HARDINGE INC - FORM 10-Q - May 8, 2015

Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - HARDINGE INCFinancial_Report.xls
EX-3.1 - EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION - HARDINGE INCexhibit31restatedcertifica.htm
EX-32 - EXHIBIT 32 CERTIFICATION - HARDINGE INChdng-3312015x10qxex32.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION - HARDINGE INChdng-3312015x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION - HARDINGE INChdng-3312015x10qxex311.htm
EX-3.2 - EXHIBIT 3.2 AMENDMENT TO CERTIFICATE OF INCORPORATION - HARDINGE INCexhibit32amendmenttocertif.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                  to                 
 
Commission File Number: 000-15760
 
Hardinge Inc.
(Exact name of registrant as specified in its charter) 
New York
 
16-0470200
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Hardinge Drive
Elmira, NY
 
14902
(Address of principal executive offices)
 
(Zip Code)
 
(607) 734-2281
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                      ýYes  oNo
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                      ýYes  oNo
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o  (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     oYes  ýNo
 
As of May 1, 2015 there were 12,847,716 shares of Common Stock of the registrant outstanding.
 




HARDINGE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 
 
 
 
 
 


2

PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.

HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
18,300

 
$
16,293

Restricted cash
3,019

 
3,151

Accounts receivable, net
55,600

 
62,877

Inventories, net
116,281

 
111,821

Other current assets
13,818

 
10,545

Total current assets
207,018

 
204,687

 
 
 
 
Property, plant and equipment, net
65,375

 
65,874

Goodwill
6,718

 
6,698

Other intangible assets, net
29,870

 
30,217

Other non-current assets
4,119

 
3,844

Total non-current assets
106,082

 
106,633

Total assets
$
313,100

 
$
311,320

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Notes payable to bank
$
124

 
$
—

Accounts payable
27,128

 
25,592

Accrued expenses
22,810

 
25,071

Customer deposits
16,077

 
12,736

Accrued income taxes
1,682

 
646

Deferred income taxes
2,326

 
2,332

Current portion of long-term debt
4,247

 
3,972

Total current liabilities
74,394

 
70,349

 
 
 
 
Long-term debt
10,740

 
12,253

Pension and postretirement liabilities
52,558

 
53,119

Deferred income taxes
2,467

 
2,516

Other liabilities
3,548

 
3,487

Total non-current liabilities
69,313

 
71,375

Commitments and contingencies (see Note 10)


 


Common stock ($0.01 par value, 20,000,000 authorized; 12,847,716 issued and
outstanding as of March 31, 2015, and 12,825,468 issued and 12,821,768
outstanding as of December 31, 2014)
128

 
128

Additional paid-in capital
120,900

 
120,538

Retained earnings
86,112

 
87,777

Treasury shares (at cost, none as of March 31, 2015, and 3,700 as of
December 31, 2014)
—

 
(46
)
Accumulated other comprehensive loss
(37,747
)
 
(38,801
)
Total shareholders’ equity
169,393

 
169,596

Total liabilities and shareholders’ equity
$
313,100

 
$
311,320

 
See accompanying notes to the unaudited consolidated financial statements.


3

HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(Unaudited)
Sales
$
69,128

 
$
70,850

Cost of sales
50,880

 
51,630

Gross profit
18,248

 
19,220

 
 
 
 
Selling, general and administrative expenses
19,600

 
19,120

Other expense, net
65

 
391

Loss from operations
(1,417
)
 
(291
)
 
 
 
 
Interest expense
157

 
243

Interest income
(17
)
 
(20
)
Loss from continuing operations before income taxes
(1,557
)
 
(514
)
Income taxes
(149
)
 
157

Net loss from continuing operations
(1,408
)
 
(671
)
 
 
 
 
Gain from disposal of discontinued operation, net of tax
—

 
218

 
 
 
 
Net loss
$
(1,408
)
 
$
(453
)
 
 
 
 
Per share data:
 

 
 

 
 
 
 
Basic loss per share:
 

 
 

Continuing operations
$
(0.11
)
 
$
(0.05
)
Discontinued operations
—

 
0.01

Basic loss per share
$
(0.11
)
 
$
(0.04
)
 
 
 
 
Diluted loss per share:
 

 
 

Continuing operations
$
(0.11
)
 
$
(0.05
)
Discontinued operations
—

 
0.01

Diluted loss per share
$
(0.11
)
 
$
(0.04
)
 
 
 
 
Cash dividends declared per share:
$
0.02

 
$
0.02

 
See accompanying notes to the unaudited consolidated financial statements.


4

HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
 
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(Unaudited)
Net loss
$
(1,408
)
 
$
(453
)
Other comprehensive income (loss):
 

 
 

Foreign currency translation adjustments
1,332

 
(859
)
Retirement plans related adjustments
511

 
118

Unrealized gain (loss) on cash flow hedges
375

 
(297
)
Other comprehensive income (loss) before tax
2,218

 
(1,038
)
Income tax expense (benefit)
1,164

 
(193
)
Other comprehensive income (loss), net of tax
1,054

 
(845
)
Total comprehensive loss
$
(354
)
 
$
(1,298
)
 
See accompanying notes to the unaudited consolidated financial statements.


