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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                 
 
Commission File Number: 000-15760
 
Hardinge Inc.
(Exact name of registrant as specified in its charter) 
New York
 
16-0470200
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Hardinge Drive
Elmira, NY
 
14902
(Address of principal executive offices)
 
(Zip Code)
 
(607) 734-2281
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                      ýYes  oNo
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                      ýYes  oNo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     oYes  ýNo
 
As of October 31, 2014 there were 12,821,768 shares of Common Stock of the registrant outstanding.
 





HARDINGE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
     and 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 
 
 
 
 
 


2


PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.

HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
15,005

 
$
34,722

Restricted cash
3,567

 
4,124

Accounts receivable, net
53,645

 
57,137

Inventories, net
123,226

 
114,064

Other current assets
12,067

 
11,563

Total current assets
207,510

 
221,610

 
 
 
 
Property, plant and equipment, net
68,207

 
74,656

Goodwill
6,727

 
10,002

Other intangible assets, net
31,030

 
32,063

Other non-current assets
6,466

 
5,852

Total non-current assets
112,430

 
122,573

Total assets
$
319,940

 
$
344,183

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Accounts payable
$
26,608

 
$
24,418

Accrued expenses
24,055

 
26,346

Customer deposits
15,033

 
15,166

Accrued income taxes
1,315

 
830

Deferred income taxes
2,551

 
2,569

Contingent consideration

 
7,500

Current portion of long-term debt
3,705

 
7,850

Total current liabilities
73,267

 
84,679

 
 
 
 
Long-term debt
13,835

 
18,785

Pension and postretirement liabilities
27,261

 
28,188

Deferred income taxes
4,582

 
4,968

Other liabilities
3,745

 
3,775

Total non-current liabilities
49,423

 
55,716

Commitments and contingencies (see Note 10)


 


Common stock ($0.01 par value, 20,000,000 authorized; 12,825,468 issued and
12,821,768 outstanding as of September 30, 2014, and 12,472,992 issued and
outstanding as of December 31, 2013)
128

 
125

Additional paid-in capital
120,339

 
114,951

Retained earnings
83,491

 
90,937

Treasury shares (at cost, 3,700 as of September 30, 2014, and 75,125 as of
December 31, 2013)
(46
)
 
(806
)
Accumulated other comprehensive loss
(6,662
)
 
(1,419
)
Total shareholders’ equity
197,250

 
203,788

Total liabilities and shareholders’ equity
$
319,940

 
$
344,183

 
See accompanying notes to the unaudited consolidated financial statements.


3


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Sales
$
68,924

 
$
79,784

 
$
218,625

 
$
226,358

Cost of sales
50,247

 
57,743

 
158,767

 
162,577

Gross profit
18,677

 
22,041

 
59,858

 
63,781

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
20,123

 
19,572

 
59,376

 
57,780

Impairment charge
5,766

 

 
5,766

 

Other (income) expense, net
(334
)
 
(99
)
 
249

 
316

(Loss) income from operations
(6,878
)
 
2,568

 
(5,533
)
 
5,685

 
 
 
 
 
 
 
 
Interest expense
171

 
325

 
569

 
841

Interest income
(15
)
 
(14
)
 
(47
)
 
(43
)
(Loss) income from continuing operations before
income taxes
(7,034
)
 
2,257

 
(6,055
)
 
4,887

Income taxes
544

 
1,084

 
845

 
1,618

Net (loss) income from continuing operations
(7,578
)
 
1,173

 
(6,900
)
 
3,269

 
 
 
 
 
 
 
 
Gain from disposal of discontinued operation and
income from discontinued operations, net of tax

 
306

 
218

 
515

 
 
 
 
 
 
 
 
Net (loss) income
$
(7,578
)
 
$
1,479

 
$
(6,682
)
 
$
3,784

 
 
 
 
 
 
 
 
Per share data:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Basic (loss) earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
(0.60
)
 
$
0.10

 
$
(0.55
)
 
$
0.28

Discontinued operations

 
0.03

 
0.02

 
0.04

Basic (loss) earnings per share
$
(0.60
)
 
$
0.13

 
$
(0.53
)
 
$
0.32

 
 
 
 
 
 
 
 
Diluted (loss) earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
(0.60
)
 
$
0.10

 
$
(0.55
)
 
$
0.28

Discontinued operations

 
0.03

 
0.02

 
0.04

Diluted (loss) earnings per share
$
(0.60
)
 
$
0.13

 
$
(0.53
)
 
$
0.32

 
 
 
 
 
 
 
 
Cash dividends declared per share:
$
0.02

 
$
0.02

 
$
0.06

 
$
0.06

 
See accompanying notes to the unaudited consolidated financial statements.


4


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
 
(Unaudited)
Net (loss) income
$
(7,578
)
 
$
1,479

 
$
(6,682
)
 
$
3,784

Other comprehensive (loss) income:
 

 
 

 
 

 
 

Foreign currency translation adjustments
(6,368
)
 
6,969

 
(5,985
)
 
2,319

Retirement plans related adjustments
1,336

 
(500
)
 
1,570

 
1,428

Unrealized gain (loss) on cash flow hedges
13

 
344

 
(78
)
 
246

Other comprehensive (loss) income before tax
(5,019
)
 
6,813

 
(4,493
)
 
3,993

Income tax expense (benefit)
927

 
(196
)
 
750

 
138

Other comprehensive (loss) income, net of tax
(5,946
)
 
7,009

 
(5,243
)
 
3,855

Total comprehensive (loss) income
$
(13,524
)
 
$
8,488

 
$
(11,925
)
 
$
7,639

 
See accompanying notes to the unaudited consolidated financial statements.


