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EX-31.2 - EXHIBIT 31.2 - HARDINGE INChdng-3312016x10qxex312.htm
EX-32 - EXHIBIT 32 - HARDINGE INChdng-3312016x10qxex32.htm
EX-31.1 - EXHIBIT 31.1 - HARDINGE INChdng-3312016x10qxex311.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 March 31, 2016
 
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 April 29, 2016 there were 12,869,771 shares of Common Stock of the registrant outstanding.
 





HARDINGE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
Consolidated Balance Sheets at March 31, 2016 and December 31, 2015 (Audited)
 
 
Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015
 
 
Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2016 and 2015
 
 
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
29,285

 
$
32,774

Restricted cash
2,163

 
2,192

Accounts receivable, net
49,940

 
56,945

Inventories, net
117,131

 
110,232

Other current assets
10,496

 
9,314

Total current assets
209,015

 
211,457

 
 
 
 
Property, plant and equipment, net
62,312

 
62,025

Goodwill
6,619

 
6,620

Other intangible assets, net
27,892

 
28,018

Other non-current assets
3,672

 
3,015

Total non-current assets
100,495

 
99,678

Total assets
$
309,510

 
$
311,135

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Notes payable to bank
$
3,177

 
$

Accounts payable
24,523

 
24,696

Accrued expenses
24,032

 
27,964

Customer deposits
17,932

 
19,845

Accrued income taxes
1,489

 
1,919

Deferred income taxes
2,385

 
2,164

Current portion of long-term debt
5,456

 
5,621

Total current liabilities
78,994

 
82,209

 
 
 
 
Long-term debt
5,376

 
5,985

Pension and postretirement liabilities
56,811

 
57,322

Deferred income taxes
1,225

 
1,121

Other liabilities
3,476

 
3,393

Total non-current liabilities
66,888

 
67,821

Commitments and contingencies (see Note 10)


 


Common stock ($0.01 par value, 20,000,000 authorized; 12,861,674 issued and outstanding as of March 31, 2016, and 12,856,716 issued and 12,838,227 outstanding as of December 31, 2015)
128

 
128

Additional paid-in capital
120,539

 
120,524

Retained earnings
87,866

 
89,368

Treasury shares (at cost, none as of March 31, 2016, and 18,489 as of
December 31, 2015)

 
(202
)
Accumulated other comprehensive loss
(44,905
)
 
(48,713
)
Total shareholders’ equity
163,628

 
161,105

Total liabilities and shareholders’ equity
$
309,510

 
$
311,135

 
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 
 March 31,
 
2016
 
2015
 
(Unaudited)
Sales
$
67,822

 
$
69,128

Cost of sales
45,078

 
47,273

Gross profit
22,744

 
21,855

 
 
 
 
Selling, general and administrative expenses
20,593

 
19,600

Research & development
3,287

 
3,607

Restructuring
200

 

Other (income) expense, net
(91
)
 
65

Loss from operations
(1,245
)
 
(1,417
)
 
 
 
 
Interest expense
153

 
157

Interest income
(67
)
 
(17
)
Loss before income taxes
(1,331
)
 
(1,557
)
Income taxes
(86
)
 
(149
)
Net loss
$
(1,245
)
 
$
(1,408
)
 
 
 
 
Per share data:
 

 
 

Basic loss per share:
$
(0.10
)
 
$
(0.11
)
 
 
 
 
Diluted loss per share:
$
(0.10
)
 
$
(0.11
)
 
 
 
 
Cash dividends declared per share:
$
0.02

 
$
0.02

 
See accompanying notes to the unaudited consolidated financial statements.


4


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
(Unaudited)
Net loss
$
(1,245
)
 
$
(1,408
)
Other comprehensive income:
 

 
 

Foreign currency translation adjustments
3,739

 
1,332

Retirement plans related adjustments
(273
)
 
511

Unrealized gain on cash flow hedges
165

 
375

Other comprehensive income before tax
3,631

 
2,218

Income tax (benefit) expense
(177
)
 
1,164

Other comprehensive income, net of tax
3,808

 
1,054

Total comprehensive income (loss)
$
2,563

 
$
(354
)
 
See accompanying notes to the unaudited consolidated financial statements.


5


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
(Unaudited)
Operating activities
 

 
 

Net loss
$
(1,245
)
 
$
(1,408
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization
2,017

 
2,338

Debt issuance costs amortization
32

 
34

Deferred income taxes
(255
)
 
(64
)
(Gain) loss on sale of assets
(13
)
 
8

Unrealized foreign currency transaction (gain) loss
(225
)
 
1,309

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
7,613

 
6,640

Inventories
(4,851
)
 
(4,821
)
Other assets
(595
)
 
(2,629
)
Accounts payable
(514
)
 
2,083

Customer deposits
(2,170
)
 
3,378

Accrued expenses
(5,177
)
 
(3,021
)
Accrued pension and postretirement liabilities
(20
)
 
(34
)
Net cash (used in) provided by operating activities
(5,403
)
 
3,813

 
 
