FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 9/30/96
OR
|_| 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.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
New York 16-0470200
Hardinge Inc.
One Hardinge Drive
Elmira, NY 14902
(607) 734-2281
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 ____
As of September 30, 1996 there were 6,440,338 shares of Common
Stock of the Registrant outstanding.
INDEX
Part I Finacial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets at September
30, 1996 and December 31, 1995. 3
Consolidated Statements of Income and
Retained Earnings for the three months
ended September 30, 1996 and 1995 and the
nine months ended September 30, 1996 and
1995. 5
Condensed Consolidated Statements of Cash
Flows for the nine months ended September
30, 1996 and 1995. 6
Notes to Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 9
Part I I Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Default upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARDINGE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in Thousands)
Sept. 30, Dec. 31,
1996 1995
--------------------------
(Unaudited)
Assets
Current assets:
Cash ...................................... $ 4,938 $ 5,120
Accounts receivable ....................... 41,427 41,095
Notes receivable .......................... 6,056 5,053
Inventories ............................... 98,375 84,968
Deferred income taxes ..................... 2,573 2,585
Prepaid expenses .......................... 1,797 1,332
-------- --------
Total current assets ........................... 155,166 140,153
Property, plant and equipment:
Property, plant and equipment ............. 117,718 109,320
Less accumulated depreciation ............. 53,715 49,716
-------- --------
64,003 59,604
Other assets:
Notes receivable .......................... 12,034 10,936
Other ..................................... 95 163
-------- --------
12,129 11,099
-------- --------
Total assets ................................... $231,298 $210,856
======== ========
See accompanying notes.
HARDINGE INC. AND SUBSIDIARIES
Consolidated Balance Sheets--Continued
(Dollars In Thousands)
Sept. 30, Dec. 31,
1996 1995
--------------------------
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 11,119 $ 18,409
Notes payable to bank 10,711 10,504
Accrued expenses 13,756 9,297
Accrued pension plan expense 517 126
Accrued income taxes 1,522 1,323
Current portion long-term debt 714 714
--------------------------
Total current liabilities 38,339 40,373
Other liabilities:
Long-term debt 42,027 27,100
Accrued pension plan expense 1,133 1,087
Deferred income taxes 783 1,200
Accrued postretirement benefits 5,011 4,993
--------------------------
48,954 34,380
Shareholders' equity
Preferred stock, Series A, par value $.01:
Authorized - 2,000,000; issued - none
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 6,476,703 65 65
Additional paid-in capital 56,917 56,323
Retained earnings 95,594 86,666
Treasury shares (916) (2,599)
Cumulative foreign currency translation
adjustment (2,903) (1,728)
Deferred employee benefits (4,752) (2,624)
--------------------------
Total shareholders' equity 144,005 136,103
--------------------------
Total liabilities and shareholders' equity $231,298 $210,856
==========================
See accompanying notes.
HARDINGE INC AND SUBSIDIARIES
Consolidated Statements of Income and Retained Earnings (Unaudited)
(In Thousands, Except Per Share Data)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
-------------------------------------
Net Sales $47,577 $42,217 $162,465 $124,405
Cost of sales 30,474 27,778 107,553 81,846
---------------------------------------------------------------------------
Gross profit 17,103 14,439 54,912 42,559
Selling, general and
administrative expenses 10,849 9,490 33,365 26,311
---------------------------------------------------------------------------
Income from operations 6,254 4,949 21,547 16,248
Interest expense 739 172 1,936 1,145
Interest (income) (174) (326) (556) (622)
(Gain) on sale of asset (326)
---------------------------------------------------------------------------
Income before income taxes 5,689 5,103 20,167 16,051
Income taxes 2,254 1,921 7,942 6,290
---------------------------------------------------------------------------
Net income 3,435 3,182 12,225 9,761
Retained earnings at beginning
of period 93,258 79,361 86,666 74,853
Less dividends declared 1,099 3,297 2,071
---------------------------------------------------------------------------
Retained earnings at end of period $95,594 82,543 $95,594 $82,543
====================================
Weighted average number
of common shares outstanding 6,189 6,176 6,212 4,634
====================================
Per share data:
Net Income $ .56 $ .52 $ 1.97 $ 2.11
==================================
Dividends Declared $ .17 $ .00 $ .51 $ .45
==================================
See accompanying notes.
HARDINGE INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Nine Months Ended
September 30,
1996 1995
----------------------------------
Net cash (used in) operating activities ($2,145) ($ 16,143)
Investing activities:
Capital expenditures (10,320) (8,120)
Proceeds from sale of assets 26 497
----------------------------------
Net cash (used in) investing activities (10,294) (7,623)
Financing activities:
Increase (decrease) in short-term
notes payable to bank 823 (3,500)
Increase (decrease) in long-term debt 15,336 (12,152)
Sale (purchase) of treasury stock (606) (266)
Dividends paid (3,299) (3,022)
Proceeds from public stock offering 43,457
----------------------------------
Net cash provided by financing activities 12,254 24,517
Effect of exchange rate changes on cash 2 167
----------------------------------
Net (decrease) increase in cash ($ 183) $918
==================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 and nine month periods ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report for the year ended December 31, 1995.
