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EX-32 - EXHIBIT 32 CERTIFICATION - HARDINGE INChdng-9302015x10qxex32.htm
EX-31.1 - EXHIBIT 31.1 SIMONS CERTIFICATION - HARDINGE INChdng-9302015x10qxex311.htm
EX-31.2 - EXHIBIT 31.2 MALONE CERTIFICATION - HARDINGE INChdng-9302015x10qxex312.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 September 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 October 30, 2015 there were 12,838,227 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)
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
18,535

 
$
16,293

Restricted cash
2,782

 
3,151

Accounts receivable, net
55,651

 
62,877

Inventories, net
119,193

 
111,821

Other current assets
12,371

 
10,545

Total current assets
208,532

 
204,687

 
 
 
 
Property, plant and equipment, net
63,751

 
65,874

Goodwill
6,636

 
6,698

Other intangible assets, net
28,511

 
30,217

Other non-current assets
4,645

 
3,844

Total non-current assets
103,543

 
106,633

Total assets
$
312,075

 
$
311,320

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Accounts payable
$
25,445

 
$
25,592

Accrued expenses
27,195

 
25,071

Customer deposits
16,034

 
12,736

Accrued income taxes
1,929

 
646

Deferred income taxes
2,539

 
2,332

Current portion of long-term debt
4,467

 
3,972

Total current liabilities
77,609

 
70,349

 
 
 
 
Long-term debt
8,718

 
12,253

Pension and postretirement liabilities
51,256

 
53,119

Deferred income taxes
2,557

 
2,516

Other liabilities
3,614

 
3,487

Total non-current liabilities
66,145

 
71,375

Commitments and contingencies (see Note 11)


 


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

 
128

Additional paid-in capital
121,016

 
120,538

Retained earnings
86,858

 
87,777

Treasury shares (at cost, 20,005 as of September 30, 2015, and 3,700 as of
December 31, 2014)
(219
)
 
(46
)
Accumulated other comprehensive loss
(39,463
)
 
(38,801
)
Total shareholders’ equity
168,321

 
169,596

Total liabilities and shareholders’ equity
$
312,075

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Sales
$
76,805

 
$
68,924

 
$
228,289

 
$
218,625

Cost of sales
55,046

 
50,247

 
164,818

 
158,767

Gross profit
21,759

 
18,677

 
63,471

 
59,858

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
19,925

 
20,123

 
60,596

 
59,376

Restructuring charges
877

 

 
877

 

Impairment charge

 
5,766

 

 
5,766

Other expense (income), net
201

 
(334
)
 
276

 
249

Income (loss) from operations
756

 
(6,878
)
 
1,722

 
(5,533
)
 
 
 
 
 
 
 
 
Interest expense
161

 
171

 
472

 
569

Interest income
(40
)
 
(15
)
 
(80
)
 
(47
)
Income (loss) from continuing operations before income
taxes
635

 
(7,034
)
 
1,330

 
(6,055
)
Income taxes
962

 
544

 
1,479

 
845

Net loss from continuing operations
(327
)
 
(7,578
)
 
(149
)
 
(6,900
)
 
 
 
 
 
 
 
 
Gain from disposal of discontinued operation, net of tax

 

 

 
218

 
 
 
 
 
 
 
 
Net loss
$
(327
)
 
$
(7,578
)
 
$
(149
)
 
$
(6,682
)
 
 
 
 
 
 
 
 
Per share data:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
Basic loss per share:
 

 
 

 
 

 
 

Continuing operations
$
(0.03
)
 
$
(0.60
)
 
$
(0.01
)
 
$
(0.55
)
Discontinued operations

 

 

 
0.02

Basic loss per share
$
(0.03
)
 
$
(0.60
)
 
$
(0.01
)
 
$
(0.53
)
 
 
 
 
 
 
 
 
Diluted loss per share:
 

 
 

 
 

 
 

Continuing operations
$
(0.03
)
 
$
(0.60
)
 
$
(0.01
)
 
$
(0.55
)
Discontinued operations

 

 

 
0.02

Diluted loss per share
$
(0.03
)
 
$
(0.60
)
 
$
(0.01
)
 
$
(0.53
)
 
 
 
 
 
 
 
 
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
(in thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Net loss
$
(327
)
 
$
(7,578
)
 
$
(149
)
 
$
(6,682
)
Other comprehensive (loss) income:
 

 
 

 
 

 
 

Foreign currency translation adjustments
(7,169
)
 
(6,368
)
 
