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EX-32 - EXHIBIT 32 - HARDINGE INChdng-9302016x10qxex32.htm
EX-31.2 - EXHIBIT 31.2 - HARDINGE INChdng-9302016x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - HARDINGE INChdng-9302016x10qxex311.htm
EX-10.1 - EXHIBIT 10.1 - HARDINGE INCexhibit101employmentagreem.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, 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
hardingehoriz646a04a08.jpg 
Hardinge Inc.
(Exact name of registrant as specified in its charter) 
New York
 
16-0470200
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Hardinge Drive
Elmira, NY
 
14902
(Address of principal executive offices)
 
(Zip Code)
 
(607) 734-2281
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                      ýYes  oNo
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                      ýYes  oNo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     oYes  ýNo
 
As of October 31, 2016 there were 12,895,670 shares of Common Stock of the registrant outstanding.
 

1



HARDINGE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 (Audited)
 
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015
 
 
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2016 and 2015
 
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 
 
 
 
 
 


2


PART I — FINANCIAL INFORMATION
 

3


Item 1. Financial Statements.


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
22,943

 
$
32,774

Restricted cash
3,423

 
2,192

Accounts receivable, net
47,205

 
56,945

Inventories, net
120,350

 
110,232

Other current assets
11,189

 
9,314

Total current assets
205,110

 
211,457

 
 
 
 
Property, plant and equipment, net
59,664

 
62,025

Goodwill
6,612

 
6,620

Other intangible assets, net
27,402

 
28,018

Other non-current assets
4,061

 
3,015

Total non-current assets
97,739

 
99,678

Total assets
$
302,849

 
$
311,135

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Accounts payable
$
24,278

 
$
24,696

Accrued expenses
25,592

 
27,964

Customer deposits
18,122

 
19,845

Accrued income taxes
1,780

 
1,919

Deferred income taxes
2,567

 
2,164

Current portion of long-term debt
4,777

 
5,621

Total current liabilities
77,116

 
82,209

 
 
 
 
Long-term debt
3,848

 
5,985

Pension and postretirement liabilities
54,102

 
57,322

Deferred income taxes
1,241

 
1,121

Other liabilities
3,178

 
3,393

Total non-current liabilities
62,369

 
67,821

Commitments and contingencies (see Note 10)


 


Common stock ($0.01 par value, 20,000,000 authorized; 12,893,537 issued and outstanding as of September 30, 2016, and 12,856,716 issued and 12,838,227 outstanding as of December 31, 2015)
129

 
128

Additional paid-in capital
121,189

 
120,524

Retained earnings
86,112

 
89,368

Treasury shares (at cost, none as of September 30, 2016, and 18,489 as of
December 31, 2015)

 
(202
)
Accumulated other comprehensive loss
(44,066
)
 
(48,713
)
Total shareholders’ equity
163,364

 
161,105

Total liabilities and shareholders’ equity
$
302,849

 
$
311,135

 
See accompanying notes to the unaudited consolidated financial statements.


4


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Sales
$
67,211

 
$
76,805

 
$
205,218

 
$
228,289

Cost of sales
44,060

 
51,435

 
135,770

 
154,103

Gross profit
23,151

 
25,370

 
69,448

 
74,186

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
19,992

 
19,925

 
60,221

 
60,596

Research & development
3,296

 
3,611

 
9,953

 
10,715

Restructuring
182

 
877

 
608

 
877

Other expense (income), net
321

 
201

 
249

 
276

(Loss) income from operations
(640
)
 
756

 
(1,583
)
 
1,722

 
 
 
 
 
 
 
 
Interest expense
142

 
161

 
427

 
472

Interest income
(56
)
 
(40
)
 
(192
)
 
(80
)
(Loss) income before income taxes
(726
)
 
635

 
(1,818
)
 
1,330

Income tax expense
657

 
962

 
666

 
1,479

Net loss
$
(1,383
)
 
$
(327
)
 
$
(2,484
)
 
$
(149
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per share data:
 

 
 

 
 

 
 

Basic loss per share:
$
(0.11
)
 
$
(0.03
)
 
$
(0.19
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Diluted loss per share:
$
(0.11
)
 
$
(0.03
)
 
$
(0.19
)
 
$
(0.01
)
 
 
 
 
 
 
 
 
Cash dividends declared per share:
$
0.02

 
$
0.02

 
$
0.06

 
$
0.06

 
See accompanying notes to the unaudited consolidated financial statements.


