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 September 30, 2011
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 000-15760
Hardinge Inc.
(Exact name of Registrant as specified in its charter)
New York | | 16-0470200 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
One Hardinge Drive
Elmira, NY 14902
(Address of principal executive offices) (Zip code)
(607) 734-2281
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 in the Exchange Act.
Large accelerated filer | | Accelerated filer X |
Non-accelerated filer | | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined by Exchange Act Rule 12b-2). Yes No X
As of September 30, 2011 there were 11,659,012 shares of Common Stock of the registrant outstanding.
HARDINGE INC. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARDINGE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands Except Share and Per Share Data)
| | September 30, | | | December 31, | |
| | 2011 | | | 2010 | |
| | (Unaudited) | | | | |
Assets | | | | | | |
Cash and cash equivalents | | $ | 21,261 | | | $ | 30,945 | |
Restricted cash | | 6,510 | | | 5,225 | |
Accounts receivable, net | | 58,678 | | | 47,572 | |
Inventories, net | | 125,788 | | | 105,306 | |
Deferred income taxes | | 1,423 | | | 1,364 | |
Prepaid expenses | | 13,727 | | | 11,518 | |
Total current assets | | 227,387 | | | 201,930 | |
| | | | | | |
Property, plant and equipment, net | | 64,996 | | | 56,628 | |
Deferred income taxes | | 966 | | | 451 | |
Intangible assets, net | | 12,837 | | | 13,642 | |
Pension assets | | 2,406 | | | 2,111 | |
Other long-term assets | | 62 | | | 85 | |
Total non-current assets | | 81,267 | | | 72,917 | |
Total assets | | $ | 308,654 | | | $ | 274,847 | |
| | | | | | |
Liabilities and shareholders’ equity | | | | | | |
Accounts payable | | $ | 38,811 | | | $ | 33,533 | |
Notes payable to bank | | 12,000 | | | 1,650 | |
Accrued expenses | | 30,704 | | | 22,791 | |
Customer deposits | | 14,819 | | | 10,468 | |
Accrued income taxes | | 3,144 | | | 3,656 | |
Deferred income taxes | | 2,769 | | | 2,546 | |
Current portion of long-term debt | | 1,214 | | | 617 | |
Total current liabilities | | 103,461 | | | 75,261 | |
| | | | | | |
Long-term debt | | 3,225 | | | 2,777 | |
Accrued pension liability | | 26,499 | | | 29,949 | |
Accrued postretirement liability | | 2,116 | | | 2,274 | |
Accrued income taxes | | 2,746 | | | 2,106 | |
Deferred income taxes | | 2,718 | | | 2,516 | |
Other liabilities | | 2,013 | | | 2,062 | |
Total non-current liabilities | | 39,317 | | | 41,684 | |
| | | | | | |
Common stock ($0.01 par value, 12,472,992 issued) | | 125 | | | 125 | |
Additional paid-in capital | | 114,118 | | | 114,183 | |
Retained earnings | | 62,032 | | | 53,637 | |
Treasury shares (813,980 and 865,703 shares at September 30, 2011 and December 31, 2010, respectively) | | (10,379) | | | (11,022) | |
Accumulated other comprehensive (loss) income | | (20) | | | 979 | |
Total shareholder’s equity | | 165,876 | | | 157,902 | |
Total liabilities and shareholders’ equity | | $ | 308,654 | | | $ | 274,847 | |
See accompanying notes to the consolidated financial statements
3
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands Except Per Share Data)
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (Unaudited) | | | (Unaudited) | |
Net sales | | $ | 90,389 | | | $ | 71,931 | | | $ | 250,527 | | | $ | 174,999 | |
Cost of sales | | 64,840 | | | 53,994 | | | 182,599 | | | 133,451 | |
Gross profit | | 25,549 | | | 17,937 | | | 67,928 | | | 41,548 | |
| | | | | | | | | | | | |
Selling, general and administrative expenses | | 18,943 | | | 18,717 | | | 54,609 | | | 49,156 | |
Gain on sale of assets | | (5) | | | (732) | | | (23) | | | (960) | |
Impairment charge recovery | | - | | | (25) | | | - | | | (25) | |
Other expense (income) | | 284 | | | 16 | | | 389 | | | (627) | |
Income (loss) from operations | | 6,327 | | | (39) | | | 12,953 | | | (5,996) | |
| | | | | | | | | | | | |
Interest expense | | 97 | | | 103 | | | 268 | | | 334 | |
Interest income | | (45) | | | (18) | | | (132) | | | (87) | |
Income (loss) before income taxes | | 6,275 | | | (124) | | | 12,817 | | | (6,243) | |
| | | | | | | | | | | | |
Income tax expense | | 2,025 | | | 1,074 | | | 4,073 | | | 915 | |
Net income (loss) | | $ | 4,250 | | | $ | (1,198) | | | $ | 8,744 | | | $ | (7,158) | |
| | | | | | | | | | | | |
Per share data: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Basic earnings (loss) per share | | $ | 0.37 | | | $ | (0.11) | | | $ | 0.75 | | | $ | (0.63) | |
| | | | | | | | | | | | |
Diluted earnings (loss) per share | | $ | 0.36 | | | $ | (0.11) | | | $ | 0.75 | | | $ | (0.63) | |
| | | | | | | | | | | | |
Cash dividends declared per share | | $ | 0.02 | | | $ | 0.005 | | | $ | 0.03 | | | $ | 0.015 | |
See accompanying notes to the consolidated financial statements
4
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
| | Nine Months Ended
September 30, | |
| | 2011 | | | 2010 | |
| | (Unaudited) | |
Operating activities | | | | | | |
Net income (loss) | | $ | 8,744 | | | $ | (7,158) | |
Adjustment to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | |
Impairment charge (recovery) | | - | | | (25) | |
Depreciation and amortization | | 5,885 | | | 5,364 | |
Debt issuance amortization | | 78 | | | 234 | |
Provision for deferred income taxes | | (411) | | | 856 | |
Gain on sale of assets | | (23) | | | (960) | |
Gain on purchase of Jones & Shipman | | - | | | (647) | |
Unrealized intercompany foreign currency translation loss | | (748) | | | 94 | |
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | | (11,362) | | | (7,215) | |
Inventories | | (20,485) | | | (11,049) | |
Prepaids and other assets | | (2,700) | | | (4,121) | |
Accounts payable | | 6,051 | | | 15,395 | |
Customer deposits | | 4,209 | | | 5,847 | |
Accrued expenses | | 2,190 | | | 706 | |
Accrued postretirement benefits | | (423) | | | (441) | |
Net cash used in operating activities | | (8,995) | | | (3,120) | |
| | | | | | |
Investing activities | | | | | | |
Capital expenditures | | (13,520) | | | (2,154) | |
Proceeds from sale of assets | | 908 | | | 1,469 | |
Purchase of Jones & Shipman | | - | | | (2,949) | |
Net cash used in investing activities | | (12,612) | | | (3,634) | |
| | | | | | |
Financing activities | | | | | | |
Proceeds from short-term notes payable to bank | | 20,447 | | | 8,666 | |
Repayments of short-term notes payable to bank | | (9,504) | | | (4,799) | |
Proceeds from long-term debt | | 1,616 | | | - | |
Payments on long-term debt | | (464) | | | (423) | |
Dividends paid | | (349) | | | (174) | |
Other financing activities | | 42 | | | (97) | |
Net cash provided by financing activities | | 11,788 | | | 3,173 | |
| | | | | | |
Effect of exchange rate changes on cash | | 135 | | | 451 | |
Net decrease in cash and cash equivalents | | (9,684) | | | (3,130) | |
| | | | | | |
Cash and cash equivalent at beginning of period | | 30,945 | | | 20,419 | |
| | | | | | |
Cash and cash equivalent at end of period | | $ | 21,261 | | | $ | 17,289 | |
See accompanying notes to the consolidated financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2011
NOTE 1. BASIS OF PRESENTATION
In these notes, the terms “Hardinge,” “Company,” “we,” “us,” or “our” mean Hardinge Inc. and its subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from our estimates. In our opinion, we made all adjustments that are necessary for a fair presentation, and those adjustments are of a normal recurring nature unless otherwise noted. Our operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected in subsequent quarters or the full year ended December 31, 2011.