(1,641
)
 
(5,985
)
Retirement plans related adjustments
1,748

 
1,336

 
1,736

 
1,570

Unrealized (loss) gain on cash flow hedges
(751
)
 
13

 
(433
)
 
(78
)
Other comprehensive loss before tax
(6,172
)
 
(5,019
)
 
(338
)
 
(4,493
)
Income tax (benefit) expense
(506
)
 
927

 
324

 
750

Other comprehensive loss, net of tax
(5,666
)
 
(5,946
)
 
(662
)
 
(5,243
)
Total comprehensive loss
$
(5,993
)
 
$
(13,524
)
 
$
(811
)
 
$
(11,925
)
 
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,
 
2015
 
2014
 
(Unaudited)
Operating activities
 

 
 

Net loss
$
(149
)
 
$
(6,682
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Impairment charge

 
5,766

Depreciation and amortization
6,831

 
7,317

Debt issuance costs amortization
29

 
33

Deferred income taxes
(284
)
 
(346
)
Gain on sale of assets
(1
)
 
(101
)
Gain on sale of business

 
(218
)
Gain on purchase of business

 
(462
)
Unrealized foreign currency transaction (gain) loss
(4
)
 
593

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
6,015

 
2,670

Inventories
(8,688
)
 
(10,054
)
Other assets
(1,360
)
 
225

Accounts payable
990

 
2,743

Customer deposits
3,494

 
259

Accrued expenses
2,161

 
(2,859
)
Accrued pension and postretirement liabilities
(13
)
 
(35
)
Net cash provided by (used in) operating activities
9,021

 
(1,151
)
 
 
 
 
Investing activities
 

 
 

Acquisition of businesses, net of cash acquired

 
(5,683
)
Capital expenditures
(3,103
)
 
(1,830
)
Proceeds from disposal of business

 
218

Proceeds from sales of assets
38

 
131

Net cash used in investing activities
(3,065
)
 
(7,164
)
 
 
 
 
Financing activities
 

 
 

Payment of contingent consideration

 
(7,500
)
Proceeds from short-term notes payable to bank
24,937

 
13,827

Repayments of short-term notes payable to bank
(24,937
)
 
(13,827
)
Repayments of long-term debt
(3,245
)
 
(8,373
)
Dividends paid
(781
)
 
(757
)
Purchases of treasury stock
(201
)
 

Net proceeds from sales of common stock

 
5,678

Net cash used in financing activities
(4,227
)
 
(10,952
)
 
 
 
 
Effect of exchange rate changes on cash
513

 
(450
)
Net increase (decrease) in cash
2,242

 
(19,717
)
 
 
 
 
Cash and cash equivalents at beginning of period
16,293

 
34,722

 
 
 
 
Cash and cash equivalents at end of period
$
18,535

 
$
15,005


See accompanying notes to the unaudited consolidated financial statements.

6


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 nine months ended September 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)
SEPTEMBER 30, 2015

In accordance with the acquisition method of accounting, the acquired net assets were recorded at 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. The 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 values of the assets acquired and liabilities assumed were finalized during the third quarter of the current year, resulting in no purchase accounting adjustments.

The following table summarizes the 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 nine months ended September 30, 2015 and 2014, as if the Voumard acquisition had occurred on January 1, 2013 (in thousands, except per share data):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Sales
$
76,805

 
$
72,342

 
$
228,289

 
$
225,053

Net loss from continuing operations(1)
(327
)
 
(7,394
)
 
(149
)
 
(12,575
)
Diluted loss per share from continuing operations
$
(0.03
)
 
$
(0.58
)
 
$
(0.01
)
 
$
(0.99
)
____________________
(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 $4.9 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)
SEPTEMBER 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):
 
September 30, 2015
 
December 31, 2014
 
Level of Fair Value Hierarchy
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
18,535

 
$
18,535

 
$
16,293

 
$
16,293

 
Level 1
Restricted cash
2,782

 
2,782

 
3,151

 
3,151

 
Level 1
Foreign currency forward contracts
299

 
299

 
307

 
307

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
Variable interest rate debt
13,185

 
13,185

 
16,225

 
16,225

 
Level 2
Foreign currency forward contracts
1,321

 
1,321

 
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 September 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):
 
September 30,
2015
 
December 31,
2014
Raw materials and purchased components
$
36,054

 
$
36,717

Work-in-process
36,599

 
28,504

Finished products
46,540

 
46,600

Inventories, net
$
119,193

 
$
111,821



9


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 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 (income), net” when the hedging relationship is deemed to be no longer effective. As of September 30, 2015 and December 31, 2014, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $38.4 million and $24.8 million, respectively. The Company expects approximately $0.6 million of expense, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months. 

