HARDINGE INC - FORM 10-Q - August 3, 2017

Attached files

file	filename
EX-32 - EXHIBIT 32 - HARDINGE INC	hdng-6302017x10qxex32.htm
EX-31.2 - EXHIBIT 31.2 - HARDINGE INC	hdng-6302017x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - HARDINGE INC	hdng-6302017x10qxex311.htm
EX-10.6 - EXHIBIT 10.6 - HARDINGE INC	exh106simonsconsultagreeme.htm
EX-10.5 - EXHIBIT 10.5 - HARDINGE INC	exh105schedulerequiredbyin.htm
EX-10.4 - EXHIBIT 10.4 - HARDINGE INC	exh104nonqualifiedoptiondo.htm
EX-10.3 - EXHIBIT 10.3 - HARDINGE INC	exh103nonqualifiedoptiondo.htm
EX-10.2 - EXHIBIT 10.2 - HARDINGE INC	exh102bahrofferletter.htm
EX-10.1 - EXHIBIT 10.1 - HARDINGE INC	exh101hdngemploymentagrmt-.htm
EX-3.1 - EXHIBIT 3.1 - HARDINGE INC	exh31hardingeinc-xconforme.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



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”, “smaller reporting company”, and "emerging growth 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
		Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes ýNo

As of July 31, 2017 there were 12,949,525 shares of Common Stock of the registrant outstanding.

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HARDINGE INC. AND SUBSIDIARIES

TABLE OF CONTENTS



		PAGE
	PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).
	Consolidated Balance Sheets at June 30, 2017 and December 31, 2016 (Audited)	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2017 and 2016	5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	26
Item 4.	Controls and Procedures.	26

	PART II — OTHER INFORMATION
Item 1.	Legal Proceedings.	27
Item 1A.	Risk Factors.	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	27
Item 3.	Defaults Upon Senior Securities.	27
Item 4.	Mine Safety Disclosures.	27
Item 5.	Other Information.	27
Item 6.	Exhibits.	28

SIGNATURES		29

Certifications

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



	June 30, 2017			December 31, 2016
	(Unaudited)
Assets
Cash and cash equivalents	$	26,369		$	28,255
Restricted cash	2,509			2,923
Accounts receivable, net	55,071			55,573
Inventories, net	118,478			107,018
Other current assets	11,321			6,926
Total current assets	213,748			200,695

Property, plant and equipment, net	57,192			56,961
Goodwill	6,658			6,579
Other intangible assets, net	26,698			26,730
Other non-current assets	6,047			6,585
Total non-current assets	96,595			96,855
Total assets	$	310,343		$	297,550

Liabilities and shareholders’ equity
Notes payable to bank	$	99		$	703
Accounts payable	25,982			24,217
Accrued expenses	27,140			25,629
Customer deposits	23,063			18,215
Accrued income taxes	671			1,160
Current portion of long-term debt	4,636			2,923
Total current liabilities	81,591			72,847

Long-term debt	—			2,970
Pension and postretirement liabilities	57,635			58,840
Deferred income taxes	4,343			3,800
Other liabilities	1,669			3,152
Total non-current liabilities	63,647			68,762
Commitments and contingencies (see Note 10)
Common stock ($0.01 par value, 20,000,000 authorized; shares issued 12,943,789 and 12,903,037)	129			129
Additional paid-in capital	121,489			121,015
Retained earnings	89,510			89,557
Treasury shares (at cost, 0 and 9,243)	—			(104		)
Accumulated other comprehensive loss	(46,023		)	(54,656		)
Total shareholders’ equity	165,105			155,941
Total liabilities and shareholders’ equity	$	310,343		$	297,550

See accompanying notes to the unaudited consolidated financial statements.

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HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(Unaudited)						(Unaudited)
Sales	$	78,197		$	70,186		$	142,754		$	138,007
Cost of sales	51,568			46,633			94,738			91,711
Gross profit	26,629			23,553			48,016			46,296

Selling, general and administrative expenses	20,081			19,637			38,103			40,230
Research & development	3,777			3,369			7,335			6,656
Restructuring	542			226			1,978			426
Other expense (income), net	37			20			192			(72		)
Income (loss) from operations	2,192			301			408			(944		)

Interest expense	104			132			210			285
Interest income	(38		)	(69		)	(79		)	(136		)
Income (loss) before income taxes	2,126			238			277			(1,093		)
Income tax (benefit) expense	(396		)	93			(198		)	8
Net Income (loss)	$	2,522		$	145		$	475		$	(1,101	)


Per share data:
Basic earnings (loss) per share:	$	0.20		$	0.01		$	0.04		$	(0.09	)

Diluted earnings (loss) per share:	$	0.20		$	0.01		$	0.04		$	(0.09	)

Cash dividends declared per share:	$	0.02		$	0.02		$	0.04		$	0.04

See accompanying notes to the unaudited consolidated financial statements.

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HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(Unaudited)						(Unaudited)
Net income (loss)	$	2,522		$	145		$	475		$	(1,101	)
Other comprehensive income (loss):
Foreign currency translation adjustments	4,675			(2,840		)	8,933			899
Retirement plans related adjustments	(527		)	1,575			(251		)	1,302
Unrealized (loss) gain on cash flow hedges	(299		)	(33		)	(68		)	132
Other comprehensive income (loss) before tax	3,849			(1,298		)	8,614			2,333
Income tax (benefit) expense	(438		)	282			(19		)	105
Other comprehensive income (loss), net of tax	4,287			(1,580		)	8,633			2,228
Total comprehensive income (loss)	$	6,809		$	(1,435	)	$	9,108		$	1,127

See accompanying notes to the unaudited consolidated financial statements.

