ITEM 1.-BUSINESS
General
Hardinge Inc.'s principal executive office is located within Chemung County at One Hardinge Drive, Elmira, New York 14902-1507.
Our website, www.hardinge.com, provides links to all of the Company's filings with the Securities and Exchange Commission. A copy of the 10-K is available on the website or can be obtained free of charge by contacting the Investor Relations Department at our principal executive office. Alternatively, such reports may be accessed at the Internet address of the SEC, which is www.sec.gov, or at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information about the operation of the SEC's Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
We are a global designer, manufacturer and distributor of machine tools, specializing in precision computer numerically controlled metal-cutting machines. The Company has the following direct and indirect wholly owned subsidiaries:
Canadian Hardinge Machine Tools, Ltd
Toronto, Ontario, Canada
Hardinge Technology Systems, Inc.
Elmira, New York
Hardinge Holdings GmbH
St. Gallen, Switzerland
Hardinge Holdings B.V.
Amsterdam, Netherlands
Hardinge GmbH
Krefeld, Germany
Hardinge Machine Tools, Ltd.
Leicester, England
Hardinge Machine Tools B.V.
Raamsdonksveer, Netherlands
L. Kellenberger & Co. AG
St. Gallen, Switzerland
Jones & Shipman Grinding Limited
Leicester, England
Jones & Shipman SARL
Cedex, France
Hardinge China, Limited
Hong Kong, People's Republic of China
Hardinge Machine (Shanghai) Co., Ltd.
Shanghai, People's Republic of China
Hardinge Precision Machinery (Jiaxing) Company, Limited
Jiaxing, People's Republic of China
Hardinge Taiwan Precision Machinery Limited
Nan Tou City, Taiwan, Republic of China
Hardinge Machine Tools B.V., Taiwan Branch
Nan Tou City, Taiwan, Republic of China
We have manufacturing facilities located in Switzerland, Taiwan, the United States, China, and the United Kingdom. We manufacture the majority of the products we sell.
Unless otherwise mentioned or unless the context requires otherwise, all references to "Hardinge," "we," "us," "our," "the Company" or similar references mean Hardinge Inc. and its predecessors together with its subsidiaries.
Products
We supply high precision computer controlled metal-cutting turning machines, grinding machines, vertical machining centers, and accessories related to those machines. We believe our products are known for accuracy, reliability, durability and value.
We have been a manufacturer of industrial-use high precision and general precision turning machine tools since 1890. Turning machines, or lathes, are power-driven machines used to remove material from either bar stock or a rough-formed part by moving multiple cutting tools against the surface of a part rotating at very high speeds in a spindle mechanism. The multi-directional movement of the cutting tools allows the part to be shaped to the desired dimensions. On parts produced by our machines, those dimensions are often measured in millionths of an inch. We consider Hardinge to be a
leader in the field of producing machines capable of consistently and cost-effectively producing parts to very close dimensions.
Grinding is a machining process in which a part's surface is shaped to closer tolerances with a rotating abrasive wheel or tool. Grinding machines can be used to finish parts of various shapes and sizes. The grinding machines of our Kellenberger subsidiary are used to grind the inside and outside diameters of cylindrical parts. Such grinding machines are typically used to provide a more exact finish on a part that has been partially completed on a lathe. The grinding machines of Kellenberger, which are manufactured in both computer and manually controlled models, are generally purchased by the same type of customers as other Hardinge equipment and further our ability to be a primary source for our customers.
Our Kellenberger precision grinding technology is complemented by the Hauser and Tschudin grinding brands. Hauser machines are jig grinders used to make demanding contour components, primarily for tool and mold-making applications. Tschudin product technology is focused on the specialized grinding of cylindrical parts when the customer requires high volume production. Our Tschudin machines are generally equipped with automatic loading and unloading mechanisms for the part being machined. These loading and unloading mechanisms significantly reduce the level of involvement a machine operator has to perform in the production process.
During 2010, the Company established Jones & Shipman Grinding Limited after acquiring the assets of Jones and Shipman, a UK-based manufacturer of grinding and super-abrasive machines and machining systems. Jones & Shipman manufactures and distributes a range of high-quality grinding (surface, creep feed and cylindrical) machines used by a diverse range of industries.
Machining centers cut material differently than a turning machine. These machines are designed to remove material from stationary, prismatic or box-like parts of various shapes with rotating tools that are capable of milling, drilling, tapping, reaming and routing. Machining centers have mechanisms that automatically change tools based on commands from a built-in computer control without the assistance of an operator. Machining centers are generally purchased by the same customers who purchase other Hardinge equipment. We supply a broad line of machining centers under the Bridgeport brand name addressing a range of sizes, speeds and powers.
Our machines are generally computer controlled and use commands from an integrated computer to control the movement of cutting tools, grinding wheels, part positioning, and in the case of turning and grinding machines, the rotation speeds of the part being shaped. The computer control enables the operator to program operations such as part rotation, tooling selection and tooling movement for a specific part and then store that program in memory for future use. The machines are able to produce parts while left unattended when connected to automatic bar-feeding, robotics equipment, or other material handling devices designed to supply raw materials and remove machined parts from the machine.
New products are critical to our growth plans. We gain access to new products through internal product development, acquisitions, joint ventures, license agreements and partnerships. Products are introduced each year to both broaden our product offering and to take advantage of new technologies available to us. These technologies generally allow our machines to run at higher speeds and with more power, thus increasing their efficiency. Customers routinely replace old machines with newer machines that can produce parts faster and with less time to set up the machine when converting from one type of part to another. Generally, our machines can be used to produce parts from all of the standard ferrous and non-ferrous metals, as well as plastics, composites and exotic materials.
We focus on products and solutions for companies making parts from hard to machine materials with hard to sustain close tolerances and hard to achieve surface finishes and which also may be hard to hold in the machine. We believe that with our high precision and super precision lathes, our grinding machines, and our rugged machining centers, combined with our accessory products and our technical
expertise, we are uniquely qualified to be the supplier of choice for customers manufacturing to demanding specifications.
On many of our machines, multiple options are available which allow customers to customize their machines to their specific operating performance and cost objectives. We produce machines for stock with popular option combinations for immediate delivery, as well as design and produce machines to specific customer requirements. In addition to our machines, we provide the necessary tooling, accessories and support services to assist customers in maximizing their return on investment.
The sale of repair parts is important to our business. Certain parts on machines wear over time or break through misuse. Customers will buy parts from us throughout the life of the machine, which is generally measured in multiple years. There are thousands of machines in operation in the world for which we provide those repair parts and in many cases the parts are available exclusively from us. In addition, we offer an extensive line of accessories including workholding, toolholding and other industrial support products, which may be used on both our machines and those produced by others.
We offer various warranties on our equipment and consider post-sale support to be a critical element of our business. Warranties on machines typically extend for twelve months after purchase. Services provided include operation and maintenance training, in-field maintenance, and in-field repair. We offer these post sales support services on a paid basis throughout the life of the machine. In territories covered by distributors, this support and service is offered through the distributor.
Sales, Markets and Distribution
We sell our products in most of the industrialized countries of the world through a combination of distributors, agents, and manufacturers' representatives. In certain areas of China, France, Germany, Netherlands, North America, and the United Kingdom, we have also used a direct sales force for portions of our product lines. Generally, our distributors have an exclusive right to sell our products in a defined geographic area. Our distributors operate as independent businesses and purchase products from us at discounted prices for their customers, while agents and representatives sell products on our behalf and receive commissions on sales. Our discount schedule is adjusted to reflect the level of pre and post sales support offered by our distributors. Our direct sales personnel earn a fixed salary plus commission. Sales through distributors are made only on standard commercial open account terms or through letters of credit. Distributors generally take title to products upon shipment from our facilities and do not have any special return privileges.
In 2010, we restructured our U.S. sales channels from a joint distributor network and direct sales force to a new group of distributors. These new distribution partners have exclusive sales, service, and support responsibilities for Hardinge and Bridgeport branded machines and repair parts in virtually all of the United States, with the exception of kneemills and workholding accessories, where they will operate on a non-exclusive basis. Additionally, members of this new distributor network will act as agents for our grinding products working with our direct technical team.
Our non-machine products are sold in the U.S. mainly through direct telephone orders to a toll-free telephone number and via our web site. In most cases, we are able to package and ship in-stock tooling and repair parts within 24 hours of receiving orders. We can package and ship items with heavy demand within a few hours. In other parts of the world, these products are sold on either a direct sales basis or through distributor arrangements.
We promote recognition of our products in the marketplace through advertising in trade publications, web presences, email newsletters, and participation in industry trade shows. In addition, we market our non-machine products through publication of general catalogues and other targeted catalogues, which we distribute to existing and prospective customers. We have a substantial presence on the internet at www.hardinge.com where customers can obtain information about our products and place orders for workholding, rotary, and kneemill products.
A substantial portion of our sales are to small and medium-sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and indirectly served by us include aerospace, automotive, computer, communications, consumer-electronics, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment and transportation.
A customer who is a supplier to the consumer electronics industry accounted for 10.7% of our consolidated sales in 2010, and one customer who is a supplier to the automotive industry accounted for 6.8% of our consolidated sales in 2009. While valuing our relationship with each customer, we do not believe that the loss of any single customer, or any few customers, would have an adverse material effect on our business.
Hardinge Inc. operates in a single business segment, industrial machine tools.
Competitive Conditions
In our industry, the barriers to entry for competition vary based on the level of product performance required. For the products with the highest performance in terms of accuracy and productivity, the barriers are generally technical in nature. For basic products, often the barriers are not technical; they are tied to product availability, competitive price position, and an effective distribution model that offers the pre and post sales support required by customers. Another significant barrier in the global machine tool industry is the high level of working capital that is required to operate the business.
We compete in the various segments of the machine tool market within the products of turning, milling, grinding and workholding. We compete with numerous vendors in each market segment we serve. The primary competitive factors in the marketplace for our machine tools are reliability, price, delivery time, service and technological characteristics. Our management considers our segment of the industry to be extremely competitive. There are many manufacturers of machine tools in the world. They can be categorized by the size of material their products can machine and the precision level they can achieve. For our high precision, multi-tasking turning and milling equipment, competition comes primarily from companies such as Mori-Seiki, Mazak, and Okuma, which are based in Japan, and DMG, which is based in Germany. Competition in our more standard turning and milling equipment comes to some degree from those companies as well as Doosan, which is based in South Korea, and Haas which is based in the U.S., as well as several smaller Taiwanese and Korean companies. Our cylindrical grinding machines compete primarily with Studer, a Swiss Company as well as Toyoda and Shigiya, which are based in Japan. Our Hauser jig grinding machines compete primarily with Moore Tool, which is based in the U.S., and some Japanese suppliers. Our surface grinding machines compete with Okamota in Japan, and Chevalier in Taiwan. Our accessories products compete with many smaller companies.
The overall number of our competitors providing product solutions serving our market segments may increase. Also, the composition of competitors may change as we broaden our product offerings and the geographic markets we serve. As we expand into new market segments, we will face competition not only from our existing competitors but from other competitors as well, including existing companies with strong technological, marketing and sales positions in those markets. In addition, several of our competitors may have greater resources, including financial, technical and engineering resources, than we do.
Sources and Availability of Components
We produce certain of our lathes, knee-mills, and related products at our Elmira, New York plant. The Kellenberger grinding machines and related products are manufactured at our St. Gallen, Switzerland plant and Hauser and Tschudin products are produced at our Biel, Switzerland facility. The Jones & Shipman grinding machines are manufactured at our Leicester, England plant. We produce
machining centers and lathes at both Hardinge Taiwan in Nan Tou, Taiwan and Hardinge Machine (Shanghai) Co., Ltd. in Shanghai, China. We manufacture products from various raw materials, including cast iron, sheet metal, and bar steel. We purchase a number of components, sub-assemblies and assemblies from outside suppliers, including the computer and electronic components for our computer controlled lathes, grinding machines, and machining centers. There are multiple suppliers for virtually all of our raw material, components, sub-assemblies and assemblies and historically, we have not experienced a serious supply interruption, however with the recent increase in demand driven by worldwide order activity, producers of bearings, ballscrews, and linear guides have had difficulty meeting demand, which could impact our production schedules in the future.
In 2009, we began strategic changes within our Elmira, NY manufacturing facility, which historically was vertically integrated with machining operations converting parts from raw castings to finished goods, the costs of which proved to be prohibitive. We have moved towards a more variable cost business model, outsourcing many of the non-critical components and subassemblies for machines which were being made in the Elmira facility. In conjunction with our decision to outsource certain parts and subassemblies, we identified certain property, plant and equipment that was no longer required for our manufacturing operations and sold them in 2010.
A major component of our computer controlled machines is the computer and related electronics package. We purchase these components for our lathes and machining centers primarily from Fanuc Limited, a large Japanese electronics company and Heidenhain, a German control supplier. We also utilize controls from Siemens, another German control manufacturer, on certain machine models in our line of machining centers. On our grinding machines we offer Heidenhain and Fanuc controls. While we believe that design changes could be made to our machines to allow sourcing from several other existing suppliers, and we occasionally do so for special orders, a disruption in the supply of the computer controls from one of our suppliers could cause us to experience a substantial disruption of our operations, depending on the circumstances at the time. We purchase parts from these suppliers under normal trade terms. There are no agreements with these suppliers to purchase minimum volumes per year.
Research and Development
Our ongoing research and development program involves creating new products, modifying existing products to meet market demands, and redesigning existing products, both to add new functionality and to reduce the cost of manufacturing. The research and development departments throughout the world are staffed with experienced design engineers with varying levels of education, ranging from technical to doctoral degrees.
The worldwide cost of research and development, all of which has been charged to cost of goods sold, amounted to $9.4 million, $9.3 million and $9.8 million, in 2010, 2009, and 2008, respectively.
Patents
Although Hardinge Inc. holds several patents with respect to certain of its products, we do not believe that our business is dependent to any material extent upon any single patent or group of patents.
Seasonal Trends and Working Capital Requirements
Hardinge's business and that of the machine tool industry in general, is cyclical. It is not subject to significant seasonal trends. However, our quarterly results are subject to fluctuation based on the timing of our shipments of machine tools, which are largely dependent upon customer delivery requirements. Historically, we have experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at our U.S. and European customers' plants and our policy of closing our U.S. and Switzerland facilities for two weeks during the third quarter. While not reflective of 2008
through 2010, due to the economic crisis (discussed further in Item 1A
Item 1A.-RISK FACTORS
The various risks related to the Company's business include the risks described below. The business, financial condition or results of operations of Hardinge Inc. could be materially adversely affected by any of these risks. The risks and uncertainties described below or elsewhere in the Form 10-K are not the only ones to which we are exposed. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business and operations. If any of the matters included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
Our customers' activity levels and spending for our products and services have been impacted by the current global economic conditions, especially deterioration in the credit markets.
Many of our customers finance their purchases of our products through cash flow from operations, the incurrence of debt or from the proceeds received in connection with an issuance of equity. Commencing in the fourth quarter of 2008, the global financial markets have experienced significant losses due to failures of many dominant financial institutions. During late 2008 and early 2009, the governments of the United States and several foreign countries instituted bailout plans to assist many banks and others impacted by the economic crisis. This crisis has resulted in, among other things, a significant decline in the credit markets and the availability of credit, the impact of which is still being experienced today. Additionally, many of our customers' equity values have substantially declined. The combination of a reduction in borrowing bases under asset based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in our customers' spending for our products and may impact the ability of our customers to pay amounts owed to us. In addition, this crisis and economic uncertainty has resulted in an overall decrease in consumer and business spending, which negatively impacted the need our customers have for our products. While economic conditions during 2010 began to show signs of improvement in many of our markets, future slow or negative growth in the global economy may materially and adversely affect our business, financial condition and results of operations.
Changes in general economic conditions and the cyclical nature of our business could harm our operating results.
Our business is cyclical in nature, following the strength and weakness of the manufacturing economies in the geographic markets we serve. As a result of this cyclicality, we have experienced, and in the future, we can be expected to experience, significant fluctuations in sales and operating income, which may affect our business, operating results, financial condition and the market price of our common shares.
The following factors, among others, significantly influence demand for our products:
•Fluctuations in capacity at both OEMs and job shops;
•The availability of skilled machinists;
•The need to replace machines that have reached the end of their useful life;
•The need to replace older machines with new technology that increases productivity, reduces general manufacturing costs, and machines parts in a new way;
•The evolution of end-use products requiring machining to more specific tolerances;
•Our customers' use of new materials requiring machining by different processes;
•General economic and manufacturing industry expansions and contractions; and
•Changes in manufacturing capabilities in developing regions.
Our competitive position and prospects for growth may be diminished if we are unable to develop and introduce new and enhanced products on a timely basis that are accepted in the market.
The machine tool industry is subject to technological change, rapidly evolving industry standards, changing customer requirements and improvements in and expansion of product offerings, especially with respect to computer-controlled products. Our ability to anticipate changes in technology, industry standards, customer requirements and product offerings by competitors, and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, will be significant factors in our ability to compete and grow. Moreover, if technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would be materially adversely affected. Developments by our competitors or others may render our products or technologies obsolete or noncompetitive. Failure to effectively introduce new products or product enhancements on a timely basis could materially adversely affect our business, operating results and financial condition.
We rely on a limited number of suppliers to obtain certain components, sub-assemblies, assemblies and products. Delays in deliveries from or the loss of any of these suppliers may cause us to incur additional costs, result in delays in manufacturing and delivering our products or cause us to carry excess or obsolete inventory.
Some components, sub-assemblies or assemblies we use in the manufacturing of our products are purchased from a limited number of suppliers. Our purchases from these suppliers are generally not made pursuant to long-term contracts and are subject to additional risks associated with purchasing products internationally, including risks associated with potential import restrictions and exchange rate fluctuations, as well as changes in tax laws, tariffs and freight rates. Although we believe that our relationships with these suppliers are good, there can be no assurance that we will be able to obtain these products from these suppliers on satisfactory terms indefinitely. The present economic environment could also pose the risk of one of these key suppliers going out of business, or cause delays in delivery times of critical components as business conditions rebound and demand increases.