5

HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
(Unaudited)
Operating activities
 

 
 

Net loss
$
(1,408
)
 
$
(453
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
2,338

 
2,531

Debt issuance costs amortization
10

 
14

Deferred income taxes
(64
)
 
205

Loss (gain) on sale of assets
8

 
(42
)
Gain on sale of business
—

 
(218
)
Unrealized foreign currency transaction loss (gain)
1,309

 
(325
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
6,640

 
5,468

Inventories
(4,821
)
 
1,705

Other assets
(2,605
)
 
(1,389
)
Accounts payable
2,083

 
(1,540
)
Customer deposits
3,378

 
(1,683
)
Accrued expenses
(3,021
)
 
(5,453
)
Accrued pension and postretirement liabilities
(34
)
 
(22
)
Net cash provided by (used in) operating activities
3,813

 
(1,202
)
 
 
 
 
Investing activities
 

 
 

Capital expenditures
(699
)
 
(325
)
Proceeds from sales of assets
—

 
48

Net cash used in investing activities
(699
)
 
(277
)
 
 
 
 
Financing activities
 

 
 

Proceeds from short-term notes payable to bank
10,212

 
4,455

Repayments of short-term notes payable to bank
(10,088
)
 
(4,455
)
Repayments of long-term debt
(1,458
)
 
(5,792
)
Dividends paid
(255
)
 
(249
)
Net proceeds from sales of common stock
—

 
5,202

Net cash used in financing activities
(1,589
)
 
(839
)
 
 
 
 
Effect of exchange rate changes on cash
482

 
94

Net increase (decrease) in cash
2,007

 
(2,224
)
 
 
 
 
Cash and cash equivalents at beginning of period
16,293

 
34,722

 
 
 
 
Cash and cash equivalents at end of period
$
18,300

 
$
32,498


See accompanying notes to the unaudited consolidated financial statements.

6

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015


NOTE 1.  BASIS OF PRESENTATION
 
In these notes, the terms “Hardinge,” or “the Company,” mean Hardinge Inc. and its predecessors together with its subsidiaries.
 
The Company operates through two reportable segments, Metalcutting Machine Solutions (“MMS”) and Aftermarket Tooling and Accessories (“ATA”). The MMS segment includes high precision computer controlled metalcutting turning machines, vertical machining centers, horizontal machining centers, grinding machines, and repair parts related to those machines. The ATA segment includes products, primarily collets and chucks that are purchased by manufacturers throughout the lives of their Hardinge or other branded machines.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from these estimates. All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods have been presented and recorded. Due to differing business conditions and some seasonality, operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2015.

In the first quarter of 2015, the Company recorded an out of period adjustment to correct finished goods inventory in the amount of $0.7 million that is related to periods beginning in 2013. This adjustment, which was in the Aftermarket Tooling and Accessories Segment, was to correct for costs that were not properly released from inventory as the product was sold. The Company assessed the impact of this adjustment and concluded that it is not material to previously reported financial statements. The Company also determined that the adjustment is not expected to be material to the full year in 2015, but was material to the first quarter. 
 
Certain amounts in the 2014 consolidated financial statements have been reclassified to conform to the current presentation.

NOTE 2.  ACQUISITION
 
Acquisition of Voumard

On September 22, 2014, Hardinge Inc., along with its indirect wholly-owned subsidiaries Hardinge GmbH and L. Kellenberger & Co., AG acquired certain assets and assumed certain liabilities associated with a product line of grinding machine systems and applications marketed and sold under the Voumard brand from Peter Wolters GmbH. The purchase price was EUR 1.7 million (approximately $2.2 million), before taking into account customary purchase price adjustments. The acquisition of Voumard expands the Company's product offerings to include internal diameter ("ID") cylindrical grinding solutions, which are a complement to the existing grinding product lines offered by the Company. The acquisition was funded with cash and has been included in the MMS business segment. Voumard is a global leader in the ID grinding market with an installed base of over 9,000 machine solutions serving more than 2,500 customers around the world. The results of operations of Voumard have been included in the consolidated financial statements from the date of acquisition.


7

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

In accordance with the acquisition method of accounting, the acquired net assets were recorded at preliminary fair value at the date of acquisition. The identifiable intangible assets acquired, which primarily consists of drawings of $0.1 million, were valued using a cost approach. At March 31, 2015 the purchase price allocation is preliminary pending the finalization of the fair values of the net assets acquired due to the timing of the acquisition. These values will be finalized no later than one year from the date of the transaction. The preliminary fair values of the acquired assets and liabilities exceeded the purchase price of Voumard, resulting in a gain on the purchase of $0.5 million.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the Voumard acquisition at the date of acquisition (in thousands):

 
September 22, 2014
Assets Acquired
 
Inventories
$
2,984

Property, plant and equipment
259

Drawings, customer lists, and other intangible assets
131

Total assets acquired
3,374

Liabilities Assumed
 
Warranties
600

Deferred tax liability
162

Net assets acquired
2,612

Total purchase price
2,150

Bargain purchase gain
$
(462
)

Supplemental Pro Forma Information
 
The following table illustrates the unaudited pro forma effect on the Company’s consolidated operating results for the three months ended March 31, 2015 and 2014, as if the Voumard acquisition had occurred on January 1, 2013 (in thousands, except per share data):
 
Three Months Ended 
 March 31,
 
2015
 
2014
Sales
$
69,128

 
$
72,699

Net loss from continuing operations(1)
(1,408
)
 
(5,987
)
Diluted loss per share from continuing operations
$
(0.11
)
 
$
(0.48
)
____________________
(1) 
The pro forma results above include abbreviated financial results for Voumard, consisting of revenues and direct expenses for that product line. During the three months ended March 31, 2014, the Voumard business incurred $4.7 million in restructuring charges, which included inventory write-offs, headcount reductions and other related costs. These amounts are included in the pro forma information presented above.
 
The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations would have been had the acquisition been completed on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.
 

8

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 3.  FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
 
Level 1 — Quoted prices in active markets for identical assets and liabilities.
 
Level 2 — Observable inputs other than quoted prices in active markets for similar assets and liabilities.
 
Level 3 — Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require.

