FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2).
Yes ý No o
As of June 30, 2005 there were 8,895,689 shares of Common Stock of the Registrant outstanding.
PART I. ITEM 1
HARDINGE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, except preferred and common share and per share amounts)
| | June 30, 2005 | | December 31, 2004 | |
| | (Unaudited) | | | |
Assets | | | | | |
| | | | | |
Current assets: | | | | | |
Cash | | $ | 4,686 | | $ | 4,189 | |
Accounts receivable, net | | 69,850 | | 65,005 | |
Notes receivable, net | | 5,684 | | 6,946 | |
Inventories | | 115,167 | | 100,738 | |
Prepaid expenses | | 8,323 | | 6,509 | |
Total current assets | | 203,710 | | 183,387 | |
| | | | | |
Property, plant and equipment: | | | | | |
Property, plant and equipment | | 169,712 | | 172,743 | |
Less accumulated depreciation | | 107,881 | | 105,968 | |
Net property, plant and equipment | | 61,831 | | 66,775 | |
| | | | | |
Other assets: | | | | | |
Notes receivable | | 5,168 | | 6,445 | |
Deferred income taxes | | 428 | | 427 | |
Intangible pension asset | | 298 | | 304 | |
Other intangible assets | | 7,472 | | 7,551 | |
Goodwill | | 18,146 | | 20,376 | |
Other long term assets | | 922 | | 1,046 | |
| | 32,434 | | 36,149 | |
| | | | | |
Total assets | | $ | 297,975 | | $ | 286,311 | |
See accompanying notes.
3
HARDINGE INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
(In Thousands, except preferred and common share and per share amounts)
| | June 30, 2005 | | December 31, 2004 | |
| | (Unaudited) | | | |
Liabilities and shareholders’ equity | | | | | |
| | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 26,774 | | $ | 25,404 | |
Notes payable to bank | | 3,073 | | 2,762 | |
Accrued expenses | | 15,357 | | 18,670 | |
Accrued pension expense | | 1,335 | | 1,541 | |
Accrued income taxes | | 3,349 | | 4,230 | |
Deferred income taxes | | 3,367 | | 3,706 | |
Current portion of long-term debt | | 4,891 | | 4,893 | |
Total current liabilities | | 58,146 | | 61,206 | |
| | | | | |
Other liabilities: | | | | | |
Long-term debt | | 56,366 | | 35,213 | |
Accrued pension expense | | 15,867 | | 15,909 | |
Deferred income taxes | | 3,296 | | 3,208 | |
Accrued postretirement benefits | | 5,862 | | 5,927 | |
Derivative financial instruments | | 2,880 | | 5,502 | |
Other liabilities | | 3,358 | | 3,225 | |
| | 87,629 | | 68,984 | |
| | | | | |
Equity of minority interest | | 7,189 | | 6,121 | |
| | | | | |
Shareholders’ equity: | | | | | |
Preferred stock, Series A, par value $.01 per share; Authorized 2,000,000; but unissued at June 30, 2005 and December 31, 2004. | | | | | |
Common stock, $.01 par value: Authorized shares - 20,000,000; Issued shares – 9,919,992 at June 30, 2005 and December 31, 2004 | | 99 | | 99 | |
Additional paid-in capital | | 60,445 | | 60,538 | |
Retained earnings | | 102,064 | | 98,277 | |
Treasury shares – 1,024,303 at June 30, 2005 and 1,090,941 shares at December 31, 2004. | | (13,142 | ) | (14,119 | ) |
Accumulated other comprehensive income | | (2,973 | ) | 6,230 | |
Deferred employee benefits | | (1,482 | ) | (1,025 | ) |
Total shareholders’ equity | | 145,011 | | 150,000 | |
| | | | | |
Total liabilities and shareholders’ equity | | $ | 297,975 | | $ | 286,311 | |
See accompanying notes.
4
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | (Unaudited) | | (Unaudited) | | (Unaudited) | | (Unaudited) | |
| | | | | | | | | |
Net sales | | $ | 73,527 | | $ | 53,330 | | $ | 141,575 | | $ | 105,247 | |
Cost of sales | | 50,030 | | 38,107 | | 96,964 | | 74,152 | |
Gross profit | | 23,497 | | 15,223 | | 44,611 | | 31,095 | |
| | | | | | | | | |
Selling, general and administrative expenses | | 18,114 | | 13,523 | | 35,590 | | 26,353 | |
Income from operations | | 5,383 | | 1,700 | | 9,021 | | 4,742 | |
| | | | | | | | | |
Interest expense | | 1,021 | | 590 | | 1,861 | | 1,213 | |
Interest (income) | | (155 | ) | (101 | ) | (291 | ) | (199 | ) |
Income before income taxes and minority interest in (profit) of consolidated subsidiary | | 4,517 | | 1,211 | | 7,451 | | 3,728 | |
Income taxes | | 1,271 | | 332 | | 2,064 | | 1,025 | |
Minority interest in (profit) of consolidated subsidiary | | (791 | ) | (523 | ) | (1,068 | ) | (918 | ) |
Net income | | 2,455 | | 356 | | 4,319 | | 1,785 | |
| | | | | | | | | |
Retained earnings at beginning of period | | 99,876 | | 95,579 | | 98,277 | | 94,150 | |
Less dividends declared | | 267 | | 88 | | 532 | | 88 | |
Retained earnings at end of period | | $ | 102,064 | | $ | 95,847 | | $ | 102,064 | | $ | 95,847 | |
| | | | | | | | | |
Per share data: | | | | | | | | | |
| | | | | | | | | |
Basic earnings per share: | | $ | 0.28 | | $ | 0.04 | | $ | 0.49 | | $ | 0.20 | |
Weighted average number of common shares outstanding | | 8,767 | | 8,735 | | 8,756 | | 8,748 | |
| | | | | | | | | |
Diluted earnings per share: | | $ | 0.28 | | $ | 0.04 | | $ | 0.49 | | $ | 0.20 | |
Weighted average number of common shares outstanding | | 8,829 | | 8,786 | | 8,840 | | 8,807 | |
| | | | | | | | | |
Cash dividends declared per share | | $ | 0.03 | | $ | 0.01 | | $ | 0.06 | | $ | 0.01 | |
See accompanying notes.