5


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Net loss
$
(1,383
)
 
$
(327
)
 
$
(2,484
)
 
$
(149
)
Other comprehensive (loss) income:
 

 
 

 
 

 
 

Foreign currency translation adjustments
(368
)
 
(7,169
)
 
531

 
(1,641
)
Retirement plans related adjustments
3,031

 
1,748

 
4,333

 
1,736

Unrealized gain (loss) on cash flow hedges
78

 
(751
)
 
210

 
(433
)
Other comprehensive income (loss) before tax
2,741

 
(6,172
)
 
5,074

 
(338
)
Income tax expense (benefit)
322

 
(506
)
 
427

 
324

Other comprehensive income (loss), net of tax
2,419

 
(5,666
)
 
4,647

 
(662
)
Total comprehensive income (loss)
$
1,036

 
$
(5,993
)
 
$
2,163

 
$
(811
)
 
See accompanying notes to the unaudited consolidated financial statements.


6


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
(Unaudited)
Operating activities
 

 
 

Net loss
$
(2,484
)
 
$
(149
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

Depreciation and amortization
6,095

 
6,831

Debt issuance costs amortization
98

 
101

Deferred income taxes
(705
)
 
(284
)
Loss (gain) on sale of assets
23

 
(1
)
Unrealized foreign currency transaction loss (gain)
219

 
(4
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
9,761

 
6,015

Inventories
(9,458
)
 
(8,688
)
Other assets
(2,301
)
 
(1,432
)
Accounts payable
(586
)
 
990

Customer deposits
(1,604
)
 
3,494

Accrued expenses
(3,338
)
 
2,161

Accrued pension and postretirement liabilities
(65
)
 
(13
)
Net cash (used in) provided by operating activities
(4,345
)
 
9,021

 
 
 
 
Investing activities
 

 
 

Capital expenditures
(1,543
)
 
(3,103
)
Proceeds from sales of assets
38

 
38

Net cash used in investing activities
(1,505
)
 
(3,065
)
 
 
 
 
Financing activities
 

 
 

Proceeds from short-term notes payable to bank
35,974

 
24,937

Repayments of short-term notes payable to bank
(35,974
)
 
(24,937
)
Repayments of long-term debt
(3,186
)
 
(3,245
)
Dividends paid
(792
)
 
(781
)
Purchases of treasury stock

 
(201
)
Net cash used in financing activities
(3,978
)
 
(4,227
)
 
 
 
 
Effect of exchange rate changes on cash
(3
)
 
513

Net (decrease) increase in cash
(9,831
)
 
2,242

 
 
 
 
Cash and cash equivalents at beginning of period
32,774

 
16,293

 
 
 
 
Cash and cash equivalents at end of period
$
22,943

 
$
18,535


See accompanying notes to the unaudited consolidated financial statements.

7


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended September 30, 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 of $0.7 million to correct finished goods inventory. This adjustment was related to periods beginning in 2013. The adjustment of $0.7 million, 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 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.