The following table presents the carrying amount, fair values, and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis (in thousands):
 
March 31, 2015
 
December 31, 2014
 
Level of Fair Value Hierarchy
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
18,300

 
$
18,300

 
$
16,293

 
$
16,293

 
Level 1
Restricted cash
3,019

 
3,019

 
3,151

 
3,151

 
Level 1
Foreign currency forward contracts
747

 
747

 
307

 
307

 
Level 2
Liabilities:
 
 
 
 
 
 
 
 
 
Notes payable to bank
124

 
124

 
—

 
—

 
Level 2
Variable interest rate debt
14,987

 
14,987

 
16,225

 
16,225

 
Level 2
Foreign currency forward contracts
448

 
448

 
629

 
629

 
Level 2
 
The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates. Based on the Company’s continued ability to enter into forward contracts, the markets for the fair value instruments are considered to be active. As of March 31, 2015 and December 31, 2014, there were no significant transfers in and/or out of Level 1 and Level 2.
 
NOTE 4.  INVENTORIES
 
Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of the cost include materials, labor and overhead.
 
Net inventories consist of the following (in thousands):
 
March 31,
2015
 
December 31,
2014
Raw materials and purchased components
$
36,277

 
$
36,717

Work-in-process
32,040

 
28,504

Finished products
47,964

 
46,600

Inventories, net
$
116,281

 
$
111,821



9

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 5.  DERIVATIVE FINANCIAL INSTRUMENTS
 
Foreign currency forward contracts are utilized to mitigate the impact of currency fluctuations on assets and liabilities denominated in foreign currencies as well as on forecasted transactions denominated in foreign currencies. These contracts are considered derivative instruments and are recognized as either assets or liabilities and measured at fair value. For contracts that are designated and qualify as cash flow hedges, the gain or loss on the contracts is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into the “Sales” or “Cost of sales” line item on the Consolidated Statements of Operations when the underlying hedged transaction affects earnings, or “Other expense, net” when the hedging relationship is deemed to be no longer effective. As of March 31, 2015 and December 31, 2014, the notional amounts of the derivative financial instruments designated to qualify for cash flow hedges were $29.2 million and $24.8 million, respectively. The Company expects that approximately $0.1 million of income, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months. 

As of March 31, 2015 and December 31, 2014, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $36.6 million and $38.3 million, respectively. For the three months ended March 31, 2015 and 2014, gains of $1.4 million and losses of $0.8 million, respectively, were recorded related to this type of derivative financial instrument. For contracts that are not designated as hedges, the gain or loss on the contract is recognized in current earnings in the “Other expense, net” line item on the Consolidated Statements of Operations.
 
The following table presents the fair value on the Consolidated Balance Sheets of the foreign currency forward contracts (in thousands):
 
March 31,
2015
 
December 31,
2014
Foreign currency forwards designated as hedges:
 

 
 

Other current assets
$
321

 
$
237

Accrued expenses
(162
)
 
(385
)
Foreign currency forwards not designated as hedges:
 

 
 

Other current assets
426

 
70

Accrued expenses
(286
)
 
(244
)
Foreign currency forwards, net
$
299

 
$
(322
)
 
NOTE 6.  PROPERTY, PLANT AND EQUIPMENT
 
Property, plant and equipment consists of the following (in thousands): 
 
March 31,
2015
 
December 31,
2014
Land, buildings and improvements
$
84,139

 
$
83,119

Machinery, equipment and fixtures
77,675

 
78,003

Office furniture, equipment and vehicles
22,164

 
22,265

Construction in progress
459

 
399

 
184,437

 
183,786

Accumulated depreciation
(119,062
)
 
(117,912
)
Property, plant and equipment, net
$
65,375

 
$
65,874



10

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 7.  GOODWILL AND INTANGIBLE ASSETS
 
Detail and activity of goodwill by segment is presented below (in thousands):
 
MMS
 
ATA
 
Total
Goodwill
$
32,434

 
$
6,698

 
$
39,132

Accumulated impairment losses
(32,434
)
 
—

 
(32,434
)
Balance at December 31, 2014
—

 
6,698

 
6,698

 
 
 
 
 
 
Currency translation adjustments
—

 
20

 
20

 
—

 
20

 
20

 
 
 
 
 
 
Goodwill
32,434

 
6,718

 
39,152

Accumulated impairment losses
(32,434
)
 
—

 
(32,434
)
Balance at March 31, 2015
$
—

 
$
6,718

 
$
6,718

The major components of intangible assets other than goodwill are as follows (in thousands):
 
March 31,
2015
 
December 31,
2014
Gross amortizable intangible assets:
 

 
 

Technical know-how
$
13,000

 
$
12,984

Customer lists
9,050

 
9,047

Land rights
2,797

 
2,796

Patents, trade names, drawings, and other
4,337

 
4,345

Total gross amortizable intangible assets
29,184

 
29,172

 
 
 
 
Accumulated amortization:
 

 
 

Technical know-how
(6,016
)
 
(5,730
)
Customer lists
(983
)
 
(871
)
Land rights
(242
)
 
(228
)
Patents, trade names, drawings, and other
(3,264
)
 
(3,227
)
Total accumulated amortization
(10,505
)
 
(10,056
)
Amortizable intangible assets, net
18,679

 
19,116

 
 
 
 
Indefinite lived intangible assets:
 

 
 

Trade names
11,191

 
11,101

 
 
 
 
Intangible assets other than goodwill, net
$
29,870

 
$
30,217

Amortization expense related to the definite-lived intangible assets are as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2014
Amortization expense
$
451

 
$
436



11

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 8.  WARRANTIES
 
A reconciliation of the changes in the product warranty accrual, which is included in "Accrued expenses" in the Consolidated Balance Sheets, is as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2014
Balance at the beginning of period
$
3,891

 
$
3,476

Warranties issued
969

 
599

Warranty settlement costs
(1,002
)
 
(620
)
Changes in accruals for pre-existing warranties
(13
)
 
(179
)
Currency translation adjustments
19

 
2

Balance at the end of period
$
3,864

 
$
3,278


NOTE 9.  INCOME TAXES
 
A valuation allowance is recorded against all or a portion of the deferred tax assets in the U.S., Canada, U.K., Germany, and the Netherlands.
 
