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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the fiscal year ended December 31, 1996.
[ ] 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 0-15760
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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, New York 14902-1507
- ---------------------------------------- -------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (607) 734-2281
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities pursuant to section 12(g) of the Act::
Common Stock with a par value of $.01 per share
Preferred Stock purchase rights
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 and 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 21, 1997:
Common Stock, $.01 par value - $111,362,636
The number of shares outstanding of the issuer's common stock as of February 21,
1997:
Common Stock, $.01 par value 6,499,338 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Hardinge Inc.'s Proxy Statement filed with the Commission on March
11, 1997 are incorporated by reference to Part III of this Form.
PART I
ITEM 1. - BUSINESS
General
- -------
Hardinge Inc.'s principal executive offices are located at One Hardinge Drive,
Elmira, New York 14902-1507; telephone (607) 734-2281. The Company has five
wholly owned subsidiaries. Canadian Hardinge Machine Tools, Ltd. located near
Toronto, Ontario was established by Hardinge Inc. in 1958. Hardinge Machine
Tools, Ltd. was established in the United Kingdom in 1939 and became a wholly
owned subsidiary in 1981 when it redeemed the shares previously held by others.
Hardinge Brothers GmbH was established by the Company in Germany in 1987. In
November 1995, the Company acquired 100% of the outstanding stock of L.
Kellenberger & Co., AG of St. Gallen, Switzerland and its subsidiary,
Kellenberger, Inc. of Elmsford, New York (collectively referred to as
"Kellenberger").
The Company's headquarters is located in Chemung County, New York, which is on
the south-central border of upstate New York. The Company has manufacturing
facilities located in Chemung County, New York and in St. Gallen, Switzerland.
The Company manufactures the majority of the products it sells, purchasing a few
machine accessories from other manufacturers for resale.
References to Hardinge Inc., the "Company", or "Hardinge" are to Hardinge Inc.
and its predecessors and subsidiaries, unless the context indicates otherwise.
The Company changed its name in 1995 from Hardinge Brothers, Inc., to Hardinge
Inc.
Products
- --------
Hardinge Inc. has been a manufacturer of industrial-use Super-Precision(R) and
general precision turning machine tools since 1890. Turning machines, or lathes,
are power-driven machines used to remove material from a rough-formed part by
moving multiple cutting tools arranged on a turret assembly against the surface
of a part rotating at very high speeds in a spindle mechanism. The
multi-directional movement of the cutting tools allows the part to be shaped to
the desired dimensions. On parts produced on Hardinge machines, those dimensions
are often measured in millionths of inches. Hardinge considers itself to be a
leader in the field of producing machines capable of consistently and
cost-effectively producing parts to those dimensions.
In the late 1970's, Hardinge began to produce computer numerically controlled
("CNC") machines which use commands from an on-board computer to control the
movement of cutting tools and rotation speeds of the part being produced. The
computer control enables the operator to program operations such as part
rotation, tooling selection and tooling movement for a specific part and then
store that program in memory for future use. The machine is able to produce
parts while left unattended when connected to automatic bar-feeding or robotics
equipment designed to supply raw materials. Because of this ability, as well as
superior speed of operation, a CNC machine is able to produce the same amount of
work as several manually controlled machines, as well as reduce the number of
operators required. Since the introduction of CNC turning machines, continual
advances in computer control technology have allowed for easier programming and
additional machine capabilities.
In 1994, the Company expanded its machine tool line to include CNC vertical
turning machines and vertical machining centers, the first sales of which
occurred during the first quarter of 1995. Prior to that, all of the Company's
turning machines were horizontal which means that the spindle holding the
rotating part and the turret holding the cutting tools are arranged on a
horizontal plane. On a vertical turning machine, the spindle and turret are
aligned on a vertical plane, with the spindle on the bottom. A vertical turning
machine permits the customer to produce
1
larger, heavier and more oddly shaped parts on a machine that uses less floor
space when compared to a traditional horizontal turning machine.
A vertical machining center cuts material differently than a turning machine.
These machines are designed to remove material from stationary, prismatic
(box-like) parts of various shapes with rotating tools that are capable of
milling, drilling, tapping, reaming and routing. Machining centers have
mechanisms that automatically change tools based on commands from a built-in
computer control without the assistance of an operator. Machining centers are
generally purchased by the same customers as turning machines and are being
marketed by the Company on the basis that a customer will be able to obtain
machining centers with the same quality and reliability as the Company's turning
machines and will be able to obtain its turning machines and machining centers
from a single supplier.
The Company has further extended its machine offerings into the grinding machine
sector of the metal-cutting machine tool industry with the acquisition of
Kellenberger. Grinding is a machining process where a surface is shaped to
closer tolerances with a rotating abrasive wheel or tool. Grinding machines can
be used to finish parts of various shapes and sizes.
The grinding machines of Kellenberger are used to grind the inside and outside
diameters of round, cylindrical parts. Such grinding machines are typically used
to provide for a more exact finish on a part which has been partially completed
on a lathe. The grinding machines of Kellenberger, which are manufactured in
both CNC and manually controlled models, are generally purchased by the same
type of customers as other Hardinge equipment and furthers the ability of the
Company to be a sole source supplier for its customers.
During 1996, the Company took yet another step to address a new market segment
with the introduction of its Cobra(TM)42 CNC lathe. A basic, no frills, yet very
reliable and accurate lathe, the Cobra provides a relatively inexpensive product
offering for potential customers with limited financial resources. Further
refining its ability to provide products aimed at particular types of customer
applications, Hardinge also introduced two new "long bed" lathes in 1996. These
machines are specially designed to manufacture parts of greater length than
would normally be possible using smaller, more conventional lathes.
Multiple options are available on the broad range of the Company's machines
which allow customers to customize their machines for the specific purpose and
cost objective they require. The Company produces machines for stock with
popular option combinations for immediate delivery, as well as machines made to
specific customer orders. In recent years, the Company has increasingly
emphasized the engineering of complete systems for customers who desire one or
more CNC machines to produce a specific part. In configuring complete systems,
the Company provides, in addition to its machines, the necessary computer
programming and tooling, as well as robotics and other parts handling equipment
manufactured by it or others.
All Hardinge machines can be used to produce parts from all of the standard
ferrous and non-ferrous metals, as well as plastics, composites and exotic
materials.
In addition, the Company offers the most extensive line available in the
industry of workholding and toolholding devices, which may be used on both its
turning machines and those produced by others. The Company considers itself to
be a worldwide leader in the design and manufacture of workholding and
toolholding devices. It also offers a complete line of six-foot and twelve-foot
bar feed systems for its CNC and manual turning machines, which hold the
workpiece steady and feed it into the turning machine. Also produced are a
variety of other optional equipment and accessories for its machines. During
1996 the Company further expanded its workholding products with the addition of
its Sure-Grip(TM) line of power jaw chucks.
The Company offers various warranties on its equipment and considers post-sales
support to be a critical element of its business. Services provided include
operation and maintenance training, maintenance, and in-field repair. The
Company's
2
intent, where practical, is to provide readily available replacement parts
throughout the life of the machine.
Markets and Distribution
- ------------------------
Sales are principally in the United States and Western Europe. In addition,
sales are made to customers in Canada, China, Mexico, Japan, Australia and other
foreign countries.
The Company primarily markets its machine tools through its direct sales force
and through distributors and manufacturers' representatives in the United States
and abroad. The Company uses a similar system of employee sales personnel and
independent distributors in the United Kingdom and Canada. In other countries,
the Company primarily sells through distributors.
The Company's U.S. distributors have the exclusive right to distribute its
products in particular markets, although these markets are located in less
industrialized areas of the country.
The Company's sales personnel earn a fixed salary plus commission based upon a
percentage of net sales. Certain of the Company's distributors operate
independent businesses, purchase machine tools and non-machine products from the
Company and maintain inventories of these products and spare parts for their
customers, while other distributors merely sell machine tools on behalf of the
Company. The Company's commission schedule is adjusted to reflect the level of
aftermarket support offered by its distributors.
As is common in its industry, the Company provides long-term financing for the
purchase of its equipment by qualified customers. The Company regards this
program as an important part of its marketing efforts, particularly to
independent machine shops. Customer financing is offered for a term of up to
seven years, with the Company retaining a security interest in the equipment. In
response to competitive pressures, the Company occasionally offers this
financing at below market interest rates or with deferred payment terms. The
present value of the difference between the actual interest charged on customer
notes for periods during which finance charges are waived or reduced and the
estimated rate at which the notes could be sold to financial institutions is
accounted for as a reduction of the Company's net sales.
The Company's non-machine products mainly are sold in the United States through
telephone orders to a toll-free "800" telephone number, which is linked to an
on-line computer order entry system maintained by the Company at its Elmira
headquarters. In most cases, the Company is able to package and ship in-stock
tooling and repair parts within 24 hours of receiving orders. With more popular
items, the Company can package and ship within several hours.
The Company promotes recognition of its products in the marketplace through
advertising in trade publications and participation in industry trade shows. In
addition, the Company markets its non-machine products through publication of
general catalogue and other targeted catalogues, which it distributes to
existing and prospective customers.
A substantial portion of the Company's sales are to small and medium-sized
independent job shops, which in turn sell machined parts to their industrial
customers. Industries directly and indirectly served by the Company include
automotive, medical equipment, aerospace, defense, recreational equipment, farm
equipment, construction equipment, energy, and transportation. Sales to the
automobile industry accounted for 9% and 21% of the Company's net sales in 1996
and 1995, respectively. In 1994, no industry or customer accounted for more than
4% of the Company's net sales.
The Company operates in a single business segment, industrial machine tools.
3
Competitive Conditions
- ----------------------
The primary competitive factors in the marketplace for the Company's machine
tools are reliability, price, delivery time, service and technological
characteristics. There are many manufacturers of machine tools in the world.
They can be categorized by the size of material their products can machine and
the precision level they can achieve. In the size and precision level the
Company addresses with its turning machines and machining centers, the primary
competition comes from several Japanese manufacturers. Several German
manufacturers also compete with the Company, primarily in Europe. The
Kellenberger machines compete with Japanese, German and other Swiss
manufacturers. Management considers its segment of the industry to be extremely
competitive. The Company believes that it brings superior quality, reliability,
value, availability, capability and support to its customers.