5
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
| | Six Months Ended June 30, | |
| | 2005 | | 2004 | |
| | (Unaudited) | | (Unaudited) | |
| | | | | |
Operating activities | | | | | |
Net income | | $ | 4,319 | | $ | 1,785 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | |
Depreciation and amortization | | 4,606 | | 4,512 | |
Provision for deferred income taxes | | 425 | | 666 | |
Minority interest | | 1,068 | | 836 | |
Foreign currency transaction loss | | 295 | | (79 | ) |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | | (7,576 | ) | (4,849 | ) |
Notes receivable | | 2,222 | | 705 | |
Inventories | | (19,762 | ) | (3,191 | ) |
Other assets | | (1,870 | ) | (95 | ) |
Accounts payable | | 2,220 | | 3,301 | |
Accrued expenses | | (3,335 | ) | (5,131 | ) |
Accrued postretirement benefits | | (65 | ) | 28 | |
Net cash used in operating activities | | (17,453 | ) | (1,512 | ) |
| | | | | |
Investing activities | | | | | |
Capital expenditures | | (2,947 | ) | (1,370 | ) |
Net cash used in investing activities | | (2,947 | ) | (1,370 | ) |
| | | | | |
Financing activities | | | | | |
Increase in short-term notes payable to bank | | 368 | | 1,945 | |
Increase (decrease) in long-term debt | | 21,067 | | (48 | ) |
Net sales (purchases) of treasury stock | | 210 | | (144 | ) |
Dividends paid | | (532 | ) | (88 | ) |
Net cash provided by financing activities | | 21,113 | | 1,665 | |
| | | | | |
Effect of exchange rate changes on cash | | (216 | ) | 21 | |
Net increase (decrease) in cash | | 497 | | (1,196 | ) |
| | | | | |
Cash at beginning of period | | 4,189 | | 4,739 | |
| | | | | |
Cash at end of period | | $ | 4,686 | | $ | 3,543 | |
See accompanying notes.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
NOTE A—BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period and the six month period ended June 30, 2005, are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. The Company operates in only one business segment – industrial machine tools.
The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
Certain amounts in the June 30, 2004 consolidated financial statements have been reclassified to conform with the June 30, 2005 presentation.
NOTE B—STOCK-BASED COMPENSATION
The Company grants restricted shares of common stock and stock options to certain officers, directors and other key employees. The Company accounts for restricted share grants and stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The stock options issued to employees under the 1996 and 2002 Incentive Stock Plans expire 10 years from the date of grant and are exercisable one-third after the first year, two-thirds after the second year, and 100 percent exercisable after the third year.
In accordance with the provisions of Statement of Financial Accounting Standard No. 123 Accounting for Stock Based Compensation, the Company has elected to continue applying the provisions of APB No. 25 and related interpretations in accounting for its stock-based compensation plans. The Company amortizes compensation expense for restricted stock over the vesting period of the grant. The Company does not recognize compensation expense for stock options when the stock option price at the grant date is equal to or greater than the fair market value of the stock at that date.
A summary of the stock option activity under the Incentive Stock Plan is as follows:
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
Shares at beginning of period | | 229,786 | | 231,334 | | 235,918 | | 234,000 | |
Shares granted | | 4,500 | | 5,250 | | 4,500 | | 5,250 | |
Weighted average price per share | | $ | 14.80 | | $ | 12.08 | | $ | 14.80 | | $ | 12.08 | |
Shares canceled, forfeited or exercised | | (8,916 | ) | — | | (15,048 | ) | (2,666 | ) |
Weighted average price per share | | $ | 8.87 | | — | | $ | 8.52 | | $ | 7.81 | |
Shares at end of period | | 225,370 | | 236,584 | | 225,370 | | 236,584 | |
Weighted average price per share | | $ | 13.36 | | $ | 13.01 | | $ | 13.36 | | $ | 13.01 | |
7
The following illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | (dollars in thousands, except per share data) | |
| | | | | | | | | |
Reported net income | | $ | 2,455 | | $ | 356 | | $ | 4,319 | | $ | 1,785 | |
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | 117 | | 115 | | 216 | | 240 | |
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | | (138 | ) | (143 | ) | (256 | ) | (296 | ) |
Pro forma net income | | $ | 2,434 | | $ | 328 | | $ | 4,279 | | $ | 1,729 | |
Earnings per share: | | | | | | | | | |
Basic and Diluted – as reported | | $ | 0.28 | | $ | 0.04 | | $ | 0.49 | | $ | 0.20 | |
Basic – pro forma | | $ | 0.28 | | $ | 0.04 | | $ | 0.49 | | $ | 0.20 | |
Diluted – pro forma | | $ | 0.28 | | $ | 0.04 | | $ | 0.48 | | $ | 0.20 | |
NOTE C—WARRANTIES
The Company offers warranties for its products. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which the Company sold the product. The Company generally provides a basic limited warranty, including parts and labor for a period of one year. The Company estimates the costs that may be incurred under its basic limited warranty, based largely upon actual warranty repair cost history, and records a liability in the amount of such costs in the month that product revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.
The Company also sells extended warranties for some of its products. These extended warranties usually cover a 12-24 month period that begins 0-12 months after time of sale. Revenues for these extended warranties are recognized monthly on a prorated basis until the warranty expires.
These liabilities are reported as accrued expenses on the Company’s consolidated balance sheet.