We operate in one business segment – industrial machine tools. Certain amounts in the December 31, 2010 consolidated financial statements have been reclassified to conform to the September 30, 2011 presentation.
NOTE 2 . SIGNIFICANT RECENT EVENT
On July 26, 2011, our Taiwan subsidiary, Hardinge Machine Tools B.V., Taiwan Branch, entered into a new unsecured general credit facility agreement replacing its existing $10.0 million facility. This agreement, which expires on May 30, 2012, provides a $12.0 million facility, or its equivalent in other currencies, for working capital, raw material purchases, and export business purposes. This credit facility charges interest at the Bank’s current base rate of 2.75%, which is subject to change by the Bank based on market conditions. It carries no commitment fees on unused funds. The principal amount outstanding for these facilities was $12.0 million and $1.7 at September 30, 2011 and December 31, 2010, respectively.
On August 31, 2011, our Chinese subsidiary, Hardinge Precision Machinery (Jiaxing) Co., Ltd., entered into a loan agreement with a local bank. This agreement, which expires on January 30, 2014, provides up to 25.0 million in Chinese Renminbi (“RMB”), or $3.9 million equivalent, that the Company may draw for plant construction and fixed assets acquisition purposes. The interest rate is the base rate as published by the People’s Bank of China, currently at 6.65%, plus a 20% mark-up making the effective interest rate 7.98%. The interest rate is recalculated annually. The agreement calls for scheduled principal repayments in the amounts of RMB 4.0 million, RMB 6.0 million, RMB 6.0 million and RMB 9.0 million on July 20, 2012, January 20, 2013, July 20, 2013, and January 30, 2014, respectively, however, if on any such date the outstanding principal of the loan is less than the scheduled repayment amount, the Company is required to repay the entire outstanding principal balance on such date. The principal amount outstanding was $1.6 million at September 30, 2011.
The Chinese subsidiary’s loan agreement contains financial covenants pursuant to which the subsidiary is required to continually maintain total liabilities to total assets ratio of less than 0.65:1.00 and a current ratio of more than 1.0:1.0. In addition, the subsidiary is not allowed to act as a guarantor to any third party. The loan agreement contains customary events of default and acceleration clauses. The loan is secured by substantially all of the real property and improvements owned by the subsidiary, including improvements currently under construction. At September 30, 2011, we are in compliance with the covenants under the loan agreement.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 3 . NET INVENTORIES
Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of the cost include materials, labor and overhead.
Net inventories consisted of the following:
| | September 30, | | | December 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Raw materials and purchased components | | $ | 47,780 | | | $ | 34,113 | |
Work-in-process | | 28,047 | | | 22,834 | |
Finished products | | 49,961 | | | 48,359 | |
Inventory, net | | $ | 125,788 | | | $ | 105,306 | |
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
| | September 30, | | | December 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Land, buildings and improvements | | $ | 70,963 | | | $ | 68,871 | |
Machinery, equipment and fixtures | | 69,418 | | | 69,882 | |
Office furniture, equipment and vehicles | | 17,884 | | | 17,389 | |
Construction in progress | | 10,737 | | | 567 | |
| | 169,002 | | | 156,709 | |
Less accumulated depreciation | | 104,006 | | | 100,081 | |
Property, plant and equipment, net | | $ | 64,996 | | | $ | 56,628 | |
NOTE 5. INTANGIBLE ASSETS
Total net intangible assets were $12.8 million at September 30, 2011 and $13.6 million at December 31, 2010. At September 30, 2011, the intangible assets not subject to amortization were valued at $7.2 million, representing the value of the name, trademarks, and copyrights associated with the former worldwide operations of Bridgeport. At September 30, 2011, the amortizable intangible assets were valued at $5.6 million, representing the value of the Jones & Shipman trade name, Bridgeport technical information, patents, customer lists, land use rights, and other items.
NOTE 6. INCOME TAXES
We continue to maintain a full valuation allowance on the net deferred tax assets in our subsidiaries in the United States, the United Kingdom, Germany, and Canada, related to tax loss carryforwards in those jurisdictions and other deferred tax assets of those entities.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 6. INCOME TAXES
(Continued)
Each quarter, we estimate our full year effective tax rate for jurisdictions not subject to valuation allowances based upon our most recent forecast of full year anticipated results, and adjust year-to-date tax expense to reflect our full year anticipated tax rate. The rate is an estimate based upon projected results for the year, estimated annual permanent differences, the statutory tax rates in the various jurisdictions in which we operate, and the non-recognition of tax benefits for entities with full valuation allowances. The overall effective tax rates were 32.3% and 31.8% for the three and nine months ended September 30, 2011, respectively. The effective tax rates for the three and nine months ended September 30, 2011 differ from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded.
The tax years 2008 to 2010 remain open to examination by United States taxing authorities. Tax years between 2005 and 2010 generally remain open to routine examinations by foreign taxing authorities in our other major jurisdictions, including Switzerland, United Kingdom, Taiwan, Germany, and China.
We recorded an increase of $0.5 million to the accrued liability associated with uncertain tax positions in the three months ended September 30, 2011. At September 30, 2011, the accrued liability for uncertain income tax positions was $2.8 million, of which approximately $0.9 million was related to interest and penalties. At December 31, 2010, the accrued liability for uncertain tax positions was $2.1 million, of which $0.8 million was related to interest and penalties. If recognized, the uncertain tax benefits, with related penalties and interest at September 30, 2011 and December 31, 2010, would be recorded as a benefit to income tax expense on the consolidated statement of operations.