We believe that design changes could be made to our machines to allow sourcing of components, sub-assemblies, assemblies or products from several other suppliers; however, a disruption in the supply from any of our suppliers could cause us to experience a material adverse effect on our operations.
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.
We manufacture a substantial portion of our products overseas and sell our products throughout the world. In 2010, approximately 77% of our products were sold in countries outside of North America. In addition, a majority of our employees are located outside of the United States. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition, results of operations and cash flows. These factors include:
•A prolonged world-wide economic downturn or economic uncertainty in our principal international markets including Asia and Europe;
•Changes in political, regulatory, legal or economic conditions;
•Restrictive governmental actions (such as restrictions on the transfer or repatriation of funds and foreign investments and trade protection measures, including export duties and quotas, customs duties and tariffs, or trade barriers erected by either the United States or other countries where we do business);
•Disruptions of capital and trading markets;
•Changes in import or export licensing requirements;
•Transportation delays;
•Civil disturbances or political instability;
•Geopolitical turmoil, including terrorism or war;
•Currency restrictions and exchange rate fluctuations;
•Changes in labor standards;
•Limitations on our ability under local laws to protect our intellectual property;
•Nationalization and expropriation;
•Changes in domestic and foreign tax laws;
•Difficulty in obtaining distribution and support; and
•Major health concerns.
Moreover, international conflicts are creating many economic and political uncertainties that are affecting the global economy. Escalation of existing international conflicts or the occurrence of new international conflicts could severely affect our operations and demand for our products.
We may face trade barriers that could have a material adverse effect on our results of operations and result in a loss of customers or suppliers.
Trade barriers established by the United States or other countries may interfere with our ability to offer our products in those markets. We manufacture a substantial portion of our products overseas and sell our products throughout the world. We cannot predict whether the United States or any other country will impose new quotas, tariffs, taxes or other trade barriers upon the importation or exportation of our products or supplies, any of which could have a material adverse effect on our results of operations and financial condition. Competition and trade barriers in those countries could require us to reduce prices, increase spending on marketing or product development, withdraw or not enter certain markets or otherwise take actions adverse to us.
In addition, our subsidiaries may require future equity-related financing, and any capital contributions to certain of our subsidiaries may require the approval of the relevant authorities in the jurisdiction in which the subsidiary is incorporated. Those approvals may be required from the investment commissions or similar agencies of the particular jurisdiction and relate to any initial or additional equity investment by foreign entities in local entities.
In all jurisdictions in which we operate, we are also subject to the laws and regulations that govern foreign investment and foreign trade, which may limit our ability to repatriate cash as dividends or otherwise.
Our business is highly competitive, and increased competition could reduce our sales, earnings and profitability.
The markets in which our machines and other products are sold are extremely competitive and highly fragmented. In marketing our products, we compete primarily with other businesses on quality, reliability, price, value, delivery time, service and technological characteristics. We compete with a number of U.S., European and Asian competitors, many of which are larger, have greater financial and other resources and are supported by governmental or financial institution subsidies. Increased
competition could force us to lower our prices or to offer additional product features or services at a higher cost to us, which could reduce our earnings.
The greater financial resources or the lower amount of debt of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product innovations that could put us at a disadvantage. If we are unable to compete successfully against other manufacturers in our marketplace, we could lose customers, and our sales may decline. There can also be no assurance that customers will continue to regard our products favorably, that we will be able to develop new products that appeal to customers, that we will be able to improve or maintain our profit margins on sales to our customers or that we will be able to continue to compete successfully in our core markets. While we believe our product lines compete effectively in their markets, we may not continue to do so.
Acquisitions could disrupt our operations and harm our operating results.
We may elect to increase our product offerings and the markets we serve through acquisitions of other companies, product lines, technologies and personnel. Acquisitions involve numerous risks, including the following:
•Difficulties in integrating the operations, technologies, products and personnel of the acquired companies;
•Diversion of management's attention from normal daily operations of the business;
•Potential difficulties in completing projects associated with in-process research and development;
•Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
•Initial dependence on unfamiliar supply chains or relatively small supply partners;
•Difficulties in predicting market demand for acquired products and technologies and the resultant risk of acquiring excess or obsolete inventory;
•Insufficient revenues to offset increased expenses associated with acquisitions; and
•The potential loss of key employees of the acquired companies.
Acquisitions may also cause us to:
•Issue common stock that would dilute our current shareholders' percentage ownership;
•Increase our level of indebtedness;
•Assume liabilities;
•Record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges;
•Incur amortization expenses related to certain intangible assets;
•Incur large and immediate write-offs and restructuring and other related expenses; and
•Become subject to litigation.
Acquisitions are inherently risky, and no assurance can be given that our future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. Failure to manage and successfully integrate acquisitions we make could harm our business and operating results in a material way. Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products, technologies, facilities and personnel to an inability to do so.
Even when an acquired business has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.
If we are unable to access additional capital on favorable terms, our liquidity, business and results of operations could be adversely affected.
The ability to raise financial capital, either in public or private markets or through commercial banks, is critical to our current business and future growth. Our business is generally working capital intensive requiring a long cash-out to cash-in cycle. In addition, we will rely on the availability of longer-term debt financing or equity financing to make investments in new opportunities. Our access to the financial markets could be adversely impacted by various factors including the following:
•Changes in credit markets that reduce available credit or the ability to renew existing facilities on acceptable terms;
•A deterioration in our financial condition that would violate current covenants or prohibit us from obtaining additional capital from banks, financial institutions, or investors;
•Extreme volatility in credit markets that increase margin or credit requirements; and
•Volatility in our results that would substantially increase the cost of our capital.
We are subject to significant foreign exchange and currency risks that could adversely affect our operations and our ability to reinvest earnings from operations.
Our international operations generate sales in a number of foreign currencies including Swiss Francs, Chinese Renminbi, British Pound Sterling, Canadian Dollars, New Taiwanese Dollars, and Euros. Therefore, our results of operations and financial condition are affected by fluctuations in exchange rates between these currencies and the U.S. dollar. In addition, our purchases of components in Yen, Euros, New Taiwan Dollars, Swiss Francs, and Chinese Renminbi are affected by inter-currency fluctuations in exchange rates.
We prepare our financial statements in U.S. Dollars in accordance with U.S. GAAP, but a sizable portion of our revenue and operating expenses are in foreign currencies. As a result, we are subject to significant risks, including:
•Foreign exchange risks resulting from changes in foreign exchange rates and the implementation of exchange controls; and
•Limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries.
Changes in exchange rates will result in increases or decreases in our costs and earnings, and may also affect the book value of our assets located outside of the United States and the amount of our invested equity. Although we may seek to decrease our currency exposure by engaging in hedges against significant transactions and balance sheet currency exposures where we deem it appropriate, we do not hedge against translation risks. We cannot assure you that any efforts to minimize our risk to currency movements will be successful. To the extent we sell our products in markets other than the market in which they are manufactured, currency fluctuations may result in our products becoming too expensive for customers in those markets.
Prices of some raw materials, especially steel and iron, fluctuate, which can adversely affect our sales, costs, and profitability.
We manufacture products with a relatively high iron castings or steel content, commodities for which worldwide prices fluctuate. The availability of and prices for these and other raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs, and anticipated or perceived shortages. In some cases, those cost increases can be passed on to customers in the form of price increases; in other cases, they cannot. If raw material prices increase and we are not able to charge our customers higher prices to compensate, it would adversely affect our business, results of operations and financial condition.
Our quarterly results may fluctuate based on customer delivery requirements.
Our quarterly results are subject to significant fluctuation based on the timing of our shipments of machine tools, which are largely dependent upon customer delivery requirements. With individual machines priced as high as $1,500,000 and several machines frequently sold together as a package, a request by a customer to delay shipment at quarter end could significantly affect our quarterly results. Historically, we have experienced reduced activity during the third quarter of the year, largely as a result of vacations scheduled at our customers' plants and our policy of closing our U.S. and Swiss facilities for two weeks in July or August. As a result, exclusive of the impact of the economic downturn experienced during 2008 and 2009, our third-quarter net sales, income from operations, and net income historically have been the lowest of any quarter during the year. However, given the larger percentage of our sales now from China, the impact of the one week to two week plant shut downs in China by us and our customers for the Chinese New Year, the first quarter net sales, income from operations and net income may result in the first quarter being the lowest quarter of the year.
Our expenditures for post-retirement pension obligations could be materially higher than we have predicted if our underlying assumptions prove to be incorrect or we are required to use different assumptions.
We provide defined benefit pension plans to eligible employees. Our pension expense, the funding status of our plans and related charges in other comprehensive income, and our required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets and the actuarial assumptions we use to measure our defined benefit pension plan obligations, including the rate at which future obligations are discounted to a present value, or the discount rate.
Our market-related value of assets recognizes asset losses and gains over a five-year period, which we believe is consistent with the long-term nature of our pension obligations. As a result, the effect of changes in the market value of assets on our pension expense may be experienced in future years rather than fully reflected in the expense for the year immediately following the year in which the fluctuations actually occurred.
For the year ended December 31, 2010, the value of our Pension Plan Assets increased by $11.7 million due to increases in market value of the underlying assets as the world markets continued to recover from the impacts the global economic recession had on the world financial markets and related investment valuations. The future investment performance of our pension plan assets could significantly impact the plan assets and future growth of the plan assets. Should the assets earn a return less than the assumed rate of return over time, it is likely that future pension expenses and funding requirements would increase. Investment earnings in excess of the assumed rate of return may reduce future pension expenses and funding requirements.
For our domestic and foreign plans, discount rates are based on the yields on high grade corporate bonds in each market with maturities matching the projected benefit payments. Discount rates are used to determine the present value of the projected and accumulated benefit obligation at the end of each year. A change in the discount rate would impact the funded status of our plans. An increase to the
discount rate would reduce the pension liability and future pension expense and conversely, a lower discount rate would raise pension liability and the future pension expense.
To develop the expected long-term rate of return on assets assumption, for our domestic and foreign plans, we consider the current level of expected returns on risk free investments (primarily government bonds) in each market, the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption.
For pension accounting purposes in our U.S. based plan, which is the largest of our plans, the rate of return assumed on the market-related value of plan assets for determining pension expense was 8.00% for 2010 and 2009. The discount rate used for determining the obligation was 5.93% at December 31, 2010 compared to 6.27% at December 31, 2009.
In our Swiss subsidiary, we have two defined benefit plans, which when taken as a whole are about as large as the U.S. defined benefit plan. The rate of return assumed on the market-related value of plan assets for determining pension expense on plan assets was 3.90% for 2010 and 5.00% for 2009. The discount rate used for determining the obligation was 2.7% at December 31, 2010 compared to 3.5% at December 31, 2009.
Based on current guidelines, assumptions and estimates, including stock market prices and interest rates, we anticipate that we may be required to make a cash contribution of approximately $1.8 million to our U.S. pension plan in 2011 and approximately $2.3 million to the foreign plans in 2011. If our current assumptions and estimates are not correct, a contribution in years beyond 2011 may be more or less than the projected 2011 contribution.
In addition, we cannot predict whether changing market or economic conditions, regulatory changes or other factors will increase our pension expenses or our funding obligations, diverting funds we would otherwise apply to other uses. At December 31, 2010, the excess of consolidated projected benefit obligations over plan assets was $27.1 million and the excess of consolidated accumulated benefit obligations over plan assets was $21.8 million.
On June 15, 2009, the Company suspended future accrual of benefits under its U.S. defined benefit pension plan (which was closed to new participants in March 2004) and Company contributions to the 401(k) program were also suspended. In November 2010, the Company permanently froze accrual of benefits for participants in the U.S. defined pension plan as well as reinstated Company contributions to the 401(k) program as of January 1, 2011. Employees impacted by the actions related to the defined benefit plan now participate in a defined contribution plan.
If we are unable to attract and retain skilled employees to work at our manufacturing facilities our operations and growth prospects would be adversely impacted.
We conduct substantially all of our manufacturing operations in relatively small urban areas, with the exception of our Shanghai facility. Our continued success depends on our ability to attract and retain a skilled labor force at these locations. If we are not able to attract and retain the personnel we require, we may be unable to develop, manufacture and market our products and expand our operations in a manner that best exploits market opportunities and capitalizes on our investment in our business. This would materially adversely affect our business, operating results and financial condition.
Due to future technological changes, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excessive.
The technologies within our products change and generally new versions of machines are brought to market in three to five year cycles. The phasing out of an old product involves both estimating the amount of inventory to hold to satisfy the final demand for those machines as well as to satisfy future
repair part needs. Based on changing customer demand and expectations of delivery times for repair parts, we may find that we have either obsolete or excess inventory on hand. Because of unforeseen changes in technology, market demand, or competition, we may have to write off unusable inventory at some time in the future, which may adversely affect our results of operations and financial condition. In 2009, we recorded a $5.0 million inventory write-down related to the strategic decision to cease manufacturing of non-critical parts and certain machine models in our Elmira, NY facility. In 2008, we recorded $7.6 million in inventory write-downs associated with discontinued product lines and the review of other expected inventory usage patterns.
Major changes in the economic situation of our customer base could require us to write off significant parts of our receivables from customers.
In difficult economic periods, our customers lose work and find it difficult if not impossible to pay for products purchased from us. Although appropriate credit reviews are done at the time of sale, rapidly changing economic conditions can have sudden impacts on customers' ability to pay. We run the risk of bad debt on existing time payment contracts and open accounts. If we write off significant parts of our customer accounts or notes receivable because of unforeseen changes in their business condition, it would adversely affect our results of operations, financial condition, and cash flows.
If we suffer loss to our factories, facilities or distribution system due to catastrophe, our operations could be seriously harmed.
Our factories, facilities and distribution system are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made disasters. In particular, several of our facilities could be subject to a catastrophic loss caused by earthquake due to their locations. Our facilities in Southeast Asia are located in areas with above average seismic activity. If any of our facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility.
We rely in part on independent distributors and the loss of these distributors could adversely affect our business.
In addition to our direct sales force, we depend on the services of independent distributors and agents to sell our products and provide service and aftermarket support to our customers. We support an extensive distributor and agent network worldwide. In 2010, approximately 64% of our sales were through distributors and agents. In December 2009, we reorganized our U.S. distribution from a joint distributor network and direct sales force to a new group of distributors. Rather than serving as passive conduits for delivery of product, many of our distributors are active participants in the sale and support of our products. Many of the distributors with whom we transact business offer competitive products and services to our customers. In addition, the distribution agreements we have are typically cancelable by the distributor after a relatively short notice period. The loss of a substantial number of our distributors or an increase in the distributors' sales of our competitors' products to our customers could reduce our sales and profits.
We rely on estimated forecasts of our customers' needs and inaccuracies in such forecasts could adversely affect our business.
We generally sell our products pursuant to individual purchase orders instead of long-term purchase commitments. Therefore, we rely on estimated demand forecasts, based upon input from our customers and the general economic environment, to determine how much material to purchase and product to manufacture. Because our sales are based on purchase orders, our customers may cancel, delay or otherwise modify their purchase commitments with little or no consequence to them and with little or no notice to us. For these reasons, we generally have limited visibility regarding our customers' actual product needs. The quantities or timing required by our customers for our products could vary
significantly. Whether in response to changes affecting the industry or a customer's specific business pressures, any cancellation, delay or other modification in our customers' orders could significantly reduce our revenue, cause our operating results to fluctuate from period to period and make it more difficult for us to predict our revenue. In the event of a cancellation or reduction of a customer order, we may not have enough time to reduce inventory purchases or our workforce to minimize the effect of the lost revenue on our business. During 2010 and 2009, orders and related sales were impacted by order cancellations of $10.2 million and $7.3 million, respectively, primarily due to the global economic conditions.
We could face potential product liability claims relating to products we manufacture, which could result in us having to expend significant time and expense to defend these claims and to pay material amounts in damages or settlement.
We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage; however, such insurance does not cover all types of damages that could be assessed against us in a product liability claim and the coverage amounts are subject to limitations under the applicable policies. We may not be able to obtain product liability insurance on acceptable terms in the future. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations or prospects. In addition, we believe our business depends on the strong brand reputation we have developed. In the event that our reputation is damaged, we may face difficulty in maintaining our pricing positions with respect to some of our products, which would reduce our sales and profitability.
Current employment laws or changes in employment laws could increase our costs and may adversely affect our business.
Various federal, state and foreign labor laws govern the relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers' compensation rates, citizenship requirements and costs to terminate or layoff employees. Significant additional government-imposed increases in the following areas could materially affect our business, financial condition, operating results or cash flow:
•minimum wages;
•mandated health benefits;
•paid leaves of absence;
•mandatory severance payments; and tax reporting.
We are subject to environmental laws that could impose significant costs on us and the failure to comply with such laws could subject us to sanctions and material fines and expenses.
Our 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. Activities at properties we own or previously owned and on adjacent areas have resulted in environmental impacts.
In particular, our Elmira, New York 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, New York. 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.
A substantial portion of the Pond is located on our property. Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the PRPs") have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study ("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 U.S. Environmental Protection Agency, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis. The cost of the RI/FS was estimated to be approximately $0.84 million. We estimate our portion of the study to be $0.12 million for which we have established a reserve of $0.13 million. As of December 31, 2010 we have incurred total expenses of $0.12 million with respect to the study and other activities relating to the Site. The remaining reserve balance at December 31, 2010 is $0.01 million.
The PRPs developed a Draft RI/FS with their consultants and, following EPA comments, submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan. The PRPs commenced field work in the spring of 2008 and submitted a Draft Site Characterization Report to EPA in the fall. The PRPs currently are performing Risk Assessments in accordance with the Remedial Investigation portion of the RI/FS.
Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the site. Environmental sampling on our 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 our operations or property have or are contributing to the contamination. Other than as described above, we have not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate. We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.