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HARDINGE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Six Months Ended June 30,
	2017			2016
	(Unaudited)
Operating activities
Net income (loss)	$	475		$	(1,101	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Impairment	1,401			—
Depreciation and amortization	4,411			4,098
Debt issuance costs amortization	65			66
Deferred income taxes	132			(119		)
Gain on sale of assets	(16		)	(4		)
Unrealized foreign currency transaction gain	(819		)	(116		)
Changes in operating assets and liabilities:
Accounts receivable	2,261			11,826
Restricted cash	499			(331		)
Inventories	(8,251		)	(7,720		)
Other assets	(2,893		)	(1,330		)
Accounts payable	745			(2,170		)
Customer deposits	4,132			(3,886		)
Accrued expenses	(2,381		)	(5,211		)
Accrued pension and postretirement liabilities	(19		)	(41		)
Net cash used in operating activities	(258		)	(6,039		)

Investing activities
Capital expenditures	(968		)	(992		)
Proceeds from sales of assets	16			37
Net cash used in investing activities	(952		)	(955		)

Financing activities
Proceeds from short-term notes payable to bank	12,418			28,871
Repayments of short-term notes payable to bank	(13,062		)	(28,643		)
Repayments of long-term debt	(1,456		)	(2,271		)
Dividends paid	(516		)	(536		)
Net cash used in financing activities	(2,616		)	(2,579		)

Effect of exchange rate changes on cash	1,940			167
Net decrease in cash	(1,886		)	(9,406		)

Cash and cash equivalents at beginning of period	28,255			32,774

Cash and cash equivalents at end of period	$	26,369		$	23,368

See accompanying notes to the unaudited consolidated financial statements.

HARDINGE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2017

NOTE 1. BASIS OF PRESENTATION

In these notes, the terms “Hardinge,” “the Company,” "we," "us," "our," or similar references 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, 2016. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from these estimates. All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods have been presented and recorded. Due to differing business conditions and some seasonality, operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2017.

Certain amounts in the June 30, 2016 consolidated financial statements have been reclassified to conform to the current presentation.

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.

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

JUNE 30, 2017

The following table presents the carrying amount, fair values, and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis (in thousands):



	June 30, 2017				December 31, 2016				Level of Fair Value Hierarchy
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Level of Fair Value Hierarchy
Assets:
Cash and cash equivalents	$	26,369	$	26,369	$	28,255	$	28,255	Level 1
Restricted cash	2,509		2,509		2,923		2,923		Level 1
Foreign currency forward contracts	373		373		308		308		Level 2
Liabilities:
Notes payable to bank	99		99		703		703		Level 2
Variable interest rate debt	4,696		4,696		5,986		5,986		Level 2
Foreign currency forward contracts	725		725		566		566		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 models based on observable market inputs such as spot and forward rates. Based on the Company’s continued ability to enter into forward contracts, the markets for the fair value instruments are considered to be active. As of June 30, 2017 and December 31, 2016, 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 net realizable value. Elements of the cost include materials, labor and overhead.

Net inventories consist of the following (in thousands):



	June 30, 2017		December 31, 2016
Raw materials and purchased components	$	32,867	$	33,822
Work-in-process	37,624		31,799
Finished products	47,987		41,397
Inventories, net	$	118,478	$	107,018

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 June 30, 2017 and December 31, 2016, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $35.7 million and $45.5 million, respectively. The Company expects that approximately $0.1 million of expense, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.

As of June 30, 2017 and December 31, 2016, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $26.3 million and $35.4 million, respectively. For the three months ended June 30, 2017 and 2016, losses of $0.2 million and gains of $0.4 million, respectively, were recorded related to this type of derivative financial instrument. For the six months ended June 30, 2017 and 2016, gains of $0.4 million and losses of $0.02 million,

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

JUNE 30, 2017

respectively, were recorded related to this type of derivative financial instrument. For contracts that are not designated as hedges, the gain or loss on the contract is recognized in current earnings in the “Other expense (income), net” line item on the Consolidated Statements of Operations.

The following table presents the fair value on the Consolidated Balance Sheets of the foreign currency forward contracts (in thousands):



	June 30, 2017			December 31, 2016
Foreign currency forwards designated as hedges:
Other current assets	$	196		$	153
Accrued expenses	(370		)	(264		)
Foreign currency forwards not designated as hedges:
Other current assets	177			155
Accrued expenses	(355		)	(302		)
Foreign currency forwards, net	$	(352	)	$	(258	)

NOTE 5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):



	June 30, 2017			December 31, 2016
Land, buildings and improvements	$	84,651		$	81,311
Machinery, equipment and fixtures	77,541			75,177
Office furniture, equipment and vehicles	23,204			22,471
Construction in progress	212			272
	185,608			179,231
Accumulated depreciation	(128,416		)	(122,270		)
Property, plant and equipment, net	$	57,192		$	56,961

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

Detail and activity of goodwill by segment is presented below (in thousands):



	MMS			ATA		Total
Goodwill	$	32,434		$	6,579	$	39,013
Accumulated impairment losses	(32,434		)	—		(32,434		)
Balance at December 31, 2016	—			6,579		6,579

Goodwill	32,434			6,579		39,013
Currency translation adjustments	—			79		79
Accumulated impairment losses	(32,434		)	—		(32,434		)
Balance at June 30, 2017	$	—		$	6,658	$	6,658

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

JUNE 30, 2017

The major components of intangible assets other than goodwill are as follows (in thousands):



	June 30, 2017			December 31, 2016
Gross amortizable intangible assets:
Technical know-how	$	12,985		$	12,944
Customer lists	9,016			8,981
Land rights	2,559			2,498
Patents, trade names, drawings, and other	4,391			4,356
Total gross amortizable intangible assets	28,951			28,779

Accumulated amortization:
Technical know-how	(7,758		)	(7,438		)
Customer lists	(1,976		)	(1,744		)
Land rights	(337		)	(304		)
Patents, trade names, drawings, and other	(3,587		)	(3,490		)
Total accumulated amortization	(13,658		)	(12,976		)
Amortizable intangible assets, net	15,293			15,803