Sources and Availability of Raw Materials
- -----------------------------------------
The Company manufactures and assembles its lathes and machining centers and
related products at its Elmira, New York plant. The Kellenberger grinding
machines and related products are manufactured at its St. Gallen, Switzerland
plant. Products are manufactured by the Company from various raw materials,
including cast iron, sheet metal, bar steel and bearings. Although the Company's
operations are highly integrated, it purchases a number of components from
outside suppliers, including the computer and electronic components for its CNC
lathes and machining centers. There are multiple suppliers for virtually all of
the Company's raw material and components and the Company has not experienced a
supply interruption in recent years.
A major component of the Company's CNC machines is the computer and related
electronics package. The Company purchases these components for its lathes and
machining centers primarily from Fanuc Limited, a large Japanese electronics
company, except on occasions where a significant customer order specifies a
different control. While the Company believes that design changes could be made
to its machines to allow sourcing from several other existing suppliers, and
occasionally does so for these special orders, a disruption in the supply of the
Fanuc components could cause the Company to experience a substantial disruption
of its operations, depending on the circumstances at the time. Kellenberger
assembles an electronics package of its own design.
The Company utilizes several quality and process control programs, including
Total Quality Management. The Company believes that it operates its quality
system to the requirements of the ISO 9000 Quality System of the International
Standards Organization and is postured to obtain ISO 9000 certification if
required for marketing. The ISO 9000 Quality System is an internationally
accepted quality standard for commercial operations, such as product design
verification, reviewing the quality of suppliers, imperfection and testing
requirements and maintaining quality records. The Company believes that these
initiatives have helped it maintain the quality and reliability of its products.
Research and Development
- ------------------------
The Company's ongoing research and development program involves creating new
products and modifying existing products to meet market demands and redesigning
existing products to reduce the cost of manufacturing. The research and
development department is staffed with experienced design engineers with
technical through doctorate degrees.
The cost of research and development, all of which has been charged to
operations, amounted to $7,932,000, $5,713,000, and $5,218,000, in 1996, 1995
and 1994, respectively.
4
Patents
- -------
Although the Company holds several patents with respect to certain of its
products, it does not believe that its business is dependent to any material
extent upon any single patent or group of patents.
Seasonal Trends and Working Capital Requirements
- ------------------------------------------------
The Company is not subject to significant seasonal trends. Its business, and
that of the machine tool industry in general, is cyclical. However, the
Company's quarterly results are subject to significant fluctuation based on the
timing of its shipments of machine tools, which are largely dependent upon
customer delivery requirements. Traditionally, the Company has experienced
reduced activity during the third quarter of the year, largely as a result of
vacations scheduled at its U.S. and European customers' plants and the Company's
policy of closing its facilities during the first two weeks of July. As a
result, the Company's third-quarter net sales, income from operations and net
income typically have been the lowest of any quarter during the year. During
1995 and 1994, shipments of certain large orders offset this historical pattern
in the third quarter
The ability to deliver products within a short period of time is an important
competitive criterion. Also, the Company feels it is important to provide
availability of replacement parts for a machine throughout its useful life.
These factors contribute to a requirement that the Company carry significant
amounts of inventory.
For many years, the Company has periodically sold a substantial portion of the
customer notes receivable generated by its customer financing program to various
financial institutions. While the Company's customer financing program has an
impact on its month-to-month borrowings, it has had little long-term impact on
its working capital requirements because of the sales of these notes.
Backlog
- -------
The Company normally ships its machine products within two to three months after
order. The Company's order backlog at December 31, 1996 and 1995 was $71,400,000
and $54,335,000, respectively.
Orders are generally subject to cancellation by the customer prior to shipment.
The level of unfilled orders at any given date during the year may be materially
affected by the timing of the Company's receipt of orders and the speed with
which those orders are filled. Accordingly, the Company's backlog is not
necessarily indicative of actual shipments or sales for any future period, and
period-to-period comparisons may not be meaningful.
Governmental Regulations
- ------------------------
The Company believes that its current operations and its current uses of
property, plant and equipment conform in all material respects to applicable
laws and regulations.
Environmental Matters
- ---------------------
The Company's operations are subject to extensive federal and state legislation
and regulation relating to environmental matters. The Company believes it is
currently
5
in material compliance with applicable environmental laws and regulations in
each of the countries in which it operates.
Future regulations, under the Clean Air Act and otherwise, are expected to
impose stricter emission requirements on the metal working industry. While the
Company believes that current pollution control measures at most of the emission
sources at its manufacturing facilities will meet these anticipated future
requirements, additional measures at some sources may be required. The Company
does not believe that these anticipated future requirements are likely to have a
material adverse effect upon its financial condition, results of operations or
competitive position.
Certain environmental laws can impose joint and several liability 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. Activities at properties owned by the Company and on adjacent areas
have resulted in environmental impacts.
In particular, the Company's New York manufacturing facility is located within
the Kentucky Avenue Well Field on the National Priorities List of hazardous
waste sites designated for cleanup by the United States Environmental Protection
Agency ("EPA") because of groundwater contamination. The Kentucky Avenue Well
Field site encompasses an area of approximately three square miles which
includes sections of the Town of Horseheads and the Village of Elmira Heights in
Chemung County, New York. The Company, however, has never been named as a
potentially responsible party at the site or received any requests for
information from EPA concerning the site. Environmental sampling on the
Company's property within this site under supervision of regulatory authorities
has identified off-site sources for such groundwater contamination and has found
no evidence that the Company's property is contributing to the contamination.
Environmental sampling at the Company's former New York manufacturing facility
following the removal of an underground storage tank disclosed the presence of
hydrocarbon contamination in surrounding soils. An environmental consultant
retained by the Company prepared a site assessment and remedial action plan
which were adopted and approved by the New York State Department of
Environmental Conservation. Pursuant to the timetable set forth in the remedial
action plan, the Company completed the construction phase of the cleanup in the
first quarter of 1996 at a cost of approximately $400,000. The Company
anticipates that ongoing operation and maintenance expenses for the cleanup are
anticipated to be less than $100,000 annually.
Although the Company believes, based upon information currently available to
management, that it will not have material liabilities for environmental
remediation, there can be no assurance that future remedial requirements or
changes in the enforcement of existing laws and regulation, which are subject to
extensive regulatory discretion, will not result in material liabilities.
Employees
- ---------
As of December 31, 1996, the Company employed 1,415 persons, 1,175 of whom were
located in the United States. None of the Company's employees are covered by
collective bargaining agreements. Management believes that relations with the
Company's employees are good.
Foreign Operations and Export Sales
- -----------------------------------
Information related to foreign and domestic operations and sales is included in
Note 5 to consolidated financial statements contained in this Annual Report. The
Company believes that its subsidiaries operate in countries where the economic
climate is relatively stable.
6
ITEM 2. - PROPERTIES
Pertinent information concerning the principal properties of the Company and its
subsidiaries is as follows:
Acreage (Land)
Square Footage
Location Type of Facility (Building)
- ------------------------------------ ------------------------------------------- -------------------------
Owned Properties
Horseheads, New York Manufacturing, Engineering, Turnkey 80 acres
Systems, Marketing, Sales, Demonstration, 515,000 sq. ft.
Service and Administration
Elmira, New York Warehouse 12 acres
176,000 sq. ft.
St. Gallen Manufacturing, Engineering, Turnkey 8 acres
Switzerland Systems, Marketing, Sales, Demonstration, 155,000 sq. ft.
Service and Administration
Lease
Expiration
Location Type of Facility Square Footage Date
- ---------------------------------------- --------------------------------- ---------------------- -----------------
Leased Properties
Exeter, England Sales, Marketing, Service, 20,000 sq. ft. 6/30/97
Turnkey System and
Administration
Krefeld, Germany Sales, Service 1,500 sq. ft. 12/31/97
Elmsford, New York Sales, Service 9,500 sq. ft. 5/31/97
Los Angeles, California Sales, Service 14,500 sq. ft. 10/31/97
Demonstration
Toronto, Canada Sales, Service 5,800 sq. ft. 6/5/2001
Charlotte, NC Sales, Service 6,400 sq. ft. 3/31/2006
Demonstration
ITEM 3. - LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental to
its operations. None of the litigation in which the Company is currently
involved, individually or in the aggregate, is material to its financial
condition or results of operations.
7
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matters were submitted to a vote of
security holders.
PART II
ITEM 5. - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to May of 1995, the Company's common stock was traded in a local,
over-the-counter market in small amounts and on an irregular basis. The Company
was aware that these and other transfers took place, but often was without
knowledge of whether the transfer was a sale, was without consideration or was
for re-registration. Valuation of the stock was made from time-to-time for tax
and other purposes and some of said valuations are known to the Company. For
example, the stock was valued quarterly by a qualified independent appraiser
retained by the Company during the first quarter of 1995, for purposes of
Employee Stock Ownership Plan administration. Also, First Albany Corporation had
supplied the Company with quarterly data of actual known trades.
For periods prior to the Company's May, 1995 public offering, the following
table reflects the highest and lowest values known to the Company from the
foregoing described sources. Since May 25, 1995, the Company has been traded on
the NASDAQ market under the symbol "HDNG". The table also includes dividends per
share, by quarter. The Company has paid five dividends in past years; in
January, March, June, September and December. In 1995, the Board of Directors
announced its intent to discontinue the special January dividend, therefore only
four dividends were paid in 1996.
1996 1995
------------------------------------- --------------------------------
Values Values
------------------------------------- --------------------------------
High Low Dividends High Low Dividends
------------------------------------- --------------------------------
Quarter Ended
March 31 $28 1/2 $25 $ .17 $17 1/4 $12 1/4 $ .40
June 30 35 1/2 26 .17 20 1/4 17 1/4 .15
September 30 31 3/4 20 3/8 .17 26 1/2 19 1/8 .15
December 31 29 23 .19 26 3/4 23 3/8 .17
At February 21, 1997, there were 1,450 holders of record of common stock.
Dividend amounts as well as high and low values have been restated for the first
quarter of 1995 to reflect the reclassification of stock, as explained in the
notes to the financial statements.
8
ITEM 6. - SELECTED FINANCIAL DATA
The following selected financial data is derived from the audited consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes and other information
included herein (dollar amounts in thousands except per share data).
