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EX-32 - EXHIBIT 32 CERTIFICATION - HARDINGE INChdng-6302015x10qxex32.htm
EX-31.2 - EXHIBIT 31.2 MALONE CERTIFICATION - HARDINGE INChdng-6302015x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 SIMONS CERTIFICATION - HARDINGE INChdng-6302015x10qxex311.htm

 
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 June 30, 2015
 
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 July 31, 2015 there were 12,836,711 shares of Common Stock of the registrant outstanding.
 





HARDINGE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
22,778

 
$
16,293

Restricted cash
2,887

 
3,151

Accounts receivable, net
56,179

 
62,877

Inventories, net
122,319

 
111,821

Other current assets
12,809

 
10,545

Total current assets
216,972

 
204,687

 
 
 
 
Property, plant and equipment, net
66,338

 
65,874

Goodwill
6,683

 
6,698

Other intangible assets, net
29,505

 
30,217

Other non-current assets
4,478

 
3,844

Total non-current assets
107,004

 
106,633

Total assets
$
323,976

 
$
311,320

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Accounts payable
$
30,488

 
$
25,592

Accrued expenses
24,980

 
25,071

Customer deposits
16,319

 
12,736

Accrued income taxes
1,961

 
646

Deferred income taxes
2,562

 
2,332

Current portion of long-term debt
4,678

 
3,972

Total current liabilities
80,988

 
70,349

 
 
 
 
Long-term debt
9,722

 
12,253

Pension and postretirement liabilities
52,534

 
53,119

Deferred income taxes
2,588

 
2,516

Other liabilities
3,636

 
3,487

Total non-current liabilities
68,480

 
71,375

Commitments and contingencies (see Note 10)


 


Common stock ($0.01 par value, 20,000,000 authorized; 12,856,716 issued and
12,836,711 outstanding as of June 30, 2015, and 12,825,468 issued and
12,821,768 outstanding as of December 31, 2014)
129

 
128

Additional paid-in capital
120,954

 
120,538

Retained earnings
87,441

 
87,777

Treasury shares (at cost, 20,005 as of June 30, 2015, and 3,700 as of December 31, 2014)
(219
)
 
(46
)
Accumulated other comprehensive loss
(33,797
)
 
(38,801
)
Total shareholders’ equity
174,508

 
169,596

Total liabilities and shareholders’ equity
$
323,976

 
$
311,320

 
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Sales
$
82,356

 
$
78,851

 
$
151,484

 
$
149,701

Cost of sales
58,892

 
56,890

 
109,772

 
108,520

Gross profit
23,464

 
21,961

 
41,712

 
41,181

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
21,071

 
20,133

 
40,671

 
39,253

Other expense, net
10

 
192

 
75

 
583

Income from operations
2,383

 
1,636

 
966

 
1,345

 
 
 
 
 
 
 
 
Interest expense
154

 
155

 
311

 
398

Interest income
(23
)
 
(12
)
 
(40
)
 
(32
)
Income from continuing operations before income taxes
2,252

 
1,493

 
695

 
979

Income taxes
666

 
144

 
517

 
301

Net income from continuing operations
1,586

 
1,349

 
178

 
678

 
 
 
 
 
 
 
 
Gain from disposal of discontinued operation, net of tax

 

 

 
218

 
 
 
 
 
 
 
 
Net income
$
1,586

 
$
1,349

 
$
178

 
$
896

 
 
 
 
 
 
 
 
Per share data:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Basic earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
0.12

 
$
0.11

 
$
0.01

 
$
0.05

Discontinued operations

 

 

 
0.02

Basic earnings per share
$
0.12

 
$
0.11

 
$
0.01

 
$
0.07

 
 
 
 
 
 
 
 
Diluted earnings per share:
 

 
 

 
 

 
 

Continuing operations
$
0.12

 
$
0.11

 
$
0.01

 
$
0.05

Discontinued operations

 

 

 
0.02

Diluted earnings per share
$
0.12

 
$
0.11

 
$
0.01

 
$
0.07

 
 
 
 
 
 
 
 
Cash dividends declared per share:
$
0.02

 
$
0.02

 
$
0.04

 
$
0.04

 
See accompanying notes to the unaudited consolidated financial statements.