    

8


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 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):
 
September 30, 2016
 
December 31, 2015
 
Level of Fair Value Hierarchy
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
22,943

 
$
22,943

 
$
32,774

 
$
32,774

 
Level 1
Restricted cash
3,423

 
3,423

 
2,192

 
2,192

 
Level 1
Foreign currency forward contracts
414

 
414

 
163

 
163

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
Variable interest rate debt
8,625

 
8,625

 
11,606

 
11,606

 
Level 2
Foreign currency forward contracts
264

 
264

 
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 variable interest rate debt approximates its respective carrying amount. The fair value of foreign currency forward contracts is measured using 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, 2016 and December 31, 2015, there were no 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):
 
September 30,
2016
 
December 31,
2015
Raw materials and purchased components
$
35,104

 
$
34,438

Work-in-process
37,878

 
33,682

Finished products
47,368

 
42,112

Inventories, net
$
120,350

 
$
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 expense (income), net” when the hedging relationship is deemed to be ineffective. As of September 30, 2016 and December 31, 2015, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $50.9 million and $27.4 million, respectively. The Company expects that approximately $0.02 million of expense, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months. 

As of September 30, 2016 and December 31, 2015, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $34.3 million and $38.5 million, respectively. For the three months ended September 30, 2016 and 2015, gains of $0.5 million and losses of $1.9 million, respectively, were recorded related to this type of derivative financial instrument. For the nine months ended September 30, 2016 and 2015, respectively, gains of $0.03 million and losses of $0.3 million were recorded related to this type of derivative financial instrument. For contracts that are not

9


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

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,
2016
 
December 31,
2015
Foreign currency forwards designated as hedges:
 

 
 

Other current assets
$
246

 
$
49

Accrued expenses
(179
)
 
(222
)
Foreign currency forwards not designated as hedges:
 

 
 

Other current assets
168

 
114

Accrued expenses
(85
)
 
(196
)
Foreign currency forwards, net
$
150

 
$
(255
)
 
NOTE 5.  PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following (in thousands): 
 
September 30,
2016
 
December 31,
2015
Land, buildings and improvements
$
83,821

 
$
82,201

Machinery, equipment and fixtures
78,951

 
79,176

Office furniture, equipment and vehicles
22,798

 
22,689

Construction in progress
126

 
238

 
185,696

 
184,304

Accumulated depreciation
(126,032
)
 
(122,279
)
Property, plant and equipment, net
$
59,664

 
$
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

 
(8
)
 
(8
)
Accumulated impairment losses
(32,434
)
 

 
(32,434
)
Balance at September 30, 2016
$

 
$
6,612

 
$
6,612


    

10


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

The major components of intangible assets other than goodwill are as follows (in thousands):
 
September 30,
2016
 
December 31,
2015
Gross amortizable intangible assets:
 

 
 

Technical know-how
$
12,962

 
$
12,956

Customer lists
8,997

 
9,011

Land rights
2,601

 
2,672

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

 
4,393

Total gross amortizable intangible assets
28,913

 
29,032

 
 
 
 
Accumulated amortization:
 

 
 

Technical know-how
(7,295
)
 
(6,833
)
Customer lists
(1,639
)
 
(1,315
)
Land rights
(303
)
 
(271
)
Patents, trade names, drawings, and other
(3,458
)
 
(3,406
)
Total accumulated amortization
(12,695
)
 
(11,825
)
Amortizable intangible assets, net
16,218

 
17,207

 
 
 
 
Indefinite lived intangible assets:
 

 
 

Trade names
11,184

 
10,811

 
 
 
 
Intangible assets other than goodwill, net
$
27,402

 
$
28,018


Amortization expense related to the definite-lived intangible assets are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Amortization expense
$
321

 
$
452

 
$
961

 
$
1,354


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Balance at the beginning of period
$
3,824

 
$
4,037

 
$
3,802

 
$
3,891

Warranties issued
568

 
682

 
1,649

 
2,081

Warranty settlement costs
(533
)
 
(620
)
 
(1,680
)
 
(2,068
)
Changes in accruals for pre-existing warranties
(141
)
 
(11
)
 
(77
)
 
64

Currency translation adjustments
14

 
(109
)
 
38

 
11

Balance at the end of period
$
3,732

 
$
3,979

 
$
3,732

 
$
3,979



11


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 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 incur one-time costs of $4.3 million. The restructuring Program is now essentially complete, with the exception of approximately $0.2 million of certain costs in our German subsidiary associated with the remaining one month of a facility lease and other related expenses. The Program is expected to provide annualized savings of approximately $4.5 million.