Year Ended December 31
1996 1995 1994 1993 1992
------------------------------------------------------------------
STATEMENT OF INCOME DATA
Net sales $ 220,295 $ 180,586 $ 117,336 $ 98,437 $ 84,797
Cost of sales 145,264 119,975 76,937 63,169 55,905
------------------------------------------------------------------
Gross profit 75,031 60,611 40,399 35,268 28,892
Selling, general and
administrative expenses 45,058 36,076 27,882 25,804 24,864
Restructuring costs (2) 1,086
------------------------------------------------------------------
Operating income 29,973 24,535 12,517 9,464 2,942
Interest expense 2,770 1,369 1,479 1,343 1,380
Interest (income) (889) (927) (453) (763) (1,160)
(Gain) on sale of assets (326) (442)
------------------------------------------------------------------
Income before income taxes 28,092 24,419 11,933 8,884 2,722
Income taxes 10,804 9,574 5,214 3,730 1,152
------------------------------------------------------------------
Income before cumulative effect of
changes in accounting methods 17,288 14,845 6,719 5,154 1,570
Cumulative effect of
changes in accounting methods(3) (2,754)
------------------------------------------------------------------
Net income (loss) $ 17,288 $ 14,845 $ 6,719 $ 5,154 $ (1,184)
==================================================================
Weighted average number of common
shares outstanding (1) 6,224 4,969 3,573 3,565 3,513
Per share data: (1)
Income before
cumulative effect of
changes in accounting
methods $2.78 $2.99 $1.88 $1.45 $ .45
Cumulative effect of
changes in accounting
methods (3) (.79)
------------------------------------------------------------------
Net income (loss) $2.78 $2.99 $1.88 $1.45 $(.34)
==================================================================
Cash dividends declared
per share $ .70 $ .62 $ .84 $ .79 $ .74
BALANCE SHEET DATA
Working capital $ 116,256 $ 99,780 $ 60,520 $ 58,455 $ 54,035
Long-term portion of notes
receivable 11,791 10,936 7,744 12,460 9,536
Total assets 229,162 211,582 121,726 111,169 98,461
Long-term debt 37,156 27,100 15,164 18,357 11,571
Shareholders' equity (3) 147,545 136,103 79,776 75,462 73,067
(1) All share and per share data has been restated to reflect the
reclassification of stock in 1995, as explained in the notes to the
financial statements.
(2) During 1992, the Company significantly restructured its overhead
functions, primarily in its foreign subsidiaries. Nonrecurring costs of
statutorily required severance payments and other costs associated with
the restructuring totaled $1,086,000 ($641,000 after tax).
(3) The cumulative effect of changes in accounting principles for the year
ended December 31, 1992 represent the adoption, as of January 1, 1992, of
(a) FASB No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions," resulting in a $2,867,000 decrease in net income (net of
income tax benefit of $1,683,000), and (b) FASB No. 109, "Accounting for
Income Taxes," resulting in a $113,000 increase in net income.
9
ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following table sets forth the net sales by product line for the periods
indicated:
For the years ended December 31,
(in thousands)
1996 1995 1994
-----------------------------------------
Machine sales $ 144,725 $ 117,381 $ 65,829
Non-machine products and
services 75,570 63,205 51,507
-----------------------------------------
Total $ 220,295 $ 180,586 $ 117,336
=========================================
Results of Operations
1996 Compared to 1995
Net Sales: Net sales for the year 1996 increased by 22.0% or $39,709,000 to
$220,295,000 from $180,586,000 in 1995. Net sales in the European markets
increased by $30,846,000 or 121.5%, primarily as a result of inclusion of a full
year's sales volume of L. Kellenberger & Co. AG, the wholly owned subsidiary
purchased on November 29, 1995. European sales of other Hardinge products
increased as well, particularly in England and France. Sales in domestic U.S.
markets increased by $10,753,000 or 7.9%, where a decline in sales to the U.S.
automotive industry was more than offset by increased sales to other market
segments plus the very successful launch of the Company's new low cost lathe
product during the second half of 1996. Shipments to the automobile industry
accounted for 9% of the Company's 1996 sales compared to 21% in 1995.
The Company experienced a substantial increase in machine units sold during
1996. This increase is primarily a result of aggressive new product
introductions and the inclusion of a full year's sales of Kellenberger grinders.
Sales of non-machine products and services continue to represent a
significant revenue source for the Company. 1996 sales of these products and
services were $75,570,000, an increase of $12,365,000 over the prior year. The
growth of these sales in 1996 is primarily caused by increased levels of
customer activity plus sales of new products introduced during the year. Sales
of these products and services account for approximately 35% of total sales
dollars in both 1996 and 1995.
Gross Profit: Gross profit increased by $14,420,000 or 23.8% to $75,031,000
in 1996, primarily as a result of increased sales. Gross profit as a percentage
of sales improved to 34.1% in 1996 from 33.6% in 1995. The improvement resulted
in part from the Company's use of advanced technology to upgrade its
manufacturing efficiency. Another factor contributing to this increase was a
higher portion of sales through the Company's direct sales organizations,
relative to sales made to independent distributors, where discounts are
generally higher. Sales of non-machine products and services continue to
generate higher gross margins than machine sales. However, since both these
sales categories increased at about the same rate during 1996, the comparison of
gross profit between 1996 and 1995 was not effected by this mix. Increasing
sales volume and improvements in manufacturing processes at the Company's
Kellenberger subsidiary also contributed to the improvement in gross profit
during 1996.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses ("SG&A") as a percentage of net sales increased only
slightly during 1996, in spite of the large increase in volume and the inclusion
of a full year's expenses for the Kellenberger
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operation. 1996's SG&A expenses represented 20.5% of sales compared to 20.0% in
1995. 1996's expenses include increased costs for product sales promotion, both
for new product introductions and for the International Manufacturing Technology
Show held in Chicago in September. This show, held every two years, is a major
event for the industry.
Income from Operations: Income from operations increased by $5,438,000 to
$29,973,000 in 1996 compared to $24,535,000 in 1995. As a percentage of net
sales, income from operations remained constant at 13.6% during both years.
Interest Expense: Interest expense during 1996 totaled $2,770,000 compared
to $1,369,000 in 1995. Interest expense during 1995 benefited from a mid-year
paydown of debt as a result of the May, 1995 public offering of stock. 1996
interest cost increased as a result of higher average outstanding debt to fund
the Kellenberger acquisition and increased working capital requirements.
Interest Income: Interest income remained relatively constant during both
years. During 1995, interest income was unusually high as a result of the
temporary investment of cash received from the Company's public stock offering.
Normally, interest income is mainly attributable to financing of customer
purchases. During 1996 a significant increase in the volume of customer
financing transactions resulted in interest income being about equal to the
prior year.
Gain on Sale of Assets: 1995's income includes a gain of $326,000
(approximately $198,000 on an after-tax basis) resulting from the sale of a
branch office building.
Income Taxes: The provision for income taxes as a percentage of pre-tax
income was 38.5% and 39.2%, respectively, for 1996 and 1995. The 1996
consolidated tax rate was impacted favorably by a larger proportion of foreign
income which was taxed at rates slightly lower than in the United States.
Net Income: Net income for 1996 was $17,288,000 compared to $14,845,000 in
1995, an increase of 16.5%. The increase represents an accumulation of the
factors discussed above. Geographically, results of operations in Western Europe
have improved significantly on higher sales. Inclusion of a full year's results
of Kellenberger was a primary factor in this improvement. Performance in North
America continues to provide the large base of profitable operations.
1995 Compared to 1994
- ---------------------
Net Sales: Net sales for the year ended December 31, 1995, increased 53.9%
to $180,586,000 from $117,336,000 in 1994. Sales in the domestic U.S. markets
increased by $44,610,000 or 48.5%, reflecting positive economic conditions and
continued strength in machine tool purchases by the auto industry. Net sales in
the European markets increased by $13,076,000 or 106.1% with particular strength
from the UK and French markets as the economies there continued to expand. In
other worldwide marketplaces, sales increased by 42.9% led mainly by growth in
shipments to Asia. The acquisition of L. Kellenberger & Co. AG ("Kellenberger")
did not result in a material impact on the year's sales and net income figures
as only their results for the month of December were included in the Company's
1995 results.
11
Unit volumes increased in substantially all of the Company's Computer
Numerically Controlled (CNC) machine lines. Shipments of the Company's newly
introduced vertical CNC lathes and vertical CNC machining centers exceeded
beginning of the year expectations. Shipments to the automobile industry of
those new models, as well as horizontal CNC lathes, contributed to increased
sales during the year with sales to the U.S. manufacturers accounting for 21% of
the Company's 1995 net sales compared to 4% in 1994.
Sales of non-machine products and services increased by 22.7% accounting for
$63,205,000 or 35.0% of total net sales for the 1995 year compared to
$51,507,000 or 43.9% of total sales for 1994. Sales in this product line
increased in all of the Company's predominant geographical markets. The positive
economic conditions in those areas contributed to increases in sales.
Gross Profit: Gross profit increased 50.0% to $60,611,000 in 1995, from
$40,399,000 in 1994. This increase was primarily the result of increased unit
volumes. Gross profit as a percentage of sales was 33.6% in 1995 compared to
34.4% in 1994. Sales in the lathe and other machine tool product group
traditionally have generated lower gross margins than the non-machine products
and services group. Therefore, overall gross margin as a percentage of sales is
negatively affected when sales in the lathe and other machine tool product group
account for a larger percentage of overall net sales. The 1995 gross profit
percentage was also affected by production start up costs for the Company's new
machine introductions. These negative impacts were partially offset by the
ability to spread fixed overhead costs over a larger number of units sold. The
decline of the dollar against the Japanese yen, particularly in the first half
of 1995, did not have a significant impact on year to year comparisons of gross
profit due to the Company's foreign currency arrangements and lower discounts
given.
Selling, General, and Administrative Expenses: Selling, general and
administrative ("SG&A") expenses decreased as a percent of net sales to 20.0%
from 23.8% in 1994. This improvement indicates the success of the Company's cost
control strategy of holding increases in this category to a minimum during
periods of higher sales growth. Increases occurred primarily in the commission
and other volume based expenditures, and advertising and show expenses where
money was spent to promote new products.
Income from Operations: Income from operations increased 96.0% to
$24,535,000 in 1995 from $12,517,000 in 1994. Income from operations as a
percentage of net sales increased to 13.6% in 1995 from 10.7% in 1994.
Interest Expense: Interest expense in 1995 decreased by $110,000 from 1994.
This resulted from a decrease in average outstanding debt due to the pay down of
debt with the proceeds of the public offering in May, 1995. Additional
borrowings to fund working capital growth partially offset this benefit.
Interest Income: Interest income increased $474,000 in 1995 from 1994
primarily due to interest earned on cash from the public offering temporarily
placed in interest bearing accounts.
Income Taxes: The provision for income taxes as a percentage of income
before income taxes was 39.2% for 1995 as compared to 43.7% for
12
1994. The 1995 consolidated tax rate was lower due to profits in the Company's
Western European operations for which no tax provision was recorded because of
tax credits available from net operating loss carryforwards which were fully
utilized in 1995.
