10-K 1 hdng-12312017x10k.htm 10-K Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017

or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
 
Commission File Number: 000-15760
hardingehoriz646a04a14.jpg 
Hardinge Inc.
(Exact name of registrant as specified in its charter) 
New York
 
16-0470200
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Hardinge Drive
Elmira, NY
 
14903
(Address of principal executive offices)
 
(Zip Code)
(607) 734-2281
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
NASDAQ Global Select Market
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     oYes  ýNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     oYes  ýNo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                                      ýYes  oNo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                      ýYes  oNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.                                  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     oYes  ýNo
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2017 was $141.6 million, based on the closing price of common stock on the NASDAQ Global Select Market on June 30, 2017.
As of March 6, 2018 there were 12,966,148 shares of common stock of the registrant outstanding.
 DOCUMENTS INCORPORATED BY REFERENCE
None.
 



HARDINGE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 


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PART I

Item 1. Business.

General

Hardinge Inc. is a New York corporation that was incorporated in 1995. Hardinge Inc.'s principal executive office is located within Chemung County at One Hardinge Drive, Elmira, New York 14903-1946. Unless otherwise mentioned or unless the context requires otherwise, all references to "Hardinge," "we," "us," "our," "the Company," or similar references mean Hardinge Inc. and its subsidiaries.

Our website, www.hardinge.com, provides links to all of the Company's filings with the Securities and Exchange Commission. A copy of this annual report on Form 10-K and our other annual, quarterly, current reports, and amendments thereto filed with SEC are available on the website or can be obtained free of charge by contacting the Investor Relations Department at our principal executive office. Alternatively, such reports may be accessed at the Internet address of the SEC, which is www.sec.gov, or at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information about the operation of the SEC's Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

On February 12, 2018, Hardinge announced that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hardinge Holdings, LLC, a Delaware limited liability company (“Parent”), and Hardinge Merger Sub, Inc., a New York corporation (“Acquisition Sub”), which are affiliates of Privet Fund LP and Privet Fund Management LLC (collectively, “Privet”). Pursuant to the Merger Agreement, Parent has agreed to acquire the shares of Hardinge that Privet does not beneficially own in an all-cash merger transaction (the “Merger”) for $18.50 per share valued at approximately $245.0 million, subject to approval of Hardinge shareholders and other customary closing conditions.

We are a global designer, manufacturer, and distributor of machine tools, specializing in precision computer numerically controlled metalcutting machines and workholding technology solutions. The Company has the following direct and indirect wholly owned subsidiaries:
North America:
 
 
Forkardt Inc.
 
Traverse City, Michigan
Hardinge Technology Systems, Inc.
 
Elmira, New York
Hardinge Grinding Group
 
Elgin, Illinois
Europe:
 
 
Forkardt Deutschland GmbH
 
Reutlingen, Germany
Forkardt SAS
 
Noisy le Sec, France
Hardinge GmbH
 
Krefeld, Germany
Hardinge Holdings GmbH
 
St. Gallen, Switzerland
Hardinge Holdings B.V.
 
Amsterdam, Netherlands
Hardinge Machine Tools B.V.
 
Raamsdonksveer, Netherlands
Jones & Shipman Hardinge Limited
 
Leicester, England
Jones & Shipman SARL
 
Bron, France
L. Kellenberger & Co., AG
 
St. Gallen, Switzerland
Asia and Other:
 
 
Forkardt India LLP
 
Hyderabad, India
Forkardt Precision Machinery (Shanghai) Co., Ltd.
 
Shanghai, People's Republic of China
Hardinge China Limited
 
Hong Kong, People's Republic of China
Hardinge Machine (Shanghai) Co., Ltd.
 
Shanghai, People's Republic of China
Hardinge Machine Tools B.V., Taiwan Branch
 
Nan Tou City, Taiwan, Republic of China
Hardinge Precision Machinery (Jiaxing) Company, Limited
 
Jiaxing, People's Republic of China
Hardinge Taiwan Precision Machinery Limited
 
Nan Tou City, Taiwan, Republic of China
    

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We have manufacturing facilities located in China, Switzerland, Taiwan, Germany, France, India, the United Kingdom ("U.K."), and the United States ("U.S."). We manufacture the majority of the products we sell.