5


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
(Unaudited)
Operating activities
 

 
 

Net (loss) income
$
(6,682
)
 
$
3,784

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 

 
 

Impairment charge
5,766

 

Depreciation and amortization
7,317

 
6,849

Debt issuance costs amortization
33

 
48

Benefit from deferred income taxes
(346
)
 
(108
)
Gain on sale of assets
(101
)
 
(9
)
Gain on sale of business
(218
)
 

Gain on purchase of business
(462
)
 

Unrealized intercompany foreign currency transaction loss (gain)
907

 
(92
)
Changes in operating assets and liabilities, net of businesses acquired:
 

 
 

Accounts receivable
2,670

 
5,223

Inventories
(10,054
)
 
1,409

Other assets
225

 
378

Accounts payable
2,743

 
(2,355
)
Customer deposits
259

 
953

Accrued expenses
(2,859
)
 
(7,348
)
Accrued pension and postretirement liabilities
(35
)
 
(298
)
Net cash (used in) provided by operating activities
(837
)
 
8,434

 
 
 
 
Investing activities
 

 
 

Acquisition of businesses, net of cash acquired
(5,683
)
 
(34,250
)
Capital expenditures
(1,830
)
 
(2,192
)
Proceeds from disposal of business
218

 

Proceeds on sales of assets
131

 
113

Net cash used in investing activities
(7,164
)
 
(36,329
)
 
 
 
 
Financing activities
 

 
 

Payment of contingent consideration
(7,500
)
 
(299
)
Proceeds from short-term notes payable to bank
13,827

 
43,041

Repayments of short-term notes payable to bank
(13,827
)
 
(45,729
)
Proceeds from long-term debt

 
23,000

Repayments of long-term debt
(8,373
)
 
(2,934
)
Debt issuance costs

 
(682
)
Dividends paid
(757
)
 
(701
)
Net proceeds from sales of common stock
5,678

 
1,632

Net cash (used in) provided by financing activities
(10,952
)
 
17,328

 
 
 
 
Effect of exchange rate changes on cash
(764
)
 
(510
)
Net decrease in cash
(19,717
)
 
(11,077
)
 
 
 
 
Cash and cash equivalents at beginning of period
34,722

 
26,855

 
 
 
 
Cash and cash equivalents at end of period
$
15,005

 
$
15,778

See accompanying notes to the unaudited consolidated financial statements.

6


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014


NOTE 1.  BASIS OF PRESENTATION
 
In these notes, the terms “Hardinge,” or “the Company,” mean Hardinge Inc. and its predecessors together with its subsidiaries.
 
The Company operates through two reportable segments, Metalcutting Machine Solutions (“MMS”) and Aftermarket Tooling and Accessories (“ATA”). The MMS segment includes high precision computer controlled metalcutting turning machines, vertical machining centers, horizontal machining centers, grinding machines, and repair parts related to those machines. The ATA segment includes products, primarily collets and chucks that are purchased by manufacturers throughout the lives of their Hardinge or other branded machines.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from these estimates. All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods have been presented and recorded. Due to differing business conditions and some seasonality, operating results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2014.
 
Certain amounts in the 2013 consolidated financial statements have been reclassified to conform to the current presentation.

During the quarter ended June 30, 2014, the Company voluntarily changed the date of the annual goodwill and indefinite-lived intangible assets impairment testing from the last day of the fiscal year to the first day of the fourth quarter. This voluntary change is preferable under the circumstances as it provides the Company with additional time to complete the annual goodwill and indefinite-lived intangible asset impairment testing in advance of year-end reporting. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an impairment charge. This change was not applied retrospectively, as doing so would require the use of significant estimates and assumptions that include hindsight. Accordingly, the change will be applied prospectively.


7


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 2.  ACQUISITIONS
 
Acquisition of Forkardt
 
On May 9, 2013, Forkardt, Inc. (“Forkardt”, formerly Cherry Acquisition Corporation) and Hardinge Holdings GmbH, direct wholly owned subsidiaries of the Company, and Hardinge GmbH, an indirect wholly-owned subsidiary of the Company, acquired the Forkardt operations from Illinois Tool Works for $34.3 million, net of cash acquired. The acquisition of Forkardt strengthens and expands the Company’s leadership position in specialty workholding solutions around the world. The acquisition, which was funded through $24.3 million in bank debt and $10.0 million in cash, has been included in the ATA business segment. Forkardt is a leading global provider of high-precision, specialty workholding devices with headquarters in Traverse City, Michigan. Forkardt has operations in the U.S., France, Germany, and India. The results of operations of Forkardt have been included in the consolidated financial statements from the date of acquisition.

    
All purchase accounting adjustments were finalized in May 2014. The final allocation of purchase price to the assets acquired and liabilities assumed is as follows (in thousands):
 
May 9, 2013
Assets Acquired
 
Accounts receivable
$
5,521

Inventories
5,357

Other current assets
1,257

Property, plant and equipment
6,271

Other non-current assets
105

Trade name, customer list, and other intangible assets
14,614

Total assets acquired
33,125

Liabilities Assumed
 
Accounts payable and other current liabilities
3,413

Other non-current liabilities
1,278

Net assets acquired
28,434

Total purchase price
34,250

Goodwill
$
5,816


On April 2, 2014, the Company acquired the Forkardt India operations, which had an immaterial impact to the consolidated financial statements.

Disposal of Forkardt, Switzerland operations
 
On December 31, 2013, the Company divested its Forkardt operations in Switzerland for CHF 5.6 million, net of cash sold ($6.3 million equivalent). The sale was subject to working capital adjustments. The Forkardt Swiss business had net assets of $1.2 million as of the sale date. In March 2014, the Company recognized $0.2 million of additional consideration as a result of final working capital adjustments, which is included in the "Gain from disposal of discontinued operation and income from discontinued operation, net of tax" line in the Statement of Operations for the nine months ended September 30, 2014.

8


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

 
Acquisition of Voumard

On September 22, 2014, Hardinge Inc., along with its indirect wholly-owned subsidiaries Hardinge GmbH and L. Kellenberger & Co., AG acquired certain assets and assumed certain liabilities associated with a product line of grinding machine systems and applications marketed and sold under the Voumard brand from Peter Wolters GmbH. The purchase price was EUR 1.7 million (approximately $2.2 million), before taking into account customary purchase price adjustments. The acquisition of Voumard expands the Company's product offerings to include internal diameter ("ID") cylindrical grinding solutions, which are a complement to the existing grinding product lines offered by the Company. The acquisition was funded with cash and has been included in the MMS business segment. Voumard is a global leader in the ID grinding market with an installed base of over 9,000 machine solutions serving more than 2,500 customers around the world. The results of operations of Voumard have been included in the consolidated financial statements from the date of acquisition.