Net Income: Net income for 1995 was $14,845,000, an increase of $8,126,000,
or 120.9% from 1994. Net income from operations in all geographic locations
increased. The largest dollar increase occurred in domestic operations while
Western European operations generated positive results after incurring losses in
1994.
Liquidity and Capital Resources: The Company's current ratio at December
31, 1996 was 4.20:1 compared to 3.47:1 at December 31, 1995. Current assets
increased by $12,423,000 during 1996, with inventory increasing by $14,938,000,
primarily in support of new product introductions and to meet customer delivery
requirements. Cash at December 31, 1996 decreased by $2,484,000 from the
previous year end.
Current liabilities decreased by $4,053,000, primarily as a result of a
reduction of $6,342,000 in accounts payable due to the timing of receipt and
payment of invoices.
Operating activities generated cash of $3,038,000 in 1996, compared to 1995 when
operations consumed cash of $9,409,000. This $12,447,000 increase in cash from
operating activities is a result of several factors. Higher earnings in 1996
provided $2,443,000 of the increase, while net increases in non-cash charges
added another $3,034,000. Finally, a slowing of the rapid working capital growth
experienced in 1995 was a primary contributor to a reduction of $6,970,000 in
the growth of net operating assets during 1996, which accounts for the remainder
of the improvement in cash generated by operating activities. The Company's
major investing and financing activities during 1996 consisted of an aggressive
program of capital investment and an increase in dividends.
As is common in its industry, the Company provides long-term financing for the
purchase of its equipment by qualified customers. The Company regards this
program as an important part of its marketing efforts, particularly to
independent machine shops. Customer financing is
13
offered for a term of up to seven years, with the Company retaining a security
interest in the purchased equipment. In the event of a customer default and
foreclosure, it is the practice of the Company to recondition and resell the
equipment. It has been the Company's experience that such equipment resales have
realized the approximate remaining contract value.
In order to reduce debt and finance current operations, the Company periodically
sells a substantial portion of its underlying customer notes receivable to
various financial institutions. In 1996, the Company sold $27,255,000 of
customer notes compared to $12,955,000 sold during 1995 reflecting the increase
in notes available for sales as the number of shipments financed through the
Company's program have increased in 1996 compared to 1995. Although the Company
has no formal arrangements with financial institutions to purchase its customer
notes receivable, it has not experienced difficulty in arranging such sales.
While the Company's customer financing program has an impact on its
month-to-month borrowings from time-to-time, it has had little long-term impact
on its working capital because of the sales of the underlying customer notes
receivable. The amount of long-term customer notes receivable held by the
Company increased to $11,791,000 at December 31, 1996 from $10,936,000 at
December 31, 1995.
Total capital expenditures in 1996 were $12,734,000. The Company completed its
expansion project at the Elmira manufacturing facility which was begun in 1995
and all related equipment is now operational, accounting for the majority of
those expenditures. During 1996, the Company's United Kingdom subsidiary began
construction of a new building to house its operations which were formerly
located in leased facilities. Total 1996 capital expenditures for this project
were approximately $2,100,000. The project's total cost at completion during the
first quarter of 1997 is expected to be $2,700,000. Also during 1996, additional
demonstration equipment was placed at foreign locations as the Company's
marketing efforts continued to expand globally.
The Company paid total dividends of $4,332,000 during 1996. At its meeting in
October, 1996, the Board of Directors increased the quarterly dividend to $.19
per share, representing an 11.8% increase from the previous regular quarterly
dividend rate of $.17 per share.
The Company has revolving loan agreements with several U.S. banks providing for
unsecured borrowing up to $50,000,000 on a revolving basis, $30,000,000 through
August 1, 1997, and $20,000,000 through November 1, 1999. At those times, the
outstanding amounts convert, at the Company's option, to term loans payable
quarterly over four years through 2001 and 2003, respectively. As of December
31, 1996, total borrowings under these agreements were $18,691,000.
The Company's Kellenberger subsidiary maintains lines of credit with commercial
banks which permit borrowing in Swiss francs equivalent to approximately
$9,000,000. These lines are secured by Kellenberger's land and buildings. At
December 31, 1996, total borrowings under these agreements were $7,950,000.
These facilities, along with a $5,000,000 unsecured short term line with another
bank, provided for immediate access of up to $65,000,000 at December 31, 1996.
Outstanding borrowings under these arrangements totaled $29,641,000 at that
time.
14
During the first quarter of 1996, the Company entered into a long-term borrowing
agreement for $17,750,000 with a syndication of banks. The proceeds were used to
repay revolving loan borrowing which had originally been used to finance the
acquisition of Kellenberger. Quarterly interest payments on this term loan began
during 1996, and principal repayments will commence in 1998. The agreement
contains financial and other covenants consistent with the revolving loan
agreements.
The annual report contains statements of a forward-looking nature relating to
the financial performance of Hardinge Inc. Such statements are based upon
information known to management at this time. The company cautions that such
statements necessarily involve risk, because actual results could differ
materially from those projected. Among the many factors that could cause actual
results to differ from those set forth in the forward-looking statements are
changes in general economic conditions in the U.S. or internationally, actions
taken by customers or competitors, the receipt of more or fewer orders than
expected, and changes in the cost of materials. The company undertakes no
obligation to revise its forward-looking statements if unanticipated events
alter their accuracy.
The Company currently intends to use its improved financial condition
to seek growth opportunities in new products, international markets, and
strategic acquisitions. Management believes that the currently available funds
and credit facilities, and internally generated funds, will provide sufficient
financial resources for its ongoing operations.
15
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HARDINGE INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
December 31, 1996
Audited Consolidated Financial Statements
Report of Independent Auditors .................................. 17
Consolidated Balance Sheets ..................................... 18
Consolidated Statements of Income ............................... 20
Consolidated Statements of Shareholders' Equity ................. 21
Consolidated Statements of Cash Flows ........................... 22
Notes to Consolidated Financial Statements ...................... 23
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
16
Report of Independent Auditors
------------------------------
Board of Directors
Hardinge Inc.
We have audited the accompanying consolidated balance sheets of Hardinge Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hardinge Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Syracuse, New York
January 27, 1997
17
HARDINGE INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
December 31
1996 1995
--------------------------
Assets
Current assets:
Cash $ 2,636 $ 5,120
Accounts receivable 41,150 41,095
Notes receivable 5,070 5,053
Inventories 99,906 84,968
Deferred income taxes 2,158 2,585
Prepaid expenses 1,656 1,332
--------------------------
Total current assets 152,576 140,153
Property, plant and equipment:
Land and buildings 40,468 38,653
Machinery, equipment and fixtures 72,736 66,676
Office furniture, equipment and vehicles 4,402 3,991
--------------------------
117,606 109,320
Less accumulated depreciation 53,716 49,716
--------------------------
63,890 59,604
Other assets:
Notes receivable 11,791 10,936
Deferred income taxes 651 726
Other 254 163
--------------------------
12,696 11,825
--------------------------
Total assets $ 229,162 $ 211,582
==========================
18
December 31
1996 1995
------------------------
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 12,067 $ 18,409
Notes payable to bank 10,950 10,504
Accrued expenses 10,676 9,423
Accrued income taxes 1,017 1,323
Deferred income taxes 896
Current portion of long-term debt 714 714
------------------------
Total current liabilities 36,320 40,373
Other liabilities:
Long-term debt 37,156 27,100
Accrued pension plan expense 1,485 1,087
Deferred income taxes 1,657 1,926
Accrued postretirement benefits 4,999 4,993
------------------------
45,297 35,106
Shareholders' equity:
Preferred stock, Series A, par value $.01 per share;
authorized 2,000,000; issued - none
Common stocks, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 6,476,703 at December 31, 1996;
6,457,703 at December 31, 1995 65 65
Additional paid-in capital 57,027 56,323
Retained earnings 99,622 86,666
Treasury shares (343) (2,599)
Cumulative foreign currency translation adjustment (3,731) (1,728)
Deferred employee benefits (5,095) (2,624)
------------------------
Total shareholders' equity 147,545 136,103
------------------------
Total liabilities and shareholders' equity $ 229,162 $ 211,582
========================
See accompanying notes.
19
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands Except Per Share Data)
Year ended December 31
1996 1995 1994
--------------------------------------
Net sales $ 220,295 $ 180,586 $ 117,336
Cost of sales 145,264 119,975 76,937
--------------------------------------
Gross profit 75,031 60,611 40,399
Selling, general and administrative expenses 45,058 36,076 27,882
--------------------------------------
Income from operations 29,973 24,535 12,517
Interest expense 2,770 1,369 1,479
Interest (income) (889) (927) (453)
(Gain) on sale of assets (326) (442)
--------------------------------------
Income before income taxes 28,092 24,419 11,933
Income taxes 10,804 9,574 5,214
--------------------------------------
Net income $ 17,288 $ 14,845 $ 6,719
======================================
Weighted average number of common shares
outstanding 6,224 4,969 3,573
======================================
Per share data:
Net income per share $ 2.78 $ 2.99 $ 1.88
======================================
Cash dividends declared per share $ .70 $ .62 $ .84
======================================
See accompanying notes.
20
Hardinge Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(In thousands)
-----------------------------------------------------------------------------------
Cumulative
Foreign
Additional Currency Deferred Total
Common Paid-in Retained Treasury Translation Employee Shareholders'
Stock Capital Earnings Stock Adjustment Benefits Equity
===================================================================================================================================
Balance at December 31, 1993 $9,444 $619 $71,206 ($565) ($1,866) ($3,376) $75,462
Net income 6,719 6,719
Dividends declared (3,072) (3,072)
Foreign currency translation adjustment (8) (8)
Amortization (long-term incentive plan) 810 810
Shares awarded pursuant to long-term
incentive plan 36 550 (575) 11
Payment on ESOP loan 200 200
Net purchase of treasury stock (346) (346)
----------------------------------------------------------------------------------
Balance at December 31, 1994 9,444 655 74,853 (361) (1,874) (2,941) 79,776
Net income 14,845 14,845
Dividends declared (3,032) (3,032)
Foreign currency translation adjustment 146 146
Reclassification Class A and B
to new Common Stock and change
in par value from $ 5.00 to $.01 (9,405) 9,405 0
Issuance of 2,540,000 common shares
in public offering 25 43,559 43,584
Issuance of 95,500 shares for long-term
incentive plan 1 1,377 (1,378) 0
Stock bonuses awarded 518 502 1,020
Amortization (long-term incentive plan) 1,345 1,345
Tax benefit from long-term incentive plan 802 802
Payment on ESOP loan 350 350
Net purchase of treasury stock 7 (2,740) (2,733)
----------------------------------------------------------------------------------
Balance at December 31, 1995 65 56,323 86,666 (2,599) (1,728) (2,624) 136,103
Net income 17,288 17,288
Dividends declared (4,332) (4,332)
Foreign currency translation adjustment (2,003) (2,003)
Shares awarded pursuant to long-term
incentive plan 259 2,779 (3,038) 0
Issuance of 18,000 shares for long-term
incentive plan 486 (486) 0
Amortization (long-term incentive plan) 1,053 1,053
Net purchase of treasury stock (41) (523) (564)
----------------------------------------------------------------------------------
Balance at December 31, 1996 $65 $57,027 $99,622 ($343) ($3,731) ($5,095) $147,545
==================================================================================
See accompanying notes.
