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HDNG > SEC Filings for HDNG > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for HARDINGE INC

Form 10-Q for HARDINGE INC


8-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview. The following Management's Discussion and Analysis ("MD&A") contains information that the Company believes is necessary to attain an understanding of the Company's financial condition and associated matters, including the Company's liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements, the accompanying notes to the financial statements ("Notes") appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2013.

We supply high precision computer controlled metalcutting turning machines, grinding machines, vertical machining centers, and repair parts related to those machines. The Company also engineers and supplies high precision, standard and specialty workholding devices, and other machine tool accessories. We believe our products are known for accuracy, reliability, durability and value. We are geographically diversified with manufacturing facilities in China, France, Germany, Switzerland, Taiwan, the United States ("U.S."), and the United Kingdom ("U.K."), with sales to most industrialized countries. Approximately 67% of our 2013 sales were to customers outside of North America, 68% of our 2013 products sold were manufactured outside of North America, and 66% of our employees were employed outside of North America.

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

Non-machine sales, which include collets, chucks, accessories, repair parts and service revenue, accounted for approximately 38% of overall sales in the first quarter of 2014 and are an important part of our business due to an installed base of thousands of machines, and the growing needs demanded by specialty workholding applications. In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.

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

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

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

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

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

Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan, which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are the British Pound Sterling ("GBP"), Chinese Renminbi ("CNY"), Euro ("EUR"), New Taiwanese Dollar ("TWD"), and Swiss Franc ("CHF"). Under U.S. generally accepted


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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.

The fluctuations of the foreign currency exchange rates during the three months ended March 31, 2014 resulted in favorable currency translation impact of approximately $0.7 million on sales as compared to the same period in 2013.


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Results of Operations



Summarized selected financial data for the three months ended March 31, 2014 and
2013:



                                        Three Months Ended March 31,
                                     2014                         2013
                            Amount (in                   Amount (in                 $ Change (in       %
                            thousands)    % of Sales     thousands)    % of Sales    thousands)     Change
Sales                      $     70,850                 $     67,219                $       3,631         5 %
Gross profit                     19,220         27.1 %        18,973         28.2 %           247         1 %
Selling, general and
administrative expenses          19,120         27.0 %        18,245         27.1 %           875         5 %
Other expense, net                  391                          276                          115        42 %
(Loss) income from
operations                         (291 )       (0.4 )%          452          0.7 %          (743 )    (164 )%
Interest expense, net               223                          190                           33        17 %
(Loss) income from
continuing operations
before income taxes                (514 )                        262                         (776 )    (296 )%
Income taxes                        157                          222                          (65 )     (29 )%
Net (loss) income from
continuing operations              (671 )       (0.9 )%           40          0.1 %          (711 )      NM
Gain from disposal of
discontinued operations,
net of tax                          218                            -                          218        NM
Net (loss) income          $       (453 )       (0.6 )% $         40          0.1 % $        (493 )      NM


NM - Not Meaningful



Sales.  The table below summarizes sales by each corresponding geographical
region for the three months ended March 31, 2014 compared to the same period in
2013:



                           For the Three Months
                             Ended March 31,
                            2014          2013      $ Change    % Change
                                    (in thousands)
Sales to customers in:
North America            $    23,203    $  24,848   $  (1,645 )       (7 )%
Europe                        25,305       20,996       4,309         21 %
Asia                          22,342       21,375         967          5 %
Total                    $    70,850    $  67,219   $   3,631          5 %

Sales were $70.9 million and $67.2 million, respectively, during the three months ended March 31, 2014 and 2013. When compared to the same period in 2013, sales increased by $3.6 million, or 5%. The acquisition of Forkardt contributed $8.9 million in incremental sales during the three months ended March 31, 2014. Currency exchange rates fluctuations had a favorable impact of approximately $0.7 million during the three months ended March 31, 2014, when compared to the same period in 2013. Excluding sales from Forkardt, and the impact of currency exchange rate fluctuations, sales decreased by $6.0 million during the three months ended March 31, 2014, which was primarily the result of lower machine sales in North America.

North America sales were $23.2 million and $24.8 million, respectively, during the three months ended March 31, 2014 and 2013. North America sales decreased by $1.6 million, or 7% when compared to the same period in 2013. The acquisition of Forkardt contributed $4.2 million in incremental sales during the three months ended March 31, 2014. Excluding sales from Forkardt, North America sales decreased by $5.8 million during the three months ended March 31, 2014. This was primarily correlated with the aforementioned lower machine sales during the period.

Europe sales were $25.3 million and $21.0 million, respectively, during the three months ended March 31, 2014 and 2013. Europe sales increased by $4.3 million, or 21% when compared to the same period in 2013. The acquisition of Forkardt contributed $4.4 million in incremental sales during the three months ended March 31, 2014. Currency exchange rate fluctuations had a favorable impact of approximately $0.8 million on sales during the three months ended March 31, 2014, when compared to the same period in 2013. Excluding sales from Forkardt and the impact of currency exchange rate fluctuations, Europe sales were lower by $0.9 million for the three months ended March 31, 2014 as compared to the prior year comparable period.