4


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Net income
$
1,586

 
$
1,349

 
$
178

 
$
896

Other comprehensive income:
 

 
 

 
 

 
 

Foreign currency translation adjustments
4,196

 
1,242

 
5,528

 
383

Retirement plans related adjustments
(523
)
 
116

 
(12
)
 
234

Unrealized (loss) gain on cash flow hedges
(57
)
 
206

 
318

 
(91
)
Other comprehensive income before tax
3,616

 
1,564

 
5,834

 
526

Income tax (benefit) expense
(334
)
 
16

 
830

 
(177
)
Other comprehensive income, net of tax
3,950

 
1,548

 
5,004

 
703

Total comprehensive income
$
5,536

 
$
2,897

 
$
5,182

 
$
1,599

 
See accompanying notes to the unaudited consolidated financial statements.


5


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
(Unaudited)
Operating activities
 

 
 

Net income
$
178

 
$
896

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
4,567

 
5,049

Debt issuance costs amortization
19

 
23

Deferred income taxes
(260
)
 
207

Gain on sale of assets
(2
)
 
(92
)
Gain on sale of business

 
(218
)
Unrealized foreign currency transaction loss (gain)
1,185

 
(32
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
6,683

 
1,945

Inventories
(8,467
)
 
(4,672
)
Other assets
(1,017
)
 
728

Accounts payable
5,097

 
3,548

Customer deposits
3,420

 
(2,853
)
Accrued expenses
(799
)
 
(4,619
)
Accrued pension and postretirement liabilities
(57
)
 
93

Net cash provided by operating activities
10,547

 
3

 
 
 
 
Investing activities
 

 
 

Acquisition of business, net of cash acquired

 
(3,533
)
Capital expenditures
(1,993
)
 
(1,124
)
Proceeds from disposal of business

 
218

Proceeds from sales of assets
11

 
122

Net cash used in investing activities
(1,982
)
 
(4,317
)
 
 
 
 
Financing activities
 

 
 

Payment of contingent consideration

 
(6,000
)
Proceeds from short-term notes payable to bank
13,706

 
6,204

Repayments of short-term notes payable to bank
(13,706
)
 
(6,204
)
Repayments of long-term debt
(2,364
)
 
(7,585
)
Dividends paid
(525
)
 
(503
)
Purchases of treasury stock
(201
)
 

Net proceeds from sales of common stock

 
5,678

Net cash used in financing activities
(3,090
)
 
(8,410
)
 
 
 
 
Effect of exchange rate changes on cash
1,010

 
292

Net increase (decrease) in cash
6,485

 
(12,432
)
 
 
 
 
Cash and cash equivalents at beginning of period
16,293

 
34,722

 
 
 
 
Cash and cash equivalents at end of period
$
22,778

 
$
22,290


See accompanying notes to the unaudited consolidated financial statements.

6


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015


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, 2014. 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 six months ended June 30, 2015 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2015.

In the first quarter of 2015, the Company recorded an out of period adjustment to correct finished goods inventory in the amount of $0.7 million that is related to periods beginning in 2013. This adjustment, which was in the Aftermarket Tooling and Accessories Segment, was to correct for costs that were not properly released from inventory as the product was sold. The Company assessed the impact of this adjustment and concluded that it is not material to previously reported financial statements. The Company also determined that the adjustment is not expected to be material to the full year in 2015, but was material to the first quarter. 
 
Certain amounts in the 2014 consolidated financial statements have been reclassified to conform to the current year presentation.

NOTE 2.  ACQUISITION
 
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.


7


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

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 June 30, 2015 the purchase price allocation is preliminary pending the finalization of the fair values of the net assets acquired. 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.