Each quarter, a full year tax rate is estimated for jurisdictions not subject to valuation allowances based upon the most recent forecast of full year anticipated results and the year-to-date tax expense is adjusted to reflect the full year anticipated tax rate. The rate is an estimate based upon projected results for the year, estimated annual permanent differences, the statutory tax rates in the various jurisdictions in which the Company operates, and the non-recognition of tax benefits for entities with full valuation allowances. The overall effective tax rate was 9.6% for the three months ended March 31, 2015.
 
The tax years 2011 through 2014 remain open to examination by the U.S. federal taxing authorities. The tax years 2009 through 2014 remain open to examination by the U.S. state taxing authorities. For other major jurisdictions (Switzerland, U.K., Taiwan, France, Germany, Netherlands and China), the tax years between 2008 and 2014 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.
 
At March 31, 2015, a liability of $2.4 million is recorded with respect to uncertain income tax positions, which includes related interest and penalties of $0.3 million. If recognized, essentially all of the uncertain tax positions and related interest at March 31, 2015 would be recorded as a benefit to income tax expense on the Consolidated Statements of Operations. It is reasonably possible that some of the uncertain tax positions pertaining to foreign operations may change within the next 12 months due to audit settlements and statute of limitations expirations. The change in uncertain tax positions for these items is estimated to be between $0.5 million and $1.5 million.

NOTE 10.  COMMITMENTS AND CONTINGENCIES
 
The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary course of business. Management believes the outcome of these lawsuits will not have a material effect on the financial position or results of operations.
 
The Company’s operations are subject to extensive federal, state, local and foreign laws and regulations relating to environmental matters. Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Hazardous substances and adverse environmental effects have been identified with respect to real property owned by the Company, and on adjacent parcels of real property.
 

12

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

In particular, the Elmira, NY manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination. The Kentucky Avenue Wellfield Site (the “Site”) encompasses an area which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, NY. In February 2006, the Company received a Special Notice Concerning a Remedial Investigation/Feasibility Study (“RI/FS”) for the Koppers Pond (the “Pond”) portion of the Site. The EPA documented the release and threatened release of hazardous substances into the environment at the Site, including releases into and in the vicinity of the Pond. The hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.
 
Until receipt of this Special Notice in February 2006, the Company had never been named as a potentially responsible party (“PRP”) at the Site nor had the Company received any requests for information from the EPA concerning the Site. Environmental sampling on the Company’s property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond, and found no evidence that the Company’s operations or property have contributed or are contributing to the contamination. All appropriate insurance carriers have been notified, and the Company is actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.
 
A substantial portion of the Pond is located on the Company’s property. The Company, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation and Toshiba America, Inc., (collectively, the "PRPs"), have agreed to voluntarily participate in the RI/FS by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the EPA, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis.
 
The EPA approved the RI/FS Work Plan in May of 2008. On September 7, 2011, the PRPs submitted the draft Remedial Investigation Report to the EPA and on January 10, 2013, the draft Feasibility Study was submitted to the EPA. As a result of changes in the hydrology of the Pond, the PRPs prepared and submitted a revised draft Feasibility Study to the EPA on January 30, 2015 to update site information and to address issues raised by the EPA.
 
The revised draft Feasibility Study includes alternative remedial actions with estimated life-cycle costs ranging from $0.9 million to $3.7 million. The Company’s portion of the potential costs, based upon the revised Feasibility Study, are estimated to range from $0.1 million to $0.5 million. Based on the current estimated costs of the various remedial alternatives now under consideration by the EPA, a reserve of $0.2 million has been recorded for the Company’s share of remediation expenses at the Pond as of March 31, 2015. This reserve is included in "Accrued expenses" in the Consolidated Balance Sheets.
 
Based upon information currently available, except as described in the preceding paragraphs, the Company does not have material liabilities for environmental remediation. Though the foregoing reflects the Company’s current assessment as it relates to environmental remediation obligations, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to the Company.


13

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 11.  PENSION AND POSTRETIREMENT PLANS
 
A summary of the components of net periodic pension and postretirement benefit costs for the three months ended March 31, 2015 and 2014 is presented below (in thousands):
 
Pension Benefits
 
Postretirement Benefits
 
Three Months Ended 
 March 31,
 
Three Months Ended 
 March 31,
 
2015
 
2014
 
2015
 
2014
Service cost
$
493

 
$
364

 
$
3

 
$
3

Interest cost
1,673

 
2,120

 
19

 
22

Expected return on plan assets
(2,400
)
 
(2,495
)
 
—

 
—

Amortization of prior service credit
(80
)
 
(102
)
 
—

 
—

Amortization of transition asset
(21
)
 
(71
)
 
—

 
—

Amortization of actuarial loss (gain)
778

 
435

 
(13
)
 
(14
)
Net periodic cost
$
443

 
$
251

 
$
9

 
$
11


NOTE 12.  STOCK BASED COMPENSATION
 
All stock based compensation to employees is recorded as "Selling, general and administrative expenses" in the Consolidated Statements of Operations based on the fair value at the grant date of the award. These non-cash compensation costs are included in the depreciation and amortization amounts in the Consolidated Statements of Cash Flows.
 