Although we believe, based upon information currently available, that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation, 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 Hardinge.
The loss of current members of our senior management team and other key personnel may adversely affect our operating results.
The loss of senior management and other key personnel could impair our ability to carry out our business plan. We believe our future success will depend in part on our ability to attract and retain highly skilled and qualified personnel. The loss of senior management and other key personnel may adversely affect our operating results as we incur costs to replace the departing personnel and potentially lose opportunities in the transition of important job functions.
If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud.
Effective internal controls are necessary for us to provide reliable financial reports, to prevent fraud and to operate successfully as a publicly traded company. Our efforts to maintain an effective system of internal controls may not be successful, and we may be unable to maintain adequate controls over our financial processes and reporting in the future. Ineffective internal controls subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common stock.
Anti-takeover provisions in our charter documents and under New York law may discourage a third party from acquiring us.
Certain provisions of our certificate of incorporation and bylaws may have the effect of discouraging a third party from making a proposal to acquire us and, as a result, may inhibit a change in control of the Company under circumstances that could give the shareholders the opportunity to realize a premium over the then-prevailing market price of our common shares. These include:
A Staggered Board of Directors. Our certificate of incorporation and bylaws provide that our Board of Directors, currently consisting of seven members, is divided into three classes of directors, with each class consisting of two or three directors, and with the classes serving staggered three-year terms. This classification of the directors has the effect of making it more difficult for shareholders, including those holding a majority of our outstanding shares, to force an immediate change in the composition of our Board of Directors.
Removal of Directors and Filling of Vacancies. Our certificate of incorporation provides that a member of our Board of Directors may be removed only for cause and upon the affirmative vote of the holders of 75% of the securities entitled to vote at an election of directors. Newly created directorships and Board of Director vacancies resulting from death, removal or other causes may be filled only by a majority vote of the then remaining directors. Accordingly, it is more difficult for shareholders, including those holding a majority of our outstanding shares, to force an immediate change in the composition of our Board of Directors.
Supermajority Voting Provisions for Certain Business Combinations. Our certificate of incorporation requires the affirmative vote of at least 75% of all of the securities entitled to vote and at least 75% of shareholders who are not Major Shareholders (defined as 10% beneficial holders) in order to effect certain mergers, sales of assets or other business combinations involving the Company. These provisions could have the effect of delaying, deferring or preventing a change of control of the Company.
In addition, as a New York corporation we are subject to provisions of the New York Business Corporation Law which may make it more difficult for a third party to acquire and exercise control over us pursuant to a tender offer or request or invitation for tenders. These provisions could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.
Item 1B.
Item 1B.-UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.-PROPERTIES
Pertinent information concerning the principal properties of the Company and its subsidiaries is as follows:
ITEM 3.
ITEM 3.-LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental to its operations. None of the litigation in which we are currently involved, individually or in the aggregate, is anticipated to be material to our financial condition, results of operations, or cash flows.
On October 28, 2008, a putative class-action lawsuit was filed in the United States District Court for the Western District of New York against the Company and certain former officers. This complaint, as amended, alleged that during the period from January 16, 2007 to February 21, 2008 the defendants made misleading statements and/or omissions relating to our business and operating results in violation of the Federal securities laws. On May 29, 2009, the Company filed a motion to dismiss the complaint. By a decision and order dated February 2, 2010, the Court dismissed the class action lawsuit. The plaintiff did not file a notice to appeal the Court's dismissal of the lawsuit and the time to appeal expired.
PART II
ITEM 5.
ITEM 5.-MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table reflects the highest and lowest values at which the stock traded in each quarter of the last two years. Hardinge Inc. common stock trades on The NASDAQ Global Select Market under the symbol "HDNG." The table also includes dividends per share, by quarter.
At March 7, 2011, there were 3,527 holders of common stock. This number includes both record holders and individual participants in security position listings.
Issuer Purchases of Equity Securities
There were no issuer repurchases of our common stock for the quarter ended December 31, 2010.
Share Repurchase Program
In February 2008, our Board of Directors approved a share repurchase program for up to $10.0 million of our common stock to be purchased through February 28, 2010. The Company repurchased 45,500 shares of its common stock at an average price of $12.72 per share under this program, through its expiration in February 2010.
Performance Graph
The graph below compares the five-year cumulative total return for Hardinge Inc. Common Stock with the comparable returns for the NASDAQ Stock Market (U.S.) Index, a new group of fourteen peer issuers, and our old group of eight peer issuers. The Company restructured its peer group this year based on a review and recommendation by an outside consultant Radford, an Aon Hewitt Company, that we use peer companies that have similar market capitalization and industry considerations. Our new peer group includes Amtech Systems Inc., Columbus McKinnon Corp., Electro Scientific Industries Inc., Flow International Corporation, Hurco Companies Inc., Kadant Inc., Ladish Company Inc., Nanometrics Inc., NN, Inc., Newport Corporation, Sifco Industries Inc., Transcat Inc., Twin Disc Inc., and Zygo Corporation. The companies included in our new peer group were selected based on comparability to Hardinge with respect to market capitalization, sales, manufactured products and international presence. Our old peer group included Circor International Inc., Flow International Corp., Hurco Companies Inc., Kadant Inc., Kaydon Corp., Magnetek Inc., NN Inc., and Sun Hydraulics Corp. Cumulative total return represents the change in stock price and the amount of dividends received during the indicated period, assuming reinvestment of dividends. The graph assumes an investment of $100 on December 31, 2005. The stock performance shown in the graph is included in response to SEC requirements and is not intended to forecast or to be indicative of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Hardinge Inc., The NASDAQ Composite Index,
an Old Peer Group and a New Peer Group
*$100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
ITEM 6.
ITEM 6.-SELECTED FINANCIAL DATA
The following selected financial data is derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes and other information included herein (dollar amounts in thousands except per share data).
(1)2009 results include a non-cash charge for impairment of $1.7 million associated with certain machinery and equipment formerly utilized in the manufacture of non-critical parts in our Elmira, NY facility. 2008 results include a non-cash charge for impairment of goodwill and intangible assets of $24.3 million due to the diminished value of goodwill and intangible assets in our Canadian, English, and Swiss entities.
(2)We adopted the provisions of ASC 260 on January 1, 2009, which establishes that unvested share-based payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The adoption of these provisions resulted in an increase in (loss) per share of $0.01 in 2008, and a reduction in income per share of $0.02 in 2007, and $0.01 in 2006. Diluted (loss) per share was impacted by an increase in (loss) per share of $0.01 in 2008, and a reduction in income per share of $0.01 in 2007 and $0.01 in 2006.
ITEM 7.
ITEM 7.-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview. Our primary business is designing, manufacturing, and distributing high-precision computer controlled metal-cutting turning, grinding and milling machines and related accessories. We are geographically diversified with manufacturing facilities in Switzerland, Taiwan, the United States, China and the United Kingdom with sales to most industrialized countries. Approximately 77% of our 2010 sales were to customers outside of North America, 78% of our 2010 products sold were manufactured outside of North America, and 69% of our employees were outside of North America.
Our machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. Our management believes that a key performance indicator is our order level as compared to industry measures of market activity levels.
While general economic conditions around the world have improved, the global economic recession, which began in 2008, continues to have some impact on the industries in several of the regions in which we conduct business. Reduced availability of credit has impacted our customers' ability to obtain financing. Order volumes have improved dramatically over 2009, however, we are still below 2008 levels in some of the regions where we conduct business. We are encouraged by the upward trend for global machine tool demand in 2010. Order volumes in the Asia and Other market have returned to early 2008 levels, as those economies rebound to normalized levels.
Metrics on machine tool market activity watched by our management include world machine tool consumption (domestic production plus imports, less exports) as reported annually by Gardner Publications in the Metalworking Insiders Report and metal-cutting machine orders as reported by the Association of Manufacturing Technology (AMT), the primary industry group for U.S. machine tool manufacturers. World machine tool consumption data as reported by the Metalworking Insiders Report shows an increase in machine tool consumption of 19% in 2010 versus a 33% decrease in consumption in 2009 due to the worldwide economic conditions. This report indicates that consumption in China, the world's largest market, increased 38% in 2010 after remaining relatively stable over the course of 2009 versus 2008. Consumption in Germany, the world's second largest market, decreased by 9% in 2010 versus 2009 as measured in local currencies, and decreased 41% in 2009 compared to 2008. In the United Kingdom, machine tool consumption measured in pound sterling increased by 6% in 2010 versus 2009 and decreased by 40% in 2009 versus 2008. Machine tool consumption in the U.S. decreased by 15% in 2010 versus 2009 compared to a decrease of 51% in 2009 compared to 2008. In 2010, U.S. orders for metal-cutting machine tools reported by the AMT increased 85.3% versus 2009 as a result of the economic recovery in the U.S. market. In 2009 orders declined by 60.4% versus 2008, primarily related to the sharp decline in world-wide order activity brought on by the global economic conditions. The AMT's statistics are reported on a voluntary basis from member companies. The report includes metal-cutting machines of all types and sizes, including segments in which we do not compete.
Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that might purchase our products. One such measurement is the PMI (formerly called the Purchasing Manager's 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 consumption in foreign countries is published in various trade journals.
Non-machine sales, which include collets, accessories, repair parts, and service revenue, have typically accounted for approximately 25% of overall sales and are an important part of our business, especially in the U.S. where Hardinge has an installed base of thousands of machines. Sales of these products do not vary on a year-to-year basis as significantly as capital goods, but demand does typically track the direction of the related machine metrics.
Other key performance indicators are geographic distribution of net sales and orders, gross profit as a percent of net 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. The current global recessionary 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, and our bank 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 also 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 nonperformance has been considered in the fair value measurements of our foreign currency forward exchange contracts.
We also 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 our accounts receivable collectability risks.
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 the Japanese Yen, Euro, Swiss Franc, South Korean Won, and New Taiwanese Dollar to be central to competitive pricing in all of our markets. Also, we translate the results of our Swiss, Taiwanese, Chinese, British, German, French, Dutch and Canadian subsidiaries into U.S. Dollars for consolidation and reporting purposes. Period to period changes in the exchange rate between their local currency and the U.S. Dollar may affect comparative data significantly. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.
In April 2010, the Company completed the acquisition of certain assets of Jones and Shipman Precision Limited, a UK based manufacturer of grinding and super-abrasive machines and machining systems, for £2.0 million ($3.0 million equivalent) from Precision Technologies Group Limited. In conjunction with this asset acquisition, we established Jones & Shipman Grinding Limited, a new UK based wholly owned subsidiary. See Note 16 to the Consolidated Financial Statements for further details.
In December 2010, we renewed our $10.0 million secured revolving credit facility which was due March 31, 2011. The new maturity date is March 31, 2012. There are no amounts outstanding under this credit facility as of December 31, 2010 and 2009.
In June 2010, we amended our working capital facility at our Swiss subsidiary to provide for borrowing of up to CHF 6.0 million ($6.4 million equivalent) from the original amount of up to CHF 5.0 million ($5.4 million equivalent), to be used as a limit for cash credits in the form of fixed advances in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months. The credit facility is secured by real property owned by Kellenberger. At December 31, 2010 and 2009, there were no borrowings under this working capital facility.
In August 2010, we amended one of our credit facilities at our Swiss subsidiary to increase the available credit from CHF 7.0 million ($7.5 million equivalent) to CHF 9.0 million ($9.6 million
equivalent). The credit facility now provides for the entire amount to be available for guarantees, documentary credit, and margin cover for foreign exchange trades and of which up to CHF 5.0 million ($5.4 million equivalent) of the facility can be used for working capital. The amendment terminates on September 1, 2013 and the credit agreement reverts to its original terms of CHF 7.0 million ($7.5 million equivalent) of which up to CHF 3.0 million ($3.2 million equivalent) is available for working capital needs.
In July 2010, Hardinge Machine Tools B.V., Taiwan Branch entered into a new unsecured credit facility replacing their existing $5.0 million facility. This new credit facility provides a $10.0 million facility for working capital purposes and expires on May 31, 2011.
Refer to Liquidity and Capital Resources for further details on all of the above credit facilities.
Results of Operations
2010 Compared to 2009
The following table summarizes certain financial data for year 2010 and 2009:
Reconciliation of Net (Loss) Income to EBITDA
(1)EBITDA, a non-GAAP financial measure, is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is used by management to internally measure our operating and management performance and by investors as a supplemental financial measure to evaluate the performance of our business that, when viewed with our GAAP results and the accompanying reconciliation, we believe, provides additional information that is useful to gain an understanding of the factors and trends affecting our business.
Orders. Orders for 2010 were $296.7 million, an increase of $121.7 million or 70% compared to 2009 orders of $175.0 million. Worldwide demand for machine tools improved during 2010 as reflected in the increases in orders for all of our major markets compared to 2009. Reduced orders levels and order cancellation activity in 2009 were directly related to the global economic recession and related financial crisis which affected all of the regions and product lines in which we conduct business, and was generally consistent with overall industry statistics. Asia and Other represents 47% of the Company's total orders for 2010 driven by a $35.8 million order in China from a supplier to the consumer electronics industry. Currency exchange rates had a favorable impact on new orders of approximately $2.5 million for the year 2010 compared to 2009.
The following table presents 2010 and 2009 new orders by region:
North American orders increased by $14.7 million or 28% for 2010 compared to 2009. The increase in North American orders was driven by strong machine orders which were up $9.4 million or 40% in 2010. The increase in machine orders can be attributed to the global economy rebounding from the recessionary conditions as well as a successful transition to our new U.S. distributors.
European orders increased by $40.4 million or 80% for the year 2010 compared to 2009. The acquisition of Jones & Shipman in April of 2010 was responsible for 25% of this increase. Exclusive of Jones & Shipman, the increase in orders for the year was driven by strong machine order activity in Turkey, Germany, and Russia. The impact of foreign currency translation on orders for the year ended December 31, 2010 compared to the prior year was favorable by $1.3 million.
Asia & Other orders increased by $66.6 million or 92% for the year 2010 compared to 2009. The increase was driven by $35.8 million in orders in China for the year from a supplier to the consumer electronics industry. Orders also increased during the year due to several multi-machine orders from consumer electronics and automotive companies in China. Foreign currency translation on Asian and Other orders for the year ended December 31, 2010 compared to 2009 was a favorable impact of $1.1 million.
Net Sales. Net sales for 2010 were $257.0 million, an increase of $42.9 million or 20% compared to 2009 net sales of $214.1 million. The increase in net sales for the year was mainly in Asia with $50.1 million of the increase coming from China of which $27.6 million was to a supplier to the consumer electronics industry. Foreign currency translation on net sales for the year ended December 31, 2010 compared to 2009 was a favorable impact of $3.1 million.
The following table presents 2010 and 2009 net sales by region:
The geographic mix of net sales as a percentage of total net sales is shown in the table below:
North American net sales decreased by $5.9 million or 9% for the year ended December 31, 2010 compared to 2009. The decrease was a result of the lagging effects of the global economic recession and was in all of our product lines with the exception of accessories, which experienced an increase in 2010 as overall manufacturing activity began to recover.
European net sales decreased $12.9 million or 15% for the year ended December 31, 2010 compared to 2009. The decrease in 2010 net sales was driven by activity during the first six months of 2010 compared to the first six months of 2009. The first half of 2009 benefited from sales out of machine backlog which was for orders received before the market collapse in 2008. Net sales in the last six months of 2010 were up $9.3 million or 24% compared to the last six months of 2009. This increase was due to the lingering effects of the global economic recession in 2009 combined with the impact of recovery in 2010 during this period. Currency exchange rates had a favorable impact on net sales of $1.0 million for the year ended December 31, 2010 compared to 2009.
Asia & Other net sales increased by $61.7 million or 99% for the year ended December 31, 2010 compared to 2009. This increase was primarily driven by strong sales in China which increased $50.1 million or 96% for the 2010 year compared to 2009. Sales in China to a supplier to the consumer electronics industry contributed approximately $27.6 million in sales in 2010. The impact of foreign currency translation on net sales for the year ended December 31, 2010 compared to the prior year was a favorable $2.1 million.
Under U.S. generally accepted accounting standards, results of foreign subsidiaries are translated into U.S. Dollars at the average exchange rate for the periods presented. For the year ended 2010, on average the U.S. Dollar weakened 4% against the New Taiwanese Dollar, 5% against the Swiss Franc and 9% against the Canadian Dollar, while it strengthened by 3% against the Euro and by 2% against the British Pound Sterling compared to the average rates during the same period in 2009. The U.S. Dollar remained relatively flat against the Chinese Renminbi. The net of these foreign currencies relative to the U.S. Dollar was a favorable impact on net sales of approximately $3.1 million for the year ended December 31, 2010, compared to 2009.
Machine sales represented approximately 75% of 2010 and 2009 net sales. Sales of non-machine products and services, primarily workholding, repair parts, and accessories made up the balance.
Gross Profit. Gross profit was $61.3 million or 23.8% of net sales in 2010, compared to $40.8 million, or 19.1% of net sales in 2009. The increase in gross profit is attributable to the $42.9 million increase in sales volume, as well as overall improving margins in 2010 compared to 2009. The 2009 margins were negatively impacted by heavy discounts as manufacturers and distributors cut prices to reduce inventory. This pricing pressure carried into early 2010, but was not as prevalent. 2009 gross profit was also negatively impacted by an inventory charge of $5.0 million related to the strategic decision to cease manufacturing non-critical parts and certain machine models in our Elmira, NY facility and $1.1 million of lower of cost or market write-downs taken on machines as a result of the 2009 market conditions. Excluding these 2009 non-recurring charges, gross profit for the year ended December 31, 2010 increased by $14.4 million or 31%, compared to the same periods in 2009. Excluding the above mentioned charges, gross margin percentage for the year 2010 and 2009 would have been 23.8% and 21.9%, respectively.