In accordance with the acquisition method of accounting, the acquired net assets were recorded at preliminary fair value at the date of acquisition. The identifiable intangible assets acquired, which primarily consists of drawings of $0.1 million, were valued using a cost approach. At September 30, 2014 the purchase price allocation is preliminary pending the finalization of the fair values of the net assets acquired due to the timing of the acquisition. These values will be finalized no later than one year from the date of the transaction. The preliminary fair values of the acquired assets and liabilities exceeded the purchase price of Voumard, resulting in a gain on the purchase of $0.5 million, which is included in the "Other (income) expense, net" line in the Statements of Operations for the three and nine months ended September 30, 2014.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Voumard acquisition at the date of acquisition (in thousands):

 
September 22, 2014
Assets Acquired
 
Inventories
$
2,984

Property, plant and equipment
259

Drawings, customer lists, and other intangible assets
131

Total assets acquired
3,374

Liabilities Assumed
 
Warranties
600

Deferred tax liability
162

Net assets acquired
2,612

Total purchase price
2,150

Bargain purchase gain
$
(462
)


9


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

Supplemental Pro Forma Information
 
The following table illustrates the unaudited pro forma effect on the Company’s consolidated operating results for the three and nine months ended September 30, 2014 and 2013, as if the Forkardt acquisition and related financing occurred on January 1, 2012 and the Voumard acquisition had occurred on January1, 2013 (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Sales
$
70,442

 
$
83,097

 
$
223,776

 
$
250,600

Net (loss) income from continuing operations(1)
(8,164
)
 
1,603

 
(13,200
)
 
4,017

Diluted (loss) earnings per share from continuing operations
$
(0.64
)
 
$
0.14

 
$
(1.04
)
 
$
0.34

____________________
(1) 
The pro forma results above include abbreviated financial results for Voumard, consisting of revenues and direct expenses for that product line. During the nine months ended September 30, 2014, the Voumard business incurred $4.8 million in restructuring charges, which included inventory write-offs, headcount reductions and other related costs. These amounts are included in the pro forma information presented above.
 
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations would have been had the acquisition been completed on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.
 
NOTE 3.  INVENTORIES
 
Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of the cost include materials, labor and overhead.
 
Net inventories consist of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Raw materials and purchased components
$
32,835

 
$
32,046

Work-in-process
33,772

 
28,591

Finished products
56,619

 
53,427

Inventories, net
$
123,226

 
$
114,064



10


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 4.  FAIR VALUE AND DERIVATIVE INSTRUMENTS
 
Fair Value
 
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
 
Level 1 — Quoted prices in active markets for identical assets and liabilities.
 
Level 2 — Observable inputs other than quoted prices in active markets for similar assets and liabilities.
 
Level 3 — Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.
 
The following table presents the carrying amount, fair values, and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Level of Fair Value Hierarchy
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
15,005

 
$
15,005

 
$
34,722

 
$
34,722

 
Level 1
Restricted cash
3,567

 
3,567

 
4,124

 
4,124

 
Level 1
Foreign currency forward contracts
384

 
384

 
285

 
285

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
Variable interest rate debt
17,540

 
17,540

 
26,635

 
26,635

 
Level 2
Contingent consideration

 

 
7,500

 
7,500

 
Level 3
Foreign currency forward contracts
578

 
578

 
872

 
872

 
Level 2
 
The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The contingent consideration represents the contingent liabilities associated with the earn-out provisions from the 2012 acquisition of Usach. The fair value of the contingent consideration is based on the present value of the estimated aggregated payment amount. The fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates. Based on the Company’s continued ability to enter into forward contracts, the markets for the fair value instruments are considered to be active. As of September 30, 2014 and December 31, 2013, there were no significant transfers in and/or out of Level 1 and Level 2.

The following table presents a reconciliation of the changes during the period ended September 30, 2014 for items categorized within Level 3 of the fair value hierarchy (in thousands):

 
Contingent Consideration
Balance at December 31, 2013
$
7,500

Current period settlements (payments)
(7,500
)
Balance at September 30, 2014
$

 

11


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

Derivative Instruments
 
Foreign currency forward contracts are utilized to mitigate the impact of currency fluctuations on assets and liabilities denominated in foreign currencies as well as on forecasted transactions denominated in foreign currencies. These contracts are considered derivative instruments and are recognized as either assets or liabilities and measured at fair value. For contracts that are designated and qualify as cash flow hedges, the gain or loss on the contracts is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into the “Sales” or “Cost of sales” line item on the Consolidated Statements of Operations when the underlying hedged transaction affects earnings, or “Other (income) expense, net” when the hedging relationship is deemed to be no longer effective. As of September 30, 2014 and December 31, 2013, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $26.2 million and $37.0 million, respectively. The Company expects less than $0.1 million of net losses, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months. 

As of September 30, 2014 and December 31, 2013, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $34.5 million and $45.5 million, respectively. For the three months ended September 30, 2014 and 2013, gains of $0.4 million and losses of $0.3 million, respectively, were recorded related to this type of derivative financial instruments. For the nine months ended September 30, 2014 and 2013, losses of $0.1 million and $1.7 million, respectively, were recorded related to this type of derivative financial instruments. For contracts that are not designated as hedges, the gain or loss on the contract is recognized in current earnings in the “Other (income) expense, net” line item on the Consolidated Statements of Operations.
 
The following table presents the fair value on the Consolidated Balance Sheets of the foreign currency forward contracts (in thousands):
 
September 30,
2014
 
December 31,
2013
Foreign currency forwards designated as hedges:
 

 
 

Other current assets
$
202

 
$
144

Accrued expenses
(209
)
 
(249
)
Foreign currency forwards not designated as hedges:
 

 
 

Other current assets
182

 
141

Accrued expenses
(369
)
 
(623
)
Foreign currency forwards, net
$
(194
)
 
$
(587
)
 
NOTE 5.  PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following(1) (in thousands): 
 
September 30,
2014
 
December 31,
2013
Land, buildings and improvements
$
85,175

 
$
88,295

Machinery, equipment and fixtures
78,829

 
80,584

Office furniture, equipment and vehicles
22,402

 
23,421

Construction in progress
83

 
217

 
186,489

 
192,517

Accumulated depreciation
(118,282
)
 
(117,861
)
Property, plant and equipment, net
$
68,207

 
$
74,656

____________________
(1) 
During the nine months ended September 30, 2014, the Company reclassified balances related to cost and accumulated depreciation. The net property, plant and equipment balance was not impacted by this adjustment. The December 31, 2013 balances have been reclassified to reflect the proper presentation.
 