A summary of stock based compensation expense is as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2014
Restricted stock/unit awards (“RSA”)
$
111

 
$
109

 
There were no RSAs granted during the three months ended March 31, 2015, and 2014, respectively. The deferred compensation is being amortized on a straight-line basis over the specified service period. There were no Performance Share Incentives ("PSIs") granted during the three months ended March 31, 2015 and 2014, respectively. The deferred compensation with respect to the PSIs is being recognized into earnings based on the passage of time and achievement of performance targets. All outstanding RSAs and PSIs are unvested.
 
Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs and PSIs as of March 31, 2015 and December 31, 2014, are as follows:
 
March 31,
2015
 
December 31,
2014
 
RSAs
 
PSIs
 
RSAs
 
PSIs
Unrecognized compensation cost (in thousands)
$
610

 
$
554

 
$
718

 
$
554

 
 
 
 
 
 
 
 
Expected weighted-average recognition period for unrecognized compensation
   cost (in years)
1.39

 
1.88

 
1.64

 
2.13

 

14

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 13.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Changes in AOCI by component for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended March 31, 2015
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
25,913

 
$
(64,570
)
 
$
(144
)
 
$
(38,801
)
Other comprehensive income before reclassifications
1,179

 
—

 
493

 
1,672

Less (loss) income reclassified from AOCI
(153
)
 
(511
)
 
118

 
(546
)
Net other comprehensive income
1,332

 
511

 
375

 
2,218

Income taxes
1,155

 
(45
)
 
54

 
1,164

Ending balance, net of tax
$
26,090

 
$
(64,014
)
 
$
177

 
$
(37,747
)
 
 
Three Months Ended March 31, 2014
 
Foreign
currency
translation
adjustments
 
Retirement
plans related
adjustments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Accumulated
other
comprehensive
loss
Beginning balance, net of tax
$
38,663

 
$
(40,213
)
 
$
131

 
$
(1,419
)
Other comprehensive (loss) income before
reclassifications
(989
)
 
—

 
(220
)
 
(1,209
)
Less income (loss) reclassified from AOCI
(130
)
 
(118
)
 
77

 
(171
)
Net other comprehensive (loss) income
(859
)
 
118

 
(297
)
 
(1,038
)
Income taxes
(153
)
 
(21
)
 
(19
)
 
(193
)
Ending balance, net of tax
$
37,957

 
$
(40,074
)
 
$
(147
)
 
$
(2,264
)

Details about reclassification out of AOCI for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
 
 
Three Months Ended 
 March 31,
 
Affected line item on the Consolidated Statements of Operations
Details of AOCI components
 
2015
 
2014
 
Unrealized (loss) gain on cash flow hedges: 
 
 

 
 

 
 
 
 
$
129

 
$
(29
)
 
Sales
 
 
(11
)
 
106

 
Other expense, net
 
 
118

 
77

 
Total before tax
 
 
21

 
2

 
Income taxes
 
 
$
139

 
$
79

 
Net of tax
Retirement plans related adjustments:
 
 

 
 

 
 
Amortization of prior service credit
 
$
80

 
$
102

 
(a)
Amortization of transition asset
 
21

 
71

 
(a)
Amortization of actuarial loss
 
(765
)
 
(421
)
 
(a)
 
 
(664
)
 
(248
)
 
Total before tax
 
 
48

 
(2
)
 
Income taxes
 
 
$
(616
)
 
$
(250
)
 
Net of tax
 
____________________
(a)  These AOCI components are included in the computation of net periodic pension and post retirement costs. See Note 11. "Pension and Postretirement Plans" for details.
 

15

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

NOTE 14.  EARNINGS (LOSS) PER SHARE
 
Basic earnings (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. In periods of earnings, the weighted average number of shares used in the diluted calculation includes common stock equivalents related to stock options and restricted stock. The following table presents the basis of the loss per share computation (in thousands):
 
 
Three Months Ended 
 March 31,
 
2015
 
2014
Numerator for basic and diluted loss per share:
 

 
 

Loss from continuing operations
$
(1,408
)
 
$
(671
)
Gain from disposal of discontinued operation, net of tax
—

 
218

Net loss applicable to common shareholders
$
(1,408
)
 
$
(453
)
 
 
 
 
Denominator for basic and diluted loss per share:
 

 
 

Denominator for basic and diluted loss per share — weighted average shares
12,742

 
12,499

 
There is no dilutive effect of the restricted stock and stock options for both the three months ended March 31, 2015 and 2014 due to the net loss in these periods. There would have been 126,004 and 99,127 of these shares included in the diluted calculation for the three months ended March 31, 2015 and 2014, respectively, had there been earnings in these periods. Common stock equivalents of certain stock-based awards totaling 16,746 and 51,073 were excluded from the calculation of diluted loss per share for the three months ended March 31, 2015 and 2014, respectively, as they were anti-dilutive.

NOTE 15. SEGMENT INFORMATION
 
Segment (loss) income is measured for internal reporting purposes by excluding corporate expenses, impairment charges, interest income, interest expense, and income taxes. Corporate expenses consist primarily of executive employment costs, certain professional fees, and costs associated with the Company’s global headquarters. Financial results for each reportable segment are as follows (in thousands):
 
Three Months Ended March 31, 2015
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,976

 
$
16,227

 
$
(75
)
 
$
69,128

Depreciation and amortization
1,624

 
600

 
 

 
2,224

Segment (loss) income
(909
)
 
1,197

 
 

 
288

Capital expenditures
306

 
393

 
 

 
699

Segment assets(1)
236,762

 
53,612

 
 

 
290,374

 
Three Months Ended March 31, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
54,189

 
$
16,733

 
$
(72
)
 
$
70,850

Depreciation and amortization
1,777

 
639

 
 

 
2,416

Segment (loss) income
(642
)
 
1,808

 
 

 
1,166

Capital expenditures
258

 
67

 
 

 
325

Segment assets(1)
243,491

 
51,541

 
 

 
295,032

____________________
(1) 
Segment assets primarily consist of restricted cash, accounts receivable, inventories, prepaid and other assets, property, plant and equipment, and intangible assets. Unallocated assets primarily include, cash and cash equivalents, corporate property, plant and equipment, deferred income taxes, and other non-current assets.
 

