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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
/ / 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 0-15760
------------------------
HARDINGE INC.
(Exact name of registrant as specified in its charter)
NEW YORK 16-0470200
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE HARDINGE DRIVE, ELMIRA, NEW YORK 14902-1507
(Address of principal executive Zip Code
offices)
Registrant's telephone number, including area code: (607) 734-2281
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock with a par value of $.01 per share
Preferred Stock purchase rights
------------------------
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 and 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. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 1, 2002:
Common Stock, $.01 par value--$70,630,597.
The number of shares outstanding of the issuer's common stock as of
February 1, 2002:
Common Stock, $.01 par value 8,789,063 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Hardinge Inc.'s Proxy Statement filed with the Commission on
March 28, 2002 are incorporated by reference to Part III of this Form.
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PART I
ITEM 1.--BUSINESS
GENERAL
Hardinge Inc.'s principal executive offices are located at One Hardinge
Drive, Elmira, New York 14902-1507; telephone (607) 734-2281. The Company has
seven wholly owned subsidiaries. Canadian Hardinge Machine Tools, Ltd. located
near Toronto, Ontario was established by Hardinge Inc. in 1958. Hardinge Machine
Tools, Ltd. was established in the United Kingdom in 1939 and became a wholly
owned subsidiary in 1981 when it redeemed the shares previously held by others.
Hardinge GmbH was established by the Company in Germany in 1987. In
November 1995, the Company acquired 100% of the outstanding stock of L.
Kellenberger & Co., AG of St. Gallen, Switzerland and its subsidiary,
Kellenberger, Inc. (collectively referred to as "Kellenberger"). The
Kellenberger, Inc. subsidiary was then liquidated in 1998. During 1996, Hardinge
Shanghai Company, Ltd. was established in Shanghai, People's Republic of China.
In December of 2000, Hardinge purchased 100% of the stock ownership of HTT
Hauser Tripet Tschudin AG (HTT), based in Biel, Switzerland. In January 2001,
Hardinge China Limited was opened in Shanghai, People's Republic of China. In
1999, Hardinge acquired a 51% interest in a newly formed company, Hardinge
Taiwan Precision Machinery Limited, located in Nan Tou City, (Taiwan) Republic
of China. The remaining 49% is owned by the management of Hardinge Taiwan
Precision Machinery Limited. In May of 2000, Hardinge and EMAG Maschinenfabrik
GmbH, of Germany established Hardinge EMAG GmbH in Leipzig, Germany. Each
company owns 50% of the shares of Hardinge EMAG.
The Company's headquarters is located in Chemung County, New York, which is
on the south-central border of upstate New York. The Company has manufacturing
facilities located in Chemung County, New York, St. Gallen, Switzerland, Nan Tou
City, Taiwan, Leipzig, Germany, and Biel, Switzerland. The Company assembles
machinery at its Shanghai, PRC facility for deliveries to customers in Asia.
Hardinge manufactures the majority of the products it sells, purchasing a few
machine accessories from other manufacturers for resale.
References to Hardinge Inc., the "Company", or "Hardinge" are to
Hardinge Inc. and its predecessors and subsidiaries, unless the context
indicates otherwise. The Company changed its name in 1995 from Hardinge
Brothers, Inc. to Hardinge Inc.
PRODUCTS
Hardinge Inc. has been a manufacturer of industrial-use
Super-Precision-Registered Trademark- and general precision turning machine
tools since 1890. Turning machines, or lathes, are power-driven machines used to
remove material from a rough-formed part by moving multiple cutting tools
arranged on a turret assembly against the surface of a part rotating at very
high speeds in a spindle mechanism. The multi-directional movement of the
cutting tools allows the part to be shaped to the desired dimensions. On parts
produced by Hardinge machines, those dimensions are often measured in millionths
of inches. Hardinge considers itself to be a leader in the field of producing
machines capable of consistently and cost-effectively producing parts to those
dimensions.
In the late 1970's, Hardinge began to produce computer numerically
controlled ("CNC") machines which use commands from an on-board computer to
control the movement of cutting tools and rotation speeds of the part being
produced. The computer control enables the operator to program operations such
as part rotation, tooling selection and tooling movement for a specific part and
then store that program in memory for future use. The machine is able to produce
parts while left unattended when connected to automatic bar-feeding or robotics
equipment designed to supply raw materials. Because of this ability, as well as
superior speed of operation, a CNC machine is able to produce the same amount of
work as several manually controlled machines, as well as reduce the number of
operators required. Since the introduction of CNC turning machines, continual
advances in computer control technology have allowed for easier programming and
additional machine capabilities.
1
In 1994, the Company expanded its machine tool line to include CNC vertical
turning machines and traditional vertical machining centers. Prior to that, all
of the Company's turning machines were horizontal which means that the spindle
holding the rotating part and the turret holding the cutting tools are arranged
on a horizontal plane. On a traditional vertical turning machine, the spindle
and turret are aligned on a vertical plane, with the spindle on the bottom. A
vertical turning machine permits the customer to produce larger, heavier and
more oddly shaped parts on a machine that uses less floor space when compared to
a traditional horizontal turning machine.
In 2000, Hardinge formed a joint venture to market a new line of inverted
spindle vertical turning lathes. These machines also have the spindle and turret
aligned on a vertical plane, but the spindle is on top. This design allows for
automatic "pick and place" of materials within the movements of the machine
itself. Combined with a built in conveyor system, this allows unattended
operation of the machine without the need for external robotic devices. These
machines are suited for a wide range of smaller manufactured components and can
support both small lot-size production requirements as well as high-volume
manufacturing.
A vertical machining center cuts material differently than a turning
machine. These machines are designed to remove material from stationary,
prismatic (box-like) parts of various shapes with rotating tools that are
capable of milling, drilling, tapping, reaming and routing. Machining centers
have mechanisms that automatically change tools based on commands from a
built-in computer control without the assistance of an operator. Machining
centers are generally purchased by the same customers as turning machines. A
customer will be able to obtain machining centers with the same quality and
reliability as the Company's turning machines and will be able to obtain both of
them from a single supplier. The Company now produces a line of eighteen
machining centers addressing a range of sizes, speeds and powers.
The Company further extended its machine offerings into the grinding machine
sector of the metal-cutting machine tool industry with the acquisition of
Kellenberger. Grinding is a machining process where a surface is shaped to
closer tolerances with a rotating abrasive wheel or tool. Grinding machines can
be used to finish parts of various shapes and sizes.
The grinding machines of Kellenberger are used to grind the inside and
outside diameters of round, cylindrical parts. Such grinding machines are
typically used to provide for a more exact finish on a part which has been
partially completed on a lathe. The grinding machines of Kellenberger, which are
manufactured in both CNC and manually controlled models, are generally purchased
by the same type of customers as other Hardinge equipment and further the
ability of the Company to be a sole source supplier for its customers.
At the end of 2000, Hardinge complemented its precision grinding technology
of Kellenberger AG by adding HTT Hauser Tripet Tschudin AG to its grinding
machine product line. Hauser machines are jig grinders used to make demanding
contour components, primarily for tool and moldmaking applications. Tripet and
Tschudin product technology is focused on specialized grinding needs of high
volume production customers.
The Company distributed electrical discharge machines (EDMs) from 1997
through 2001. However, as part of the September 2001 realignment, the Company
has discontinued sales of these machines.
New product development is important to the Company's growth. Products are
introduced each year to take advantage of new technologies available to the
Company. These technologies generally allow the machine to run at higher speeds
and with more power, thus increasing their efficiency. Customers routinely
replace old machines with newer machines that can produce parts faster and with
less time to set up the machine when converting from one type of part to
another.
Also, due to a chronic shortage of skilled labor, customers are looking for
machines and accessories that can produce parts without an operator attending to
the machine. New products introduced in recent years have been aimed at this
need.
2
Multiple options are available on the broad range of the Company's machines
which allow customers to customize their machines for the specific purpose and
cost objective they require. The Company produces machines for stock with
popular option combinations for immediate delivery, as well as machines made to
specific customer orders. In recent years, the Company has increasingly
emphasized the engineering of complete systems for customers who desire one or
more CNC machines to produce a specific part. In configuring complete systems,
the Company provides, in addition to its machines, the necessary computer
programming and tooling, as well as robotics and other parts handling equipment
manufactured by it or others.
Generally, Hardinge machines can be used to produce parts from all of the
standard ferrous and non-ferrous metals, as well as plastics, composites and
exotic materials.
In addition, the Company offers the most extensive line available in the
industry of workholding and toolholding devices, which may be used on both its
turning machines and those produced by others. The Company considers itself to
be a worldwide leader in the design and manufacture of workholding and
toolholding devices. It also offers a complete line of bar feed systems for its
horizontal turning machines, which automatically feed the workpiece into the
turning machine.
The Company offers various warranties on its equipment and considers
post-sales support to be a critical element of its business. Services provided
include operation and maintenance training, in-field maintenance, and in-field
repair. The Company, where practical, provides readily available replacement
parts.
MARKETS AND DISTRIBUTION
Sales are principally in the United States and Western Europe. In addition,
sales are made to customers in Canada, China, Mexico, Japan, Australia and other
foreign countries.
The Company markets its machine tools through a combination of a direct
sales force and through distributors and manufacturers' representatives. In the
United States, Canada, and the United Kingdom, the company primarily uses a
direct sales force, supplemented by distributors and manufacturers'
representatives where appropriate. In the remainder of the world, sales are
exclusively through distributors and agents. Generally, distributors have
exclusive rights to sell the Company's products in a defined geographic area.
The Company's direct sales personnel earn a fixed salary plus commission
based upon a percentage of net sales. Certain of the Company's distributors
operate independent businesses, purchase machine tools and non-machine products
from the Company and maintain inventories of these products and spare parts for
their customers, while other distributors only sell machine tools on behalf of
the Company. The Company's commission schedule is adjusted to reflect the level
of aftermarket support offered by its distributors.
In North America, the Company provides long-term financing for the purchase
of its equipment by qualified customers. The Company regards this program as an
important part of its marketing efforts, particularly to independent machine
shops. Customer financing is offered for a term of up to seven years, with the
Company retaining a security interest in the equipment. In response to
competitive pressures, the Company occasionally offers this financing at below
market interest rates or with deferred payment terms. The present value of the
difference between the actual interest charged on customer notes for periods
during which finance charges are waived or reduced and the estimated rate at
which the notes could be sold to financial institutions is accounted for as a
reduction of the Company's net sales.
The Company's non-machine products mainly are sold in the United States
through telephone orders to a toll-free "800" telephone number, which is linked
to an on-line computer order entry system maintained by the Company at its
Elmira headquarters. In most cases, the Company is able to package and ship
in-stock tooling and repair parts within 24 hours of receiving orders. The
Company can package and ship items with heavy demand within several hours. In
other parts of the world, these products are sold through distributor
arrangements associated with machine sales.
3
The Company promotes recognition of its products in the marketplace through
advertising in trade publications and participation in industry trade shows. In
addition, the Company markets its non-machine products through publication of
general catalogues and other targeted catalogues, which it distributes to
existing and prospective customers. The Company has a substantial presence on
the internet at www.hardinge.com where customers can obtain information about
the Company's products.
A substantial portion of the Company's sales are to small and medium-sized
independent job shops, which in turn sell machined parts to their industrial
customers. Industries directly and indirectly served by the Company include
aerospace, automotive, construction equipment, defense, energy, farm equipment,
fiber optics, medical equipment, recreational equipment, telecommunications, and
transportation.
The Company operates in a single business segment, industrial machine tools.
COMPETITIVE CONDITIONS
The primary competitive factors in the marketplace for the Company's machine
tools are reliability, price, delivery time, service and technological
characteristics. There are many manufacturers of machine tools in the world.
They can be categorized by the size of material their products can machine and
the precision level they can achieve. In the size and precision level the
Company addresses with its turning machines and machining centers, the primary
competition comes from several Japanese manufacturers. Several German
manufacturers also compete with the Company, primarily in Europe. The
Kellenberger and HTT machines compete with Japanese, German and other Swiss
manufacturers. Management considers its segment of the industry to be extremely
competitive. The Company believes that it brings superior quality, reliability,
value, availability, capability and support to its customers.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company manufactures and assembles its lathes and related products at
its Elmira, New York plant. The Kellenberger grinding machines and related
products are manufactured at its St. Gallen, Switzerland plant and HTT products
are produced at its Biel, Switzerland facility. Hardinge produces its machining
centers at its majority-owned subsidiary in Taiwan. The inverted-spindle
vertical lathes are manufactured by Hardinge EMAG (our 50 percent joint venture)
in Leipzig, Germany. Products are manufactured by the Company from various raw
materials, including cast iron, sheet metal, bar steel and bearings. Although
the Company's operations are highly integrated, it purchases a number of
components from outside suppliers, including the computer and electronic
components for its CNC lathes and machining centers. There are multiple
suppliers for virtually all of the Company's raw material and components and the
Company has not experienced a supply interruption in recent years.
A major component of the Company's CNC machines is the computer and related
electronics package. The Company purchases these components for its lathes and
machining centers primarily from Fanuc Limited, a large Japanese electronics
company, except on occasions where a significant customer order specifies a
different control. In 2000, the Company announced the introduction of a Siemen's
(a German control manufacturer) control on its line of machining centers. While
the Company believes that design changes could be made to its machines to allow
sourcing from several other existing suppliers, and occasionally does so for
special orders, a disruption in the supply of the Fanuc components could cause
the Company to experience a substantial disruption of its operations, depending
on the circumstances at the time.
The Company utilizes several quality and process control programs, including
Total Quality Management. The Company's U.S. quality management system is
certified to the ISO 9001 Quality Standard of the International Standards
Organization. The ISO 9001 Quality System is an internationally accepted quality
standard for commercial operations, such as product design verification,
reviewing the quality of suppliers, imperfection and testing requirements and
maintaining quality records. The Company believes that these initiatives have
helped it maintain and improve the quality and reliability of its products.
4
RESEARCH AND DEVELOPMENT
The Company's ongoing research and development program involves creating new
products and modifying existing products to meet market demands and redesigning
existing products to reduce the cost of manufacturing. The research and
development department is staffed with experienced design engineers with
technical through doctorate degrees.
The cost of research and development, all of which has been charged to
operations, amounted to $9,798,000, $6,992,000, and $7,060,000, in 2001, 2000,
and 1999, respectively. The Company has obtained significant new product
knowledge through its Hardinge EMAG joint venture and its purchase of HTT.
PATENTS
Although the Company holds several patents with respect to certain of its
products, it does not believe that its business is dependent to any material
extent upon any single patent or group of patents.
SEASONAL TRENDS AND WORKING CAPITAL REQUIREMENTS
The Company's business, and that of the machine tool industry in general, is
cyclical. It is not subject to significant seasonal trends. However, the
Company's quarterly results are subject to fluctuation based on the timing of
its shipments of machine tools, which are largely dependent upon customer
delivery requirements. Traditionally, the Company has experienced reduced
activity during the third quarter of the year, largely as a result of vacations
scheduled at its U.S. and European customers' plants and the Company's policy of
closing its New York facilities during the first two weeks of July. As a result,
the Company's third-quarter net sales, income from operations and net income
typically have been the lowest of any quarter during the year.