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 and nine months ended September 30, 2016 and the cumulative costs recognized to date by the Program (in thousands):
 
Total Costs Expected to be Incurred
 
Costs Recognized for Three Months Ended September 30, 2016
Costs Recognized for the Nine Months Ended September 30, 2016
Cumulative Costs Recognized to Date
MMS Segment:
 
 
 
 
 
Employee termination costs
$
260

 
$

$

$
255

Other related costs

 



Total MMS Segment
260

 


255

ATA Segment:
 
 
 
 
 
Employee termination costs
3,323

 

269

3,314

Facility exit costs
137

 
68

114

114

Other related costs
605

 
114

225

483

Total ATA Segment
4,065

 
182

608

3,911

Total:
 
 
 
 
 
Employee termination costs
3,583

 

269

3,569

Facility exit costs
137

 
68

114

114

Other related costs
605

 
114

225

483

Total Company
$
4,325

 
$
182

$
608

$
4,166


During the three and nine months ended September 30, 2015 the Company recognized $0.9 million of costs under the Program. 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

 
269

 
269

Facility exit costs

 
114

 
114

Other related costs

 
225

 
225

Total restructuring charges for the period

 
608

 
608

 
 
 
 
 
 
Cash expenditures
(14
)
 
(1,539
)
 
(1,553
)
Foreign currency translation adjustment

 
40

 
40

Balance at September 30, 2016
$
153

 
$
351

 
$
504



12


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 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 (90.5)% and (36.6)% for the three and nine months ended September 30, 2016, 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.  Additionally, in 2016, the Company’s effective tax rate was impacted by a one-time dividend from an indirect wholly-owned subsidiary in China to its parent, a direct wholly-owned subsidiary in Switzerland, of which $0.6 million of the total income tax expense is related to the associated withholding taxes.

The tax years 2013 through 2015 remain open to examination by the U.S. federal taxing authorities. 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 September 30, 2016, a liability of $2.2 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 September 30, 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

13


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

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 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. On July 6, 2012 the PRPs submitted the Remedial Investigation (RI). On July 18, 2016 the PRPs submitted the final Feasibility Study (FS) and the EPA issued the Record of Decision on September 30, 2016.

Based upon Alternative 3 (Capping), the preferred EPA remedy, the Company, under present circumstances, would be responsible for $0.3 million of the estimated $1.92 million cost. This has been reserved and reported as an Accrued expense 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 and nine months ended September 30, 2016 and 2015 is presented below (in thousands):
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended 
 September 30,
 
Three Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
566

 
$
484

 
$
3

 
$
3

Interest cost
1,662

 
1,673

 
19

 
19

Expected return on plan assets
(2,305
)
 
(2,395
)
 

 

Amortization of prior service credit
(64
)
 
(79
)
 

 

Amortization of transition asset
(78
)
 
(19
)
 

 

Settlement loss
765

 

 

 

Amortization of actuarial loss (gain)
951

 
772

 
(14
)
 
(13
)
Net periodic cost
$
1,497

 
$
436

 
$
8

 
$
9

 
 
 
 
 
 
 
 

14


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

 
Pension Benefits
 
Postretirement Benefits
 
Nine Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
1,695

 
$
1,475

 
$
9

 
$
9

Interest cost
5,010

 
5,024

 
57

 
56

Expected return on plan assets
(6,942
)
 
(7,208
)
 

 

Amortization of prior service credit
(191
)
 
(241
)
 

 

Amortization of transition asset
(234
)
 
(61
)
 

 

Settlement loss
765

 

 

 

Amortization of actuarial loss (gain)
2,850

 
2,334

 
(42
)
 
(38
)
Net periodic cost
$
2,953

 
$
1,323

 
$
24

 
$
27


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Restricted stock/unit awards (“RSA”)
$
67

 
$
63

 
$
190

 
$
264

Performance share incentives (“PSI”)

 
1

 

 
(61
)
Total stock based compensation
$
67

 
$
64

 
$
190

 
$
203

 
There were no RSAs granted during the nine months ended September 30, 2016, and 2015, 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, 2016 and 2015, respectively. The deferred compensation with respect to the PSIs is being recognized into earnings based on the passage of time and achievement of performance targets. All outstanding RSAs and PSIs are unvested.        

Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs and PSIs as of September 30, 2016 and December 31, 2015, are as follows:
 
September 30,
2016
 
December 31,
2015
 
RSAs
 
PSIs
 
RSAs
 
PSIs
Unrecognized compensation cost (in thousands)
$
159

 
$
529

 
$
349

 
$
1,192

 
 
 
 
 
 
 
 
Expected weighted-average recognition period for unrecognized compensation
   cost (in years)
0.63

 
1.32

 
1.20

 
1.16

 
As of March 31, 2016, $0.6 million of unrecognized compensation cost associated with the cancellation of PSIs granted in 2011 was released as a result of not meeting performance targets prior to the date of expiration.

15


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016


NOTE 13.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Changes in AOCI by component for the three and nine months ended September 30, 2016 and 2015 are as follows (in thousands):
 
Three Months ended September 30, 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
$
21,359

 
$
(67,815
)
 
$
(29
)
 
$
(46,485
)
Other comprehensive (loss) income before reclassifications
(368
)
 
1,471

 
204

 
1,307

Less (loss) income reclassified from AOCI

 
(1,560
)
 
126

 
(1,434
)
Net other comprehensive (loss) income
(368
)
 
3,031

 
78

 
2,741

Income taxes
256

 
53

 
13

 
322

Ending balance, net of tax
$
20,735

 
$
(64,837
)
 
$
36

 
$
(44,066
)
 
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) income before
reclassifications
(7,169
)
 
1,087

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

 
(661
)
 
(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
)
 
Nine Months Ended September 30, 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 (loss) before reclassifications
531

 
1,185

 
320

 
2,036

Less (loss) income reclassified from AOCI

 
(3,148
)
 
110

 
(3,038
)
Net other comprehensive income
531

 
4,333

 
210

 
5,074

Income taxes
325

 
70

 
32

 
427

Ending balance, net of tax
$
20,735

 
$
(64,837
)
 
$
36

 
$
(44,066
)

16


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

 
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
(1,641
)
 
(258
)
 
(396
)
 
(2,295
)
Less (loss) income reclassified from AOCI

 
(1,994
)
 
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
)

Details about reclassification out of AOCI for the three and nine months ended September 30, 2016 and 2015 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
 
2016
 
2015
 
2016
 
2015
 
Unrealized gain (loss) on cash flow hedges: 
 
 

 
 

 
 
 
 
 
 
 
 
$
39

 
$
(119
)
 
$
62

 
$
26

 
Sales
 
 
87

 
(23
)
 
48

 
11

 
Other expense (income), net
 
 
126

 
(142
)
 
110

 
37

 
Total before tax
 
 
21

 
(25
)
 
18

 
7

 
Income taxes
 
 
$
147

 
$
(167
)
 
$
128

 
$
44

 
Net of tax
Retirement plans related adjustments:
 
 

 
 

 
 
 
 
 
 
Amortization of prior service credit
 
$
64

 
$
79

 
$
191

 
$
241

 
(a)
Amortization of transition asset
 
78

 
19

 
234

 
61

 
(a)
Settlement loss
 
(765
)
 

 
(765
)
 

 
(a)
Amortization of actuarial loss
 
(937
)
 
(759
)
 
(2,808
)
 
(2,296
)
 
(a)
 
 
(1,560
)
 
(661
)
 
(3,148
)
 
(1,994
)
 
Total before tax
 
 
228

 
47

 
396

 
143

 
Income taxes
 
 
$
(1,332
)
 
$
(614
)
 
$
(2,752
)
 
$
(1,851
)
 
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.
 