As of September 30, 2015 and December 31, 2014, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $38.4 million and $38.3 million, respectively. For the three months ended September 30, 2015 and 2014, losses of $1.9 million and gains $0.4 million, respectively, were recorded related to this type of derivative financial instrument. For the nine months ended September 30, 2015 and 2014, losses of $0.3 million and $0.1 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 (income), 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,
2015
 
December 31,
2014
Foreign currency forwards designated as hedges:
 

 
 

Other current assets
$
142

 
$
237

Accrued expenses
(743
)
 
(385
)
Foreign currency forwards not designated as hedges:
 

 
 

Other current assets
157

 
70

Accrued expenses
(578
)
 
(244
)
Foreign currency forwards, net
$
(1,022
)
 
$
(322
)
 
NOTE 6.  PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following (in thousands): 
 
September 30,
2015
 
December 31,
2014
Land, buildings and improvements
$
83,531

 
$
83,119

Machinery, equipment and fixtures
79,382

 
78,003

Office furniture, equipment and vehicles
22,626

 
22,265

Construction in progress
222

 
399

 
185,761

 
183,786

Accumulated depreciation
(122,010
)
 
(117,912
)
Property, plant and equipment, net
$
63,751

 
$
65,874



10


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

 
(62
)
 
(62
)
Total current year activity

 
(62
)
 
(62
)
Balance at September 30, 2015:
 
 
 
 
 
Goodwill
32,434

 
6,636

 
39,070

Accumulated impairment losses
(32,434
)
 

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

 
$
6,636

 
$
6,636

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

 
 

Technical know-how
$
12,961

 
$
12,984

Customer lists
9,020

 
9,047

Land rights
2,730

 
2,796

Patents, trade names, drawings, and other
4,395

 
4,345

Total gross amortizable intangible assets
29,106

 
29,172

 
 
 
 
Accumulated amortization:
 

 
 

Technical know-how
(6,557
)
 
(5,730
)
Customer lists
(1,207
)
 
(871
)
Land rights
(264
)
 
(228
)
Patents, trade names, drawings, and other
(3,364
)
 
(3,227
)
Total accumulated amortization
(11,392
)
 
(10,056
)
Amortizable intangible assets, net
17,714

 
19,116

 
 
 
 
Indefinite lived intangible assets:
 

 
 

Trade names
10,797

 
11,101

 
 
 
 
Intangible assets other than goodwill, net
$
28,511

 
$
30,217

Amortization expense related to the definite-lived intangible assets are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Amortization expense
$
452

 
$
448

 
$
1,354

 
$
1,339



11


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Balance at the beginning of period
$
4,037

 
$
3,257

 
$
3,891

 
$
3,449

Warranties issued
682

 
538

 
2,081

 
1,750

Warranty settlement costs
(620
)
 
(665
)
 
(2,068
)
 
(1,797
)
Changes in accruals for pre-existing warranties
(11
)
 
67

 
64

 
(217
)
Other adjustments(1)

 
600

 

 
600

Currency translation adjustments
(109
)
 
(141
)
 
11

 
(129
)
Balance at the end of period
$
3,979

 
$
3,656

 
$
3,979

 
$
3,656

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

NOTE 9.  RESTRUCTURING CHARGES
 
On August 4, 2015, the Company's Board of Directors approved a strategic restructuring program (the "Program") with the goals of streamlining the Company's 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. Virtually all of the restructuring Program costs are expected to result in cash expenditures. The restructuring Program is expected to be substantially completed by the end of the first quarter of 2016.

Restructuring charges are included in the "Restructuring charges" line item in the Consolidated Statements of Operations. The table below presents the total costs expected to be incurred in connection with the Program, the amount of costs that have been incurred during the three and nine months ended September 30, 2015, and the cumulative costs incurred to date by the Program (in thousands):
 
Total Costs Expected to be Incurred
 
Total Costs Incurred in the Period
 
Cumulative Costs Incurred to Date
 
 
Three Months Ended 
 September 30, 2015
 
Nine Months Ended 
 September 30, 2015
 
MMS Segment:
 
 
 
 
 
 
 
Employee termination costs
$
243

 
$
243

 
$
243

 
$
243

Total MMS Segment
243

 
243

 
243

 
243

ATA Segment:
 