The ability to deliver products within a short period of time is an
important competitive criterion. Also, the Company feels it is important, where
practical, to provide ready availability of replacement parts for the machines
it sells. These factors contribute to a requirement that the Company carry
significant amounts of inventory.
For many years, the Company has periodically sold to various financial
institutions a substantial portion of the customer notes receivable generated by
its customer financing program. While the Company's customer financing program
has an impact on its month-to-month borrowings, it has had little long-term
impact on its working capital requirements because of the subsequent sales of
these notes to financial institutions.
BACKLOG
The Company normally ships its machine products within two to three months
after order. The Company's order backlog was $51,202,000 at December 31, 2001,
compared to $64,801,000 at December 31, 2000.
Orders are generally subject to cancellation by the customer prior to
shipment. The level of unfilled orders at any given date during the year may be
materially affected by the timing of the Company's receipt of orders and the
speed with which those orders are filled. Accordingly, the Company's backlog is
not necessarily indicative of actual shipments or sales for any future period,
and period-to-period comparisons may not be meaningful.
GOVERNMENTAL REGULATIONS
The Company believes that its current operations and its current uses of
property, plant and equipment conform in all material respects to applicable
laws and regulations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive federal and state
legislation and regulation relating to environmental matters.
5
Certain environmental laws can impose joint and several liability for
releases or threatened releases of hazardous substances upon certain statutorily
defined parties regardless of fault or the lawfulness of the original activity
or disposal. Activities at properties owned by the Company and on adjacent areas
have resulted in environmental impacts.
In particular, the Company's New York manufacturing facility is located
within the Kentucky Avenue Well Field 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 Well Field site encompasses an area of approximately three square miles
which includes sections of the Town of Horseheads and the Village of Elmira
Heights in Chemung County, New York. The Company, however, has never been named
as a potentially responsible party at the site or received any requests for
information from EPA concerning the site. Environmental sampling on the
Company's property within this site under supervision of regulatory authorities
has identified off-site sources for such groundwater contamination and has found
no evidence that the Company's property is contributing to the contamination.
Environmental sampling at the Company's former New York manufacturing
facility following the removal of an underground storage tank disclosed the
presence of hydrocarbon contamination in surrounding soils. An environmental
consultant retained by the Company prepared a site assessment and remedial
action plan which were adopted and approved by the New York State Department of
Environmental Conservation. Pursuant to the timetable set forth in the remedial
action plan, the Company completed the construction phase of the cleanup in the
first quarter of 1996. On August 31, 1998, the New York State Department of
Conservation notified the Company that it could decommission the pump and treat
system, skim product from one of the wells, and bioremediate in three locations.
The Company is following this process at a nominal yearly cost.
Although the Company believes, based upon information currently available to
management, that it will not have material liabilities for environmental
remediation, there can be no assurance that future remedial requirements or
changes in the enforcement of existing laws and regulation, which are subject to
extensive regulatory discretion, will not result in material liabilities.
EMPLOYEES
As of December 31, 2001 the Company employed 1,282 persons, 636 of whom were
located in the United States. None of the Company's employees are covered by
collective bargaining agreements. Management believes that relations with the
Company's employees are good.
FOREIGN OPERATIONS AND EXPORT SALES
Information related to foreign and domestic operations and sales is included
in Note 7 to consolidated financial statements contained in this Annual Report.
The Company believes that its subsidiaries operate in countries in which the
economic climate is relatively stable.
6
ITEM 2.--PROPERTIES
Pertinent information concerning the principal properties of the Company and
its subsidiaries is as follows:
ACREAGE (LAND)
SQUARE FOOTAGE
LOCATION TYPE OF FACILITY (BUILDING)
-------- ------------------------------------------------- --------------
OWNED PROPERTIES
Horseheads, New York Manufacturing, Engineering, Turnkey Systems, 80 acres
Marketing, Sales, Demonstration, Service and 515,000 sq.
Administration ft.
Elmira, New York Warehouse 12 acres
176,000 sq.
ft.
St. Gallen, Switzerland Manufacturing, Engineering, Turnkey Systems, 8 acres
Marketing, Sales, Demonstration, Service and 155,000 sq.
Administration ft.
Biel, Switzerland Manufacturing, Engineering, Turnkey Systems 4 acres
41,500 sq. ft.
Exeter, England Sales, Marketing, Demonstration, Service, Turnkey 2 acres
Systems and Administration 27,500 sq. ft.
LEASE
EXPIRATION
LOCATION TYPE OF FACILITY SQUARE FOOTAGE DATE
-------- -------------------------------------------- --------------- ----------
LEASED PROPERTIES
Krefeld, Germany Sales, Service and Demonstration 4,000 sq. ft. 3/31/07
Los Angeles, California Sales 14,500 sq. ft. 10/31/02
Toronto, Canada Sales, Service 5,800 sq. ft. 6/5/04
Cleveland, Ohio Sales, Service and Demonstration 10,000 sq. ft. 6/30/03
Shanghai, PRC Product Assembly, Sales, Service, 14,500 sq. ft. 7/31/02
Demonstration and Administration
Nan Tou, Taiwan Manufacturing, Engineering,Marketing Sales, 110,000 sq. ft. 12/31/19
Service, Demonstration and Administration
Biel, Switzerland Marketing Sales, Service, and Administration 17,400 sq. ft. 6/30/05
ITEM 3.--LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to its operations. None of the litigation in which the Company is currently
involved, individually or in the aggregate, is anticipated to be material to its
financial condition or results of operations.
ITEM 4.--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matters were submitted to a vote of
security holders.
7
PART II
ITEM 5.--MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table reflects the highest and lowest values at which the
stock traded in each quarter of the last two years. Hardinge Inc. common stock
trades on The Nasdaq Stock Market under the symbol "HDNG." The table also
includes dividends per share, by quarter.
2001 VALUES 2000 VALUES
------------------------------- -------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
-------- -------- --------- -------- -------- ---------
QUARTER ENDED
March 31........................................ $15.25 $11.88 $.14 $13.94 $9.06 $.14
June 30......................................... 17.50 12.55 .14 13.50 8.38 .14
September 30.................................... 15.65 11.16 .14 13.88 9.56 .14
December 31..................................... 12.09 8.85 .11 14.25 10.44 .14
At February 1, 2002, there were 2,890 holders of record of common stock.
8
ITEM 6.--SELECTED FINANCIAL DATA
The following selected financial data is derived from the audited
consolidated financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related notes and other
information included herein (dollar amounts in thousands except per share data).
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA
Net sales............................................ $209,522 $189,479 $178,533 $259,625 $246,579
Cost of sales........................................ 145,508 128,531 121,375 167,528 164,161
Cost of sales--nonrecurring (1)...................... 27,237
-------- -------- -------- -------- --------
Gross profit......................................... 36,777 60,948 57,158 92,097 82,418
Selling, general and administrative expenses......... 53,209 47,037 46,261 56,957 49,325
Unusual expense (2).................................. 950 1,960
Provision--doubtful accounts (1,3)................... 6,676 1,242 1,280 550 634
Impairment charge (1)................................ 5,519
-------- -------- -------- -------- --------
Operating (loss) income.............................. (28,627) 12,669 9,617 33,640 30,499
Interest expense..................................... 3,656 1,736 1,743 2,324 2,378
Interest (income).................................... (509) (582) (565) (597) (705)
-------- -------- -------- -------- --------
(Loss)income before income taxes and minority
interest in consolidated subsidiary and in
investment of equity company....................... (31,774) 11,515 8,439 31,913 28,826
Income taxes (benefits).............................. (10,245) 3,631 3,054 11,630 10,886
Minority interest in (profit) loss of consolidated
subsidiary......................................... (642) (263) 656
Profit (loss) in investment of equity company........ 318 (89)
-------- -------- -------- -------- --------
Net (loss) income (1)................................ $(21,853) $ 7,532 $ 6,041 $ 20,283 $ 17,940
======== ======== ======== ======== ========
PER SHARE DATA:
Weighted average number of common shares
outstanding........................................ 8,695 8,755 9,287 9,432 9,357
Basic (loss)earnings per share (1,4)................. $ (2.51) $ .86 $ .65 $ 2.15 $ 1.92
======== ======== ======== ======== ========
Weighted average number of common shares
outstanding........................................ 8,695 8,794 9,287 9,434 9,427
Diluted(loss)earnings per share (1,4)................ $ (2.51) $ .86 $ .65 $ 2.15 $ 1.90
======== ======== ======== ======== ========
Cash dividends declared per share.................... $ .53 $ .56 $ .56 $ .56 $ .53
======== ======== ======== ======== ========
BALANCE SHEET DATA
Working capital (5).................................. $ 61,837 $120,324 $117,723 $132,486 $119,785
Long-term portion of notes receivable................ 10,394 17,354 15,014 13,063 11,951
Total assets......................................... 254,491 283,116 241,457 256,681 245,284
Long-term debt....................................... 4,474 47,417 23,380 35,415 31,012
Shareholders' equity................................. 141,215 169,463 171,714 179,795 163,184
--------------------------
(1) 2001 results include a realignment charge of $37,956 (after tax $26,455)
which included a nonrecurring inventory write-off for underperforming
product lines; bad debt write-off; and the impairment of goodwill and other
underutilized assets.
(2) 1998 included a one-time charge of $950 (approximately $570 after tax)
resulting from costs incurred to relocate the manufacture and support of
Hansvedt Inc. from Illinois to Elmira, New York, and from a workforce
reduction of approximately 200 full-time jobs. 1997 included a one-time
charge of $1,960 ($1,200 after tax). This non-recurring charge involves
outside costs incurred in connection with a major acquisition that the
Company carried into the final stages of the due diligence process but
decided not to complete.
(3) In 2001, the provision for doubtful accounts includes $5,200 related to the
realignment discussed herein.
(4) All share and per share data have been restated, where appropriate, to
reflect the Company's three-for-two stock split in May, 1998.
(5) Certain amounts in 2000, 1999, 1998, and 1997 have been reclassified to
conform with current year presentation.
9
ITEM 7.--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
NET SALES. Net sales for the year 2001 were $209,522,000 compared to
$189,479,000 in 2000, an increase of $20,043,000, or 10.6%. The Company's
December 2000 acquisition of HTT Hauser Tripet Tschudin (HTT) added sales of
$39,099,000 in 2001. Excluding that acquisition, net sales for 2001 would have
been $170,423,000, a decrease of 10.1% from the previous year.
Sales in Europe and in other areas of the world excluding the U.S. increased
dramatically during the year. European sales were $79,610,000 in 2001 compared
to $43,289,000 during the prior year, for an increase of $36,321,000, or 83.9%.
$29,532,000 of that increase was attributable to European sales of HTT. Sales in
Europe by the Company's Kellenberger subsidiary also increased substantially
during 2001, accounting for another $5,862,000 of the European sales
improvement. Likewise, sales to other areas of the world increased by
$18,222,000, or 84.0%, from $21,706,000 in 2000 to $39,928,000 in 2001. In this
region, sales to customers in the Peoples' Republic of China, from both
previously existing Hardinge Companies and from HTT, were primarily responsible
for the increase.
On the other hand, sales to customers in the United States declined
significantly, from $124,484,000 in 2000 to $89,984,000 in 2001, for a reduction
of $34,500,000 or 27.7%. This decrease is the result of a reduction in North
American manufacturing activity levels which has been occurring throughout the
year. That reduction has resulted in an industry-wide decline in machine tool
sales to North American manufacturers.
The geographic changes described above have resulted in a significant change
in the global apportionment of Hardinge sales. In 2001, sales in the United
States accounted for 43.0% of total sales, with Europe and the remainder of the
world accounting for 38.0% and 19.0%, respectively. This compares to 65.7% in
the U.S. for the year 2000, with the remaining 22.9% and 11.4% to Europe and the
remainder of the world, respectively.
Machine sales represented 68.3% of revenues for the year 2001, compared to
63.5% during the previous year. Sales of non-machine products and services make
up the balance.
The Company's backlog at December 31, 2001 was $51,202,000 compared to
$64,801,000 at December 31, 2000.
REALIGNMENT CHARGE. Realignment charges of $26,455,000, net of tax benefits
or $3.05 per basic and diluted share at date of charge ($37,956,000 excluding
tax benefits), were recorded in the third quarter of 2001. The realignment
reflects a management review of each of the Company's product lines in order to
better focus its U.S. manufacturing operations, as well as the Company's
worldwide engineering and financial resources, on those product lines which will
provide the strongest long-term shareholder returns. In particular, domestic
manufacturing and engineering resources will focus on cost-effective, high-end
products, leveraging the Company's experience in developing technologically
advanced, high performance machines. The realignment will also reduce debt as
under-performing inventory is converted into cash through sales at discounted
prices as well as tax benefits.
The realignment charge included: a nonrecurring inventory write-down of
$27,237,000, or $18,081,000 net of tax benefits, for under-performing product
lines which will be discontinued; a goodwill write-down of $3,542,000 for which
no tax benefit is available; an additional reserve for uncollectable accounts
and notes receivable of $5,200,000, or $3,380,000 net of tax benefits for
expected write-offs of domestic and foreign trade and note receivables related
to the poor economic climate; and $1,977,000, or $1,452,000 net of tax benefits,
for write-down of underutilized assets, which have now been sold or offered for
sale and other charges. The above amounts include cash charges of $977,000,
excluding tax benefits.
10
GROSS PROFIT. Excluding the realignment charge described above, gross
margin for the year 2001 was 30.6% of net sales compared to 32.2% for the year
2000. Competitive discounting of turning machines and machining centers,
especially in the depressed North American market, continued to reduce gross
margins. Gross margins were also negatively impacted by lower recovery of fixed
manufacturing overhead because of decreased U.S. machine production, reflecting
both reduced North American orders and the workforce reductions of June, August
and December 2001. Including the realignment charge described above, which added
$27,237,000 to cost of sales, gross margin was 17.6% of net sales for the year
2001.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the year 2001 were $53,209,000, or 25.4% of
net sales, compared to 24.8% during the previous year. The $6,172,000 increase
was primarily due to the SG&A incurred at HTT.
PROVISION FOR DOUBTFUL ACCOUNTS. Excluding the one-time realignment charge
of an additional $5,200,000 described above, bad debt expense was $1,476,000 for
the year 2001, compared to $1,242,000 during the previous year. Including the
realignment charge, bad debt expense was $6,676,000 for the year 2001.
IMPAIRMENT CHARGES. The realignment charges described above included
$3,542,000 for the impairment of purchased goodwill. An additional $1,977,000
represented impairment of other assets, which have since been sold or offered
for sale, and other, lesser charges.
INCOME FROM OPERATIONS. Excluding the realignment charges described above,
income from operations was $9,329,000 for the year 2001, compared to $12,669,000
for the previous year. The reduction was the result of the reduced North
American sales, and other factors, discussed above. Including the realignment
charges, the loss from operations was $28,627,000 for the year 2001. This
included $826,000 for amortization of purchased intangibles.