 
 
Investing activities
 

 
 

Capital expenditures
(436
)
 
(699
)
Proceeds from sales of assets
32

 

Net cash used in investing activities
(404
)
 
(699
)
 
 
 
 
Financing activities
 

 
 

Proceeds from short-term notes payable to bank
18,172

 
10,212

Repayments of short-term notes payable to bank
(14,995
)
 
(10,088
)
Repayments of long-term debt
(1,010
)
 
(1,458
)
Dividends paid
(274
)
 
(255
)
Net cash provided by (used in) financing activities
1,893

 
(1,589
)
 
 
 
 
Effect of exchange rate changes on cash
425

 
482

Net (decrease) increase in cash
(3,489
)
 
2,007

 
 
 
 
Cash and cash equivalents at beginning of period
32,774

 
16,293

 
 
 
 
Cash and cash equivalents at end of period
$
29,285

 
$
18,300


See accompanying notes to the unaudited consolidated financial statements.

6


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016


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, 2015, as amended. 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 months ended March 31, 2016 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2016.

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 was not expected to be material to the full year in 2015, but was material to the first quarter. 
 
Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the current presentation. In order to provide greater clarity on investments in research and development, these expenses have been reclassified from Cost of Sales to Operating Expenses where the costs are identified as Research and development, a separate line item.

NOTE 2.  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.

    




7


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

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):
 
March 31, 2016
 
December 31, 2015
 
Level of Fair Value Hierarchy
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
29,285

 
$
29,285

 
$
32,774

 
$
32,774

 
Level 1
Restricted cash
2,163

 
2,163

 
2,192

 
2,192

 
Level 1
Foreign currency forward contracts
454

 
454

 
163

 
163

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
Notes payable to bank
3,177

 
3,177

 

 

 
Level 2
Variable interest rate debt
10,832

 
10,832

 
11,606

 
11,606

 
Level 2
Foreign currency forward contracts
592

 
592

 
418

 
418

 
Level 2
 
The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The 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 March 31, 2016 and December 31, 2015, there were no significant transfers in and/or out of Level 1 and Level 2.
 
NOTE 3.  INVENTORIES
 
Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of the cost include materials, labor and overhead.
 
Net inventories consist of the following (in thousands):
 
March 31,
2016
 
December 31,
2015
Raw materials and purchased components
$
35,075

 
$
34,438

Work-in-process
35,965

 
33,682

Finished products
46,091

 
42,112

Inventories, net
$
117,131

 
$
110,232


NOTE 4.  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 (income) expense, net” when the hedging relationship is deemed to be ineffective. As of March 31, 2016 and December 31, 2015, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $35.2 million and $27.4 million, respectively. The Company expects that approximately $0.05 million of expense, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months. 

As of March 31, 2016 and December 31, 2015, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $31.8 million and $38.5 million, respectively. For the three months ended March 31, 2016 and 2015, losses of $0.4 million and gains of $1.4 million, respectively, were recorded related to this type of

8


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

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 (income) expense, net” line item on the Consolidated Statements of Operations.
 
The following table presents the fair value on the Consolidated Balance Sheets of the foreign currency forward contracts (in thousands):
 
March 31,
2016
 
December 31,
2015
Foreign currency forwards designated as hedges:
 

 
 

Other current assets
$
215

 
$
49

Accrued expenses
(249
)
 
(222
)
Foreign currency forwards not designated as hedges:
 

 
 

Other current assets
239

 
114

Accrued expenses
(343
)
 
(196
)
Foreign currency forwards, net
$
(138
)
 
$
(255
)
 
NOTE 5.  PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following (in thousands): 
 
March 31,
2016
 
December 31,
2015
Land, buildings and improvements
$
84,159

 
$
82,201

Machinery, equipment and fixtures
79,274

 
79,176

Office furniture, equipment and vehicles
22,787

 
22,689

Construction in progress
201

 
238

 
186,421

 
184,304

Accumulated depreciation
(124,109
)
 
(122,279
)
Property, plant and equipment, net
$
62,312

 
$
62,025


NOTE 6.  GOODWILL AND INTANGIBLE ASSETS
 
Detail and activity of goodwill by segment is presented below (in thousands):
 
MMS
 
ATA
 
Total
Goodwill
$
32,434

 
$
6,620

 
$
39,054

Accumulated impairment losses
(32,434
)
 

 
(32,434
)
Balance at December 31, 2015

 
6,620

 
6,620

 
 
 
 
 
 
Goodwill
32,434

 
6,620

 
39,054

Currency translation adjustments

 
(1
)
 
(1
)
Accumulated impairment losses
(32,434
)
 

 
(32,434
)
Balance at March 31, 2016
$

 
$
6,619

 
$
6,619


    





9


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016



The major components of intangible assets other than goodwill are as follows (in thousands):
 
March 31,
2016
 
December 31,
2015
Gross amortizable intangible assets:
 

 
 