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


Supplemental Pro Forma Information
 
The following table illustrates the unaudited pro forma effect on the Company’s consolidated operating results for the three and six months ended June 30, 2015 and 2014, as if the Voumard acquisition had occurred on January 1, 2013 (in thousands, except per share data):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Sales
$
82,356

 
$
80,013

 
$
151,484

 
$
152,711

Net income (loss) from continuing operations(1)
1,586

 
806

 
178

 
(5,181
)
Diluted earnings (loss) per share from continuing operations
$
0.12

 
$
0.06

 
$
0.01

 
$
(0.41
)
____________________
(1) 
The pro forma results above include abbreviated financial results for Voumard, consisting of revenues and direct expenses for that product line. During the six months ended June 30, 2014, the Voumard business incurred $4.7 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.
 

8


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 3.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
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):
 
June 30, 2015
 
December 31, 2014
 
Level of Fair Value Hierarchy
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
22,778

 
$
22,778

 
$
16,293

 
$
16,293

 
Level 1
Restricted cash
2,887

 
2,887

 
3,151

 
3,151

 
Level 1
Foreign currency forward contracts
572

 
572

 
307

 
307

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
Variable interest rate debt
14,400

 
14,400

 
16,225

 
16,225

 
Level 2
Foreign currency forward contracts
373

 
373

 
629

 
629

 
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 variable interest rate debt approximates the carrying 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 June 30, 2015 and December 31, 2014, there were no significant transfers in and/or out of Level 1 and Level 2.
 
NOTE 4.  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 consists of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Raw materials and purchased components
$
38,443

 
$
36,717

Work-in-process
37,193

 
28,504

Finished products
46,683

 
46,600

Inventories, net
$
122,319

 
$
111,821



9


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 5.  DERIVATIVE FINANCIAL 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 expense, net” when the hedging relationship is deemed to be no longer effective. As of June 30, 2015 and December 31, 2014, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $38.7 million and $24.8 million, respectively. The Company expects that approximately $0.1 million of income, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months. 

As of June 30, 2015 and December 31, 2014, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $37.8 million and $38.3 million, respectively. For the three months ended June 30, 2015 and 2014, gains of $0.2 million and $0.3 million, respectively, were recorded related to this type of derivative financial instrument. For the six months ended June 30, 2015 and 2014, gains of $1.6 million and losses of $0.5 million, respectively, were recorded related to this type of derivative financial instrument. For contracts that are not designated as hedges, the gain or loss on the contract is recognized in current earnings in the “Other 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):
 
June 30,
2015
 
December 31,
2014
Foreign currency forwards designated as hedges:
 

 
 

Other current assets
$
314

 
$
237

Accrued expenses
(145
)
 
(385
)
Foreign currency forwards not designated as hedges:
 

 
 

Other current assets
258

 
70

Accrued expenses
(228
)
 
(244
)
Foreign currency forwards, net
$
199

 
$
(322
)
 
NOTE 6.  PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following (in thousands): 
 
June 30,
2015
 
December 31,
2014
Land, buildings and improvements
$
85,858

 
$
83,119

Machinery, equipment and fixtures
79,445

 
78,003

Office furniture, equipment and vehicles
22,679

 
22,265

Construction in progress
711

 
399

 
188,693

 
183,786

Accumulated depreciation
(122,355
)
 
(117,912
)
Property, plant and equipment, net
$
66,338

 
$
65,874



10


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 7.  GOODWILL AND INTANGIBLE ASSETS
 
Detail and activity of goodwill by segment is presented below (in thousands):
 
MMS
 
ATA
 
Total
Balance at December 31, 2014:
 
 
 
 
 
Goodwill
$
32,434

 
$
6,698

 
$
39,132

Accumulated impairment losses
(32,434
)
 

 
(32,434
)
Goodwill, net of impairment losses

 
6,698

 
6,698

Current Year Activity:
 
 
 
 
 
Currency translation adjustments

 
(15
)
 