INTEREST EXPENSE. Interest expense for the year 2001 was $3,656,000
compared to $1,736,000 for the previous year. The increase was primarily caused
by borrowing $31,511,000 which was attributable to the acquisition of HTT.
Partially offsetting the effect of this increased debt were decreases in
interest rates on borrowings.
INTEREST INCOME. Interest income, primarily derived from internally
financed customer sales during both years, remained relatively flat, at $509,000
for 2001 and $582,000 for 2000.
INCOME TAXES. The realignment charges described above included $11,501,000
of tax benefits, of which $4,586,000 is expected to be recovered in 2002 as a
tax refund through the carryback of the net operating loss, and the remaining
$6,915,000 will provide deferred tax benefits for use in 2002 and thereafter.
Excluding the realignment charges described above, the provision for income
taxes for the year 2001 was $1,256,000, or 20.3% of income before taxes,
compared to $3,631,000, or 31.5% for the previous year. The unusual 2001 tax
rate was due to increased taxable profits earned in countries with comparatively
lower tax rates partially offset by taxable losses incurred in jurisdictions
with higher tax rates.
Including the realignment charges, the provision for income taxes was a
benefit of $10,245,000 for the year 2001.
MINORITY INTEREST IN (PROFIT) OF CONSOLIDATED SUBSIDIARY. The Company has a
51% interest in Hardinge Taiwan Precision Machinery Limited, an entity that is
recorded as a consolidated subsidiary. In 2001 and 2000, respectively, $642,000
and $263,000 reductions in net income represent the minority stockholders' 49%
share in the joint venture's net income.
PROFIT (LOSS) IN INVESTMENT OF EQUITY COMPANY. Hardinge EMAG GmbH generated
$318,000 and ($89,000) for 2001 and 2000, respectively, for Hardinge's 50%
interest in this joint venture.
11
NET INCOME. Excluding the realignment charges described above, net income
for the year 2001 was $4,602,000, or $.53 per basic and diluted share, compared
to $7,532,000, or $.86 per basic and diluted share for the year 2000. These
reductions in earnings were the result of the reduced North American sales, and
other factors, discussed above. Including the realignment charges described
above, net (loss) for the year 2001 was ($21,853,000), or ($2.51) per basic and
diluted share.
2000 COMPARED TO 1999
NET SALES. Net sales for the year 2000 were $189,479,000 compared to
$178,533,000 in 1999, an increase of $10,946,000, or 6.1%. Sales in the U.S.
market increased 7.4% to $124,484,000, or 65.7% of the total. Sales in Europe
declined 5.0% to $43,289,000, or 22.9% of total sales. Other international sales
rose 27.4% to $21,706,000 or 11.4% of sales. Sales to customers in the
automotive industry declined to $2,911,000 in 2000, compared to $6,499,000 in
1999, and accounted for only 1.5% of total 2000 sales compared to 3.6% of total
1999 sales.
Sales of machines represented 63.5% of 2000's total sales, with the balance
of 36.5% represented by non-machine products and services. This compares to
1999's breakdown of 61.9% for machines and 38.1% for non-machine products and
services.
The Company's backlog of orders was $64,801,000 at December 31, 2000,
including orders totaling $17,813,000 at HTT Hauser Tripet Tschudin AG (HTT),
which Hardinge acquired on December 22, 2000. Excluding HTT, the backlog was
$46,988,000, compared to $38,950,000 at December 31, 1999, representing a 20.6%
increase.
GROSS PROFIT. Gross profit for 2000 was $60,948,000 compared to $57,158,000
during 1999. This $3,790,000 improvement includes both $3,503,000 due to the
6.1% increase in sales discussed above and $287,000 due to the gross margin
percentage increase to 32.2% from 32.0% in 1999. Continued difficult worldwide
market conditions caused significant price discounting in Hardinge's primary
markets, often requiring continued selective discounting by the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses totaled $47,037,000, or 24.8% of sales, during
2000, compared to $46,261,000, or 25.9% of sales in 1999. The Company continued
with the cost control program begun in 1999 and accomplished this lower SG&A
percentage despite the substantial promotional expenses incurred in 2000 for the
bi-annual International Manufacturing Technology Show. Bad debt provision was
$1,242,000 and $1,280,000 for 2000 and 1999 respectively.
INCOME FROM OPERATIONS. Income from operations was $12,669,000, or 6.7% of
sales, during 2000, compared to $9,617,000, or 5.4% of sales for 1999. This
improvement was due to the higher sales level and the cost reduction efforts,
both described above.
INTEREST EXPENSE. Interest expense totaled $1,736,000 in 2000 compared to
$1,743,000 in the previous year. While interest rates were higher during most of
2000, the reduced average borrowing level, which benefited from the substantial
operating cash flow more than offset the impact of the higher interest rates.
INTEREST INCOME. Interest income, primarily derived from internally
financed customer sales during both years, remained relatively flat, at $582,000
for 2000 compared to $565,000 for 1999.
INCOME TAXES. Income taxes declined to 31.5% of pre-tax income, from 36.2%
in 1999, primarily for three reasons: the new Hardinge Taiwan subsidiary's
profitability allowed utilization of a tax loss carry-forward of $1,171,000
generated during its 1999 startup; the higher proportion of profits earned at
foreign operations, which are generally taxed at lower rates; and the benefits
from final resolution of multi-year tax audits in the U.S. and Canada.
12
MINORITY INTEREST IN (PROFIT) OF CONSOLIDATED SUBSIDIARY. The Company has a
51% interest in Hardinge Taiwan Precision Machinery Limited, an entity, which is
recorded as a consolidated subsidiary. The $263,000 reduction in net income
represents the minority stockholders' 49% share in that joint venture's 2000 net
income.
(LOSS) IN INVESTMENT OF EQUITY COMPANY. The new Hardinge EMAG GmbH joint
venture generated ($89,000) loss for Hardinge's 50% interest during its startup
and initial four months of operation.
NET INCOME. Net income increased to $7,532,000 for 2000, compared to
$6,041,000 during 1999. The increased net income during 2000 was directly
attributable to the higher sales level and other issues described above.
EARNINGS PER SHARE. Earnings per share improved to $.86 per diluted share
in 2000, compared to $.65 per diluted share in 1999, because of the higher net
income together with the Company's repurchase of stock which resulted in the
decline in weighted shares outstanding to 8,794,000 shares in 2000 compared to
9,287,000 shares in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio at December 31, 2001 was 1.68:1 compared to
3.48:1 at December 31, 2000. In September 2001, the Company amended the
financial covenant requirements of its revolver and its two term loan agreements
and is in compliance with those covenants at December 31, 2001. As described in
the footnotes to the financial statements and later in this discussion, the
entire balances of $26,911,000 of loans outstanding under the revolver and
$28,438,000 outstanding under its two term loan agreements have been classified
as current liabilities at December 31, 2001. The Company has received commitment
letters from its primary lenders providing for renewal of the revolving credit
facility through August 2003 and amendments to its financial covenants in each
of the revolving credit agreement and the two term loan agreements. The
commitment letters are dated March 25, 2002 and it is anticipated that the
amendments to the loan agreements will be executed on or before April 5, 2002.
Upon closing of the terms as referenced in the letters, the revolver and the
appropriate portions of the term loans will be reclassified as long-term
liabilities.
Cash generated from operating activities in 2001 totaled $9,414,000 compared
to $17,808,000 during the previous year, for a decrease of $8,394,000. The net
loss of $21,853,000 in 2001, after removal of non-cash realignment charges
totaling $37,919,000, resulted in cash generation of $16,066,000 compared to
$7,532,000 in 2000, accounting for an increase in cash generation of $8,534,000
between the two years. Changes in notes receivable and other assets accounted
for additional cash generation of $4,971,000 and $1,856,000, respectively.
Offsetting this cash generation were uses of cash totaling $10,124,000 related
to reduction in accounts payable and accrued expenses which occurred primarily
as a result of the previously discussed reduction in North American business
activity during 2001. Finally, net increases in deferred tax assets of
$7,121,000 and the generation of an income tax receivable of $4,648,000 during
2001 caused a further reduction in cash generated from operations.
The Company provides long-term financing for the purchase of its equipment
by qualified customers. The Company regards this program as an important part of
its marketing efforts, particularly to independent machine shops. Customer
financing is offered for a term of up to seven years, with the Company retaining
a security interest in the purchased equipment. In the event of a customer
default and foreclosure, which have been relatively uncommon, it is the practice
of the Company to recondition and resell the equipment. It has been the
Company's experience that such equipment resales have realized most of the
remaining contract value.
In order to reduce debt and finance current operations, the Company
periodically sells a substantial portion of its underlying customer notes
receivable to various financial institutions. In 2001, the Company sold
$14,120,000 of customer notes compared to $26,593,000 sold during 2000,
reflecting the lower North
13
American sales volume previously discussed. The remaining outstanding balances
of all notes sold as of December 31, 2001 was $53,715,000. Recourse against the
Company from default of most of the notes included in the sales is limited to
10% of the then outstanding balance of the underlying notes. Although the
Company has no formal arrangements with financial institutions to purchase its
customer notes receivable, it has not experienced difficulty in arranging such
sales. While the Company's customer financing program has an impact on its
month-to-month borrowings from time-to-time, it has had little long-term impact
on its working capital because of the sales of the underlying customer notes
receivable. Long-term customer notes receivable held by the Company totaled
$10,394,000 and $17,354,000 at December 31, 2001 and December 31, 2000,
respectively.
The Company conducts some of its manufacturing, sales and service operations
from leased office space with lease terms up to 20 years and uses certain data
processing equipment under lease agreements expiring at various dates during the
next five years. Rent expense under these leases totaled $2,479,000, $2,219,000,
and $1,755,000, during the years ended December 31, 2001, 2000, and 1999,
respectively. Future minimum payments under noncancelable operating leases as of
December 31, 2001 total $14,318,000, with payments over the next five years of
$2,073,000, $1,645,000, $1,372,000, $877,000, and $682,000, respectively.
Total capital expenditures in 2001 were $6,293,000, which included
construction of an additional manufacturing and administration facility at the
Company's Kellenberger subsidiary in St. Gallen, Switzerland.
Financing activities during 2001 used cash of $2,606,000, primarily for the
payment of dividends of $4,622,000 which was partially offset by a net increase
in borrowing of $2,600,000.
During 2001, the Company had revolving loan agreements with several U.S.
banks providing for unsecured borrowing up to $50,000,000 on a revolving basis
through August 1, 2002. As of December 31, 2001, total borrowings under this
credit line were $26,911,000. As discussed further in the footnotes to the
financial statements, the Company has classified the entire amount of
outstanding loans as a current liability at December 31, 2001. The Company has
received a commitment letter from its lenders providing for renewal of the
revolving credit facility for secured borrowings of up to $40,000,000 through
August 2003. The commitment letter is dated March 25, 2002 and it is anticipated
that the extension will be executed on or before April 5, 2002. Upon closing of
the terms as referenced in the letters, the revolver will be reclassified as a
long-term liability.
The Company's Kellenberger subsidiary maintains unsecured overdraft
facilities with commercial banks which permit borrowing in Swiss francs
equivalent to approximately $5,400,000. At December 31, 2001, outstanding loans
under these facilities totaled $1,000.
The Company's HTT subsidiary maintains overdraft facilities with commercial
banks which permit borrowing in Swiss francs equivalent to approximately
$5,400,000. These facilities are secured by an interest in the Company's real
property. At December 31, 2001, total borrowings under these agreements were
$462,000.
During the first quarter of 1996, the Company entered into a long-term
borrowing agreement for $17,750,000 with a syndication of banks. The proceeds
were used to repay revolving loan borrowing which had originally been used to
finance the acquisition of Kellenberger. Quarterly interest payments on this
term loan began during 1996, and quarterly principal repayments commenced in
1998 and are due through February 28, 2003. The agreement contains financial and
other covenants consistent with the revolving loan agreement. The remaining
outstanding principal balance on this loan at December 31, 2001 was $4,438,000.
During the first quarter of 2001, the Company entered into a long-term
borrowing agreement for $24,000,000 with a bank. The proceeds were used to repay
revolving loan borrowing which had originally been used to finance the
acquisition of HTT Hauser Tripet Tschudin. Quarterly interest payments on this
14
term loan began during 2001. The agreement calls for 20 equal quarterly
principal repayments to begin in June 2003. The agreement contains financial and
other covenants consistent with the revolving loan agreement.
As discussed further in the footnotes to the financial statements, the
Company has classified the entire balances of both these loans as current
liabilities at December 31, 2001. The Company has received commitment letters
from its lenders providing for amendments to its financial covenants in each of
the two term loan agreements above. The commitment letters are dated March 25,
2002 and it is anticipated that the amendment agreements will be executed on or
before April 5, 2002. Upon closing of the terms as referenced in the letters,
the portions of these two term loans due on a date more than twelve months past
the balance sheet date ($22,800,000 as of March 31, 2002) will be reclassified
as long-term liabilities.
The Company's HTT subsidiary is also obligated to several commercial banks
under terms of various mortgage agreements on its factory building. The loans
are secured by the property and have unspecified maturities. At December 31,
2001, total balances outstanding under these loans were $4,745,000, with
$271,000 expected to be repaid within the next 12 months.
Management believes that the currently available funds and credit
facilities, along with anticipated additional facilities currently being
negotiated with several banks, and internally generated funds, will provide
sufficient financial resources for its ongoing operations.
MARKET RISK
The following information has been provided in accordance with the
Securities and Exchange Commission's requirements for disclosure of exposures to
market risk arising from certain market risk sensitive instruments.
The Company's earnings are affected by changes in short-term interest rates
as a result of its floating interest rate debt. However, due to its purchase of
interest rate swap agreements, the effects of interest rate changes are limited.
If market interest rates on debt subject to floating interest rates were to have
increased by 2% over the actual rates paid in that year, interest expense would
have increased by $443,000 in 2001 and $274,000 in 2000, after considering the
effect of the interest rate swap agreements. These amounts are determined by
considering the impact of hypothetical interest rates on the Company's borrowing
cost and interest rate swap agreements. These analyses do not consider the
effects of the reduced level of economic activity that could exist in such an
environment. Furthermore, in the event of a change of significant magnitude,
management would likely take actions to further mitigate its exposure to the
change. However, due to the uncertainty of the specific actions that would be
taken and their possible effects, the sensitivity analysis assumes no changes in
the Company's financial structure.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures its products in
the United States, Switzerland, Taiwan and Germany using production components
purchased internationally, and sells the products in those markets as well as
other worldwide markets. The U.S. parent purchases grinding machines
manufactured in Switzerland by its Swiss subsidiaries. Likewise, it purchases
vertical machining centers manufactured in Taiwan by its 51% owned Taiwanese
subsidiary and it purchases vertical lathes from its 50% joint venture, Hardinge
EMAG GmbH. The Company's subsidiaries in the U.K., Germany, Switzerland and
Canada sell products in native currency to customers in those countries. The
Company's Taiwanese subsidiary sells products to foreign purchasers in U.S.
dollars. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. The Company's operating results are exposed to changes in exchange
rates between the U.S. dollar, Canadian dollar, U.K. pound, Swiss franc, Euro,
New Taiwan Dollar, and Japanese yen. For example, when the U.K. pound or Swiss
franc strengthens against other European currencies, the value of sales
denominated in these other currencies decreases when translated to pounds or
Swiss francs. When the U.S. dollar strengthens against
15
the Japanese yen, the price of competitive Japanese imports to the United States
decreases. To mitigate the short-term effect of changes in currency exchange
rates on the Company's functional currency based purchases and sales, the
Company regularly hedges by entering into foreign exchange forward contracts to
hedge portions of its 3 to 6 months' planned purchase and sales transactions.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements requires the
application of a number of accounting policies which are described in the notes
to the financial statements. These policies require the use of assumptions or
estimates, which, if interpreted differently under different conditions or
circumstances, could result in material changes to the reported results.
