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HDNG > SEC Filings for HDNG > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for HARDINGE INC

Form 10-Q for HARDINGE INC


8-Aug-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 China, France, Germany, Switzerland, Taiwan, the United States ("U.S."), 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. We believe that the acquisition of Forkardt in May 2013 will increase non-machine sales to overall sales by 8% to 10% on a full year basis. 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.


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We monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal. Our cash and cash equivalents are diversified among counterparties to minimize exposure to any one of these entities.

We are subject to credit risks relating to the ability of counterparties of hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and 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 and six months ended June 30, 2013 as compared to their respective USD equivalents during the same periods in 2012:

       Three Months Ended        Six Months Ended
             June 30                  June 30
      increase / (decrease)    increase / (decrease)
CHF                    (0.4 )%                  (3.6 )%
CNY                     2.8 %                    5.7 %
EUR                     1.8 %                   (6.5 )%
GBP                    (2.9 )%                  (4.6 )%
TWD                    (0.9 )%                  (2.1 )%

The fluctuations of the foreign currency exchange rates during the three months ended June 30, 2013 resulted in favorable currency translation impact of approximately $0.4 million on new orders and $0.5 million on sales, as compared to the same period in 2012. The fluctuations of the foreign currency exchange rates during the six months ended June 30, 2013 resulted in favorable currency translation impact of approximately $0.4 million on new orders and $0.6 million on sales, as compared to the same period in 2012.


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Results of Operations



Summarized selected financial data for the three and six months ended June 30,
2013 and 2012:



                                 Three Months Ended                                Six Months Ended
                                      June 30,                                         June 30,
                                              $             %                                   $             %
                       2013       2012      Change        Change      2013        2012       Change         Change
                                                 (in thousands, except per share data)
Orders               $ 78,568   $ 80,342   $ (1,774 )         (2 )% $ 145,339   $ 161,704   $ (16,365 )        (10 )%
Sales                  80,814     86,320     (5,506 )         (6 )%   148,033     160,970     (12,937 )         (8 )%
Gross profit           23,351     23,972       (621 )         (3 )%    42,324      45,161      (2,837 )         (6 )%
% of sales               28.9 %     27.8 %      1.1 pts.                 28.6 %      28.1 %       0.5 pts.
Selling, general &
administrative
expenses               20,258     19,047      1,211            6 %     38,503      36,646       1,857            5 %
% of sales               25.1 %     22.1 %      3.0 pts.                 26.0 %      22.8 %       3.2 pts.
Other expense
(income)                  136         99         37           37 %        454         303         151           50 %
Income from
operations              2,926      4,838     (1,912 )        (40 )%     3,378       8,226      (4,848 )        (59 )%
% of sales                3.6 %      5.6 %     (2.0 )pts.                 2.3 %       5.1 %      (2.8 )pts.
Net income              2,265      3,640     (1,375 )        (38 )%     2,305       6,083      (3,778 )        (62 )%
% of sales                2.8 %      4.2 %     (1.4 )pts.                 1.6 %       3.8 %      (2.2 )pts.

Basic and diluted
earnings per share   $   0.19   $   0.31      (0.12 )               $    0.20   $    0.52       (0.32 )

Weighted average
shares outstanding
- basic                11,663     11,562        101                    11,662      11,543         119

Weighted average
shares outstanding
- diluted              11,754     11,600        154                    11,749      11,578         171


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Orders. The table below summarizes orders by each corresponding geographical region for the three and six months ended June 30, 2013 compared to the same periods in 2012:

                            Three Months Ended                            Six Months Ended
                                 June 30,                                     June 30,
                                          $          %                                   $          %
                   2013       2012      Change     Change      2013        2012       Change      Change
                         (in thousands)                               (in thousands)
North America    $ 24,891   $ 19,960   $  4,931        25 %  $  42,339   $  40,659   $   1,680         4 %
Europe             22,632     32,489     (9,857 )     (30 )%    45,457      62,285     (16,828 )     (27 )%
Asia               31,045     27,893      3,152        11 %     57,543      58,760      (1,217 )      (2 )%
                 $ 78,568   $ 80,342   $ (1,774 )      (2 )% $ 145,339   $ 161,704   $ (16,365 )     (10 )%