8
A reconciliation of the changes in the Company’s product warranty liability during the three month and six month periods ended June 30, 2005 and 2004 is as follows:
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | (dollars in thousands) | | (dollars in thousands) | |
| | | | | | | | | |
Beginning balance | | $ | 1,405 | | $ | 1,581 | | $ | 1,449 | | $ | 1,671 | |
Provision for warranties | | 622 | | 446 | | 897 | | 994 | |
Warranties settlement costs | | (440 | ) | (530 | ) | (705 | ) | (1,142 | ) |
Other – currency translation impact | | (75 | ) | 14 | | (129 | ) | (12 | ) |
Quarter end balance | | $ | 1,512 | | $ | 1,511 | | $ | 1,512 | | $ | 1,511 | |
NOTE D—INVENTORIES
Inventories are summarized as follows (dollars in thousands):
| | June 30, 2005 | | December 31, 2004 | |
| | | | | |
Finished products | | $ | 47,376 | | $ | 39,940 | |
Work-in-process | | 34,227 | | 27,144 | |
Raw materials and purchased components | | 33,564 | | 33,654 | |
| | $ | 115,167 | | $ | 100,738 | |
NOTE E—INCOME TAXES
The Company continues to maintain a full valuation allowance on the tax benefits of its U.S. and U.K. net deferred tax assets and the Company expects to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in those countries is sustained. Additionally, until an appropriate level of profitability is reached, the Company does not expect to recognize any significant tax benefits in future results of operations.
Each quarter, the Company estimates its full year tax rate based upon its most recent forecast of full year anticipated results and adjusts year to date tax expense to reflect its full year anticipated tax rate.
9
NOTE F— DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for derivative financial instruments in accordance with Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement requires the Company to recognize all its derivative instruments on the balance sheet at fair value. Derivatives that are not qualifying hedges must be adjusted to fair value through income. If the derivative is a qualifying hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value is immediately recognized in earnings.
NOTE G—EARNINGS PER SHARE AND WEIGHTED AVERAGE SHARES OUTSTANDING
Earnings per share are computed in accordance with Statement of Financial Accounting Standards No. 128 Earnings per Share. Basic earnings per share are computed using the weighted average number of shares of common stock outstanding during the period. For diluted earnings per share, the weighted average number of shares includes common stock equivalents related primarily to restricted stock.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations required by SFAS No. 128:
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | (dollars in thousands) | |
Numerator: | | | | | | | | | |
Net income | | $ | 2,455 | | $ | 356 | | $ | 4,319 | | $ | 1,785 | |
Numerator for basic earnings per share | | 2,455 | | 356 | | 4,319 | | 1,785 | |
Numerator for diluted earnings per share | | 2,455 | | 356 | | 4,319 | | 1,785 | |
Denominator: | | | | | | | | | |
Denominator for basic earnings per share-weighted average shares (in thousands) | | 8,767 | | 8,735 | | 8,756 | | 8,748 | |
Effect of diluted securities: | | | | | | | | | |
Restricted stock and stock options (in thousands) | | 62 | | 51 | | 84 | | 59 | |
Denominator for diluted earnings per share-adjusted weighted average shares (in thousands) | | 8,829 | | 8,786 | | 8,840 | | 8,807 | |
| | | | | | | | | |
Basic earnings per share | | $ | 0.28 | | $ | 0.04 | | $ | 0.49 | | $ | 0.20 | |
Diluted earnings per share | | $ | 0.28 | | $ | 0.04 | | $ | 0.49 | | $ | 0.20 | |
10
NOTE H—REPORTING COMPREHENSIVE INCOME (LOSS)
During the three and six month periods ended June 30, 2005 and 2004, the components of total comprehensive income (loss) consisted of the following (dollars in thousands):
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
Net Income | | $ | 2,455 | | $ | 356 | | $ | 4,319 | | $ | 1,785 | |
Other Comprehensive Income (Loss): | | | | | | | | | |
Foreign currency translation adjustments | | (7,462 | ) | 619 | | (12,036 | ) | (1,094 | ) |
Foreign currency translation – pension | | 203 | | 4 | | 323 | | (5 | ) |
Unrealized (loss) gain on derivatives, net of tax: | | | | | | | | | |
Cash flow hedges | | (91 | ) | 614 | | 317 | | 581 | |
Net investment hedges | | 1,373 | | 1,114 | | 2,193 | | 152 | |
Other comprehensive (loss) income | | (5,977 | ) | 2,351 | | (9,203 | ) | (366 | ) |
Total Comprehensive (Loss) Income | | $ | (3,522 | ) | $ | 2,707 | | $ | (4,884 | ) | $ | 1,419 | |
Accumulated balances of the components of other comprehensive (loss) income consisted of the following at June 30, 2005 and December 31, 2004 (dollars in thousands):
| | Accumulated balances | |
| | June 30, 2005 | | Dec. 31, 2004 | |
Other Comprehensive Income (Loss): | | | | | |
Pension liability (net of tax of $3,562 and $3,615, respectively) | | $ | (9,826 | ) | $ | (10,149 | ) |
Foreign currency translation adjustments | | 9,709 | | 21,745 | |
Cumulative effect of accounting change, net of tax | | 25 | | 25 | |
Unrealized gain (loss) on derivatives, net of tax: | | | | | |
Cash flow hedges, (net of tax of $669 and $692, respectively) | | 128 | | (189 | ) |
Net investment hedges, (net of tax of $715 and $715, respectively) | | (3,009 | ) | (5,202 | ) |
Other Comprehensive (Loss) Income | | $ | (2,973 | ) | $ | 6,230 | |
NOTE I—GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill and intangibles in accordance with Statements of Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. The statement requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives are amortized over their estimated useful lives.
The total carrying amount of goodwill was $18.1 million as of June 30, 2005 and $20.4 million as of December 31, 2004. The majority of this asset resulted from the acquisition of HTT Hauser Tripet Tschudin AG in 2000. The acquisition of the European sales and service operations of Bridgeport in 2004
11
added $0.5 million to goodwill. The asset value of the goodwill decreased by $1.3 million and $2.2 million, respectively, during the three month and six month periods ended June 30, 2005, with the entire change caused by the decreased dollar value of the functional currency of the Company’s subsidiaries whose balance sheets include the goodwill.
The Company completed annual impairment testing during the fourth quarter of 2004 and 2003 and determined that there has been no impairment of goodwill.
Other intangible assets include $6.7 million representing the value of the name, trademarks and copyrights associated with the former worldwide operations of Bridgeport, which were acquired in 2004. The Company will be using this brand name on all of its machining center lines in the future, and therefore, the asset has been determined to have an indefinite useful life. The asset will be reviewed annually for impairment under the provisions of SFAS 142.
