600

 

11,495

 

105

 

 

 

 

 

11,578

 

11,486

 

92

 

 

 

 

Reconciliation of net income to EBITDA

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

$ Change

 

2012

 

2011

 

$ Change

 

 

 

(in thousands)

 

GAAP net income

 

$

3,640

 

$

3,113

 

$

527

 

$

6,083

 

$

4,494

 

$

1,589

 

Plus:

Interest expense, net

 

242

 

45

 

197

 

358

 

84

 

274

 

 

Income tax expense

 

956

 

1,217

 

(261

)

1,785

 

2,048

 

(263

)

 

Depreciation and amortization

 

1,915

 

1,980

 

(65

)

3,658

 

3,896

 

(238

)

EBITDA (1) 

 

$

6,753

 

$

6,355

 

$

398

 

$

11,884

 

$

10,522

 

$

1,362

 

 


(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. We believe that monitoring EBITDA along with our GAAP results and the accompanying reconciliation provides additional information that is useful to gain an understanding of the factors and trends affecting our business.

 

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Table of Contents

 

Orders.   The table below summarizes orders by each corresponding geographical region for the three and six months ended June 30, 2012 compared to the same periods in 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

$
Change

 

%
Change

 

2012

 

2011

 

$
Change

 

%
Change

 

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

North America

 

$

19,960

 

$

29,403

 

$

(9,443

)

(32

)%

$

40,659

 

$

52,620

 

$

(11,961

)

(23

)%

Europe

 

32,489

 

34,338

 

(1,849

)

(5

)%

62,285

 

63,755

 

(1,470

)

(2

)%

Asia

 

27,893

 

44,404

 

(16,511

)

(37

)%

58,760

 

105,528

 

(46,768

)

(44

)%

 

 

$

80,342

 

$

108,145

 

$

(27,803

)

(26

)%

$

161,704

 

$

221,903

 

$

(60,199

)

(27

)%

 

Orders during the three months ended June 30, 2012 were $80.3 million, a decrease of $27.8 million, or 26%, when compared to the same period in 2011. Orders during the six months ended June 30, 2012 were $161.7 million, a decrease of $60.2 million or 27%, when compared to the same period in 2011. The decrease over the prior year periods was the result of exceptional growth experienced by the machine tool industry during the three and six months ended June 30, 2011. Order volume during the three and six months ended June 30, 2011 was at a historical high for the Company as customers reacted to the increasing prices and extended lead times. These trends resulted from constraints on the machine tool supply chain due to significant demand caused by strong economic recovery in the industry.  Foreign currency translation had an unfavorable impact of approximately $2.0 million and $1.3 million for the three and six months ended June 30, 2012, respectively, when compared to the same periods in 2011.

 

North America orders decreased by $9.4 million, or 32%, and $12.0 million, or 23%, for the respective three and six months ended June 30, 2012, when compared to the same periods in 2011. These decreases were driven by higher order levels during the three and six months ended June 30, 2011 as our distributors and customers were reacting to longer lead times as a result of supply chain constraints as well as the potential for price increases due to raising costs of raw materials and components. Additionally, the decreases were impacted by the slowing economy during the three and six months ended June 30, 2012 as compared to the same periods in 2011.

 

Europe orders decreased by $1.8 million, or 5%, and $1.5 million, or 2%, for the respective three and six months ended June 30, 2012, when compared to the same periods in 2011. Unfavorable foreign currency translation during the three and six months ended June 30, 2012 contributed approximately $2.4 million and $2.4 million, respectively, to the decrease in Europe orders when compared to the same periods in 2011. Excluding the unfavorable foreign currency impact, Europe orders increased by $0.6 million and $0.9 million in the respective three and six months ended June 30, 2012, when compared to the same periods in 2011.

 

Asia orders represented 35% and 36%, respectively, of the total orders for the three and six months ended June 30, 2012, compared to 41% and 48%, respectively of the same periods in 2011. Asia orders decreased by $16.5 million, or 37%, and 46.8 million, or 44%, for the respective three and six months ended June 30, 2012, when compared to the same periods in 2011. The decrease was driven by declining demands for machine tools in the region as a result of slowing Chinese economy during the current year periods compared to an overheated economy during the first half of 2011. The impact of the overheated economy in 2011 was further influenced by supply chain constraints and customers placing orders to ensure deliveries as a result of long lead times for machine tools.  Additionally, multiple machine orders from a China-based supplier to the consumer electronics industry were $4.4 million in the six months ended June 30, 2012, a $6.5 million decrease compared to the same period in 2011. Foreign currency translation had a favorable impact of approximately $0.4 million and $1.1 million for the three and six months ended June 30, 2012, respectively, when compared to the same periods in 2011.