21
HARDINGE INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
Year ended December 31
1996 1995 1994
--------------------------------------
Operating activities
Net income $ 17,288 $ 14,845 $ 6,719
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,433 5,952 4,354
Provision for deferred income taxes 1,408 (642) (786)
(Gain) on sale of assets (326) (442)
Foreign currency transaction (gain) loss (556) 267 (147)
Changes in operating assets and liabilities:
Accounts receivable (387) (14,114) (4,340)
Notes receivable (882) (3,255) 5,467
Inventories (16,439) (21,248) (6,249)
Other assets (562) 1,060 109
Accounts payable (6,167) 7,240 2,603
Accrued expenses 1,896 657 3,922
Accrued postretirement benefits 6 155 80
--------------------------------------
Net cash provided by (used in) operating activities 3,038 (9,409) 11,290
Investing activities
Capital expenditures - net (12,734) (17,703) (8,046)
Proceeds from sale of assets 510 864
Acquisition of L. Kellenberger & Co. AG, net of
cash acquired (19,232)
--------------------------------------
Net cash (used in) investing activities (12,734) (36,425) (7,182)
Financing activities
Increase (decrease) in short-term notes
payable to bank 1,591 (2,730) 2,791
Increase (decrease) in long-term debt 10,478 11,936 (3,193)
(Purchase) of treasury stock, net of stock bonus (564) (1,713) (346)
Dividends paid (4,332) (3,993) (2,864)
Proceeds from stock offering 43,584
--------------------------------------
Net cash provided by (used in) financing activities 7,173 47,084 (3,612)
Effect of exchange rate changes on cash 39 87 (67)
--------------------------------------
Net (decrease) increase in cash (2,484) 1,337 429
Cash at beginning of year 5,120 3,783 3,354
--------------------------------------
Cash at end of year $ 2,636 $ 5,120 $ 3,783
======================================
See accompanying notes.
22
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996
1. Significant Accounting Policies
Nature of Business
Hardinge Inc. is a machine tool manufacturer, which designs, manufactures and
distributes metal cutting lathes, grinding machines, machining centers and
tooling and accessories related to metal cutting machines. Sales are principally
in the United States and Western Europe. Sales are also made to customers in
Canada, China, Mexico, Japan, Australia, and other foreign countries. A
substantial portion of the Company's sales are to small and medium - sized
independent job shops, which in turn sell machined parts to their industrial
customers. Industries directly and indirectly served by the Company include
automotive, medical equipment, aerospace, defense, recreational equipment, farm
equipment, construction equipment, energy and transportation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Property, Plant and Equipment
Property additions, including major renewals and betterments, are recorded at
cost and are depreciated over their estimated useful lives. Upon retirement or
disposal of an asset, the asset and related allowance for depreciation are
eliminated and any resultant gain or loss is credited or charged to income.
Depreciation is provided on the straight-line and sum of the years digits
methods. Total depreciation expense on property, plant and equipment was
$6,300,000, $4,538,000, and $3,388,000 for 1996, 1995 and 1994, respectively.
Income Taxes
The Company accounts for income taxes using the liability method according to
Financial Accounting Standards Board Statement No. 109. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. Certain balance sheet amounts in 1995 were reclassified
to conform to 1996 presentation.
Foreign Currency Translation
In accordance with Financial Accounting Standards Board Statement No. 52, all
balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and income statement items are translated at an average exchange
rate for the year. The gain or loss resulting from translating subsidiary
financial statements is recorded as a separate component of shareholders'
equity. Transaction gains and losses are recorded in operations.
23
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Foreign Exchange Contracts
Gains and losses on contracts designated as hedges of existing assets and
liabilities are accrued as exchange rates change and are recognized in income.
Gains and losses on contracts designated as hedges of net investments in foreign
subsidiaries are accrued as exchange rates change and are recognized in
Shareholders' Equity as foreign currency translation adjustment. Gains and
losses on contracts designated as hedges of identifiable foreign currency firm
commitments are deferred and included in the measurement of the related foreign
currency transaction.
Income Per Share
Income per share is computed using the weighted average number of shares of
common stock outstanding during the year including common stock equivalents
related to restricted stock. Restricted shares awarded under the Company's
long-term incentive stock plans are treated as issued shares at time of award
and are treated as outstanding in accordance with the treasury stock method over
the period of their vesting. The number of shares outstanding has been adjusted
to reflect the stock transactions as explained in Note 4 to the financial
statements.
Research and Development Costs
The cost of research and development, all of which has been charged to
operations, amounted to $7,932,000, $5,713,000, and $5,218,000 in 1996, 1995 and
1994, respectively.
Stock Based Compensation
The Company grants restricted shares of common stock to certain officers and
other key managers. The Company accounts for restricted share grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees"
(see note 6).
Revenue Recognition
The Company recognizes revenue from product sales upon shipment of the product.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. They are summarized as follows:
December 31,
1996 1995
--------------------------
(in thousands)
Finished products $ 29,966 $ 29,231
Work-in-process 35,479 29,083
Raw materials and purchased components 34,461 26,654
--------------------------
$ 99,906 $ 84,968
==========================
24
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Financing Arrangements
Long-term debt consists of:
December 31
1996 1995
--------------------------
(in thousands)
Note payable, due in annual installments of $714,000
through 1998, with interest payable quarterly at 9.38% $ 1,429 $ 2,143
Note payable, under revolving loan agreement, with
interest at 6.45% as of December 31, 1996 8,691 25,671
Note payable, under revolving loan agreement, with
interest at 6.21% as of December 31, 1996 10,000
Note payable, under term loan agreement, with an
effective interest rate of 4.49% at December 31, 1996 17,750
--------------------------
37,870 27,814
Less current portion 714 714
--------------------------
$ 37,156 $ 27,100
==========================
The Company maintains an unsecured credit arrangement with two banks which
provides for borrowing in several currencies up to the equivalent of $30,000,000
on a revolving loan basis through August 1, 1997. The credit agreement provides
for repayment of the outstanding principal beginning September 30, 1997 in 16
consecutive equal quarterly installments. Interest charged on the debt is based
on London Interbank Offered Rates (LIBOR) plus a fixed percentage. A commitment
fee of 3/8 of 1% is payable on the unused portion of the facility. At December
31, 1996 total borrowings under the facility were $8,691,000. Approximately
$1,691,000 of the borrowing was denominated in British pounds sterling.
In November, 1996, the Company entered into an unsecured credit arrangement with
a bank which provides for borrowing in several currencies up to the equivalent
of $20,000,000 on a revolving loan basis through November 1, 1999. The credit
agreement provides for repayment of the then outstanding principal beginning
January 1, 2000 in 16 consecutive equal quarterly installments. Interest charged
on the debt is based on LIBOR plus a fixed percentage. A commitment fee of 3/8
of 1% is payable on the unused portion of the facility. At December 31, 1996,
total borrowings under this arrangement were $10,000,000.
All debt under both revolving credit arrangements has been classified as
long-term debt, as it is the Company's intention to maintain the principal
amounts outstanding either through the existing credit facilities or new
borrowing arrangements.
In February 1996, the Company entered into an unsecured term loan arrangement
with a syndication of banks for the purpose of financing its November, 1995
acquisition of L. Kellenberger & Co. AG. The loan provides for repayment of the
outstanding principal in twenty equal installments beginning May, 1998. Interest
is charged on the debt based on LIBOR plus a fixed percentage. The Company has
entered into a
25
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
2. Financing Arrangements (continued)
cross-currency interest rate swap agreement which effectively converts the
$17,750,000 term loan to a borrowing in 21,000,000 Swiss francs with an
effective interest rate of 4.49%. The swap agreement has been designated as a
hedge against the Company's net investment in its Kellenberger facility.
The Company also has a $5,000,000 unsecured short-term line of credit with a
bank with interest based on a fixed percent over the one-month LIBOR. As of
December 31, 1996, the $3,000,000 borrowed on this line carries an average
interest rate of 6.03%. The agreement is negotiated annually and requires no
commitment fee.
The Company's Kellenberger subsidiary maintains lines of credit with commercial
banks that permit borrowings in Swiss francs equivalent to approximately
$9,000,000. These lines provide for interest at a fixed percentage over LIBOR
and carry no commitment fees on unused funds. At December 31, 1996, total
borrowings under these lines were $7,950,000 with an average interest rate of
4.12%. The borrowings are secured by the land and buildings of Kellenberger with
a net book value of $9,421,000 at December 31, 1996 and terms are negotiated
annually.
The debt agreements require, among other things, that the Company maintain
specified levels of tangible net worth, working capital and indebtedness.
Interest paid in 1996, 1995, and 1994 totaled $2,799,000, $1,416,000, and
$1,477,000, respectively.
The Company conducts some of its sales and service operations from leased office
space with lease terms up to 15 years and uses certain data processing equipment
under lease agreements expiring at various dates during the next five years.
Rent expense under these leases totaled $1,378,000, $1,192,000, and $1,290,000
during the years ended December 31, 1996, 1995, and 1994, respectively. Future
minimum payments under noncancelable operating leases as of December 31, 1996
total $3,530,000, with payments over the next five years of $1,143,000,
$704,000, $509,000, $121,000, and $116,000, respectively.
The Company has provided financing terms of up to seven years for qualified
customers who purchase equipment. The Company may choose, when appropriate, to
sell underlying notes receivable contracts to financial institutions to reduce
debt and finance current operations. During 1996, 1995, and 1994, the Company
sold notes totaling $27,255,000, $12,955,000, and $30,000,000, respectively. The
remaining outstanding balance of all notes sold as of December 31, 1996 and 1995
was $50,724,000 and $44,220,000, respectively. Gains and losses from the sales
of notes receivable have not been material. Recourse against the Company from
default of any of the notes included in the sales is limited to 10% of the then
outstanding balance of the underlying notes.