Following is a discussion of those accounting policies which the company feels
are most susceptible to such interpretation.
ACCOUNTS AND NOTES RECEIVABLE. The Company assesses the collectibility of
its trade accounts and notes receivable using a combination of methods. It
reviews large individual accounts for evidence of circumstances which suggest a
collection problem might exist. Such situations include, but are not limited to,
the customer's past history of payments, its current financial condition as
evidenced by credit ratings, financial statements or other sources, and previous
recent collection activities. The Company's notes receivable are limited to
machine sales to customers in North America, and a security interest is normally
maintained in the equipment sold under terms of the notes. In cases where
repossession may be likely, the Company estimates the probable resale potential
of the assets to be repossessed, and provides a reserve for the remaining
receivable balance after realization of such proceeds. Additionally, the Company
provides a reserve for losses based on current payment trends in the economies
where it holds concentrations of receivables and provides a reserve for what it
believes to be the most likely risk of uncollectibility. In order to make these
allowances, the Company must rely on assumptions regarding economic conditions,
equipment resale values, and the likelihood that previous performance will be
indicative of future results.
INVENTORIES. The Company uses a number of assumptions and estimates in
determining the value of its inventory. An allowance is provided for the value
of inventory quantities of specific items which are deemed to be excessive based
on past usage and anticipated future usage. While the Company feels this is the
most appropriate methodology for determining excess quantities, the possibility
exists that customers will change their buying habits in the future should their
own requirements change. Changes in metal-cutting technology can render certain
products obsolete or reduce their market value. The Company continually
evaluates changes in technology and adjusts its products and inventories
accordingly, either by write-off or by price reductions. However, the
possibility exists that a future technology development, currently
unanticipated, might affect the marketability of specific products produced by
the Company. The Company includes in the cost of its inventories a component to
cover the estimated cost of overhead activities associated with production of
its products. A significant change in future business conditions, either
positive or negative, could cause the need to adjust this absorption factor. The
Company believes that being able to offer immediate delivery on many of its
products is critical to its competitive success. Likewise, it believes that
maintaining an inventory of service parts, with a particular emphasis on
purchased parts, is especially important to support its policy of maintaining
serviceability of its products. Consequently, it maintains significant
inventories of repair parts on many of its machine models, including some which
are no longer in production. The Company's ability to accurately determine which
parts are needed to maintain this serviceability is critical to its success in
managing this element of its business.
INTANGIBLE ASSETS. The Company has on several occasions acquired other
machine tool companies. When doing so, it has used outside specialists to assist
it in determining the value of assets acquired, and has used traditional models
for establishing purchase price based on EBITDA multiples. Consequently, the
value of goodwill on the Company's balance sheet has been affected by the use of
numerous estimations of the value of assets purchased and of future business
opportunity.
16
NET DEFERRED TAX ASSETS. The Company's balance sheet contains a significant
net deferred tax asset. As of December 31, 2001, the Company has relied on
expected future U.S. taxable income as a basis for recognizing the net deferred
tax asset. The Company would need to generate future U.S. taxable income of
approximately $35 million in subsequent periods in order to realize the benefits
of the net deferred tax asset. Given the Company's trend of earnings during past
cycles in the industry and expected upturns based on external market analysis,
the Company believes that it will be able to generate taxable income sufficient
to realize the value of this deferred net tax asset. As of March 7, 2002,
President Bush signed into law the "Job Creation and Workers Assistance Act of
2002." Among other things, this law temporarily extends the general net
operating loss carryback period to five years (from two years) for net operating
losses arising in taxable years 2001 and 2002. As of December 31, 2001, the
Company has sufficient taxable income in the five year carryback period to
support the recognition of the net deferred tax asset.
DEBT. The Company's debt to third parties is described in detail in the
footnotes to the financial statements and in the previous liquidity section of
this analysis. As previously discussed, the Company has classified the entire
balances of the revolver and term loans as current liabilities at December 31,
2001. The Company has begun negotiations to replace its expiring revolver
facility with a new similar arrangement. During 2002, the Company has received
commitment letters from its primary lenders providing for renewal of the
revolving credit facility for secured borrowings of up to $40,000,000 through
August 2003 and amendments to its financial covenants in each of the revolving
credit agreement and the two term loan agreements. The commitment letters are
dated March 25, 2002 and it is anticipated that the extension and amendment
agreements will be executed on or before April 5, 2002. Upon closing of the
terms as referenced in the letters, the revolver and the appropriate portions of
the term loans will be reclassified as long-term liabilities.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted Financial Accounting Standards Board Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, on January 1,
2001. The statement requires the Company to recognize all its derivative
instruments on the balance sheet at fair value. Derivatives that are not
qualifying hedges must be adjusted to fair value through income. If the
derivative is a qualifying hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
The Company accounted for the accounting change as a cumulative effect of an
accounting principle. The adoption of Statement 133, resulted in a cumulative
effect of an accounting change of a credit of $25,000 to other comprehensive
income in the first quarter of 2001.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provision of this statement is expected to result in an
increase to net income in 2002 of $718,000. During 2002, the Company will
perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets as of
17
January 1, 2002 and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company, if any.
In August 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the criteria for classifying an asset as
held-for-sale are significantly changed from prior treatment. Assets which are
to be disposed of are stated at the lower of their fair values or carrying
amounts and depreciation is no longer recognized.
The Company will apply this new rule beginning in the first quarter of 2002.
The Company has determined that implementation of this new rule will not impact
the financial position of the Company as of January 1, 2002.
THIS REPORT CONTAINS STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO THE
FINANCIAL PERFORMANCE OF HARDINGE INC. SUCH STATEMENTS ARE BASED UPON
INFORMATION KNOWN TO MANAGEMENT AT THIS TIME. THE COMPANY CAUTIONS THAT SUCH
STATEMENTS NECESSARILY INVOLVE UNCERTAINTIES AND RISK AND DEAL WITH MATTERS
BEYOND THE COMPANY'S ABILITY TO CONTROL, AND IN MANY CASES THE COMPANY CANNOT
PREDICT WHAT FACTORS WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED. AMONG THE MANY FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS ARE FLUCTUATIONS IN THE
MACHINE TOOL BUSINESS CYCLES, CHANGES IN GENERAL ECONOMIC CONDITIONS IN THE U.S.
OR INTERNATIONALLY, THE MIX OF PRODUCTS SOLD AND THE PROFIT MARGINS THEREON, THE
RELATIVE SUCCESS OF THE COMPANY'S ENTRY INTO NEW PRODUCT AND GEOGRAPHIC MARKETS,
THE COMPANY'S ABILITY TO MANAGE ITS OPERATING COSTS, ACTIONS TAKEN BY CUSTOMERS
SUCH AS ORDER CANCELLATIONS OR REDUCED BOOKINGS BY CUSTOMERS OR DISTRIBUTORS,
COMPETITORS' ACTIONS SUCH AS PRICE DISCOUNTING OR NEW PRODUCT INTRODUCTIONS,
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS, CHANGES IN THE AVAILABILITY
AND COST OF MATERIALS AND SUPPLIES, THE IMPLEMENTATION OF NEW TECHNOLOGIES AND
CURRENCY FLUCTUATIONS. ANY FORWARD-LOOKING STATEMENT SHOULD BE CONSIDERED IN
LIGHT OF THESE FACTORS. THE COMPANY UNDERTAKES NO OBLIGATION TO REVISE ITS
FORWARD-LOOKING STATEMENTS IF UNANTICIPATED EVENTS ALTER THEIR ACCURACY.
ITEM 7A.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated herein by reference to
the section entitled "Market Risk" in Item 7, Management's Discussion and
Analysis of Results of Operations and Financial Condition, of this Form 10K.
18
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HARDINGE INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 2001
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors.............................. 20
Consolidated Balance Sheets................................. 21
Consolidated Statements of Operation........................ 22
Consolidated Statements of Shareholders' Equity............. 23
Consolidated Statements of Cash Flows....................... 24
Notes to Consolidated Financial Statements.................. 25
Schedule II--Valuation and Qualifying Accounts is included in Item 14(a) of
this report.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
19
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Hardinge Inc.
We have audited the accompanying consolidated balance sheets of
Hardinge Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedule listed in the Index 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hardinge Inc. and Subsidiaries at December 31, 2001 and 2000 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Buffalo, New York
January 28, 2002,
except for Note 4,
as to which the date
is March 25, 2002
20
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
2001 2000
-------- --------
ASSETS
Current assets:
Cash...................................................... $ 4,608 $ 2,740
Accounts receivable....................................... 38,562 45,276
Notes receivable.......................................... 6,961 7,185
Inventories............................................... 84,084 102,780
Deferred income taxes..................................... 9,558 5,065
Income tax receivables.................................... 4,648
Prepaid expenses.......................................... 4,381 5,825
-------- --------
Total current assets........................................ 152,802 168,871
Property, plant and equipment:
Land and buildings........................................ 45,804 46,407
Machinery, equipment and fixtures......................... 98,371 98,243
Office furniture, equipment and vehicles.................. 5,539 8,781
-------- --------
149,714 153,431
Less accumulated depreciation............................. 79,490 77,561
-------- --------
70,224 75,870
Other assets:
Notes receivable.......................................... 10,394 17,354
Deferred income taxes..................................... 3,659 66
Goodwill.................................................. 13,660 18,238
Other..................................................... 3,752 2,717
-------- --------
31,465 38,375
-------- --------
Total assets................................................ $254,491 $283,116
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 12,757 $ 17,477
Notes payable to bank..................................... 464 7,037
Accrued expenses.......................................... 17,612 15,390
Accrued income taxes...................................... 1,889 2,386
Deferred income taxes..................................... 2,623 2,152
Current portion of long-term debt......................... 55,620 4,105
-------- --------
Total current liabilities................................... 90,965 48,547
Other liabilities:
Long-term debt............................................ 4,474 47,417
Accrued pension plan expense.............................. 6,113 6,092
Deferred income taxes..................................... 1,810 2,342
Accrued postretirement benefits........................... 5,795 5,747
Other liabilities......................................... 2,251 2,282
-------- --------
20,443 63,880
Equity of minority interest................................. 1,868 1,226
Shareholders' equity:
Preferred stock, Series A, par value $.01 per share;
Authorized 2,000,000; issued -- none....................
Common stock, $.01 par value:
Authorized shares -- 20,000,000;
Issued shares -- 9,919,992 at December 31, 2001 and
2000................................................... 99 99
Additional paid-in capital................................ 61,328 61,542
Retained earnings......................................... 104,480 130,955
Treasury shares........................................... (14,934) (14,243)
Accumulated other comprehensive loss...................... (7,799) (6,239)
Deferred employee benefits................................ (1,959) (2,651)
-------- --------
Total shareholders' equity.................................. 141,215 169,463
-------- --------
Total liabilities and shareholders' equity.................. $254,491 $283,116
======== ========
SEE ACCOMPANYING NOTES.
21
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
Net sales................................................... $209,522 $189,479 $178,533
Cost of sales............................................... 145,508 128,531 121,375
Cost of sales--nonrecurring................................. 27,237
-------- -------- --------
Gross profit................................................ 36,777 60,948 57,158
Selling, general and administrative expenses................ 53,209 47,037 46,261
Provision for doubtful accounts............................. 6,676 1,242 1,280
Impairment charge........................................... 5,519
-------- -------- --------
(Loss) income from operations............................... (28,627) 12,669 9,617
Interest expense............................................ 3,656 1,736 1,743
Interest (income)........................................... (509) (582) (565)
-------- -------- --------
(Loss) income before income taxes and minority interest in
consolidated subsidiary and investment of equity
company................................................... (31,774) 11,515 8,439
Income taxes (benefits)..................................... (10,245) 3,631 3,054
Minority interest in (profit) loss of consolidated
subsidiary................................................ (642) (263) 656
Profit (loss) in investment of equity company............... 318 (89)
-------- -------- --------
Net (loss) income........................................... $(21,853) $ 7,532 $ 6,041
======== ======== ========
Per share data:
Basic earnings per share:
Weighted average number of common shares outstanding........ 8,695 8,755 9,287
======== ======== ========
(Loss) earnings per share................................... $ (2.51) $ .86 $ .65
======== ======== ========
Diluted earnings per share:
Weighted average number of common shares outstanding........ 8,695 8,794 9,287
======== ======== ========
(Loss) earnings per share................................... $ (2.51) $ .86 $ .65
======== ======== ========
Cash dividends declared per share........................... $ .53 $ .56 $ .56
======== ======== ========
SEE ACCOMPANYING NOTES.
22
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER DEFERRED TOTAL
COMMON PAID-IN RETAINED TREASURY COMP. EMPLOYEE SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME BENEFITS EQUITY
-------- ---------- -------- -------- ------------ --------- -------------
BALANCE AT DECEMBER 31, 1998............ $ 98 $60,351 $127,526 $ (853) $(2,485) $(4,842) $179,795
Comprehensive Income
Net income.............................. 6,041 6,041
Other comprehensive (loss) income
Foreign currency translation
adjustment........................ (3,230) (3,230)
Unrealized gain on net investment
hedge............................. 1,572 1,572
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income.................... 4,383
--------------------------------------------------------------------------------------------------------------------------------
Dividends declared...................... (5,242) (5,242)
Issuance of 76,000 shares for long-term
incentive plan........................ 1 1,367 (1,368)
Shares issued and forfeited pursuant to
long-term incentive plan.............. (260) 250 230 220
Amortization (long-term incentive
plan)................................. 1,852 1,852
Tax benefit from long-term incentive
plan.................................. 390 390
Net purchase of treasury stock.......... (88) (9,596) (9,684)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999............ 99 61,760 128,325 (10,199) (4,143) (4,128) 171,714
Comprehensive Income
Net income.............................. 7,532 7,532
Other comprehensive (loss)
Foreign currency translation
adjustment........................ (963) (963)
Unrealized (loss) on net investment
hedge, net of tax................. (1,133) (1,133)
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive income.................... 5,436
--------------------------------------------------------------------------------------------------------------------------------
Dividends declared...................... (4,902) (4,902)
Shares issued and forfeited pursuant to
long-term incentive plan.............. (177) 404 (118) 109
Amortization (long-term incentive
plan)................................. 1,595 1,595
Tax effect from long-term incentive
plan.................................. (41) (41)
Net purchase of treasury stock.......... (4,448) (4,448)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000............ 99 61,542 130,955 (14,243) (6,239) (2,651) 169,463
Comprehensive Income
Net (loss).............................. (21,853) (21,853)
Other comprehensive income (loss)
Foreign currency translation
adjustment........................ (1,326) (1,326)
Cumulative effect of accounting
change, net of tax................ 25 25
Unrealized (loss) on cash flow
hedge, net of tax................. (980) (980)
Unrealized gain on net investment
hedge, net of tax................. 721 721
--------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss).................... (23,413)
--------------------------------------------------------------------------------------------------------------------------------
Dividends declared...................... (4,622) (4,622)
Shares issued and forfeited pursuant to
long-term incentive plan.............. (246) 531 (285)
Amortization (long-term incentive
plan)................................. 977 977
Tax benefit from long-term incentive
plan.................................. 36 36
Net purchase of treasury stock.......... (4) (1,222) (1,226)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001............ $ 99 $61,328 $104,480 $(14,934) $(7,799) $(1,959) $141,215
================================================================================================================================
SEE ACCOMPANYING NOTES.
