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HDNG > SEC Filings for HDNG > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for HARDINGE INC


10-May-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview. The following Management's Discussion and Analysis ("MD&A") contains information that the Company believes is necessary to an understanding of the Company's financial condition and associated matters, including the Company's liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements, the accompanying notes to the financial statements ("Notes") appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

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 ("U.S."), China, and the United Kingdom ("U.K.") with sales to most industrialized countries. Approximately 75% of our 2012 sales were to customers outside of North America, 80% of our 2012 products sold were manufactured outside of North America, and 69% of our employees were employed 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.

Metrics on machine tool market activity monitored by our management include world machine tool consumption (a proxy for shipments), as reported annually by Gardner Publications in the Metalworking Insiders Report and metal-cutting machine orders as reported by the Association of Manufacturing Technology, the primary industry group for U.S. machine tool manufacturers. Other closely followed U.S. market indicators are tracked to determine activity levels in U.S. manufacturing plants that are prospective customers for our products. One such measurement is the Purchasing Managers Index, as reported by the Institute for Supply Management. Another measurement is capacity utilization of U.S. manufacturing plants, as reported by the Federal Reserve Board. Similar information regarding machine tool consumption in foreign countries is published by trade associations in those countries.

Non-machine sales, which include collets, accessories, repair parts and service revenue, historically account for approximately 24% of overall sales and are an important part of our business due to an installed base of thousands of machines. In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.

Other key performance indicators are geographic distribution of net sales ("sales") and net orders ("orders"), gross profit as a percent of sales, income from operations, working capital changes, and debt level trends. In an industry where constant product technology development has led to an average model life of three to five years, effectiveness of technological innovation and development of new products are also key performance indicators.

We are exposed to financial market risk resulting from changes in interest and foreign currency rates. Global economic conditions and related disruptions within the financial markets have also increased our exposure to the possible liquidity and credit risks of our counterparties. We believe we have sufficient liquidity to fund our foreseeable business needs, including cash and cash equivalents, cash flows from operations, 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.


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We are subject to credit risks relating to the ability of counterparties of hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance have been considered in the fair value measurements of our foreign currency forward exchange contracts.

We expect that some of our customers and vendors may experience difficulty in maintaining the liquidity required to buy inventory or raw materials. We continue to monitor our customers' financial condition in order to mitigate the risk associated with our ability to collect on our accounts receivable.

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

Below is a summary of the percentage changes for the average rates of our functional currencies for the three months ended March 31, 2013 as compared to their respective USD equivalents during the same period in 2012:

       Three Months Ended
            March 31
      increase / (decrease)
CHF                    (1.1 )%
CNY                     1.4 %
EUR                     0.6 %
GBP                    (1.4 )%
TWD                     0.7 %

The impact on new orders and sales due to the fluctuations of the foreign currency exchange rates was not material during the three months ended March 31, 2013 as compared to the same period in 2012.


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Results of Operations



Summarized selected financial data for the three months ended March 31, 2013 and
2012:



                                      Three Months Ended
                                           March 31,
                                        % of                 % of         $          %
                              2013      Sales      2012      Sales     Change     Change
                                   (dollar and share data in thousands)
Orders                      $ 66,771             $ 81,362             $ (14,591 )     (18 )%
Sales                         67,219               74,650                (7,431 )     (10 )%
Gross profit                  18,973      28.2 %   21,189      28.4 %    (2,216 )     (10 )%
Selling, general and
administrative expenses       18,245      27.1 %   17,599      23.6 %       646         4 %
Other expense                    318                  204                   114        56 %
Income from operations           452       0.7 %    3,388       4.5 %    (2,936 )     (87 )%
Net income                        40       0.1 %    2,443       3.3 %    (2,403 )     (98 )%

Basic and diluted
earnings per share          $      -             $   0.21             $   (0.21 )
Weighted average shares
outstanding - basic           11,660               11,524                   136
Weighted average shares
outstanding - diluted         11,743               11,557                   186


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Orders. The table below summarizes orders by each corresponding geographical region for the three months ended March 31, 2013 compared to the same period in 2012:

                  Three Months Ended
                      March 31,
                   2013         2012     $ Change    % Change
                          (in thousands)
North America   $    17,448   $ 20,699   $  (3,251 )      (16 )%
Europe               22,824     29,796      (6,972 )      (23 )%
Asia                 26,499     30,867      (4,368 )      (14 )%
                $    66,771   $ 81,362   $ (14,591 )      (18 )%

Orders during the three months ended March 31, 2013 were $66.8 million, a decrease of $14.6 million, or 18%, when compared to the same period in 2012. The decrease in order level over the prior year period was the result of lower demand which is attributable, in part, to the current difficult economic and financial conditions across the world.