Asia sales were $22.3 million and $21.4 million, respectively, during the three months ended March 31, 2014 and 2013. Asia sales increased by $1.0 million, or 5%, for the three months ended March 31, 2014, when compared to the same period in 2013. The acquisition of Forkardt contributed $0.4 million in incremental sales during the three months ended March 31, 2014.


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Currency exchange rates fluctuations did not have a significant impact when compared to the same period in 2013. Excluding sales from Forkardt, Asia sales increased by $0.6 million during the three months ended March 31, 2014 as compared to the prior year period. Although machine tool industry data from Asia has been weak, Hardinge has been able to maintain sales volume levels in the customer segments that it serves.

Sales of machines accounted for approximately 62% of the consolidated sales for the three months ended March 31, 2014, compared to 72% for the same period in 2013. Sales of non-machine products and services, primarily chucks, accessories, repair parts, and service revenue, accounted for 38% of the consolidated sales for the three months ended March 31, 2014, compared to 28% for the same period in 2013. The increase in the portion of non-machine sales over total sales during the three months ended March 31, 2014 when compared to the same period in 2013 was driven by sales activity from the Forkardt business.

Gross Profit. Gross profit was $19.2 million, or 27.1% of sales for the three months ended March 31, 2014, compared to $19.0 million, or 28.2% of sales for the same period in 2013. The decrease in gross margin was mainly attributable to lower production levels in the Company's grinding facilities, which resulted in lower factory absorption.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses were $19.1 million, or 27.0% of net sales for the three months ended March 31, 2014, an increase of $0.9 million or 4.8%, compared to $18.2 million, or 27.1% of net sales for the three months ended March 31, 2013. SG&A expenses for the three months ended March 31, 2014 included $2.0 million of incremental SG&A expense from our Forkardt acquisition, and $0.4 million due to unfavorable changes in currency exchange rates. Excluding the impact of the Forkardt acquisition and foreign currency impact, SG&A decreased by $1.5 million compared to the same period in 2013, primarily as a result of headcount reductions.

(Loss) Income from Operations. As a result of the foregoing, loss from operations was $0.3 million for the three months ended March 31, 2014 compared to income from operations of $0.5 million for the same period in 2013.

Income Taxes. The provision for income taxes was $0.2 million for both the three months ended March 31, 2014 and 2013, respectively. The effective tax rates were (52.8)% and 84.7% for the three months ended March 31, 2014 and 2013, which differ from the U.S. statutory rate primarily due to the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded.

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.

We continue to maintain a valuation allowance on all or a portion of the tax benefits of our U.S., Canada, U.K., Germany, and the Netherlands net deferred tax assets and we expect to continue to record a full valuation allowance on future tax benefits until an appropriate level of profitability in the U.S. is sustained.

Net (Loss) Income. As a result of the foregoing, net loss for the three months ended March 31, 2014 was $0.5 million, or 0.6% of net sales, compared to net income of $0.0 million, or 0.1% of net sales, for the same period in 2013. Basic
(loss) earnings per share for the three months ended March 31, 2014 and 2013 were $(0.04) and $0.00, respectively. Diluted (loss) earnings per share for the three months ended March 31, 2014 and 2013 were $(0.04) and $0.00, respectively.


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Business Segment Information - Comparison of the three months ended March 31, 2014 and 2013

In 2013, the Company changed its reportable business segment from one reportable segment to two reportable segments, Metalcutting Machine Solutions ("MMS") and Aftermarket Tooling and Accessories ("ATA"). The Company has recast its disclosures for all periods presented to conform to this segment presentation.

Metalcutting Machine Solutions Segment



                          Three Months Ended
                              March 31,
                           2014         2013     $ Change    % Change
                                  (in thousands)
Sales                   $    54,189   $ 60,072   $  (5,883 )      (10 )%
Segment (loss) income          (977 )      863      (1,840 )     (213 )%

MMS sales declined by $5.9 million, or 10% in the three months ended 2014 when compared with the same period in 2013. The primary driver was lower levels of machine order backlog entering into 2014, driven by softer demand for machine tool consumption in North America.

Segment loss in 2014 was $1.0 million, or $1.8 million below 2013 performance. The primary factor in reduced profitability was lower machine sales, which resulted in under absorption of factory costs due to lower utilization of our factories.

Aftermarket Tooling and Accessories Segment (ATA)



                   Three Months Ended
                       March 31,
                    2014         2013      $ Change    % Change
                           (in thousands)
Sales            $    16,733    $ 7,321   $    9,412        129 %
Segment income         1,808      1,117          691         62 %

ATA sales were $16.7 million, an increase of $9.4 million when compared to 2013. Virtually all of the additional sales were generated from the newly acquired Forkardt business in May of 2013.

Segment income in 2014 was $1.8 million, a 62% increase over prior year. The additional income was driven by the Forkardt sales volume, and offset in part by unfavorable product mix and productivity investments in the U.S., which resulted in lower profitability.