NOTE 7. WARRANTIES
A reconciliation of the changes in our product warranty accrual is as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Balance at beginning of period | | $ | 3,995 | | | $ | 2,766 | | | $ | 3,297 | | | $ | 2,470 | |
Warranties issued | | 951 | | | 1,168 | | | 3,146 | | | 3,040 | |
Warranty settlement costs | | (763) | | | (541) | | | (1,945) | | | (1,371) | |
Changes in accruals for pre-existing warranties | | (322) | | | (329) | | | (823) | | | (1,012) | |
Currency translation adjustment | | (193) | | | 163 | | | (7) | | | 100 | |
Balance at end of period | | $ | 3,668 | | | $ | 3,227 | | | $ | 3,668 | | | $ | 3,227 | |
Warranty liabilities are reported as accrued expenses on our consolidated balance sheets.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 8. PENSION AND POST RETIREMENT PLANS
The following tables summarize the components of net periodic pension and postretirement costs for the three and nine months ended September 30, 2011 and 2010.
| | Pension Benefits | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Service cost | | $ | 422 | | | $ | 466 | | | $ | 1,203 | | | $ | 1,118 | |
Interest cost | | 2,182 | | | 2,025 | | | 6,453 | | | 6,269 | |
Expected return on plan assets | | (2,575) | | | (2,363) | | | (7,592) | | | (7,026) | |
Amortization of prior service cost | | (20) | | | (30) | | | (57) | | | (89) | |
Amortization of transition asset | | (76) | | | (56) | | | (215) | | | (161) | |
Amortization of loss | | 472 | | | 218 | | | 1,356 | | | 638 | |
| | $ | 405 | | | $ | 260 | | | $ | 1,148 | | | $ | 749 | |
| | Postretirement Benefits | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Service cost | | $ | 5 | | | $ | 5 | | | $ | 14 | | | $ | 13 | |
Interest cost | | 34 | | | 39 | | | 103 | | | 117 | |
Amortization of prior service cost | | (89) | | | (93) | | | (265) | | | (278) | |
| | $ | (50) | | | $ | (49) | | | $ | (148) | | | $ | (148) | |
The expected contributions to be paid during the year ending December 31, 2011 to the domestic defined benefit plans are $2.1 million. Contributions to the domestic plans were $1.7 million and $0.3 million during the nine months ended September 30, 2011 and 2010, respectively. The Company also provides defined benefit pension plans for some of its foreign subsidiaries. The expected contributions to be paid during the year ending December 31, 2011 to the foreign defined benefit plans are $2.4 million. For each of the Company’s foreign plans, contributions are made on a monthly or quarterly basis and are determined by applicable governmental regulations. Contributions to the foreign plans were $1.8 million and $1.5 million during the nine months ended September 30, 2011 and 2010, respectively. Each of the foreign plans requires employee and employer contributions, except for Taiwan, to which only employer contributions are made.
NOTE 9. DERIVATIVE INSTRUMENTS & FAIR VALUE
The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, notes payable to bank, and variable interest rate debt approximate their fair values either due to the short period to maturity of the instruments or due to the nature of underlying assets or liabilities.
Derivative Instruments
We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on monetary assets and liabilities denominated in currencies other than the applicable functional currency as well as on forecasted transactions denominated in currencies other than the applicable functional currency. These contracts are considered derivative instruments and are recorded as either assets or liabilities which are measured at fair value using internal models based on observable market inputs such as spot and forward rates.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 9. DERIVATIVE INSTRUMENTS & FAIR VALUE
(Continued)
For contracts that are designated and qualify as cash flow hedges, the unrealized gains or losses on the contracts are reported as a component of other comprehensive income (“OCI”) and are reclassified from accumulated other comprehensive income (“AOCI”) into earnings on the consolidated statement of operations when the hedged transaction affects earnings. As of September 30, 2011, $2.2 million of the unrealized loss is expected to be reclassified from AOCI into earnings over the next 12 months. For contracts that are not designated as hedges, the gains and losses on the contract are recognized in current earnings as other (income) expense.
Notional amounts of the derivative financial instruments not qualifying or designated as hedges were $47.1 million at September 30, 2011 and $20.0 million at December 31, 2010. For the three and nine months ended September 30, 2011, losses related to this type of derivative financial instruments were $1.0 million and $1.3 million, respectively. For the three and nine months ended September 30, 2010, losses related to this type of derivative financial instruments were $0.36 million and $0.04 million, respectively. The losses were recorded as other expense in our consolidated statement of operations.
Derivative financial instruments qualifying and designated as hedges are as follows:
| | September 30, 2011 | | | December 31, 2010 | |
| | Notional
Amount | | | Unrealized
(Loss) | | | Notional
Amount | | | Unrealized
(Loss) | |
| | (in thousands) | |
Foreign currency forward contracts | | $ | 84,330 | | | $ | (2,853) | | | $ | 2,161 | | | $ | (90) | |
| | | | | | | | | | | | | | | | |
Fair Value
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1 – Quoted prices in active markets for identical assets and liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level 3 – Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.
The following table presents the fair values and classification of our financial instruments measured on a recurring basis as of September 30, 2011:
| As of September 30, 2011 | |
| Classification | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | (in thousands) | |
Foreign currency forwards designated as hedges: | | | | | | | | | | | | |
Prepaid expenses | | $ | 225 | | | $ | - | | | $ | 225 | | | $ | - | |
Accrued expenses | | $ | 3,078 | | | $ | - | | | $ | 3,078 | | | $ | - | |
| | | | | | | | | | | | |
Foreign currency forwards not designated as hedges: | | | | | | | | | | | | |
Prepaid expenses | | $ | 449 | | | $ | - | | | $ | 449 | | | $ | - | |
Accrued expenses | | $ | 1,295 | | | $ | - | | | $ | 1,295 | | | $ | - | |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 9. DERIVATIVE INSTRUMENTS & FAIR VALUE
(Continued)
The following table presents the fair values and classification of our financial instruments measured on a recurring basis as of December 31, 2010:
| As of December 31, 2010 | |
| Classification | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | (in thousands) | |
Foreign currency forwards designated as hedges: | | | | | | | | | | | | | |
Prepaid expenses | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Accrued expenses | | | $ | 90 | | | $ | - | | | $ | 90 | | | $ | - | |
| | | | | | | | | | | | | |
Foreign currency forwards not designated as hedges: | | | | | | | | | | | | | |
Prepaid expenses | | | $ | 254 | | | $ | - | | | $ | 254 | | | $ | - | |
Accrued expenses | | | $ | 16 | | | $ | - | | | $ | 16 | | | $ | - | |
NOTE 10. COMMITMENTS AND CONTINGENCIES
Certain environmental laws can impose joint and several liabilities for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Hazardous substances and adverse environmental effects have been identified with respect to properties we own or previously owned and on adjacent areas.