12


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 6.  GOODWILL AND INTANGIBLE ASSETS
 
Detail and activity of goodwill by segment is presented below (in thousands):
 
MMS
 
ATA
 
Total
Balance at December 31, 2013
 
 
 
 


Goodwill(1)
$
32,434

 
$
5,154

 
$
37,588

Accumulated impairment losses
(27,586
)
 

 
(27,586
)
 
4,848

 
5,154

 
10,002

Acquisition of Forkardt India

 
1,626

 
1,626

Impairment loss
(4,848
)
 

 
(4,848
)
Currency translation adjustments

 
(53
)
 
(53
)
 
(4,848
)
 
1,573

 
(3,275
)
Balance at September 30, 2014
 
 
 
 
 
Goodwill
32,434

 
6,727

 
39,161

Accumulated impairment losses
(32,434
)
 

 
(32,434
)
 
$

 
$
6,727

 
$
6,727

____________________
(1) 
In accordance with business combination guidance, changes to the purchase price allocation are adjusted retrospectively to the consolidated financial results. The values above include measurement period adjustments recorded in the nine months ended September 30, 2014 to primarily revise the fair value of other current assets, accrued expenses and AOCI. The December 31, 2013 balances included in the consolidated balance sheets have been revised to include the effect of the measurement period adjustments.
Goodwill is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Based on lower than expected performance in the Usach reporting unit during the current year, combined with a downward revision in the anticipated future results, the Company determined that there were indicators of an impairment of that reporting unit. Accordingly, an initial calculation of the fair value was performed, which resulted in the carrying amount of the Usach reporting unit exceeding its fair value, which was estimated based on the present value of expected future cash inflows and market data. Accordingly, a goodwill impairment charge of $4.8 million was recognized in that reporting unit during the third quarter of the current year. This amount is an estimate based on preliminary data, and will be finalized in the fourth quarter in connection with the formal annual impairment test.


13


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

The major components of intangible assets other than goodwill are as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Gross amortizable intangible assets:
 

 
 

Land rights
$
2,827

 
$
2,865

Patents
3,065

 
3,030

Technical know-how, customer lists, and other
22,729

 
21,375

Total gross amortizable intangible assets
28,621

 
27,270

 
 
 
 
Accumulated amortization:
 

 
 

Land rights
(217
)
 
(177
)
Patents
(2,936
)
 
(2,884
)
Technical know-how, customer lists, and other
(6,463
)
 
(5,220
)
Total accumulated amortization
(9,616
)
 
(8,281
)
Amortizable intangible assets, net
19,005

 
18,989

 
 
 
 
Indefinite lived intangible assets:
 

 
 

Assets associated with Bridgeport acquisition(1)
7,225

 
7,354

Usach trade name(2)
630

 
1,550

Forkardt trade name(3) 
4,170

 
4,170

 
12,025


13,074

Intangible assets other than goodwill, net
$
31,030

 
$
32,063

____________________
(1) 
Represents the aggregate value of the trade name, trademarks and copyrights associated with the former worldwide operations of Bridgeport. The Bridgeport brand name is used on all of the machining center lines. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has been determined to have an indefinite useful life.
 
(2) 
Represents the value of the trade name associated with Usach, which the Company acquired in 2012. The Usach trade name is used on all of the grinding machines and grinding systems manufactured by Usach. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has been determined to have an indefinite useful life. Based on impairment indicators present in the third quarter of the current year as discussed above, the Company performed a review of the valuation of the Usach intangible assets, resulting in an impairment charge to the Usach trade name of $0.9 million. This amount is an estimate based on preliminary data, and will be finalized in the fourth quarter in connection with the formal annual impairment test.
 
(3)  
Represents the value of the trade name associated with Forkardt, which the Company acquired in 2013. The Forkardt trade name is used on all of the products manufactured by Forkardt. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has been determined to have an indefinite useful life.

Amortization expense related to the definite-lived intangible assets are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Amortization expense
$
448

 
$
440

 
$
1,339

 
$
1,125



14


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 7.  WARRANTIES
 
A reconciliation of the changes in the product warranty accrual, which is included in accrued expenses, is as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Balance at the beginning of period
$
3,409

 
$
3,249

 
$
3,601

 
$
3,432

Warranties issued
538

 
787

 
1,750

 
2,182

Warranty settlement costs
(665
)
 
(577
)
 
(1,797
)
 
(1,905
)
Changes in accruals for pre-existing warranties
67

 
(248
)
 
(217
)
 
(718
)
Other adjustments(1)
589

 

 
589

 
332

Currency translation adjustments
(130
)
 
117

 
(118
)
 
5

Balance at the end of period
$
3,808

 
$
3,328

 
$
3,808

 
$
3,328

____________________
(1) 
Represents the warranty liabilities assumed in connection with the Voumard acquisition in 2014 and the Forkardt acquisition in 2013. Refer to Note 2. "Acquisitions" for details.

NOTE 8.  FINANCING ARRANGEMENTS
 
See Note 6. “Financing Arrangements” of the 2013 Annual Report on Form 10-K for a description of the financing arrangements in place as of December 31, 2013.
 
In January 2014, Hardinge Jiaxing amended its secured credit facility with a local bank. The amendment increased the total availability under the facility from Chinese Yuan (“CNY”) 34.2 million (approximately $5.6 million) to CNY 59.0 million (approximately $9.6 million) or its equivalent in other currencies. The facility, which expires on December 20, 2014, is available for working capital and letter of credit purposes. Borrowings for working capital purposes are limited to CNY 39.0 million (approximately $6.4 million). The facility is secured by real property owned by the subsidiary. The interest rate on the credit facility, currently at 6.60%, is based on the basic interest rate as published by the People’s Bank of China, plus a 10% mark-up. There was no principal amount outstanding under this facility at September 30, 2014.