Technical know-how
$
12,959

 
$
12,956

Customer lists
9,009

 
9,011

Land rights
2,690

 
2,672

Patents, trade names, drawings, and other
4,353

 
4,393

Total gross amortizable intangible assets
29,011

 
29,032

 
 
 
 
Accumulated amortization:
 

 
 

Technical know-how
(6,988
)
 
(6,833
)
Customer lists
(1,424
)
 
(1,315
)
Land rights
(287
)
 
(271
)
Patents, trade names, drawings, and other
(3,389
)
 
(3,406
)
Total accumulated amortization
(12,088
)
 
(11,825
)
Amortizable intangible assets, net
16,923

 
17,207

 
 
 
 
Indefinite lived intangible assets:
 

 
 

Trade names
10,969

 
10,811

 
 
 
 
Intangible assets other than goodwill, net
$
27,892

 
$
28,018


Amortization expense related to the definite-lived intangible assets are as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2016
 
2015
Amortization expense
$
320

 
$
451


NOTE 7.  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 
 March 31,
 
2016
 
2015
Balance at the beginning of period
$
3,802

 
$
3,891

Warranties issued
373

 
969

Warranty settlement costs
(590
)
 
(1,002
)
Changes in accruals for pre-existing warranties
2

 
(13
)
Currency translation adjustments
(66
)
 
19

Balance at the end of period
$
3,521

 
$
3,864



10


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016


NOTE 8.  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 $4.5 million once the Program is fully implemented. Virtually all of the costs are expected to result in cash expenditures. The Program is expected to be substantially completed during the first half of 2016.

Restructuring charges are included in the "Restructuring " 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 recognized during the three months ended March 31, 2016 and the cumulative costs recognized to date by the Program (in thousands):
 
Total Costs Expected to be Incurred
 
 
Cost Recognized for Three Months Ended March 31, 2016
 
Cumulative Costs Recognized to Date
MMS Segment:
 
 
 
 
 
 
Employee termination costs
$
255

 
 
$

 
$
255

Total MMS Segment
255

 
 

 
255

ATA Segment:
 
 
 
 
 
 
Employee termination costs
3,358

 
 
200

 
3,245

Facility exit costs
605

 
 

 

Other related costs
274

 
 

 
258

Total ATA Segment
4,237

 
 
200

 
3,503

Total:
 
 
 
 
 
 
Employee termination costs
3,613

 
 
200

 
3,500

Facility exit costs
605

 
 

 

Other related costs
274

 
 

 
258

Total Company
$
4,492

 
 
$
200

 
$
3,758



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, 2015
$
167

 
$
1,242

 
$
1,409

Restructuring charges:
 
 
 
 
 
Employee termination costs

 
200

 
200

Total restructuring charges

 
200

 
200

 
 
 
 
 
 
Cash expenditures
(5
)
 
(831
)
 
(836
)
Foreign currency translation adjustment

 
43

 
43

Balance at March 31, 2016
$
162

 
$
654

 
$
816



11


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

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 6.5% for the three months ended March 31, 2016.

The tax years 2010 through 2015 remain open to examination by the U.S. state taxing authorities. For other major jurisdictions (Switzerland, U.K., Taiwan, France, Germany, Netherlands, China and India), the tax years between 2008 and 2015 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.
 
At March 31, 2016, a liability of $2.1 million is recorded with respect to uncertain income tax positions, which includes related interest of $0.1 million. If recognized, essentially all of the uncertain tax positions and related interest at March 31, 2016 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 up to $1.3 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.
 
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 be estimated with any degree of certainty at this time.
 
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"), agreed to voluntarily participate in the RI/FS by signing an Administrative Settlement Agreement

12


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

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 costs associated with the RI/FS study on a per capita basis.
 
The EPA approved the RI/FS Work Plan in May of 2008. In July of 2012 the PRPs submitted a Remedial Investigation (RI) to respond to EPA issues raised in the initial draft RI. In January 2016, the PRPs submitted a draft Feasibility Study (FS), also to respond to issues raised by the EPA about previous drafts of the FS.

The recent draft FS identified alternative remedial actions with estimated life-cycle costs ranging from $0.9 million to $5.0 million. The Company’s portion of the potential costs is estimated to range from $0.1 million to $0.7 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 March 31, 2016. This reserve is reported as an Accrued expenses on the Consolidated Balance Sheets.

Based upon information currently available, except as described in the preceding paragraphs, the Company does not have material liabilities for environmental remediation. Though the foregoing reflects the Company’s current assessment as it relates to environmental remediation obligations, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to the Company.