Selling, General, and Administrative Expense. Selling, general and administrative ("SG&A") expense for the year 2010 was $65.7 million, or 25.5% of net sales, compared to $68.0 million, or 31.8% of net sales, in 2009. SG&A for the year ended December 31, 2010 includes charges of $3.5 million for professional services costs related to the unsolicited tender offer, $0.6 million associated with the settlement of a tax audit in a foreign subsidiary, and $0.3 million related to Jones and Shipman acquisition costs. SG&A for the year ended December 31, 2009 included $4.3 million primarily related to severance costs associated with the discontinuance of manufacturing non-critical parts and certain machine models in our Elmira, NY facility as well as workforce reductions in Europe. Exclusive of these charges, SG&A for 2010 and 2009 would have been $61.3 million (23.8% of sales) and $63.7 million (29.8% of sales), respectively, a year to year decrease of $2.5 million or 4%. The $2.5 million decrease was driven by the Company's cost control efforts, offset by increased commissions and variable selling expenses on the higher sales volume, and the impact of our Jones & Shipman acquisition. Foreign currency translation had an unfavorable impact of approximately $0.8 million for the year ended December 31, 2010.
Impairment Charge. We recorded a non-cash impairment charge of $1.7 million in 2009 related to machinery and equipment. During 2009, as part of restructuring our North American manufacturing operations, we ceased manufacturing operations involved in the non-critical parts production in our Elmira, NY facility. In conjunction with this action, we identified assets with a historical cost of $37.9 million and a net book value of $1.9 million that would no longer be used in its operations, of which, assets with a historical cost of $15.0 million and a net book value of $1.1 million were determined to have no value and disposed of resulting in a $1.1 million impairment charge. We also reclassified certain property, plant and equipment with a historical cost of $22.9 million and a net book value of $0.8 million as available for sale at $0.2 million and recorded an impairment charge of $0.6 million during 2009. This charge was determined by an analysis of current book value and the related assets fair value, if any, less costs to sell.
(Loss) from Operations. Loss from operations in 2010 was ($2.7) million compared to ($29.7) million in 2009. The 2010 loss from operations included $3.5 million for professional services related to the unsolicited tender offer. Excluding these fees, we would have had income from operations of $0.8 million, a dramatic improvement over 2009 results. This 2010 income from operations of $0.8 million was driven by the second half of the year which had income from operations of $4.9 million, offset by a loss from operations of $4.1 million in the first half of the year. The loss generated during the first six months in 2010 was related to the lingering effects of the global economy, while the income during the last six months of 2010 was driven by the improving sales activity in a majority of our markets.
The 2009 loss from operations can primarily be attributed to the lower net sales due to the global economic crisis. While the Company aggressively reacted to the severe business downturn through restructuring activities in North America and Europe, the full impact of the reduction was not eliminated. As a result of the 2009 restructuring activities we recorded an inventory write-down of $5.0 million resulting from discontinued production of non-critical manufacturing parts and certain machines in our Elmira, NY facility, a severance charge of $4.3 million and $1.7 million due to impairment of machinery and equipment in the Elmira, NY facility. Additionally, during the last half of 2009, the Company, like many machine tool manufacturers, discounted the price of certain machines in order to liquidate inventory resulting in machines being sold at below costs in some cases. Also, as a result of the 2009 price discounting we recorded a lower of cost or market charge of $1.5 million for machines remaining in inventory.
(Gain) Loss on Sale of Assets. In 2010, we recorded proceeds of $1.6 million and a gain of $1.0 million from the sale of assets. The 2009 loss on sale of assets was related to asset disposals in North America and Europe as a result of the Company's restructuring activities.
Interest Expense & Interest Income. Interest expense includes interest payments under our credit facilities and amortization of deferred financing costs associated with our credit facility. Interest expense for the year 2010 was $0.4 million compared to $1.9 million for 2009. The decrease for 2010 compared to 2009 is attributed to $1.0 million of unamortized deferred financing costs related to the termination of the multi-currency credit facility which was expensed in 2009. Interest income was $0.1 million in 2010 and 2009.
Income Tax Expense. Income tax expense in 2010 was $2.2 million compared to $1.8 million for 2009. The effective tax rate was 70.7% in 2010 and 5.9% in 2009. The increase in the income tax expense is the result of an increase in unrecognized tax benefits, and a change in the mix of profits by country, including those countries where losses cannot be fully benefitted due to valuation allowances. The income tax expense fundamentally represents tax expense on profits in certain of the Company's foreign subsidiaries.
We maintain a full valuation allowance on the tax benefits of our U.S. U.K., German, and Canadian deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.
In 2010, the valuation allowance increased by $7.1 million. This was due to an increase of $6.3 million due to not recording a tax benefit on losses and other deferred tax assets in the U.S., U.K., and Germany, and an increase of $0.8 million due to the net increase in minimum pension liabilities in the U.S. and the U.K. (and other items recorded in Other Comprehensive Income).
We regularly review recent results and projected future results of operations, as well as other relevant factors, to reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.
Net (Loss). Net loss for 2010 was ($5.2) million or (2.0%) of net sales, compared to ($33.3) million net loss, or (15.6%) of net sales in 2009. Basic and diluted loss per share for 2010 were ($0.46) compared to basic and diluted loss per share of ($2.93) in 2009.
Results of Operations
2009 Compared to 2008
The following table summarizes certain financial data for year 2009 and 2008:
Orders. Orders, net of cancellations for 2009 were $175.0 million, a decrease of $166.1 million or 49% compared to 2008 orders of $341.2 million. Order cancellations for 2009 and 2008 were
$7.3 million and $8.8 million, respectively. The year over year decrease in orders, and the order cancellation activity is directly related to the global economic recession and related financial crisis which has affected all of the regions and product lines in which we conduct business, and is generally consistent with overall industry statistics.
The following table presents 2009 and 2008 new orders by region:
Currency exchange rates had an unfavorable impact on new orders of approximately $2.8 million for the year 2009 compared to 2008. Without the currency impact, new orders for the year would have decreased $163.3 million or 48% compared to 2008.
North American orders decreased $50.7 million or 49% compared to the prior year. The decline in North American orders can be attributed to the global economic recession and related financial crisis. Decreases were noted across all of our product lines.
European orders decreased by $106.1 million or 68% for the year 2009 compared to 2008. Decreases were noted across all of our product lines and all of the countries within Europe, and as with North America, were primarily the result of the global economic recession and related financial crisis. The decrease over 2008 was also driven by unfavorable foreign currency translation on European orders of approximately $3.1 million for the year.
Asia & Other order activity decreased $9.4 million or 11% compared to 2008. The decrease was noted across all of our product lines and countries, with the exception of China. Our China market experienced an increase of $5.0 million or 8.9% for the year 2009 compared to 2008. The increase in order activity in China was attributed to two large orders totaling approximately $5.6 million from the computer, communications and consumer-electronics industry. The impact of foreign currency translation on Asia and Other orders for the year ended December 31, 2009 compared to the same periods in the prior year was not material.
Net Sales. Net sales for 2009 were $214.1 million, a $130.9 million or a 38% decline compared to 2008 net sales of $345.0 million. Net sales for the year were down in all regions and countries with the exception of China, which was flat compared to 2008. On a full year basis, net sales were unfavorably impacted by approximately $5.9 million related to foreign currency translation. Without the currency impact, sales for the year would have declined $125.0 million or 36% compared to 2008. 2009 sales benefited from $96.9 million in order backlog at December 31, 2008, which was generated before the financial crisis began. The following table presents 2009 and 2008 sales by region:
The geographic mix of net sales as a percentage of total net sales is shown in the table below:
Machine sales represented approximately 74% of 2009 and 2008 net sales. Sales of non-machine products and services, primarily workholding, repair parts, and accessories made up the balance.
Gross Profit. Gross profit was $40.8 million or 19.1% of net sales in 2009, compared to $92.3 million, or 26.7% of net sales in 2008. The reduction in gross profit due to the $130.9 million reduced sales volume was $35.0 million. 2009 gross profit was also negatively impacted by approximately $11.9 million as a result of significantly reduced margins as we discounted machines to reduce inventory levels, sometimes below cost, as well as approximately $4.6 million related to lower capacity utilization in the U.S. and Taiwan. 2009 gross profit was negatively impacted by a $0.5 million year over year increase in inventory write down charges. This increase in the inventory write down charge over 2008 is primarily due to the discontinuance of production of non-critical manufacturing parts and certain machines in our Elmira, NY facility, as well as lower of cost or market write-downs on machines due to competitive pressures related to the worldwide economic crisis offset by 2008 charges related to the discontinuance of certain product lines. The decrease over 2008 was also negatively impacted by foreign currency translation of approximately $1.5 million for the year.
Selling, General, and Administrative Expense. Selling, general and administrative ("SG&A") expense for the year 2009 was $68.6 million, or 32.0% of net sales, compared to $97.8 million, or 28.3% of net sales, in 2008. 2009 SG&A expense was negatively impacted by $4.3 million related to severance expense and early retirement costs associated with the discontinuance of manufacturing non-critical parts and certain machine models in the Elmira, NY facility as well as workforce reductions in Europe. 2008 SG&A expense was negatively impacted by $2.3 million related to severance expense in the U.S. and Europe and $1.0 million related to a U.S. voluntary early retirement program. In addition to the severance, and early retirement costs, 2008 SG&A expense included approximately $1.9 million due to foreign currency transaction losses associated with our New Taiwanese Dollar-U.S. Dollar exposure. Severance expense for both 2009 and 2008 was a result of workforce reduction programs we implemented in all of our subsidiaries with the exception of China as a result of the global economic crisis. Excluding these costs, SG&A for the year ended December 31, 2009 was $64.3 million or 30.0% of sales, a decrease of $28.3 million or 30.6% compared to the same period in 2008. This decrease was driven by the impact of lower commissions and strategic actions taken by the Company to manage operating expenses as a result of the current order and sales activity levels. We had a favorable foreign currency translation impact of approximately $3.0 million for the year 2009, as compared to 2008.
Impairment Charge. We recorded non-cash impairment charges of $1.7 million in 2009 related to machinery and equipment and $24.4 million in 2008 related to goodwill and intangible assets. In December 2009, as a result of the Company's decision to outsource non-critical components, significant sections of the Elmira manufacturing operation involved in parts production were shut down. In conjunction with this shut down, we identified assets with a historical cost of $37.9 million and a net book value of $1.9 million that will no longer be used in its operations, of which assets with a historical cost of $15.0 million and a net book value of $1.1 million were determined to have no value and disposed of resulting in a $1.1 million impairment charge. We reclassified assets with a historical cost of $22.9 million and a net book value of $0.8 million as available for sale at $0.2 million and recorded an impairment charge of $0.6 million during 2009. This charge was determined by an analysis of current
book value and the related assets fair value, if any, less costs to sell. In October of 2008, based on a comprehensive market evaluation, the Company determined that its model of doing business in Canada did not provide adequate returns, which triggered a review of the goodwill. The Company recorded a non-cash charge of $2.7 million in 2008, to reflect the diminished value of goodwill of $2.1 million and $0.6 million of intangible assets associated with our Canadian operations. Our 2008 annual impairment testing for recorded goodwill and indefinite lived intangible assets determined that all of our goodwill was impaired, thus we recorded a $21.7 million impairment charge.
(Loss) from Operations. Loss from operations in 2009 was ($29.7) million compared to ($29.8) million in 2008. The 2009 loss can primarily be attributed to the $130.9 million reduction in net sales compared to 2008. These decreases were primarily the result of the global economic crisis. While the Company aggressively reacted to this severe business downturn through restructuring activities in North America and Europe, the full impact of the reduction was not eliminated during 2009. As a result of the restructuring activities we recorded an inventory write-down of $5.0 million resulting from discontinued production of non-critical manufacturing parts and certain machines in our Elmira, NY facility, a severance charge of $4.3 million and $1.7 million due to impairment of machinery and equipment in the Elmira, NY facility. Additionally, during the last half of 2009, the Company, like many machine tool manufacturers, began discounting machines in order to liquidate inventory resulting in machines being sold at below costs in some cases. Also as a result of this discounting we recorded a lower of cost or market charge of $1.5 million for machines remaining in inventory.
The 2008 loss was due to: the goodwill and intangible asset impairment charges of $24.4 million; $7.6 million in impairment charges associated with the discontinuance of certain product lines and other expected inventory usage patterns; and $3.2 million related to severance charges associated with our restructuring activities.
(Loss) Gain on Sale of Assets. The 2009 loss on sale of assets is related to asset disposals in North America and Europe as a result of the Company's restructuring activities.
Interest Expense & Interest Income. Interest expense includes interest payments under our credit facilities and amortization of deferred financing costs associated with our credit facility. Interest expense for the year 2009 was $1.9 million compared to $1.7 million for 2008. The increase is attributable to $1.0 million of unamortized deferred financing costs related to the termination of the multi-currency credit facility in 2009, offset by lower levels of borrowing in the current year. Interest income was $0.1 million in 2009 compared to $0.3 million in 2008.
Income Tax Expense. Income tax expense in 2009 was $1.8 million compared to $3.0 million for 2008. The effective tax rate was 5.9% in 2009 and 9.8% in 2008. The decrease in the effective tax rate from 2008 was due primarily to the non-recurring goodwill impairment charges, which were non-deductible, resulting in a significant negative impact of 16.0% in 2008. Other items that negatively affected the 2009 tax rate included an increase in our valuation allowance due to not recording a tax benefit on losses in the U.S., U.K., German, Canadian, and Netherlands operations, a net increase in our liability for uncertain tax benefits due to foreign tax positions and liabilities, as well as a change in the mix of profits by country. The income tax expense fundamentally represents tax expense on profits in certain of the Company's foreign subsidiaries.
We continue to maintain a full valuation allowance on the tax benefits of our U.S. 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 in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, Canadian, and Dutch deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.
In 2009, the valuation allowance increased by $8.4 million. This was due to an increase of $11.2 million due to not recording a tax benefit on losses in the U.S., U.K., Germany, Canada, and the Netherlands, a decrease of $3.3 million due to the decrease in minimum pension liabilities in the U.S. and the U.K. (recorded in Other Comprehensive Income), and an increase of $0.5 million due to derecognition of uncertain tax positions.
We regularly review recent results and projected future results of operations, as well as other relevant factors, to reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.
Net (Loss) Income. Net loss for 2009 was ($33.3) million or (15.6%) of net sales, compared to ($34.3) million net loss, or (9.9%) of net sales in 2008. Basic and diluted loss per share for 2009 were ($2.93) compared to basic and diluted loss per share of ($3.04) in 2008.
Liquidity and Capital Resources
The Company's principal capital requirements are to fund its operations, including working capital, to purchase and fund improvements to its facilities, machines and equipment, and to fund acquisitions.
At December 31, 2010, cash and cash equivalents were $30.9 million, compared to $20.4 million at December 31, 2009. The current ratio at December 31, 2010 was 2.64:1 compared to 3.89:1 at December 31, 2009.
Cash Flows from Operating Activities:
As shown in the Consolidated Statements of Cash Flows, cash provided by operating activities was $17.1 million in 2010 compared to $29.1 million in 2009. This represents a decrease in cash provided by operations of $12.0 million.
The table below shows the changes in cash flows from operating activities by component:
In 2010, $17.1 million cash was provided by operating activities. Cash was provided by accounts payable, which increased primarily due to increased production levels. Cash was also provided by accrued expenses/other liabilities, which increased primarily due to increases in customer deposits related to order activity. Cash was used by prepaids/other assets which increased due to higher levels of restricted cash, increased levels of supplier advances and VAT refunds as a result of increasing order and sales activity.
In 2009, $29.1 million cash was provided by operating activities. Cash was provided by changes in accounts receivable, inventories, and prepaid and other assets. Cash was used for accrued expenses which were primarily driven by decreases in customer deposits and accounts payable which decreased as a result of reduced purchasing activity driven by the economic downturn. The decrease in accounts receivable was due to lower sales levels during the end of 2008 and 2009. The decrease in inventory levels was due to special customer incentive programs, decreased production levels, and concentrated inventory reduction efforts.
Cash (Used In) Provided By Investing Activities:
The table below shows the changes in cash flows from investing activities by component:
Net cash used in investing activities was $7.8 million for 2010, compared to $3.2 million in 2009. Capital expenditures for 2010 and 2009 were $3.7 million and $3.2 million, respectively, and included modest investment in manufacturing equipment. During 2010, we acquired land use rights in Jiaxing, China for $2.6 million and we used $3.0 million to purchase Jones & Shipman. In 2010, we had proceeds of $1.5 million from the sale of machinery and equipment at our Elmira, NY manufacturing facility.
Cash (Used in)/ Provided by Financing Activities:
Cash (used in)/provided by financing activities for 2010 and 2009 are summarized in the table below:
Cash flow used in financing activities was $0.8 million for 2010, compared to $24.3 million in 2009. During 2009, we used $24.0 million generated from operations to repay and terminate our multi-currency debt facility. Dividend payments decreased by $0.06 million in 2010 as a result of decreasing the quarterly dividend payout to $0.005 per share in June 2009. During 2010, we paid fees of $0.1 million related to the revolving credit facility compared to $0.7 million paid for the term loan facility and the multi-currency debt facility during 2009.
During 2010 and 2009, there were no shares of stock purchased under our Stock Repurchase Program which expired February 28, 2010.
At December 31, 2010 and 2009, debt outstanding, including notes payable was $5.0 million.
Credit Facilities:
In June 2008, we entered into a five-year $100.0 million multi-currency secured credit facility ("Credit Facility"). The Credit Facility was secured by substantially all of the Company's and its domestic subsidiaries' assets, other than real estate, and a pledge of (i) 100% of the Company's investments in its domestic subsidiaries and (ii) 662/3% of the Company's investment in Hardinge Holdings GmbH, the parent corporation of our significant foreign subsidiaries. In addition, if certain conditions were met, Hardinge Holdings GmbH may have been required to pledge its investment in certain of its material foreign subsidiaries. The obligations of the Company and Hardinge Holdings GmbH were also guaranteed by all of the Company's domestic subsidiaries and, under certain conditions, by certain of the Company's material foreign subsidiaries. Interest was based on London Interbank Offered Rates plus a spread which varied depending on the Company's debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. A variable commitment fee of 0.20% to 0.375%, based on the Company's debt to EBITDA ratio, was payable on the unused portion of the Credit Facility.