23
HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
OPERATING ACTIVITIES
Net (loss) income........................................... $(21,853) $ 7,532 $ 6,041
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Noncash portion of realignment charge..................... 33,077
Impairment charge......................................... 4,842
Depreciation and amortization............................. 10,722 9,827 10,458
Provision for deferred income taxes....................... (7,663) (542) (1,195)
Loss on sale of assets.................................... 797
Foreign currency transaction loss......................... 606 134 517
Changes in operating assets and liabilities:
Accounts receivable..................................... 4,621 6,115 7,371
Notes receivable........................................ 3,123 (1,848) (2,081)
Income tax receivable................................... (4,648)
Inventories............................................. (9,301) (6,850) 4,103
Other assets............................................ 260 (1,596) (151)
Accounts payable........................................ (4,718) 2,348 3,605
Accrued expenses........................................ (499) 2,559 5,152
Accrued postretirement benefits......................... 48 129 230
-------- -------- --------
Net cash provided by operating activities................... 9,414 17,808 34,050
INVESTING ACTIVITIES
Capital expenditures -- net................................. (6,293) (3,171) (5,445)
Proceeds from sale of asset................................. 1,833
Acquisition of HTT, net of cash acquired.................... (21,479)
Investment in Hardinge EMAG................................. (318) (1,338)
-------- -------- --------
Net cash (used in) investing activities..................... (4,778) (25,988) (5,445)
FINANCING ACTIVITIES
(Decrease) increase in short-term notes payable to bank..... (6,704) 1,383 (4,229)
Increase (decrease) in long-term debt....................... 9,304 17,385 (11,866)
Purchase of treasury stock.................................. (1,226) (4,338) (9,143)
Dividends paid.............................................. (4,622) (4,902) (5,242)
Funds provided by minority interest......................... 642 263 963
-------- -------- --------
Net cash (used in) provided by financing activities......... (2,606) 9,791 (29,517)
Effect of exchange rate changes on cash..................... (162) (27) (124)
-------- -------- --------
Net increase (decrease) in cash............................. 1,868 1,584 (1,036)
Cash at beginning of year................................... 2,740 1,156 2,192
-------- -------- --------
Cash at end of year......................................... $ 4,608 $ 2,740 $ 1,156
======== ======== ========
SEE ACCOMPANYING NOTES.
24
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Hardinge Inc. is a machine tool manufacturer, which designs, manufactures
and distributes metal cutting lathes, grinding machines, machining centers, and
tooling and accessories related to metal cutting machines. Sales are principally
in the United States and Western Europe. Sales are also made to customers in
Canada, China, Mexico, Japan, Australia, and other foreign countries. A
substantial portion of the Company's sales are to small and medium--sized
independent job shops, which in turn sell machined parts to their industrial
customers. Industries directly and indirectly served by the Company include:
aerospace, automotive, construction equipment, defense, energy, farm equipment,
fiber optics, medical equipment, recreational equipment, telecommunications, and
transportation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation. The
consolidated accounts do not include an unconsolidated subsidiary which is a
joint venture in which the Company owns 50% of the stock but does not have
control of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. They are summarized as follows:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Finished products........................................... $32,494 $ 36,766
Work-in-process............................................. 27,431 32,727
Raw materials and purchased components...................... 24,159 33,287
------- --------
$84,084 $102,780
======= ========
PROPERTY, PLANT AND EQUIPMENT
Property additions, including major renewals and betterments, are recorded
at cost and are depreciated over their estimated useful lives. Upon retirement
or disposal of an asset, the asset and related allowance for depreciation are
eliminated and any resultant gain or loss is credited or charged to income.
Depreciation is provided on the straight-line and sum of the years digits
methods. Total depreciation expense on property, plant and equipment was
$8,451,000, $7,691,000, and $8,003,000 for 2001, 2000 and 1999, respectively.
25
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Intangibles resulting from business acquisitions comprised of costs in
excess of net business assets acquired and brands and trademarks have been
amortized on a straight-line basis over periods ranging from 20 to 30 years. The
Company periodically evaluates the recoverability of intangibles resulting from
business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions. Amortization expense was $826,000, $144,000, and $144,000 for 2001,
2000 and 1999, respectively. Accumulated amortization was $718,000 and $492,000
at December 31, 2001 and 2000, respectively. During the third quarter of 2001,
the Company's realignment charge included a write-off of $3,542,000 for the
Hansvedt goodwill.
INCOME TAXES
The Company accounts for income taxes using the liability method according
to Financial Accounting Standards Board Statement No. 109. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
FOREIGN CURRENCY TRANSLATION
In accordance with Financial Accounting Standards Board Statement No. 52,
all balance sheet accounts of foreign subsidiaries are translated at current
exchange rates and income statement items are translated at an average exchange
rate for the year. The gain or loss resulting from translating subsidiary
financial statements is recorded as a separate component of shareholders' equity
as other comprehensive income. Transaction gains and losses are recorded in
operations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Financial Accounting Standards Board Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, on January 1,
2001. The statement requires the Company to recognize all its derivative
instruments on the balance sheet at fair value. Derivatives that are not
qualifying hedges must be adjusted to fair value through income. If the
derivative is a qualifying hedge, depending on the nature of the hedge, changes
in the fair value of derivatives will either be offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings.
The Company accounted for the accounting change as a cumulative effect of an
accounting principle. The adoption of Statement 133, resulted in a cumulative
effect of an accounting change of a credit of $25,000 to other comprehensive
income.
Prior to January 1, 2001 gains and losses on foreign exchange contracts
designated as hedges of specific transactions were accrued as exchange rates
change and were recognized in income. Gains and losses on contracts designated
as hedges of net investments in foreign subsidiaries were accrued as exchange
rates change and were recognized in the comprehensive income section of the
Shareholders' Equity as a foreign currency translation adjustment. Gains and
losses on contracts designated as hedges of
26
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
identifiable foreign currency firm commitments were deferred and included in the
measurement of the related foreign currency transaction.
RESEARCH AND DEVELOPMENT COSTS
The cost of research and development, all of which has been charged to
operations, amounted to $9,798,000, $6,992,000, and $7,060,000 in 2001, 2000,
and 1999, respectively.
EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of shares
of common stock outstanding during the year. For diluted earnings per share, the
weighted average number of shares includes common stock equivalents related
primarily to restricted stock. Restricted shares awarded under the Company's
long-term incentive stock plans are treated as issued shares at time of award
and are treated for diluted earnings per share as outstanding in accordance with
the treasury stock method over the period of their vesting.
STOCK-BASED COMPENSATION
The Company grants restricted shares of common stock and stock options to
certain officers and other key employees. The Company accounts for restricted
share grants and stock option grants in accordance with APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
REVENUE RECOGNITION
The Company recognizes revenue from product sales upon shipment of the
product.
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 of the Company.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been
reclassified to conform with current year presentation.
2. REALIGNMENT CHARGE
2001's third quarter included a one-time charge of $37,956,000 ($26,455,000
after tax or $3.05 per basic and diluted share at date of charge). This charge
is in response to the current recession impacting the machine tool industry and
market changes requiring the Company to realign its U.S. based manufacturing
operations in Elmira, New York. This realignment charge is designed to improve
the Company's
27
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
2. REALIGNMENT CHARGE (CONTINUED)
profitability, strengthen its financial position and enhance its competitive
advantages. The realignment charge included:
TAX NET OF
PRE-TAX BENEFIT TAXES
-------- -------- --------
(IN THOUSANDS)
Realignment charge:
Inventory write-off related to under-performing product
lines which have been discontinued........................ $27,237 $ 9,156 $18,081
Goodwill write-off.......................................... 3,542 3,542
Reserve for uncollectable accounts and notes receivable..... 5,200 1,820 3,380
A write-down of underutilized assets that have been offered
for sale, and other charges............................... 1,977 525 1,452
------- ------- -------
$37,956 $11,501 $26,455
======= ======= =======
The balance of the realignment charge at December 31, 2001 is as follows:
DECEMBER 31, DECEMBER 31,
2000 ADDITIONS USAGES RECLASS. 2001
------------ --------- -------- -------- ------------
Inventory write-off....................... $0 $27,237 $15,846 $0 $11,391
Goodwill write-off........................ 0 3,542 3,542 0 0
Reserve for uncollectable accounts and
notes receivable........................ 0 5,200 306 0 4,894
Write-down of under utilized assets and
other charges........................... 0 1,977 1,156 0 821
-- ------- ------- -- -------
Pre-tax realignment charge................ 0 37,956 20,850 0 17,106
Tax benefit............................... 0 (11,501) (5,169) 0 (6,332)
-- ------- ------- -- -------
Realignment net of taxes.................. $0 $26,455 $15,681 $0 $10,774
== ======= ======= == =======
The above balance of $17,106 at December 31, 2001 primarily represents
inventories that have been identified but not yet physically discarded through
sale or other disposition, accounts receivable that have not been written off
and other assets that have not been sold or abandoned.
3. ACQUISITION AND JOINT VENTURE
On December 22, 2000, the Company acquired 100% of the outstanding stock of
HTT Hauser Tripet Tschudin AG (HTT), a Biel, Switzerland based manufacturer of
grinding machines. The Company paid $31,659,000, including assumed debt and
acquisition expenses. The acquisition was funded using the Company's revolving
loan agreement. The acquisition was accounted for as a purchase effective
December 31, 2000. During the first quarter of 2001, the Company refinanced the
acquisition with a long term borrowing agreement for $24,000,000.
The purchase price was allocated based on the fair value of assets and
liabilities as of the date of acquisition, resulting in goodwill of $14,098,000.
On the basis of an unaudited pro-forma consolidation of the results of
operations, as if the acquisition had taken place on January 1, 1999,
consolidated net sales for
28
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
3. ACQUISITION AND JOINT VENTURE (CONTINUED)
the combined companies would have been $225,700,000 and $213,189,000 for the
years ended December 31, 2000 and 1999, respectively. Consolidated net income
would have been $7,373,000 and $5,764,000 and earnings per share would have been
$0.84 and $0.62 for the years of 2000 and 1999, respectively. These pro-forma
results reflect additional depreciation on the step-up in basis of certain fixed
assets acquired, interest expense that would have been incurred to finance the
purchase, and amortization of the goodwill recorded for the purchase. The
pro-forma amounts are not necessarily indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of 1999 or of future results of operations of the consolidated
entities.
On May 9, 2000, the Company entered into an agreement with EMAG
Maschinenfabrik GmbH of Leipzig, Germany to jointly manufacture inverted spindle
vertical lathes in Germany. The joint venture, Hardinge EMAG GmbH, was
capitalized with a Company contribution of $1,500,000 of cash for a 50%
interest. The joint venture is recorded as an unconsolidated subsidiary herein;
the joint venture is accounted for using the equity method of accounting for
investments.
4. FINANCING ARRANGEMENTS
Long-term debt consists of:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Note payable, under revolving loan agreement expiring August
1, 2002, with interest averaging 3.59% at December 31,
2001 (5.20% in 2000)...................................... $26,911 $38,535
Note payable, under term loan agreement, due in quarterly
installments of $887,500 through February 28, 2003, with
an effective interest rate of 4.49% at December 31,
2001...................................................... 4,438 7,988
Note payable, under term loan agreement, due in 20 equal
quarterly installments of $1,200,000 beginning March 20,
2003 with an effective interest rate of 4.33% at December
31, 2001.................................................. 24,000 0
Mortgages payable under terms of various loan agreements
with interest averaging 5.05% at December 31, 2001........ 4,745 4,999
------- -------
60,094 51,522
Less current portion........................................ 55,620 4,105
------- -------
$ 4,474 $47,417
======= =======
In August 1997, the Company entered into an unsecured credit arrangement
with three banks which provides for borrowing in several currencies up to the
equivalent of $50,000,000 on a revolving loan basis through August 1, 2002.
Interest charged on the debt is based on London Interbank Offered Rates (LIBOR)
plus a fixed percentage. A commitment fee of 1/4 of 1% is payable on the unused
portion of the facility. At December 31, 2001, total borrowings under the
facility were $26,911,000 at an average interest rate of 3.59%.
29
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
4. FINANCING ARRANGEMENTS (CONTINUED)
Approximately $1,453,000 of the borrowing was denominated in British pounds
sterling and $4,458,000 in Swiss francs. At December 31, 2000, total borrowings
under the facility were $38,535,000. Approximately $1,495,000 of the borrowing
was denominated in British pounds sterling and $26,540,000 in Swiss francs,
which included $24,071,000 for temporary financing of the acquisition of HTT
Hauser Tripet Tschudin AG in December 2000.
The Company has begun negotiations to replace this expiring facility with a
new similar multi-year arrangement. During 2002, the Company has received
commitment letters from its primary lenders providing for renewal of the
revolving credit facility for secured borrowings of up to $40,000,000 through
August 2003 and amendments to its financial covenants in each of the revolving
credit agreement and the two term loan agreements. The commitment letters are
dated March 25, 2002 and it is anticipated that the extension and amendment
agreements will be executed on or before April 5, 2002.
In May 1998, the Company entered into an interest swap arrangement with a
financial institution which effectively fixed the interest rate on $15,000,000
of the Company's revolving debt at 6.01% through June 2003. On July 15, 1999,
the amount of the swap was reduced to $10,000,000.
In February 1996, the Company entered into an unsecured term loan
arrangement with a syndication of banks for the purpose of financing its
November 1995 acquisition of L. Kellenberger & Co. AG. The loan provides for
repayment of the outstanding principal in twenty equal installments beginning
May 1998. Interest is charged on the debt based on LIBOR plus a fixed
percentage. At December 31, 2001 and 2000, the balance owed on this loan was
$4,438,000 and $7,988,000, respectively. In February 1996, the Company entered
into a cross-currency interest rate swap agreement which effectively converted
the $17,750,000 term loan to a borrowing of 21,000,000 Swiss francs with an
effective interest rate of 4.49%. In December 2000, that swap arrangement was
bifurcated into two separate swap agreements, a cross currency swap, and an
interest rate swap. The cross currency swap, which effectively converts the
remaining term loan principal to Swiss francs, has been designated as a hedge
against the Company's net investment in Kellenberger. The interest rate swap
effectively converts the floating interest rate to a fixed rate.