26
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1996 and
1995, the Company had state investment tax credits expiring at various dates
through the year 2006, and foreign tax credit carryforwards expiring in 2001 for
which no benefit has been recognized in the financial statements. Significant
components of the Company's deferred tax assets and liabilities are as follows:
1996 1995
------------------------
(in thousands)
Deferred tax assets:
Federal and state tax credit carryforwards $ 4,571 $ 3,507
Foreign net operating loss carryforwards 1,147 1,542
Postretirement benefits 1,861 1,852
Inventory valuation 265
Deferred employee benefits 1,201 742
Accrued pension 590 437
Other 818 634
------------------------
10,188 8,979
Less valuation allowance 4,571 3,507
------------------------
Total deferred tax assets 5,617 5,472
Deferred tax liabilities:
Tax over book depreciation 3,976 3,512
Margin on installment sales 257 126
Other 1,128 449
------------------------
Total deferred tax liabilities 5,361 4,087
------------------------
Net deferred tax assets $ 256 $ 1,385
========================
Pretax income was $22,872,000, $21,554,000, and $11,709,000 from domestic
operations and $5,220,000, $2,865,000, and $224,000 from foreign operations for
1996, 1995, and 1994, respectively.
27
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
3. Income Taxes (continued)
Significant components of income tax expense (benefit) attributable to
continuing operations are as follows:
1996 1995 1994
-------------------------------------
(in thousands)
Current:
Federal $ 7,488 $ 7,885 $ 4,812
Foreign 788 1,117 414
State 1,006 1,214 782
-------------------------------------
Total current 9,282 10,216 6,008
-------------------------------------
Deferred:
Federal $ 468 $ (484) $ (739)
Foreign 991 (104) 53
State 63 (54) (108)
-------------------------------------
Total deferred 1,522 (642) (794)
-------------------------------------
$10,804 $ 9,574 $ 5,214
=====================================
Income tax payments totaled $9,467,000, $9,009,000, and $4,642,000 in 1996, 1995
and 1994, respectively.
The following is a reconciliation of income tax expense computed at the United
States statutory rate to amounts shown in the consolidated statements of income.
1996 1995 1994
-----------------------
Federal income taxes 34.0% 34.0% 34.0%
Tax differential on operations of foreign
subsidiaries (.4) .2 3.3
State income taxes 2.4 3.1 3.7
Other 2.5 1.9 2.7
-----------------------
38.5% 39.2% 43.7%
=======================
As a result of changes in U.S. tax law effective in 1994, earnings of a foreign
subsidiary were deemed distributed and U.S. federal taxes of $260,000 were
provided in 1994. The remaining undistributed earnings of the foreign
subsidiaries, which amounted to approximately $10,921,000 at December 31, 1996,
are considered to be indefinitely reinvested and, accordingly, no provision for
U.S. federal and state taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of the unrecognized deferred U.S. income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation.
28
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
4. Shareholders' Equity
Treasury Shares
The number of shares of common stock in treasury were 12,365, 108,766, and
33,232 at December 31, 1996, 1995 and 1994, respectively. In 1996, the Company
purchased a net 28,570 treasury shares and issued 124,971 shares under the
long-term incentive plan from treasury. During 1995, the Company purchased a net
114,755 treasury shares and awarded 39,221 shares under the long-term incentive
plan from treasury. The Company purchased a net 31,236 shares for treasury and
awarded 46,750 shares under the long-term incentive stock plan from treasury
during 1994.
Stock Reclassification
At the annual meeting on May 16, 1995, shareholders approved amendments to the
Company's Certificate of Incorporation (a) converting each Class A common share
into 2.00 shares of a new single class of Common Stock, representing a 2-for-1
stock split and each Class B common share into 2.05 shares of the new single
class of Common Stock, representing a 2.05-for-1 stock split; (b) increasing the
number of shares of Common Stock the Company is authorized to issue from
6,000,000 to 20,000,000 shares and reducing the par value of all Common Stock
from $5 to $0.01 per share; and (c) authorizing a new class of Preferred Stock
consisting of 2,000,000 shares. All share and per share data appearing in the
financial statements and notes thereto have been restated giving effect to the
amendments discussed above.
Public Offering
In June 1995, the Company issued 2,540,000 shares of its common stock at $19.00
per share in a public common stock offering. Proceeds of the offering, net of
commissions and expenses, were $43,584,000. The proceeds were used to reduce the
Company's debt, fund building expansion, and fund working capital growth.
Preferred Stock Purchase Rights
Pursuant to the Shareholder Rights Plan adopted at the Annual Meeting in 1995,
each outstanding share of the Company's common stock carries with it the right
to purchase shares of Series A Preferred Stock. Each right entitles the holder
of the right to purchase one one-hundredth of a share of Series A Preferred
Stock (a "Unit") at a purchase price of $80.00 per Unit. The rights will become
exercisable ten business days after any person or group becomes the beneficial
owner of 20% or more of the common stock or commences a tender or exchange offer
upon consummation of which such person or group would, if successful, own 30% or
more of the common stock. The rights, which will expire ten years from the date
of issuance, may be redeemed by the Board of Directors, at $.01 per right, at
any time prior to the expiration of ten business days after the acquisition by a
person or group of affiliated or associated persons of beneficial ownership of
20% or more of the outstanding common stock.
29
5. Industry Segment and Foreign Operations
The Company operates in one business segment - industrial machine tools.
Domestic and foreign operations consist of:
Year Ended December 31
1996 1995 1994
--------------------------------------
(in thousands)
Sales:
Gross sales:
United States $ 189,060 $ 168,679 $ 110,942
Western Europe 65,051 25,739 12,346
Other 16,654 18,544 12,980
--------------------------------------
Total 270,765 212,962 136,268
--------------------------------------
Less interarea transfers:
United States 41,670 32,042 18,915
Western Europe 8,800 334 17
--------------------------------------
Total 50,470 32,376 18,932
--------------------------------------
Net sales:
United States 147,390 136,637 92,027
Western Europe 56,251 25,405 12,329
Other 16,654 18,544 12,980
--------------------------------------
Total net sales $ 220,295 $ 180,586 $ 117,336
======================================
Operating income (loss):
United States $ 23,630 $ 20,998 $ 12,220
Western Europe 5,258 1,502 (875)
Other 1,085 2,361 1,614
--------------------------------------
Total operating income $ 29,973 $ 24,861 $ 12,959
======================================
Net income (loss):
United States $ 13,117 $ 12,418 $ 6,884
Western Europe 3,381 1,247 (1,039)
Other 790 1,180 874
--------------------------------------
Total net income $ 17,288 $ 14,845 $ 6,719
======================================
Identifiable assets:
United States $ 174,687 $ 155,733 $ 106,606
Western Europe 48,163 43,214 7,256
Other 6,312 12,635 7,864
--------------------------------------
Total identifiable assets $ 229,162 $ 211,582 $ 121,726
======================================
Interarea sales are accounted for at prices comparable to normal, unaffiliated
customer sales, reduced by estimated costs not incurred on these sales.
Operating income excludes interest income and interest expense directly
attributable to the related operations. The operating loss in Western Europe in
1994 includes a $540,000 charge for the write off of inventory that became
obsolete when the Company changed its distribution strategies there.
In 1996 and 1995, sales to one customer in the automotive industry represented
approximately 5% and 17%, respectively, of consolidated sales.
30
6. Employee Benefits
Pension Plan
The Company provides a non-contributory defined benefit pension plan covering
all eligible domestic employees. The related benefits are generally based on
years of service and a percentage of the employee's average annual compensation.
The Company's practice is to fund all pension costs accrued and to contribute
annually amounts within the range allowed by the
Internal Revenue Service.
A summary of the components of net periodic pension cost is presented below.
Year Ended December 31
1996 1995 1994
-------------------------------------
(in thousands)
Service costs--benefits earned
during the year $ 1,321 $ 962 $ 1,126
Interest costs on projected benefit
obligation 3,425 3,186 3,055
Actual return on plan assets (6,008) (9,753) (1,538)
Net amortization and deferral 1,996 5,763 (2,065)
-------------------------------------
Net pension costs $ 734 $ 158 $ 578
=====================================
Actuarial assumptions used to determine pension costs include a discount rate of
8.00% at December 31, 1996 (7.75% and 8.75% as of December 31, 1995 and 1994,
respectively), expected long-term rate of return on assets of 9% for all three
years, and expected rate of increase in compensation levels of 5% for all three
years. Transition amounts, unrecognized prior service costs and unrecognized
gains or losses are amortized on a straight line basis over the future working
lifetime of those expected to receive benefits under the plan. The increase in
the discount rate in 1996 decreased the projected benefit obligation at the end
of the year by approximately $1,500,000. The decrease in the discount rate in
1995 increased the projected benefit obligation at the end of 1995 by
approximately $5,000,000.
31
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Employee Benefits (continued)
A summary of the Plan's funded status and amounts recognized in the Company's
consolidated balance sheets is as follows:
1996 1995
----------------------------
(in thousands)
Plan assets at fair value $ 54,037 $ 50,496
Projected benefit obligation for services
rendered to date (47,053) (45,372)
----------------------------
Plan assets in excess of projected benefit
obligation 6,984 5,124
Unrecognized net (gain) (9,816) (7,436)
Unrecognized net (asset) from transition (2,091) (2,265)
Unrecognized prior service costs resulting
from Plan amendment 3,101 3,364
----------------------------
Net pension (liability) recognized in the
balance sheets $ (1,822) $ (1,213)
============================
Net pension liability consists of a long-term portion of $1,485,000 and
$1,087,000 as of December 31, 1996 and December 31, 1995, respectively. The
remaining balance is included in accrued expenses in the respective years.
The portion of the projected benefit obligation representing the accumulated
benefit obligation for the pension plan was $42,270,000 and $41,097,000 at the
end of 1996 and 1995, respectively. The vested benefit obligation included in
those numbers was $36,710,000 and $35,909,000 at the end of 1996 and 1995,
respectively.
Pension plan assets include 165,924 shares of the Company's common stock valued
at approximately $4,418,000 and $4,314,000 at December 31, 1996 and 1995,
respectively. Dividends paid on those shares were $116,000 and $103,000 in 1996
and 1995 respectively. The remaining plan assets consisted of United States
Government securities, corporate bonds and notes, other common stocks and an
insurance contract.