(15
)
Total current year activity

 
(15
)
 
(15
)
Balance at June 30, 2015:
 
 
 
 
 
Goodwill
32,434

 
6,683

 
39,117

Accumulated impairment losses
(32,434
)
 

 
(32,434
)
Goodwill, net of impairment losses
$

 
$
6,683

 
$
6,683

The major components of intangible assets other than goodwill are as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Gross amortizable intangible assets:
 

 
 

Technical know-how
$
12,991

 
$
12,984

Customer lists
9,042

 
9,047

Land rights
2,795

 
2,796

Patents, trade names, drawings, and other
4,376

 
4,345

Total gross amortizable intangible assets
29,204

 
29,172

 
 
 
 
Accumulated amortization:
 

 
 

Technical know-how
(6,294
)
 
(5,730
)
Customer lists
(1,100
)
 
(871
)
Land rights
(256
)
 
(228
)
Patents, trade names, drawings, and other
(3,325
)
 
(3,227
)
Total accumulated amortization
(10,975
)
 
(10,056
)
Amortizable intangible assets, net
18,229

 
19,116

 
 
 
 
Indefinite lived intangible assets:
 

 
 

Trade names
11,276

 
11,101

 
 
 
 
Intangible assets other than goodwill, net
$
29,505

 
$
30,217

Amortization expense related to the definite-lived intangible assets are as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Amortization expense
$
451

 
$
455

 
$
902

 
$
891



11


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 8.  WARRANTIES
 
A reconciliation of the changes in the product warranty accrual, which is included in "Accrued expenses" in the Consolidated Balance Sheets, is as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Balance at the beginning of period
$
3,864

 
$
3,251

 
$
3,891

 
$
3,449

Warranties issued
430

 
613

 
1,399

 
1,212

Warranty settlement costs
(446
)
 
(512
)
 
(1,448
)
 
(1,132
)
Changes in accruals for pre-existing warranties
88

 
(105
)
 
75

 
(284
)
Currency translation adjustments
101

 
10

 
120

 
12

Balance at the end of period
$
4,037

 
$
3,257

 
$
4,037

 
$
3,257


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 rate was 29.6% and 74.4% for the three and six months ended June 30, 2015, respectively. The overall effective tax rate for six months ended June 30, 2015 of 74.4% is primarily driven by year-to-date losses of certain entities for which no tax benefit can be realized due to valuation allowances, the impact of finalizing prior year tax return filings and resolution of tax uncertainties related to an income tax examination in Canada.
 
The tax years 2011 through 2014 remain open to examination by the U.S. federal taxing authorities. The tax years 2009 through 2014 remain open to examination by the U.S. state taxing authorities. For other major jurisdictions (Switzerland, U.K., Taiwan, France, Germany, India, Netherlands and China), the tax years between 2008 and 2014 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.
 
At June 30, 2015, a liability of $2.4 million is recorded with respect to uncertain income tax positions, which includes related interest and penalties of $0.4 million. If recognized, essentially all of the uncertain tax positions and related interest at June 30, 2015 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 $0.5 million and $1.6 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 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. 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.
 

12


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

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.
 
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., (collectively, the "PRPs"), have agreed to voluntarily participate in the 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, they submitted the draft Feasibility Study. Due to changes in the hydrology of the Pond, the PRPs prepared and submitted two revised draft Feasibility Studies to the EPA, one on January 30, 2015 and one on July 28, 2015 to update site information and to address issues raised by the EPA.
 
The revised draft Feasibility Study submitted on July 28, 2015 includes alternative remedial actions with estimated life-cycle costs ranging from $0.9 million to $3.5 million. The Company’s portion of the potential costs, based upon the revised Feasibility Study, 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 $0.3 million has been recorded for the Company’s share of remediation expenses at the Pond as of June 30, 2015. This reserve is included in "Accrued expenses" in 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.