In particular, our Elmira, New York manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of Hazardous Waste Sites (the “Site”) designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination.
In February 2006, we received a Special Notice Concerning a Remedial Investigation/Feasibility Study (“RI/FS”) for the Koppers Pond (the “Pond”) portion of the Site. The Notice stated that the EPA had documented the release and threatened release of hazardous substances into the environment at the Site, including releases into and in the vicinity of the Pond. The hazardous substances included metals and polychlorinated biphenyls.
A substantial portion of the Pond is located on our property. Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the “PRPs”) have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order of Consent (the “Order”) on September 29, 2006; the EPA approved and executed the Order that day.
The PRPs also signed a PRP Member Agreement to share the cost of the RI/FS Study on a per capita basis. We estimated our portion of the cost to be $0.12 million for which we established a reserve. As of September 30, 2011, we have spent $0.12 million with respect to the study and other activities relating to the Site.
The PRPs, with their consultants, developed and submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan. On September 7, 2011, the PRPs submitted a draft Remedial Investigation Report to the EPA. The PRPs are continuing to address the EPA comments and to perform the tasks required by the Work Plan and the Order.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 10. COMMITMENTS AND CONTINGENCIES
(Continued)
Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the Site. Environmental sampling on our property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and contamination in the Pond, and had found no evidence that our operations or property have contributed or are contributing to the contamination. Other than as described above, we have not established a reserve for any potential costs relating to this Site, as the issue whether remediation is necessary, and if so to what extent and cost, has yet to be determined.
We have notified all appropriate insurance carriers, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.
Although we believe, based upon information currently available, that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, may result in material liabilities to Hardinge.
NOTE 11. STOCK-BASED COMPENSATION
On May 3, 2011, our shareholders approved the 2011 Incentive Stock Plan (the “Plan”). The Plan’s purpose is to enhance the profitability and value of the Company for the benefit of its shareholders by attracting, retaining and motivating officers and other key employees who make important contributions to the success of the Company. The Plan reserves 750,000 shares of the Company’s Common Stock (as such amount may be adjusted in accordance with the terms of the Plan, the “Authorized Plan Amount”) to be issued for grants of several different types of incentives including incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock incentives and performance share incentives. Any shares of Common Stock granted under options or stock appreciation rights shall be counted against the Authorized Plan Amount on a one-for-one basis and any shares of Common Stock granted as awards other than options or stock appreciation rights shall be counted against the Authorized Plan Amount as two (2) shares of Common Stock for every one (1) share of Common Stock subject to such award. Authorized and issued shares of Common Stock or previously issued shares of Common Stock purchased by the Company for purposes of the Plan may be issued under the Plan.
Our 2002 Incentive Stock Plan authorized various long-term incentives (the “2002 Plan”). Subsequent to May 3, 2011, no grants have been made or will in the future be made under the 2002 Plan. However, all outstanding awards and grants under the 2002 Plan will remain in effect until the end of the corresponding terms of such awards and grants.
All of our stock-based compensation to employees is recorded as selling, general and administrative expenses in our statement of operations based on the fair value at the grant date of the award.
During the nine months ended September 30, 2011 and 2010, we did not issue any new stock options. Expenses related to stock options were not material for the three months and nine months ended September 30, 2011 and 2010.
During the nine months ended September 30, 2011 and 2010, we granted 57,780 and 70,340 restricted stock/units awards (the “RSA”), respectively. The total deferred compensation expenses associated with these awards, which were measured based on the fair value at the grant date, were $0.6 million and $0.4 million, respectively, which were being amortized over the specific service period.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 11. STOCK-BASED COMPENSATION
(Continued)
During the nine months ended September 30, 2011, we granted 54,000 performance share incentives (the “PSI”). We did not grant any PSIs during the same period in 2010. The total deferred compensation expenses associated with these PSI awards, which were measured based on the fair value at the grant date, were $0.7 million, which were being realized into earnings based on passage of time and achievement of performance criteria.
Total stock-based compensation expenses related to the RSAs and PSIs were $0.2 million and $0.1 million for the three months ended September 30, 2011 and 2010, respectively, and $0.5 million and $0.4 million for the nine months ended September 30, 2011 and 2010, respectively.
Unrecognized compensation and the expected weighted-average recognition periods as of September 30, 2011 and December 31, 2010, related to RSAs are as follows:
| | September 30, | | | December 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Unrecognized compensation cost | | $ | 1,002 | | | $ | 821 | |
Expected weighted-average recognition period for unrecognized compensation cost, in years | | 1.4 | | | 1.4 | |
| | | | | | | | |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 12. EARNINGS PER SHARE
The computation of earnings per share is as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands except per share data) | |
Basic earnings (loss) per share computation: | | | | | | | | | | | | |
Net earnings (loss) | | $ | 4,250 | | | $ | (1,198) | | | $ | 8,744 | | | $ | (7,158) | |
Earnings allocated to participating awards | | 56 | | | 1 | | | 120 | | | 3 | |
Net earnings (loss) applicable to common shareholders | | $ | 4,194 | | | $ | (1,199) | | | $ | 8,624 | | | $ | (7,161) | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding | | 11,467 | | | 11,409 | | | 11,461 | | | 11,409 | |
Basic earnings (loss) per share | | $ | 0.37 | | | $ | (0.11) | | | $ | 0.75 | | | $ | (0.63) | |
| | | | | | | | | | | | |
Diluted earnings (loss) per share computation: | | | | | | | | | | | | |
Net earnings (loss) | | $ | 4,250 | | | $ | (1,198) | | | $ | 8,744 | | | $ | (7,158) | |
Earnings allocated to participating awards | | 56 | | | 1 | | | 120 | | | 3 | |
Net earnings (loss) applicable to common shareholders | | $ | 4,194 | | | $ | (1,199) | | | $ | 8,624 | | | $ | (7,161) | |
| | | | | | | | | | | | |
Weighted average common shares outstanding | | 11,467 | | | 11,409 | | | 11,461 | | | 11,409 | |
Assumed exercise of stock options | | 25 | | | - | | | 26 | | | - | |
Assumed satisfaction of restricted stock conditions | | 1 | | | - | | | - | | | - | |
Assumed satisfaction of performance share conditions | | 40 | | | - | | | 40 | | | - | |
Weighted-average diluted shares outstanding | | 11,533 | | | 11,409 | | | 11,527 | | | 11,409 | |
Diluted earnings (loss) per share | | $ | 0.36 | | | $ | (0.11) | | | $ | 0.75 | | | $ | (0.63) | |
For the three months ended September 30, 2011 and 2010, 186,753 and 161,419 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive. For the nine months ended September 30, 2011 and 2010, 175,225 and 141,380 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 13. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2011 and 2010 are as follows:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (in thousands) | |
Net income (loss) | | $ | 4,250 | | | $ | (1,198) | | | $ | 8,744 | | | $ | (7,158) | |
Foreign currency translation adjustment | | (9,902) | | | 9,766 | | | 887 | | | 4,265 | |
Retirement plans related adjustment(1) | | 1,428 | | | (992) | | | 261 | | | (401) | |
Unrealized loss on cash flow hedges(2) | | (2,060) | | | - | | | (2,147) | | | - | |
Other comprehensive loss (income) | | (10,534) | | | 8,774 | | | (999) | | | 3,864 | |
Total comprehensive (loss) income | | $ | (6,284) | | | $ | 7,576 | | | $ | 7,745 | | | $ | (3,294) | |
(1) Tax effects on retirement plans related adjustments, in thousands, were $(326) and $173 for three months ended September 30, 2011 and 2010, respectively, and $(62) and $61 for nine months ended September 30, 2011 and 2010, respectively.