North America orders decreased by $3.3 million, or 16%, in the three months ended March 31, 2013 when compared to the same period in 2012. The decrease in North America orders resulted, in part, from the decline in order activity from our U.S.-based distributors as they managed their existing inventory.

Europe orders decreased by $7.0 million, or 23%, in the three months ended March 31, 2013 when compared to the same period in 2012. The decrease in Europe order activity was primarily due to continued challenging economic and fiscal conditions in the region. The impact of currency exchange rates on new orders during the three months ended March 31, 2013 was not material when compared to the same period in 2012.

Asia orders decreased by $4.4 million, or 14%, when compared to the same period in 2012. The decrease was driven by soft demand as a result of slower growth in the Chinese economy as compared to the same period in 2012. In addition, multiple machine orders from suppliers to the consumer electronics industry in China decreased by $2.5 million in the three months ended March 31, 2013 when compared to the same period in 2012. The impact of currency exchange rates on new orders during the three months ended March 31, 2013 was not material when compared to the same period in 2012.

Sales. The table below summarizes sales by each corresponding geographical region for the three months ended March 31, 2013 compared to the same period in 2012:

                  Three Months Ended
                      March 31,
                   2013         2012     $ Change    % Change
                          (in thousands)
North America   $    24,848   $ 18,621   $   6,227         33 %
Europe               20,996     24,657      (3,661 )      (15 )%
Asia                 21,375     31,372      (9,997 )      (32 )%
                $    67,219   $ 74,650   $  (7,431 )      (10 )%

Sales during the three months ended March 31, 2013 were $67.2 million, a decrease of $7.4 million, or 10%, when compared to the same period in 2012. The decrease in sales level over the prior year period was attributable to a reduction in global economic activity which began during the second half of 2012.

North America sales increased by $6.2 million, or 33%, in the three months ended March 31, 2013 when compared to the same period in 2012. The increase in North America sales was driven by sales of grinding products attributable to solid grinding backlog.


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Europe sales decreased by $3.7 million, or 15%, in the three months ended March 31, 2013 when compared to the same period in 2012. The decrease in Europe sales was the result of lower demand for machine tools attributable to continued economic and fiscal uncertainties in the region. The impact of currency exchange rates on sales during the three months ended March 31, 2013 was not material when compared to the same period in 2012.

Asia sales decreased by $10.0 million, or 32%, in the three months ended March 31, 2013 compared to the same period in 2012. The decrease was driven by slower growth in Chinese economy as compared to the same period in 2012. In addition, multi machine sales to suppliers to the consumer electronics industries in China decreased by $2.9 million during the three months ended March 31, 2013 as compared to the same period in 2012. The impact of currency exchange rates on sales during the three months ended March 31, 2013 was not material when compared to the same period in 2012.

Sales of machines accounted for approximately 72% of the consolidated sales for the three months ended March 31, 2013. Sales of non-machine products and services, principally consisting of workholding, repair parts, and accessories, accounted for the remaining 28% of the consolidated sales for the three months ended March 31, 2013.

Gross Profit. Gross profit for the three months ended March 31, 2013 was $19.0 million, a decrease of $2.2 million, or 10%, when compared to the same period in 2012. The decrease in gross profit was primarily attributable to lower sales volume. Gross margin for the three months ended March 31, 2013 was 28.2%, relatively flat when compared to 28.4% for the same period in 2012.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses were $18.2 million for the three months ended March 31, 2013, an increase of $0.6 million, or 4.0%, when compared to $17.6 million for the three months ended March 31, 2012. SG&A expenses for the three months ended March 31, 2013 included $0.6 million of expense related to the acquisition of Forkardt. In addition, our 2012 acquisition of Usach resulted in a $0.4 million incremental SG&A expense for the three months ended March 31, 2013.