13


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 11.  PENSION AND POSTRETIREMENT PLANS
 
A summary of the components of net periodic pension and postretirement benefit costs for the three and six months ended June 30, 2015 and 2014 is presented below (in thousands):
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended 
 June 30,
 
Three Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
498

 
$
362

 
$
3

 
$
3

Interest cost
1,678

 
2,124

 
18

 
22

Expected return on plan assets
(2,413
)
 
(2,501
)
 

 

Amortization of prior service credit
(82
)
 
(102
)
 

 

Amortization of transition asset
(21
)
 
(71
)
 

 

Amortization of actuarial loss (gain)
784

 
436

 
(12
)
 
(14
)
Net periodic cost
$
444

 
$
248

 
$
9

 
$
11

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Six Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
991

 
$
726

 
$
6

 
$
6

Interest cost
3,351

 
4,244

 
37

 
44

Expected return on plan assets
(4,813
)
 
(4,996
)
 

 

Amortization of prior service credit
(162
)
 
(204
)
 

 

Amortization of transition asset
(42
)
 
(142
)
 

 

Amortization of actuarial loss (gain)
1,562

 
871

 
(25
)
 
(28
)
Net periodic cost
$
887

 
$
499

 
$
18

 
$
22


NOTE 12.  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 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Restricted stock/unit awards (“RSA”)
$
90

 
$
109

 
$
201

 
$
218

Performance share incentives (“PSI”)
(62
)
 

 
(62
)
 

 
$
28

 
$
109

 
$
139

 
$
218

 
There were no RSAs granted during the six months ended June 30, 2015, and 2014, respectively. The deferred compensation is being amortized on a straight-line basis over the specified service period. There were no PSIs granted during the six months ended June 30, 2015 and 2014, 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. During the six months ended June 30, 2015, 50,000 RSA shares vested. All other outstanding RSAs and PSIs are unvested.
 

14


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015


Expected unrecognized compensation and the estimated weighted-average recognition periods with respect to the outstanding RSAs and PSIs as of June 30, 2015 and December 31, 2014, are as follows:
 
June 30, 2015
 
December 31, 2014
 
RSAs
 
PSIs
 
RSAs
 
PSIs
Unrecognized compensation cost (in thousands)
$
516

 
$
81

 
$
718

 
$
554

 
 
 
 
 
 
 
 
Expected weighted-average recognition period for unrecognized compensation
   cost (in years)
1.72

 
0.75

 
1.64

 
2.13

 
NOTE 13.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Changes in AOCI by component for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended June 30, 2015
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
26,090

 
$
(64,014
)
 
$
177

 
$
(37,747
)
Other comprehensive income before reclassifications
3,004

 

 
4

 
3,008

Less (loss) income reclassified from AOCI
(1,192
)
 
523

 
61

 
(608
)
Net other comprehensive income (loss)
4,196

 
(523
)
 
(57
)
 
3,616

Income taxes
(201
)
 
(119
)
 
(14
)
 
(334
)
Ending balance, net of tax
$
30,487

 
$
(64,418
)
 
$
134

 
$
(33,797
)
 
 
Three Months Ended June 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
$
37,957

 
$
(40,074
)
 
$
(147
)
 
$
(2,264
)
Other comprehensive income before reclassifications
1,109

 

 
151

 
1,260

Less loss reclassified from AOCI
(133
)
 
(116
)
 
(55
)
 
(304
)
Net other comprehensive income
1,242

 
116

 
206

 
1,564

Income taxes
(17
)
 
(1
)
 
34

 
16

Ending balance, net of tax
$
39,216

 
$
(39,957
)
 
$
25

 
$
(716
)
 
Six Months Ended June 30, 2015
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
25,913

 
$
(64,570
)
 
$
(144
)
 
$
(38,801
)
Other comprehensive income before reclassifications
4,183

 

 
497

 
4,680

Less (loss) income reclassified from AOCI
(1,345
)
 
12

 
179

 
(1,154
)
Net other comprehensive income (loss)
5,528

 
(12
)
 