(2) Tax effects on unrealized gain (loss) on cash flow hedges, in thousands, were $260 and $-0- for three months ended September 30, 2011 and 2010, respectively, and $321 and $-0- for nine months ended September 30, 2011 and 2010, respectively.
Balances of the components of accumulated other comprehensive income (loss), net of accumulated tax effect, are as follows:
| | September 30, | | | December 31, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Foreign currency translation adjustments | | $ | 34,702 | | | $ | 33,815 | |
Retirement plans related adjustments | | (32,485) | | | (32,746) | |
Unrealized loss on cash flow hedges | | (2,237) | | | (90) | |
Accumulated other comprehensive income | | $ | (20) | | | $ | 979 | |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2011
NOTE 14. NEW ACCOUNTING STANDARDS
On January 1, 2011, we adopted Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force (“ASU 2009-13”). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. The adoption of this standard did not have material impact on our consolidated results of operations and financial condition.
In June 2011, the Financial Accounting Standards Board issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires companies to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two separate but consecutive statements. ASU 211-05 will be effective for our fiscal year beginning January 1, 2012. ASU 2011-05 is to be applied retrospectively, and early adoption is permitted. Adoption of this pronouncement is not expected to have a material effect on our consolidated financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview. The following Management’s Discussion and Analysis (“MD&A”) contains information that the Company believes is necessary to an understanding of the Company’s financial condition and associated matters, including the Company’s liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements, the accompanying notes to the financial statements (“Notes”) appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2010.
Our primary business is designing, manufacturing, and distributing high-precision computer controlled metal-cutting turning machines, grinding machines, vertical machining centers, and related accessories. We are geographically diversified with manufacturing facilities in Switzerland, Taiwan, the United States, China, and the United Kingdom, with sales to most industrialized countries. Approximately 77% of our 2010 sales were to customers outside of North America, 78% of our 2010 products sold were manufactured outside of North America, and 69% of our employees in 2010 were located outside of North America.
Our machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. Our management believes that a key performance indicator is our order level as compared to industry measurement of market activity.
During the nine months ended September 30, 2011, global economic conditions continued to improve as compared to the same period in 2010. As a result, we experienced higher levels of incoming orders and higher sales activity in almost all of the regions in which we conduct business.
Metrics on machine tool market activity monitored by our management include world machine tool consumption (domestic production plus imports, less exports) as reported annually by Gardner Publications in the Metalworking Insiders Report and metal-cutting machine orders as reported by the Association of Manufacturing Technology (“AMT”), the primary industry group for U.S. machine tool manufacturers. Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that are among the set of prospective customers for our products. One such measurement is the Purchasing Manager’s Index (“PMI”), as reported by the Institute for Supply Management. Another measurement is capacity utilization of U.S. manufacturing plants, as reported by the Federal Reserve Board. Similar information regarding machine tool consumption in foreign countries is published by trade associations in those countries.
Non-machine sales, which include collets, accessories, repair parts, and services, have typically accounted for approximately 24% of overall sales and are an important part of our business, especially in the U.S. where Hardinge has an installed base of thousands of machines. In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.
Other key performance indicators are geographic distribution of net sales and orders, gross profit as a percent of net sales, income from operations, working capital changes, and debt level trends. In an industry where constant product technology development has led to an average model life of three- to- five years, effectiveness of technological innovation and development of new products are also key performance indicators.
We are exposed to financial market risk resulting from changes in interest and foreign currency rates. The current global economic conditions, though improved from prior periods, have increased our exposure to the possible liquidity and credit risks of our counterparties.
We believe we have sufficient liquidity to fund our foreseeable business needs, including cash and cash equivalents, cash flows from operations, and our bank financing arrangements.
We monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal. Our cash and cash equivalents are diversified among depository institutions to minimize exposure to any one of these entities.
17
We are also subject to credit risks relating to the ability of hedging transactions counterparties to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance have been considered in the fair value measurements of our foreign currency forward exchange contracts.
We also expect that some of our customers and vendors may experience difficulty in maintaining the liquidity required to buy inventory or raw materials. We continue to monitor our customers’ financial condition in order to mitigate our accounts receivable collectability risks.
Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are, in alphabetical order, British Pound Sterling (“GBP”), Chinese Renminbi (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“TWD”), and Swiss Franc (“CHF”). Under U.S. generally accepted accounting principles, results of foreign subsidiaries are translated into U.S. Dollars (“USD”) at the average exchange rate during the periods presented. Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative data significantly. During the third quarter of 2011, as compared to the respective average values of those functional currencies in the third quarter of 2010, the value of USD decreased by a range of 4% to 25%. On a year to date basis, the value of USD decreased by a range of 5% to 22%, as compared to the respective year to date average values of those of functional currencies in the same period of 2010. The weaker USD resulted in favorable currency translation impact of approximately $5.4 million on orders and approximately $7.4 million on net sales in the three months September 30, 2011, and approximately $16.2 million on orders and approximately $18.3 million on net sales in the nine months ended September 30, 2011. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.