Indefinite lived intangible assets:
Trade names	11,405			10,927

Intangible assets other than goodwill, net	$	26,698		$	26,730

Amortization expense related to the definite-lived intangible assets are as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Amortization expense	$	312	$	320	$	624	$	640

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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Balance at the beginning of period	$	3,266		$	3,521		$	3,556		$	3,802
Warranties issued	473			709			845			1,081
Warranty settlement costs	(479		)	(557		)	(852		)	(1,147		)
Changes in accruals for pre-existing warranties	(36		)	62			(381		)	64
Currency translation adjustments	100			89			156			24
Balance at the end of period	$	3,324		$	3,824		$	3,324		$	3,824

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

JUNE 30, 2017

NOTE 8. RESTRUCTURING CHARGES

In March 2017, management initiated a strategic restructuring program (the "Program") in our MMS segment with the goals of streamlining the Company's cost structure, increasing operational efficiencies, generating cash and improving shareholder returns. This Program consists of rationalizing certain product lines, consolidating certain European manufacturing operations, and the sale of assets. The Program, which is projected to be substantially complete by mid-2018, is expected to generate annual pre-tax savings in the range of approximately $2.0 million to $2.5 million once fully implemented. Of the total costs estimated below, we expect approximately $1.6 million will be non-cash costs.

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 six months ended June 30, 2017 and the cumulative costs recognized to date by the Program (in thousands):



	Total Costs Expected to be Incurred		Cost Recognized for Three Months Ended June 30, 2017		Cost Recognized for Six Months Ended June 30, 2017 (Cumulative costs recognized to date)
Restructuring:
Employee termination costs	$	1,010	$	393	$	393
Inventory Impairment	1,401		—		1,401
Facility related costs	1,373		105		115
Other related costs	492		44		69
Total Restructuring Activity	$	4,276	$	542	$	1,978

The amounts accrued associated with the Program are included in "Accrued expenses" and "Inventory" in the Consolidated Balance Sheets. A rollforward of the accrued restructuring costs is presented below (in thousands):



Balance at December 31, 2016	$	—
Restructuring charges:
Employee termination costs	393
Inventory Impairment	1,401
Facility related costs	115
Other related costs	69
Total restructuring charges for the period	1,978

Cash expenditures	(373		)
Other adjustments to accrual	—
Foreign currency translation adjustment	80
Balance at June 30, 2017	$	1,685

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 (18.6)% and (71.5)% for the three and six months ended June 30, 2017. The tax benefit recorded during the three months ended June 30, 2017 is mainly driven by the release of an uncertain tax position due to the lapsing of the statute of limitations resulting in a tax benefit of $0.6 million.

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HARDINGE INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

JUNE 30, 2017

The tax years 2013 through 2016 remain open to examination by the U.S. federal taxing authorities. The tax years 2011 through 2016 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 2009 and 2016 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.

At June 30, 2017, a liability of $1.4 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 June 30, 2017 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 potential settlements is estimated to be up to $1.2 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 "PRP's"), 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 PRP's also signed a PRP Member Agreement, agreeing to share the costs associated with the RI/FS study on a per capita basis. In June 2017, the EPA notified the PRP’s that two additional parties had been added to the group of PRP’s (Eaton Corporation and Elmira Water Board). The impact of these new parties to the cost sharing agreement has not yet been determined.

The EPA approved the RI/FS Work Plan in May of 2008. In July of 2012 the PRP's submitted a Remedial Investigation (RI) to respond to EPA issues raised in the initial draft RI. In January 2016, the PRP's submitted a draft Feasibility Study (FS), also to respond to issues raised by the EPA about previous drafts of the FS. In July 2016, the EPA announced its proposed

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remediation plan based on an alternative put forth in a July 2016 Woodruff & Curran FS with an estimated total clean-up phase cost of $1.9 million. The preferred remedy consists of the placement of a continuous six-inch thick soil and sand cap, including a geotextile membrane to act as a demarcation layer, over Koppers Pond. The preferred remedy includes long-term monitoring and institutional controls. After a public comment period, on December 13, 2016, the EPA issued a Certificate of Completion confirming that the RI/FS was complete, confirming that all PRP obligations related to the RI/FS had been performed in accordance with the provisions of the Administrative Settlement Agreement and Order on Consent, and approving the remedy selected in the FS as the final response action for Koppers Pond.

The company has $0.3 million as of June 30, 2017 as a reserve for its estimated related liability, assuming all of the original PRP's would continue to share costs equally in the clean-up phase of the project. Based on our understanding including discussions with our experts, it is possible that the PRP's may change, the total clean-up liability may change, and/or the relative split of costs may be different for this final phase of the project. This reserve is reported in Accrued expenses in the Consolidated Balance Sheets.

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

NOTE 11. PENSION AND POSTRETIREMENT PLANS

A summary of the components of net periodic pension and postretirement benefit costs for the three and six months ended June 30, 2017 and 2016 is presented below (in thousands):



	Pension Benefits						Postretirement Benefits
	Three Months Ended June 30,						Three Months Ended June 30,
	2017			2016			2017			2016
Service cost	$	487		$	569		$	3		$	3
Interest cost	1,504			1,676			18			19
Expected return on plan assets	(2,126		)	(2,328		)	—			—
Amortization of prior service credit	(78		)	(64		)	—			—
Amortization of transition asset	—			(79		)	—			—
Amortization of actuarial loss (gain)	935			957			(11		)	(14		)
Settlement loss (gain)	30			—			—			—
Net periodic cost	$	752		$	731		$	10		$	8

	Pension Benefits						Postretirement Benefits
	Six Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Service cost	$	974		$	1,128		$	6		$	6
Interest cost	3,002			3,348			36			38
Expected return on plan assets	(4,236		)	(4,637		)	—			—
Amortization of prior service credit	(154		)	(127		)	—			—
Amortization of transition asset	—			(156		)	—			—
Amortization of actuarial loss (gain)	1,867			1,900			(22		)	(28		)
Settlement loss (gain)	30			—			—			—
Net periodic cost	$	1,483		$	1,456		$	20		$	16

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NOTE 12. STOCK BASED COMPENSATION

The Company's 2011 Incentive Stock Plan (the "Plan"), as amended on May 6, 2014, permits the grant of several types of incentives, including share options, non-qualified stock options, stock appreciation rights, restricted stock awards/ units (“RSAs”) and performance share incentives (“PSIs”).