318

 
5,834

Income taxes
954

 
(164
)
 
40

 
830

Ending balance, net of tax
$
30,487

 
$
(64,418
)
 
$
134

 
$
(33,797
)
 

15


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

 
Six Months Ended June 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 income (loss) before
reclassifications
120

 

 
(69
)
 
51

Less (loss) income reclassified from AOCI
(263
)
 
(234
)
 
22

 
(475
)
Net other comprehensive income (loss)
383

 
234

 
(91
)
 
526

Income taxes
(170
)
 
(22
)
 
15

 
(177
)
Ending balance, net of tax
$
39,216

 
$
(39,957
)
 
$
25

 
$
(716
)

Details about reclassification out of AOCI for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Affected line item on the Consolidated Statements of Operations
Details of AOCI components
 
2015
 
2014
 
2015
 
2014
 
Unrealized gain (loss) on cash flow hedges: 
 
 

 
 

 
 
 
 
 
 
 
 
$
16

 
$
(52
)
 
$
145

 
$
(81
)
 
Sales
 
 
45

 
(3
)
 
34

 
103

 
Other expense, net
 
 
61

 
(55
)
 
179

 
22

 
Total before tax
 
 
11

 
(15
)
 
32

 
(13
)
 
Income taxes
 
 
$
72

 
$
(70
)
 
$
211

 
$
9

 
Net of tax
Retirement plans related adjustments:
 
 

 
 

 
 
 
 
 
 
Amortization of prior service credit
 
$
82

 
$
102

 
$
162

 
$
204

 
(a)
Amortization of transition asset
 
21

 
71

 
42

 
142

 
(a)
Amortization of actuarial loss
 
(772
)
 
(422
)
 
(1,537
)
 
(843
)
 
(a)
 
 
(669
)
 
(249
)
 
(1,333
)
 
(497
)
 
Total before tax
 
 
48

 
(2
)
 
96

 
(4
)
 
Income taxes
 
 
$
(621
)
 
$
(251
)
 
$
(1,237
)
 
$
(501
)
 
Net of tax
 
____________________
(a)  These AOCI components are included in the computation of net periodic pension and post retirement costs. See Note 11. "Pension and Postretirement Plans" for details.
 

16


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 14.  EARNINGS PER SHARE
 
Basic earnings per share is computed using the weighted average number of shares of common stock outstanding during the period. In periods of earnings, the weighted average number of shares used in the diluted calculation includes common stock equivalents related to stock options and restricted stock. The following table presents the basis of the earnings per share computation (in thousands):
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Numerator for basic and diluted earnings per share:
 

 
 

 
 
 
 
Earnings from continuing operations
$
1,586

 
$
1,349

 
$
178

 
$
678

Gain from disposal of discontinued operation, net of tax

 

 

 
218

Net earnings applicable to common shareholders
$
1,586

 
$
1,349

 
$
178

 
$
896

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Denominator for basic earnings per share — weighted average shares
12,776

 
12,715

 
12,759

 
12,607

Assumed exercise of stock options
21

 
24

 
22

 
24

Assumed satisfaction of restricted stock conditions
60

 
81

 
81

 
78

Denominator for diluted earnings per share — adjusted weighted
   average shares
12,857

 
12,820

 
12,862

 
12,709

 
Common stock equivalents of certain stock-based awards totaling 32,342 and 45,033 were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2015 and 2014, respectively, as they were anti-dilutive. Common stock equivalents of certain stock-based awards totaling 24,544 and 48,053 were excluded from the calculation of diluted earnings per share for the six months ended June 30, 2015 and 2014, respectively, as they were anti-dilutive.