16

HARDINGE INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MARCH 31, 2015

A reconciliation of segment income to consolidated loss from operations before income taxes for the three months ended March 31, 2015 and 2014 are as follows (in thousands):
 
Three Months Ended 
 March 31,
 
2015
 
2014
Segment income
$
288

 
$
1,166

Unallocated corporate expense
(1,704
)
 
(1,457
)
Interest expense, net
(140
)
 
(223
)
Other unallocated expense
(1
)
 
—

Loss from continuing operations before income taxes
$
(1,557
)
 
$
(514
)
 
A reconciliation of segment assets to consolidated total assets follows (in thousands):
 
March 31,
2015
 
December 31,
2014
Total segment assets
$
290,374

 
$
290,300

Unallocated assets
22,726

 
21,020

Total assets
$
313,100

 
$
311,320


Unallocated assets include cash of $18.3 million and $16.3 million at March 31, 2015 and December 31, 2014, respectively.

NOTE 16.  NEW ACCOUNTING STANDARDS

In April 2015, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the balance sheet presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early application is permitted, and the guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company is evaluating the impact that this guidance will have on the financial statements and related disclosures.     

In April 2015, the FASB provided authoritative guidance on accounting for cloud computing arrangements, including software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements. This update provides guidance to customers about whether a cloud computing arrangement includes a software license, which should be accounted for consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. An entity may elect to adopt the amendments either prospectively or retrospectively. The Company is evaluating the method and impact that this guidance will have on the financial statements and related disclosures.     


17

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, 2014.
 
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, India, Switzerland, Taiwan, the United States (“U.S.”), and the United Kingdom (“U.K.”), with sales to most industrialized countries. Approximately 68% of our 2014 sales were to customers outside of North America, 71% of our 2014 products sold were manufactured outside of North America, and 67% of our employees as of December 31, 2014 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 37% of overall sales through the first quarter of 2015 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.
 

18

Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now largely manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan, which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are the British Pound Sterling (“GBP”), Chinese Renminbi (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“TWD”), and Swiss Franc (“CHF”). Under U.S. generally accepted accounting principles, results of foreign subsidiaries are translated into U.S. Dollars (“USD”) at the average exchange rate during the periods presented. Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative data significantly. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.
 
For the three months ended March 31, 2015, foreign currency fluctuations resulted in unfavorable currency translation impact of approximately $2.5 million on sales when compared to the same period in 2014.

Results of Operations
 
Presented below is summarized selected financial data for the three months ended March 31, 2015 and 2014 (in thousands): 
 
 
Three Months Ended 
 March 31,
 
$
Change
 
%
Change
 
 
2015
 
2014
 
 
Sales
 
$
69,128

 
$
70,850

 
$
(1,722
)
 
(2
)%
Gross profit
 
18,248

 
19,220

 
(972
)
 
(5
)%
% of sales
 
26.4
 %
 
27.1
 %
 
(0.7
)
pts.
Selling, general and administrative expenses
 
19,600

 
19,120

 
480

 
3
 %
% of sales
 
28.4
 %
 
27.0
 %
 
1.4

pts.
Other expense, net
 
65

 
391

 
(326
)
 
(83
)%
Loss from operations
 
(1,417
)
 
(291
)
 
(1,126
)
 
387
 %
% of sales
 
(2.0
)%
 
(0.4
)%
 
(1.6
)
pts.
Interest expense, net
 
140

 
223

 
(83
)
 
(37
)%
Loss from continuing operations before income taxes
 
(1,557
)
 
(514
)
 
(1,043
)
 
203
 %
Income taxes
 
(149
)
 
157

 
(306
)
 
(195
)%
Net loss from continuing operations
 
(1,408
)
 
(671
)
 
(737
)
 
110
 %
Gain from disposal of discontinued operation, net of tax
 
—

 
218

 
(218
)
 
(100
)%
Net loss
 
$
(1,408
)
 
$
(453
)
 
$
(955
)
 
211
 %
% of sales
 
(2.0
)%
 
(0.6
)%
 
(1.4
)
pts.

Sales.  The table below summarizes sales by each corresponding geographical region for the three months ended March 31, 2015 compared to the same period in 2014 (in thousands): 
 
Three Months Ended 
 March 31,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Sales to customers in:
North America
$
26,305

 
$
23,203

 
$
3,102

 
13
 %
Europe
22,929

 
25,305

 
(2,376
)
 
(9
)%
Asia and other
19,894

 
22,342

 
(2,448
)
 
(11
)%
Total
$
69,128

 
$
70,850

 
$
(1,722
)
 
(2
)%
 
Sales for the three months ended March 31, 2015 were $69.1 million, which remained relatively flat when compared with the same period in 2014 after considering the impact of unfavorable foreign currency translation adjustments of approximately $2.5 million.
 

19

North America sales were $26.3 million during the three months ended March 31, 2015, an increase of $3.1 million, or 13%, when compared to the same period in 2014. The increase in sales was mainly the result of higher sales from the Metalcutting Machine Solutions segment as compared to the prior year due to higher demand in that market.
 