Stock Options

There were 225,000 non-qualified stock options granted in the three months ended June 30, 2017. There were no other vested or unvested stock options outstanding at the time of these grants. The fair market value of stock options is estimated using the Black Scholes valuation model using the following assumptions:



	Three Months ended June 30, 2017
Expected volatility	38.50%
Expected dividend yield	0.66%
Risk free rate	1.32% - 1.45%
Expected term (in years)	6.0 - 6.5
Weighted average grant date fair value	$4.48
Weighted average exercise price	$12.04

Stock options vest over a two or three-year period based on either a service period or a combination of service period and performance measures. Deferred compensation for stock options is amortized on a straight-line basis for stock options, which vest over a specified service period, and is recognized ratably for stock options which also have a performance requirement to the extent that it is probable that the performance target will be met. All stock options granted have a ten-year contractual term.

The intrinsic value of stock options at June 30, 2017 was $0.1 million, which is calculated as the difference between the stock price as of June 30, 2017 and the exercise price of the option.

Restricted Stock/ Unit Awards ("RSAs")

There were 42,350 RSAs granted during the six months ended June 30, 2017, and no awards in the same period of 2016. The deferred compensation for RSAs is amortized on a straight-line basis over the specified service period, which ranges from three to four years.

Performance Share Incentives ("PSIs")

There were 42,350 Performance Share Incentives ("PSIs") granted during the six months ended June 30, 2017, and no awards in the same period of 2016. The deferred compensation with respect to the PSIs is being recognized into earnings based on the passage of time and achievement of performance targets.

Compensation Costs

Stock based compensation costs are based on estimated fair values. The fair value of service and performance based stock awards are based on the market value on the date of the grant. The fair value of stock options are estimated using a Black-Scholes valuation model. All stock based compensation to employees is recorded as "Selling, general and administrative expenses" in the Consolidated Statements of Operations. These non-cash compensation costs are included in the depreciation and amortization amounts in the Consolidated Statements of Cash Flows.

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A summary of stock based compensation expense is as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Stock Options	$	31	$	—	$	31	$	—
Restricted stock/unit awards (“RSA”)	66		58		107		123
Performance share incentives (“PSI”)	32		—		39		—
Total stock based compensation	$	129	$	58	$	177	$	123

Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs and PSIs as of June 30, 2017 and December 31, 2016, are as follows:



	June 30, 2017						December 31, 2016
	Stock Options		RSAs		PSIs		Stock Options		RSAs		PSIs
Unrecognized compensation cost (in thousands)	$	976	$	464	$	904	$	—	$	113	$	520
Expected weighted-average recognition period for unrecognized compensation cost (in years)	2.67		1.65		1.51		N/A		0.92		0.97

NOTE 13. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS

Changes in AOCI by component for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):



	Three Months ended June 30, 2017
	Foreign currency translation adjustments			Retirement plans related adjustments			Unrealized gain (loss) on cash flow hedges			Accumulated other comprehensive loss
Beginning balance, net of tax	$	19,324		$	(69,816	)	$	182		$	(50,310	)
Other comprehensive income (loss) before reclassifications	4,675			(1,403		)	(261		)	3,011
Less: (Loss) income reclassified from AOCI	—			(876		)	38			(838		)
Net other comprehensive income (loss)	4,675			(527		)	(299		)	3,849
Income taxes	(229		)	(155		)	(54		)	(438		)
Ending balance, net of tax	$	24,228		$	(70,188	)	$	(63	)	$	(46,023	)



	Three Months Ended June 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	$	24,312		$	(69,221	)	$	4		$	(44,905	)
Other comprehensive (loss) income before reclassifications	(2,840		)	775			(96		)	(2,161		)
Less: (loss) income reclassified from AOCI	—			(800		)	(63		)	(863		)
Net other comprehensive (loss) income	(2,840		)	1,575			(33		)	(1,298		)
Income taxes	113			169			—			282
Ending balance, net of tax	$	21,359		$	(67,815	)	$	(29	)	$	(46,485	)

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	Six Months Ended June 30, 2017
	Foreign currency translation adjustments		Retirement plans related adjustments			Unrealized gain (loss) on cash flow hedges			Accumulated other comprehensive loss
Beginning balance, net of tax	$	15,483	$	(70,102	)	$	(37	)	$	(54,656	)
Other comprehensive income (loss) before reclassifications	8,933		(1,972		)	(179		)	6,782
Less: (loss) income reclassified from AOCI	—		(1,721		)	(111		)	(1,832		)
Net other comprehensive income (loss)	8,933		(251		)	(68		)	8,614
Income taxes	188		(165		)	(42		)	(19		)
Ending balance, net of tax	$	24,228	$	(70,188	)	$	(63	)	$	(46,023	)



	Six Months Ended June 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	899		(287		)	116			728
Less: (loss) income reclassified from AOCI	—		(1,589		)	(16		)	(1,605		)
Net other comprehensive income (loss)	899		1,302			132			2,333
Income taxes	69		17			19			105
Ending balance, net of tax	$	21,359	$	(67,815	)	$	(29	)	$	(46,485	)