NOTE 11.  PENSION AND POSTRETIREMENT PLANS
 
A summary of the components of net periodic pension and postretirement benefit costs for the three months ended March 31, 2016 and 2015 is presented below (in thousands):
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended 
 March 31,
 
Three Months Ended 
 March 31,
 
2016
 
2015
 
2016
 
2015
Service cost
$
559

 
$
493

 
$
3

 
$
3

Interest cost
1,672

 
1,673

 
19

 
19

Expected return on plan assets
(2,309
)
 
(2,400
)
 

 

Amortization of prior service credit
(63
)
 
(80
)
 

 

Amortization of transition asset
(77
)
 
(21
)
 

 

Amortization of actuarial loss (gain)
943

 
778

 
(14
)
 
(13
)
Net periodic cost
$
725

 
$
443

 
$
8

 
$
9


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 
 March 31,
 
2016
 
2015
Restricted stock/unit awards (“RSA”)
$
65

 
$
111

 
There were no RSAs granted during the three months ended March 31, 2016, and 2015, respectively. The deferred compensation is being amortized on a straight-line basis over the specified service period. There were no Performance Share Incentives ("PSIs") granted during the three months ended March 31, 2016 and 2015, respectively. The deferred compensation

13


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

with respect to the PSIs is being recognized into earnings based on the passage of time and achievement of performance targets. All outstanding RSAs and PSIs are unvested.

Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs and PSIs as of March 31, 2016 and December 31, 2015, are as follows:
 
March 31,
2016
 
December 31,
2015
 
RSAs
 
PSIs
 
RSAs
 
PSIs
Unrecognized compensation cost (in thousands)
$
275

 
$
563

 
$
349

 
$
1,192

 
 
 
 
 
 
 
 
Expected weighted-average recognition period for unrecognized compensation
   cost (in years)
1.12

 
1.84

 
1.20

 
1.16

 
NOTE 13.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Changes in AOCI by component for the three months ended March 31, 2016 and 2015 are as follows (in thousands):
 
Three Months Ended March 31, 2016
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
20,529

 
$
(69,100
)
 
$
(142
)
 
$
(48,713
)
Other comprehensive income before reclassifications
3,739

 
(1,062
)
 
212

 
2,889

Less (loss) income reclassified from AOCI

 
(789
)
 
47

 
(742
)
Net other comprehensive income
3,739

 
(273
)
 
165

 
3,631

Income taxes
(44
)
 
(152
)
 
19

 
(177
)
Ending balance, net of tax
$
24,312

 
$
(69,221
)
 
$
4

 
$
(44,905
)
 

14


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

 
Three Months Ended March 31, 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) income before
reclassifications
1,332

 
(153
)
 
493

 
1,672

Less income (loss) reclassified from AOCI

 
(664
)
 
118

 
(546
)
Net other comprehensive (loss) income
1,332

 
511

 
375

 
2,218

Income taxes
1,155

 
(45
)
 
54

 
1,164

Ending balance, net of tax
$
26,090

 
$
(64,014
)
 
$
177

 
$
(37,747
)

Details about reclassification out of AOCI for the three months ended March 31, 2016 and 2015 are as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
Affected line item on the Consolidated Statements of Operations
Details of AOCI components
 
2016
 
2015
 
Unrealized (loss) gain on cash flow hedges: 
 
 

 
 

 
 
 
 
$
76

 
$
129

 
Sales
 
 
(29
)
 
(11
)
 
Other (income) expense, net
 
 
47

 
118

 
Total before tax
 
 
7

 
21

 
Income taxes
 
 
$
54

 
$
139

 
Net of tax
Retirement plans related adjustments:
 
 

 
 

 
 
Amortization of prior service credit
 
$
63

 
$
80

 
(a)
Amortization of transition asset
 
77

 
21

 
(a)
Amortization of actuarial loss
 
(929
)
 
(765
)
 
(a)
 
 
(789
)
 
(664
)
 
Total before tax
 
 
83

 
48

 
Income taxes
 
 
$
(706
)
 
$
(616
)
 
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.
 
NOTE 14.  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 loss per share computation (in thousands):

15


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

 
 
Three Months Ended 
 March 31,
 
2016
 
2015
Numerator for basic and diluted loss per share:
 

 
 

Net loss applicable to common shareholders
$
(1,245
)
 
$
(1,408
)
 
 
 
 
Denominator for basic and diluted loss per share:
 

 
 

Denominator for basic and diluted loss per share — weighted average shares
12,797

 
12,742

 
There is no dilutive effect of the restricted stock and stock options for both the three months ended March 31, 2016 and 2015 due to the net loss in these periods. There would have been 100,365 and 126,004 of these shares included in the diluted calculation for the three months ended March 31, 2016 and 2015, respectively, had there been earnings in these periods. Common stock equivalents of certain stock-based awards totaling 16,746 were excluded from the calculation of diluted loss per share for the three months ended March 31, 2015 as they were anti-dilutive.