 
 
 
 
 
 
Employee termination costs
2,718

 
549

 
549

 
549

Facility exit costs
605

 

 

 

Other related costs
774

 
85

 
85

 
85

Total ATA Segment
4,097

 
634

 
634

 
634

Total:
 
 
 
 
 
 
 
Employee termination costs
2,961

 
792

 
792

 
792

Facility exit costs
605

 

 

 

Other related costs
774

 
85

 
85

 
85

Total company
$
4,340

 
$
877

 
$
877

 
$
877


12


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

        
The amounts accrued associated with the Program are included in "Accrued expenses" and "Pension and postretirement liabilities" in the Consolidated Balance Sheets. A rollforward of the accrued restructuring costs is presented below (in thousands):
 
Segment
 
Total
 
MMS
 
ATA
 
Balance at December 31, 2014
$

 
$

 
$

 
 
 
 
 
 
Restructuring charges:
 
 
 
 
 
Employee termination costs
243

 
549

 
792

Other related costs

 
85

 
85

Total restructuring charges
243

 
634

 
877

 
 
 
 
 
 
Cash expenditures
(61
)
 
(95
)
 
(156
)
Foreign currency translation adjustment

 
(2
)
 
(2
)
Balance at September 30, 2015
$
182

 
$
537

 
$
719


NOTE 10.  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 151.5% and 111.2% for the three and nine months ended September 30, 2015, respectively. The overall effective tax rate is primarily driven by the mix of earnings by country and by year-to-date losses of certain entities for which no tax benefit can be realized due to valuation allowances.  Additionally the Company's effective rate was impacted by the finalization of prior year tax return filings, resolution of tax uncertainties related to an income tax examination in Canada and revaluation of tax uncertainties related to an ongoing tax examination in Taiwan.

The tax years 2012 through 2014 remain open to examination by the U.S. federal taxing authorities. The tax years 2010 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 September 30, 2015, a liability of $2.6 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 September 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 $1.7 million.


13


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

NOTE 11.  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.
 
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 PRPs are continuing to cooperate with the EPA and to examine potential remedial options.
 
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 September 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.

14


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



NOTE 12.  PENSION AND POSTRETIREMENT PLANS
 
A summary of the components of net periodic pension and postretirement benefit costs for the three and nine months ended September 30, 2015 and 2014 is presented below (in thousands):
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended 
 September 30,
 
Three Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
484

 
$
352

 
$
3

 
$
3

Interest cost
1,673

 
2,107

 
19

 
22

Expected return on plan assets
(2,395
)
 
(2,477
)
 

 

Amortization of prior service credit
(79
)
 
(99
)
 

 

Amortization of transition asset
(19
)
 
(69
)
 

 

Amortization of actuarial loss (gain)
772

 
431

 
(13
)
 
(14
)
Net periodic cost
$
436

 
$
245

 
$
9

 
$
11

 
 
 
 
 
 
 
 
 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
1,475

 
$
1,078

 
$
9

 
$
9

Interest cost
5,024

 
6,351

 
56

 
66

Expected return on plan assets
(7,208
)
 
(7,473
)
 

 

Amortization of prior service credit
(241
)
 
(303
)
 

 

Amortization of transition asset
(61
)
 
(211
)
 

 

Amortization of actuarial loss (gain)
2,334

 
1,302

 
(38
)
 
(42
)
Net periodic cost
$
1,323

 
$
744

 
$
27

 
$
33


NOTE 13.  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,
 
2015
 
2014
 
2015
 
2014
Restricted stock/unit awards (“RSA”)
$
63

 
$
109

 
$
264

 
$
327

Performance share incentives (“PSI”)
1

 
(170
)
 
(61
)
 
(170
)
 
$
64

 
$
(61
)
 
$
203

 
$
157

 
There were no RSAs granted during the nine months ended September 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 nine months ended September 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. In May of 2015, 50,000 RSA shares vested. All other outstanding RSAs and PSIs are unvested.
 