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Details about reclassification out of AOCI for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,						Affected line item on the Consolidated Statements of Operations
Details of AOCI components	2017			2016			2017			2016
Unrealized gain (loss) on cash flow hedges:
	$	18		$	(53	)	$	(120	)	$	23		Sales
	20			(10		)	9			(39		)	Other expense (income), net
	38			(63		)	(111		)	(16		)	Total before tax
	15			(10		)	(9		)	(3		)	Income taxes
	$	53		$	(73	)	$	(120	)	$	(19	)	Net of tax
Retirement plans related adjustments:
Amortization of prior service credit	$	78		$	64		$	154		$	127		(a)
Amortization of transition asset	—			79			—			156			(a)
Amortization of actuarial loss	(924		)	(943		)	(1,845		)	(1,872		)	(a)
Settlement loss	(30		)	—			(30		)	—			(a)
	(876		)	(800		)	(1,721		)	(1,589		)	Total before tax
	96			85			184			168			Income taxes
	$	(780	)	$	(715	)	$	(1,537	)	$	(1,421	)	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 per share is computed using the weighted average number of shares of common stock outstanding during the period. In periods of earnings, the weighted average number of shares used in the diluted calculation includes common stock equivalents related to stock options and restricted stock. The following table presents the basis of the earnings per share computation (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Numerator for basic and diluted loss per share:
Net earnings (loss) applicable to common shareholders	$	2,522	$	145	$	475	$	(1,101	)

Denominator for basic and diluted loss per share:
Denominator for basic and diluted loss per share — weighted average shares	12,894		12,812		12,887		12,804
Assumed exercise of stock options	1		22		1		—
Assumed satisfaction of restricted stock conditions	37		67		33		—
Denominator for diluted earnings per share — adjusted weighted average shares	12,932		12,901		12,921		12,804

Common stock equivalents of certain stock-based awards totaling 81,233 and 5,384 were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2017 and June 30, 2016, respectively, as they were anti-dilutive. Common stock equivalents of certain stock-based awards totaling 41,681 were excluded from the calculation of diluted earnings per share for the six months ended June 30, 2017, as they were anti-dilutive. There is no dilutive effect of the

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restricted stock and stock options for six months ended June 30, 2016 due to the net loss in this period. There would have been 94,666 of these shares included in the diluted calculation for the six months ended June 30, 2016 had there been earnings in this period.

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 June 30, 2017
	MMS		ATA		Inter-Segment Eliminations			Total
Sales	$	62,016	$	16,302	$	(121	)	$	78,197
Depreciation and amortization	1,429		495					1,924
Segment income	1,928		2,745					4,673
Capital expenditures	433		55					488



	Three Months Ended June 30, 2016
	MMS		ATA		Inter-Segment Eliminations			Total
Sales	$	54,359	$	15,883	$	(56	)	$	70,186
Depreciation and amortization	1,494		526					2,020
Segment income	276		1,641					1,917
Capital expenditures	394		163					557



	Six Months Ended June 30, 2017
	MMS			ATA		Inter-Segment Eliminations			Total
Sales	$	110,848		$	32,161	$	(255	)	$	142,754
Depreciation and amortization	2,829			1,003		0			3,832
Segment (loss) income	(741		)	5,031					4,290
Capital expenditures	768			200					968
Segment assets⁽¹⁾	233,613			46,153					279,766



	Six Months Ended June 30, 2016
	MMS			ATA		Inter-Segment Eliminations			Total
Sales	$	106,630		$	31,504	$	(127	)	$	138,007
Depreciation and amortization	2,921			1,064					3,985
Segment (loss) income	(880		)	3,495					2,615
Capital expenditures	685			307					992
Segment assets⁽¹⁾	222,098			48,440					270,538

____________________


⁽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.

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A reconciliation of segment income to consolidated income (loss) before income taxes for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Segment income	$	4,673		$	1,917		$	4,290		$	2,615
Unallocated corporate expense	(2,481		)	(1,616		)	(3,882		)	(3,559		)
Interest expense, net	(66		)	(63		)	(131		)	(149		)
Income (loss) before income taxes	$	2,126		$	238		$	277		$	(1,093	)

A reconciliation of segment assets to consolidated total assets follows (in thousands):



	June 30, 2017		December 31, 2016
Total segment assets	$	279,766	$	265,279
Unallocated assets	30,577		32,271
Total assets	$	310,343	$	297,550

Unallocated assets include cash of $26.4 million and $28.3 million at June 30, 2017 and December 31, 2016, respectively.

NOTE 16. NEW ACCOUNTING STANDARDS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This update provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. We have the option of using either a full retrospective or modified approach to adopt this guidance. Between August 2015 and May 2016, the FASB issued four additional updates to 1) ASU No. 2015-14, Deferral of the Effective Date, 2) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), 3) ASU No. 2016-10, Identifying Performance Obligations and Licensing, and 4) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients to provide further guidance and clarification in accounting for revenue arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, and all annual and interim periods thereafter. In the first quarter 2017 the Company developed a project plan and timeline to complete a diagnostic assessment to begin developing solutions. This assessment has progressed in the second quarter of 2017 and has included an initial training of key personnel, sampling of contracts, and revenue stream evaluation. The Company has not determined the impact this standard may have on the financial statements, nor decided on the method of adoption. In the second half of 2017, the Company expects to implement and test any changes in policy, processes, systems and internal controls and compute required transition adjustments and disclosures.

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, 2016.

We supply high precision computer controlled metalcutting turning machines, grinding machines, vertical and horizontal machining centers, and repair parts related to those machines. The Company also engineers and supplies high precision, standard and specialty workholding devices, and other machine tool accessories. We believe our products are known for accuracy, reliability, durability and value. We are geographically diversified with manufacturing facilities in China, France, Germany, India, Switzerland, Taiwan, the United States (“U.S.”), and the United Kingdom (“U.K.”), with sales to most industrialized countries. Approximately 68% of our 2016 sales were to customers outside of North America, 71% of our 2016 products sold were manufactured outside of North America, and 68% of our employees as of December 31, 2016 were employed outside of North America. In the first half of 2017, approximately 69% of our sales were to customers outside of North America, 73% of our products sold were manufactured outside of North America, and, as of June 30, 2017, 68% of our employees were 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 second quarter of 2017 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.

Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan, which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are the British Pound Sterling (“GBP”), Chinese Renminbi (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“TWD”), and Swiss Franc (“CHF”). Under U.S. generally accepted accounting principles, results of foreign subsidiaries are translated into U.S. Dollars (“USD”) at the average exchange rate during the periods presented. Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative data significantly. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.

For the three and six months ended June 30, 2017, foreign currency fluctuations resulted in unfavorable currency translation impact of approximately $1.5 million and $3.0 million on sales when compared to the same periods in 2016.

Results of Operations

Presented below is summarized selected financial data for the three and six months ended June 30, 2017 and 2016 (in thousands):



	Three Months Ended June 30,						$ Change				% Change		Six Months Ended June 30,						$ Change				% Change
	2017			2016			$ Change				% Change		2017			2016			$ Change				% Change
Sales	$	78,197		$	70,186		$	8,011			11	%	$	142,754		$	138,007		$	4,747			3	%
Gross profit	26,629			23,553			3,076				13	%	48,016			46,296			1,720				4	%
% of sales	34.1		%	33.6		%	0.5			pts.			33.6		%	33.5		%	0.1			pts.
Selling, general and administrative expenses	20,081			19,637			444				2	%	38,103			40,230			(2,127		)		(5	)%
% of sales	25.7		%	28.0		%	(2.3		)	pts.			26.7		%	29.2		%	(2.5		)	pts.
Research & development	3,777			3,369			408				12	%	7,335			6,656			679				10	%
Restructuring	542			226			316				140	%	1,978			426			1,552				364	%
Other expense (income), net	37			20			17				85	%	192			(72		)	264				(367	)%
Income (loss) from operations	2,192			301			1,891				628	%	408			(944		)	1,352				(143	)%
% of sales	2.8		%	0.4		%	2.4			pts.			0.3		%	(0.7		)%	1.0			pts.
Interest expense, net	66			63			3				5	%	131			149			(18		)		(12	)%
Income (loss) before income taxes	2,126			238			1,888				793	%	277			(1,093		)	1,370				(125	)%
Income tax (benefit) expense	(396		)	93			(489		)		(526	)%	(198		)	8			(206		)		(2,575	)%
Net income (loss)	$	2,522		$	145		$	2,377			1,639	%	$	475		$	(1,101	)	$	1,576			(143	)%
% of sales	3.2		%	0.2		%	3.0			pts.			0.3		%	(0.8		)%	1.1			pts.

Sales. The table below summarizes sales by each corresponding geographical region for the three and six months ended June 30, 2017 compared to the same period in 2016 (in thousands):



	Three Months Ended June 30,				$			%	Six Months Ended June 30,				$			%
	2017		2016		Change			Change	2017		2016		Change			Change
Sales to customers in:
North America	$	24,220	$	20,694	$	3,526		17%	$	43,803	$	38,144	$	5,659		15%
Europe	22,240		22,242		(2		)	—%	39,942		46,084		(6,142		)	(13)%
Asia and other	31,737		27,250		4,487			16%	59,009		53,779		5,230			10%
Total	$	78,197	$	70,186	$	8,011		11%	$	142,754	$	138,007	$	4,747		3%

Sales for the three months ended June 30, 2017 were $78.2 million, an increase of $8.0 million, or 11%, compared to the same period in 2016. The increase in sales was driven by higher demand in Asia and North America, partially offset by unfavorable foreign currency translation of approximately $1.5 million. Excluding the translation impact, the increase in sales would have been 14%.

Sales for the six months ended June 30, 2017 were $142.8 million, an increase of $4.7 million, or 3%, compared to the same period in 2016. The increase in sales was driven by increases in North America and Asia machine sales, partially offset by decreases in machine sales in Europe and an unfavorable foreign currency translation of approximately $3.0 million. Excluding the translation impact, the increase in sales would have been 6%.

North America sales were $24.2 million and $43.8 million during the three and six months ended June 30, 2017, respectively, an increase of $3.5 million, or 17%, and $5.7 million, or 15%, when compared to the same periods in 2016.

Europe sales were $22.2 million and $39.9 million during the three and six months ended June 30, 2017, respectively. Sales for the three months ended June 30, 2017 were flat compared to the prior year period. Sales for the six-month period ended June 30, 2017 decreased by $6.1 million or 13% due to first quarter weakness in the European industrial markets. Sales for the three and six months ended June 30, 2017 had unfavorable foreign currency translation of approximately $0.6 and $1.1 million, respectively.

Asia and other sales were $31.7 million and $59.0 million during the three and six months ended June 30, 2017, respectively, an increase of $4.5 million, or 16%, and $5.2 million, or 10%, when compared to the same periods in 2016. The sales increases over prior year in both three and six month comparative periods was due to a significant increase in machine sales which was partially offset by unfavorable foreign currency translation of approximately $0.9 million and $1.9 million, respectively.

Sales of machines accounted for approximately 67% and 65% of the consolidated sales for the three and six months ended June 30, 2017 and 66% for the three and six months ended June 30, 2016, respectively. Sales of non-machine products and services, primarily consisting of collets, chucks, accessories, repair parts, and service revenue, accounted for approximately 33% and 35% of the consolidated sales for the three and six months ended June 30, 2017 and 34% for the three and six months ended June 30, 2016.

Gross Profit. Gross profit was $26.6 million, or 34% of sales for the three months ended June 30, 2017, compared to $23.6 million, or 34% of sales for the same period in 2016. The increase in gross profit was attributable to higher sales volume for the three months ended June 30, 2017 as compared to the same period in 2016 and a $0.2 million improvement due to incremental savings generated by the restructuring program initiated in late 2015.