NOTE 15. SEGMENT INFORMATION
 
Segment (loss) income is measured for internal reporting purposes by excluding corporate expenses, impairment charges, interest income, interest expense, and income taxes. Corporate expenses consist primarily of executive employment costs, certain professional fees, and costs associated with the Company’s global headquarters. Financial results for each reportable segment are as follows (in thousands):
 
Three Months Ended March 31, 2016
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,272

 
$
15,620

 
$
(70
)
 
$
67,822

Depreciation and amortization
1,427

 
538

 
 

 
1,965

Segment (loss) income
(1,156
)
 
1,854

 
 

 
698

Capital expenditures
291

 
145

 
 

 
436

Segment assets(1)
225,987

 
49,732

 
 

 
275,719

 
Three Months Ended March 31, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,976

 
$
16,227

 
$
(75
)
 
$
69,128

Depreciation and amortization
1,624

 
600

 
 

 
2,224

Segment (loss) income
(909
)
 
1,197

 
 

 
288

Capital expenditures
306

 
393

 
 

 
699

Segment assets(1)
236,762

 
53,612

 
 

 
290,374

____________________
(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 loss from operations before income taxes for the three months ended March 31, 2016 and 2015 are as follows (in thousands):

16


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2016

 
Three Months Ended 
 March 31,
 
2016
 
2015
Segment income
$
698

 
$
288

Unallocated corporate expense
(1,943
)
 
(1,704
)
Interest expense, net
(86
)
 
(140
)
Other unallocated expense

 
(1
)
Loss before income taxes
$
(1,331
)
 
$
(1,557
)
 
A reconciliation of segment assets to consolidated total assets follows (in thousands):
 
March 31,
2016
 
December 31,
2015
Total segment assets
$
275,719

 
$
274,334

Unallocated assets
33,791

 
36,801

Total assets
$
309,510

 
$
311,135


Unallocated assets include cash of $29.3 million and $32.8 million at March 31, 2016 and December 31, 2015, respectively.

NOTE 16.  NEW ACCOUNTING STANDARDS

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an amended 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 while the recognition and measurement guidance for debt issuance costs is not affected. In August 2015, FASB subsequently issued an amended guidance to clarify debt issuance costs associated with a line-of-credit arrangement, which allow an entity to defer and present debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendments are required to be applied retrospectively to all prior periods.
    
In January 2016, the Company adopted the guidance. As a result, the Company reclassified $0.07 million and $0.09 million debt issuance cost as of December 31, 2015 into Current portion of long-term debt and Long-term debt respectively to reduce the carrying amount of debt liability, from Other current assets and Other non-current assets on the Consolidated Balance Sheets. Debt issuance costs associated with line-of-credit arrangements remained in the Other current assets and Other non-current assets on the Consolidated Balance Sheets. Unamortized debt issuance costs of $0.06 million and $0.08 million are recorded as Other current assets and Other non-current assets respectively, and $0.07 million and $0.08 million were recorded as Current portion of long-term debt and Long-term debt respectively to reduce the carrying amount of debt liability, on the balance sheet at March 31, 2016. The Company's debt issuance cost amortization was not affected by the adoption of the new guidance.
In March 2016, the FASB issued an amended guidance on improvements to employee share-based payment accounting. The guidance includes multiple provisions to simplify various aspects of the accounting for share-based payments. These amendments are expected to impact net income, EPS, and the statement of cash flows. In particular, the tax effects of all stock compensation awards will be included in income. The guidance is effective for public companies in annual periods beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted in any interim period, with all adjustments applied as of the beginning of the fiscal year of adoption. The Company is assessing the impact and method of adoption.
    

17


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, 2015, as amended.
 
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 66% of our 2015 sales were to customers outside of North America, 70% of our 2015 products sold were manufactured outside of North America, and 69% of our employees as of December 31, 2015 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 35% of overall sales through the first quarter of 2016 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.
 

18


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 months ended March 31, 2016, foreign currency fluctuations resulted in unfavorable currency translation impact of approximately $1.9 million on sales when compared to the same period in 2015.

Results of Operations
 
Presented below is summarized selected financial data for the three months ended March 31, 2016 and 2015 (in thousands): 
 
 
Three Months Ended 
 March 31,
 
$
Change
 
%
Change
 
 
2016
 
2015
 
 
Sales
 
$
67,822

 
$
69,128

 
$
(1,306
)
 
(2
)%
Gross profit
 
22,744

 
21,855

 
889

 
4
 %
% of sales
 
33.5
 %
 
31.6
 %
 
1.9

pts.
Selling, general and administrative expenses
 
20,593

 
19,600

 
993

 
5
 %
% of sales
 
30.4
 %
 
28.4
 %
 
2.0

pts.
Research & development
 
3,287

 
3,607

 
(320
)
 
(9
)%
Restructuring
 
200

 

 
200

 
NM

Other (income) expense, net
 
(91
)
 
65

 
(156
)
 
(240
)%
Loss from operations
 
(1,245
)
 
(1,417
)
 
172

 
(12
)%
% of sales
 
(1.8
)%
 
(2.0
)%
 
0.2

pts.
Interest expense, net
 
86

 
140

 
(54
)
 
(39
)%
Loss before income taxes
 
(1,331
)
 
(1,557
)
 
226

 
(15
)%
Income taxes
 
(86
)
 
(149
)
 
63

 
(42
)%
Net loss
 
$
(1,245
)
 
$
(1,408
)
 
$
163

 
(12
)%
% of sales
 
(1.8
)%
 
(2.0
)%
 
0.2

pts.
NM--not meaningful

Sales.  The table below summarizes sales by each corresponding geographical region for the three months ended March 31, 2016 compared to the same period in 2015 (in thousands): 
 
Three Months Ended 
 March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Sales to customers in:
North America
$
17,450

 
$
26,305

 
$
(8,855
)
 
(34
)%
Europe
23,843

 
22,929

 
914

 
4
 %
Asia and other
26,529

 
19,894

 
6,635

 
33
 %
Total
$
67,822

 
$
69,128

 
$
(1,306
)
 
(2
)%
 
Sales for the three months ended March 31, 2016 were $67.8 million, which remained relatively flat when compared with the same period in 2015 after considering the impact of unfavorable foreign currency translation adjustments of approximately $1.9 million.
 