In March 2001, the Company entered into an unsecured term loan arrangement
with a bank for the purpose of financing its December 2000 acquisition of HTT
Hauser Tripet Tschudin AG. The loan provides for repayment of the principal in
twenty equal quarterly installments beginning March 20, 2003. Interest is
charged on the debt based on LIBOR plus a fixed percentage. At December 31, 2001
the balance owed on this loan was $24,000,000. Also in March 2001, the Company
entered into a cross-currency swap and an interest rate swap in association with
this loan. These swaps effectively convert the loan to a borrowing of 39,540,000
Swiss francs with an effective interest rate of 4.33%. The cross-currency swap
has been designated as a hedge against the Company's net investment in HTT. The
interest rate swap effectively converts the floating interest rate to a fixed
rate.
The Company also has a $8,000,000 unsecured short-term line of credit with a
bank with interest based on a fixed percent over the one-month LIBOR. There were
no outstanding loans on this line at December 31, 2001. As of December 31, 2000,
outstanding loans under this agreement totaled $2,000,000 with interest payable
at 7.06%. The agreement is negotiated annually and requires no commitment fee.
The Company's Kellenberger subsidiary maintains unsecured overdraft
facilities with commercial banks that permit borrowings in Swiss francs
equivalent to approximately $5,400,000. These lines provide
30
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
4. FINANCING ARRANGEMENTS (CONTINUED)
for interest at competitive short-term interest rates and carry no commitment
fees on unused funds. At December 31, 2001, total borrowings under these lines
were $1,000 with an average interest rate of 8.05%. There were no loans
outstanding under these lines at December 31, 2000.
The Company's HTT Hauser Tripet Tschudin subsidiary maintains overdraft
facilities with commercial banks that permit borrowings in Swiss francs
equivalent to approximately $5,400,000. The facilities are secured by an
interest in HTT's real property. These lines provide for interest at competitive
short-term interest rates and carry no commitment fees on unused funds. At
December 31, 2001, total borrowings under these lines were $462,000 with an
average interest rate of 6.75%. At December 31, 2000, total borrowings under
these lines were $5,033,000 with an average interest rate of 7.18%. HTT is also
obligated under terms of various mortgage agreements with commercial banks on
its factory building. These loans are secured by the property and have
unspecified maturities. At December 31, 2001 and 2000, total balances
outstanding on these loans were $4,745,000 and $4,999,000, respectively, at
average interest rates of 5.05% and 6.85%, respectively.
Certain of these debt agreements require, among other things, that the
Company maintain specified levels of tangible net worth, working capital, and
specified ratios of debt to earnings, earnings to interest cost, and earnings to
fixed charges. During 2001, the Company and its creditors amended certain of
these requirements in order to include Hauser Tripet Tschudin, and to permit the
realignment charge during the third quarter of 2001.
While the Company is in compliance with its amended debt covenants at
December 31, 2001, it anticipates that it may violate one or more of these
amended covenants during the next twelve months. As a result, all debt on the
Company's 1996 and 2001 term loans and its revolver has been classified as
currently payable at December 31, 2001. The Company has received commitment
letters from its primary lenders providing for renewal of the revolving credit
facility through August 2003 and amendments to its financial covenants in each
of the revolving credit agreement and the two term loan agreements. The
commitment letters are dated March 25, 2002 and it is anticipated that the
extension and amendment agreements will be executed on or before April 5, 2002.
Interest paid in 2001, 2000, and 1999 totaled $3,590,000, 1,684,000, and
$1,765,000, respectively.
The Company conducts some of its manufacturing, sales and service operations
from leased office space with lease terms up to 20 years and uses certain data
processing equipment under lease agreements expiring at various dates during the
next five years. Rent expense under these leases totaled $2,479,000, $2,219,000,
and $1,755,000, during the years ended December 31, 2001, 2000, and 1999,
respectively. Future minimum payments under noncancelable operating leases as of
December 31, 2001 total $14,318,000, with payments over the next five years of
$2,073,000, $1,645,000, $1,372,000, $877,000, and $682,000, respectively.
The Company has provided financing terms of up to seven years for qualified
customers who purchase equipment. The Company has chosen, when appropriate, to
sell underlying notes receivable contracts to financial institutions to reduce
debt and finance current operations. During 2001, 2000, and 1999, the Company
sold notes totaling $14,120,000, $26,593,000, and $16,852,000, respectively. The
remaining outstanding balance of all notes sold as of December 31, 2001 and 2000
was $53,715,000 and $65,282,000, respectively. Gains and losses from the sales
of notes receivable have not been material. Recourse against
31
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
4. FINANCING ARRANGEMENTS (CONTINUED)
the Company from default of most of the notes included in the sales is limited
to 10% of the then outstanding balance of the underlying notes.
In September 2000, the Financial Accounting Standards Board issued Statement
No. 140 ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, which is effective for fiscal years ending after
December 15, 2000. The Company has reviewed the provisions of the statement, and
has determined that their existing notes receivable contract sales are not
impacted by the statement.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In the third quarter of
2001, the Company established a U.S. deferred tax asset related to a realignment
charge. As of December 31, 2001, the Company has recorded a U.S. net deferred
tax asset of approximately $13.2 million. The Company has relied on expected
future U.S. taxable income as a basis for recognizing the net deferred tax
asset. The Company will need to generate future U.S. taxable income of
approximately $35 million in subsequent periods in order to realize the benefits
of the net deferred tax asset. Given the Company's trend of earnings during past
cycles in the industry and expected upturns based on external market analysis,
it believes that it will be able to generate taxable income sufficient to
realize the value of this deferred net tax asset. At December 31, 2001 and 2000,
the Company had state investment tax credits expiring at various dates through
the year 2011. The net change in the valuation allowance was caused by the
expiration of foreign tax credits and an additional valuation for state
investment tax credits for which no benefit was recognized in the financial
statements.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Federal and state tax credit carryforwards................ $4,570 $5,053
Postretirement benefits................................... 2,213 2,194
Deferred employee benefits................................ 2,022 2,437
Accrued pension........................................... 2,496 2,421
Inventory valuation....................................... 6,824 1,633
Other..................................................... 5,583 2,414
------ ------
23,708 16,152
Less valuation allowance.................................. 4,570 5,053
------ ------
Total deferred tax assets............................... 19,138 11,099
------ ------
Deferred tax liabilities:
Tax over book depreciation................................ 6,406 6,908
Margin on installment sales............................... 254 270
Other..................................................... 3,694 3,284
------ ------
Total deferred tax liabilities.......................... 10,354 10,462
------ ------
Net deferred tax assets................................. $8,784 $ 637
====== ======
32
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
5. INCOME TAXES (CONTINUED)
Pre-tax(loss) income was $(41,977,000), $6,111,000, and $6,968,000 from
domestic operations and $10,203,000, $5,404,000, and $1,471,000 from foreign
operations for 2001, 2000, and 1999, respectively.
Significant components of income tax expense (benefit) attributable to
continuing operations are as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Current:
Federal......................................... $ (4,954) $2,912 $3,072
Foreign......................................... 2,183 1,379 447
State........................................... 88 565 637
-------- ------ ------
Total current................................. (2,683) 4,856 4,156
-------- ------ ------
Deferred:
Federal......................................... (6,890) (1,028) (1,236)
Foreign......................................... 925 (59) 255
State........................................... (1,597) (138) (121)
-------- ------ ------
Total deferred................................ (7,562) (1,225) (1,102)
-------- ------ ------
$(10,245) $3,631 $3,054
======== ====== ======
Income tax payments totaled $2,399,000, $5,728,000, and $651,000 in 2001,
2000 and 1999, respectively.
The following is a reconciliation of income tax expense (benefit) computed
at the United States statutory rate to amounts shown in the consolidated
statements of income.
2001 2000 1999
-------- -------- --------
Federal income taxes (benefit)...................... (35.0)% 35.0% 35.0%
State income taxes (benefit)........................ (3.1) 2.4 3.9
Other............................................... 2.9 (5.9) (2.7)
Write-off of nondeductible goodwill impaired........ 3.0
(32.2)% 31.5% 36.2%
===== ==== ====
The income tax rate decreased in 2000 primarily for three reasons: the new
Hardinge Taiwan subsidiary's profitability allowed utilization of a tax
loss-carryforward of $1,171,000 generated during it's 1999 startup; the higher
proportion of profits earned at foreign operations, which are generally taxed at
lower rates; and the benefits from final resolution of multi-year tax audits in
the U.S. and Canada.
Undistributed earnings of the foreign subsidiaries, which amounted to
approximately $27,233,000 at December 31, 2001, are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state taxes has been provided thereon. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount of
the unrecognized deferred U.S. income tax liability is not practicable because
of the complexities associated with its hypothetical calculation.
33
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
6. SHAREHOLDERS' EQUITY
TREASURY SHARES
The number of shares of common stock in treasury was 1,118,909, 1,051,846,
and 686,059, at December 31, 2001, 2000, and 1999, respectively. During 2001,
the Company purchased 105,693 shares and distributed 90,030 shares and had
51,400 shares forfeited pursuant to the long-term incentive plan. During 2000,
the Company purchased 390,232 shares and distributed 33,320 shares and had 8,875
shares forfeited pursuant to the plan. In 1999, the Company purchased 652,080
shares and distributed 33,030 shares with 26,100 shares forfeited pursuant to
the long-term incentive plan.
COMPANY STOCK REPURCHASE PROGRAM
On April 9, 1999, Hardinge announced a stock repurchase program. The Board
of Directors authorized the repurchase of up to 1.0 million shares of the
Company's stock, or approximately 10% of the total shares outstanding. The
Company purchased 900,351 shares under the program through July 25, 2000. On
July 26, 2000, Hardinge announced that its Board of Directors expanded the
Company's stock buyback program by authorizing a plan to repurchase up to an
additional one million shares of stock. No shares have been purchased under the
new plan.
PREFERRED STOCK PURCHASE RIGHTS
On May 16, 1995, the Board of Directors of the Company adopted a Shareholder
Rights Plan and declared a dividend of one Right to purchase Series A Preferred
Stock for each outstanding share of Company common stock held as of May 16,
1995. Each Right entitles the holder of the Right to purchase one one-hundredth
of a share of Series A Preferred Stock (a "Unit") at a purchase price of $80.00
per Unit. The Rights will become exercisable ten business days after any person
or group becomes the beneficial owner of 20% or more of the Common Stock or
commences a tender or exchange offer upon consummation of which such person or
group would, if successful, own 30% or more of the Common Stock. The Rights,
which will expire ten years from the date of issuance, may be redeemed by the
Board of Directors, at $.01 per Right, at any time prior to the expiration of
ten business days after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Common Stock.
34
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
6. SHAREHOLDERS' EQUITY (CONTINUED)
RECONCILIATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations required by Statement
No. 128:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Net (loss) income........................................... $(21,853) $7,532 $6,041
Numerator for basic earnings per share...................... (21,853) 7,532 6,041
Numerator for diluted earnings per share.................... (21,853) 7,532 6,041
Denominator for basic earnings per share--weighted average
shares.................................................... 8,695 8,755 9,287
Effect of diluted securities:
Restricted stock and stock options.......................... 39
Denominator for diluted earnings per share--adjusted
weighted average shares................................... 8,695 8,794 9,287
======== ====== ======
Basic (loss) earnings per share............................. $ (2.51) $ .86 $ .65
======== ====== ======
Diluted (loss) earnings per share........................... $ (2.51) $ .86 $ .65
======== ====== ======
35
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
7. INDUSTRY SEGMENT AND FOREIGN OPERATIONS
The Company operates in one business segment--industrial machine tools.
Domestic and foreign operations consist of:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
UNITED WESTERN UNITED WESTERN UNITED WESTERN
STATES EUROPEAN STATES EUROPEAN STATES EUROPEAN
OPER. OPER. OPER. OPER. OPER. OPER.
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Sales
Gross domestic sales............... $ 93,724 $74,454 $124,484 $38,092 $115,932 $38,572
Export sales....................... 43,581 28,463 41,468 17,058 39,512 10,688
-------- ------- -------- ------- -------- -------
137,305 102,917 165,952 55,150 155,444 49,260
Less interarea eliminations........ 19,739 10,961 19,308 12,315 16,791 9,380
-------- ------- -------- ------- -------- -------
Total net sales.................... $117,566 $91,956 $146,644 $42,835 $138,653 $39,880
======== ======= ======== ======= ======== =======
Operating income................... $(38,110) $ 9,483 $ 7,795 $ 4,874 $ 6,283 $ 3,334
======== ======= ======== ======= ======== =======
Net (loss) income.................. $(28,753) $ 6,900 $ 4,316 $ 3,216 $ 3,798 $ 2,243
======== ======= ======== ======= ======== =======
Identifiable assets................ $166,820 $87,671 $193,358 $89,758 $195,475 $45,982
======== ======= ======== ======= ======== =======
Export sales from Hardinge's U.S. operations include the following:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2001 2000 1999
------------------- ------------------- -------------------
UNITED WESTERN UNITED WESTERN UNITED WESTERN
STATES EUROPEAN STATES EUROPEAN STATES EUROPEAN
OPER. OPER. OPER. OPER. OPER. OPER.
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Sales to Western European
customers........................ $ 2,357 $ 2,504 $ 6,173
Sales to affiliated companies...... 13,028 19,308 16,791
Sales to customers in the remainder
of the world..................... 28,196 19,656 16,548
-------- -------- --------
$ 43,581 $ 41,468 $ 39,512
======== ======== ========
Sales attributable to Western European Operations are based on those sales
generated by subsidiaries located in Europe.
Interarea sales are accounted for at prices comparable to normal,
unaffiliated customer sales, reduced by estimated costs not incurred on these
sales. Operating income excludes interest income and interest expense directly
attributable to the related operations.
No single customer accounted for more than 5% of consolidated sales in any
of the three years presented.
36
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
8. EMPLOYEE BENEFITS
PENSION AND POSTRETIREMENT PLANS
The Company accounts for the pension plan and postretirement benefits in
accordance with Financial Accounting Standards Board Statements No. 87 and 106.
The following disclosures related to the pension and postretirement benefits are
presented in accordance with Financial Accounting Standards Board Statement
No. 132 which became effective in 1998.
The Company provides a qualified defined benefit pension plan covering all
eligible domestic employees. The Plan bases benefits upon both years of service
and earnings. The Company's policy is to fund at least an amount necessary to
satisfy the minimum funding requirements of ERISA. The amount to be funded is
subject to annual review by management and its consulting actuary.