Gross profit was $48.0 million or 34% of sales for the six months ended June 30, 2017, compared to $46.3 million or 34% of sales for the same period in 2016. The increase in gross profit was attributable to higher sales volume for the six months ended June 30, 2017 as compared to the same period in 2016 and a $0.5 million improvement due to incremental savings generated by the restructuring program initiated in late 2015.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $20.1 million, or 26% of sales for the three months ended June 30, 2017, an increase of $0.4 million, or 2%, compared to $19.6 million, or 28% of sales for the three months ended June 30, 2016. We incurred $1.2 million of unusual charges in the current quarter, primarily associated with our change in Chief Executive Officer (CEO). The prior year quarter included $0.4 million in costs associated with the Company’s strategic review process. Without the impact of these unusual costs, SG&A would have decreased by $0.4 million in the current quarter compared to the prior-year quarter.

SG&A expenses were $38.1 million, or 27% of sales for the six months ended June 30, 2017, compared to $40.2 million, or 29% of sales for the six months ended June 30, 2016. We incurred $1.3 million of unusual charges in the current six-month period, primarily associated with our change in CEO. The prior year six-month period included $1.1 million in costs associated with the Company’s strategic review process. Without the impact of these unusual costs, SG&A would have decreased by $2.3 million in the current six-month period compared to the prior-year period. This decrease in six-month period SG&A expenses was largely attributable to lower variable selling related expenses.

Restructuring. Restructuring expenses were $0.5 million and $2.0 million for the three and six months ended June 30, 2017, respectively. In March 2017, management initiated a strategic restructuring program in our MMS segment that is expected to be substantially completed in 2018. Restructuring expenses were $0.2 million and $0.4 million for the three and six months ended June 30, 2016, respectively. The 2016 expenses were related to the 2015 restructuring program.

Research and Development Expenses. Research and Development ("R&D") expenses were $3.8 million, or 5% of sales for the three months ended June 30, 2017, relatively flat compared to $3.4 million, or 5% of sales for the three months ended June 30, 2016. R&D expenses were $7.3 million, or 5% of sales for the six months ended June 30, 2017, compared to $6.7 million, or 5% of sales for the six months ended June 30, 2016.

Income (Loss) Before Income Taxes. As a result of the foregoing, income before income taxes was $2.1 million for the three months ended June 30, 2017, compared to income before income taxes of $0.2 million for the same period in 2016. For the six months

ended June 30, 2017, income before income taxes was $0.3 million compared to loss before income taxes of $1.1 million for the same period in 2016.

Income Taxes. The income tax provision was a benefit of $0.4 million and $0.2 million for the three and six months ended June 30, 2017, compared to an income tax provision expense of $0.1 million and $0.01 million for the same periods in 2016. The effective tax rate was (18.6)% and (71.5)% for the three and six months ended June 30, 2017, compared to 39.1% and (0.7)% for the same periods in 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. The tax benefit recorded during the three months ended June 30, 2017 is mainly driven by the release of an uncertain tax position due to the lapsing of the statute of limitations resulting in a tax benefit of $0.6 million.

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 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.

Net Income (Loss). As a result of the foregoing, net income for the three months ended June 30, 2017 was $2.5 million, or 3% of sales, compared to $0.1 million, or 0.2% of sales, for the same period in 2016. Net income for the six months ended June 30, 2017 was $0.5 million, or 0.3% of sales, compared to net loss of $1.1 million, or (0.8)% of sales, for the same period in 2016. Both basic and diluted income (loss) per share for the three and six months ended June 30, 2017 were $0.20 and $0.04, compared to $0.01 and $(0.09) for the same periods in 2016.

Business Segment Information — Comparison of the three and six months ended June 30, 2017 and 2016

Metalcutting Machine Solutions Segment (MMS) (in thousands):



	Three Months Ended June 30,								Six Months Ended June 30,
	2017		2016		$ Change		% Change		2017			2016			$ Change		% Change
Sales	$	62,016	$	54,359	$	7,657	14	%	$	110,848		$	106,630		$	4,218	4	%
Segment income (loss)	1,928		276		1,652		599	%	(741		)	(880		)	139		16	%

MMS sales were $62.0 million for the three months ended June 30, 2017, an increase of $7.7 million, or 14% when compared to the corresponding period in 2016. Increases in Asia and North America were partially offset by a decrease in Europe. For the six months ended June 30, 2017, MMS sales were $110.8 million, an increase of $4.2 million, or 4%, when compared to the same period in 2016. Increases in Asia and North America were partially offset by a decrease in Europe and unfavorable foreign currency translation of approximately $2.8 million.

Segment income for the three months ended June 30, 2017 was $1.9 million, an increase of $1.7 million. The increase is due to increased sales volume, partially offset by restructuring charges of $0.5 million in the current period.

For the six months ended June 30, 2017, segment loss was $0.7 million, an improvement of $0.1 million, or 16%, when compared to the segment loss in the same period of 2016. The volume related increases in gross profit and lower agent commissions of $1.7 million due to changes in channel mix, were largely offset by restructuring charges of $2.0 million in the current period.

Aftermarket Tooling and Accessories Segment (ATA) (in thousands):



	Three Months Ended June 30,								Six Months Ended June 30,
	2017		2016		$ Change		% Change		2017		2016		$ Change		% Change
Sales	$	16,302	$	15,883	$	419	3	%	$	32,161	$	31,504	$	657	2	%
Segment income	2,745		1,641		1,104		67	%	5,031		3,495		1,536		44	%

ATA sales for the three months ended June 30, 2017 were $16.3 million, an increase of $0.4 million, or 3%, when compared to the corresponding period in 2016. Increases in Europe were partially offset by decreases in other markets. ATA sales for the six months ended June 30, 2017 were $32.2 million, an increase of $0.7 million, or 2%, when compared to the corresponding period in 2016. Increases in North America and Europe were partially offset by decreases in Asia and unfavorable foreign currency translation of approximately $0.2 million.