19


North America sales were $17.5 million during the three months ended March 31, 2016, a decrease of $8.9 million, or 34%, when compared to the same period in 2015. The decrease in sales was mainly the result of lower sales from the Metalcutting Machine Solutions segment as compared to the prior year due to lower demand for capital goods in that market, as also exhibited in industry published data.

Europe sales were $23.8 million during the three months ended March 31, 2016, an increase of $0.9 million, or 4%, when compared to the same period in 2015. Foreign currency translation adjustments resulted in an unfavorable impact of approximately of $0.8 million to sales, Excluding the foreign exchange impact, sales growth was $1.7 million or 7.4%. Virtually all of the increase was in the Metalcutting Machine Solutions segment.
 
Asia and other sales were $26.5 million during the three months ended March 31, 2016, an increase of $6.6 million, or 33%, when compared to the same period in 2015. Increased shipments for our turning and milling machines were responsible for the overall increase in sales, and was partially offset by the unfavorable translation impact from currency exchange rate fluctuations of $1.1 million. Demand from customers in China is the key driver of the performance of the machine tool industry, and while recent machine tool industry data from China has continued to be subdued, Hardinge has been able to perform better in the market based upon targeting customer segments that provide better opportunities for growth.
 
Sales of machines accounted for approximately 65% of the consolidated sales for the three months ended March 31, 2016, compared to 63% for the same period in 2015. Sales of non-machine products and services, primarily consisting of collets, chucks, accessories, repair parts, and service revenue, accounted for 35% of the consolidated sales for the three months ended March 31, 2016, compared to 37% for the same period in 2015
 
Gross Profit.  Gross profit was $22.7 million, or 33.5% of sales for the three months ended March 31, 2016, compared to $21.9 million, or 31.6% of sales for the same period in 2015. Gross profit and margin for the three months ended March 31, 2016 impacted by unfavorable product mix, partially offset by $0.2 million in savings from the Company’s 2015 restructuring actions, as well as the non-recurrence of an out of period inventory adjustment of $0.7 million recorded in the first quarter of 2015 at one of our European subsidiaries to correct for costs that were not properly released from inventory as the product was sold.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $20.6 million, or 30.4% of net sales for the three months ended March 31, 2016, an increase of $1.0 million or 5%, compared to $19.6 million, or 28.4% of net sales for the three months ended March 31, 2015. The increase in SG&A expenses for the three months ended March 31, 2016 was driven by $1.2 million in increased commission expense based upon the mix of sales, in addition to $0.7 million associated with professional fees related to the Company’s strategic review process. Partially offsetting this increase was $0.6 million of favorable foreign currency translation impact, and $0.4 million in restructuring savings. 

Research and Development Expenses.  Research and Development expenses were $3.3 million, or 4.8% of sales for the three months ended March 31, 2016, a decrease of 0.3 million or 8.9% compared to $3.6 million, or 5.2% of net sales for the three months ended March 31, 2015. $0.2 million of savings was a result of restructuring actions.

Other (Income)Expense, Net. (Income)/ Expense improved by $0.2 million to $0.1 million income for the three months ended March 31, 2016 primarily as a result of fluctuations in foreign currency exchange rates during the period as compared to the same period in 2015.

Loss from Operations Before Income Taxes.  As a result of the foregoing, loss from operations before income taxes was $1.3 million for the three months ended March 31, 2016, compared to a loss of $1.6 million for the same period in 2015.

Income Taxes.  The income tax benefit was $0.1 million for the three months ended March 31, 2016, compared to compared to an income tax benefit of $0.1 million for the same period in 2015. The effective tax rate was 6.5% for the three months ended March 31, 2016, compared to 9.6% for the same period in 2015, which differs from the U.S. statutory rate primarily due to the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded.
 
Each quarter, an estimate of the full year tax rate is developed based upon anticipated annual results and an adjustment is made, if required, to the year-to-date income tax expense to reflect the full year anticipated effective tax rate.

We continue to maintain a valuation allowance on all or a portion of the tax benefits of our U.S., Canada, U.K., Germany, and the Netherlands net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability is sustained in the respective jurisdiction.

20


 
Net Loss.  As a result of the foregoing, net loss for the three months ended March 31, 2016 was $1.2 million, or 1.8% of net sales, compared to $1.4 million, or 2.0% of net sales, for the same period in 2015. Both basic and diluted loss per share for the three months ended March 31, 2016 was $0.10, compared to $0.11 for the same period in 2015.