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Results of Operations
Summarized selected financial data for the three and nine months ended September 30, 2011 and 2010:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | 2010 | | $
Change | | %
Change | | | 2011 | | 2010 | | $
Change | | %
Change | |
| | (in thousands, except per share data) | |
| | | | | | | | | | | | | | | | | | |
Orders | | $ | 81,474 | | $ | 70,563 | | $ | 10,911 | | 16% | | | $ | 303,377 | | $ | 213,714 | | $ | 89,663 | | 42% | |
Net sales | | 90,389 | | 71,931 | | 18,458 | | 26% | | | 250,527 | | 174,999 | | 75,528 | | 43% | |
Gross profit | | 25,549 | | 17,937 | | 7,612 | | 42% | | | 67,928 | | 41,548 | | 26,380 | | 64% | |
% of net sales | | 28.3% | | 24.9% | | 3.4 pts. | | | | | 27.1% | | 23.7% | | 3.4 pts | | | |
Selling, general & administrative expenses | | 18,943 | | 18,717 | | 226 | | 1% | | | 54,609 | | 49,156 | | 5,453 | | 11% | |
% of net sales | | 21.0% | | 26.0% | | (5.0) pts. | | | | | 21.8% | | 28.1% | | (6.3) pts. | | | |
Gain on sale of assets | | (5) | | (732) | | 727 | | (99)% | | | (23) | | (960) | | 937 | | (98)% | |
Other expense (income) | | 284 | | 16 | | 268 | | N/M | | | 389 | | (627) | | 1,016 | | N/M | |
Income (loss) from operations | | 6,327 | | (39) | | 6,366 | | N/M | | | 12,953 | | (5,996) | | 18,949 | | N/M | |
% of net sales | | 7.0% | | (0.1)% | | 7.1 pts. | | | | | 5.2% | | (3.4)% | | 8.6 pts. | | | |
Income (loss) before income taxes | | 6,275 | | (124) | | 6,399 | | N/M | | | 12,817 | | (6,243) | | 19,060 | | N/M | |
Net income (loss) | | 4,250 | | (1,198) | | 5,448 | | N/M | | | 8,744 | | (7,158) | | 15,902 | | N/M | |
% of net sales | | 4.7% | | (1.7)% | | 6.4 pts. | | | | | 3.5% | | (4.1)% | | 7.6 pts. | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
N/M – The percentage calculation is not meaningful.
Reconciliation of Net Income to EBITDA
| | Three Months Ended
September 30, | | | Nine Months Ended
September 30, | |
| | 2011 | | | 2010 | | | $ Change | | | 2011 | | | 2010 | | | $ Change | |
| | (in thousands) | |
GAAP net income (loss) | | $ | 4,250 | | | $ | (1,198) | | | $ | 5,448 | | | $ | 8,744 | | | $ | (7,158) | | | $ | 15,902 | |
Plus: | Interest expense, net | | 52 | | | 85 | | | (33) | | | 136 | | | 247 | | | (111) | |
| Income tax expense | | 2,025 | | | 1,074 | | | 951 | | | 4,073 | | | 915 | | | 3,158 | |
| Depreciation & amortization | | 1,989 | | | 1,755 | | | 234 | | | 5,885 | | | 5,364 | | | 521 | |
EBITDA (1) | | $ | 8,316 | | | $ | 1,716 | | | $ | 6,600 | | | $ | 18,838 | | | $ | (632) | | | $ | 19,470 | |
(1) EBITDA, a non-GAAP financial measure, is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe provides additional information that is useful to gain an understanding of the factors and trends affecting our business.
19
Orders: Comparison of orders by geographical region for the three and nine months ended September 30, 2011 and 2010 is summarized below:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | 2010 | | $
Change | | % Change | | | 2011 | | 2010 | | $
Change | | % Change | |
| | (in thousands) | | | | | (in thousands) | | | |
North America | | $ | 20,167 | | $ | 15,462 | | $ | 4,705 | | 30% | | | $ | 72,788 | | $ | 48,052 | | $ | 24,736 | | 51% | |
Europe | | 29,735 | | 22,366 | | 7,369 | | 33% | | | 93,490 | | 58,591 | | 34,899 | | 60% | |
Asia & Other | | 31,572 | | 32,735 | | (1,163) | | (4)% | | | 137,099 | | 107,071 | | 30,028 | | 28% | |
| | $ | 81,474 | | $ | 70,563 | | $ | 10,911 | | 15% | | | $ | 303,377 | | $ | 213,714 | | $ | 89,663 | | 42% | |
Orders for the three months ended September 30, 2011 were $81.5 million, an increase of $10.9 million or 15% compared to the same period in 2010. Orders for the nine months ended September 30, 2011 were $303.4 million, an increase of $89.7 million or 42% compared to the same period in 2010. On a year to date basis, worldwide machine tools demand improved considerably compared to the same period in 2010 as the global economy recovered from the recent recessionary conditions. Further, certain countries in Asia, particularly China, have had strong economic growth which also led to increased demand for machine tools. This increased demand contributed to the improved order levels in all of our major markets and product lines. In addition, favorable foreign currency impact added approximately $5.4 million and $16.2 million to the overall increase for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010.
North American orders increased by $4.7 million, or 30%, and $24.7 million, or 51%, for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The increase in both periods was primarily in the U.S. and was driven by the improved economic environment as the U.S. economy rebounded from recessionary conditions and our distribution partners continued to gain traction in the market-place with our product lines.
European orders increased by $7.4 million, or 33%, and $34.9 million, or 60%, for the three and nine months ended September 30, 2011, respectively, compared to the same periods in 2010. The increase in both periods was driven by favorable foreign currency impact and an improved manufacturing environment in the region. Foreign currency had a favorable impact of approximately $4.3 million and $11.8 million to the overall European increase for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010. In addition, the current year impact of the Jones & Shipman acquisition contributed $0.2 million and $5.1 million to the increase in orders for the three and nine months ended September 30, 2011, respectively, when compared to the corresponding periods in 2010.
Asia & Other orders represented 39% and 45%, respectively, of the total orders for the three and nine months ended September 30, 2011. Compared to the same period in 2010, Asia & Other orders for the three months ended September 30, 2011 decreased by $1.2 million, or 4%. Orders from a China-based supplier to the consumer electronics industry were $1.5 million and $4.6 million for the three months ended September 30, 2011 and 2010, respectively. Excluding the orders from this customer, Asia & Other orders increased by $1.9 million, or 7%, in the third quarter of 2011 compared to the same quarter in 2010. When compared to the corresponding nine months period in 2010, Asia & Other orders for the nine months ended September 30, 2011 increased by $30.0 million, or 28%. Orders from the China-based customer were $12.5 million and $30.3 million for the nine months ended September 30, 2011 and 2010, respectively. Excluding the orders from this customer, Asia & Other orders increased by $47.8 million, or 62%, during the nine months ended September 30, 2011 compared to the corresponding period in 2010. The increase was driven by strong demand for machine tools in Asia, particularly in China. In addition, favorable foreign currency impact contributed approximately $1.1 million and $4.4 million to the Asia & Other increase in orders for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010.