NOTE B--INVENTORIES
Inventories are summarized as follows (dollars in thousands):
September 30, December 31,
1996 1995
-----------------------------------
Finished products $ 32,907 $29,231
Work-in-process 33,581 29,083
Raw materials and purchased components 31,887 26,654
--------- ---------
$98,375 $ 84,968
========= =========
NOTE C--CHANGES IN SHAREHOLDERS' EQUITY
In June 1995, the Company issued 2,540,000 shares of its common stock in a
public offering. Proceeds from the offering, net of commissions and expenses,
were $43,457,000. The proceeds were used to reduce the Company's debt, fund
building expansion, and fund working capital growth.
NOTE D--EARNINGS PER SHARE AND WEIGHTED SHARES OUTSTANDING
Earnings per share are calculated using a monthly weighted average shares
outstanding and include common stock equivalents related to restricted stock.
Third quarter and year to date 1995 averages have been calculated treating the
2,540,000 shares sold in the public offering as outstanding as of June 1995.
NOTE E--DIVIDENDS DECLARED
The third quarter 1996 dividends paid were declared in the third quarter of
1996, whereas the dividends paid in the third quarter of 1995 were declared in
the second quarter of 1995.
NOTE F--ACQUISITION
On November 29, 1995, the Company acquired 100% of the outstanding stock of
L. Kellenberger & Co. AG and subsidiary ("Kellenberger"), a St. Gallen,
Switzerland based manufacturer of grinding machines.
The acquisition was accounted for as a purchase. The three month period and
nine month period ended September 30, 1996 results of operations of Kellenberger
are included in the consolidated financial statements of the Company.
NOTE G--DEBT
In March, 1996 Hardinge entered into a seven-year $17,750,000 unsecured
credit agreement with a syndication of banks. The proceeds were applied to pay
down amounts on the Company's revolving loan agreement which had been used to
finance the acquisition of Kellenberger. This agreement calls for variable
quarterly interest payments based upon the London Interbank Offered Rates plus
additional basis points based upon attaining certain financial ratios. Principal
payments begin in May, 1998 and will be made in equal quarterly payments through
2003. Hardinge also entered into a cross-currency interest rate swap agreement
with a major international bank related to this borrowing. The swap agreement
effectively changes the dollar principal payment commitment to a commitment to
pay 21,000,000 Swiss Francs over the same period, the effect of which is to
hedge exchange rate fluctuations on the Kellenberger equity purchased in
November, 1995. The swap agreement also effectively changes the Company's
variable interest rate exposure to a fixed rate of 4.49%.
PART I, ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following are management's comments relating to significant changes
in the results of operations for the three month and nine month periods ended
September 30, 1996 and 1995 and in the Company's financial condition during the
nine month period ended September 30, 1996.
Results of Operations
Net Sales. Net sales for the quarter ended September 30, 1996 increased
by 12.7% to $47,577,000 from $42,217,000 in the same 1995 period. Year to date
sales of $162,465,000 for the first nine months of 1996 represent a 30.6%
increase over the $124,405,000 net sales for the same 1995 period.
Sales of machines accounted for $29,815,000 of net sales for the third
quarter of 1996, representing a 8.0% increase from the same 1995 period. Year to
date September 30, 1996 sales in the same product grouping accounted for
$104,554,000 or a 33.5% increase over the $78,339,000 in the same 1995 period.
Sales of non-machine products and services in the third quarter of 1996
increased to $17,762,000, a 21.3% increase over the levels in the same 1995
period, while year to date sales of this product group increased to $57,911,000,
a 25.7% increase over the previous year.
Machine shipments accounted for 62.7% of total net sales for the third
quarter and 64.4% for the first nine months of 1996. In 1995, sales of this
product group accounted for 65.3% and 63.0% of third quarter and first nine
month total net sales, respectively. The third quarter of 1995 included
significant sales of machines to the automotive industry. There were no such
sales in the third quarter of 1996. However, in the year to date comparison, the
inclusion of Kellenberger machines results in a higher percentage of machines in
1996. The proportion of Kellenberger's machine sales, as compared to non-machine
products, is higher than our traditional relationships.
Geographically, the largest amount of the third quarter sales increase
from 1995 occurred in European markets, where net sales increased by 156% to
$12,793,000 in 1996. European sales more than tripled from the nine month period
ended September 30, 1995, to $46,288,000 in the comparable period of 1996.