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Products

We supply high precision computer controlled metalcutting turning machines, grinding machines, machining centers, and repair parts related to those machines. The Company also engineers and supplies high precision, standard and specialty workholding devices, and other machine tool accessories. We believe our products are known for accuracy, reliability, durability, and value.

Segments

The Company has two unique business segments: Metalcutting Machine Solutions ("MMS") and Aftermarket Tooling and Accessories ("ATA"). For further information regarding financial information about our segments and geographic areas, refer to Note 17. "Segment Information" to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K.

Metalcutting Machine Solutions (MMS)

This segment includes operations related to grinding, turning, and milling machines, as discussed below, and related repair parts and services. The products are considered to be capital goods with sales prices ranging from approximately thirty thousand dollars for some standard products to approximately two million dollars for specialized grinding machines or turnkey systems that are designed and built for specific customer needs. Sales are subject to economic cycles and, because they are often purchased to add manufacturing capacity, the cycles can be severe with customers delaying purchases during down cycles and then aggressively requiring machine deliveries during up cycles. Machines are purchased to a lesser extent during down cycles, as customers are looking for productivity improvements or they have new products that require new machining capabilities.

We have been a manufacturer of industrial-use high precision and general precision turning machine tools since 1890. Turning machines, or lathes, are power-driven machines used to remove material from either bar stock or a rough-formed part by moving multiple cutting tools 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 our machines, those dimensions are often measured in millionths of an inch. We consider Hardinge to be a leader in the field of producing machines capable of consistently and cost-effectively producing parts to very tight tolerances.

Grinding is a machining process in which a part's surface is shaped to tight 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 our Kellenberger subsidiary are used to grind the inside and outside diameters of cylindrical parts. Such grinding machines are typically used to provide a more exact finish on a part that has been partially completed on a lathe. The Kellenberger grinding machines are generally purchased by the same type of customers as other Hardinge equipment and further our ability to be a primary source for our customers.

Our Kellenberger precision grinding technology is complemented by our Hauser, Tschudin, Voumard, and Usach grinding brands. Hauser machines are jig grinders used to make demanding contour components, primarily for tool and mold-making applications. Tschudin product technology is focused on the specialized grinding of cylindrical parts when the customer requires high volume production. Our Tschudin machines are generally equipped with automatic loading and unloading mechanisms for the part being machined. These loading and unloading mechanisms significantly reduce machine operator involvement in the production process. Voumard machines are high quality internal diameter cylindrical grinding systems used in production and job shop environments. Usach builds special purpose machines for internal diameter, outer diameter, and multiple grinding processes mix of internal diameter and outer diameter. Usach typically sells the machines as a turnkey system with integrated automation and value added processes such as probe and measuring.

Milling machines (also known as machining centers) are designed to remove material from stationary, prismatic, or 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 an integrated computer control without the assistance of an operator. Machining centers are generally purchased by the same customers who purchase other Hardinge equipment. We supply a broad line of machining centers under our Bridgeport brand name addressing a range of sizes, speeds, and powers.

Our machines generally use commands from an integrated computer to control the movement of cutting tools, grinding wheels, part positioning, and in the case of turning and grinding machines, the rotation speeds of the part being shaped. The computer control enables the operator to program operations such as part rotation, tooling selection, and tooling movement for a specific part and then stores that program in memory for future use. The machines are able to produce parts

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while left unattended when connected to automatic bar-feeding, robotics equipment, or other material handling devices designed to supply raw materials and remove machined parts from the machine.

The introduction of new machines are critical to our growth plans. We gain access to new machine offerings through internal product development, acquisitions, joint ventures, license agreements, and partnerships. Products are introduced each year to broaden our product offering, to take advantage of new technologies available to us, and to replace older models nearing the end of their respective product life cycles. These technologies generally allow our machines 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. Generally, our 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.

We focus on products and solutions for companies making parts from hard to machine materials with tough to sustain, tight tolerances and difficult to attain surface finishes that may be hard to achieve with competitor machines. We believe that with our high precision and super precision lathes, our grinding machines, and our rugged machining centers, combined with our accessory products and our technical expertise, we are uniquely qualified to be the supplier of choice for customers manufacturing products to demanding specifications.

Multiple options are available on many of our machines, which allows customers to customize their machines to their specific operating performance and cost objectives. We produce machines for stock with popular option combinations for immediate delivery, as well as design and produce machines to specific customer requirements. In addition to our machines, we provide the necessary tooling, accessories, and support services to assist customers in maximizing their return on investment.