20
Net Sales: Comparison of sales by geographical region for the three and nine months ended September 30, 2011 and 2010 is summarized below:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | 2010 | | $
Change | | %
Change | | | 2011 | | 2010 | | $
Change | | %
Change | |
| | (in thousands) | | | | | (in thousands) | | | |
North America | | $ | 22,480 | | $ | 12,877 | | $ | 9,603 | | 75% | | | $ | 58,204 | | $ | 43,124 | | $ | 15,080 | | 35% | |
Europe | | 33,293 | | 18,230 | | 15,063 | | 83% | | | 78,376 | | 44,161 | | 34,215 | | 77% | |
Asia & Other | | 34,616 | | 40,824 | | (6,208) | | (15)% | | | 113,947 | | 87,714 | | 26,233 | | 30% | |
| | $ | 90,389 | | $ | 71,931 | | $ | 18,458 | | 26% | | | $ | 250,527 | | $ | 174,999 | | $ | 75,528 | | 43% | |
Net sales for the three months ended September 30, 2011 were $90.4 million, an increase of $18.5 million or 26% compared to the same period in 2010. The increase was driven by higher demand for machine tools as the global economy rebounded from the recent economic crisis. In addition, favorable foreign currency impact contributed approximately $7.4 million to the overall increase for the three months ended September 30, 2011, when compared to the same period in 2010.
Net sales for the nine months ended September 30, 2011 were $250.5 million, an increase of $75.5 million or 43% compared to the same period in 2010. The increase was driven by higher demand for machine tools as the global economy rebounded from the recent economic crisis. The increased sales levels were noted in almost all of our regions particularly in Asia & Other which was primarily driven by sales activity in China. In addition, favorable foreign currency impact contributed approximately $18.3 million to the overall increase for nine months ended September 30, 2011, when compared to the same period in 2010.
North American net sales increased by $9.6 million, or 75%, and $15.1 million, or 35%, for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010. The increase was primarily driven by the impact of improved economic conditions in the U.S. and the favorable impact of our new distribution partners. Sales during the nine months ended September 30, 2010 were negatively impacted as our new distribution partner did not enter into the market until the end of the first quarter 2010.
European net sales increased by $15.1 million, or 83%, and $34.2 million, or 77%, for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010. The increase in both periods was driven by favorable foreign currency impact and higher demand for machine tools as the manufacturing environment in Europe improved. Foreign currency had a favorable impact of approximately $5.8 million and $14.4 million to the overall European increase for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010. In addition, the current year impact of our Jones & Shipman acquisition added $2.8 million and $5.3 million to the increases in net sales for the three and nine months ended September 30, 2011, respectively, when compared to the corresponding periods in 2010.
Asia & Other net sales for the three months ended September 30, 2011 decreased by $6.2 million, or 15% when compared to the same period in 2010. Sales to a China-based supplier to the consumer electronics industry were $1.3 million and $14.2 million for the three months ended September 30, 2011 and 2010, respectively. Excluding the sales to this customer, Asia & Other sales increased by $6.7 million, or 25%, in the third quarter of 2011 compared to the same quarter in 2010. When compared to the corresponding nine months period in 2010, Asia & Other sales for the nine months ended September 30, 2011 increased by $26.2 million, or 30%. Sales to the China-based customer were $16.7 million and $21.5 million for the nine months ended September 30, 2011 and 2010, respectively. Excluding the sales to this customer, Asia & Other sales increased by $31.0 million, or 47%, during the nine months ended September 30, 2011 compared to the same period in 2010. The increase was driven by strong demand for machine tools in Asia, particularly in China. In addition, favorable foreign currency impact contributed approximately $1.6 million and $3.9 million to the Asia & Other increase in net sales for the three and nine months ended September 30, 2011, respectively, when compared to the same periods in 2010.
21
Gross Profit: Gross profit for the three months ended September 30, 2011 was $25.5 million, an increase of $7.6 million, or 42.4%, when compared to the same period in 2010. Gross profit for the nine months ended September 30, 2011 was $67.9 million, an increase of $26.4 million, or 63.5%, when compared to the nine months ended September 30, 2010. The increased gross profit is primarily attributable to the increase in sales as well as higher manufacturing volumes against fixed manufacturing cost. Gross margin for the three and nine months ended September 30, 2011 were 28.3% and 27.1%, respectively, compared to 24.9% and 23.7% for the corresponding periods in 2010.
Selling, General and Administrative Expenses: Selling, general and administrative (SG&A) expenses were $18.9 million, or 21.0% of net sales for the three months ended September 30, 2011, an increase of $0.2 million, or 1.2%, compared to $18.7 million, or 26.0% of net sales for the three months ended September 30, 2010. SG&A expenses were $54.6 million, or 21.8% of net sales for the nine months ended September 30, 2011, an increase of $5.5 million or 11.1%, compared to $49.2 million, or 28.1% of net sales for the nine months ended September 30, 2010. With respect to the applicable three and nine month periods, the increase in SG&A expenses is primarily attributable to increased sales levels.
SG&A expense as a percentage of sales decreased by 5.0 percentage points and 6.3 percentage points, respectively, for the three and nine months ended September 30, 2011 as compared to the same periods in 2010. For both the three and nine month periods, the decrease is reflective of increasing sales volume and the impact associated with the successful transformational changes to our business model and continued focus on cost control.
SG&A expenses for the three months ended September 30, 2010 included charges of $1.5 million for professional service expenses related to the unsolicited tender offer initiated by Industrias Romi S.A and $0.6 million charge associated with the settlement of a tax audit concerning a foreign subsidiary of the Company. Exclusive of these charges, SG&A for the three months ended September 30, 2010 would have been $16.6 million, or 23.1% of net sales. SG&A expenses for the nine months ended September 30, 2010 included charges of $3.5 million for professional service expenses related to the unsolicited tender offer initiated by Industrias Romi S.A, $0.6 million charge associated with the settlement of a tax audit at a foreign subsidiary, and $0.3 million related to Jones & Shipman acquisition costs. Exclusive of these charges, SG&A for the nine months ended September 30, 2010 would have been $44.8 million, or 25.6% of net sales.
Foreign currency translation had unfavorable impact of approximately $1.5 million and $3.9 million for the three and nine months ended September 30, 2011, respectively.
Gain On Sale Of Assets: Gain on sale of assets for the three and nine months ended September 30, 2011 were not material. Gain on sale of assets for the three and nine months ended September 30, 2010 was primarily related to a $0.8 million gain on sale of certain fixed assets.
Other (Income) Expense: Other expenses for the three and nine months ended September 30, 2011 were $0.3 million and $0.4 million respectively. Other (income) expense for the three and nine months ended September 30, 2010 were $0.02 million and $(0.7) million, respectively. Other income for the nine months ended September 30, 2010 was primarily related to $0.7 million gain associated with the purchase of Jones & Shipman in the second quarter of 2010.
Income (Loss) From Operations: Income from operations was $6.3 million and $13.0 million for the three and nine months ended September 30, 2011, respectively, compared to a loss of $0.04 million and $6.0 million for the same periods in 2010.