15


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


Expected unrecognized compensation and the estimated weighted-average recognition periods with respect to the outstanding RSAs and PSIs as of September 30, 2015 and December 31, 2014, are as follows:
 
September 30, 2015
 
December 31, 2014
 
RSAs
 
PSIs
 
RSAs
 
PSIs
Unrecognized compensation cost (in thousands)
$
437

 
$
81

 
$
718

 
$
554

 
 
 
 
 
 
 
 
Expected weighted-average recognition period for unrecognized compensation
   cost (in years)
1.46

 
0.50

 
1.64

 
2.13

 
NOTE 14.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Changes in AOCI by component for the three and nine months ended September 30, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended September 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
$
30,487

 
$
(64,418
)
 
$
134

 
$
(33,797
)
Other comprehensive loss before reclassifications
(6,082
)
 

 
(893
)
 
(6,975
)
Less income (loss) reclassified from AOCI
1,087

 
(1,748
)
 
(142
)
 
(803
)
Net other comprehensive (loss) income
(7,169
)
 
1,748

 
(751
)
 
(6,172
)
Income taxes
(625
)
 
218

 
(99
)
 
(506
)
Ending balance, net of tax
$
23,943

 
$
(62,888
)
 
$
(518
)
 
$
(39,463
)
 
 
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
Beginning balance, net of tax
$
39,216

 
$
(39,957
)
 
$
25

 
$
(716
)
Other comprehensive loss before reclassifications
(5,281
)
 

 
(5
)
 
(5,286
)
Less income (loss) reclassified from AOCI
1,087

 
(1,336
)
 
(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
)
 
Nine Months Ended September 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 loss before reclassifications
(1,899
)
 

 
(396
)
 
(2,295
)
Less (loss) income reclassified from AOCI
(258
)
 
(1,736
)
 
37

 
(1,957
)
Net other comprehensive (loss) income
(1,641
)
 
1,736

 
(433
)
 
(338
)
Income taxes
329

 
54

 
(59
)
 
324

Ending balance, net of tax
$
23,943

 
$
(62,888
)
 
$
(518
)
 
$
(39,463
)
 

16


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

 
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 before reclassifications
(5,161
)
 

 
(74
)
 
(5,235
)
Less income (loss) reclassified from AOCI
824

 
(1,570
)
 
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
)

Details about reclassification out of AOCI for the three and nine months ended September 30, 2015 and 2014 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
 
2015
 
2014
 
2015
 
2014
 
Unrealized (loss) gain on cash flow hedges: 
 
 

 
 

 
 
 
 
 
 
 
 
$
(119
)
 
$
10

 
$
26

 
$
(71
)
 
Sales
 
 
(23
)
 
(28
)
 
11

 
75

 
Other expense (income), net
 
 
(142
)
 
(18
)
 
37

 
4

 
Total before tax
 
 
(25
)
 
(3
)
 
7

 
(16
)
 
Income taxes
 
 
$
(167
)
 
$
(21
)
 
$
44

 
$
(12
)
 
Net of tax
Retirement plans related adjustments:
 
 

 
 

 
 
 
 
 
 
Amortization of prior service credit
 
$
79

 
$
99

 
$
241

 
$
303

 
(a)
Amortization of transition asset
 
19

 
69

 
61

 
211

 
(a)
Amortization of actuarial loss
 
(759
)
 
(417
)
 
(2,296
)
 
(1,260
)
 
(a)
 
 
(661
)
 
(249
)
 
(1,994
)
 
(746
)
 
Total before tax
 
 
47

 
11

 
143

 
7

 
Income taxes
 
 
$
(614
)
 
$
(238
)
 
$
(1,851
)
 
$
(739
)
 
Net of tax
 
____________________
(a)  These AOCI components are included in the computation of net periodic pension and post retirement costs. See Note 12. "Pension and Postretirement Plans" for details.
 

17


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

NOTE 15.  EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Numerator for basic and diluted loss per share:
 

 
 

 
 
 
 
Loss from continuing operations
$
(327
)
 
$
(7,578
)
 
$
(149
)
 
$
(6,900
)
Gain from disposal of discontinued operation, net of tax

 

 

 
218

Net loss applicable to common shareholders
$
(327
)
 
$
(7,578
)
 
$
(149
)
 
$
(6,682
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Denominator for basic and diluted loss per share — weighted
   average shares
12,793

 
12,715

 
12,770

 
12,643

 
There is no dilutive effect of the restricted stock and stock options for the three and nine months ended September 30, 2015 and 2014 due to the net losses in those periods. There would have been 85,723 and 97,539 shares included in the diluted earnings per share calculation for the three and nine months ended September 30, 2015, respectively, and 108,701 and 103,998 shares included in the diluted earnings per share calculation for the three and nine months ended September 30, 2014, respectively, had the impact of including these securities not been anti-dilutive. Common stock equivalents of certain stock-based awards totaling 10,877 and 36,516 were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2015 and 2014, respectively, as they were anti-dilutive. Common stock equivalents of certain stock-based awards totaling 19,989 and 44,208 were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2015 and 2014, respectively, as they were anti-dilutive.