The sale of repair parts is important to our business. Certain parts on machines may need to be replaced due to normal wear over many operating cycles or improper operation of the machine. Customers will buy parts from us throughout the life of the machine, which typically extends over many years. There are thousands of machines in operation in the world for which we provide those repair parts and in many cases the parts are available exclusively from us.

We offer various warranties on our equipment and consider post-sale support to be a critical element of our business. Warranties on machines typically extend for twelve months after purchase. Services provided include operation and maintenance training, in-field maintenance, and in-field repair. We offer these post-sales support services on a paid basis throughout the life of the machine. In territories covered by distributors, this support and service is offered through the distributor.

Aftermarket Tooling and Accessories (ATA)

This segment includes products that are purchased by manufacturers throughout the lives of their machines. The selling prices of these units are relatively low per piece with prices ranging from forty dollars on high volume collets to two hundred thousand dollars or more for specialty chucks. While considered to be consumable, these products are more durable in nature, with replacement due to wear over time. Our products are used on all types and brands of machine tools, not limited to our own. Sales levels are affected by manufacturing cycles, but not as severely as capital goods lines. While customers may not purchase high cost machines during a down cycle, their factories are operating with their existing equipment and therefore accessories are still needed as they wear out or they are needed for a change in production requirements.

The two primary product groups in ATA are collets and chucks. Collets are cone-shaped metal sleeves used for holding circular or rod-like pieces in a lathe or other machine that provide effective part holding and accurate part location during machining operations. Chucks are a specialized clamping device used to hold an object with radial symmetry, especially a cylindrical object. It is most commonly used to hold a rotating work piece. Some of our specialty chucks can also hold irregularly shaped objects that lack radial symmetry. While our products are known for accuracy and durability, they are consumable in nature.

We offer an extensive line of workholding and toolholding solutions that are available in thousands of shapes and sizes to meet unique customer application needs. These solutions can be used on virtually all types and brands of metalcutting machines, as well as non-traditional uses in many industrial applications. The Company continues to explore opportunities to expand this business organically and through acquisitions.


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Sales, Markets and Distribution

We sell our products in most of the industrialized countries of the world through a combination of direct sales, distributors, agents, and manufacturers' representatives. Generally, our distributors have an exclusive right to sell our products in a defined geographic area. Our distributors operate as independent businesses and purchase products from us at discounted prices for their customers, while agents and representatives sell products on our behalf and receive commissions on sales. Our discount schedule is adjusted to reflect the level of pre and post-sales support offered by our distributors. Our direct sales personnel earn a fixed salary plus commission. Sales through distributors are made only on standard commercial open account terms or through letters of credit. Distributors generally take title to products upon shipment from our facilities and do not have any special return privileges.

 Our standard ATA products are sold through direct sales, distribution, and via our web site at www.shophardinge.com. Custom or special solutions are sold through direct sales and agents. In most cases, we are able to package and ship in-stock tooling, accessories, and repair parts within 24 hours of receiving orders. We can package and ship items with heavy demand within a few hours.

We promote our products through advertising in trade publications, web presences, email newsletters, and participation in industry trade shows. In addition, we market our non-machine products and capabilities through the publication of general catalogs and other targeted catalogs, which we distribute to existing and prospective customers. We have a presence on the internet at www.hardinge.com and www.forkardt.com, where customers can obtain information about our products and place orders for accessories, tooling, knee mill products, and repair parts.

A substantial portion of our end use customers are small and medium-sized independent job shops, which in turn sell machined parts to their industrial customers. Industries directly and indirectly served by us include aerospace, automotive, computer, communications, consumer-electronics, construction equipment, defense, energy, farm equipment, medical equipment, recreational equipment, and transportation.

No single customer or related group of customers accounted for more than 5% of our consolidated sales in 2017 or 2016. While valuing our relationship with each customer, we do not believe that the loss of any single customer, or any few customers, would have an adverse material effect on our business. Order backlog was $130.6 million and $117.0 million at December 31, 2017 and 2016, respectively.


Competitive Conditions

In our industry, the barriers to entry for competition vary based on the level of product performance required. For the products with the highest performance in terms of accuracy and productivity, the barriers are generally technical in nature. For basic products, the barriers are tied to product availability, competitive price position, and an effective distribution model that offers the pre and post-sales support required by customers. Another significant barrier in the global machine tool industry is the high level of working capital that is required to operate the business.