Income Taxes: The provision for income taxes was $2.0 million and $4.1 million for the three and nine months ended September 30, 2011, compared to $1.1 million and $0.9 million for same periods in 2010. The effective tax rates were 32.3% and 31.8% for the three and nine months ended September 30, 2011, compared to (866.1)% and (14.7)% for the same periods in 2010.
This difference was driven by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded, by the mix of earnings by country, and by changes in our liabilities for uncertain tax positions.
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Each quarter, an estimate of the full year tax rate for jurisdictions not subject to a full valuation allowance is developed based upon anticipated annual results and an adjustment is made, if required, to the year-to-date income tax expense to reflect the full year anticipated effective tax rate.
We continue to maintain a full valuation allowance on the tax benefits of our U.S. net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, and Canadian deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.
The effective tax rates for the three and nine months ended September 30, 2011 differ from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded, and due to an increase to the accrued liability associated with uncertain tax positions.
Net Income (Loss): Net income for the three and nine months ended September 30, 2011 was $4.3 million and $8.7 million, respectively, compared to a net loss of $1.2 million and $7.2 million for the respective periods in 2010. Net income as a percentage of sales was 4.7% and 3.5% for the three and nine months ended September 30, 2011, respectively. Net loss as a percentage of sales was 1.7% and 4.1%, for the three and nine months ended September 30, 2010, respectively. The increase in net income is attributed to higher sales levels, improved gross profit, and effective cost control in SG&A expenses.
Summary of Cash Flows for the nine months ended September 30, 2011 and 2010:
| | Nine Months Ended
September 30, | |
| | 2011 | | | 2010 | |
| | (in thousands) | |
Net cash used in operating activities | | $ | (8,995) | | | $ | (3,120) | |
Net cash used in investing activities | | (12,612) | | | (3,634) | |
Net cash provided by financing activities | | 11,788 | | | 3,173 | |
Effect of exchange rate changes on cash and cash equivalents | | 135 | | | 451 | |
Decrease in cash and cash equivalents | | $ | (9,684) | | | $ | (3,130) | |
| | | | | | |
Capital expenditures (included in investing activities) | | $ | (13,520) | | | $ | (2,154) | |
During the nine months ended September 30, 2011, we used $9.0 million net cash in operating activities. Cash was primarily used for inventory growth which increased due to higher demand for our products and the related increase in production levels. Cash was also used to fund account and notes receivables, and prepaids and other assets as business activity levels increased. The outflow of cash was offset by cash provided by accounts payable and accrued expenses which increased due to higher production levels and higher customer deposits related to order activity.
During the nine months ended September 30, 2010, cash used in operating activities was $3.1 million, primarily as a result of improving business conditions. During this period, approximately $22.4 million cash was used to purchase inventory and to fund receivables and other current assets as a result of higher order volumes and resulting improved sales. The outflow of cash was offset by $22.0 million cash provided by accounts payable and accrued expenses/other liabilities which increased due to higher production activity and customer deposits.
Net cash used in investing activities was $12.6 million for the nine months ended September 30, 2011 compared to $3.6 million for the same period in 2010. The majority of the cash used in 2011 was related to investment in facilities and equipment in Switzerland and China. In 2010, we used $2.9 million to purchase Jones & Shipman.
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Cash flow provided by financing activities was $11.8 million for the nine months ended September 30, 2011 compared to $3.2 million for the same period in 2010. The increase was due to additional borrowings under our existing loan and credit facilities to fund our facility expansion in China and working capital needs.
Liquidity and Capital Resources
Our liquidity requirements primarily include funding for operations, including working capital requirements, and funding for capital investments and acquisitions. We expect to meet these requirements in the long term through cash provided by operating activities and cash available under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and changes in working capital needs. During the nine months ended September 30, 2011, cash flows from financing activities and available cash were sufficient to fund our investment activities, primarily capital expenditures for property, plant and equipment and other productive assets. We had additional borrowing capacity of $25.7 million at September 30, 2011, and $31.4 million at December 31, 2010, available under various credit facilities maintained by the Company and certain subsidiaries.
We assess on an ongoing basis our portfolio of operations, as well as our financial and capital structures, to ensure we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate and pursue acquisition opportunities that we believe will enhance our strategic position.
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Accordingly, there can be no assurance that our expectations will be realized. Such statements are based upon information known to management at this time. The Company cautions that such statements necessarily involve uncertainties and risk and deal with matters beyond the Company’s ability to control, and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are fluctuations in the machine tool business cycles, changes in general economic conditions in the U.S. or internationally, the mix of products sold and the profit margins thereon, the relative success of the Company’s entry into new product and geographic markets, the Company’s ability to manage its operating costs, actions taken by customers such as order cancellations or reduced 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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There have been no material changes to our market risk exposures during the first nine months of 2011. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2010 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2011, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, and determined that these controls and procedures were effective.
There have been no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2011 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 1.a. Risk Factors
There is no change to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Default upon Senior Securities
None
Item 4. (Removed and Reserved)
Item 5. Other Information
None
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PART II. OTHER INFORMATION
Item 6. Exhibits
The following exhibits are submitted electronically and filed with this report:
10.1 | | - | | Summary Sheet reflecting the changes made to Director Compensation Arrangements, incorporate by reference from the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2011. |
| | | | |
10.2 | | - | | Credit Agreement dated July 26, 2011 between Hardinge Machine Tools B.V., Taiwan Branch, and Mega International Commercial Bank Co., Ltd. |
| | | | |
10.3 | | - | | Loan Agreement dated August 31, 2011 between Hardinge Precision Machinery (Jiaxing) Co., Ltd., and China Construction Bank. |
| | | | |
31.1 | | - | | Chief Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
31.2 | | - | | Chief Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
32 | | - | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
The following exhibits are submitted electronically and furnished with this report:
101.INS | | - | | XBRL Instance Document |
| | | | |
101.SCH | | - | | XBRL Taxonomy Schema Document |
| | | | |
101.CAL | | - | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | | |
101.LAB | | - | | XBRL Taxonomy Extension Label Linkbase Document |
| | | | |
101.PRE | | - | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | | | |
101.DEF | | - | | XBRL Taxonomy Extension Definition Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Hardinge Inc.
November 9, 2011 | By: | /s/ Richard L. Simons | |
Date | | Richard L. Simons | |
| | President and Chief Executive Officer | |
| | (Principal Executive Officer) | |
| | | |
| | | |
November 9, 2011 | By: | /s/ Edward J. Gaio | |
Date | | Edward J. Gaio. | |
| | Vice President and Chief Financial Officer | |
| | (Principal Financial Officer) | |
| | | |
| | | |
November 9, 2011 | By: | /s/ Douglas J. Malone | |
Date | | Douglas J. Malone | |
| | Corporate Controller and Chief Accounting Officer | |
| | (Principal Accounting Officer) | |
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