Postretirement Plans Other Than Pensions
The Company provides a contributory retiree health plan covering all eligible
domestic employees who retired at normal retirement age prior to January 1, 1993
and all retirees who will retire at normal retirement age after January 1, 1993
with at least 10 years of active service. Employees who elect early retirement
are eligible for the plan benefits if they have 15 years of active service at
retirement. Benefit obligations and funding policies are at the discretion of
the Company's management. Retiree contributions are adjusted annually and
contain other cost-sharing features such as deductibles and coinsurance, all of
which varies according to the retiree's date of retirement. The accounting for
the plan anticipates future cost-sharing changes to the written plan that are
consistent with the Company's
32
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Employee Benefits (continued)
expressed intent to limit its contributions to 125% of the average aggregate
1993 claim cost. The Company also provides a non-contributory life insurance
plan to retirees. Because the amount of liability relative to this plan is
insignificant, it is combined with the health plan for purposes of this
disclosure.
The Company accounts for other postretirement benefit costs in accordance with
Financial Accounting Standards Board Statement No. 106. A summary of the
components of net periodic other postretirement benefit costs relating to the
plan is presented below.
1996 1995 1994
----------------------------
(in thousands)
Service cost--benefits earned during the year $114 $ 78 $ 97
Interest costs on projected benefit obligations 449 451 435
Amortization of actuarial losses 46 - 27
----------------------------
Amount recorded in operations $609 $529 $559
============================
Actuarial assumptions used to determine the liability for postretirement plans
other than pensions included a discount rate of 7.50%, 7.25% and 8.75% at
December 31, 1996, 1995 and 1994, respectively. The annual rate of increase in
the per capita cost of covered health care benefits (the health care cost trend)
was assumed to be 11% for 1996, and is assumed to decrease gradually to 6% by
the year 2005 and remain at that level thereafter.
The health care cost trend rate assumption does not have a significant effect on
the amounts reported due to the 125% cap on the Company's portion of the medical
plan claims. A one percentage point increase in the assumed health care cost
trend rates would increase the accumulated postretirement benefit obligation by
only $171,000 and increase the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for 1996 by $20,000.
The Company has not prefunded any of its postretirement health and life
insurance liabilities and, consequently, there are no expected returns on assets
anticipated in the calculation of expense.
A schedule reconciling the accumulated benefit obligation with the Company's
recorded liability follows:
1996 1995
---------------------------
(in thousands)
Accumulated postretirement benefit obligation:
Current retirees $ (3,039) $ (3,145)
Fully eligible active participants (1,676) (1,877)
Other active participants (1,308) (1,389)
---------------------------
Total (6,023) (6,411)
Unrecognized losses 1,024 1,418
---------------------------
Accrued postretirement benefit recognized in
balance sheet $ (4,999) $ (4,993)
===========================
33
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Employee Benefits (continued)
Group Health Plan
The Company has a contributory group benefit plan which provides medical and
dental benefits to all of its domestic employees.
Savings Plan
The Company maintains a 401(k)plan which covers all domestic employees of the
Company subject to minimum employment period requirements. Provisions of the
plan allow employees to defer from 1% to 15% of their pre-tax salary to the
plan. Those contributions may be invested at the option of the employees in a
number of investment alternatives, one being Hardinge Inc. common stock. The
Company contributes to the plan on a matching formula of 25% of an employee's
contribution up to 5% of the employee's compensation. The Company's match is in
Hardinge Inc. common stock. The Company contributed $253,000 in 1996 for this
match. The Company may also contribute a discretionary contribution to the plan
to be distributed among all participants. In 1996, the Company contributed
$250,000 as a discretionary contribution.
The Company maintains an Employee Stock Ownership Plan for its domestic
employees. The approved Plan required establishment of an employee stock
ownership trust, which borrowed from a bank to purchase the Company's common
stock. The Company thereby effectively obligated itself to contribute to the
employee trust sufficient amounts to allow the trust to repay the loan and
related interest installments. During 1995, the Company made contributions to
the trust sufficient to allow payment of the remainder of the loan.
Contributions, including dividends, to the trust for the years ended December
31, 1995 and 1994 totaled $372,000 and $240,000, respectively. The interest
portion of those contributions was $22,000 and $40,000 in 1995 and 1994,
respectively. Approximately $29,000 and $41,000 of dividends on shares owned by
the ESOP were used to service debt requirements in 1995 and 1994, respectively.
Long-Term Incentive Plans
In 1996, the Board of Directors established an Incentive Stock Plan to assist in
attracting and retaining key employees. The Plan allows the Board to grant
restricted stock, performance share awards, stock options and stock appreciation
rights up to an aggregate of 300,000 shares of common stock to these employees.
During 1996, certain officers and other key managers were awarded a total of
134,650 restricted shares of common stock. During 1995 and 1994, shares of
restricted common stock were awarded totaling 95,500 and 46,750, respectively.
Restrictions on 10,250 shares expired in 1996. Restrictions on 177,750 shares of
common stock from similar 1993 and 1988 Incentive Stock Plans were released
during 1995.
As of December 31, 1996, a total of 448,700 restricted shares of common stock
were outstanding under the three plans. All shares of restricted stock are
subject to forfeiture and restrictions on transfer, and unconditional vesting
occurs upon the completion of a specified period ranging from three to eight
years from date of grant.
34
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
6. Employee Benefits (continued)
Deferred compensation associated with these grants is measured by the market
value of the stock on the date of grant and totaled $3,467,000, $1,377,500 and
$575,000 in 1996, 1995 and 1994, respectively. This deferred compensation is
being amortized on a straight-line basis over the specified service period. The
unamortized deferred compensation at December 31, 1996, 1995 and 1994, totaled
$5,095,000,$2,624,000, and $2,591,000, respectively, and is included along with
Employee Stock Ownership Benefits as a reduction of shareholders' equity.
Foreign Operations
The Company also has employees in certain foreign countries that are covered by
defined contribution and benefit pension plans and other employee benefit plans.
Related obligations and costs charged to operations are not material.
7. Financial Instruments
At December 31, 1996 and 1995, the carrying value of financial instruments such
as cash, accounts receivable, accounts payable and short-term debt approximated
their fair values, based on the short-term maturities of these instruments. The
carrying amounts of debt under the revolving agreements classified as long-term
debt approximate fair value as the underlying instruments are comprised of notes
that are repriced on a short-term basis.
In addition, the carrying amount of the term loan dated February, 1996
approximates its fair value as the underlying interest rate is variable. Related
to this term loan, the Company entered into a seven year cross-currency interest
rate swap agreement (see Note 2). The fair value of the instrument at December
31, 1996 was $1,241,000 based on current settlement value as determined by a
financial institution.
The fair value of notes receivable, short-term and long-term, was determined
using a discounted cash flow analysis based on the rate at which the Company
could sell those notes at year end under standard terms experienced on recent
sales (a fixed percentage over U.S. Treasury notes). At December 31, 1996 and
1995, the carrying value of these notes approximated the
fair value.
The fair value of other long-term debt was determined based on rates obtained
from financial institutions on funds available for terms approximating the
remaining term of that debt. At December 31, 1996, the fair value of that debt
with carrying value of $1,429,000 was $1,480,000.
The Company regularly enters into foreign currency contracts to manage its
exposure to fluctuations in foreign currency exchange rates on purchases of
materials used in production and cash settlements of intercompany sales. Any
gains or losses from these contracts have not been material. At December 31,
1996 and 1995, the Company had notional principal amounts of approximately
$10,621,000 and $1,931,000 in contracts to purchase currency in the future from
major commercial banks. The fair value of these contracts is not material.
Concentration of Credit Risk
The Company sells products to companies in diversified industries, with a
substantial majority of sales occurring in North America and Western Europe. The
Company performs periodic credit evaluations of the financial condition of its
customers. The Company offers financing terms of up to seven years for its
35
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
7. Financial Instruments (continued)
customers in the United States and Canada and files a lien against the equipment
purchased under those terms. No collateral is required for sales made on open
account terms with payment due within thirty days. As of December 31, 1996 and
1995, 22% and 18%, respectively, of the accounts receivable were from the three
major U.S. automobile manufacturers, with receivables from one representing 10%
at December 31, 1996 and 14% at December 31, 1995 of the consolidated accounts
receivable.
In addition, at December 31, 1996, receivables from one of the Company's
distributors totaled 8% of the consolidated accounts receivable.
8. Acquisition
On November 29, 1995, the Company completed the acquisition of 100% of the
outstanding stock of L. Kellenberger & Co. AG and subsidiary, a St. Gallen,
Switzerland based manufacturer of grinding machines ("Kellenberger"). The
Company paid $19,232,000 including acquisition expenses. In connection with the
acquisition, approximately $1,800,000 was placed in an escrow account to cover
potential purchase price adjustments. This escrow is scheduled to be released in
1997 and the Company is not aware of any purchase price adjustment at this time.
The acquisition cost was funded with an unsecured term loan arrangement with two
banks.
The acquisition has been accounted for as a purchase. Results of operations of
Kellenberger have been included in the consolidated financial statements of the
Company from the date of acquisition. The purchase price was allocated based on
the estimated fair values of assets and liabilities as of the date of
acquisition resulting in no goodwill.
On the basis of an unaudited proforma consolidation of the results of operations
as if the acquisition had taken place as of January 1, 1994, consolidated net
sales for the combined companies would have been $213,127,000 and $141,703,000
for the years ended December 31, 1995 and 1994, respectively. Consolidated net
income would have been $13,430,000 and $4,422,000 and earnings per share would
have been $2.70 and $1.24 for the years of 1995 and 1994, respectively. The
results reflect additional depreciation on the step-up in basis of certain fixed
assets acquired, interest expense that would have been incurred to finance the
purchase, and savings which would have resulted if cost cutting measures taken
at the time of acquisition had taken place at the beginning of 1994. The
proforma amounts are not necessarily indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of 1994 or of future results of operations of the consolidated
entities.
36
HARDINGE INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (continued)
9. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 1996 and 1995 is as follows:
Quarter
First Second Third Fourth
-----------------------------------------
(in thousands, except per share data)
1996
----
Net sales $ 59,622 $ 55,266 $ 47,577 $ 57,830
Gross profit 19,332 18,477 17,103 20,119
Income from operations 7,762 7,531 6,254 8,426
Net income 4,470 4,320 3,435 5,063
Net income per share .72 .69 .56 .82
Weighted average shares outstanding 6,199 6,228 6,189 6,204
1995
----
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
Earnings per share amounts are based on the weighted average shares outstanding
for each period presented. As a result of the changes in outstanding shares from
quarter to quarter, the total of the four quarters for 1996 and 1995 does not
equal the annual earnings per share for each of the years.