In March 2009, after using cash on hand generated from operating results to reduce the outstanding obligations under our $100.0 million multi-currency secured credit facility to $8.0 million, the facility was terminated. We recorded a non-cash charge of $1.0 million in the first quarter of 2009 related to the unamortized deferred financing costs in connection with this termination.
In March 2009, we entered into an agreement with a bank for a 366 day $10.0 million term loan due on March 16, 2010. This term loan replaced the $100.0 million multi-currency secured credit facility. The term loan was secured by substantially all of the Company's U.S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 662/3% of
the Company's investment in Hardinge Holdings GmbH. Interest was based on one-month London Interbank Offered Rates ("LIBOR") plus 5.0%. The interest rate increased by 1.0% to LIBOR plus 6.0% on September 30, 2009, with a minimum interest rate of 5.5% at all times.
In December 2009, we replaced the $10.0 million term loan due March 16, 2010 with a $10.0 million revolving credit facility due March 31, 2011. This new credit facility is secured by substantially all of the Company's U. S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 65% of the Company's investment in Hardinge Holdings GmbH. The credit facility is guaranteed by Hardinge Technology Systems, Inc., a wholly-owned subsidiary of the Company and owner of the real property comprising the Company's world headquarters in Elmira, New York. The credit facility's interest is based on the one-month LIBOR with a minimum interest rate of 5.5%. The new credit facility does not include any financial covenants. Simultaneous with closing the new credit agreement, the Company used cash on hand generated from operating results to repay the $8.4 million that was outstanding under the $10.0 million term loan. In December 2010, we extended the maturity of the credit facility to March 31, 2012. All other terms of the credit facility remained the same. There are no amounts outstanding under this credit facility as of December 31, 2010 or 2009.
We have a $3.0 million unsecured short-term line of credit from a bank with interest based on the prime rate with a floor of 5.0% and a ceiling of 16.0%. There was no balance outstanding at December 31, 2010 or 2009 on this line. The agreement is negotiated annually, requires no commitment fee and is payable on demand.
At our Swiss subsidiary, Kellenberger, we have two credit agreements with one bank. The first facility provides for borrowing of up to CHF 7.5 million ($8.0 million equivalent) which can be used for guarantees, documentary credit, or margin cover for foreign exchange hedging activity conducted with the bank with maximum terms of 12 months. The interest rate is based on the prevailing money and capital market conditions and the bank's risk assessment of the borrower.
The second credit facility is a working capital facility to provide for borrowing of up to CHF 5.0 million ($5.4 million equivalent), and can be used as a limit for cash credits in the form of fixed advances in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months. The interest rate, which is currently LIBOR plus 1.20% for a 90 day borrowing, is determined by the bank based on prevailing money and capital market conditions and the bank's risk assessment of Kellenberger. The credit facility is secured by real property owned by Kellenberger. In June 2010, we amended this facility to increase our borrowing capacity to CHF 6.0 million ($6.4 million equivalent). In conjunction with this amendment, all other terms of the credit facility remained the same. At December 31, 2010 and 2009, there were no borrowings under the working capital facility.
The above two facilities are also subject to a minimum equity covenant requirement where the minimum equity for Kellenberger must be at least 35% of its balance sheet total assets. Indebtedness under both facilities is payable upon demand. At December 31, 2010 and 2009, we were in compliance with the required minimum equity ratios.
Kellenberger also had a credit agreement with another bank that provided a CHF 7.0 million ($7.5 million equivalent) facility, which provided for the entire amount to be available for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($3.2 million equivalent) of the facility could have been used for working capital. The facility was secured by the Company's real estate in Biel, Switzerland up to CHF 3.0 million ($3.2 million equivalent). In August, 2010, this credit facility was amended to increase the available credit to CHF 9.0 million ($9.6 million equivalent). It provides for the entire amount to be available for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 5.0 million ($5.4 million equivalent) of the facility can be used for working capital. The amendment terminates on September 1, 2013 and the credit agreement reverts to its original terms.
This amended facility was secured by the Company's real estate in Biel, Switzerland up to CHF 5.0 million ($5.4 million equivalent). The interest rate, which is currently LIBOR plus 4.75% for a 90 day borrowing, is determined by the bank based on current market conditions. It carries no commitment fees on unused funds. The credit facility contains a minimum equity ratio covenant. At December 31, 2010 and 2009, we were in compliance with the required minimum equity ratios and there were no borrowings under the working capital facility.
At our Taiwan subsidiary, Hardinge Taiwan Precision Machinery Limited, we have a mortgage loan with a bank secured by the real property owned by the Taiwan subsidiary which initially provided borrowings of 180.0 million New Taiwanese Dollars ("NTD") which was equivalent to approximately $5.5 million. At December 31, 2010 and 2009 borrowings under this agreement were NTD 99.0 million ($3.4 million equivalent) and NTD 117.0 million ($3.7 million equivalent). Principal on the mortgage loan is repaid quarterly in the amount of NTD 4.5 million ($0.2 million equivalent).
In October 2009, Hardinge Machine Tools B.V., Taiwan Branch entered into an unsecured credit facility with a bank. This agreement provided a working capital facility of NTD 100.0 million ($3.4 million equivalent). This credit facility charged interest at the banks current base rate of 2.5% subject to change by the bank based on market conditions. It carried no commitment fees on unused funds. At December 31, 2009 the balance outstanding under this facility was NTD 43.6 million ($1.4 million equivalent). In March 2010, this credit facility was amended to change the borrowing currency from NTD to USD as well as increase the available credit under the facility to $5.0 million.
In July 2010, the Hardinge Machine Tools B.V., Taiwan Branch credit facility was replaced with a new agreement that provides a $10.0 million multi-currency facility for working capital purposes. The credit facility charges interest at the bank's current base rate of 1.6% subject to change by the bank based on market conditions. This new credit facility matures on May 31, 2011. It carries no commitment fees on unused funds. At December 31, 2010 the balance outstanding under this facility was $1.7 million.
We maintain a standby letter of credit for potential liabilities pertaining to self-insured workers compensation exposure. The amount of the letter of credit was $1.3 million at December 31, 2010. It expires on March 15, 2011. In total, we had various outstanding letters of credit totaling $8.0 million and $7.2 million at December 31, 2010 and 2009, respectively.
Under our current credit facilities, the Company has total credit availability of up to $50.5 million at December 31, 2010 of which $34.8 million is available for working capital needs. $31.4 million was available under these facilities at December 31, 2010. Total consolidated outstanding borrowings at December 31, 2010 and 2009 were $5.0 million and $5.0 million, respectively. Interest expense in 2010, 2009, and 2008 totaled $0.4 million, $1.9 million, and $1.7 million, respectively.
We conduct some of our manufacturing, sales and service operations from leased space, with lease terms up to 10 years, and use office equipment and automobiles under lease agreements expiring at various dates. Rent expense under these leases totaled $2.1 million, $1.9 million, and $2.5 million, during the years ended December 31, 2010, 2009, and 2008, respectively.
The following table shows our future commitments in effect as of December 31, 2010 (in thousands):
We have not included the liabilities for uncertain tax positions in the above table as we cannot make a reliable estimate of the period of cash settlement. We have not included pension obligations in the above table as we cannot make a reliable estimate of the timing of employer contributions. In 2011, we anticipate making $4.3 million contributions to our domestic and foreign defined benefit pension plans and $0.5 million contributions to our domestic post-retirement plan.
We believe that the currently available funds and credit facilities, along with internally generated funds, will provide sufficient financial resources for ongoing operations throughout 2011.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Market Risk
The following information has been provided in accordance with the Securities and Exchange Commission's requirements for disclosure of exposures to market risk arising from certain market risk sensitive instruments.
Our earnings are affected by changes in short-term interest rates as a result of our floating interest rate debt. If market interest rates on debt subject to floating interest rates were to have increased by 2% over the actual rates paid in that year, interest expense would have increased by $0.1 million in 2010 and $0.3 million in 2009. These amounts are determined by considering the impact of hypothetical interest rates on the Company's borrowing cost.
Our operations include manufacturing and sales activities in foreign jurisdictions. We currently manufacture our products in Switzerland, Taiwan, the United States, China, and United Kingdom using production components purchased internationally, and we sell our products in those markets as well as other worldwide markets. Our subsidiaries in the United Kingdom, Germany, the Netherlands, Switzerland and Canada sell products in local currency to customers in those countries. These subsidiaries also transact business in currencies other than their functional currency outside of their home country. Our Taiwanese subsidiary sells products to foreign purchasers in U.S. dollars. As a result of these sales in various currencies and in various countries of the world, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we distribute our products. Our operating results are exposed to changes in exchange rates between the U.S. Dollar, Canadian Dollar, British Pound Sterling, Swiss Franc, Euro, New Taiwanese Dollar, Chinese Renminbi and Japanese Yen. As a result of having sales, purchases and certain intercompany transactions denominated in currencies other than the functional currencies of our subsidiaries, we are exposed to the effect of currency exchange rate changes on our cash flows, earnings and balance sheet. To mitigate this currency risk we enter into currency forward exchange contracts to hedge significant non-functional currency denominated transactions for periods consistent with the terms of the underlying transactions. Contracts generally have maturities that do not exceed one year.
Discussion of Critical Accounting Policies
The preparation of our financial statements requires the application of a number of accounting policies which are described in the notes to the financial statements. These policies require the use of assumptions or estimates, which, if interpreted differently under different conditions or circumstances, could result in material changes to the reported results. Following is a discussion of those accounting policies, which were reviewed with our audit committee, and which we feel are most susceptible to such interpretation.
Accounts and Notes Receivable. We assess the collectibility of our trade accounts and notes receivable using a combination of methods. We review large individual accounts for evidence of circumstances that suggest a collection problem might exist. Such situations include, but are not limited to, the customer's past history of payments, its current financial condition as evidenced by credit ratings, financial statements or other sources, and recent collection activities. On a case by case basis, we offer long-term customer financing in the form of notes receivable at some of our foreign operations. We provide a reserve for losses based on current payment trends in the economies where we hold concentrations of receivables and provide a reserve for what we believe to be the most likely risk of uncollectibility. In order to make these allowances, we rely on assumptions regarding economic conditions, equipment resale values, and the likelihood that previous performance will be indicative of future results.
Inventories. We use a number of assumptions and estimates in determining the value of our inventory. An allowance is provided for the value of inventory quantities of specific items that are deemed to be excessive based on an annual review of past usage and anticipated future usage. While we feel this is the most appropriate methodology for determining excess quantities, the possibility exists that customers will change their buying habits in the future should their own requirements change. Changes in metal-cutting technology can render certain products obsolete or reduce their market value. We continually evaluate changes in technology and adjust our products and inventory carrying values accordingly, either by write-off or by price reductions. Changes in market conditions and realizable selling prices for our machines could reduce the value of our inventory. We continually evaluate the carrying value of our machine inventory against the estimated selling price, less related costs to sell and adjust our inventory carrying values accordingly. However, the possibility exists that a future technological development, currently unanticipated, might affect the marketability of specific products produced by the company.
We include in the cost of our inventories a component to cover the estimated cost of manufacturing overhead activities associated with production of our products.
We believe that being able to offer immediate delivery on many of our products is critical to our competitive success. Likewise, we believe that maintaining an inventory of service parts, with a particular emphasis on purchased parts, is especially important to support our policy of maintaining serviceability of our products. Consequently, we maintain significant inventories of repair parts on many of our machine models, including some which are no longer in production. Our ability to accurately determine which parts are needed to maintain this serviceability is critical to our success in managing this element of our business.
Intangible Assets. We have acquired other machine tool companies or assets of companies. When doing so, we have used outside specialists to assist in determining the value of assets acquired, and have used traditional models for establishing purchase price based on EBITDA (earnings before interest, taxes, depreciation and amortization) multiples and present value of future cash flows. Consequently, the value of goodwill and other purchased intangible assets on our balance sheet have been affected by the use of numerous estimates of the value of assets purchased and of future business opportunity.
Net Deferred Tax Assets. We regularly review the recent results and projected future results of our operations, as well as other relevant factors, to reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.
Retirement Plans. We sponsor various defined benefit pension plans, defined contribution plans, and one postretirement benefit plan, all as described in Note 8 of the Consolidated Financial Statements. The calculation of our plan expenses and liabilities require the use of a number of critical accounting estimates. Changes in the assumptions can result in different plan expense and liability amounts, and actual experience can differ from the assumptions. We believe that the most critical assumptions are the discount rate and the expected rate of return on plan assets.
We annually review the discount rate to be used for retirement plan liabilities, using bond pricing models based on high grade U.S. corporate bonds constructed to match the projected liability benefit payments. We discounted our future plan liabilities for our U.S. plan using a rate of 5.93% and 6.27% at our plan measurement date of December 31, 2010 and 2009, respectively. We discounted our future plan liabilities for our foreign plans using rates appropriate for each country, which resulted in a blended rate of 3.09% and 3.84% at their measurement dates of December 31, 2010 and 2009, respectively. A change in the discount rate can have a significant effect on retirement plan obligations. For example, a decrease of one percent would increase U.S. pension obligations by approximately $12.2 million. An increase of one percent would decrease U.S. pension obligations by approximately $10.1 million. A decrease of one percent in the discount rate would increase the Kellenberger pension obligations by approximately $11.9 million. An increase of one percent would decrease the Kellenberger pension obligations by approximately $9.3 million.
A change in the discount rate can also have a significant effect on retirement plan expense. For example, a decrease of one percent would increase U.S. pension expense by approximately $0.1 million. An increase of one percent would decrease U.S. pension expense by approximately $0.05 million. A decrease of one percent would increase the Kellenberger pension expense by approximately $1.2 million. An increase of one percent would decrease the Kellenberger pension expense by approximately $1.0 million.
The expected rate of return on plan assets varies based on the investment mix of each particular plan and reflects the long-term average rate of return expected on funds invested or to be invested in each pension plan to provide for the benefits included in the pension liability. We review our expected rate of return annually based upon information available to us at that time, including the current level of expected returns on risk free investments (primarily government bonds in each market), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption. We used an expected rate of return of 8.00% and 8.00% at our measurement dates of December 31, 2010 and 2009, respectively, for our domestic plan. We used rates of return appropriate for each country for our foreign plans which resulted in a blended expected rate of return of 4.23% and 5.14% at their measurement dates of December 31, 2010 and 2009, respectively. A change in the expected return on plan assets can also have a significant effect on retirement plan expense. For example, a decrease of one percent would increase U.S. pension expense by approximately $0.8 million. Conversely, an increase of one percent would decrease U.S. pension expense by approximately $0.8 million. A decrease of one percent would increase the Kellenberger pension expense by approximately $0.7 million. Conversely, an increase of one percent would decrease the Kellenberger pension expense by approximately $0.7 million.
New Accounting Standards
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We do not expect adoption of this standard to have a material impact on our consolidated results of operations and financial condition.
In January 2010, the FASB issued an amendment to ASC Topic 820 Fair Value Measurements and Disclosures. The amendment requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We have applied the new disclosure requirements as of January 1, 2010, which is effective for fiscal years beginning after December 15, 2010. Other than requiring additional disclosures, adoption of this new guidance did not and will not have a material impact on our 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 7A.
ITEM 7A.-QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to the section entitled "Market Risk" in Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition, of this Form 10-K.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HARDINGE INC. AND SUBSIDIARIES
December 31, 2010
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
Schedule II-Valuation and Qualifying Accounts is included in Item 15(a) of this report.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Hardinge Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Hardinge Inc. and Subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hardinge Inc. and Subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hardinge Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Rochester, New York
March 14, 2011
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to the consolidated financial statements.
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to the consolidated financial statements.
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands)
See accompanying notes to the consolidated financial statements.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
1. Significant Accounting Policies
Nature of Business
Hardinge Inc. (the "Company") is a machine tool manufacturer, which designs and manufactures computer-numerically controlled cutting lathes, machining centers, grinding machines, collets, chucks, index fixtures and other industrial products. Sales are to customers in North America, Europe, and 'Asia and Other.' A substantial portion of our sales are to small and medium-sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and indirectly served by the Company include: aerospace, automotive, communications, computer, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment, and transportation.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current-year presentation.
Use of Estimates
The accompanying consolidated financial statements have been prepared in accordance with GAAP which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of purchase. The fair value of the Company's cash and cash equivalents approximates carrying amounts due to the short maturities.
Restricted Cash
Occasionally, we are required to maintain cash deposits with certain banks with respect to contractual obligations as collateral for customer deposits or foreign exchange forward contracts. As of December 31, 2010 and 2009, the amount of restricted cash was approximately $5.2 million and $4.2 million, respectively.
Accounts Receivable
We perform periodic credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Letters of credit from major banks back the majority of sales in the Asian region. Concentrations of credit risk with respect to accounts receivable are generally limited due to the large number of customers comprising our customer base. We consider
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
1. Significant Accounting Policies (Continued)
trade accounts receivable to be past due when in excess of 30 days past terms, and charge off uncollectible balances when all collection efforts have been exhausted.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts was $2.4 million and $2.7 million at December 31, 2010 and 2009, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would result in additional expense to the Company.
Notes Receivable
In the past, we provided long-term financing for the purchase of our equipment by qualified end-user customers in North America, with the Company retaining a security interest in the purchased equipment. We also have notes receivable in our Asian subsidiaries. These notes are fully guaranteed by local financial institutions and are generally for periods of less than one year. The amount of notes receivable outstanding was $1.8 million and $2.5 million at December 31, 2010, and December 31, 2009, respectively. These amounts are net of bad debt allowances of $1.6 million and $2.2 million at December 31, 2010 and 2009, respectively. In the event of a customer default and foreclosure, it is our practice to recondition and resell the equipment. It has been our experience that such equipment resales have realized most, but not all, of the remaining contract value. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments on notes.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of prepaid insurance, prepaid real estate taxes, prepaid software license agreements, prepaid income taxes and deposits on certain inventory purchases. When applicable, prepayments are expensed on a straight-line basis over the corresponding life of the underlying asset.