NOTE 16. SEGMENT INFORMATION
 
Segment income (loss) 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, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
60,856

 
$
16,005

 
$
(56
)
 
$
76,805

Depreciation and amortization
1,643

 
553

 
 

 
2,196

Segment income
895

 
1,083

 
 

 
1,978

Capital expenditures
983

 
127

 
 

 
1,110

 
Three Months Ended September 30, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,353

 
$
16,681

 
$
(110
)
 
$
68,924

Depreciation and amortization
1,721

 
629

 
 

 
2,350

Segment (loss) income
(1,715
)
 
1,338

 
 

 
(377
)
Capital expenditures
457

 
249

 
 

 
706


18


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

 
Nine Months Ended September 30, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
180,042

 
$
48,904

 
$
(657
)
 
$
228,289

Depreciation and amortization
4,881

 
1,738

 
 

 
6,619

Segment income
1,729

 
4,137

 
 

 
5,866

Capital expenditures
2,229

 
874

 
 

 
3,103

Segment assets(1)
239,594

 
49,566

 
 

 
289,160

 
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
(1,021
)
 
5,072

 
 

 
4,051

Capital expenditures
1,136

 
694

 
 

 
1,830

Segment assets(1)
248,789

 
51,657

 
 

 
300,446

____________________
(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 (loss) to consolidated income (loss) from operations before income taxes for the three and nine months ended September 30, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2014
 
2015
 
2014
Segment income (loss)
$
1,978

 
$
(377
)
 
$
5,866

 
$
4,051

Unallocated corporate expense
(1,224
)
 
(1,181
)
 
(3,995
)
 
(4,180
)
Interest expense, net
(121
)
 
(156
)
 
(392
)
 
(522
)
Other unallocated income (expense)
2

 
(5,320
)
 
(149
)
 
(5,404
)
Income (loss) from continuing operations before income taxes
$
635

 
$
(7,034
)
 
$
1,330

 
$
(6,055
)
 
A reconciliation of segment assets to consolidated total assets follows (in thousands):
 
September 30,
2015
 
December 31,
2014
Total segment assets
$
289,160

 
$
290,816

Unallocated assets
22,915

 
20,504

Total assets
$
312,075

 
$
311,320


Unallocated assets include cash of $18.5 million and $16.3 million at September 30, 2015 and December 31, 2014, respectively.


19


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

NOTE 17.  NEW ACCOUNTING STANDARDS

In September 2015, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on accounting for purchase price adjustments. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. An entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in the current period earnings by line item that would have been recorded in previous reporting periods if the adjustments of the provisional amounts had been recognized as of the acquisition date. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued.

In July 2015, the 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.


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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview.  The following Management’s Discussion and Analysis (“MD&A”) contains information that the Company believes is necessary to 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 33% of overall sales through the third 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 have 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.
 

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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 nine months ended September 30, 2015, foreign currency fluctuations resulted in unfavorable currency translation impact on sales of approximately $2.2 million and $6.6 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 the first quarter 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.


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Results of Operations
 
Presented below is summarized selected financial data for the three and nine months ended September 30, 2015 and 2014 (in thousands): 
 
 
Three Months Ended 
 September 30,
 
$
Change
 
%
Change
 
Nine Months Ended 
 September 30,
 
 
 
 
 
 
2015
 
2014
 
 
 
2015
 
2014
 
$
Change
 
%
Change
Sales
 
$
76,805

 
$
68,924

 
$
7,881

 
11
 %
 
$
228,289

 
$
218,625

 
$
9,664

 
4
 %
Gross profit
 
21,759

 
18,677

 
3,082

 
17
 %
 
63,471

 
59,858

 
3,613

 
6
 %
% of sales
 
28.3
 %
 
27.1
 %
 
1.2

pts.
 
27.8
 %
 
27.4
 %
 
0.4

pts.
Selling, general and
  administrative expenses
 
19,925

 
20,123

 
(198
)
 
(1
)%
 
60,596

 
59,376

 
1,220

 
2
 %
% of sales
 
25.9
 %
 
29.2
 %
 
(3.3
)
pts.
 
26.5
 %
 
27.2
 %
 
(0.7
)
pts.
Restructuring charges
 
877

 

 
877

 
NM

 
877

 

 
877

 
NM

Impairment charge
 

 
5,766