SG&A expense as a percentage of sales was 27.1% for the three months ended March 31, 2013, an increase of 3.5 percentage points as compared to 23.6% for the same period in 2012. The increase is mainly attributable to lower sales volume along with higher SG&A expenses associated with the acquisition of Forkardt and the incremental impact of Usach acquisition.

Other Expense. Other expense was $0.3 million for the three months ended March 31, 2013 compared to $0.2 million for the same period in 2012.

Income from Operations. Income from operations was $0.5 million for the three months ended March 31, 2013 compared to $3.4 million for the same period in 2012. The decrease in income from operations is primarily attributable to lower gross profit due to lower sales volume.

Interest Expense & Interest Income. Net interest expense was $0.2 million for the three months ended March 31, 2013 compared to $0.1 million for the same period in 2012.

Income Taxes. The provision for income taxes was $0.2 million for the three months ended March 31, 2013 compared to a $0.8 million for the same period in 2012. The effective tax rate was 84.7% for the three months ended March 31, 2013 compared to 25.3% for the same period in 2012.

The difference in effective tax rates between these two periods was driven by the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded.

Each quarter, an estimate of the full year tax rate for jurisdictions not subject to a full valuation allowance is developed based upon anticipated annual results and an adjustment is made, if required, to the


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year-to-date income tax expense to reflect the full year anticipated effective tax rate.

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 against all or a portion of our deferred tax assets in Canada, U.K., Germany, Switzerland, and the Netherlands.

The effective tax rate for the three months ended March 31, 2013 of 84.7% differs from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded, and due to the rate difference between the U.S. and non-US entities.

Net Income. Net income for the three months ended March 31, 2013 was $0.04 million, or 0.1% of sales, compared to $2.4 million, or 3.3% of sales, for the same period in 2012. The decrease in net income was primarily a result of lower level of sales. Earnings per share, both basic and diluted, were $0.0 and $0.21 for the three months ended March 31, 2013 and March 31, 2012, respectively.

Summary of Cash Flows for the three months ended March 31, 2013 and March 31, 2012:

                                                            Three Months Ended
                                                                March 31,
                                                             2013         2012
                                                              (in thousands)
Net cash used in operating activities                     $    (6,691 ) $ (3,507 )
Net cash used in investing activities                            (782 )   (2,113 )
Net cash provided by financing activities                         412      5,630
Effect of exchange rate changes on cash                          (387 )      460
Increase (decrease) in cash and cash equivalent           $    (7,448 ) $    470

Capital expenditures (included in investing activities)   $      (851 ) $ (2,113 )

During the three months ended March 31, 2013, we used $6.7 million net cash in operating activities. Cash was primarily used for vendor payments, to pay accrued expenses, including bonuses and taxes, and contributions made to our defined contribution plan. Cash was also used to fund inventory purchases and other prepaid assets.

During the three months ended March 31, 2012, we used $3.5 million net cash in operating activities. Cash inflow was primarily provided by collections on accounts receivables and higher customer deposits. The cash inflow was offset by cash used in inventory purchases to support production, vendor payments, and contributions to the pension plans.

Net cash used in investing activities was $0.8 million for the three months ended March 31, 2013 compared to $2.1 million for the same period in 2012. The decrease was primarily due to lower capital expenditures as we have recently completed our facility expansion projects in China and Switzerland.

Cash flow provided by financing activities was $0.4 million for the three months ended March 31, 2013 compared to $5.6 million for the same period in 2012. The decrease was primarily due to lower borrowings under our existing credit facilities driven by decreased working capital and capital expenditure needs.


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Liquidity and Capital Resources

Our liquidity requirements primarily include funding for operations, including working capital requirements, and funding for capital investments and acquisitions. We expect to meet these requirements in the long term through cash provided by operating activities and availability under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and change in working capital needs. In the first quarter of 2013, cash flows from financing activities and available cash were sufficient to fund our investment activities, primarily capital expenditures for property, plant and equipment and other productive assets. We had additional credit and borrowing capacity of $52.2 million at March 31, 2013, and $54.3 million at December 31, 2012, available under various credit facilities maintained by the Company and certain Company subsidiaries.

We assess on an ongoing basis our portfolio of operations, as well as our financial and capital structures, to ensure we have sufficient capital and liquidity to meet our strategic objectives. As part of this process, from time to time we evaluate and pursue acquisition opportunities that we believe will enhance our strategic position.

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.


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PART I.

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