NOTE J—PENSION AND POST RETIREMENT PLANS
The Company accounts for the pension plans and postretirement benefits in accordance with Financial Accounting Standards Board Statements No. 87 and 106. The following disclosures related to the pension and postretirement benefits are presented in accordance with Financial Accounting Standards Board Statement No. 132, as revised.
A summary of the components of net periodic pension costs for the consolidated company for the three and six months ended June 30, 2005 and 2004 is presented below:
| | Pension Benefits | |
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | (dollars in thousands) | |
| | | |
Service cost | | $ | 773 | | $ | 738 | | $ | 1,556 | | $ | 1,481 | |
Interest cost | | 1,889 | | 1,858 | | 3,800 | | 3,727 | |
Expected return on plan assets | | (2,248 | ) | (2,153 | ) | (4,525 | ) | (4,320 | ) |
Amortization of prior service cost | | (33 | ) | 42 | | (67 | ) | 84 | |
Amortization of transition (asset) obligation | | (92 | ) | (97 | ) | (186 | ) | (195 | ) |
Amortization of (gain) loss | | 179 | | 35 | | 361 | | 71 | |
Net periodic benefit cost | | $ | 468 | | $ | 423 | | $ | 939 | | $ | 848 | |
12
A summary of the components of net postretirement benefits costs for the consolidated company for the three and six months ended June 30, 2005 and 2004 is presented below:
| | Postretirement Benefits | |
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | 2005 | | 2004 | |
| | (dollars in thousands) | |
| | | |
Service cost | | $ | 20 | | $ | 19 | | $ | 40 | | $ | 39 | |
Interest cost | | 90 | | 95 | | 180 | | 190 | |
Amortization of prior service cost | | (6 | ) | (6 | ) | (12 | ) | (12 | ) |
Amortization of (gain) loss | | 2 | | | | 3 | | | |
Net periodic benefit cost | | $ | 106 | | $ | 108 | | $ | 211 | | $ | 217 | |
The expected contributions to be paid during the year ending December 31, 2005 to the domestic defined benefit plan are $0.8 million. As of June 30, 2005, no contributions had been made to the domestic plan. As of June 30, 2004, $0.5 million of contributions had been made to the domestic plan. Contributions of $0.3 million and $0.5 million were made on July 15, 2005 and 2004, respectively, to the domestic plan. The Company also provides defined benefit pension plans or defined contribution pension plans for its foreign subsidiaries. The expected contributions to be paid during the year ending December 31, 2005 to the foreign defined benefit plans are $2.0 million. For each of the Company’s foreign plans, employer and employee contributions are made on a monthly basis and are determined by applicable governmental regulations. As of June 30, 2005 and 2004, $1.1 million and $0.8 million of contributions have been made to the foreign plans, respectively.
On December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was passed which expands Medicare to include an outpatient prescription drug benefit beginning in 2006. To encourage employers to retain or provide postretirement drug benefits, beginning in 2006 the federal government will provide non-taxable subsidy payments to employers that sponsor prescription drug benefits to retirees that are “actuarially equivalent” to the Medicare benefit. In May 2004, the FASB issued Staff Position (FSP) No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”, which provides guidance on how companies should account for the impact of the Act on its postretirement health care plans. Based on guidance available at this time, the plan is not expected to be actuarially equivalent to the Medicare benefit due to the fact that the employer’s premiums are capped at the level paid in 2001. Based on that assumption, there would be no change in the plans’ accumulated postretirement benefit obligation or annual expense.
13
NOTE K—NEW ACCOUNTING STANDARDS
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs - An Amendment of ARB No. 43, Chapter 4. This statement amends ARB No. 43, Chapter 4, Inventory Pricing, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt SFAS 151 effective January 1, 2006. Hardinge does not expect the adoption of SFAS 151 to have a material impact on the consolidated financial statements of the Company.
In December 2004, the FASB issued FASB Staff Position No. 109-1, (FSP109-1) “Application of FASB Statement No. 109 (SFAS 109), ‘Accounting for Income Taxes,’ to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004”. FAS 109-1 provides that the manufacturer’s deduction created in the American Jobs Creation Act of 2004 (the Act) should be accounted for as a special deduction in accordance with SFAS 109 and not as a tax rate reduction. The Company is currently evaluating the effect that the manufacturer’s deduction will have on future results.
In December 2004, the FASB issued FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision Within the American Jobs Creation Act of 2004” (FSP 109-2). The Act introduced a temporary incentive for U.S. multinationals to repatriate earnings accumulated outside the U.S. by providing a one-time tax deduction of 85 percent for certain foreign earnings from controlled foreign corporations. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision. The Company did not elect to apply this provision in 2004 and may elect to apply this provision to qualifying repatriations in 2005. Due to the complexity of the repatriation provision, the Company has not yet completed its evaluation of the impact the Act may have on its decision regarding repatriation of earnings, including a definitive calculation of qualifying dividends and the effect of any repatriation on the Company’s tax provision. The Company expects to complete its evaluation in 2005.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements at fair value. On April 14, 2005, the SEC issued a new rule that amends the required effective dates for SFAS 123R. SFAS 123R will now be effective beginning with the first fiscal year that begins after June 15, 2005. As a result of the SEC amendment, Hardinge intends to adopt SFAS 123R in the first quarter of 2006. The SEC amendment does not change the accounting required under SFAS 123R.
Under SFAS 123R, Hardinge must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost, and the transition method to be used at date of adoption. The Company is currently evaluating the impact that SFAS 123R will have on Hardinge’s consolidated results of operations and financial condition, which in part will be dependent on the transition and amortization methods used to adopt the new rules in 2006.
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In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143, “(FIN 47) which clarifies the term “conditional asset retirement obligation” used in FASB No. 143 “Accounting for Asset Retirement Obligations” and specifically when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The Company is required to adopt FIN 47 no later than December 31, 2005. The Company does not expect the adoption of FIN 47 to have a material impact on its consolidated results of operations and financial condition.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (SFAS 154), which replaces APB Opinion No. 20, “Accounting Changes,” (APB 20) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 will have a material impact on the consolidated financial statements of the Company.
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PART I - ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview. The following Management’s Discussion and Analysis (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed financial statements, the accompanying condensed financial notes (“Notes”) appearing elsewhere in this report and our annual report on Form 10-K for the year ended December 31, 2004.