We compete in various sectors of the machine tool market within the products of turning, milling, grinding, tooling, and accessories. We compete with multiple companies in each market sector we serve. The primary competitive factors in the marketplace for our machine tools are technical performance, reliability, price, delivery time, and service. Our management considers our segment of the industry to be extremely competitive. 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 their products can achieve. For our high precision, multi-tasking turning and milling equipment, competition comes primarily from companies such as DMG Mori Seiki, Mazak, and Okuma. Competition in our more standard turning and milling equipment comes, in part, from those companies as well as Doosan, which is based in South Korea, and Haas, which is based in the U.S., as well as many Taiwanese companies. Our internal and outer diameter cylindrical grinding machines compete primarily with products manufactured by United Grinding Group, a Swiss company, as well as Toyoda and Shigiya, which are based in Japan. Our Hauser jig grinding machines compete primarily with products manufactured by Moore Tool, which is based in the U.S., and some Japanese suppliers. Our surface grinding machines compete with products manufactured by Okamoto in Japan and Chevalier in Taiwan. Our ATA products compete with many products manufactured by a variety of small companies.

The overall number of our competitors providing product solutions serving our target markets may increase. Also, the overall composition of companies with which we compete may change as we broaden our product offerings and the geographic markets we serve. As we expand into new market areas, we will face competition not only from our existing competitors but from other competitors as well, including existing companies with strong technological, marketing, and sales positions in those

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markets. In addition, several of our competitors may have greater resources, including financial, technical, and engineering resources, than we do.

Sources and Availability of Components

Our machines within the MMS segment are produced around the world. We produce certain of our lathes, knee mills, and related products at our Elmira, New York plant. The Kellenberger and Voumard grinding machines and related products are manufactured at our St. Gallen, Switzerland plant and Hauser and Tschudin products are produced at our Biel, Switzerland facility. The Jones & Shipman grinding machines are currently manufactured at our Leicester, England plant. The Usach grinding machines are manufactured at our Elgin, Illinois plant. We produce machining centers and lathes at our Hardinge Taiwan facility in Nan Tou, Taiwan and our Hardinge Precision Machinery (Jiaxing) Company, Ltd. facility in Jiaxing, China. The Company's Forkardt and Hardinge branded ATA segment products and solutions are engineered and produced in our plants located in Traverse City, Michigan, Elmira, New York, Reutlingen, Germany, Noisy le Sec, France, Hyderabad, India and Shanghai, China. We manufacture products from various raw materials, including cast iron, sheet metal, and bar steel. We purchase a number of components, sub-assemblies, and assemblies from outside suppliers, including the computer and electronic components for our computer controlled lathes, grinding machines, and machining centers. There are multiple suppliers for virtually all of our raw material, components, sub-assemblies, and assemblies and, historically, we have not experienced a serious supply interruption. However, in 2011, because of the increase in demand driven by early 2011 worldwide order activity, producers of bearings, ball screws, and linear guides had difficulty meeting the rise in demand. Similar demand increase in the future could impact our production schedules.

A major component of our computer controlled machines is the computer and related electronics package. We purchase these components from Fanuc Limited, a Japanese electronics company, Heidenhain, a German control supplier, Mitsubishi Electric, a Japanese electronics company, or from Siemens, another German control manufacturer. While we believe that design changes could be made to our machines to allow sourcing from several other existing suppliers, and we occasionally do so for special orders, a disruption in the supply of the computer controls from one of our suppliers could cause us to experience a substantial disruption of our operations, depending on the circumstances at the time. We purchase parts from these suppliers under normal trade terms. There are no agreements with these suppliers to purchase minimum volumes per year.

Research and Development

Our ongoing research and development program involves creating new products, modifying existing products to meet specific customer needs, and redesigning existing products, both to add new functionality and to reduce the cost of manufacturing. Our research and development departments throughout the world are staffed with experienced design engineers with varying levels of education, ranging from technical training to doctoral degrees.

The worldwide cost of research and development, all of which has been charged to operating expense, amounted to $14.5 million, $13.5 million and $14.1 million, in 2017, 2016 and 2015, respectively.

Patents

Although we hold several patents with respect to certain of our products, we do not believe that our business is dependent to any material extent upon any single patent or group of patents.