Segment income for the three months ended June 30, 2017 was $2.7 million, a $1.1 million, or 67% increase from the prior year due to reduced manufacturing costs and operating expenses. Segment income for the six months ended June 30, 2017 was $5.0 million, a $1.5 million, or 44% increase from the prior year. ATA experienced higher volumes with improved absorption and reduced manufacturing costs, including $0.4 million of improvement generated by the 2015 restructuring program completed in late 2016.

Segment Summary For the Three and Six Months Ended June 30, 2017 and 2016 (in thousands):



	Three Months ended June 30, 2017										Three Months Ended June 30, 2016
	MMS		ATA		Inter-Segment Eliminations			Total			MMS		ATA		Inter-Segment Eliminations			Total
Sales	$	62,016	$	16,302	$	(121	)	$	78,197		$	54,359	$	15,883	$	(56	)	$	70,186
Segment income	1,928		2,745					4,673			276		1,641					1,917
Unallocated corporate expense								(2,481		)								(1,616		)
Interest expense, net								(66		)								(63		)
Other unallocated expense								—										—
Income before income taxes								$	2,126									$	238



	Six Months Ended June 30, 2017											Six Months Ended June 30, 2016
	MMS			ATA		Inter-Segment Eliminations			Total			MMS			ATA		Inter-Segment Eliminations			Total
Sales	$	110,848		$	32,161	$	(255	)	$	142,754		$	106,630		$	31,504	$	(127	)	$	138,007
Segment (loss) income	(741		)	5,031					4,290			(880		)	3,495					2,615
Unallocated corporate expense									(3,882		)									(3,559		)
Interest expense, net									(131		)									(149		)
Other unallocated expense									—											—
(Loss) income before income taxes									$	277										$	(1,093	)

Summary of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (in thousands):



	Six Months Ended June 30,
	2017			2016
Net cash used in operating activities	$	(258	)	$	(6,039	)
Net cash used in investing activities	$	(952	)	$	(955	)
Net cash used in financing activities	$	(2,616	)	$	(2,579	)

During the six months ended June 30, 2017, we used $0.3 million net cash from operating activities. The net cash used was the result of offsetting movements in operating results and net working capital. In the first half of 2017, total changes in operating assets and liabilities used $5.9 million, but was offset by sources from net income of $0.5 million, non-cash adjustments of $4.4 million for depreciation and amortization and $1.4 million for inventory impairment. The prior year cash used in operating activities of $6.0 million was the result of total changes in operating assets and liabilities of $8.9 million and a net loss of $1.1 million, partially offset by sources from non-cash adjustments of $4.1 million for depreciation and amortization.

Net cash used in investing activities was $1.0 million for the six months ended June 30, 2017 and 2016. The primary use of cash was for capital expenditures during these periods, which were made primarily for maintenance capital purchases.

Net cash flow used in financing activities was $2.6 million for the six months ended June 30, 2017. Cash used was primarily attributable to $1.5 million of payments on long-term debt due to normal scheduled payment activity, $0.6 million of payments on short term borrowings and year-to-date dividends paid of $0.5 million.

Net cash flow used in financing activities was $2.6 million for the six months ended June 30, 2016. Cash used for financing activities was primarily driven by $2.3 million of payments on long-term debt due to normal scheduled payment activity and year-to-date dividends paid of $0.5 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 $76.4 million at June 30, 2017 and $74.7 million at December 31, 2016, of which $54.3 million and $53.0 million, respectively, can be borrowed for working capital needs. As of June 30, 2017 and December 31, 2016, $68.0 million and $67.1 million was available for borrowing under these respective arrangements, of which $53.7 million and $51.9 million, respectively, was available for working capital needs. Total consolidated borrowings outstanding were $4.7 million and $6.0 million at June 30, 2017 and December 31, 2016, respectively. Additionally, we had borrowings under revolving credit facilities of $0.1 million and $0.7 million at June 30, 2017 and December 31, 2016, 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 June 30, 2017, 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 by operating activities and availability under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before non-cash charges and change in working capital needs. During the six months ended June 30, 2017, 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 six months of 2017. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2016 Annual Report on Form 10-K.

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 June 30, 2017, 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 June 30, 2017 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.

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, 2016.

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.



Item 6.		Exhibits.

3.1		Restated Certificate of Incorporation of Hardinge Inc. (conformed to reflect the Certificate of Amendment to the Restated Certificate of Incorporation, dated February 19, 2012 and the Certificate of Amendment to the Restated Certificate of Incorporation, dated May 3, 2017).

3.2		Amended and Restated By-Laws of Hardinge Inc. (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2017).

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)).

10.1		Employment Agreement dated as of May 10, 2017, between Hardinge Inc. and Charles P. Dougherty.

10.2		Employment Offer Letter dated as of June 1, 2017, issued by Hardinge Inc. to Randall D. Bahr.

10.3		Non-qualified Option Agreement dated as of June 6, 2017, between Hardinge Inc. and Charles P. Dougherty.

10.4		Non-qualified Option Agreement dated as of June 6, 2017, between Hardinge Inc. and Charles P. Dougherty.

10.5		Schedule Required by Instruction 2 to Item 601 of Regulation S-K.

10.6		Consulting Agreement dated as of May 10, 2017, between Hardinge Inc. and Richard L. Simons.

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

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

August 3, 2017	By:	/s/ Charles P. Dougherty
Date		Charles P. Dougherty
		President and Chief Executive Officer
		(Principal Executive Officer)

August 3, 2017	By:	/s/ Douglas J. Malone
Date		Douglas J. Malone
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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