Our primary business is manufacturing high-precision computer controlled metal cutting and grinding machines and related accessories. We are geographically diversified with manufacturing facilities in the U.S., Switzerland, Taiwan, and China and with sales to most industrialized countries. Over 60% of our net sales are to customers outside North America, and approximately half of our employees are located outside of North America.
Our machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. The U.S. market activity metric most closely watched by our management has been metal-cutting machine orders as reported by the Association of Manufacturing Technology (AMT), the primary industry group for U.S. machine tool manufacturers. Similar information regarding machine tool consumption in foreign countries is published in various trade journals.
Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that might purchase our products. One such measurement is the PMI (formerly called the Purchasing Manager’s Index), as reported by the Institute for Supply Management. Another is capacity utilization of U.S manufacturing plants, as reported by the Federal Reserve Board.
Other key performance indicators are geographic distribution of sales and orders, gross margin as percent of sales, income from operations, working capital changes and debt level trends.
Since our U.S. operations have experienced net losses since 2001, we recorded a deferred tax charge in September 2003 and established a valuation allowance offsetting our entire U.S. deferred tax asset in accordance with Statement of Financial Accounting Standards No. 109. Our management team continues to believe that ultimately these deferred tax assets will be fully utilized as credits against tax expense on future taxable income well before the assets would expire, since our U.S. operations historically averaged $10.0 million annual pretax profit in the years 1990-2000 and the current tax law provides for a lengthy carry-forward period, which for our current deferred tax assets extends until 2021-2023; however the recovery of these tax assets is currently uncertain.
Foreign currency exchange rate changes can besignificant to our reported financial results for several reasons. Our primary competitors, particularly for the most technologically advanced products are now, largely, manufacturers in Japan, Germany, and Switzerland, which causes the worldwide valuation of the Japanese yen, Euro, and Swiss franc to be central to competitive pricing in all of our markets. Also, we translate the financial results of our Swiss, Taiwanese, Chinese, English, German and Canadian subsidiaries into U.S. dollars for consolidation and financial reporting purposes. Period to period changes in the exchange rate between their local currency and the U.S. dollar may significantly affect comparative data. We also purchase computer controls and other components from suppliers throughout the world, and our purchase costs reflect these foreign currency exchange rate changes.
In the past three years, pension liabilities have represented another significant uncertainty for us. We provide defined benefit pension plans for eligible employees in the U.S., Switzerland, England, and Taiwan. Declines in interest rates used to calculate the present value of future pension obligations and negative equity market investment returns in the U.S. and UK in 2002 resulted in our recording a deferred pension charge to equity of $3.9 million in 2003 and $5.1 million in 2002. This deferred pension charge was
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reduced by $2.3 million in 2004 due to improved returns on investments. These non-cash charges were recorded in “other comprehensive income” in the equity section of the consolidated balance sheets. The underlying economic causes for these charges reflect a risk of increased future pension expense. As discussed later, further large pension charges driven by declines in interest rates or lower than assumed investment returns may require us to negotiate changes to our current borrowing arrangements.
In November 2004, we acquired the name, trademarks, copyrights, designs, patents, know-how, and all other intangibles associated with the former Bridgeport Machine Company throughout the world. We also acquired certain operating assets from the court appointed receiver of the former Bridgeport operations in the U.K. to allow us to carry on Bridgeport’s sales, service and support operations. The products of Bridgeport, which are sourced from Taiwan, expanded the line of machines available. Also, the operations in the U.K. were combined with our U.K. subsidiary to provide sales and service support for our complete line of products.
Results of Operations
Summarized selected financial data for the three and six months ended June 30, 2005 and 2004, respectively:
| | Three months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | | Change | | % Change | | 2005 | | 2004 | | Change | | % Change | |
| | (dollars in thousands, except per share data) | |
Net Sales | | $ | 73,527 | | $ | 53,330 | | $ | 20,197 | | 38 | % | $ | 141,575 | | $ | 105,247 | | $ | 36,328 | | 35 | % |
Gross Profit | | 23,497 | | 15,223 | | 8,274 | | 54 | % | 44,611 | | 31,095 | | 13,516 | | 44 | % |
Income from operations | | 5,383 | | 1,700 | | 3,683 | | 217 | % | 9,021 | | 4,742 | | 4,279 | | 90 | % |
Profit before taxes | | 4,517 | | 1,211 | | 3,306 | | 273 | % | 7,451 | | 3,728 | | 3,723 | | 100 | % |
Net income | | 2,455 | | 356 | | 2,099 | | 590 | % | 4,319 | | 1,785 | | 2,534 | | 141 | % |
Diluted earnings per share | | $ | 0.28 | | $ | 0.04 | | $ | 0.24 | | | | $ | 0.49 | | $ | 0.20 | | $ | 0.29 | | | |
Weighted average shares outstanding (in thousands) | | 8,829 | | 8,786 | | | | | | 8,840 | | 8,807 | | | | | |
Gross Profit as % of sales | | 32.0 | % | 28.5 | % | | | | | 31.5 | % | 29.5 | % | | | | |
Profit before taxes as % of sales | | 6.1 | % | 2.3 | % | | | | | 5.3 | % | 3.5 | % | | | | |
Net income as % of sales | | 3.3 | % | 0.7 | % | | | | | 3.1 | % | 1.7 | % | | | | |
Net Sales. Net sales for the three months ended June 30, 2005 were $73.5 million, an increase of $20.2 million or 38% compared to the three months ended June 30, 2004. Net sales for the six months ended June 30, 2005 were $141.6 million, an increase of $36.3 million or 35% compared to the six months ended June 30, 2004. Sales in 2005 increased due to the addition of Bridgeport products, which were acquired in November 2004, and due to increased shipments of our historical products. Sales of the Bridgeport products were approximately $10.1 million and $21.6 million for the three months and six months ended June 30, 2005.