 

20



Table of Contents

 

Sales.  The table below summarizes sales by each corresponding geographical region for the three and six months ended June 30, 2012 compared to the same periods in 2011:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2011

 

$
Change

 

%
Change

 

2012

 

2011

 

$
Change

 

%
Change

 

 

 

(in thousands)

 

 

(in thousands)

 

 

 

North America

 

$

20,735

 

$

18,529

 

$

2,206

 

12

%

$

39,356

 

$

35,724

 

$

3,632

 

10

%

Europe

 

34,028

 

25,267

 

8,761

 

35

%

58,685

 

45,083

 

13,602

 

30

%

Asia

 

31,557

 

42,860

 

(11,303

)

(26

)%

62,929

 

79,331

 

(16,402

)

(21

)%

 

 

$

86,320

 

$

86,656

 

$

(336

)

0

%

$

160,970

 

$

160,138

 

$

832

 

1

%

 

Sales for the three months ended June 30, 2012 were $86.3 million, a decrease of $0.3 million, when compared to the same period in 2011. Sales for the six months ended June 30, 2012 were $161.0 million, an increase of $0.8 million, when compared to the same period in 2011. Foreign currency translation had an unfavorable impact of approximately $2.1 million and $1.3 million for the three and six months ended June 30, 2012, respectively, when compared to the same periods in 2011. Excluding the unfavorable foreign currency translation impact, sales increased by $1.8 million and $2.1 million for the three and six months ended June 30, 2012, when compared to the same periods in 2011.

 

North America sales increased by $2.2 million, or 12%, and $3.6 million, or 10%, for the respective three and six months ended June 30, 2012, when compared to the same periods in 2011. The increase in North America sales was primarily concentrated in our milling machine product line and non-machine sales, and can be attributed to an improved U.S. industrial economy and the effectiveness of our sales channels as compared to the prior year periods.

 

Europe sales increased by $8.8 million, or 35%, and $13.6 million, or 30%, for the respective three and six month periods ended June 30, 2012, when compared to the same periods in 2011. The increases were noted across all of our machine product lines and were driven by higher demand for machine tools attributable to solid activity levels in Germany and the United Kingdom. Foreign currency translation had an unfavorable impact of approximately $2.6 million and $2.5 million for the respective three and six months ended June 30, 2012, respectively, when compared to the same periods in 2011.

 

Asia sales decreased by $11.3 million, or 26%, and $16.4 million, or 21%, for the respective three and six months ended June 30, 2012, when compared to the same periods in 2011. Lower margin sales to a China-based supplier to the consumer electronics industry were approximately $1.5 million and $4.3 million for the three and six months ended June 30, 2012, respectively, when compared to $5.8 million and $13.3 million for the three and six months ended June 30, 2011, respectively. Excluding the sales to this customer, Asia sales decreased by $7.1 million, or 19%, and $7.4 million, or 11%, for the respective three and six months ended June 30, 2012, when compared to the same periods in 2011. The decrease was primarily due to the slowing Chinese economy. Foreign currency translation had a favorable impact of approximately $0.4 million and $1.2 million for the three and six months ended June 30, 2012, respectively, when compared to the same periods in 2011.

 

Sales of machines accounted for approximately 79% and 77% of the consolidated sales for the three and six months ended June 30, 2012, respectively. Sales of non-machine products and services, primarily workholding, repair parts, and accessories, accounted for 21% and 23% of the consolidated sales for the three and six months ended June 30, 2012, respectively.

 

Gross Profit.  Gross profit for the three months ended June 30, 2012 was $24.0 million, an increase of $0.7 million, or 3.0%, when compared to the same period in 2011. Gross profit for the six months ended June 30, 2012 was $45.2 million, an increase of $2.8 million, or 6.6%, when compared to the six months ended June 30, 2011. The increase in gross profit for the six months ended June 30, 2012 was primarily attributable to favorable product mix. Gross margin for the three and six month period ended June 30, 2012 were 27.8% and 28.1%, respectively, compared to 26.9% and 26.5% for the same periods in 2011.

 

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Table of Contents

 

Selling, General and Administrative Expenses.  Selling, general and administrative (SG&A) expenses were $19.1 million, or 22.1% of net sales for the three months ended June 30, 2012. This amount is relatively flat when compared to $19.0 million, or 21.9% of net sales for the three months ended June 30, 2011. SG&A expenses were $36.7 million, or 22.8% of net sales for the six months ended June 30, 2012. This amount represents an increase of $1.0 million or 2.8%, compared to $35.7 million, or 22.3% of net sales for the six months ended June 30, 2011. This year-to-year increase was primarily inflationary.

 

Other Expense (Income).  Other expense was $0.1 million for the three months ended June 30, 2012 compared to income of $0.1 million for the same period in 2011. Other expense for the six months ended June 30, 2012 was $0.3 million compared to expense of $0.1 million during the same period in 2011.

 

Income from Operations.  Income from operations was $4.8 million for the three months ended June 30, 2012 compared to $4.4 million for the same period in 2011. Income from operations was $8.2 million for the six months ended June 30, 2012 compared to $6.6 million for the same period in 2011.

 

Interest Expense, Net.  Net interest expense was $0.2 million for the three months ended June 30, 2012 compared to $0.04 million for the same period in 2011. Net interest expense was $0.4 million for the six months ended June 30, 2012 compared to $0.08 million for the same period in 2011. The increase in interest expense was attributable to the Company’s higher average outstanding indebtedness as of June 30, 2012 as compared to the same period in 2011.