Europe sales were $22.9 million during the three months ended March 31, 2015, a decrease of $2.4 million, or 9%, when compared to the same period in 2014. Foreign currency translation adjustments resulted in an unfavorable impact of approximately of $2.2 million to sales, which was the primary driver of the decrease in sales.
 
Asia and other sales were $19.9 million during the three months ended March 31, 2015, a decrease of $2.4 million, or 11%, when compared to the same period in 2014. Reduced demand for our turning and milling machines was responsible for the overall decrease in sales, combined with the unfavorable translation impact from currency exchange rate fluctuations of $0.3 million. This decrease in sales was partially offset by an increase in demand for our grinding machines. Demand from customers in China is the key driver of the performance of the machine tool industry, and while recent machine tool industry data from China has been subdued, Hardinge has been able to maintain sales volume levels in the customer segments that it serves.
 
Sales of machines accounted for approximately 63% of the consolidated sales for the three months ended March 31, 2015, compared to 62% for the same period in 2014. Sales of non-machine products and services, primarily consisting of collets, chucks, accessories, repair parts, and service revenue, accounted for 37% of the consolidated sales for the three months ended March 31, 2015, compared to 38% for the same period in 2014. 
 
Gross Profit.  Gross profit was $18.2 million, or 26.4% of sales for the three months ended March 31, 2015, compared to $19.2 million, or 27.1% of sales for the same period in 2014. Gross profit and margin for the three months ended March 31, 2015 benefited from increased production volume and resulting overhead absorption when compared to the same period in the prior year, which was more than offset by the unfavorable impact of foreign currency translation adjustments combined with an out of period inventory adjustment of $0.7 million at one of our European subsidiaries to correct for costs that were not properly released from inventory as the product was sold.
 
Selling, General and Administrative Expenses.  Selling, general and administrative (“SG&A”) expenses were $19.6 million, or 28.4% of net sales for the three months ended March 31, 2015, an increase of $0.5 million or 3%, compared to $19.1 million, or 27.0% of net sales for the three months ended March 31, 2014. The increase in SG&A expenses for the three months ended March 31, 2015 was driven by growth initiatives for the recently acquired Voumard business, and expansion of our Forkardt business into China and India. Offsetting this increase was $0.7 million of favorable foreign currency translation impact. 

Other Expense, Net.  Other expense, net decreased by $0.3 million, or 83.4% to $0.1 million for the three months ended March 31, 2015 primarily as a result of fluctuations in foreign currency exchange rates during the period as compared to the same period in 2014.

Loss from Continuing Operations Before Income Taxes.  As a result of the foregoing, net loss from continuing operations was $1.6 million for the three months ended March 31, 2015, compared to $0.5 million for the same period in 2014.
 
Income Taxes.  The income tax benefit was $0.1 million for the three months ended March 31, 2015, compared to a provision for taxes of $0.2 million for the same period in 2014. The effective tax rate was 9.6% for the three months ended March 31, 2015, compared to (30.5)% for the same period in 2014, which differs from the U.S. statutory rate primarily due to the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded. Additionally, in 2015, the Company’s effective tax rate was impacted by the finalization of prior year tax return filings and resolution of tax uncertainties related to an income tax examination in Canada.
 
Each quarter, an estimate of the full year tax rate is developed based upon anticipated annual results and an adjustment is made, if required, to the year-to-date income tax expense to reflect the full year anticipated effective tax rate.
 
We continue to maintain a valuation allowance on all or a portion of the tax benefits of our U.S., Canada, U.K., Germany, and 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 is sustained in the respective jurisdiction.
 
Net Loss.  As a result of the foregoing, net loss for the three months ended March 31, 2015 was $1.4 million, or 2.0% of net sales, compared to $0.5 million, or 0.6% of net sales, for the same period in 2014. Both basic and diluted loss per share for the three months ended March 31, 2015 was $0.11, compared to $0.04 for the same period in 2014.

20


Business Segment Information — Comparison of the three months ended March 31, 2015 and 2014

Metalcutting Machine Solutions Segment ("MMS") (in thousands):
 
Three Months Ended 
 March 31,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Sales
$
52,976

 
$
54,189

 
$
(1,213
)
 
(2
)%
Segment loss
(909
)
 
(642
)
 
(267
)
 
42
 %
 
MMS sales were $53.0 million for the three months ended March 31, 2015, which remained relatively flat when compared with the same period in 2014 after considering the unfavorable impact of foreign currency translation adjustments. Sales of grinding machines increased as compared to the prior year, primarily offset by declines in turning and milling machine sales, combined with the aforementioned foreign currency impact.
 
Segment loss for the three months ended March 31, 2015 was $0.9 million, comparable to 2014 performance.
 
Aftermarket Tooling and Accessories Segment ("ATA") (in thousands):
 
Three Months Ended 
 March 31,
 
 
 
 
 
2015
 
2014
 
$ Change
 
% Change
Sales
$
16,227

 
$
16,733

 
$
(506
)
 
(3
)%
Segment income
1,197

 
1,808

 
(611
)
 
(34
)%
 
ATA sales for the three months ended March 31, 2015 were $16.2 million, a decrease of $0.5 million, or 3%, when compared to the corresponding period in 2014. The primary driver of the decline in sales was unfavorable foreign currency translation adjustments when compared to the same period in 2014.
 
Segment income for the three months ended March 31, 2015 was $1.2 million, a 34% decrease from the prior year. The ATA segment experienced increased profitability from a more favorable product mix when compared to the same quarter in 2014, which was more than offset by an out of period inventory adjustment of $0.7 million at one of our European subsidiaries to correct for costs that were not properly released from inventory as the product was sold.