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The table below summarizes our 2005 net sales by geographical region, with comparisons to the same periods in 2004. As noted below, net sales increased in all three sales regions:
| | (U.S. dollars in thousands) | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
Sales to Customers in: | | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | |
North America | | $ | 26,292 | | $ | 21,822 | | 20 | % | $ | 50,756 | | $ | 41,551 | | 22 | % |
Europe | | 29,932 | | 20,232 | | 48 | % | 61,046 | | 42,543 | | 43 | % |
Asia & Other | | 17,303 | | 11,276 | | 54 | % | 29,773 | | 21,153 | | 41 | % |
| | $ | 73,527 | | $ | 53,330 | | 38 | % | $ | 141,575 | | $ | 105,247 | | 35 | % |
Sales to customers in North America increased as manufacturing activity continues to improve. The increase in sales in this region included sales of new Bridgeport products in addition to the continuing rise in sales of the Company’s other products. Sales to customers in Europe increased due to shipments of the new Bridgeport products as well as stronger sales of grinding products. Sales to customers in Asia and Other also increased due to of sales of new Bridgeport products, specifically the start of shipments of the large order received at the end of 2004.
Under U.S. accounting standards, results of foreign subsidiaries are translated into U.S. dollars at the average exchange rate during the periods presented. The foreign currencies, in which our subsidiaries operate, continue to strengthen against the U.S. dollar. For the three months ended June 30, 2005, the U.S. dollar weakened by 4% against the Swiss Franc, 3% against the British Pound Sterling, 5% against the Euro and 6% against the New Taiwanese dollar, compared to the average rate during the three months ended June 30, 2004. The strength of these foreign currencies relative to the U.S. dollar had a favorable impact on sales in the three and six months ended June 30, 2005 of $1.8 million and $3.7 million, respectively. Excluding the impact of foreign currency translation, sales for the three and six months ended June 30, 2005 increased 35% and 31%.
The geographic mix of sales is shown as percentages of total sales in the table below:
| | Three months ended June 30, | | Six months ended June 30, | |
Sales to Customers in: | | 2005 | | 2004 | | Change | | 2005 | | 2004 | | Change | |
North America | | 35.8 | % | 40.9 | % | (5.1 | )% | 35.9 | % | 39.5 | % | (3.6 | )% |
Europe | | 40.7 | % | 38.0 | % | 2.7 | % | 43.1 | % | 40.4 | % | 2.7 | % |
Asia & Other | | 23.5 | % | 21.1 | % | 2.4 | % | 21.0 | % | 20.1 | % | .9 | % |
Total | | 100.0 | % | 100.0 | % | | | 100.0 | % | 100.0 | % | | |
We expect those sales to customers in Europe and Asia and Other as a percentage of total sales will continue to increase. Sales of machines accounted for approximately 71% and 70% of net sales for the three months and six months ended June 30, 2005, as compared to approximately 67% and 68% for the three months and six months ended June 30, 2004. Sales of non-machine products and services consist of workholding, repair parts, service and accessories.
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Orders and Backlog: Our orders per region are shown in the table below:
| | (U.S. dollars in thousands) | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
Orders from Customers in: | | 2005 | | 2004 | | % Change | | 2005 | | 2004 | | % Change | |
North America | | $ | 29,847 | | $ | 23,283 | | 28 | % | $ | 56,474 | | $ | 47,075 | | 20 | % |
Europe | | 29,832 | | 22,007 | | 36 | % | 61,216 | | 39,638 | | 54 | % |
Asia & Other | | 16,997 | | 14,176 | | 20 | % | 30,094 | | 23,265 | | 29 | % |
| | $ | 76,676 | | $ | 59,466 | | 29 | % | $ | 147,784 | | $ | 109,978 | | 34 | % |
Orders for the three months ended June 30, 2005 were $76.7 million, an increase of $17.2 million or 29% compared to the three months ended June 30, 2004. Orders for the six months ended June 30, 2005 were $147.8 million, an increase of $37.8 million or 34% compared to the six months ended June 30, 2004. The increase is primarily due to orders for our new Bridgeport products. Orders for our new Bridgeport product were for $12.7 million and $25.4 million during the three and six months ended June 30, 2005, respectively.
Foreign currency translation accounted for $1.0 million and $3.6 million of the increase in orders for the three and six months ended June 30, 2005, respectively. The remaining increase in orders represents a 27% and 31% increase compared to the order rate for the three and six months ended June 30, 2004.
The increased North American orders reflected the general increase in manufacturing activity in the U.S. European orders increased due to orders of the new Bridgeport products and stronger sales of grinding products. Orders in Asia and Other continued to grow, primarily due to increased demand for machines in China. We are continuing to invest in Asia through our Taiwanese and Chinese subsidiaries by increasing capacity, promotional expenses, and support personnel to take advantage of the strong sales growth opportunities in that area.
Our consolidated backlog at June 30, 2005 was $72.5 million, an increase of $25.1 million or 53% compared to June 30, 2004. The backlog at December 31, 2004 was $66.3 million.
Gross Profit. Gross Profit for the three months ended June 30, 2005 was $23.5 million, an increase of $8.3 million or 54% compared to the three months ended June 30, 2004. Gross profit for the six months ended June 30, 2005 was $44.6 million, an increase of $13.5 million or 44% compared to the six months ended June 30, 2004. The increased gross profit is primarily due to the increased sales levels discussed above. In addition, gross margin percentage for the three and six months ended June 30, 2005 was 32.0% and 31.5% of sales, compared to 28.5% and 29.5% for the three and six months ended June 30, 2004. This improvement in gross margin percentage resulted primarily from higher production levels at our European and U.S. manufacturing facilities and increased shipments of higher margin machines.
Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses were $18.1 million, or 24.7% of sales for the three months ended June 30, 2005, an increase of $4.6 million compared to $13.5 million or 25.3% of sales for the three months ended June 30, 2004. SG&A expenses were $35.6 million or 25.1% of sales for the six months ended June 30, 2005, compared to $26.4 million or 25.0% of sales for the six months ended June 30, 2004. The increase in expenses is primarily due to the addition of two new sales, service and technical centers located in the UK and Holland and the addition of over 70 people associated with these operations to support our Bridgeport acquisition. These expenses accounted for $2.7 million of the overall quarterly increase of $4.6 million. Commission expense increased by $0.9 million due to higher sales volume, and higher promotional and support efforts in China accounted for $0.4 million of the quarterly increase. The foreign currency translation impact accounted for $0.4 million of the quarterly increase.