 

Income Taxes.  The provision for income taxes was $1.0 million and $1.8 million for the three and six months ended June 30, 2012, respectively, compared to $1.2 million and $2.0 million for the three and six months ended June 30, 2011, respectively.  The effective tax rates were 20.8% and 22.7% for the three and six months ended June 30, 2012, respectively, compared to 28.1% and 31.3% for the three and six months ended June 30, 2011.

 

The difference in effective tax rates between the three and six months ended June 30, 2012 and 2011 was driven by the mix of earnings by country and by 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, Netherlands, and Canada).

 

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, Netherlands, 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 rates for the three and six months ended June 30, 2012 of 20.8% and 22.7%, respectively, 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 mix of earnings by country, and an increase to the accrued liabilities associated with uncertain tax positions.

 

Net Income.  Net income for the three months ended June 30, 2012 was $3.6 million, or 4.2% of net sales, compared to $3.1 million, or 3.6% of net sales, for the same period in 2011. Net income for the six months ended June 30, 2012 was $6.1 million, or 3.8% of net sales, compared to $4.5 million, or 2.8% of net sales, for the same period in 2011. The increase in net income is attributable to higher gross profits which is the result of favorable product mix. Earnings per share, both basic and diluted, for the three and six months ended June 30, 2012 were $0.31 and $0.52, respectively, compared to $0.27 and $0.39, respectively,  for the same periods ended June 30, 2011.

 

22



Table of Contents

 

Summary of Cash Flows for the six months ended June 30, 2012 and 2011:

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

 

 

(in thousands)

 

Net cash provided by (used in) operating activities

 

$

314

 

$

(10,539

)

Net cash used in investing activities

 

(5,342

)

(8,138

)

Net cash (used in) provided by financing activities

 

(588

)

5,614

 

Effect of exchange rate changes on cash

 

29

 

819

 

Decrease in cash and cash equivalents

 

$

(5,587

)

$

(12,244

)

 

 

 

 

 

 

Capital expenditures (included in investing activities)

 

$

(5,364

)

$

(9,002

)

 

During the six months ended June 30, 2012, we generated $0.3 million net cash from operating activities, an improvement of $10.8 million compared to $10.5 million net cash used in operating activities during the same period in 2011.  The improved cash flow from operating activities was driven by active management of working capital. During the six months ended June 30, 2012, net cash was primarily provided by collections on accounts receivables. The cash inflow was offset by cash used in inventory purchases to support production, vendor payments, and contributions to the pension plans.

 

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 accounts receivables, and other working capital needs as business activity levels increased.  The outflow of cash was offset by cash provided by accounts payables and accrued expenses which increased due to higher production levels and higher customer deposits related to order activity.

 

Net cash used in investing activities was $5.3 million for the six months ended June 30, 2012 compared to $8.1 million for the same period in 2011. The decrease was primarily due to lower capital expenditures as we approach completion of our facility expansion projects in Switzerland and China.

 

Cash flow used in financing activities was $0.6 million for the six months ended June 30, 2012 compared to $5.6 million cash provided by financing activities for the same period in 2011. The decrease was primarily due to payment on outstanding short-term debt under our existing credit facilities to align financing activities to current 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 availability under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and change in working capital needs.  During the six months ended June 30, 2012, cash flows from operating 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 $45.4 million at June 30, 2012, and $43.4 million at December 31, 2011, available under various credit facilities maintained by the Company and certain Company 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.

 

23



Table of Contents

 

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

 

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 2012.  For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2011 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, 2012, 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, 2012 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



Table of Contents

 

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, 2011.

 

 

 

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

 

 

 

None

 

 

 

ITEM 3.

 

DEFAULT UPON SENIOR SECURITIES

 

 

 

 

 

None

 

 

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

 

 

 

 

 

Not Applicable

 

 

 

ITEM 5.

 

OTHER INFORMATION

 

 

 

 

 

None

 

25



Table of Contents

 

ITEM 6.

 

EXHIBITS

 

 

 

3.1

 

Restated Certificate of Incorporation of Hardinge Inc. filed with the Secretary of State of the State of New York on May 24, 1995, incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

 

 

3.2

 

Certificate of Amendment of the Restated Certificate of Incorporation of Hardinge Inc. Company, incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2010.

 

 

 

3.3

 

By-Laws of Hardinge Inc., incorporated by reference from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

 

 

4.1

 

Specimen of certificate for shares of Common Stock, par value $.01 per share, of Hardinge Inc., incorporated by reference from the Registrant’s Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on May 19, 1995.

 

 

 

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.

 

 

 

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

 

 

 


*In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.

 

26



Table of Contents

 

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, 2012

 

By:

/s/ Richard L. Simons

Date

 

 

Richard L. Simons

 

 

 

Chairman, President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

August 9, 2012

 

By:

/s/ Edward J. Gaio

Date

 

 

Edward J. Gaio.

 

 

 

Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

August 9, 2012

 

By:

/s/ Douglas J. Malone

Date

 

 

Douglas J. Malone

 

 

 

Corporate Controller and Chief Accounting Officer

 

 

 

(Principal Accounting Officer)

 

27


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