Approximately two-thirds of the increase in European sales in the third quarter
and year to date came as a result of the Kellenberger acquisition. Also, sales
of other Hardinge products increased, especially in France and England.
Shipments in our United States markets remained relatively flat compared to last
year.
Gross Profit. Gross margin, as a percentage of sales, was 35.9% in the
third quarter and 33.8% in the first nine months of 1996. During the same
periods of 1995, we achieved percentages of 34.2% in both periods. The third
quarter improvement resulted from sales mix and production efficiencies in both
the United States and Switzerland.
The benefit to margin from sales mix arises from both the type of
products sold as well as the product distribution channels. Non-machine products
and services traditionally have generated higher gross margins than the machine
category. In periods where a higher percentage of total sales is in this product
group, such as the third quarter of 1996, total company margins increase. Also,
margins were improved in the third quarter of 1996 with a higher percentage of
sales through our direct sales organizations, meaning there was a lower
percentage of discounted distributor based sales in the quarter.
In the United States, efforts to build up CobraTM inventory to meet the
quick order and delivery demands expected on this model have caused higher
production levels in manufacturing. At Kellenberger, production levels continue
to grow to meet the increasing demand for their products. These higher
production levels allow for the distribution of fixed manufacturing costs over a
larger number of units and therefore have a positive impact on gross margin.
The year to date 1996 decrease in gross margin percentage represents
the impact the sales mix had on first half results. During that period, the
percentage of machine sales to total sales was much higher than the previous
year and more of our sales occurred in areas where distributor discounts
affected margins.
Selling, General, and Administrative Expenses. Selling, general and
administrative ("SG&A") expenses, at 22.8% of sales in the third quarter of
1996, remained relatively flat to the 22.5% experienced in the same period of
1995. Year to date in 1996, these expenses represent 20.5%, compared to 21.1%
for the year to date period of 1995. The reduction in percentage results from
the fixed portion of these expenses being compared to a higher sales volume. The
addition of Kellenberger's expenses was the most significant factor in
increasing the amount of expense from year to year.
Income from Operations. Income from operations as a percentage of net
sales increased in the three and nine month periods ended September 30, 1996, to
13.1% and 13.3%, respectively, from the same 1995 periods, which were 11.7% and
13.1%, respectively. The third quarter increase resulted from the improvements
in gross margins. In the nine month period figures, a slight decrease in the
gross margin percentages is offset by a decrease in the SG&A percentages.
Interest Expense. Interest expense increased to $739,000 in the third
quarter of 1996, from $172,000 in the same 1995 period. Interest expense
increased in the first nine months of 1996 to $1,936,000 compared to $1,145,000
in the same 1995 period. The third quarter of 1995 benefited from the pay down
of debt using the proceeds of the May, 1995 public offering of stock. Higher
average borrowings to fund the acquisition of Kellenberger and the increase in
working capital resulted in higher interest expense in 1996.
Interest Income. Interest income decreased to $174,000 in the third
quarter of 1996 from $326,000 in the third quarter of 1995. Interest in the
third quarter of 1995 was earned on funds invested in interest bearing accounts
which were in excess of those required to pay down debt.
Gain on Sale of Assets. Results for the first nine months of 1995
included a gain of $326,000 (approximately $198,000 on an after-tax basis) on
the sale of a branch office building.
Income Taxes. The provision for income taxes as a percentage of net
income was 39.6% and 39.4%, for the third quarter and first nine months of 1996,
respectively, compared to 37.6% and 39.2% for the same 1995 periods. The third
quarter of 1995 was favorably affected by profits in the Company's western
European operations for which no tax provision was recorded because of the
availability of net operating loss carryforwards.
Net Income. Net income for the third quarter of 1996 was $3,435,000, an
increase of $253,000 or 8.0% from the same 1995 period. Year to date 1996 net
income was $12,225,000, an increase of 25.2% or $2,464,000 from the same 1995
period. These increases represent an accumulation of the factors discussed
above. Geographically, results of operations in Western Europe have improved
significantly on higher sales, while performance in North America continues to
provide the large base of profitable operations.
Quarterly Information
The following table sets forth certain quarterly financial data for
each of the periods indicated.