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Income from Operations. Income from operations was $5.4 million, or 7.3% of sales for the three months ended June 30, 2005, compared to $1.7 million or 3.2% of sales for the three months ended June 30, 2004. Income from operations was $9.0 million or 6.4% of sales for the six months ended June 30, 2005, compared to $4.7 million or 4.5% of sales for the six months ended June 30, 2004.
Interest Expense & Interest Income. Interest expense includes interest payments under our credit facility, unrealized and realized gains or losses on our interest rate swap agreement and amortization of deferred financing costs associated with our credit facility. Interest expense was $1.0 million and $1.9 million for the three and six months ended June 30, 2005, compared to $0.6 million and $1.2 million for the three and six months ended June 30, 2004. This increase was primarily due to higher average borrowings, which is related to the acquisition of Bridgeport assets at the end of 2004 and an increase in inventory, resulting from increased production levels and an increase in receivables resulting from our increased sales levels. This was offset by lower losses on our interest rate swap agreement. Interest income, which is primarily derived from previous years’ internally financed customer sales, was $0.2 million and $0.3 million for the three and six months ended June 30, 2005, compared to $0.1 million and $0.2 million for the three and six months ended June 30, 2004.
Income Taxes. The provision for income taxes was $1.3 million and $2.1 million for the three and six months ended June 30, 2005, compared to $0.3 million and $1.0 million for the three and six months ended June 30, 2004. This increase is due to the increased level of pre-tax net income compared to 2004. Our effective tax rate was 28.1% and 27.7% for the three and six months ended June 30, 2005, compared to 27.4% and 27.5% for the three and six months ended June 30, 2004. Each quarter, we estimate our full year tax rate based upon its most recent forecast of full year anticipated results and adjusts year to date tax expense to reflect its full year anticipated tax rate. We do not expect our 2005 effective tax rate to change significantly.
As described previously, in 2003, we recorded a valuation allowance for the full value of the deferred tax assets of our U.S. operations. Consistent with accounting for taxes under FAS109, no tax benefits were recorded as a result of the pre-tax loss of the U.S. operations for 2005 or 2004 to offset the taxes accrued for pre-tax earnings from profitable foreign subsidiaries.
In October 2004, Congress passed the American Job Creation Act of 2004, which includes certain tax relief provisions. We are currently assessing the effects of the act.
Minority Interest In (Profit) of Consolidated Subsidiary. We have a 51% interest in Hardinge Taiwan Precision Machinery Limited, an entity that is recorded as a consolidated subsidiary. In the three and six months ended June 30, 2005, $0.8 million and $1.1 million of reductions in consolidated net income was recorded, compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2004. This represents the minority stockholders’ 49% share in the joint venture’s net income. The elimination of the minority interest in this consolidated subsidiary increased due to slightly higher profits at the subsidiary’s operations.
Net Income. Net income for the three months ended June 30, 2005 was $2.5 million, or 3.3% of net sales, compared to $0.4 million, or 0.7% of net sales for the three months ended June 30, 2004. Net income for the six months ended June 30, 2005 was $4.3 million or 3.1% of net sales, compared to $1.8 million or 1.7% of net sales for the six months ended June 30, 2004. Diluted and basic earnings per share for the three and six months ended June 30, 2005 was $0.28 and $0.49, an increase compared to $0.04 and $0.20 for the three and six months ended June 30, 2004.
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Liquidity and Capital Resources
At June 30, 2005, we had $4.7 million in cash and cash equivalents, compared to $4.2 million at December 31, 2004. Our current ratio at June 30, 2005 was 3.50:1, compared to 3.00:1 at December 31, 2004.
Cash Flows Used in Operating Activities and Investing Activities:
Our cash flows used in operating and investing activities for the six months ended June 30, 2005 and 2004, are summarized in the table below:
| | Six months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | |
Net cash used in operating activities | | $ | (17,453 | ) | $ | (1,512 | ) |
Cash flows from investing activities: | | | | | |
Capital expenditures | | (2,947 | ) | (1,370 | ) |
| | | | | | | |
Cash used in operating activities was $17.5 million for the six months ended June 30, 2005, compared to $1.5 million for the six months ended June 30, 2004. This represents a decrease in cash generation of $16.0 million. This is due to increased accounts receivables and inventory levels due to increased production and sales levels, offset by higher net income levels.
Cash used in investing activities was $2.9 million for the six months ended June 30, 2005, compared to $1.4 million for the six months ended June 30, 2004. Capital expenditures accounted for all cash used in investing activities. Most of our 2005 capital expenditures were for leasehold improvement costs to outfit our new demonstration and technical center, which houses the activities of Bridgeport operations in the UK. Total 2005 capital expenditures are projected to be in the range of $4.0 million to $6.0 million and are expected to be financed through operations or available bank borrowings. The 2004 capital expenditures were for expanding our manufacturing capacity in China and upgrading our accessory manufacturing in the U.S.
Cash Flows from Financing Activities:
Our cash flows from financing activities for the six months ended June 30, 2005 and 2004, are summarized in the table below:
| | Six months ended June 30, | | Six months ended June 30, | |
| | 2005 | | 2004 | |
Borrowings/(repayments) of long-term debt | | $ | 21,067 | | $ | (48 | ) |
Borrowings on short-term notes payable | | 368 | | 1,945 | |
Sales/(purchases) of treasury stock | | 210 | | (144 | ) |
Payments of dividends | | (532 | ) | (88 | ) |
Net cash provided by financing activities | | $ | 21,113 | | $ | 1,665 | |
Cash provided by financing activities was $21.1 million for the six months ended June 30, 2005, compared to $1.7 million for the six months ended June 30, 2004. Debt, including notes payable, increased by $21.4 million in 2005 compared to $1.9 million in 2004. The additional debt is due primarily to the increase in working capital due to the increased accounts receivables and inventory levels.