Orders during the three months ended June 30, 2013 were $78.6 million, a decrease of $1.8 million, or 2%, when compared to the same period in 2012. Orders during the six months ended June 30, 2013 were $145.3 million, a decrease of $16.4 million or 10%, when compared to the same period in 2012. The decrease in order level over the prior year periods was the result of lower demand which was attributable to the current difficult economic and financial conditions in Europe. The acquisition of Forkardt contributed $7.4 million in incremental orders during the three and six months ended June 30, 2013. Currency exchange rates fluctuations had a favorable impact of $0.4 million on new orders during the three and six months ended June 30, 2013, when compared to the same periods in 2012.

North America orders increased by $4.9 million, or 25%, and $1.7 million, or 4%, for the respective three and six months ended June 30, 2013, when compared to the same periods in 2012. The acquisition of Forkardt contributed $2.5 million in incremental orders to North America during the three and six months ended June 30, 2013. Excluding orders from Forkardt, North America orders increased by $2.4 million during the three months ended June 30, 2013, when compared to the same period in 2012, principally driven by grinding activity. Excluding orders from Forkardt, North America orders decreased by $0.8 million during the six months ended June 30, 2013, when compared to the same period in 2012. The decrease was attributable, in part, to the decline in order activity during the first quarter of 2013 from our U.S.-based distributors as they managed their existing inventory.

Europe orders decreased by $9.9 million, or 30%, and $16.8 million, or 27%, for the respective three and six months ended June 30, 2013, when compared to the same periods in 2012. The acquisition of Forkardt contributed $4.4 million in incremental orders to Europe during the three and six months ended June 30, 2013. Excluding orders from Forkardt, Europe orders decreased by $14.3 and $21.2 million, respectively, during the three and six months ended June 30, 2013, when compared to the same periods in 2012. The decrease in Europe order activity was primarily driven by decline in demand due to continued challenging economic and fiscal conditions in the region. Currency exchange rates fluctuations had an unfavorable impact of $0.1 million and $0.4 million on new orders during the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012.

Asia orders represented 40% of total orders for the three and six months ended June 30, 2013, compared to 35% and 36%, respectively of the same periods in 2012. Asia orders increased by $3.2 million, or 11%, and decreased by $1.2 million, or 2%, for the respective three and six months ended June 30, 2013, when compared to the same periods in 2012. Multiple machine orders from suppliers to the consumer electronics industry in China decreased by $2.2 million and $4.6 million, respectively, during the three and six months ended June 30, 2013, when compared to the same periods in 2012. Excluding these multiple machine orders, Asia orders increased by $5.4 million and $3.4 million during the three and six months ended June 30, 2013, when compared to the same periods in 2012. The increase in Asia orders was driven by solid order activity in China, attributable, in part, to favorable activities with our customers and the industry segments we serve. Currency exchange rates fluctuations had a favorable impact of $0.5 million and $0.8 million on new orders during the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012.


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Sales. The table below summarizes sales by each corresponding geographical region for the three and six months ended June 30, 2013 compared to the same periods in 2012:

                            Three Months Ended                            Six Months Ended
                                 June 30,                                     June 30,
                                          $          %                                   $          %
                   2013       2012      Change     Change      2013        2012       Change      Change
                         (in thousands)                               (in thousands)
North America    $ 26,116   $ 20,735   $  5,381        26 %  $  50,964   $  39,356   $  11,608        29 %
Europe             24,743     34,028     (9,285 )     (27 )%    45,739      58,685     (12,946 )     (22 )%
Asia               29,955     31,557     (1,602 )      (5 )%    51,330      62,929     (11,599 )     (18 )%
                 $ 80,814   $ 86,320   $ (5,506 )      (6 )% $ 148,033   $ 160,970   $ (12,937 )      (8 )%

Sales for the three months ended June 30, 2013 were $80.8 million, a decrease of $5.5 million, or 6%, when compared to the same period in 2012. Sales for the six months ended June 30, 2013 were $148.0 million, a decrease of $12.9 million, or 8%, when compared to the same period in 2012. We believe that the decrease in sales level over prior year periods was attributable to reduction in global economic activities which started during the second half of 2012. The acquisition of Forkardt contributed $6.5 million in incremental sales during the three and six months ended June 30, 2013. Currency exchange rates fluctuations had a favorable impact of $0.5 million and $0.6 million on sales during the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012.