Seasonal Trends and Working Capital Requirements

Hardinge's business and that of the machine tool industry in general, is cyclical. It is not subject to significant seasonal trends. However, our quarterly results are subject to fluctuation based on the timing of our shipments of machines, which are largely dependent upon customer delivery requirements. Given that a large percentage of our sales are from Asia, the impact of plant shutdowns in that region by us and our customers due to the celebration of the Lunar New Year holiday may impact the first quarter sales, income from operations, and net income, and result in the first quarter being the lowest quarter of the year.

The ability to deliver products within a short period of time is an important competitive criterion. We must have inventory on hand to meet customers' delivery expectations, which for standard machines typically range from immediate to eight weeks delivery. Meeting this requirement is especially difficult with some of our products, where delivery is extended due to time associated with shipping on ocean-going vessels, depending on the location of the customer. This creates a need to have inventory of finished machines available in our major markets to serve our customers in a timely manner.


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We deliver many of our machine products within one to two months after the order. Some orders, especially multiple machine orders, are delivered on a turnkey basis with the machine or group of machines configured to make certain parts for the customer. This type of order often includes the addition of material handling equipment, tooling, and specific programming. In those cases, the customer usually observes and inspects the parts being made on the machine at our facility before shipment so the timing of the sale is dependent upon the customer's schedule and acceptance. Lead times for these types of orders, especially grinding machines, can range from six to eight months. Therefore, sales from quarter-to-quarter can vary depending upon the timing of customers' acceptances and the significance of those orders.

We feel it is important, where practical, to provide readily available accessories and replacement parts for the machines we sell and we carry inventory at levels sufficient to meet these customer requirements.

Governmental Regulations

We believe that our current operations and our current uses of property, plant and equipment conform in all material respects to applicable laws and regulations in the various countries in which we conduct business.

Governmental Contracts

No material portion of our business is subject to government contracts.

Environmental Matters

Our operations are subject to extensive federal, state, local, and foreign laws and regulations relating to environmental matters. Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Hazardous substances and adverse environmental effects have been identified with respect to real property we own and on adjacent parcels of real property.

The Elmira, NY manufacturing facility is located within the Kentucky Avenue Wellfield on the National Priorities List of hazardous waste sites designated for cleanup by the United States Environmental Protection Agency (“EPA”) because of groundwater contamination. The Kentucky Avenue Wellfield Site (the “Site”) encompasses an area which includes sections of the Town of Horseheads and the Village of Elmira Heights in Chemung County, NY. In February 2006, the Company received a Special Notice Concerning a Remedial Investigation/Feasibility Study (“RI/FS”) for the Koppers Pond (the “Pond”) portion of the Site. The EPA documented the release and threatened release of hazardous substances into the environment at the Site, including releases into and in the vicinity of the Pond. The hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.

Until receipt of this Special Notice in February 2006, the Company had never been named as a potentially responsible party ("PRP") at the Site nor had the Company received any requests for information from the EPA concerning the Site. Environmental sampling on the Company’s property within this Site under supervision of regulatory authorities had identified off-site sources for such groundwater contamination and sediment contamination in the Pond, and found no evidence that the Company’s operations or property have contributed or are contributing to the contamination.

A substantial portion of the Pond is located on the Company’s property. The Company, along with Beazer East, Inc., the Village of Horseheads, the Town of Horseheads, the County of Chemung, CBS Corporation and Toshiba America, Inc., (collectively, the "PRP's"), agreed to voluntarily participate in the RI/FS by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the EPA, Region II, approved and executed the Agreement on behalf of the EPA. The PRP's also signed a PRP Member Agreement, agreeing to share the costs associated with the RI/FS study on a per capita basis.

The EPA approved the RI/FS Work Plan in May of 2008. In July of 2012, the PRP's submitted a Remedial Investigation ("RI") to respond to EPA issues raised in the initial draft RI. In January 2016, the PRP's submitted a draft Feasibility Study ("FS"), also to respond to issues raised by the EPA about previous drafts of the FS. In July 2016, the EPA announced its proposed remediation plan based on an alternative put forth in a July 2016 Woodruff & Curran FS with an estimated total clean-up phase cost of $1.9 million. The preferred remedy consists of the placement of a continuous six-inch thick soil and sand cap, including a geotextile membrane to act as a demarcation layer, over the Pond. The preferred remedy includes long-term monitoring and institutional controls. After a public comment period, on December 13, 2016, the EPA issued a Certificate of Completion confirming that the RI/FS was complete, confirming that all PRP obligations related to the

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RI/FS had been performed in accordance with the provisions of the Administrative Settlement Agreement and Order on Consent, and approving the remedy selected in the FS as the final response action for the Pond.