37
ITEM 9. - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
38
PART III
ITEM 10. - DIRECTORS AND OFFICERS OF THE REGISTRANT
Certain information required by this item is incorporated by reference from the
Registrant's proxy statement filed with the Commission on March 11, 1997.
Additional information required to be furnished by Item 401 of Regulation S-K is
as follows:
List of Executive Officers of the Registrant
- ---------------------------------------------------------------------------------------------------------------------
Executive
Officer
Name Age Since Positions and Offices Held
- ------------------------------ ------ --------------- -------------------------------------------------------
Robert E. Agan 58 1978 Chairman of the Board and Chief Executive Officer
since October, 1996; Chairman of the Board,
President and Chief Executive Officer in 1996;
President and Chief Executive Officer 1984-1995;
President and Chief Operating Officer in 1983;
Executive Vice President and Chief Operating Officer
1980-1982; Vice President - Employee Relations
1978-1979; member of Board of Directors of the
Company since 1980.
J. Allan Krul 54 1988 President and Chief Operating Officer since October,
1996; Executive Vice President and Chief Operating
Officer in 1996; Senior Vice President and Chief
Operating Officer 1995-1996; Vice President - General
Manager Machine Operations 1991-1994; Vice President -
Engineering 1988-1990; member of Board of Directors
of the Company since November, 1996.
Malcolm L. Gibson 56 1983 Executive Vice President and Chief Financial Officer,
and Assistant Secretary since October, 1996. Senior
Vice President, Chief Financial Officer and Assistant
Secretary 1995-1996; Vice President-Finance,
Treasurer and Assistant Secretary 1985-1994; Vice
President - Finance and Assistant Secretary
1983-1984; Treasurer 1972-1982.
Joseph T. Colvin 53 1996 Vice President - Manufacturing since October, 1996;
General Manager, Workholding Operations in 1996;
Manufacturing Director, Machine Operations 1994-
1996; Formerly Vice President Operations, General
Manager, Inertial Guidance Test Equipment and
Original Equipment Manufacturing, Contraves, Inc.,
1994; President and CEO, Modern Manufacturing, 1993;
President, Inland Motor Division, Kollmorgen Corp.,
1987-1992.
39
List of Executive Officers of the Registrant
- ---------------------------------------------------------------------------------------------------------------------
Executive
Officer
Name Age Since Positions and Offices Held
- ------------------------------ ------ --------------- -------------------------------------------------------
J. Patrick Ervin 39 1996 Vice President - Sales & Marketing since October,
1996; General Manager, Machine Tool Division in 1996;
Director, Sales & Marketing 1992-1996; Director of
Materials & Purchasing 1990-1992; Superintendent,
Machine Division 1989-1990, Various other Company
positions 1978-1989.
Douglas A. Greenlee 49 1992 Vice President - Business Development since 1993;
Secretary in 1992; Formerly attorney, Hazel & Thomas,
P.C., Law Firm; member of Board of Directors of the
Company since 1979.
Richard L. Simons 41 1996 Vice President - Finance since October, 1996;
Controller 1987-1996; Assistant Treasurer 1985-1987;
Manager Financial Accounting 1983-1984.
Daniel P. Soroka 48 1996 Vice President - Engineering since October, 1996;
Director of Research & Engineering 1992-1996; Manager
of Mechanical Design and Analysis 1989-1992.
Douglas C. Tifft 42 1988 Vice President - Employee Relations since 1988.
Various other Company positions 1978-1988.
Thomas T. Connelly 49 1984 Treasurer since 1995; Senior Vice President-General
Manager Workholding Operations 1991 - 1994; Senior
Vice President 1987 - 1990; Vice President and
Assistant to the President 1985 - 1986; Treasurer and
Assistant to the President in 1984; Treasurer in
1983; Assistant Treasurer in 1982.
40
ITEM 11. - EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Registrant's proxy statement filed with the Commission on March 11, 1997.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Registrant's proxy statement filed with the Commission on March 11, 1997.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Registrant's proxy statement filed with the Commission on March 11, 1997.
41
PART IV
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The financial statements of the Registrant listed in ITEM 8. of this
Report are incorporated herein by reference.
(2) The financial statement schedules of the Registrant listed in ITEM 8.
of this Report are incorporated herein by reference.
(3) Exhibits filed as part of this Report: See (c) below.
(b) Reports on Form 8-K filed by the Registrant during the last quarter of the
period covered by this report: None.
(c) Exhibits required by Item 601 of Regulation S-K filed as a part of this
Report on Form 10-K:
Item Description
- ---- -----------
4.1 - Restated Certificate of Incorporation of Hardinge Inc. filed with
the Secretary of State of the State of New York on May 24, 1995,
incorporated by reference from the Registrant's Form 8-A, filed
with the Securities and Exchange Commission on May 19, 1995.
4.2 - By-Laws of Hardinge Inc. as amended November 19, 1996.
4.3 - Section 719 through 726 of the New York Business Corporation Law,
incorporated by reference from the Registrant's Form 10, effective
June 29, 1987.
4.4 - Specimen of certificate for shares of Common Stock, par value
$.01 per share, of Hardinge Inc., incorporated by reference from
the Registrant's Form 8-A, filed with the Securities and Exchange
Commission on May 19, 1995.
4.5 - Form of Rights Agreement, dated as of May 16, 1995, between
Hardinge Inc. and American Stock Transfer and Trust Company,
incorporated by reference from the Registrant's Form 8-A, filed
with the Securities and Exchange Commission on May 23, 1995.
10.1 - Credit Agreement dated as of November 18, 1996 between Hardinge
Inc. and Marine Midland Bank.
10.2 - Credit Agreement dated as of February 28, 1996 among Hardinge Inc.
and the Banks signatory thereto and The Chase Manhattan Bank as
Agent, incorporated by reference from the Registrant's Form 10-Q
for the quarter ended March 31, 1996.
10.3 - $5,000,000 Master Note among Hardinge Inc. and Chemung Canal Trust
Company dated July 23, 1996.
10.4 - Credit Agreement dated as of August 1, 1994 among Hardinge Inc.,
the Banks signatory thereto and The Chase Manhattan Bank,
incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
10.5 - Amendment Number One dated February 29, 1996 to Credit Agreement
dated as of August 1, 1994 among Hardinge Inc., the Banks
signatory thereto and The Chase Manhattan Bank.
42
10.6 - Stock Purchase Agreement dated as of November 15, 1995 between
Hardinge Inc. and L. Kellenberger & Co. AG, incorporated by
reference from the Registrant's Form 8-K, as amended, dated
November 29, 1995.
10.7 - Note Agreement dated August 29, 1991 between Hardinge Inc. and
AEtna Life Insurance Company, relating to the issuance by Hardinge
Inc. of $5,000,000 principal amount of its 9.38% notes due 1998,
incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
*10.8 - The 1996 Hardinge Inc. Incentive Stock Plan as adopted by
shareholders at the April 23, 1996 annual meeting, incorporated by
reference from the Registrant's Form 10-Q for the quarter
ended June 30, 1996.
*10.9 - Hardinge Inc. Savings Plan, incorporated by reference from the
Registrant's Registration Statement on Form S-8 (No. 33-65049).
*10.10 - Employment Agreement with Robert E. Agan dated as of April 1,
1995, incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
*10.11 - Employment Agreement with J. Allan Krul dated as of April 1, 1995,
incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
*10.12 - Employment Agreement with Malcolm L. Gibson dated as of April 1,
1995, incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
*10.13 - Employment Agreement with Douglas A. Greenlee dated as of April 1,
1995, incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
*10.14 - Employment Agreement with Douglas C. Tifft dated as of April 1,
1995, incorporated by reference from the Registrant's Registration
Statement on Form S-2 (No. 33-91644).
*10.15 - Hardinge Inc. 1993 Incentive Stock Plan, incorporated by reference
from the Registrant's Form 10-K for the year ended December 31,
1993.
*10.16 - The 1988 Hardinge Inc. Incentive Stock Plan, as adopted by
shareholders at the annual meeting of shareholders held on
May 17, 1988, incorporated by reference from the Registrant's Form
10-Q for the quarter ended June 30, 1988.
*10.17 - First Amendment to Hardinge Inc. 1988 Incentive Stock Plan,
incorporated by reference from the Registrant's Form 10-K for the
year ended December 31, 1993.
*10.18 - Hardinge Inc. Executive Supplemental Pension Plan, incorporated by
reference from the Registrant's Form 10-K for the year ended
December 31, 1993.
*10.19 - Form of Deferred Directors Fee Plan, incorporated by reference
from the Registrant's Registration Statement on Form S-2
(No. 33-91644).
*10.20 - Description of Incentive Cash Bonus Program, incorporated by
reference from the Registrant's Registration Statement on Form S-2
(No. 33-91644).
21 - Subsidiaries of the Company.
23 - Consent of Ernst & Young LLP, Independent Auditors.
27 - Financial Data Schedule.
- -------------------------------
*Management contract or compensatory plan or arrangement.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
-----------------------------------------------------
(Registrant)
February 25, 1997 /s/ Robert E. Agan
- ---------------------- -----------------------------------------------------
Robert E. Agan
Chairman of the Board, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
February 25, 1997 /s/ J. Allan Krul
- ---------------------- -----------------------------------------------------
J. Allan Krul
President, Chief Operating Officer and Director
February 25, 1997 /s/ Malcolm L. Gibson
- ---------------------- -----------------------------------------------------
Malcolm L. Gibson
Executive Vice President/Chief Financial Officer
and Assistant Secretary (Principal Financial Officer)
February 25, 1997 /s/ John W. Bennett
- ---------------------- -----------------------------------------------------
John W. Bennett
Director
February 25, 1997 /s/ Richard J. Cole
- ---------------------- -----------------------------------------------------
Richard J. Cole
Director
February 25, 1997
- ---------------------- -----------------------------------------------------
James L. Flynn
Director
February 25, 1997 /s/ E. Martin Gibson
- ---------------------- ---------------------------------------------------
E. Martin Gibson
Director
44
February 25, 1997 /s/ Douglas A. Greenlee
- --------------------- ---------------------------------------------------
Douglas A. Greenlee
Vice President and Director
February 25, 1997 /s/ J. Philip Hunter
- --------------------- ---------------------------------------------------
J. Philip Hunter
Director and Secretary
February 25, 1997 /s/ Dr. Eve L. Menger
- --------------------- ---------------------------------------------------
Dr. Eve L. Menger
Director
February 25, 1997 /s/ Richard L. Simons
- --------------------- ---------------------------------------------------
Richard L. Simons
Vice President - Finance (Principal
Accounting Officer)
45