North America sales increased by $5.4 million, or 26%, and $11.6 million, or 29%, for the respective three and six months ended June 30, 2013, when compared to the same periods in 2012. The acquisitions of Usach in December 2012 and Forkardt in May 2013 contributed $7.2 million and $7.5 million in incremental sales during the three and six months ended June 30, 2013, respectively. Excluding sales from Usach and Forkardt, North America sales decreased by $1.8 million during the three months ended June 30, 2013, when compared to the same period in 2012, and increased by $4.1 million during the six months ended June 30, 2013, when compared to the same period in 2012. The increase in North America sales was primarily driven by the sales of grinding products as a result of solid order backlog.

Europe sales decreased by $9.3 million, or 27%, and $12.9 million, or 22%, for the respective three and six month periods ended June 30, 2013, when compared to the same periods in 2012. The acquisition of Forkardt in 2013 contributed $3.6 million in incremental sales during the three and six months ended June 30, 2013. Excluding sales from Forkardt, Europe sales decreased by $12.9 million and $16.5 million during the three and six months ended June 30, 2013, respectively, when compared to the same periods 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. Currency exchange rates fluctuations had an unfavorable impact of $0.1 million and $0.2 million on sales during the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012.

Asia sales decreased by $1.6 million, or 5%, and $11.6 million, or 18%, for the respective three and six months ended June 30, 2013, when compared to the same periods in 2012. Multiple machine sales to suppliers to the consumer electronics industry in China decreased by $0.9 million and $3.6 million, respectively, during the three and six months ended June 30, 2013, when compared to the same periods in 2012. Excluding these multiple machine sales, Asia sales decreased by $0.7 million and $8.0 million during the three and six months ended June 30, 2013, when compared to the same periods in 2012. We believe that the decrease in Asia sales was driven by lower backlog as a result of a decelerating Chinese economy during the second half of 2012. Currency exchange rates fluctuations had a favorable impact of $0.6 million and $0.8 million on Asia sales during the three and six months ended June 30, 2013, respectively, when compared to the same periods in 2012.

Sales of machines accounted for approximately 70% and 71% of the consolidated sales for the three and six months ended June 30, 2013, respectively, compared to 79% and 77% for the same periods in 2012.


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Sales of non-machine products and services, primarily workholding, repair parts, and accessories, accounted for 30% and 29% of the consolidated sales for the three and six months ended June 30, 2013, respectively, compared to 21% and 23% for the same periods in 2012. The increase in the portion of non-machine sales over total sales during the three and six months ended June 30, 2013, when compared to the same periods in 2012, was driven by $6.5 million incremental sales as a result of the Forkardt acquisition.

Gross Profit. Gross profit for the three months ended June 30, 2013 was $23.4 million, a decrease of $0.6 million, or 2.6%, when compared to the same period in 2012. Gross profit for the six months ended June 30, 2013 was $42.3 million, a decrease of $2.8 million, or 6.3%, when compared to the six months ended June 30, 2012. The decrease in gross profit for the three and six months ended June 30, 2013 was attributable to lower sales volume as well as the negative impact of $0.8 million in inventory valuation step-up charges associated with acquisitions. Gross margin for the three and six month period ended June 30, 2013 were 28.9% and 28.6%, respectively, compared to 27.8% and 28.1% for the same periods in 2012. The increase in gross margin for the three and six months ended June 30, 2013 was primarily attributable to favorable product mix due to higher portion of non-machine sales as a result of the Forkardt acquisition, offset by the unfavorable impact of inventory valuation step-up charges of 1.0% and 0.5% for the three and six months ended June 30, 2013, respectively.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses were $20.3 million, or 25.1% of net sales for the three months ended June 30, 2013, an increase of $1.2 million or 6.4%, compared to $19.0 million, or 22.1% of net sales for the three months ended June 30, 2012. SG&A expenses were $38.5 million, or 26.0% of net sales for the six months ended June 30, 2013, an increase of $1.9 million or 5.1%, compared to $36.6 million, or 22.8% of net sales for the six months ended June 30, 2012. SG&A expenses for the three and six months ended June 30, 2013 included $1.0 million and $1.6 million, respectively, in transaction related expenses related to the acquisition of Forkardt. In addition, our acquisition of Usach and Forkardt resulted in a $2.5 million and $2.9 million incremental SG&A expense for the three and six months ended June 30, 2013, respectively.