In June 2014, Hardinge Machine Tools B.V., Taiwan Branch, a wholly-owned subsidiary in Taiwan, renewed its unsecured credit facility, which will expire in June 2015 under the renewal. This facility provides up to $12.0 million, or its equivalent in other currencies, for working capital and export business purposes. This credit facility charges interest at 1.5% and is subject to change by the lender based on market conditions and carries no commitment fees on unused funds. There was no principal amount outstanding under this facility at September 30, 2014.

In September 2014, Hardinge Machine (Shanghai) Co., Ltd., an indirectly wholly-owned subsidiary in China, entered into a new credit facility. This facility, which expires in July 2015, provides up to CNY 34.0 million ($5.5 million equivalent) for letters of guarantee. Individual letters of guarantee issued under this facility require a cash deposit at the bank of 30% of the letter’s face value. The total issued letters of guarantee at September 30, 2014 had a face value of CNY 0.1 million (less than $0.1 million equivalent).



15


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 9.  INCOME TAXES
 
A valuation allowance is recorded against all or a portion of the deferred tax assets in the U.S., Canada, U.K., Germany, and the Netherlands.
 
Each quarter, a full year tax rate is estimated for jurisdictions not subject to valuation allowances based upon the most recent forecast of full year anticipated results and the year-to-date tax expense is adjusted to reflect the full year anticipated tax rate. The rate is an estimate based upon projected results for the year, estimated annual permanent differences, the statutory tax rates in the various jurisdictions in which the Company operates, and the non-recognition of tax benefits for entities with full valuation allowances. The overall effective tax rates were (7.7)% and (14.0)% for the three and nine months ended September 30, 2014, respectively.
 
The tax years 2011, 2012 and 2013 remain open to examination by the U.S. federal taxing authorities. The tax years 2009 through 2013 remain open to examination by the U.S. state taxing authorities. For other major jurisdictions (Switzerland, U.K., Taiwan, France, Germany, Netherlands and China), the tax years between 2007 and 2013 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.
 
At September 30, 2014, a liability of $2.8 million is recorded with respect to uncertain income tax positions, which includes related interest and penalties of $0.7 million. If recognized, essentially all of the uncertain tax positions and related interest at September 30, 2014 would be recorded as a benefit to income tax expense on the Consolidated Statements of Operations. It is reasonably possible that some of the uncertain tax positions pertaining to foreign operations may change within the next 12 months due to audit settlements and statute of limitations expirations. The change in uncertain tax positions for these items is estimated to be between $0.1 million and $1.0 million.

NOTE 10.  COMMITMENTS AND CONTINGENCIES
 
The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary course of business. Management believes the outcome of these lawsuits will not have a material effect on the financial position or results of operations.
 
The Company’s operations are subject to extensive federal, state, local and foreign laws and regulations relating to environmental matters. Certain environmental laws can impose joint and several liabilities for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Hazardous substances and adverse environmental effects have been identified with respect to real property owned by the Company, and on adjacent parcels of real property.
 
In particular, the Elmira, NY manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination. The Kentucky Avenue Wellfield Site (the “Site”) encompasses an area which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, NY. In February 2006, the Company received a Special Notice Concerning a Remedial Investigation/Feasibility Study (“RI/FS”) for the Koppers Pond (the “Pond”) portion of the Site. The EPA documented the release and threatened release of hazardous substances into the environment at the Site, including releases into and in the vicinity of the Pond. The hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.
 
Until receipt of this Special Notice in February 2006, the Company had never been named as a potentially responsible party (“PRP”) at the Site nor had the Company received any requests for information from the EPA concerning the Site. Environmental sampling on the Company’s property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond, and found no evidence that the Company’s operations or property have contributed or are contributing to the contamination. All appropriate insurance carriers have been notified, and the Company is actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.
 

16


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

A substantial portion of the Pond is located on the Company’s property. The Company, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation and Toshiba America, Inc., the PRPs, have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the EPA, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis.
 
The EPA approved the RI/FS Work Plan in May of 2008. On September 7, 2011, the PRPs submitted the draft Remedial Investigation Report to the EPA and on January 10, 2013, the draft Feasibility Study was submitted to the EPA.
 
The draft Feasibility Study identified alternative remedial actions with estimated life-cycle costs ranging from $0.7 million to $3.4 million. The Company’s portion of the potential costs are estimated to range from $0.1 million to $0.5 million. Based on the current estimated costs of the various remedial alternatives now under consideration by the EPA, a reserve of $0.2 million has been recorded for the Company’s share of remediation expenses at the Pond as of September 30, 2014. This reserve is included in "Accrued expenses" on the Consolidated Balance Sheets.
 
Based upon information currently available, except as described in the preceding paragraphs, the Company does not have material liabilities for environmental remediation. Though the foregoing reflects the Company’s current assessment as it relates to environmental remediation obligations, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to the Company.

NOTE 11.  STOCK BASED COMPENSATION
 
All stock based compensation to employees is recorded as "Selling, general and administrative expenses" in the Consolidated Statements of Operations based on the fair value at the grant date of the award. These non-cash compensation costs are included in the depreciation and amortization amounts in the Consolidated Statements of Cash Flows.
 
A summary of stock based compensation expense is as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Restricted stock/unit awards (“RSA”)
$
109

 
$
87

 
$
327

 
$
277

Performance share incentives (“PSI”)
(170
)
 
35

 
(170
)
 
95

 
$
(61
)
 
$
122

 
$
157

 
$
372

 
There were no RSAs granted during the nine months ended September 30, 2014, and 2013, respectively. The deferred compensation is being amortized on a straight-line basis over the specified service period. There were no PSIs granted during the nine months ended September 30, 2014 and 2013, respectively. The deferred compensation with respect to the PSIs is being recognized into earnings based on the passage of time and achievement of performance targets. All outstanding RSAs and PSIs are unvested.
 
Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs as of September 30, 2014 and December 31, 2013, are as follows:
 
September 30,
2014
 
December 31,
2013
Unrecognized compensation cost (in thousands)
$
826

 
$
1,179

 
 
 
 
Expected weighted-average recognition period for unrecognized compensation cost (in years)
1.9

 
2.6

 

17


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 12.  STOCK OFFERING
 
On August 9, 2013, the Company entered into a sales agreement (the “Agreement”) with an independent sales agent (“Agent”), under which the Company may, from time to time, sell shares of its common stock, par value $0.01 per share (the “Shares”), having an aggregate offering price of up to $25.0 million through the Agent. Under the Agreement, the Agent may sell the Shares by methods deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended, including sales made directly on the NASDAQ Global Select Market, on any other existing trading market for the common stock or to or through a market maker. In addition, with the prior consent of the Company, the Agent may sell the common stock by any other method permitted by law, including in privately negotiated transactions.
 
The Agreement will terminate upon the earlier of (i) sale of the Shares under the Agreement having an aggregate offering price of $25.0 million and (ii) the termination of the Agreement as permitted therein. The Agreement may be terminated by the Agent or the Company at any time upon 10 days notice to the other party, or by the Agent at any time in certain circumstances, including the occurrence of a material adverse change in the Company. The Company's Board of Directors authorized this program for a period of one year ending August 8, 2014. This authorization has not been renewed as of September 30, 2014.
 
As of September 30, 2014, 1,014,252 Shares have been sold under the Agreement for aggregated net proceeds of $14.6 million, of which 663,276 of the shares sold were issued from treasury. During the nine months ended September 30, 2014, 403,863 Shares of common stock have been sold under the “at-the-market” stock offering program for aggregate net proceeds of $5.7 million, of which 52,887 of the shares sold were issued from treasury.

NOTE 13.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Changes in AOCI by component for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
 
Three Months Ended September 30, 2014
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
(loss) income
Beginning balance, net of tax
$
39,216

 
$
(39,957
)
 
$
25

 
$
(716
)
Other comprehensive (loss) income before
reclassifications
(6,368
)
 
1,585

 
31

 
(4,752
)
Less income reclassified from AOCI

 
249

 
18

 
267

Net other comprehensive (loss) income
(6,368
)
 
1,336

 
13

 
(5,019
)
Income taxes
756

 
170

 
1

 
927

Ending balance, net of tax
$
32,092

 
$
(38,791
)
 
$
37

 
$
(6,662
)
 

 
Three Months Ended September 30, 2013
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
32,040

 
$
(60,657
)
 
$
(46
)
 
$
(28,663
)
Other comprehensive income before
reclassifications
6,969

 
68

 
371

 
7,408

Less income reclassified from AOCI

 
568

 
27

 
595

Net other comprehensive income (loss)
6,969

 
(500
)
 
344

 
6,813

Income taxes
(93
)
 
(120
)
 
17

 
(196
)
Ending balance, net of tax
$
39,102

 
$
(61,037
)
 
$
281

 
$
(21,654
)


18


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

 
Nine Months Ended September 30, 2014
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
38,663

 
$
(40,213
)
 
$
131

 
$
(1,419
)
Other comprehensive (loss) income before
reclassifications
(5,985
)
 
2,316

 
(82
)
 
(3,751
)
Less income (loss) reclassified from AOCI

 
746

 
(4
)
 
742

Net other comprehensive (loss) income
(5,985
)
 
1,570

 
(78
)
 
(4,493
)
Income taxes
586

 
148

 
16

 
750

Ending balance, net of tax
$
32,092

 
$
(38,791
)
 
$
37

 
$
(6,662
)

 
Nine Months Ended September 30, 2013
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
36,830

 
$
(62,375
)
 
$
36

 
$
(25,509
)
Other comprehensive (loss) income before
reclassifications
2,319

 
3,128

 
263

 
5,710

Less income (loss) reclassified from AOCI

 
1,700

 
17

 
1,717

Net other comprehensive (loss) income
2,319

 
1,428

 
246

 
3,993

Income taxes
47

 
90

 
1

 
138

Ending balance, net of tax
$
39,102

 
$
(61,037
)
 
$
281

 
$
(21,654
)

Details about reclassification out of AOCI for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
Affected line item on the Consolidated Statements of Operations
Details of AOCI components
 
2014
 
2013
 
2014
 
2013
 
Unrealized gain (loss) on cash flow hedges: 
 
 

 
 

 
 
 
 
 
 
 
 
$
(10
)
 
$
41

 
$
71

 
$
20

 
Sales
 
 
28

 
(14
)
 
(75
)
 
(3
)
 
Other (income) expense, net
 
 
18

 
27

 
(4
)
 
17

 
Total before tax
 
 
3

 
(5
)
 
16

 
(2
)
 
Tax benefit (expense)
 
 
$
21

 
$
22

 
$
12

 
$
15

 
Net of tax
Retirement plans related adjustments:
 
 

 
 

 
 
 
 
 
 
Amortization of prior service credit
 
$
(99
)
 
$
(167
)
 
$
(303
)
 
$
(499
)
 
(a)
Amortization of transition asset
 
(69
)
 
(68
)
 
(211
)
 
(203
)
 
(a)
Amortization of actuarial loss
 
417

 
803

 
1,260

 
2,402

 
(a)
 
 
249

 
568

 
746

 
1,700

 
Total before tax
 
 
3

 
(43
)
 
7

 
(127
)
 
Tax benefit (expense)
 
 
$
252

 
$
525

 
$
753

 
$
1,573

 
Net of tax
 
____________________
(a)  These AOCI components are included in the computation of net period pension and post retirement costs. See Note 14. "Pension and Postretirement Plans" for details.
 