17


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

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 earnings (loss) per share computation (in thousands):  
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Numerator for basic and diluted loss per share:
 

 
 

 
 
 
 
Net loss applicable to common shareholders
$
(1,383
)
 
$
(327
)
 
$
(2,484
)
 
$
(149
)
 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 
 
 
Denominator for basic and diluted loss per share — weighted average shares
12,835

 
12,793

 
12,815

 
12,770

 
There is no dilutive effect of the restricted stock and stock options for the three and nine months ended September 30, 2016 and September 30, 2015 due to the net loss in those periods. There would have been 90,405 and 93,245 of shares included in the diluted calculation for the three and nine months ended September 30, 2016, respectively, and 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, had the impact of including these securities not been anti-dilutive. Common stock equivalents of certain stock-based awards totaling 10,877 were excluded from the calculation of diluted earnings per share for the three months ended September 30, 2015 as they were anti-dilutive. Common stock equivalents of certain stock-based awards totaling 771 and 19,989 were excluded from the calculation of diluted earnings per share for the nine months ended September 30, 2016 and September 30, 2015, respectively, as they were anti-dilutive.

NOTE 15. 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, 2016
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,089

 
$
15,270

 
$
(148
)
 
$
67,211

Depreciation and amortization
1,433

 
498

 

 
1,931

Segment income (loss)
(984
)
 
1,847

 


 
863

Capital expenditures
433

 
118

 

 
551


 
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



18


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016

 
Nine Months Ended September 30, 2016
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
158,718

 
$
46,773

 
$
(273
)
 
$
205,218

Depreciation and amortization
4,353

 
1,562

 
 

 
5,915

Segment income (loss)
(1,864
)
 
5,342

 
 

 
3,478

Capital expenditures
1,119

 
424

 
 

 
1,543

Segment assets(1)
226,618

 
48,341

 
 

 
274,959

 
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

____________________
(1) 
Segment assets primarily consist of restricted cash, accounts receivable, inventories, prepaid and other assets, property, plant and equipment, and intangible assets. Unallocated assets primarily include, cash and cash equivalents, corporate property, plant and equipment, deferred income taxes, and other non-current assets.
 
A reconciliation of segment income to consolidated income (loss) before income taxes for the three and nine months ended September 30, 2016 and 2015 are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Segment income
$
863

 
$
1,978

 
$
3,478

 
$
5,866

Unallocated corporate expense
(1,503
)
 
(1,222
)
 
(5,061
)
 
(4,144
)
Interest expense, net
(86
)
 
(121
)
 
(235
)
 
(392
)
(Loss) income before income taxes
$
(726
)
 
$
635

 
$
(1,818
)
 
$
1,330

 
A reconciliation of segment assets to consolidated total assets follows (in thousands):
 
September 30,
2016
 
December 31,
2015
Total segment assets
$
274,959

 
$
274,334

Unallocated assets
27,890

 
36,801

Total assets
$
302,849

 
$
311,135


Unallocated assets include cash of $22.9 million and $32.8 million at September 30, 2016 and December 31, 2015, respectively.

19


HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
SEPTEMBER 30, 2016


NOTE 16.  NEW ACCOUNTING STANDARDS

In April 2015, the Financial Accounting Standards Board (“FASB”) issued 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 of 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 $0.05 million are recorded as Other current assets and Other non-current assets respectively, and $0.07 million and $0.04 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 Consolidated Balance Sheet at September 30, 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.
    

20



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 understand 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 third 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.
 

21


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 Yuan (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“NTD”), 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, 2016, respectively, foreign currency fluctuations resulted in unfavorable currency translation impact of approximately $1.3 million and $4.8 million on sales when compared to the same period in 2015.