In June 2017, the EPA issued a Special Notice letter to the original PRP’s and two new additional parties (Eaton Corporation and Elmira Water Board) requesting these PRPs to fund, undertake, and complete the remedy for the Pond. Shortly after, the EPA provided a proposed Statement of Work for completion of the remedy (“SOW”) and the EPA agreed to waive the past response costs as defined in the RI/FS Order of Consent in full if the parties could reach a settlement with the EPA by September 30, 2017.

    In September 2017, the nine participating PRPs privately negotiated and finalized an allocation of costs amongst themselves, with 10.75% of the costs being allocated to the Company. Based on the estimated cost of the present remedy of $1.9 million, and with credit for costs previously paid by the Company for the RI/FS, the remaining costs that have been allocated to the Company will not exceed $0.2 million. The Company has the entire amount reserved as of December 31, 2017. This reserve is reported in Accrued expenses in the Consolidated Balance Sheets.

Based upon information currently available, except as described in the preceding paragraphs, the Company does not have material liabilities for environmental remediation. Though the foregoing reflects the Company’s current assessment as it relates to environmental remediation obligations, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to the Company.

Employees

As of December 31, 2017, Hardinge Inc. employed 1,384 persons, 440 of whom were located in the United States. Management believes that relations with our employees are good.

Foreign Operations and Export Sales

Information related to foreign and domestic operations and sales is included in Note 17. "Segment Information" to the Consolidated Financial Statements contained in this Annual Report. Our strategy has been to diversify our sales and operations geographically so that the impact of economic trends in different regions can be balanced.

The risks associated with conducting business on an international basis are discussed further in Item 1A. "Risk Factors".

Item 1A. Risk Factors.

Risk Factors That May Impact Future Results

Current and potential shareholders should carefully consider the risks described below. These are the risks and uncertainties we believe are most important for shareholders to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. Any of these factors, many of which are beyond our control, could materially adversely affect our business, financial condition, operating results, cash flow, and stock price.

Risks Relating to the Pending Merger

On February 12, 2018, Hardinge announced that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hardinge Holdings, LLC, a Delaware limited liability company (“Parent”), and Hardinge Merger Sub, Inc., a New York corporation (“Acquisition Sub”), which are affiliates of Privet Fund LP and Privet Fund Management LLC (collectively, “Privet”). Pursuant to the Merger Agreement, Parent has agreed to acquire the shares of Hardinge that Privet does not beneficially own in an all-cash merger transaction (the “Merger”) for $18.50 per share valued at approximately $245.0 million, subject to approval of Hardinge shareholders and other customary closing conditions.
Our businesses may be subject to uncertainties and other operating restrictions until completion of the Merger.

In connection with the Merger, our business may experience disruptions as customers, suppliers, and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with other

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parties. Additionally, we have agreed to refrain from taking certain actions with respect to our business and financial affairs during the pendency of the Merger, which could adversely impact our financial condition, results of operations, or cash flows.

We may have difficulty attracting, motivating and retaining key employees during the pendency of the Merger.

In connection with the pending Merger, current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may adversely affect our ability to attract and retain key personnel while the Merger is pending. Key employees may depart because of the uncertainty or potential difficulty of integration or a desire not to remain with the combined company following the Merger.

One of the conditions to completion of the Merger is the absence of any injunctions or laws that prevents, makes illegal, or prohibits the closing of the Merger. Accordingly, if a plaintiff is successful in obtaining a judgment prohibiting completion of the Merger, then such judgment may prevent the Merger from being completed, or from being completed within the expected time frame.

Although we currently expect the Merger to be completed during the second quarter of 2018, the expected timing for completion of the Merger could change.