19


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 14.  PENSION AND POSTRETIREMENT PLANS
 
A summary of the components of net periodic pension benefit costs for the three and nine months ended September 30, 2014 and 2013 is presented below (in thousands):
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended 
 September 30,
 
Three Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
352

 
$
348

 
$
3

 
$
4

Interest cost
2,107

 
1,843

 
22

 
23

Expected return on plan assets
(2,477
)
 
(2,366
)
 

 

Amortization of prior service credit
(99
)
 
(103
)
 

 
(64
)
Amortization of transition asset
(69
)
 
(68
)
 

 

Amortization of actuarial loss (gain)
431

 
804

 
(14
)
 
(1
)
Net periodic cost (benefit)
$
245

 
$
458

 
$
11

 
$
(38
)

 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
1,078

 
$
1,038

 
$
9

 
$
12

Interest cost
6,351

 
5,521

 
66

 
69

Expected return on plan assets
(7,473
)
 
(7,083
)
 

 

Amortization of prior service credit
(303
)
 
(307
)
 

 
(192
)
Amortization of transition asset
(211
)
 
(203
)
 

 

Amortization of loss (gain)
1,302

 
2,405

 
(42
)
 
(3
)
Net periodic cost (benefit)
$
744

 
$
1,371

 
$
33

 
$
(114
)


20


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 15.  (LOSS) EARNINGS PER SHARE
 
Basic (loss) earnings per share is computed using the weighted average number of shares of common stock outstanding during the period. For diluted (loss) earnings per share, the weighted average number of shares includes common stock equivalents related to stock options and restricted stock. The following table presents the basis of the (loss) earnings per share computation (in thousands):
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Numerator for basic and diluted (loss) earnings per share:
 

 
 

 
 
 
 
(Loss) earnings from continuing operations
$
(7,578
)
 
$
1,173

 
$
(6,900
)
 
$
3,269

Gain from disposal of discontinued operation and income from
   discontinued operations, net of tax

 
306

 
218

 
515

Net (loss) earnings applicable to common shareholders
$
(7,578
)
 
$
1,479

 
$
(6,682
)
 
$
3,784

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Denominator for basic (loss) earnings per share — weighted
   average shares
12,715

 
11,721

 
12,643

 
11,681

Assumed exercise of stock options

 
29

 

 
28

Assumed satisfaction of restricted stock conditions

 
63

 

 
61

Denominator for diluted (loss) earnings per share — adjusted
   weighted average shares
12,715

 
11,813

 
12,643

 
11,770

 
There is no dilutive effect of the restricted stock and stock options for the three and nine months ended September 30, 2014 due to the current period and year to date net loss. There would have been 108,701 and 103,998 shares included in the diluted earnings per share calculation for the three and nine months ended September 30, 2014 had the impact of including these securities not been anti-dilutive. Shares of certain stock-based awards totaling 36,516 and 47,793 were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2014 and 2013, respectively, as they were anti-dilutive. For the nine months ended September 30, 2014 and 2013, there were 44,208 shares and 53,524 shares, respectively, of certain stock-based compensation awards excluded from the calculation of diluted earnings per share, as they were anti-dilutive.


21


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

NOTE 16. SEGMENT INFORMATION
 
Segment (loss) income is measured for internal reporting purposes by excluding corporate expenses, impairment charges, interest income, interest expense, and income taxes. Corporate expenses consist primarily of executive employment costs, certain professional fees, and costs associated with the Company’s global headquarters. Financial results for each reportable segment are as follows (in thousands):
 
Three Months Ended September 30, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,353

 
$
16,681

 
$
(110
)
 
$
68,924

Depreciation and amortization
1,722

 
630

 
 

 
2,352

Segment (loss) income
(2,094
)
 
1,338

 
 

 
(756
)
Capital expenditures
457

 
249

 
 

 
706


 
Three Months Ended September 30, 2013
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
64,382

 
$
15,462

 
$
(60
)
 
$
79,784

Depreciation and amortization
1,742

 
612

 
 

 
2,354

Segment income
2,149

 
1,564

 
 

 
3,713

Capital expenditures
540

 
25

 
 

 
565


 
Nine Months Ended September 30, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
167,977

 
$
50,909

 
$
(261
)
 
$
218,625

Depreciation and amortization
5,255

 
1,916

 
 

 
7,171

Segment (loss) income
(2,107
)
 
5,072

 
 

 
2,965

Capital expenditures
1,136

 
694

 
 

 
1,830

Segment assets(1)
246,429

 
53,874

 
 

 
300,303

 
Nine Months Ended September 30, 2013
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
191,272

 
$
35,448

 
$
(362
)
 
$
226,358

Depreciation and amortization
5,102

 
1,335

 
 

 
6,437

Segment income
6,224

 
4,464

 
 

 
10,688

Capital expenditures
1,676

 
516

 
 

 
2,192

Segment assets(1)
268,802

 
55,675

 
 

 
324,477

____________________
(1) 
Segment assets primarily consist of restricted cash, accounts receivable, inventories, prepaid and other assets, property, plant and equipment, and intangible assets. Unallocated assets primarily include, cash and cash equivalents, corporate property, plant and equipment, deferred income taxes, and other non-current assets.
 

22


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

A reconciliation of segment (loss) income to consolidated (loss) income from operations before income taxes for the three and nine months ended September 30, 2014 and 2013 are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2014
 
2013
 
2014
 
2013
Segment (loss) income
$
(756
)
 
$
3,713

 
$
2,965

 
$
10,688

Unallocated corporate expense
(859
)
 
(415
)
 
(3,151
)
 
(1,931
)
Interest expense, net
(156
)
 
(311
)
 
(522
)
 
(798
)
Other unallocated income (expense)
(5,263
)
 
(730
)
 
(5,347
)
 
(3,072
)
(Loss) income from continuing operations before income taxes
$
(7,034
)
 
$
2,257

 
$
(6,055
)
 
$
4,887

 
A reconciliation of segment assets to consolidated total assets follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Total segment assets
$
300,303

 
$
303,423

Unallocated assets
19,637

 
40,760

Total assets
$
319,940

 
$
344,183


Unallocated assets include cash of $15.0 million and $34.7 million at September 30, 2014 and December 31, 2013, respectively.

NOTE 17.  NEW ACCOUNTING STANDARDS
In August 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on management's evaluation and disclosure of uncertainties about the entity's ability to continue as a going concern. In connection with the preparation of the interim and annual financial statements, management will be required to perform an assessment of whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. If conditions or events are identified that raise substantial doubt that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued, additional disclosures are required. This guidance is effective for the annual period ending after December 15, 2016, and for interim and annual periods thereafter. Early application is permitted. Management does not believe that the adoption of this accounting guidance will have a material impact on the financial statements or related disclosures.     
In June 2014, FASB issued authoritative guidance on accounting for share-based payments when the terms of the award provide that a performance target could be achieved after the requisite service period. This guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition, and as such, should not be reflected in estimating the grant-date fair value of the award. This guidance is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on the financial statements.
    