Results of Operations
 
Presented below is summarized selected financial data for the three and nine months ended September 30, 2016 and 2015 (in thousands): 
 
 
Three Months Ended 
 September 30,
 
$
Change
 
%
Change
 
Nine Months Ended 
 September 30,
 
 
 
 
 
 
2016
 
2015
 
 
 
2016
 
2015
 
$
Change
 
%
Change
Sales
 
$
67,211

 
$
76,805

 
$
(9,594
)
 
(12.5
)%
 
$
205,218

 
$
228,289

 
$
(23,071
)
 
(10.1
)%
Gross profit
 
23,151

 
25,370

 
(2,219
)
 
(8.7
)%
 
69,448

 
74,186

 
(4,738
)

(6.4
)%
% of sales
 
34.4
 %
 
33.0
 %
 
1.4

pts.
 
33.8
 %
 
32.5
 %
 
1.3


pts.
Selling, general and administrative expenses
 
19,992

 
19,925

 
67

 
 %
 
60,221

 
60,596

 
(375
)

(0.6
)%
% of sales
 
29.7
 %
 
25.9
 %
 
3.8

pts.
 
29.3
 %
 
26.5
 %
 
2.8


pts.
Research & development
 
3,296

 
3,611

 
(315
)
 
(8.7
)%
 
9,953

 
10,715

 
(762
)

(7.1
)%
Restructuring
 
182

 
877

 
(695
)
 
(79.2
)%
 
608

 
877

 
(269
)

(30.7
)%
Other expense (income), net
 
321

 
201

 
120

 
59.7
 %
 
249

 
276

 
(27
)

(9.8
)%
(Loss) income from operations
 
(640
)
 
756

 
(1,396
)
 
(184.7
)%
 
(1,583
)
 
1,722

 
(3,305
)

(191.9
)%
% of sales
 
(1.0
)%
 
1.0
 %
 
(2.0
)
pts.
 
(0.8
)%
 
0.8
 %
 
(1.6
)

pts.
Interest expense, net
 
86

 
121

 
(35
)
 
(28.9
)%
 
235

 
392

 
(157
)

(40.1
)%
(Loss) income before income taxes
 
(726
)
 
635

 
(1,361
)
 
(214.3
)%
 
(1,818
)
 
1,330

 
(3,148
)

(236.7
)%
Income tax expense
 
657

 
962

 
(305
)
 
(31.7
)%
 
666

 
1,479

 
(813
)

(55.0
)%
Net loss
 
$
(1,383
)
 
$
(327
)
 
$
(1,056
)
 
322.9
 %
 
$
(2,484
)
 
$
(149
)
 
$
(2,335
)

1,567.1
 %
% of sales
 
(2.1)%
 
(0.4
)%
 
(1.7
)
pts.
 
(1.2
)%
 
(0.1
)%
 
(1.1
)
pts.

Sales.  The table below summarizes sales by each corresponding geographical region for the three and nine months ended September 30, 2016 compared to the same period in 2015 (in thousands): 
 
Three Months Ended 
 September 30,
 
 
 
 
 
Nine Months Ended 
 September 30,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
 
2016
 
2015
 
$ Change
 
% Change
Sales to customers in:
North America
$
24,780

 
$
24,661

 
$
119

 
0.5%
 
$
62,924

 
$
80,039

 
$
(17,115
)
 
(21.4)%
Europe
18,271

 
21,569

 
(3,298
)
 
(15.3)%
 
64,355

 
66,553

 
(2,198
)
 
(3.3)%
Asia and other
24,160

 
30,575

 
(6,415
)
 
(21.0)%
 
77,939

 
81,697

 
(3,758
)
 
(4.6)%
Total
$
67,211

 
$
76,805

 
$
(9,594
)
 
(12.5)%
 
$
205,218

 
$
228,289

 
$
(23,071
)
 
(10.1)%
 

22



Sales for the three months ended September 30, 2016 were $67.2 million, a decrease of $9.6 million, or 12.5%, compared with the prior-year period. The decline in sales is primarily related to a $8.8 million decrease in our Metalcutting Machine Solutions ("MMS") segment. Foreign currency translation was unfavorable by $1.3 million. Excluding the translation impact, the decline in sales would have been 10.8%.