Other Expense (Income). Other expense was $0.1 million for the three months ended June 30, 2013, which was relatively flat when compared to the same period in 2012. Other expense for the six months ended June 30, 2013 was $0.5 million, an increase of $0.2 million when compared to $0.3 million during the same period in 2012.

Income from Operations. Income from operations was $2.9 million for the three months ended June 30, 2013 compared to $4.8 million for the same period in 2012. Income from operations was $3.4 million for the six months ended June 30, 2013 compared to $8.2 million for the same period in 2012. The decrease in income from operations was driven by lower sales volume, the $0.8 million in acquisition related inventory valuation step-up charges, and the $1.6 million in transaction related expenses associated with the Forkardt acquisition.

Interest Expense, Net. Net interest expense was $0.3 million for the three months ended June 30, 2013 compared to $0.2 million for the same period in 2012. Net interest expense was $0.5 million for the six months ended June 30, 2013 compared to $0.4 million for the same period in 2012. The increase in interest expense was attributable to the additional interest on the $23.0 million term loan which the Company entered into in May 2013 to fund the acquisition of Forkardt.

Income Taxes. The provision for income taxes was $0.4 million and $0.6 million for the three and six months ended June 30, 2013, respectively, compared to $1.0 million and $1.8 million for the three and six months ended June, 30 2012, respectively. The effective tax rates were 13.8% and 20.3% for the three and six months ended June 30, 2013 compared to 20.8% and 22.7% for the three and six months ended June 30, 2012, respectively.

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


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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 six months ended June 30, 2013 of 20.3% 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 June 30, 2013 was $2.3 million, or 2.8% of net sales, compared to $3.6 million, or 4.2% of net sales, for the same period in 2012. Net income for the six months ended June 30, 2013 was $2.3 million, or 1.6% of net sales, compared to $6.1 million, or 3.8% of net sales, for the same period in 2012. The decrease in net income is attributable to lower gross profit due to the decrease in sales volume, acquisition related inventory valuation step-up charges and acquisition related expenses. Earnings per share, both basic and diluted, for the three and six months ended June 30, 2013 were $0.19 and $0.20, respectively, compared to $0.31 and $0.52, respectively, for the same periods ended June 30, 2012.

Summary of Cash Flows for the six months ended June 30, 2013 and 2012:

                                                            Six Months Ended
                                                                June 30,
                                                            2013        2012
                                                             (in thousands)
Net cash provided by operating activities                 $   2,009   $    314
Net cash used in investing activities                       (35,775 )   (5,342 )
Net cash provided by (used in) financing activities          26,218       (588 )
Effect of exchange rate changes on cash                        (591 )       29
Decrease in cash and cash equivalents                     $  (8,139 ) $ (5,587 )

Capital expenditures (included in investing activities)   $  (1,627 ) $ (5,364 )

During the six months ended June 30, 2013, we generated $2.0 million net cash from operating activities, an improvement of $1.7 million compared to $0.3 million net cash provided by operating activities during the same period in 2012. During the six months ended June 30, 2013, net cash was primarily used for vendor payments, to pay accrued expenses, including bonuses and taxes, and contributions made to our defined contribution plan. The cash outflow was offset by collections on accounts receivable, decreases in inventory levels, as well as increases in customer deposits as a result of improving order activities in North America and Asia.

During the six months ended June 30, 2012, we generated $0.3 million net cash from operating activities. Net cash was primarily provided by collections on accounts receivables. 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 $35.8 million for the six months ended June 30, 2013 compared to $5.3 million for the same period in 2012. In May of 2013, we used $34.3 million net cash to acquire Forkardt. Excluding this use of . . .

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