Business Segment Information — Comparison of the three months ended March 31, 2016 and 2015

Metalcutting Machine Solutions Segment ("MMS") (in thousands):
 
Three Months Ended 
 March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Sales
$
52,272

 
$
52,976

 
$
(704
)
 
(1
)%
Segment loss
(1,156
)
 
(909
)
 
(247
)
 
27
 %
 
MMS sales were $52.3 million for the three months ended March 31, 2016, which remained relatively flat when compared with the same period in 2015 after considering the unfavorable impact of foreign currency translation adjustments. Sales of grinding machines increased as compared to the prior year, primarily offset by declines in turning and milling machine sales, combined with the aforementioned foreign currency impact.
 
Segment loss for the three months ended March 31, 2016 was $1.2 million, or 27% below prior year. The key driver was lower volume, and a leaner mix of grinding products.
 
Aftermarket Tooling and Accessories Segment ("ATA") (in thousands):
 
Three Months Ended 
 March 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Sales
$
15,620

 
$
16,227

 
$
(607
)
 
(4
)%
Segment income
1,854

 
1,197

 
657

 
55
 %
 
ATA sales for the three months ended March 31, 2016 were $15.6 million, a decrease of $0.6 million, or 4%, when compared to the corresponding period in 2015. The primary driver of the decline in sales was unfavorable foreign currency translation adjustments when compared to the same period in 2015.
 
Segment income for the three months ended March 31, 2016 was $1.9 million, a 55% increase from the prior year. The ATA segment experienced increased profitability as a result of $0.4 million in net savings from the restructuring programs, as well as improved product mix when compared to the same quarter in 2015, which was more than offset by an out of period inventory adjustment of $0.7 million at one of our European subsidiaries to correct for costs that were not properly released from inventory as the product was sold in 2015.

Segment Summary For the Three Months Ended March 31, 2016 and 2015(in thousands):

 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,272

 
$
15,620

 
$
(70
)
 
$
67,822

 
$
52,976

 
$
16,227

 
$
(75
)
 
$
69,128

Segment (loss) income
(1,156
)
 
1,854

 
 

 
698

 
(909
)
 
1,197

 
 

 
288

Unallocated corporate
   expense
 

 
 

 
 

 
(1,943
)
 
 

 
 

 
 

 
(1,704
)
Interest expense, net
 

 
 

 
 

 
(86
)
 
 

 
 

 
 

 
(140
)
Other unallocated
   expense
 
 
 
 
 
 

 
 
 
 
 
 
 
(1
)
Loss before
   income taxes
 

 
 

 
 

 
$
(1,331
)
 
 
 
 
 
 
 
$
(1,557
)


21


Summary of Cash Flows for the Three Months Ended March 31, 2016 and 2015:
 
 
 
Three Months Ended 
 March 31,
 
 
 
2016
 
2015
 
Net cash (used in) provided by operating activities
 
$
(5,403
)
 
$
3,813

 
Net cash used in investing activities
 
$
(404
)
 
$
(699
)
 
Net cash provided by (used in) financing activities
 
$
1,893

 
$
(1,589
)
 

During the three months ended March 31, 2016, we used $5.4 million net cash from operating activities. The net cash used was driven by a net loss (as adjusted for depreciation and amortization expense as well as the impact of unrealized foreign currency transaction loss), a decrease in customer receivables due to the timing of sales and collection activity, and a decrease in accounts payable due to timing of purchases and payment activity and an increase in other assets related to advanced vendor payments for inventory. These cash inflows were partially offset by an increase in inventories based on orders and associated production levels, decrease in customer deposits due to timing of shipments and new orders received, a decrease in accrued expenses, primarily as a result of payment of annual bonuses as well as the payment of the annual Company contribution to the 401(k) Plan.

During the three months ended March 31, 2015, we generated $3.8 million net cash from operating activities. The net cash generated was driven by a net loss (as adjusted for depreciation and amortization expense as well as the impact of unrealized foreign currency transaction loss), a decrease in customer receivables due to the timing of sales and collection activity, an increase in customer deposits due to timing of shipments and new orders received, and an increase in accounts payable due to timing of purchases and payment activity. These cash inflows were partially offset by an increase in inventories based on orders and associated production levels, a decrease in accrued expenses, primarily as a result of payment of annual bonuses as well as the payment of the annual Company contribution to the 401(k) Plan, and an increase in other assets related to advanced vendor payments for inventory.
 
Net cash used in investing activities was $0.4 million for the three months ended March 31, 2016. The primary use of cash was for capital expenditures during the period, which were made primarily for maintenance capital purchases.

Net cash used in investing activities was $0.7 million for the three months ended March 31, 2015. The primary use of cash was for capital expenditures, which were made primarily for maintenance capital purchases.

Net cash flow generated by financing activities was $1.9 million for the three months ended March 31, 2016. Cash generated was primarily attributable to $3.2 million of short-term borrows offset by $1.0 million of payments on long-term debt due to normal scheduled payment activity and year-to-date dividends paid of $0.3 million.