Inventories
Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include raw materials, purchased components, labor and overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major additions, renewals or improvements that extend the useful lives of assets are capitalized. Maintenance and repairs are expensed to operations as incurred. Depreciation expense is computed on the straight-line and accelerated methods over the assets' estimated useful lives. The depreciable lives of our fixed assets vary according to their estimated useful lives and generally are: 40 years for buildings, 12 years for machinery, and 10 years for patterns, tools, jigs, and furniture and fixtures, and 5 years for office and computer equipment. Depreciation expense was $5.7 million, $7.2 million, and $8.1 million for 2010, 2009 and 2008, respectively.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
1. Significant Accounting Policies (Continued)
Goodwill and Intangibles
Goodwill and other separately recognized intangible assets with indefinite lives are not subject to amortization, but are reviewed at least annually for impairment or are reviewed for impairment between annual tests if an event occurs or circumstances change that more likely than not would indicate the carrying amount may be impaired. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified.
Impairment of Long Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To assess whether impairment exists, we use undiscounted cash flows and measure any impairment loss using discounted cash flows. Assets to be held for sale are reported at the lower of their carrying amount or fair value less costs to sell and are no longer depreciated.
Income Taxes
We account for income taxes using the liability method where deferred tax assets and liabilities are recognized based on differences between financial reporting and tax bases of assets and liabilities. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
A valuation allowance is established when it is more likely than not that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company's current and past performance, the market conditions in which the company operates, the utilization of past tax credits, the length of carryback and carryforward periods, sales backlogs, etc. that will result in future profits. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment and were a major consideration in our decision to establish a valuation allowance.
We maintain a full valuation allowance on the tax benefits of our U.S. 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 in the U.S. is sustained. We also maintain a valuation allowance on our U.K., German, and Canadian deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.
The determination of our provision for income taxes requires significant judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed in the U.S. and the various states, as well as federal and provincial jurisdictions in Switzerland, U.K., Canada, Germany, France, the Netherlands, China and Taiwan. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. Accordingly, these substantial judgment items impacted the effective tax rate for 2010.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
1. Significant Accounting Policies (Continued)
We account for our uncertain tax positions in accordance with the provisions of ASC 740. Interest and penalties are included as a component of income tax expense.
Revenue Recognition
Revenue from product sales is generally recognized upon shipment, provided persuasive evidence of an arrangement exists, the sales price is fixed or determinable, collectibility is reasonably assured, and the title and risk of loss have passed to the customer. Sales are recorded net of discounts, customer sales incentives, and returns. Discounts and customer sales incentives are typically negotiated as part of the sales terms at the time of sale and are recorded as a reduction of revenue. The Company does not routinely permit customers to return machines. In the rare case that a machine return is permitted, a restocking fee is typically charged. Returns of spare parts and workholding products are limited to a period of 90 days subsequent to purchase, excluding special orders which are not eligible for return. An estimate of returns, which is not significant, is recorded as a reduction of revenue and is based on historical experience. Transfer of ownership and risk of loss are generally not contingent upon contractual customer acceptance. Prior to shipment, each machine is tested to ensure the machine's compliance with standard operating specifications as listed in our promotional literature. On an exception basis, where larger multiple machine installations are delivered which require run-offs and customer acceptance at their facility, revenue is recognized in the period of customer acceptance.
Revenue from extended warranties are deferred and recognized on a pro-rata basis across the term of the warranty contract.
Sales Tax/VAT
We collect and remit taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue producing transactions between the Company and its customers. These taxes may include sales, use, and value-added taxes. We report the collection of these taxes on a net basis (excluded from revenues).
Shipping and Handling Costs
Shipping and handling cost are recorded as part of cost of goods sold.
Warranties
We offer warranties for our products. The specific terms and conditions of those warranties vary depending upon the product sold and the country in which we sold the product. We generally provide a basic limited warranty for a period of one year. We estimate the costs that may be incurred under our basic limited warranty, based largely upon actual warranty repair cost history, and record a liability for such costs in the month that product revenue is recognized. The resulting accrual balance is reviewed during the year. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim.
We also sell extended warranties for some of our products. These extended warranties usually cover a 12-24 month period that begins up to 12 months after time of sale. Revenues for these extended warranties are recognized monthly as a portion of the warranty expires.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
1. Significant Accounting Policies (Continued)
These liabilities are reported in accrued expenses on our consolidated balance sheet.
A reconciliation of the changes in our product warranty accrual during the year ended December 31, 2010 and 2009 is as follows:
Research and Development Costs
The costs associated with research and development programs for new products and significant product improvements are expensed as incurred as a component of cost of goods sold. Research and development expenses totaled $9.4 million, $9.3 million, and $9.8 million, in 2010, 2009, and 2008, respectively.
Foreign Currency Translation and Re-measurement
The functional currency of our foreign subsidiaries is their local currency. Net assets are translated at month end exchange rates while income, expense, and cash flow items are translated at average exchange rates for the applicable period. Translation adjustments are recorded within Accumulated Other Comprehensive Income (loss). Gains and losses resulting from foreign currency denominated transactions are included as a component of selling, general and administrative expense in our Consolidated Statement of Operations.
Fair Value of Financial Instruments
Financial instruments consist primarily of cash and cash equivalents, accounts receivable, notes receivable, accounts payable, notes payable, long-term debt and foreign currency forwards. The carrying values for our financial instruments approximate fair value. See Note 9 for additional disclosure.
Derivative Financial Instruments
As a multinational Company, we are exposed to market risk from changes in foreign currency exchange rates that could affect our results of operations and financial condition. To manage this risk, we enter into derivative instruments namely in the form of foreign currency forwards. Our derivative instruments are held to hedge economic exposures, such as fluctuations in foreign currency exchange rates on balance sheet exposures of both trade and intercompany assets and liabilities. We hedge this exposure with contracts settling in less than a year. These derivatives do not qualify for hedge
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
1. Significant Accounting Policies (Continued)
accounting treatment. Gains or losses resulting from the changes in the fair value of these hedging contracts are recognized in earnings. We have some forward contracts to hedge vendor firm commitments. These contracts which are for less than two years have maturity dates in alignment with our contractual payment requirements. These derivatives qualify for hedge accounting treatment and are designated as cash flow hedges. Unrealized gains or losses resulting from the changes in the fair value of these hedging contracts are charged to Other Comprehensive Income (Loss). Gains or losses on any ineffective portion of the contracts will be recognized in earnings.
Stock-Based Compensation
We account for stock-based compensation based on the estimated fair value of the award as of the grant date and recognize as expense the value of the award over the required service period.
Comprehensive Income
Comprehensive income consists of net income, postretirement plan adjustments, foreign currency translation adjustments and unrealized gains or losses on hedging, net of tax, and is presented in the Consolidated Statements of Shareholders' Equity.
Earnings Per Share
Basic earnings per common share is computed by dividing net (loss) income available to common shareholders by the weighted average number of common shares outstanding for the period. Net (loss) income available to common shareholders represents net (loss) income reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive stock options.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the earnings allocation in the earnings per share calculation under the two-class method. Recipients of restricted stock are entitled to receive non-forfeitable dividends during the vesting period, therefore, meeting the definition of a participating security.
2. Net Inventories
Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and are as follows:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
2. Net Inventories (Continued)
We assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable value. We estimate the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand, and market requirements. We also review the carrying value of our inventory compared to the estimated selling price less costs to sell and adjust our inventory carrying value accordingly. Reductions to the carrying value of inventories are recorded in cost of goods sold. If future demand for our products is less favorable than our forecasts, inventories may need to be reduced, which would result in additional expense.
Reserve for Excess and Obsolete Inventory
During 2009, we recognized a non-cash charge of $8.1 million for the impairment of inventory. $5.0 million of this charge resulted from the discontinued production of non-critical manufacturing parts and certain machines in our Elmira, NY facility. $1.5 million of this charge was related to lower of cost or market write-downs on machines reflecting the current competitive market conditions and $1.6 million was related to excess and obsolescence reserve requirements.
During 2008, we conducted a comprehensive evaluation of our operations, products, and worldwide markets. As a result of this strategic review, we decided to focus on products which were in the higher end of the product spectrum. As a result of this change, we discontinued certain product lines which targeted less demanding manufacturing applications. Additionally, due to the actions taken to reposition our product mix, as well as a review of other expected inventory usage patterns, we recognized a non-cash charge as a component of cost of sales of approximately $7.6 million in 2008 for the impairment of inventory.
3. Property, Plant and Equipment
Components of property, plant and equipment at December 31 consisted of the following:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
3. Property, Plant and Equipment (Continued)
During 2009, as part of restructuring our North American manufacturing operations, we ceased manufacturing operations involved in the non-critical parts production in our Elmira, NY facility. In conjunction with this action, we identified certain property, plant and equipment with an acquisition cost of $22.9 million and net book value of $0.8 million that would no longer be utilized in our manufacturing operations and made them available for sale. These assets were recorded on the balance sheet at $0.2 million as of December 31, 2009 based on the lower of the assets' carrying value or fair value less estimated costs to sell, with a related impairment charge of $0.6 million.
In addition to the assets that were classified as available for sale, we identified certain property, plant and equipment with an acquisition cost of $15.0 million and a net book value of $1.1 million that would no longer be utilized in our manufacturing operations and disposed of them. As of December 31, 2009 we recorded an impairment charge of $1.1 million related to these assets.
During 2010, we changed our plan to sell some of these assets that had been identified in December 2009. In conjunction with this change in plan, we have reclassified these assets from "held for sale" to "held and used." The assets reclassified to "held and used" had an original acquisition cost of $4.7 million and a net book value of $0.05 million. Upon returning these assets to "held and used," we measured them at the lower of their (a) carrying amount before they were classified as "held for sale," adjusted by any depreciation expense or impairment losses that would have been recognized had the assets continuously been classified as "held for sale" or (b) fair value at the date of the subsequent decision not to sell, which resulted in a recovery of $0.03 million.
During 2010, we recognized a gain of $1.0 million on the sale of assets primarily related to the sale of the excess machinery and equipment at the Elmira, NY manufacturing facility.
4. Goodwill and Intangibles
Goodwill and other separately recognized intangible assets with indefinite lives are not amortized, but rather reviewed at least annually for impairment or reviewed for impairment between annual tests if an event occurs or circumstances change that more likely than not would indicate the carrying amount may be impaired. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment if indicators for impairment are identified.
At December 31, 2010 and 2009, we do not have any amounts recorded as goodwill on our balance sheet.
The major components of intangible assets are as follows:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
4. Goodwill and Intangibles (Continued)
Nonamortizable intangible assets include $7.5 million representing the value of the name, trademarks and copyrights associated with the former worldwide operations of Bridgeport. We use the Bridgeport brand name on all of our machining center lines; therefore, the asset has been determined to have an indefinite useful life. The $0.7 million increase in this nonamortizable intangible asset in 2010 was the impact of foreign currency exchange.
Amortizable intangible assets include $3.5 million for the Bridgeport technical information, Jones & Shipman trade name, customer lists, patents and other items. In late 2010, we acquired land use rights in China and recorded an intangible asset of $2.6 million. Amortization of these intangible assets for the years ended December 31, 2010 and 2009 was $0.8 million and $0.7 million. The estimated amortization expense on existing intangible assets for each of the next five years is approximately $0.8 million, $0.7 million, $0.7 million, $0.7 million, and $0.6 million, respectively. The estimated remaining weighted average useful life of these intangible assets is 11.7 years.
5. Financing Arrangements
Long-term debt consists of:
Maturities of long-term debt under the long-term financing agreements in place are as follows for the years ended December 31, (in thousands):
In June 2008, we entered into a five-year $100.0 million multi-currency secured credit facility ("Credit Facility"). The Credit Facility was secured by substantially all of the Company's and its domestic subsidiaries' assets, other than real estate, and a pledge of (i) 100% of the Company's investments in its domestic subsidiaries and (ii) 662/3% of the Company's investment in Hardinge Holdings GmbH, the parent corporation of our significant foreign subsidiaries. In addition, if certain conditions were met, Hardinge Holdings GmbH may have been required to pledge its investment in certain of its material foreign subsidiaries. The obligations of the Company and Hardinge Holdings GmbH were also guaranteed by all of the Company's domestic subsidiaries and, under certain conditions, by certain of the Company's material foreign subsidiaries. Interest was based on London Interbank Offered Rates ("LIBOR"') plus a spread which varied depending on the Company's debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio. A variable commitment fee of 0.20% to 0.375%, based on the Company's debt to EBITDA ratio, was payable on the unused portion of the Credit Facility.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
5. Financing Arrangements (Continued)
In March 2009, after using cash on hand generated from operating results to reduce the outstanding obligations under our $100.0 million multi-currency secured credit facility to $8.0 million, the facility was terminated. We recorded a non-cash charge of $1.0 million in 2009 related to the unamortized deferred financing costs in connection with this termination.
In March 2009, we entered into an agreement with a bank for a 366 day $10.0 million term loan due on March 16, 2010. This term loan replaced the $100.0 million multi-currency secured credit facility. The term loan was secured by substantially all of the Company's U.S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 662/3% of the Company's investment in Hardinge Holdings GmbH. Interest was based on one-month ("LIBOR") plus 5.0%. The interest rate increased by 1.0% to LIBOR plus 6.0% on September 30, 2009, with a minimum interest rate of 5.5% at all times.
In December 2009, we replaced the $10.0 million term loan due March 16, 2010 with a $10.0 million revolving credit facility due March 31, 2011. This new credit facility is secured by substantially all of the Company's U. S. assets (exclusive of real property), a negative pledge on the Company's headquarters in Elmira, NY and a pledge of 65% of the Company's investment in Hardinge Holdings GmbH. The credit facility is guaranteed by Hardinge Technology Systems, Inc., a wholly-owned subsidiary of the Company and owner of the real property comprising the Company's world headquarters in Elmira, New York. The credit facility's interest is based on the one-month LIBOR with a minimum interest rate of 5.5%. The new credit facility does not include any financial covenants. Simultaneous with closing the new credit agreement, the Company used cash on hand generated from operating results to repay the $8.4 million that was outstanding under the $10.0 million term loan. In December 2010, we extended the maturity of the credit facility to March 31, 2012. All other terms of the credit facility remained the same. There are no amounts outstanding under this credit facility as of December 31, 2010 or 2009.
We have a $3.0 million unsecured short-term line of credit from a bank with interest based on the prime rate with a floor of 5.0% and a ceiling of 16.0%. There was no balance outstanding at December 31, 2010 or 2009 on this line. The agreement is negotiated annually and requires no commitment fee and is payable on demand.
At our Swiss subsidiary, Kellenberger, we have two credit agreements with one bank. The first facility provides for borrowing of up to CHF 7.5 million ($8.0 million equivalent) which can be used for guarantees, documentary credit, or margin cover for foreign exchange hedging activity conducted with the bank with maximum terms of 12 months. The interest rate is based on the prevailing money and capital market conditions and the bank's risk assessment of the borrower.
The second credit facility is a working capital facility to provide for borrowing of up to CHF 5.0 million ($5.4 million equivalent), and can be used as a limit for cash credits in the form of fixed advances in CHF and/or in any other freely convertible foreign currencies with maximum terms of up to 36 months. The interest rate, which is currently LIBOR plus 1.20% for a 90 day borrowing, is determined by the bank based on prevailing money and capital market conditions and the bank's risk assessment of Kellenberger. The credit facility is secured by real property owned by Kellenberger. In June 2010, we amended this facility to increase our borrowing capacity to CHF 6.0 million ($6.4 million equivalent). In conjunction with this amendment, all other terms of the credit facility remained the same. At December 31, 2010 and 2009, there were no borrowings under the working capital facility.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
5. Financing Arrangements (Continued)
The above two facilities are also subject to a minimum equity covenant requirement where the minimum equity for Kellenberger must be at least 35% of its balance sheet total assets. Indebtedness under both facilities is payable upon demand. At December 31, 2010 and 2009, we were in compliance with the required minimum equity ratios.
Kellenberger also had a credit agreement with another bank that provided a CHF 7.0 million ($7.5 million equivalent) facility, which provided for the entire amount to be available for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 3.0 million ($3.2 million equivalent) of the facility could have been used for working capital. The facility was secured by the Company's real estate in Biel, Switzerland up to CHF 3.0 million ($3.2 million equivalent). In August, 2010, this credit facility was amended to increase the available credit to CHF 9.0 million ($9.6 million equivalent). It provides for the entire amount to be available for guarantees, documentary credit and margin cover for foreign exchange trades and of which up to CHF 5.0 million ($5.4 million equivalent) of the facility can be used for working capital. The amendment terminates on September 1, 2013 and the credit agreement reverts to its original terms. This amended facility is secured by the Company's real estate in Biel, Switzerland up to CHF 5.0 million ($5.4 million equivalent). The interest rate, which is currently LIBOR plus 4.75% for a 90 day borrowing, is determined by the bank based on current market conditions. It carries no commitment fees on unused funds. The credit facility contains a minimum equity ratio covenant. At December 31, 2010 and 2009, we were in compliance with the required minimum equity ratios and there were no borrowings under the working capital facility.
At our Taiwan subsidiary, Hardinge Taiwan Precision Machinery Limited, we have a mortgage loan with a bank secured by the real property owned by the Taiwan subsidiary which initially provided borrowings of NTD 180.0 million New Taiwanese Dollars ("NTD") which was equivalent to approximately $5.5 million. At December 31, 2010 and 2009, borrowings under this agreement were NTD 99.0 million ($3.4 million equivalent) and NTD 117.0 million ($3.7 million equivalent). Principal on the mortgage loan is repaid quarterly in the amount of NTD 4.5 million ($0.2 million equivalent).