The Company provides a contributory retiree health plan covering all
eligible domestic employees who retired at normal retirement age prior to
January 1, 1993 and all retirees who will retire at normal retirement age after
January 1, 1993 with at least 10 years of active service. Employees who elect
early retirement are eligible for the plan benefits if they have 15 years of
active service at retirement. Benefit obligations and funding policies are at
the discretion of the Company's management. Retiree contributions are adjusted
annually and contain other cost-sharing features such as deductibles and
coinsurance, all of which vary according to the retiree's date of retirement.
The accounting for the plan anticipates future cost-sharing changes to the
written plan that are consistent with the Company's expressed intent to limit
its contributions to 125% of the average aggregate 1993 claim cost. The Company
also provides a non-contributory life insurance plan to retirees. Because the
amount of liability relative to this plan is insignificant, it is combined with
the health plan for purposes of this disclosure.
A summary of the components of net periodic pension cost and postretirement
benefit costs is presented below.
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
2001 2000 1999 2001 2000 1999
-------- -------- -------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
Service cost............................... $1,963 $2,424 $2,472 $ 93 $130 $134
Interest cost.............................. 4,864 4,724 4,401 381 447 431
Expected return on plan assets............. (6,507) (6,095) (5,519) -- -- --
Amortization of prior service cost......... 307 264 264 (24) (24) (24)
Amortization of transition (asset)
obligation............................... (174) (174) (174) -- -- --
Amortization of (gain) loss................ (433) (22) -- -- 11 37
------ ------ ------ ---- ---- ----
Net periodic benefit cost.................. $ 20 $1,121 $1,444 $450 $564 $578
====== ====== ====== ==== ==== ====
37
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
8. EMPLOYEE BENEFITS (CONTINUED)
A summary of the Pension and Postretirement Plans' funded status and amounts
recognized in the Company's consolidated balance sheets is as follows:
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -------------------
DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS) (IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of period............. $63,660 $64,362 $ 5,282 $ 6,167
Service cost.......................................... 1,963 2,424 93 130
Interest cost......................................... 4,864 4,724 381 447
Plan participants' contributions...................... -- -- 486 380
Amendments............................................ 1,137 -- -- --
Actuarial(gain)loss................................... 1,690 (4,642) 104 (1,024)
Benefits paid......................................... (3,573) (3,208) (888) (818)
------- ------- ------- -------
Benefit obligation at end of period................... 69,741 63,660 5,458 5,282
------- ------- ------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of period...... 69,798 70,647 -- --
Actual return on plan assets.......................... (3,031) 2,359 -- --
Employer contribution................................. -- -- 402 438
Plan participants' contributions...................... -- -- 486 380
Benefits paid......................................... (3,573) (3,208) (888) (818)
------- ------- ------- -------
Fair value of plan assets at end period............... 63,194 69,798 -- --
------- ------- ------- -------
RECONCILIATION OF FUNDED STATUS:
Funded status......................................... (6,547) 6,138 (5,458) (5,282)
Unrecognized net actuarial(gain)loss.................. (1,220) (12,881) (121) (225)
Unrecognized transition (asset) obligation............ (1,220) (1,394) -- --
Unrecognized prior service cost....................... 2,874 2,045 (216) (240)
------- ------- ------- -------
Prepaid (accrued) benefit cost........................ $(6,113) $(6,092) $(5,795) $(5,747)
======= ======= ======= =======
Actuarial assumptions used to determine pension costs and other
postretirement benefit costs include:
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31,
Discount rate............................................... 7.50% 7.75% 7.25% 7.50%
Expected return on plan assets.............................. 9.50% 9.50% N/A N/A
Rate of compensation increase............................... 4.50% 4.50% N/A N/A
38
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
8. EMPLOYEE BENEFITS (CONTINUED)
The decrease in 2001 in the discount rate from 7.75% to 7.50% related to the
Pension Plan and the decrease from 7.50% to 7.25% related to the Postretirement
Benefits resulted in an actuarial loss of $2,091,000 and $140,000 at
December 31, 2001, respectively.
Pension plan assets include 383,886 shares of the Company's common stock
valued at approximately $3,666,000 and $5,470,000 at December 31, 2001 and 2000,
respectively. Dividends paid on those shares were $203,000 and $201,000 in 2001
and 2000 respectively. The remaining plan assets consisted of United States
Government securities, corporate bonds and notes, other common stocks and an
insurance contract.
The annual rate of increase in the per capita cost of covered health care
benefits (the health care cost trend) used to calculate the liability for the
postretirement benefits was assumed to be 8.0% at December 31, 2000, decreasing
gradually to 5.5% by the year 2006 and remaining at that level thereafter.
In 1998, the postretirement benefit plan changed from a self-funded plan to
an insured plan under third party coverage.
The health care cost trend rate assumption does not have a significant
effect on the amounts reported due to the 125% cap on the Company's portion of
the medical plan claims. As of December 31, 2001, Hardinge Inc. reached the caps
set in 1993 for all participants who receive subsidized coverage. Therefore, the
medical trend no longer affects the results.
GROUP HEALTH PLANS
The Company has contributory group benefit plans which provide medical
benefits to all of its domestic employees.
SAVINGS PLAN
The Company maintains a 401(k)plan which covers all eligible domestic
employees of the Company subject to minimum employment period requirements.
Provisions of the plan allow employees to defer from 1% to 20% of their pre-tax
salary to the plan. Those contributions may be invested at the option of the
employees in a number of investment alternatives, one being Hardinge Inc. common
stock. The Company contributes to the plan on a matching formula of 25% of an
employee's contribution up to 5% of the employee's compensation. The Company's
match is in Hardinge Inc. common stock. The Company contributed $293,000,
$342,000, and $376,000 in 2001, 2000 and 1999 respectively, for this match. The
Company may also contribute a discretionary contribution to the plan to be
distributed among all participants.
LONG-TERM INCENTIVE PLANS
In 1996, the Board of Directors established an Incentive Stock Plan to
assist in attracting and retaining key employees. The Plan allows the Board to
grant restricted stock, performance share awards, stock options and stock
appreciation rights up to an aggregate of 450,000 shares of common stock to
these employees. Additionally, in 1988 and 1993, similar plans were established
by the Company; no further shares will be awarded under these plans.
Certain officers were awarded a total of 76,000 and 23,000 restricted shares
of common stock during 2001 and 2000, respectively. In 1999, certain officers
were awarded a total of 79,000 restricted shares of
39
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
8. EMPLOYEE BENEFITS (CONTINUED)
common stock and 21,000 shares were granted to key managers. In 2001,
restrictions on 155,871 shares from the Incentive Stock Plans were released and
51,400 shares were forfeited. During 2000, restrictions on 72,521 shares from
the Incentive Stock Plans were released and 8,875 shares were forfeited.
Restrictions on 236,183 shares were released and 26,100 shares were forfeited in
1999.
As of December 31, 2001, a total of 313,425 restricted shares of common
stock were outstanding under the plans. All shares of restricted stock are
subject to forfeiture and restrictions on transfer, and unconditional vesting
occurs upon the completion of a specified period ranging from three to eight
years from date of grant.
Deferred compensation associated with these grants is measured by the market
value of the stock on the date of grant and totaled $1,001,000, $316,000, and
$1,573,000 in 2001, 2000 and 1999, respectively. This deferred compensation is
being amortized on a straight-line basis over the specified service period. The
unamortized deferred compensation at December 31, 2001, 2000 and 1999, totaled
$1,959,000, $2,651,000,and $4,128,000, respectively, and is included in deferred
employee benefits as a reduction of shareholders' equity.
Stock options for 5,250, 5,250, and 5,250, shares were issued in 2001, 2000
and 1999, respectively under the 1996 Plan. As of December 31, 2001, a total of
100,500 options remained outstanding under the plan. The options expire ten
years from the date of issue and vest over periods varying from immediate
vesting to three years. The Company accounts for the stock options issued under
the Plan using the intrinsic value method as defined by Accounting Principle
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Since all such
options have been issued at exercise prices equal to the trading price of
Hardinge stock at date of issue, no expense is recognized. The Company has
considered valuation of stock options using the fair value method as determined
by Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR STOCK
BASED COMPENSATION. Application of the fair value method, however, would not
have a material impact on the financial statements.
FOREIGN OPERATIONS
The Company also has employees in certain foreign countries that are covered
by defined contribution and benefit pension plans and other employee benefit
plans. Related obligations and costs charged to operations are not material.
40
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
9. OTHER COMPREHENSIVE INCOME
The components of other comprehensive income consisted of the following:
ACCUMULATED
BALANCES AT
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Other Comprehensive (Loss) Income:
Foreign currency translation adjustments.................... $(10,187) $(8,861)
Cumulative effect of accounting change, net of tax.......... 25
Unrealized gain (loss) on derivatives, net of tax:
Cash flow hedges............................................ (979) 1
Net investment hedges....................................... 3,342 2,621
-------- -------
Other Comprehensive (Loss).................................. $ (7,799) $(6,239)
======== =======
10. FINANCIAL INSTRUMENTS
At December 31, 2001 and 2000, the carrying value of financial instruments
such as cash, accounts receivable, accounts payable and short-term debt
approximated their fair values, based on the short-term maturities of these
instruments. The carrying amounts of debt under the revolving agreement and of
mortgages classified as long-term debt approximate fair value as the underlying
instruments are comprised of notes that are repriced on a short-term basis.
In May 1998, the Company entered into a five year interest rate swap
arrangement with a financial institution (See Note 4). At December 31, 2001 and
2000, the fair market values of this instrument were liabilities of $478,000 and
$53,000, respectively.
The carrying amount of the term loan dated February 1996 approximates its
fair value as the underlying interest rate is variable. Related to this term
loan, the Company entered into a seven-year cross-currency interest rate swap
agreement (see Note 4). In December 2000 this agreement was terminated and
re-written as two separate agreements, a currency swap, and a separate interest
rate swap. At December 31, 2001 and 2000, the fair market values of the currency
swap were assets of $1,187,000 and $2,017,000, respectively. At December 31,
2001 and 2000, the fair market values of the interest rate swap were liabilities
of $43,000 and $38,000, respectively. The fair market values of these
instruments are based on current settlement value as determined by a financial
institution.
The carrying amount of the term loan dated March 2001 approximates its fair
value as the underlying interest rate is variable. Related to this term loan,
the Company entered into seven-year cross-currency and interest rate swap
agreements (see Note 4). At December 31, 2001 the fair market values of the
currency swap and interest rate swap were an asset of $902,000 and a liability
of $1,028,000, respectively.
The fair value of notes receivable, short-term and long-term, was determined
using a discounted cash flow analysis based on the rate at which the Company
could sell those notes at year end under standard terms experienced on recent
sales (a fixed percentage over U.S. Treasury notes). At December 31, 2001 and
2000, the carrying value of these notes approximated the fair value.
41
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
10. FINANCIAL INSTRUMENTS (CONTINUED)
The Company regularly enters into foreign currency contracts to manage its
exposure to fluctuations in foreign currency exchange rates on purchases of
materials used in production and cash settlements of intercompany sales. Gains
or losses from these contracts have not been material. At December 31, 2001 and
2000, the Company had notional principal amounts of approximately $2,511,000 and
$6,410,000 in contracts to purchase or sell currency in the future from and to
major commercial banks. The fair value of these contracts is not material.
CONCENTRATION OF CREDIT RISK
The Company sells products to companies in diversified industries, with a
substantial majority of sales occurring in North America and Western Europe. The
Company performs periodic credit evaluations of the financial condition of its
customers. The Company offers financing terms of up to seven years for its
customers in the United States and Canada and files a lien against the equipment
purchased under those terms. No collateral is required for sales made on open
account terms with payment due within thirty days. As of December 31, 2001 and
2000, 1% and 6%, respectively, of the accounts receivable were from the three
major U.S. automobile manufacturers. In addition, at December 31, 2001 and 2000,
receivables from the Company's distributor in France totaled 6% and 7%,
respectively, of the consolidated accounts receivable. The Company holds a
security interest in any of its equipment held by the distributor for inventory
or demonstration purposes.
11. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provision of this statement is expected to result in an
increase to 2002 net income of $718,000. During 2002, the Company will perform
the first of the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company, if any.
In August 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, the criteria for classifying an asset as
held-for-sale are significantly changed from prior treatment. Assets which are
to be disposed of are stated at the lower of their fair values or carrying
amounts and depreciation is no longer recognized.
The Company will apply this new rule beginning in the first quarter of 2002.
The Company has determined that implementation of this new rule will not impact
the financial position of the Company as of January 1, 2002.
42
HARDINGE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001
12. QUARTERLY FINANCIAL INFORMATION
Summarized quarterly financial information for 2001 and 2000 is as follows:
QUARTER
------------------------------------------
FIRST SECOND THIRD (1) FOURTH
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Net sales.............................................. $58,433 $55,872 $ 47,703 $47,514
Gross profit (loss).................................... 19,212 17,021 (13,761) 14,305
Income (loss) from operations.......................... 3,899 3,239 (37,588) 1,823
Net income (loss)...................................... 2,193 1,782 (26,390) 562
Basic earnings per share:
Weighted average shares outstanding.................. 8,705 8,716 8,682 8,695
Earnings (loss) per share............................ .25 .20 (3.04) .06
Diluted earnings per share:
Weighted average shares outstanding.................. 8,711 8,724 8,690 8,695
Earnings (loss) per share............................ .25 .20 (3.04) .06
2000
Net sales.............................................. $47,836 $47,773 $ 45,335 $48,535
Gross profit........................................... 15,702 15,796 14,432 15,018
Income from operations................................. 3,781 3,686 2,424 2,778
Net income............................................. 2,162 1,983 1,369 2,018
Basic earnings per share:
Weighted average shares outstanding.................. 8,852 8,680 8,715 8,718
Earnings per share................................... .24 .23 .16 .23
Diluted earnings per share:
Weighted average shares outstanding.................. 8,934 8,680 8,715 8,718
Earnings per share................................... .24 .23 .16 .23
Earnings per share amounts are based on the weighted average shares outstanding
for each period presented. As a result of the changes in outstanding shares from
quarter to quarter, the total of the four quarters for 2001 does not equal the
annual earnings per share for the year.
------------------------
(1) Third quarter 2001 results include a realignment charge of $37,956 (after
tax $26,455) which included an inventory write-off for under-performing
product lines; bad debt write-off; and the impairment of goodwill and other
underutilized assets.
ITEM 9.-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
43
PART III
ITEM 10.--DIRECTORS AND OFFICERS OF THE REGISTRANT
Certain information required by this item is incorporated by reference from
the Registrant's proxy statement filed with the Commission on March 28, 2002.
Additional information required to be furnished by Item 401 of Regulation S-K is
as follows:
LIST OF EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------
EXECUTIVE
OFFICER
NAME AGE SINCE POSITIONS AND OFFICES HELD
---- -------- --------- --------------------------
J. Patrick Ervin..................... 44 1996 President and Chief Executive Officer since
May, 2001; President and Chief Operating
Officer, April, 2000--April 2001: Executive
Vice President--Operations, August 1998--March
2000; Senior Vice President of Operations,
Mfg., Eng. and Marketing, April 1998--July
1998; Vice President--Sales & Marketing
1996--March 1998; General Manager, Machine Tool
Operations in 1996; Director, Sales & Marketing
1992-1996; Director of Materials & Purchasing
1990-1992; Superintendent, Machine Operations
1989-1990, Various other Company positions
1978-1989.