Segment Summary For the Three Months Ended March 31, 2015 (in thousands):
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
52,976

 
$
16,227

 
$
(75
)
 
$
69,128

 
$
54,189

 
$
16,733

 
$
(72
)
 
$
70,850

Segment (loss) income
(909
)
 
1,197

 
 

 
288

 
(642
)
 
1,808

 
 

 
1,166

Unallocated corporate
   expense
 

 
 

 
 

 
(1,704
)
 
 

 
 

 
 

 
(1,457
)
Interest expense, net
 

 
 

 
 

 
(140
)
 
 

 
 

 
 

 
(223
)
Other unallocated
   expense
 
 
 
 
 
 
(1
)
 
 
 
 
 
 
 
—

Loss from
   continuing
   operations, before
   income taxes
 

 
 

 
 

 
$
(1,557
)
 
 
 
 
 
 
 
$
(514
)
 

21

Summary of Cash Flows for the Three Months Ended March 31, 2015 and 2014:
 
During the three months ended March 31, 2015, we generated $3.8 million net cash from operating activities. The net cash generated was driven by a net loss (as adjusted for depreciation and amortization expense as well as the impact of unrealized foreign currency transaction loss), a decrease in customer receivables due to the timing of sales and collection activity, an increase in customer deposits due to timing of shipments and new orders received, and an increase in accounts payable due to timing of purchases and payment activity. These cash inflows were partially offset by an increase in inventories based on orders and associated production levels, a decrease in accrued expenses, primarily as a result of payment of annual bonuses as well as the payment of the annual Company contribution to the 401(k) Plan, and an increase in other assets related to advanced vendor payments for inventory.

During the three months ended March 31, 2014, we utilized $1.2 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 annual bonuses 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.
 
Net cash used in investing activities was $0.7 million for the three months ended March 31, 2015. The primary use of cash was for capital expenditures during the period, which were made primarily for maintenance capital purchases.

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

Net cash flow used by financing activities was $1.6 million for the three months ended March 31, 2015. Cash used was primarily attributable to $1.5 million of payments on long-term debt due to normal scheduled payment activity and year-to-date dividends paid of $0.3 million.

Net cash flow used by financing activities was $0.8 million for the three months ended March 31, 2014. Cash used by financing activities 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 entered into on August 9, 2013, 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.

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 $82.1 million at March 31, 2015 and $76.6 million at December 31, 2014, of which $57.3 million and $58.0 million, respectively, can be borrowed for working capital needs. As of March 31, 2015 and December 31, 2014, $72.3 million and $70.0 million was available for borrowing under these respective arrangements, of which $56.5 million and $56.8 million, respectively, was available for working capital needs. Total consolidated borrowings outstanding were $15.1 million and $16.2 million at March 31, 2015 and December 31, 2014, 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, 2015, 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, 2015, 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.

22


Accounting Guidance Not Yet Adopted

We are currently assessing the financial impact to our consolidated financial statements of accounting guidance not yet adopted. For further information on accounting guidance not yet adopted, refer to Note 16. "New Accounting Standards" of the Consolidated Financial Statements.
 
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Accordingly, there can be no assurance that our expectations will be realized. Such statements are based upon information known to management at this time. The Company cautions that such statements necessarily involve uncertainties and risk and deal with matters beyond the Company’s ability to control, and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are fluctuations in the machine tool business cycles, changes in general economic conditions in the U.S. or internationally, the mix of products sold and the profit margins thereon, the relative success of the Company’s entry into new product and geographic markets, the Company’s ability to manage its operating costs, actions taken by customers such as order cancellations or reduced bookings by customers or distributors, competitors’ actions such as price discounting or new product introductions, governmental regulations and environmental matters, changes in the availability and cost of materials and supplies, the implementation of new technologies and currency fluctuations. Any forward-looking statement should be considered in light of these factors. The Company undertakes no obligation to revise its forward-looking statements if unanticipated events alter their accuracy.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 
There have been no material changes to our market risk exposures during the first three months of 2015. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2014 Annual Report on Form 10-K.
 
Item 4.  Controls and Procedures.
 
Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2015, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, and determined that these controls and procedures were effective.
 
There have been no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2015 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.


23

PART II — OTHER INFORMATION
 
Item 1.        Legal Proceedings.
 
None.
 
Item 1A.     Risk Factors.
 
There is no change to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
 
Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.
 
Item 3.        Defaults Upon Senior Securities.
 
None.
 
Item 4.        Mine Safety Disclosures.
 
Not Applicable.
 
Item 5.        Other Information.
 
None.

24

Item 6.
 
Exhibits.
 
 
 
3.1
 
Restated Certificate of Incorporation of Hardinge Inc.
 
 
 
3.2
 
Certificate of Amendment of the Restated Certificate of Incorporation of Hardinge Inc.
 
 
 
3.3
 
By-Laws of Hardinge Inc. (incorporated by reference to Exhibit 3.3 to Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 8, 2014 (File No. 001-34639)).
 
 
 
4.1
 
Specimen of certificate for shares of Common Stock, par value $.01 per share, of Hardinge Inc. (incorporated by reference to Exhibit 3 to Registrant’s Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on May 19, 1995 (File No. 000-15760)).
 
 
 
31.1
 
Chief Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Chief Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


25

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
HARDINGE INC.
 
 
Registrant
 
 
May 8, 2015
 
By:
/s/ Richard L. Simons
Date
 
 
Richard L. Simons
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
May 8, 2015
 
By:
/s/ Douglas J. Malone
Date
 
 
Douglas J. Malone
 
 
 
Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)
 
 
 
 
May 8, 2015
 
By:
/s/ Edward J. Gaio
Date
 
 
Edward J. Gaio
 
 
 
Corporate Controller
 
 
 
(Principal Accounting Officer)
 
 
 
 


26

Stock widget

Investing forum

HARDINGE INC Reports