In October 2009, Hardinge Machine Tools B.V., Taiwan Branch entered into an unsecured credit facility with a bank. This agreement provided a working capital facility of NTD 100.0 million ($3.4 million equivalent). This credit facility charged interest at the banks current base rate of 2.5% subject to change by the bank based on market conditions. It carried no commitment fees on unused funds. At December 31, 2009 the balance outstanding under this facility was NTD 43.6 million ($1.4 million equivalent). In March 2010, this credit facility was amended to change the borrowing currency from NTD to USD as well as increase the available credit under the facility to $5.0 million.
In July 2010, the Hardinge Machine Tools B.V., Taiwan Branch credit facility was replaced with a new agreement that provides a $10.0 million multi-currency facility for working capital purposes. The credit facility charges interest at the bank's current base rate of 1.6% subject to change by the bank based on market conditions. This new credit facility matures on May 31, 2011. It carries no commitment fees on unused funds. At December 31, 2010, the balance outstanding under this facility was $1.7 million.
We maintain a standby letter of credit for potential liabilities pertaining to self-insured workers compensation exposure. The amount of the letter of credit was $1.3 million at December 31, 2010. It expires on March 15, 2011. In total, we had various outstanding letters of credit totaling $8.0 million and $7.2 million at December 31, 2010 and 2009, respectively.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
5. Financing Arrangements (Continued)
Under our current credit facilities, the Company has total credit availability of up to $50.5 million at December 31, 2010 of which $34.8 million is available for working capital needs. $31.4 million was available under these facilities at December 31, 2010. Total consolidated outstanding borrowings at December 31, 2010 and 2009 were $5.0 million and $5.0 million, respectively. Interest expense in 2010, 2009, and 2008 totaled $0.4 million, $1.9 million, and $1.7 million, respectively.
6. Income Taxes
The Company's pre-tax income for domestic and foreign sources is as follows:
Significant components of the Company's deferred tax assets and liabilities are as follows:
We continue to maintain a full valuation allowance on the tax benefits of our U.S., U.K., German, and Canadian net deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
6. Income Taxes (Continued)
In 2010, the valuation allowance increased by $7.1 million. This was due to an increase of $6.3 million due to not recording a tax benefit on losses and other deferred tax assets in the U.S., U.K., and Germany, and an increase of $0.8 million due to the net increase in minimum pension liabilities in the U.S. and the U.K., (and other items recorded in Other Comprehensive Income (Loss)).
In 2009, the valuation allowance increased by $8.4 million. This was due to an increase of $11.2 million due to not recording a tax benefit on losses in the U.S., U.K., Germany, Canada, and the Netherlands, a decrease of $3.3 million due to the decrease in minimum pension liabilities in the U.S. and the U.K. (recorded in Other Comprehensive Income (Loss)), and an increase of $0.5 million due to a derecognition of uncertain tax positions.
At December 31, 2010 and 2009, we had state investment tax credits of $6.8 million and $6.7 million, respectively, expiring at various dates through the year 2017. In addition, we have U.S. and state net operating loss carryforwards of $61.3 million and $52.2 million, respectively, which expire from 2023 through 2029. We also have foreign net operating loss carryforwards of $34.4 million. The U.S. net operating loss includes approximately $1.5 million of the net operating loss carryforward for which a benefit will be recorded in Additional Paid in Capital when realized.
Significant components of income tax expense (benefit) attributable to continuing operations are as follows:
There were tax refunds of $0.5 million in 2010, $1.4 million in 2009, and $0 in 2008. Income tax payments primarily related to foreign locations totaled $2.1 million, $2.5 million, and $5.6 million, in 2010, 2009, and 2008, respectively.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
6. Income Taxes (Continued)
The following is a reconciliation of income tax expense computed at the United States statutory rate to amounts shown in the Consolidated Statements of Income:
At the end of 2010, the undistributed earnings of our foreign subsidiaries, which amounted to approximately $115.5 million, are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
We had been granted a tax holiday in China which expires in 2011. For 2010, our tax rate for our Chinese subsidiary was 22%, and our tax rate in China will be 24% in 2011 and 25% in 2012.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
If recognized, essentially all of the uncertain tax benefits and related interest at December 31, 2010 would be recorded as a benefit to income tax expense on the Consolidated Statement of Operations.
We record interest and penalties on tax reserves as income tax expense in the financial statements. For the year ended December 31, 2010 interest expense of $0.07 million and a penalty reduction of $0.08 million were recorded, and there was $0.5 million of accrued interest and $0.2 million of accrued penalties related to uncertain tax positions included in the liability for uncertain tax positions at December 31, 2010.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
6. Income Taxes (Continued)
For the year ended December 31, 2009 interest expense of $0.2 million and penalties of $.04 million were recorded, and there was $0.5 million of accrued interest and $0.3 million of accrued penalties related to uncertain tax positions included in the liability for uncertain tax positions at December 31, 2009.
The tax years 2007 to 2010 remain open to examination by United States taxing authorities, and for our other major jurisdictions (Switzerland, U.K., Taiwan, Germany, Canada, and China); the tax years between 2005 to 2010 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.
7. Industry Segment and Foreign Operations
We operate in one business segment-industrial machine tools.
Domestic and foreign operations consist of:
Sales attributable to European Operations and Asian Operations are based on those sales generated by subsidiaries located in Europe and Asia.
Inter-area sales are accounted for at prices comparable to normal, unaffiliated customer sales, reduced by estimated costs not incurred on these sales.
One customer in the consumer electronics business accounted for 10.7% of our net sales in 2010 and one customer in the automotive industry accounted for 6.8% of our net sales in 2009. No single customer accounted for more than 5% of consolidated sales in 2008.
Machine sales accounted for approximately 75% of 2010, 2009, and 2008 net sales. Sales of non-machine products and services, primarily workholding, repair parts, and accessories made up the balance.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
7. Industry Segment and Foreign Operations (Continued)
Revenues from external customers by country:
Total Property, Plant and Equipment by country:
8. Employee Benefits
Pension and Postretirement Plans
We provide a qualified defined benefit pension plan covering all eligible domestic employees hired before March 1, 2004. The plan based benefits upon both years of service and earnings. Our policy is to fund at least an amount necessary to satisfy the minimum funding requirements of ERISA. For our foreign plans, contributions are made on a monthly basis and are governed by their governmental regulations. Each foreign plan requires employee and employer contributions except Hardinge Taiwan, which requires only employer contributions. Effective June 15, 2009, we suspended benefit accruals under the U.S. defined benefit pension plan (which was closed to new participants in 2004). In November and September of 2010, we permanently froze the accrual of benefits under the domestic and one of our foreign defined benefit pension plans.
Domestic employees hired on or after March 1, 2004 have retirement benefits under our 401(k) defined contribution plan. After one year of service, we will contribute 4% of an employee's pay and
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
will further match 25% of the first 4% that the employee contributes. As of June 15, 2009, we suspended the 25% company match as well as the 4% company contribution to the 401(k) plan. For 2009, employees were credited with a pro-rata portion of the 4% company contribution which was paid in January 2010. We made contributions of $0.1 million and $0.2 million in 2010 and 2009, respectively. In November 2010 and effective January 1, 2011, we rescinded the suspension of company contributions to the plan. In conjunction with the permanent freeze of benefit accruals under the domestic defined benefit plan, employees that were actively participating in the domestic defined benefit plan became eligible to receive company contributions in the 401(k) defined contribution plan. Additionally, upon reaching age 50, employees who are age 40 or older as of January 1, 2011 are also provided enhanced employer contributions in the 401(k) defined contribution plan to compensate for the loss of future benefit accruals under the defined benefit plan. Employees may contribute additional funds to the plan for which there is no required company match. All employer and employee contributions are invested at the direction of the employees in a number of investment alternatives, one being Hardinge Inc. common stock.
As a result of the permanent freeze to the accrual of benefits under the domestic and one of our foreign defined benefit pension plans, we realized a net curtailment gain of $0.3 million in 2010. As a result of our 2009 restructuring activities in North America and Europe, we realized a reduction in the number of participants in our defined benefit pension and post-retirement plans. Accordingly, in 2009, we recognized settlement and curtailment losses of $0.6 million in our defined benefit pension plans and a curtailment gain of $0.6 million in our other post-retirement benefits plan.
We provide a contributory retiree health plan covering all eligible domestic employees who retired at normal retirement age prior to January 1, 1993 and all retirees who have or will retire at normal retirement age after January 1, 1993 with at least 10 years of active service. Employees who elect early retirement on or after reaching age 55 are eligible for the plan benefits if they have 15 years of active service at retirement. Benefit obligations and funding policies are at the discretion of management. We also provide a non-contributory life insurance plan to retirees who meet the same eligibility criteria as required for retiree health insurance. Because the amount of liability relative to this plan is insignificant, it is combined with the health plan for purposes of this disclosure.
In 2009 and 2008, we offered a Voluntary Early Retirement Program ("VERP") to eligible employees. Employees were eligible to participate in the VERP if the sum of their current age and length of service equaled 94 years. The VERP covers post-retirement health care costs for 60 months or until Medicare coverage begins, whichever occurs first. We have recognized $1.1 million in costs for the 2009 and 2008 VERP, of which $0.6 million and $0.8 million are included within the postretirement benefit obligation at December 31, 2010 and December 31, 2009, respectively.
Increases in the cost of the retiree health plan are paid by the participants with the exception of premium costs for eligible employees who retired under a VERP. For each VERP retiree, we pay the premium in excess of a scheduled amount until they reach Medicare eligibility or for a period not to exceed five years at which point the retiree assumes responsibility for any premium increases.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
The discount rate for determining benefit obligations in the postretirement benefits plan was 5.50% and 5.80% at December 31, 2010 and 2009, respectively. The change in the discount rate increased the accumulated postretirement benefit obligation as of December 31, 2010 by $0.1 million.
A summary of the components of net periodic pension cost and postretirement benefit costs for the consolidated Company is presented below. The pension cost includes an executive supplemental pension plan.
The net periodic benefit cost for the foreign pension plans included in the amounts above was $1.7 million, $2.8 million, and $0.3 million, for the years ended December 31, 2010, 2009, and 2008, respectively.
A summary of the changes in pension and postretirement benefits recognized in Other Comprehensive (Income) Loss is presented below.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
We expect to recognize $1.7 million of net loss, $0.3 million credit of transition asset obligation and $0.1 million of net prior service cost credit as components of net periodic pension cost in 2011 for our defined benefit pension plans. We expect to recognize $0.4 million of net prior service credit as components of net periodic postretirement benefit cost in 2011.
A summary of the Pension and Postretirement Plans' funded status and amounts recognized in our consolidated balance sheets is as follows:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
The projected benefit obligations for the foreign pension plans included in the amounts above were $92.2 million and $79.3 million at December 31, 2010 and 2009, respectively. The plan assets for the foreign pension plans included above were $84.2 million and $75.8 million at December 31, 2010 and 2009, respectively.
The accumulated benefit obligations were $185.0 million and $165.8 million at December 31, 2010 and 2009, respectively.
The following information is presented for pension plans where the projected benefit obligations exceeded the fair value of plan assets (all plans except one plan in Switzerland in 2010 and 2009):
The following information is presented for pension plans where the accumulated benefit obligations exceeded the fair value of plan assets (all plans except Taiwan and one plan in Switzerland in 2010 and all plans except Taiwan and two plans in Switzerland in 2009):
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
Actuarial assumptions used to determine pension costs and other postretirement benefit costs include:
Actuarial assumptions used to determine pension obligations and other postretirement obligations include:
For our domestic and foreign plans, discount rates used to determine the benefit obligations are based on the yields on high grade corporate bonds in each market with maturities matching the projected benefit payments. To develop the expected long-term rate of return on assets assumption, for our domestic and foreign plans, we considered the current level of expected returns on risk free investments (primarily government bonds) in each market, the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
Investment Policies and Strategies
For the domestic defined benefit plan, the plan targets an asset allocation of approximately 55% equity securities, 36% debt securities, and 9% other. For the foreign defined benefit plans, the plans target blended asset allocation of 41% equity securities, 45% debt securities, and 14% other.
Given the relatively long horizon of our aggregate obligation, our investment strategy is to improve and maintain the funded status of our domestic and foreign plans over time without exposure to excessive asset value volatility. We manage this risk primarily by maintaining actual asset allocations between equity and fixed income securities for the plans within a specified range of its target asset allocation. In addition, we ensure that diversification across various investment subcategories within each plan are also maintained within specified ranges.
Our domestic and foreign pension assets are managed by outside investment managers and held in trust by third-party custodians. The selection and oversight of these outside service providers is the responsibility of management, investment committees, plan trustees, and their advisors. The selection of specific securities is at the discretion of the investment manager and is subject to the provisions set forth by written investment management agreements and related policy guidelines and applicable governmental regulations regarding permissible investments and risk control practices.
Our funding policy is to contribute to defined benefit plans when pension laws and economics either require or encourage funding. Of our defined benefit plans, the U.S. plan covering the parent company is the largest. The contributions to the U.S. defined benefit plan for the year ended December 31, 2010 totaled $0.5 million.
Cash flows
Contributions
The expected contributions to be paid during the year ending December 31, 2011 to the domestic defined benefit plan are approximately $1.8 million. We also provide defined benefit pension plans or defined contribution retirement plans for our foreign subsidiaries. The expected contributions to be paid during the year ending December 31, 2011 to the foreign defined benefit plans are $2.3 million. For each of our foreign plans, contributions are made on a monthly basis and are determined by their governmental regulations. Also, each of the foreign plans requires employee and employer contributions, except for Taiwan, which has only employer contributions.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
8. Employee Benefits (Continued)
Foreign Operations
Hardinge also has employees in certain foreign countries that are covered by defined contribution retirement plans and other employee benefit plans. Related obligations and costs charged to operations for these are not material. The foreign entities with defined benefit plans are included in the consolidated pension plan described earlier within this Employee Benefits Note.
9. Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate fair value. We are using the following fair value hierarchy definition:
Level1- Quoted prices in active markets for identical assets and liabilities.
Level2- Observable inputs other than quoted prices in active markets for similar assets and liabilities.
Level3- Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis as of December 31, 2010:
The following table presents the fair values and classification of our financial assets and liabilities measured on a recurring basis as of December 31, 2009:
Our derivative assets and liabilities are foreign exchange derivatives that are measured at fair value using internal models based on observable market inputs such as spot and forward rates. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments to be active. As of December 31, 2010, there were no significant transfers in and out of Level 1 and Level 2.
At December 31, 2010 and 2009, the carrying value of notes receivable approximated their fair value. The fair value of our variable interest rate debt is approximately equal to its carrying value, as the underlying interest rate is variable. During 2010 and 2009, we did not have any significant non-recurring measurements of nonfinancial assets and nonfinancial liabilities other than the impairment related to machinery and equipment. See Note 3.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
9. Fair Value of Financial Instruments (Continued)
Pension Plan Assets
The following table presents the fair values and classification of our defined benefit plan assets as of December 31, 2010:
The following table presents the fair values and classification of our defined benefit plan assets as of December 31, 2009:
(1)Growth funds represent a type of fund containing a diversified portfolio of domestic and international equities with a goal of capital appreciation.
(2)Income funds represent a type of fund with an emphasis on current income as opposed to capital appreciation. Such funds may contain a variety of domestic and international government and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks.
(3)Growth and Income funds represent a type of fund containing a combination of growth and income securities.
(4)Hedge funds represent a managed portfolio of investments that use advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns. These funds are subject to quarterly redemptions and
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
9. Fair Value of Financial Instruments (Continued)
advanced notification requirements, as well as the right to delay redemption until sufficient fund liquidity exists.
The table below sets forth a summary of the changes in the fair value of the defined benefit plans level 3 assets for the year ended December 31, 2010 and 2009:
Most of our defined benefit pension plan Level 1 assets are debt and equity investments that are traded in active markets, either domestically or internationally. They are measured at fair value using closing prices from active markets. The Level 2 assets are typically investments in pooled funds, which are measured based on the value of their underlying assets that are publicly traded with observable values. The fair value of our Level 3 plan assets are measured by compiling the portfolio holdings and independently valuing the securities in those portfolios.
10. Derivative Financial Instruments
We principally use derivative financial instruments to manage foreign exchange risk related to foreign operations and foreign currency transactions. We enter into derivative financial instruments with a number of major financial institutions to minimize foreign exchange risk. These derivatives do not qualify for hedge accounting treatment. We have foreign currency exposure on receivables and payables that are denominated in a foreign currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in the statement of operations. To minimize foreign currency exposure, we have foreign currency forwards with notional amounts of approximately $22.3 million and $12.4 million at December 31, 2010 and December 31, 2009, respectively.
Generally, our foreign currency forwards are recorded in the balance sheet at fair value and resulting gains or losses are recorded in the statements of operations, generally offsetting the gains or losses from the revaluation of the foreign currency denominated assets and liabilities. At December 31, 2010, the fair value of the foreign currency forwards was a $0.3 million asset, which was included in prepaid expenses and a $0.1 million liability which was included in accrued expenses. At December 31, 2009, the fair value of the foreign currency forwards was a $0.06 million asset, which was included in prepaid expenses and a $0.03 million liability which was included in accrued expenses. The (gain) loss recognized for derivative instruments in the statement of operations for the year ended December 31, 2010 and 2009 was ($1.4) million and $0.6 million, respectively, and was included in other (income) expense.
We also enter into forward contracts to hedge vendor firm commitments. These contracts, which are for less than two years, have maturity dates in alignment with our contractual payment
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
10. Derivative Financial Instruments (Continued)
requirements. These derivatives are treated as cash flow hedges. Gains or losses resulting from the changes in the fair value of these hedging contracts are charged to Other Comprehensive (Income) Loss. Gains or losses on any ineffective portion of the contracts will be recognized in earnings. There was no impact on earnings in 2010 related to these contracts. The unrealized (gain) loss recognized for derivative instruments that qualify for hedge accounting treatment in Other Comprehensive (Income) Loss for the year ended December 31, 2010 was $0.1 million.