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Segment Summary For the Three Months Ended March 31, 2014



                                                                 Inter-Segment
                                      MMS            ATA         Eliminations         Total
                                                         (in thousands)
Sales                             $    54,189    $    16,733    $           (72 )  $    70,850
Segment (loss) income                    (977 )        1,808                               831
Unallocated corporate expense                                                           (1,122 )
Interest expense, net                                                                     (223 )
Loss from continuing
operations, before income
taxes                                                                              $      (514 )

Segment Summary For the Three Months Ended March 31, 2013



                                                                 Inter-Segment
                                      MMS            ATA         Eliminations         Total
                                                         (in thousands)
Sales                             $    60,072    $     7,321    $          (174 )  $    67,219
Segment income                            863          1,117                             1,980
Unallocated corporate expense                                                           (1,024 )
Interest expense, net                                                                     (190 )
Other expense, net                                                                        (504 )
Income from continuing
operations, before income
taxes                                                                              $       262

Summary of Cash Flows for the three months ended March 31, 2014 and 2013:

During the three months ended March 31, 2014, we utilized $1.0 million net cash from operating activities. The net cash used was driven by a decrease in accrued expenses, primarily as a result of payment of the annual bonus as well as the payment of the annual Company contribution to the 401(k) Plan, a decrease in customer deposits due to timing of shipments and new orders received, a decrease in accounts payable due to timing of purchases and payment activity, and an increase in other assets mainly as a result of the timing of prepayments made to vendors. The cash outflow was partially offset by a decrease in customer receivables due to the timing of sales and collection activity, depreciation and amortization for the period, and a decrease in inventories based on production and sales activities.

During the three months ended March 31, 2013, we used $6.7 million net cash in operating activities. The net cash used was driven by a decrease in accrued expenses, primarily as a result of payment of the annual bonus as well as the payment of the annual Company contribution to the 401(k) Plan, a decrease in accounts payable due to timing of purchases and payment activity, and an increase in other assets mainly as a result of the timing of prepayments made to vendors. The cash outflow was offset in part an increase in customer deposits due to the timing of order and shipping activity, a decrease in customer receivables due to the timing of sales and collection activity, and depreciation and amortization for the period.

Net cash used in investing activities was $0.3 million for the three months ended March 31, 2014 and $0.8 million for the same period in 2013. The primary use of cash was for capital expenditures in each respective period, made during the ordinary course of business.

Net cash flow used by financing activities was $0.8 million for the three months ended March 31, 2014 versus $0.4 million net cash provided by financing activities for the same period in 2013. Cash used by financing activities for the three months ended March 31, 2014 was primarily driven by $5.8 million of payments on long-term debt due to the mandatory principal payments in connection with the at-the-market stock offering program, pay down of debt as a result of the sale of the Forkardt Switzerland operations, combined with normal scheduled payment activity, offset in part by $5.2 million of proceeds from sale of common stock in connection with the at-the-market stock offering sales agreement entered into on August 9, 2013. During the three months ended March 31, 2013, the cash provided by financing activities was driven by $1.8 million net proceeds from notes payable to bank, partially offset by $1.1 million of payments on long-term debt.


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Liquidity and Capital Resources

We maintain financing arrangements with several financial institutions. These financing arrangements are in the form of long term loans, credit facilities, and lines of credit. The credit facilities allow us to borrow up to $77.7 million at March 31, 2014 and $76.6 million at December 31, 2013, of which $58.7 million and $58.0 million, respectively, can be borrowed for working capital needs. As of March 31, 2014 and December 31, 2013, $71.9 million and $70.0 million was available for borrowing under these arrangements, of which $57.7 million and $56.8 million, respectively, was available for working capital needs. Total consolidated borrowings outstanding were $20.9 million and $26.6 million at March 31, 2014 and December 31, 2013, respectively.

Our financing arrangements contain certain debt covenant requirements, including financial covenants, representations, affirmative and negative covenants, prepayment provisions and events of default. As of March 31, 2014, we were in compliance with all of our debt covenants.

Our liquidity requirements primarily include funding for operations, including working capital requirements, and funding for capital investments and acquisitions. We expect to meet these requirements in the long term through cash provided by operating activities and availability under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and change in working capital needs. During the three months ended March 31, 2014, cash flows from operating activities and available cash were sufficient to fund our normal investment activities, primarily capital expenditures for property, plant and equipment and other productive assets.

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

On August 9, 2013, the Company entered into a sales agreement with an independent sales agent, under which we may sell shares of our common stock with an aggregate price of up to $25.0 million in sales deemed to be "at-the-market" offerings as defined in Rule 415 under the Securities Act of 1933, as amended. As of May 2, 2014 we have sold 1,014,252 shares of our common stock for an aggregated net proceeds of $14.6 million.

On one of our term loans, we are required to make mandatory principal payments equal to 25% of the net proceeds from the sale of our common stock. As a result of sales of the Company's common stock subsequent to March 31, 2014, we are required to make additional principal payments of $0.8 million associated with net proceeds from the sale of common stock.

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 . . .

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