Net cash flow used by financing activities was $1.6 million for the three months ended March 31, 2015. Cash used by financing activities was primarily driven by $1.5 million of payments on long-term debt due to normal scheduled payment activity and year-to-date dividends paid of $0.3 million.

Liquidity and Capital Resources
 
We maintain financing arrangements with several financial institutions. These financing arrangements are in the form of long term loans, credit facilities, and lines of credit. The credit facilities allow us to borrow up to $78.3 million at March 31, 2016 and $77.2 million at December 31, 2015, of which $54.5 million and $54.1 million, respectively, can be borrowed for working capital needs. As of March 31, 2016 and December 31, 2015, $66.5 million and $69.8 million was available for borrowing under these respective arrangements, of which $48.7 million and $53.2 million, respectively, was available for working capital needs. Total consolidated borrowings outstanding were $14.0 million and $11.6 million at March 31, 2016 and December 31, 2015, respectively.
 
Our financing arrangements contain certain debt covenant requirements, including financial covenants, representations, affirmative and negative covenants, prepayment provisions and events of default. As of March 31, 2016, we were in compliance with all of our debt covenants.
 
Our liquidity requirements primarily include funding for operations, including working capital requirements, and funding for capital investments and acquisitions. We expect to meet these requirements in the long term through cash provided

22


by operating activities and availability under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and change in working capital needs. During the three months ended March 31, 2016, cash flows from operating activities and available cash were sufficient to fund our normal investment activities, primarily capital expenditures for property, plant and equipment and other productive assets.
 
We assess on an ongoing basis our portfolio of operations, as well as our financial and capital structures, to ensure we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate and pursue acquisition opportunities that we believe will enhance our strategic position.

Accounting Guidance Not Yet Adopted

We are currently assessing the financial impact to our consolidated financial statements of accounting guidance not yet adopted. For further information on accounting guidance not yet adopted, refer to Note 16. "New Accounting Standards" of the Consolidated Financial Statements.
 
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Accordingly, there can be no assurance that our expectations will be realized. Such statements are based upon information known to management at this time. The Company cautions that such statements necessarily involve uncertainties and risk and deal with matters beyond the Company’s ability to control, and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are fluctuations in the machine tool business cycles, changes in general economic conditions in the U.S. or internationally, the mix of products sold and the profit margins thereon, the relative success of the Company’s entry into new product and geographic markets, the Company’s ability to manage its operating costs, actions taken by customers such as order cancellations or reduced bookings by customers or distributors, competitors’ actions such as price discounting or new product introductions, governmental regulations and environmental matters, changes in the availability and cost of materials and supplies, the implementation of new technologies and currency fluctuations. Any forward-looking statement should be considered in light of these factors. The Company undertakes no obligation to revise its forward-looking statements if unanticipated events alter their accuracy.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
There have been no material changes to our market risk exposures during the first three months of 2016. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2015 Annual Report on Form 10-K, as amended.
 
Item 4.  Controls and Procedures.
 
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2016, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, and determined that these controls and procedures were effective.
 
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2016 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.


23


PART II — OTHER INFORMATION
 
Item 1.        Legal Proceedings.
 
None.
 
Item 1A.     Risk Factors.
 
There is no change to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as amended.
 
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3.        Defaults Upon Senior Securities.
 
None.
 
Item 4.        Mine Safety Disclosures.
 
Not Applicable.
 
Item 5.        Other Information.
 
None.

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Item 6.
 
Exhibits.
 
 
 
3.1
 
Restated Certificate of Incorporation of Hardinge Inc. (incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2015 (File No. 001-34639))

 
 
 
3.2
 
Certificate of Amendment of the Restated Certificate of Incorporation of Hardinge Inc. (incorporated by reference to Exhibit 3.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2015 (File No. 001-34639)).
 
 
 
3.3
 
Amended and Restated By-Laws of Hardinge Inc. (incorporated by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 16, 2015 (File No. 001-34639)).
 
 
 
3.4
 
Amendment to Amended and Restated By-Laws of Hardinge Inc. (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 11, 2016 (File No. 001-34639)).
 
 
 
4.1
 
Specimen of certificate for shares of Common Stock, par value $.01 per share, of Hardinge Inc. (incorporated by reference to Exhibit 3 to Registrant’s Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on May 19, 1995 (File No. 000-15760)).
 
 
 
31.1
 
Chief Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Chief Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


25


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
HARDINGE INC.
 
 
Registrant
 
 
May 10, 2016
 
By:
/s/ Richard L. Simons
Date
 
 
Richard L. Simons
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
May 10, 2016
 
By:
/s/ Douglas J. Malone
Date
 
 
Douglas J. Malone
 
 
 
Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
May 10, 2016
 
By:
/s/ Edward J. Gaio
Date
 
 
Edward J. Gaio
 
 
 
Corporate Controller
 
 
 
(Principal Accounting Officer)
 
 
 
 


26