11. Commitments and Contingencies
The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary course of business. Management believes the outcome of these lawsuits will not have a material effect on our financial position or results of operations.
On October 28, 2008, a putative class-action lawsuit was filed in the United States District Court for the Western District of New York against the Company and certain former officers. This complaint, as amended, alleged that during the period from January 16, 2007 to February 21, 2008 the defendants made misleading statements and/or omissions relating to our business and operating results in violation of the Federal securities laws. On May 29, 2009, the Company filed a motion to dismiss the complaint. By a decision and order dated February 2, 2010, the Court dismissed the class action lawsuit. The plaintiff did not file a notice to appeal the Court's dismissal of the lawsuit and the time to appeal expired.
Our 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. Activities at properties we own or previously owned and on adjacent areas have resulted in environmental impacts.
In particular, our Elmira, New York 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, New York. 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.
A substantial portion of the Pond is located on our property. Hardinge, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation, and Toshiba America, Inc., the Potentially Responsible Parties (the PRPs") have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study ("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 U.S. Environmental Protection Agency, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
11. Commitments and Contingencies (Continued)
also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis. The cost of the RI/FS was estimated to be approximately $0.84 million. We estimate our portion of the study to be $0.12 million for which we have established a reserve of $0.13 million. As of December 31, 2010 we have incurred total expenses of $0.12 million with respect to the study and other activities relating to the Site. The remaining reserve balance at December 31, 2010 is $0.01 million.
The PRPs developed a Draft RI/FS with their consultants and, following EPA comments, submitted a Revised RI/FS on December 6, 2007. In May 2008, the EPA approved the RI/FS Work Plan. The PRPs commenced field work in the spring of 2008 and submitted a Draft Site Characterization Report to EPA in the fall. The PRPs currently are performing Risk Assessments in accordance with the Remedial Investigation portion of the RI/FS.
Until receipt of this Special Notice, Hardinge had never been named as a PRP at the Site nor had we received any requests for information from the EPA concerning the site. Environmental sampling on our 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 our operations or property have or are contributing to the contamination. Other than as described above, we have not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate. We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.
Although we believe, based upon information currently available that except as described in the preceding paragraphs we will not have material liabilities for environmental remediation, 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 Hardinge.
We lease space for some of our manufacturing, sales and service operations with lease terms up to 10 years and use certain office equipment and automobiles under lease agreements expiring at various dates. Rent expense under these leases totaled $2.1 million, $1.9 million, and $2.5 million, during the years ended December 31, 2010, 2009, and 2008, respectively.
Future minimum payments under non-cancelable operating leases are as follows for the years ending December 31 (in thousands):
The Company has entered into written employment contracts with its executive officers. The currently effective term of the employment agreements is two years and the agreements contain an automatic, successive one-year extension unless either party provides the other with 60 days prior notice of termination. In the case of a change in control, as defined in the employment contracts, the term of
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
11. Commitments and Contingencies (Continued)
each officer's employment will be automatically extended for a period of two years following the date of the change in control. These employment contracts also provide for severance payments in the event of specified termination of employment, the amount of which is increased upon certain termination events following a change in control.
During 2008 and 2009, the Company offered a Voluntary Early Retirement Program (VERP) to employees whose sum of current age and length of service equaled 94. The VERP covers post-retirement health care costs for 60 months or until Medicare coverage begins, whichever occurs first. The Company also incurred various restructuring related charges in 2009 due to workforce reductions in Europe, the closure of our Exeter England facility, and the reduction in our U.S. workforce due the strategic changes within the Elmira, NY manufacturing facility. Total severance related charges on these items in 2009 were $4.3 million. There was no additional charge in 2010. These charges were recorded in SG&A in our Statement of Operations.
12. Shareholders' Equity
Common Shares Outstanding
As of December 31, 2010, Hardinge has 20,000,000 common shares of stock authorized and 12,472,992 shares issued. On December 31, 2010, 2009 and 2008, we had 11,607,289, 11,533,752 and 11,469,164 shares of common stock outstanding, respectively.
Treasury Shares
The number of shares of common stock in treasury was as follows:
Share Repurchase Program
In 2008, the Board of Directors approved a share repurchase program for up to $10.0 million of our common stock to be purchased through February 28, 2010. The Company repurchased 45,500 shares of our common stock at an average price of $12.72 through this program during 2008.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
12. Shareholders' Equity
Share Purchase Rights Plan
In February 2010, the Company adopted a one-year Shareholders Rights Plan and declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. The Rights are designed to ensure that all stockholders of Hardinge receive fair and equal treatment in the case of a takeover bid and to enable our stockholders to realize the full long-term value of their investment. No Rights were exercised under the Shareholder Rights Plan, which expired on March 1, 2011.
13. Earnings Per Share
We calculate earnings per share using the two-class method. Basic earnings per common share is computed by dividing net (loss) income applicable to common shareholders by the weighted average number of common shares outstanding for the period. Net (loss) income applicable to common shareholders represents net (loss) income reduced by the allocation of earnings to participating securities. Losses are not allocated to participating securities. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares to assume conversion of all potentially dilutive stock options. The computation of earnings per share is as follows:
There is no dilutive effect of the restrictive stock and stock options for the year ended December 31, 2010, 2009, and 2008 since the impact would be anti-dilutive. 150,262, 54,933, and 69,167 shares would have been included in the diluted earnings per share calculations for the year ended December 31, 2010, 2009, and 2008, respectively, had the impact of including these diluted securities not been anti-dilutive. All restricted shares are subject to forfeiture and restrictions on transfer. Unconditional vesting occurs upon the completion of a specified period ranging from three to eight years from the date of grant. Stock options vest over a three year period and are exercisable over ten years.
14. Incentive Stock Plans
We have an Incentive Stock Plan which allows the Board of Directors to issue restricted stock, performance share awards, stock options, and stock appreciation rights. Under the 2002 Plan, an aggregate of 450,000 shares of common stock can be awarded.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
14. Incentive Stock Plans (Continued)
The Company recognizes share-based compensation expense in relation to restricted stock awards. A summary of the restricted stock activity under the Incentive Stock Plan is as follows:
A total of 247,840 and 184,500 restricted shares/units of common stock were outstanding under the plans at December 31, 2010 and December 31, 2009, respectively. All shares of restricted stock are subject to forfeiture and restrictions on transfer. Unconditional vesting occurs upon the completion of a specified period ranging from three to eight years from date of grant.
Deferred compensation associated with these restricted stock awards is measured by the market value of the stock on the date of grant and totaled $0.4 million, $0.2 million, and $0.7 million, related to awards in 2010, 2009, and 2008, respectively. This deferred compensation is being amortized on a straight-line basis over the specified service period, which ranges from three to eight years. The unamortized deferred compensation at December 31, 2010, 2009, and 2008 totaled $0.8 million, $1.0 million and $1.3 million, respectively, and is included in additional paid in capital as a reduction of shareholders' equity.
We use shares of stock held in treasury to fulfill restricted stock awards or shares earned from the exercise of stock options.
A summary of the stock option activity under the Incentive Stock Plans is as follows:
There were no options exercised in 2010 or 2009. During 2008, the Company received cash of $0.01 million for 1,500 options that were exercised. The aggregate intrinsic value of options exercised during the year ended December 31, 2008 was $0.01 million.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
14. Incentive Stock Plans (Continued)
The following table summarizes information about the stock options outstanding as of December 31, 2010:
The aggregate intrinsic value of exercisable options as of December 31, 2010 was $0.2 million.
15. Accumulated Other Comprehensive Income (Loss)
The components of Other Comprehensive Income (Loss), net of tax, for the year ended December 31, 2010 and 2009 are as follows:
Balances of the components of Accumulated Other Comprehensive Income (Loss), net of tax, in the Consolidated Balance Sheets are as follows:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
16. Acquisition of the Assets of Jones & Shipman
On April 7, 2010, the Company completed the acquisition of certain assets of Jones and Shipman Precision Limited, a UK based manufacturer of grinding and super-abrasive machines and machining systems, for £2.0 million ($3.0 million equivalent) from Precision Technologies Group Limited. In conjunction with this asset acquisition, we established Jones & Shipman Grinding Limited, a new UK based wholly owned subsidiary. The results of operations of this acquisition have been included in the consolidated financial statements from the date of acquisition. We expensed acquisition related costs of $0.3 million during 2010 and recorded it in selling, general and administrative expense in the Consolidated Statement of Operations. The acquisition provided Hardinge with valuable product lines, as well as the addition of the strong Jones & Shipman brand name to our grinding portfolio.
The acquisition agreement contains provisions for a contingent purchase price payment based on sales through March 31, 2014. The contingent purchase price payment is 5.42% of sales in excess of £36.4 million (approximately $54.5 million), with a maximum payment of £0.3 million (approximately $0.45 million). Based on the Company's forecasted revenue over this period, the fair value of this contingent purchase price was £0.2 (approximately $0.3 million) as of April 7, 2010 and December 31, 2010. This contingent liability is recorded on the balance sheet within accrued expenses.
The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed as of December 31, 2010:
The assets acquired and liabilities assumed are measured at fair value. Acquired inventory is valued based on one of the following methods: for acquired finished goods inventory, the value is based on the expected sales price less an allowance for direct selling costs and profits thereon; for acquired work in process the value is based on the expected sales price less an allowance for costs to complete the manufacturing process, direct selling costs and profits thereon; and for acquired raw materials, the value is based on the current market price. Acquired property, plant and equipment are valued based upon our estimate of replacement cost less an allowance for age and condition at the time of acquisition. The weighted average life of these intangible assets is 6.6 years. Other assets, accounts payable, accrued expenses and other liabilities are expected to be settled at face value; therefore face value is assumed to approximate fair value. The fair value of the net assets acquired exceeded the purchase price; accordingly, a gain of £0.4 million (approximately $0.6 million) was recorded in 2010 within other expense (income) in the Consolidated Statement of Operations.
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
17. Unsolicited Tender Offer by Industrias Romi S.A.
On March 30, 2010, Industrias Romi S.A. ("Romi"), through a wholly-owned subsidiary, commenced an unsolicited tender offer to acquire the outstanding Common Shares of Stock of Hardinge Inc. ("Hardinge" or the "Company") for $8.00 per share, subject to a number of terms and conditions contained in the tender offer documents filed by Romi with the SEC ("Romi's Offer"). On May 10, 2010, Romi increased their offer to $10.00 per share ("Romi's Amended Offer"). After multiple extensions, on July 15, 2010 Romi announced the expiration of their tender offer to acquire all of the outstanding shares of Hardinge and did not further extend the offer. No shares of Hardinge stock were purchased pursuant to the offer, and Romi indicated that all shares of Hardinge previously tendered and not withdrawn were returned.
As noted in the Company's Schedule 14D-9 filings with the SEC, our Board unanimously determined that Romi's Offer and Romi's Amended Offer were not in the best interests of the Company and the Company's shareholders and recommended that Company shareholders reject Romi's Offer and not tender their shares. The Schedule 14D-9 and the amendments thereto include a complete discussion of the reasons and other material factors contributing to the Board of Director's recommendations.
The Company recorded expense of $3.5 million in 2010 within Selling, General and Administrative expense in the Consolidated Statement of Operations related to this unsolicited tender offer.
18. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for 2010 and 2009 is as follows:
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2010
18. Quarterly Financial Information (Unaudited) (Continued)
2009 results include a non-cash impairment charge of $1.7 million associated with certain machinery and equipment formerly utilized in the manufacture of non-critical parts in our Elmira, NY facility.
We adopted the provisions of ASC 260 on January 1, 2009, which establishes that unvested share-based payment awards that contain non-forfeitable rights to dividends (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
Due to the changes in outstanding shares from quarter to quarter, the total of the four quarters may not necessarily equal the annual earnings per share for the year.
19. New Accounting Standards
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition ASC Topic 605: Multiple-Deliverable Revenue Arrangements-a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 addresses the accounting for sales arrangements that include multiple products or services by revising the criteria for when deliverables may be accounted for separately rather than as a combined unit. Specifically, this guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is necessary to separately account for each product or service. This hierarchy provides more options for establishing selling price than existing guidance. ASU 2009-13 is required to be applied prospectively to new or materially modified revenue arrangements in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We do not expect adoption of this standard to have a material impact on our consolidated results of operations and financial condition.
In January 2010, the FASB issued an amendment to ASC Topic 820 Fair Value Measurements and Disclosures. The amendment requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). We have applied the new disclosure requirements as of January 1, 2010, which is effective for fiscal years beginning after December 15, 2010. Other than requiring additional disclosures, adoption of this new guidance did not and will not have a material impact on our consolidated financial statements.
20. Subsequent Event
In February 2010, the Company adopted a one-year Shareholders Rights Plan and declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. The Rights are designed to ensure that all stockholders of Hardinge receive fair and equal treatment in the case of a takeover bid and to enable our stockholders to realize the full long-term value of their investment. No rights were exercised under the Shareholder Rights Plan, which expired on March 1, 2011.
ITEM 9.
ITEM 9.-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A.-CONTROLS AND PROCEDURES
(a)Management's Evaluation of Disclosure 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 as of December 31, 2010 of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.
Based upon this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2010.
Management's Report on Internal Control over Financial Reporting
The management of Hardinge Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, management has concluded that it maintained effective internal control over financial reporting as of December 31, 2010.
Ernst & Young LLP, an independent registered public accounting firm, has audited our consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their attestation report, included herein, on the effectiveness of our internal control over financial reporting.
Changes in Internal Control
There have been no changes in the Company's internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
/s/ RICHARD L. SIMONS
Richard L. Simons
President and Chief Executive Officer
/s/ EDWARD J. GAIO
Edward J. Gaio
Vice President and Chief Financial Officer
(b) Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
of Hardinge Inc. and Subsidiaries
We have audited Hardinge Inc. and Subsidiaries' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Hardinge Inc. and Subsidiaries' management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Hardinge Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hardinge Inc. and Subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2010 of Hardinge Inc. and Subsidiaries and our report dated March 14, 2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Rochester, New York
March 14, 2011
PART III
ITEM 10.
ITEM 10.-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this item such as: the identity of the Board of Directors and, those directors determined by the Board to be independent; the members of the Audit Committee, all of whom have been determined by the Board to be independent; the Audit Committee member determined by the Board to be the financial expert; and the Shareholders Nominating Procedures are all incorporated by reference from the Registrant's proxy statement to be filed with the Commission on or about March 30, 2011. Additional information required to be furnished by Item 401 of Regulation S-K is as follows:
CODE OF ETHICS
Our Board of Directors adopted the Code of Ethics for the Chief Executive and the Senior Financial Officers and the Code of Conduct for Directors and Executive Officers which supplement the Code of Conduct governing all employees and directors. In February 2011, our Board of Directors adopted an amended and restated version of the Code of Ethics for the Chief Executive and Senior Financial Officers. A copy of all said Codes is available on our website at www.hardinge.com. We will also provide a copy of the said Codes to shareholders upon request. We will disclose future
amendments to, or waivers from, the said Code of Ethics for the Chief Executive and Senior Financial Officers s on our website within four business days following the date of such amendment or waiver.
ITEM 11.
ITEM 11.-EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Registrant's proxy statement to be filed with the Commission on or about March 30, 2011.
ITEM 12.
ITEM 12.-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
The information required by this item is incorporated by reference from the Registrant's proxy statement to be filed with the Commission on or about March 30, 2011.
ITEM 13.
ITEM 13.-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Registrant's proxy statement to be filed with the Commission on or about March 30, 2011.
ITEM 14.
ITEM 14.-PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item is incorporated by reference from the Registrant's proxy statement to be filed with the Commission on or about March 30, 2011.
PART IV
ITEM 15.
ITEM 15.-EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
(1)
Financial Statements: The financial statements of the Registrant listed in ITEM 8. of this Report are incorporated herein by reference.
(2)
Financial Statement Schedules: The financial statement schedules of the Registrant listed in ITEM 8. of Form 10-K as filed on March 14, 2011 are incorporated herein by reference. The financial statement schedule required by Regulation S-X (17 CFR 210) is filed as part of this report:
Schedule II-Valuation and Qualifying Accounts
(3)
Exhibits: Exhibits filed as part of this Report: See (b) below.
(b)
Exhibits required by Item 601 of Regulation S-K filed as a part of this Report on Form 10-K or incorporated by reference as indicated.
*Management contract or compensatory plan or arrangement.
HARDINGE INC. AND SUBSIDIARIES
ITEM 15(a) Schedule II-Valuation and Qualifying Accounts
1.Currency translation impact on balances recorded in foreign currencies.
2.Uncollectable accounts written off, net of recoveries.
3.See Note 6 to the Financial Statements for further details.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
March 14, 2011
/s/ RICHARD L. SIMONS
Richard L. Simons
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 14, 2011
/s/ RICHARD L. SIMONS
Richard L. Simons
President and Chief Executive Officer and Director
(Principal Executive Officer)
March 14, 2011
/s/ EDWARD J. GAIO
Edward J. Gaio
Vice President and Chief Financial Officer
(Principal Financial Officer)
March 14, 2011
/s/ DOUGLAS J. MALONE
Douglas J. Malone
Corporate Controller and Chief Accounting Officer
(Principal Accounting Officer)
March 14, 2011
/s/ KYLE H. SEYMOUR
Kyle H. Seymour
Chairman of the Board of Directors
March 14, 2011
/s/ DANIEL J. BURKE
Daniel J. Burke
Director
March 14, 2011
/s/ DOUGLAS A. GREENLEE
Douglas A. Greenlee
Director
March 14, 2011
/s/ J. PHILIP HUNTER
J. Philip Hunter
Director and Secretary
March 14, 2011
/s/ JOHN J. PERROTTI
John J. Perrotti
Director
March 14, 2011
/s/ MITCHELL I. QUAIN
Mitchell I. Quain
Director