Richard L. Simons.................... 46 1996 Executive Vice President, Chief Financial
Officer and Assistant Secretary since April,
2000; Senior Vice President, Chief Financial
Officer and Assistant Secretary, in 1999; Vice
President--Finance 1996-1998; Controller
1987-1996; Assistant Treasurer 1985-1987;
Manager Financial Accounting 1983-1984.
Douglas C. Tifft..................... 47 1988 Senior Vice President--Administration since
April, 2000; Vice President--Administration
1998--1999; Vice President--Employee Relations
since 1988. Various other Company positions
1978-1988.
Joseph T. Colvin..................... 58 1996 Vice President--Workholding since March, 2001;
Vice President--Manufacturing October, 1996--
March 2001; Manufacturing Director, Machine
Operations 1994-1996; Formerly Vice President
Operations, General Manager, Inertial Guidance
Test Equipment and Original Equipment
Manufacturing, Contraves, Inc., 1994; President
and CEO, Modern Manufacturing, 1993; President,
Inland Motor Division, Kollmorgen Corp.,
1987-1992.
44
LIST OF EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------
EXECUTIVE
OFFICER
NAME AGE SINCE POSITIONS AND OFFICES HELD
---- -------- --------- --------------------------
Clive M. Danby....................... 43 2001 Vice President--Engineering since March, 2001;
Formerly Director of Engineering, Ingersoll
Milling Machine Co., 1998--March 2001; Project
Manager, Sunstrand Aerospace, 1986--1998.
Richard B. Hendrick.................. 47 2001 Vice President/Controller since May, 2001;
Corporate Controller July 2000--April 2001;
Formerly, Controller, MMI Products, Inc.,
1993--2000; various financial management
positions, Baker Hughes, Inc., 1981--1993.
Douglas G. Rich...................... 45 2001 Vice President--Manufacturing since November,
2001; Director of Manufacturing, Machine Tool
Division, March--October 2001; Formerly, Plant
Manager, Ingersoll-Rand Company, 1992--March
2001; Plant Superintendent, Watts Fluid Air,
Compressed Air Equipment, 1984--1992.
Thomas T. Connelly................... 54 1984 Treasurer since 1995; Senior Vice
President--General Manager Workholding
Operations 1991--1994; Senior Vice President
1987-1990; Vice President and Assistant to the
President 1985--1986; Treasurer and Assistant
to the President in 1984; Treasurer in 1983;
Assistant Treasurer in 1982.
ITEM 11.--EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Registrant's proxy statement filed with the Commission on March 28, 2002.
ITEM 12.--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Registrant's proxy statement filed with the Commission on March 28, 2002.
ITEM 13.--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Registrants's proxy statement filed with the Commission on March 28, 2002.
45
PART IV
ITEM 14.--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The financial statements of the Registrant listed in ITEM 8. of this
report are incorporated herein by reference.
(2) The financial statement schedules of the Registrant listed in ITEM 8. of
this Report are incorporated herein by reference. The financial statement
schedule required by Regulation S-X (17 CFR 210) is filed as part of this
report:
(a) Schedule II--Valuation and Qualifying Accounts
(3) Exhibits filed as part of this Report: See (c) below.
(b) Reports on Form 8-K filed by the Registrant during the last quarter of the
period covered by this report:
Current Report on 8-K, regarding a December 5, 2001 press release announcing
a further reduction in the North American workforce.
(c) Exhibits required by Item 601 of Regulation S-K filed as a part of this
Report on Form 10-K:
ITEM DESCRIPTION
---- -----------
4.1 -- Restated Certificate of Incorporation of Hardinge Inc. filed
with the Secretary of State of the State of New York on
May 24, 1995, incorporated by reference from the
Registrant's Form 8-A, filed with the Securities and
Exchange Commission on May 19, 1995.
4.2 -- By-Laws of Hardinge Inc. as amended November 19, 1996,
incorporated by reference from the Registrant's Form 10-K
for the year ended December 31, 1996.
4.3 -- Amendment to the By-Laws of Hardinge Inc. dated
February 22, 2000 incorporated by reference from the
Registrant's Form 10-Q for the quarter ended March 31, 2000.
4.4 -- Section 719 through 726 of the New York Business Corporation
Law, incorporated by reference from the Registrant's
Form 10, effective June 29, 1987.
4.5 -- Specimen of certificate for shares of Common Stock, par
value $.01 per share, of Hardinge Inc., incorporated by
reference from the Registrant's Form 8-A, filed with the
Securities and Exchange Commission on May 19, 1995.
4.6 -- Form of Rights Agreement, dated as of May 16, 1995, between
Hardinge Inc. and American Stock Transfer and Trust Company,
incorporated by reference from the Registrant's Form 8-A,
filed with the Securities and Exchange Commission on
May 23, 1995.
4.7 -- Amended Form of Rights Agreement, dated as of
August 25,1997 between Hardinge Inc. and Fifth Third Bank,
incorporated by reference from the Registrant's Form 8-A/A
filed with the Securities and Exchange Commission on
September 29, 1997.
4.8 -- Stock Repurchase Program incorporated by reference from the
Registrant's Form 8-K filed with the Securities & Exchange
Commission on April 16, 1999.
4.9 -- Stock Repurchase Program incorporated by reference from the
Registrant's Form 8-K filed with the Securities & Exchange
Commission on August 3, 2000.
10.1 -- Swap Transaction Agreement effective June 1, 1998 between
Hardinge Inc. and The Chase Manhattan Bank incorporated by
reference from the Registrant's Form 10-Q for the quarter
ended September 30, 1998.
46
ITEM DESCRIPTION
---- -----------
10.2 -- Credit Agreement dated as of August 1, 1997 among
Hardinge Inc. and the Banks signatory thereto and The Chase
Manhattan Bank as Agent, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended September 30,
1997.
10.3 -- Amendment Number One dated December 11, 2000 to the Credit
Agreement dated as of August 1, 1997 among Hardinge Inc. and
the Bank's signatory thereto and the Chase Manhattan Bank as
Agent incorporated by reference from the Registrant's
Form 10-K for the year ended December 31, 2000.
10.4 -- Credit Agreement dated as of February 28, 1996 among
Hardinge Inc. and the Banks signatory thereto and The Chase
Manhattan Bank as Agent, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended March 31, 1996.
10.5 -- Amendment Number One dated August 1, 1997 to Credit
Agreement dated as of February 28, 1996 among
Hardinge Inc. and the Banks signatory thereto and The Chase
Manhattan Bank as Agent, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended September 30,
1997.
10.6 -- Amendment Number Two dated December 11, 2000 to the Credit
Agreement dated as of February 28, 1996 and amended
August 1, 1997 among Hardinge Inc. and the Banks signatory
thereto and The Chase Manhattan Bank as Agent incorporated
by reference from the Registrant's Form 10-K for the year
ended December 31, 2000.
10.7 -- $8,000,000 Master Note among Hardinge Inc. and Chemung Canal
Trust Company dated February 8, 2001, incorporated by
reference from the Registrant's Form 10-Q for the quarter
ended March 31, 2001.
10.8 -- Amendment Number Two dated February 5, 2001 to the Credit
Agreement dated as of August 1, 1997 and amended
December 11, 2000 among Hardinge Inc. and the Banks
signatory thereto and The Chase Manhattan Bank as Agent
incorporated by reference from the Registrant's Form 10-Q
for the quarter ended March 31, 2001.
10.9 -- Amendment Number Three dated February 5, 2001 to the Credit
Agreement dated as of February 28, 1996 and amended
August 1, 1997 and December 11, 2000 among Hardinge Inc.
and the Banks signatory thereto and The Chase Manhattan Bank
as Agent incorporated by reference from the Registrant's
Form 10-Q for the quarter ended March 31, 2001.
10.10 -- Term Loan Agreement and Term Loan Promissory Mote dated as
of March 20, 2001 among Hardinge Inc. and KeyBank National
Association incorporated by reference from the Registrant's
Form 10-Q for the quarter ended March 31, 2001.
10.11 -- Amendment Number One dated October 1, 2001 to the Term Loan
Agreement dated March 20, 2001 among Hardinge Inc. and
KeyBank National Association incorporated by reference from
the Registrant's Form 10-Q for the quarter ended
September 30, 2001.
10.12 -- Amendment Number Three dated September 20, 2001 to Credit
Agreement dated as of August 1, 1997, and amended
December 11, 2000 and February 5, 2001 among Hardinge Inc.
and the Banks signatory thereto and The Chase Manhattan Bank
as Agent, incorporated by reference from the Registrant's
Form 10-Q for the quarter ended September 30, 2001.
10.13 -- Amendment Number Four dated September 20, 2001 to Credit
Agreement dated as of February 28, 1996 and amended
August 1, 1997, December 11, 2000 and February 5, 2001 among
Hardinge Inc. and the Banks signatory thereto and The Chase
Manhattan Bank as Agent, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended September 30,
2001.
47
ITEM DESCRIPTION
---- -----------
10.14 -- Stock Purchase Agreement dated as of November 15, 1995
between Hardinge Inc. and L. Kellenberger & Co. AG,
incorporated by reference from the Registrant's Form 8-K, as
amended, dated November 29, 1995.
10.15 -- The 1996 Hardinge Inc. Incentive Stock Plan as adopted by
shareholders at the April 23, 1996 annual meeting,
incorporated by reference from the Registrant's Form 10-Q
for the quarter ended June 30, 1996.
10.16 -- Hardinge Inc. Savings Plan, incorporated by reference from
the Registrant's Registration Statement on Form S-8
(No. 33-65049).
10.17 -- Employment Agreement with Joseph T. Colvin effective
January 1, 1997, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended March 31, 1997.
*10.18 -- Employment Agreement with J. Patrick Ervin effective
January 1, 1997, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended March 31, 1997.
*10.19 -- Employment Agreement with Richard L. Simons effective
January 1, 1997, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended March 31, 1997.
*10.20 -- Employment Agreement with Douglas C. Tifft dated as of
April 1, 1995, incorporated by reference from the
Registrant's Registration Statement on Form S-2
(No. 33-91644).
*10.21 -- Employment Agreement with Richard B. Hendrick effective
February 1, 2001, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended March 31, 2001.
*10.22 -- Employment Agreement with Clive M. Danby effective April 1,
2001, incorporated by reference from the Registrant's
Form 10-Q for the quarter ended March 31, 2001.
*10.23 -- Employment Agreement with Douglas Rich effective April 1,
2001, incorporated by reference from the Registrant's
Form 10-Q for the quarter ended June 30, 2001.
*10.24 -- Hardinge Inc. 1993 Incentive Stock Plan, incorporated by
reference from the Registrant's Form 10-K for the year ended
December 31, 1993.
*10.25 -- The 1988 Hardinge Inc. Incentive Stock Plan, as adopted by
shareholders at the annual meeting of shareholders held on
May 17, 1988, incorporated by reference from the
Registrant's Form 10-Q for the quarter ended June 30, 1988.
*10.26 -- First Amendment to Hardinge Inc. 1988 Incentive Stock Plan,
incorporated by reference from the Registrant's Form 10-K
for the year ended December 31, 1993.
*10.27 -- Hardinge Inc. Executive Supplemental Pension Plan,
incorporated by reference from the Registrant's Form 10-K
for the year ended December 31, 1993.
*10.28 -- Form of Deferred Directors Fee Plan, incorporated by
reference from the Registrant's Registration Statement on
Form S-2 (No. 33-91644).
21 -- Subsidiaries of the Company.
23 -- Consent of Ernst & Young LLP, Independent Auditors.
------------------------
* Management contract or compensatory plan or arrangement.
48
HARDINGE INC. AND SUBSIDIARIES
ITEM 14(A).--SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS CHARGED TO:
BALANCE ---------------------- BALANCE
AT BEG. COSTS & OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
--------- -------- -------- ---------- ---------
(DOLLARS IN THOUSANDS)
Year ended December 31, 2001:
Allowance for Bad Debts................... $ 963 $ 6,676 $ (7)(1) $ 1,218(2) $ 6,414
Reserve for Obsolete Inventory............ 2,700 27,754 (11)(2) 16,272(3) 14,171
------ ------- ----- ------- -------
Total................................... $3,663 $34,430 $ (18) $17,490 $20,585
====== ======= ===== ======= =======
Year ended December 31, 2000:
Allowance for Bad Debts................... $ 562 $ 1,243 $ (5)(1) $ 837(2) $ 963
Reserve for Obsolete Inventory............ 2,258 1,092 (8)(1) 642(3) 2,700
------ ------- ----- ------- -------
Total................................... $2,820 $ 2,335 $ (13) $ 1,479 $ 3,663
====== ======= ===== ======= =======
Year ended December 31, 1999:
Allowance for Bad Debts................... $ 463 $ 1,412 $ (49)(1) $ 1,264(2) $ 562
Reserve for Obsolete Inventory............ 2,331 432 (73)(1) 432(3) 2,258
------ ------- ----- ------- -------
Total................................... $2,794 $ 1,844 $(122) $ 1,696 $ 2,820
====== ======= ===== ======= =======
(1) Currency translation for balances recorded in foreign currencies,
charged to Cumulative Translation Adjustment.
(2) Uncollectable accounts written off, net of recoveries.
(3) Slow-moving parts inventories written down to net recoverable market
value.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HARDINGE INC.
---------------------------------------------
(REGISTRANT)
March 28, 2002 /s/ J. PATRICK ERVIN
---------------------------------------------
J. Patrick Ervin
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 28, 2002 /s/ E. MARTIN GIBSON
---------------------------------------------
E. Martin Gibson
NON-EXECUTIVE CHAIRMAN OF THE BOARD
March 28, 2002 /s/ RICHARD L. SIMONS
---------------------------------------------
Richard L. Simons
EXECUTIVE VICE PRESIDENT/CHIEF FINANCIAL
OFFICER AND ASSISTANT SECRETARY AND
DIRECTOR (PRINCIPAL FINANCIAL OFFICER)
March 28, 2002 /s/ RICHARD B. HENDRICK
---------------------------------------------
Richard B. Hendrick
VICE PRESIDENT/CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 28, 2002 /s/ DANIEL J. BURKE
---------------------------------------------
Daniel J. Burke
DIRECTOR
50
March 28, 2002 /s/ RICHARD J. COLE
---------------------------------------------
Richard J. Cole
DIRECTOR
March 28, 2002 /s/ JAMES L. FLYNN
---------------------------------------------
James L. Flynn
DIRECTOR
March 28, 2002 /s/ DOUGLAS A. GREENLEE
---------------------------------------------
Douglas A. Greenlee
DIRECTOR
March 28, 2002 /s/ J. PHILIP HUNTER
---------------------------------------------
J. Philip Hunter
DIRECTOR AND SECRETARY
March 28, 2002 /s/ ALBERT W. MOORE
---------------------------------------------
Albert W. Moore
DIRECTOR
51