NOTE 15. SEGMENT INFORMATION
 
Segment 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 June 30, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
66,210

 
$
16,672

 
$
(526
)
 
$
82,356

Depreciation and amortization
1,614

 
585

 
 

 
2,199

Segment income
1,743

 
1,857

 
 

 
3,600

Capital expenditures
940

 
354

 
 

 
1,294

 
Three Months Ended June 30, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
61,435

 
$
17,495

 
$
(79
)
 
$
78,851

Depreciation and amortization
1,757

 
648

 
 

 
2,405

Segment income
1,336

 
1,926

 
 

 
3,262

Capital expenditures
421

 
378

 
 

 
799


17


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

 
Six Months Ended June 30, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
119,186

 
$
32,899

 
$
(601
)
 
$
151,484

Depreciation and amortization
3,238

 
1,185

 
 

 
4,423

Segment income
834

 
3,054

 
 

 
3,888

Capital expenditures
1,246

 
747

 
 

 
1,993

Segment assets(1)
246,331

 
50,788

 
 

 
297,119

 
Six Months Ended June 30, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
115,624

 
$
34,228

 
$
(151
)
 
$
149,701

Depreciation and amortization
3,534

 
1,287

 
 

 
4,821

Segment income
694

 
3,734

 
 

 
4,428

Capital expenditures
679

 
445

 
 

 
1,124

Segment assets(1)
241,340

 
49,476

 
 

 
290,816

____________________
(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.
 
A reconciliation of segment income to consolidated income from operations before income taxes for the three and six months ended June 30, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Segment income
$
3,600

 
$
3,262

 
$
3,888

 
$
4,428

Unallocated corporate expense
(1,068
)
 
(1,542
)
 
(2,771
)
 
(2,999
)
Interest expense, net
(131
)
 
(143
)
 
(271
)
 
(366
)
Other unallocated expense
(149
)
 
(84
)
 
(151
)
 
(84
)
Income from continuing operations before income taxes
$
2,252

 
$
1,493

 
$
695

 
$
979

 
A reconciliation of segment assets to consolidated total assets follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Total segment assets
$
297,119

 
$
290,816

Unallocated assets
26,857

 
20,504

Total assets
$
323,976

 
$
311,320


Unallocated assets include cash of $22.8 million and $16.3 million at June 30, 2015 and December 31, 2014, respectively.


18


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015

NOTE 16.  NEW ACCOUNTING STANDARDS

In July 2015, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the valuation of inventory. This guidance directs an entity to measure inventory at lower of cost and net realizable value, versus lower of cost or market. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early application is permitted, and the guidance should be applied prospectively. The Company is evaluating the impact that this guidance will have on the financial statements and related disclosures.     

In April 2015, the FASB issued authoritative guidance on the balance sheet presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early application is permitted, and the guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company has determined that the impact that this guidance will have on the financial statements and related disclosures is not material.     

In April 2015, the FASB provided authoritative guidance on accounting for cloud computing arrangements, including software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. This update provides guidance to customers about whether a cloud computing arrangement includes a software license, which should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. An entity may elect to adopt the amendments either prospectively or retrospectively. The Company is evaluating the method and impact that this guidance will have on the financial statements and related disclosures.     

In May 2014, the 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 performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In July 2015, the FASB voted to defer the effective date of this standard by one year, but will allow companies to apply the standard on its original effective date of December 15, 2016. The new guidance is now effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2017 for public companies. 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.


19


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, 2014.
 
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, India, Switzerland, Taiwan, the United States (“U.S.”), and the United Kingdom (“U.K.”), with sales to most industrialized countries. Approximately 68% of our 2014 sales were to customers outside of North America, 71% of our 2014 products sold were manufactured outside of North America, and 67% of our employees as of December 31, 2014 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 34% of overall sales through the second quarter of 2015 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.
 

20


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.
 
For the three and six months ended June 30, 2015, foreign currency fluctuations resulted in unfavorable currency translation impact on sales of approximately $1.9 million and $4.4 million, respectively, when compared to the same periods in 2014.