Three Months Ended
--------------------------------------------
March 31, June 30, Sept. 30,
1996 1996 1996
--------------------------------------------
(in thousands, except per share data)
--------------------------------------------
Net Sales $ 59,622 $ 55,266 47,577
Gross Profit 19,332 18,477 17,103
Income from operations 7,762 7,531 6,254
Net income 4,470 4,320 3,435
Net income per share .72 .69 .56
Weighted average shares
outstanding 6,199 6,228 6,189
Three Months Ended
---------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1995 1995 1995 1995
---------------------------------------------
(in thousands, except per share data)
---------------------------------------------
Net Sales $ 40,687 $ 41,501 $ 42,217 $ 56,181
Gross Profit 13,913 14,207 14,439 18,052
Income from operations 5,498 5,801 4,949 8,287
Net income 3,304 3,275 3,182 5,084
Net income per share .92 .75 .52 .82
Weighted average shares
outstanding 3,584 4,349 6,176 6,217
Liquidity and Capital Resources
Hardinge's current ratio at September 30, 1996 was 4.05:1 compared to
3.47:1 at December 31, 1995. Current assets increased by $15,013,000 during the
first nine months of 1996 as we increased our work in process and finished goods
prior to the launch of our newest product, the CobraTM CNC lathe. Also, there
has been an increase in inventory caused by a build up of machines for the
automotive industry, which are being equipped with specialized tooling and
accessories for fourth quarter shipment. Accounts payable have decreased by
$7,290,000 due to the timing of receipt and payment of invoices. Accrued
expenses have increased by $4,459,000, primarily from expenses to be paid in the
fourth quarter.
In the first nine months of 1996, operating activities used $2,145,000
of cash, while operating activities in the same period of 1995 used $16,143,000
of cash. Operating activities used cash in these periods, notwithstanding the
Company's improved net income, primarily because of the increases in inventory
and accounts receivable. During these periods, we have required cash for capital
expenditures and dividend payments in our investing and financing activities. We
have used the cash flow from income and our revolving credit facility to finance
the increase in current assets, capital expenditures and dividend payments in
the first nine months of 1996.
Hardinge provides long-term financing for the purchase of its equipment
by qualified customers. We periodically sell portfolios of our customer notes to
financial institutions in order to reduce debt and finance current operations.
Our customer financing program has an impact on our month-to-month borrowings,
but it has had little long-term impact on our working capital because of the
ability to sell the underlying notes. We sold $20,000,000 of customer notes in
the first nine months of 1996, compared to $7,700,000 during the same period of
1995. There was no need to sell more notes in the first nine months of 1995,
since the cash received from the stock offering more than covered operational
needs during that period.
Year to date capital expenditures in 1996 were approximately
$10,320,000. We completed the expansion of the Elmira manufacturing facility and
the related equipment is operational. We have increased our demonstration
equipment in our foreign locations and purchased productive equipment at
Kellenberger during the third quarter. We now anticipate capital expenditures
will be approximately $12,000,000 during 1996, which includes further
expenditures to improve productivity and distribution efforts.
Hardinge maintains a loan agreement with two banks which provides for
borrowing up to $30,000,000 on a revolving basis through August 1, 1997. At that
time, the outstanding amounts convert to a term loan payable quarterly over four
years through 2001. This facility, along with other short term credit
agreements, provide for immediate access of up to $45,000,000. At September 30,
1996, outstanding borrowings under these arrangements totaled $34,274,000.
In March, 1996, we completed negotiations with a syndication of banks
on a long term note agreement for $17,750,000. The proceeds were used to pay
down the amount on the revolving loan agreement which had originally been used
to finance the acquisition of Kellenberger. Quarterly interest payments began in
1996, and principal payments begin in 1998. The agreement contains financial
covenants consistent with the revolving loan agreement.
We currently have a commitment from a bank for an additional
$20,000,000 revolving credit line to be structured similar to the existing
agreement. We anticipate completing the negotiation of terms and drafting and
execution of documents during the fourth quarter of 1996, bringing our total
availability of revolving credit funds to $65,000,000. The increase will provide
us with further flexibility in financing our world-wide operations. We believe
that the currently available funds and credit facilities, along with internally
generated funds, will provide sufficient financial resources for ongoing
operations.
In September, 1996, our Board of Directors authorized the repurchase of
up to 640,000, or approximately 10% of the outstanding shares of our common
stock. The stock purchases will be made principally through open market
transactions and will occur from time to time as market conditions warrant. To
date, 26,500 shares have been purchased at an average cost of $23.87 per share.
At its meeting on October 22, 1996, our Board of Directors declared a
dividend of $.19 per share payable on December 10, 1996, to shareholders of
record on November 27, 1996. This dividend rate represents a 12% increase over
the previous quarterly rate.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Default upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27. Financial Data Schedule.
B. Reports on Form 8-K
Current report on Form 8-K, dated August 27, 1996 filed in
connection with a press release announcing the Company's
stock repurchase program.
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.
By:_____________________________________________________
Robert E. Agan
Chairman of the Board,
Chief Executive Officer
Date: November 8, 1996
By:_____________________________________________________
J. Allan Krul
President,
Chief Operating Officer
Date: November 8, 1996
By:_____________________________________________________
Malcolm L. Gibson
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 1996
By:_____________________________________________________
Richard L. Simons
Vice President - Finance
(Principal Accounting Officer)
Date: November 8, 1996