Credit Facilities:
We maintain a revolving loan agreement with a group of U.S. banks. This agreement, which expires in January 2011, provides for borrowings of up to $40.0 million, secured by substantially all of our domestic assets, other than real estate, and by a pledge of two-thirds of our investment in our Canadian and
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European subsidiaries. Interest charged on this debt is based on LIBOR plus a spread that varies depending on our debt to EBITDA ratio. A variable commitment fee of 0.175% to 0.375%, based upon our debt to EBITDA ratio, is payable on the unused portion of the revolving loan agreement. At June 30, 2005, borrowings under this agreement totaled $32.0 million.
We also have a term loan with substantially the same security and financial covenants as provided under the revolving loan agreement described above. The term loan is in the amount of $27.6 million with quarterly principal payments of $1.2 million through December 2006 and $1.3 million from 2007 through December 2010.
We have an additional loan agreement with another U.S. bank that provides an unsecured, short-term line of credit of $8.0 million. Interest is based on a fixed percent above the one-month LIBOR rate. At June 30, 2005, borrowings under this agreement totaled $3.0 million.
Our Swiss subsidiaries maintain unsecured overdraft facilities with commercial banks, providing borrowing up to 11.0 million Swiss francs, which is equivalent to approximately $8.6 million at June 30, 2005. At June 30, 2005, borrowings under these facilities totaled $0.1 million. Our Swiss subsidiaries also have loan agreements with a Swiss bank, which provide for borrowings up to 7.5 million Swiss francs, which is equivalent to approximately $5.8 million at June 30, 2005. At June 30, 2005, there were no borrowings under these facilities, which are secured by the real property owned by our two Swiss subsidiaries.
Our U.K. subsidiary maintains an overdraft facility with a bank, providing borrowings up to 0.3 million pounds sterling, which is equivalent to approximately $0.5 million at June 30, 2005. At June 30, 2005, borrowings under this facility totaled $0.1 million. Our U.K. subsidiary also has mortgage debt in the amount of $1.6 million at June 30, 2005.
Certain of these debt agreements require, among other things, that we maintain specified levels of tangible net worth, working capital, and specified ratios of debt to EBITDA, and EBITDA minus capital expenditures to fixed charges. We were in compliance with all financial covenants at June 30, 2005.
In aggregate, these and other borrowing agreements provide for borrowing availability of up to $92.0 million, of which $64.3 million was borrowed at June 30, 2005. We believe that the currently available funds and credit facilities, along with internally generated funds, will provide sufficient financial resources for ongoing operations.
This report contains statements of a forward-looking nature relating to the financial performance of Hardinge Inc. Such statements are based upon information known to management at this time. The company cautions that such statements necessarily involve uncertainties and risk and deal with matters beyond the company’s ability to control, and in many cases the company cannot predict what factors would cause actual results to differ materially from those indicated. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are fluctuations in the machine tool business cycles, changes in general economic conditions in the U.S. or internationally, the mix of products sold and the profit margins thereon, the relative success of the company’s entry into new product and geographic markets, the company’s ability to manage its operating costs, actions taken by customers such as order cancellations or reduced bookings by customers or distributors, competitors’ actions such as price discounting or new product introductions, governmental regulations and environmental matters, changes in the availability and cost of materials and supplies, the implementation of new technologies and currency fluctuations. Any forward-looking statement should be considered in light of these factors. The company undertakes no obligation to revise its forward-looking statements if unanticipated events alter their accuracy.
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PART I.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to our market risk exposures during the first six months of 2005. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2004 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2005 and has concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2005. There were no changes in the Company’s internal control over financial reporting during the second quarter of 2005.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following tables provides information about issuer repurchases of our common stock by month for the quarter ended June 30, 2005:
Issuer Purchases of Equity Securities
Period | | Total Number of Shares Purchased | | Average Price Paid per Share | |
April 1 – April 30, 2005 | | — | | — | |
May 1 – May 31, 2005 | | 513 | | $ | 16.27 | |
June 1 – June 30, 2005 | | 218 | | $ | 15.05 | |
Total | | 731 | | | |
The above shares were repurchased as part of the Company’s Incentive Compensation Plan to satisfy tax withholding obligations or payment for the exercise of stock options.
Item 3. Default upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The 2005 Annual Meeting of Shareholders of Hardinge Inc. was held on May 3, 2005. A total of 7,840,772 of the Company’s shares were present or represented by proxy at the meeting. This represents approximately 89% of the Company’s shares outstanding.
The two Class II directors named below were elected to serve a three-year term.
Class II Directors: | | Votes For | |
Daniel J. Burke | | 7,827,140 | |
J. Philip Hunter | | 6,848,026 | |
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J. Patrick Ervin, Douglas A. Greenlee, John Perrotti, Mitch Quain, and Kyle Seymour continue as Directors of the Company. Albert Moore retired from the Board effective May 3, 2005.
The election of Ernst & Young LLP as the Company’s independent accountants for the year 2005 was ratified with 7,815,129 shares voted in favor.
No other matters were presented for a vote at the meeting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
31.1 | - | Chief Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | - | Chief Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32 | - | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
B. Reports on Form 8-K:
| Current Report on Form 8-K, filed May 6, 2005 in connection with the retirement of a member of the Company’s Board of Directors and an amendment to the Company’s By-Laws. |
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| Current Report on Form 8-K, filed May 9, 2005 in connection with a May 5, 2005 press release announcing the Company’s first quarter 2005 results and the declaration of a dividend. The 8K also included an entry into a material definitive agreement by amending the Directors Compensation package and also the announcement of a temporary suspension of trading under the Company’s Employee Benefit Plans. |
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| Current Report on Form 8-K/A, filed May 10, 2005 in connection with a correction to the Directors Compensation package filed in the 8K of May 9, 2005. |
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| Current Report on Form 8-K filed May 20, 2005 by the Company due to a material modification to rights of security holders as the Hardinge Inc. Rights Agreement expired. |
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| Current Report on Form 8-K filed June 24, 2005 by the Company due to the resignation of a principal officer of the Company. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Hardinge Inc. |
| |
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August 9, 2005 | | By: | | /s/ J. Patrick Ervin | |
Date | | J. Patrick Ervin |
| | Chairman of the Board, President/CEO |
| | |
August 9, 2005 | | By: | | /s/ Richard Hendrick | |
Date | | Richard Hendrick |
| | Treasurer, |
| | Interim Chief Financial Officer |
| | | | | | |
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