23


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2014

In May 2014, FASB issued authoritative guidance on accounting for revenue recognition. The objective of this guidance is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This guidance applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The new guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt this guidance. The Company is currently evaluating the new guidance and has not determined the impact this standard may have on the financial statements, nor decided upon the method of adoption.

In April 2014, FASB issued authoritative guidance on the presentation and disclosure of discontinued operations. This guidance is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been previously reported in financial statements. Management does not believe that the adoption of this accounting guidance will have a material impact on the financial statements.

24


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview.  The following Management’s Discussion and Analysis (“MD&A”) contains information that the Company believes is necessary to attain an understanding of the Company’s financial condition and associated matters, including the Company’s liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements, the accompanying notes to the financial statements (“Notes”) appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2013.
 
We supply high precision computer controlled metalcutting turning machines, grinding machines, vertical machining centers, and repair parts related to those machines. The Company also engineers and supplies high precision, standard and specialty workholding devices, and other machine tool accessories. We believe our products are known for accuracy, reliability, durability and value. We are geographically diversified with manufacturing facilities in China, France, Germany, Switzerland, Taiwan, the United States (“U.S.”), the United Kingdom (“U.K.”), and India, with sales to most industrialized countries. Approximately 67% of our 2013 sales were to customers outside of North America, 68% of our 2013 products sold were manufactured outside of North America, and 66% of our employees in 2013 were employed outside of North America.
 
Metrics on machine tool market activity monitored by our management include world machine tool shipments, as reported annually by Gardner Publications in the Metalworking Insiders Report, and metal-cutting machine orders, as reported by the Association of Manufacturing Technology, the primary industry group for U.S. machine tool manufacturers. Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that are prospective customers for our products. One such measurement is the Purchasing Managers Index, as reported by the Institute for Supply Management. Another measurement is capacity utilization of U.S. manufacturing plants, as reported by the Federal Reserve Board. Similar information regarding machine tool shipments and economic indicators in foreign countries is published by trade associations, government agencies, and economic services in those countries.
 
Non-machine sales, which include collets, chucks, accessories, repair parts and service revenue, accounted for approximately 36% of overall sales through the third quarter of 2014 and are an important part of our business due to an installed base of thousands of machines, and the growing needs demanded by specialty workholding applications. In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.
 
Other key performance indicators are geographic distribution of net sales (“sales”) and net orders (“orders”), gross profit as a percent of sales, income from operations, working capital changes, and debt level trends. In an industry where constant product technology development has led to an average model life of three to five years, effectiveness of technological innovation and development of new products are also key performance indicators.
 
We are exposed to financial market risk resulting from changes in interest and foreign currency rates. Global economic conditions and related disruptions within the financial markets have also increased our exposure to the possible liquidity and credit risks of our counterparties. We believe we have sufficient liquidity to fund our foreseeable business needs, including cash and cash equivalents, cash flows from operations, our bank financing arrangements, and equity financing arrangements.
 
We monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal. Our cash and cash equivalents are diversified among counterparties to minimize exposure to any one of these entities.
 
We are subject to credit risks relating to the ability of counterparties of hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and non-performance has been considered in the fair value measurements of our foreign currency forward exchange contracts.
 
We expect that some of our customers and vendors may experience difficulty in maintaining the liquidity required to buy inventory or raw materials. We continue to monitor our customers’ financial condition in order to mitigate the risk associated with our ability to collect on our accounts receivable.
 

25


Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan, which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are the British Pound Sterling (“GBP”), Chinese Renminbi (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“TWD”), and Swiss Franc (“CHF”). Under U.S. generally accepted accounting principles, results of foreign subsidiaries are translated into U.S. Dollars (“USD”) at the average exchange rate during the periods presented. Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative data significantly. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.
 
The fluctuations of the foreign currency exchange rates during the three months ended September 30, 2014 did not have a measurable impact on sales as compared to the same period in 2013. For the nine months ended September 30, 2014, foreign currency fluctuations resulted in favorable currency translation impact of approximately $1.1 million on sales when compared to the same period in 2013.


26


Results of Operations
 
Presented below is summarized selected financial data for the three and nine months ended September 30, 2014 and 2013 (in thousands): 
 
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
 
 
2014
 
2013
 
$
Change
 
%
Change
 
2014
 
2013
 
$
Change
 
%
Change
Sales
 
$
68,924

 
$
79,784

 
$
(10,860
)
 
(14
)%
 
$
218,625

 
$
226,358

 
$
(7,733
)
 
(3
)%
Gross profit
 
18,677

 
22,041

 
(3,364
)
 
(15
)%
 
59,858

 
63,781

 
(3,923
)
 
(6
)%
% of sales
 
27.1
 %
 
27.6
%
 
(0.5
)
pts.
 
27.4
 %
 
28.2
%
 
(0.8
)
pts.
Selling, general and
   administrative
   expenses
 
20,123

 
19,572

 
551

 
3
 %
 
59,376

 
57,780

 
1,596

 
3
 %
% of sales
 
29.2
 %
 
24.5
%
 
4.7

pts.
 
27.2
 %
 
25.5
%
 
1.7

pts.
Impairment charge
 
5,766

 

 
5,766

 
NM

 
5,766

 

 
5,766

 
NM

Other (income)
   expense, net
 
(334
)
 
(99
)
 
(235
)
 
237
 %
 
249

 
316

 
(67
)
 
(21
)%
(Loss) income from
   operations
 
(6,878
)
 
2,568

 
(9,446
)
 
(368
)%
 
(5,533
)
 
5,685

 
(11,218
)
 
(197
)%
% of sales
 
(10.0
)%
 
3.2
%
 
(13.2
)
pts.
 
(2.5
)%
 
2.5
%
 
(5.0
)
pts.
Interest expense, net
 
156

 
311

 
(155
)
 
(50
)%
 
522

 
798

 
(276
)
 
(35
)%
(Loss) income from
   continuing
   operations before
   income taxes
 
(7,034
)