On August 4, 2015, our Board of Directors approved a strategic restructuring program with the goals of streamlining our cost structure, increasing operational efficiencies and improving shareholder returns. This program consists of the consolidation of certain facilities and restructuring of certain business units and is expected to generate annual pre-tax savings in the range of approximately $4.0 million to $5.0 million once the program is fully implemented. To fully implement these initiatives, we estimate that we will recognize cumulative pre-tax charges that include severance, moving costs, lease termination, and other related expenses over the upcoming quarters of between $4.0 million to $5.0 million. Virtually all of the restructuring program costs are expected to result in cash expenditures. We expect the restructuring program will be substantially completed by the end of 2016. Accordingly, the results of operations, and anticipated future cash flows as discussed below are not necessarily indicative of the expected results and cash flows in future periods.


21


Results of Operations
 
Presented below is summarized selected financial data for the three and six months ended June 30, 2015 and 2014 (in thousands): 
 
 
Three Months Ended 
 June 30,
 
$
Change
 
%
Change
 
Six Months Ended 
 June 30,
 
 
 
 
 
 
2015
 
2014
 
 
 
2015
 
2014
 
$
Change
 
%
Change
Sales
 
$
82,356

 
$
78,851

 
$
3,505

 
4
 %
 
$
151,484

 
$
149,701

 
$
1,783

 
1
 %
Gross profit
 
23,464

 
21,961

 
1,503

 
7
 %
 
41,712

 
41,181

 
531

 
1
 %
% of sales
 
28.5
%
 
27.9
%
 
0.6

pts.
 
27.5
%
 
27.5
%
 

pts.
Selling, general and
  administrative expenses
 
21,071

 
20,133

 
938

 
5
 %
 
40,671

 
39,253

 
1,418

 
4
 %
% of sales
 
25.6
%
 
25.5
%
 
0.1

pts.
 
26.8
%
 
26.2
%
 
0.6

pts.
Other expense, net
 
10

 
192

 
(182
)
 
(95
)%
 
75

 
583

 
(508
)
 
(87
)%
Income from operations
 
2,383

 
1,636

 
747

 
46
 %
 
966

 
1,345

 
(379
)
 
(28
)%
% of sales
 
2.9
%
 
2.1
%
 
0.8

pts.
 
0.6
%
 
0.9
%
 
(0.3
)
pts.
Interest expense, net
 
131

 
143

 
(12
)
 
(8
)%
 
271

 
366

 
(95
)
 
(26
)%
Income from continuing
  operations before
  income taxes
 
2,252

 
1,493

 
759

 
51
 %
 
695

 
979

 
(284
)
 
(29
)%
Income taxes
 
666

 
144

 
522

 
363
 %
 
517

 
301

 
216

 
72
 %
Net income from
  continuing operations
 
1,586

 
1,349

 
237

 
18
 %
 
178

 
678

 
(500
)
 
(74
)%
Gain from disposal of
  discontinued operation,
  net of tax
 

 

 

 
NM

 

 
218

 
(218
)
 
(100
)%
Net income
 
$
1,586

 
$
1,349

 
$
237

 
18
 %
 
$
178

 
$
896

 
$
(718
)
 
(80
)%
% of sales
 
1.9
%
 
1.7
%
 
0.2

pts.
 
0.1
%
 
0.6
%
 
(0.5
)
pts.
____________________
NM - Not Meaningful

Sales.  The table below summarizes sales by each corresponding geographical region for the three and six months ended June 30, 2015 compared to the same periods in 2014 (in thousands): 
 
Three Months Ended 
 June 30,
 
 
 
 
 
Six Months Ended 
 June 30,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
 
2015
 
2014
 
$ Change
 
% Change
Sales to customers in:
North America
$
29,073

 
$
25,029

 
$
4,044

 
16
 %
 
$
55,378

 
$
48,232

 
$
7,146

 
15
 %
Europe
22,055

 
25,370

 
(3,315
)
 
(13
)%
 
44,984

 
50,675

 
(5,691
)
 
(11
)%
Asia and other
31,228

 
28,452

 
2,776

 
10
 %
 
51,122

 
50,794

 
328

 
1
 %
Total
$
82,356

 
$
78,851

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