We currently expect that the Merger be completed during the second quarter of 2018. However, the completion of the Merger remains subject to a number of conditions, including receipt of required approvals and the absence of any law, judgment or injunction prohibiting the consummation of the Merger. While we believe we will receive the requisite approvals, there can be no assurance that these and other conditions to closing will be satisfied on the proposed terms and schedules as contemplated by the parties or at all. These and other conditions to the completion of the Merger may delay or preclude our ability to consummate the Merger. As a result, the Merger may not be completed until after that time, or at all, and the effect of the risks and constraints relating to the pending Merger (including those discussed in this section “Risk Factors-Risks Relating to the Pending Merger”) may be increased if the timing for the completion of the Merger is extended or becomes more uncertain.

If the Merger is not completed, the Company will have incurred substantial costs that may adversely affect the Company’s financial results and operations

The Company has incurred and will continue to incur substantial costs in connection with the Merger. These costs are primarily associated with the fees of attorneys, accountants, and financial advisors. In addition, the Company has diverted significant management resources in an effort to complete the Merger and continues to do so. The Company is also subject to restrictions contained in the Merger Agreement on the conduct of the Company’s business during the pendency of the Merger. If the Merger is not completed, the Company will have received little or no benefit in respect of such costs incurred and the restrictions on the Company’s conduct. Moreover, the views of third parties as to the Company’s business and prospects may be adversely impacted if the Merger is not completed, even if the reason for the failure of the Merger to be completed did not relate to the Company’s business and prospects.

If the Merger Agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to Parent.

These costs could require us to use available cash that would have otherwise been available for general corporate purposes. If the Merger Agreement is terminated in certain circumstances, we would be required to pay Parent a termination fee of $8,535,000 and reimburse certain expenses of Parent up to $3,658,000 (or a termination fee of $3,658,000 and reimbursement of certain expenses up to $3,658,000 under specified conditions where the Company terminates the Merger Agreement to accept a superior proposal and enters into a definitive agreement relating to such superior proposal prior to May 13, 2018). If the Merger Agreement is terminated, we may decide to pay the termination fee from available cash that we would have otherwise used for general corporate purposes. For these and other reasons, a failed Merger could materially adversely affect our business, operating results, financial condition, and cash flows, or the price per share of our common stock.

If the Merger is not completed, Privet Fund LP and Privet Fund Management LLC will continue to hold a substantial number of our outstanding shares, but their investment thesis may change with respect to such share ownership.

As of March 5, 2018, Privet Fund LP and Privet Fund Management collectively hold approximately 10.6% of our outstanding shares of common stock. If the Merger Agreement is terminated, Privet Fund LP and Privet Fund Management LLC may change their intentions with respect to holding our shares as compared to those prior to entering into the Merger

11


Agreement. For example, Privet Fund LP and Privet Fund Management LLC may desire to acquire more of our shares of common stock, or become more likely to sell the shares of our common stock that they already hold, compared to their intentions with respect to our shares prior to entering into the Merger Agreement (including the plans and purposes that Privet had publicly disclosed). Such a change in intention could impact the trading price of our shares or our business and results of operations or require additional time and attention of our board of directors and senior management team.

Anyone buying shares of our common stock for more than $18.50 per share is unlikely to receive more than $18.50 per share for such stock for as long as the Merger Agreement remains in effect.

The Merger Agreement provides that upon consummation of the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger (except for shares owned by Acquisition Sub or Parent after Privet Fund LP contributes its shares to Parent), will be cancelled and converted into the right to receive $18.50 in cash, without interest (and less applicable withholding taxes). It is likely that the Merger consideration will act as a cap on the market price of our common stock until the Merger is consummated or the Merger Agreement terminated. Therefore, it is unlikely that anyone selling shares of our common stock before consummation of the Merger will receive more than $18.50 per share.

Risks Relating to Our Industry

Changes in general economic conditions and the cyclical nature of our business could harm our operating results.

Our business is cyclical in nature, following the strength and weakness of the manufacturing economies in the geographic markets we serve. As a result of this cyclicality, we have experienced, and in the future we can be expected to experience, significant fluctuations in sales and operating income, which may affect our business, operating results, financial condition, and the market price of our common shares.

The following factors, among others, significantly influence demand for our products:

Fluctuations in capacity at both original equipment manufacturers and job shops;
The availability of skilled machinists;
The need to replace machines that have reached the end of their useful life;
The need to replace older machines with new technology that increases productivity, reduces general manufacturing costs, and machines parts in a new way;
The evolution of end-use products requiring machining to more specific tolerances;
Our customers' use of new materials requiring machining by different processes;
General economic and manufacturing industry expansions and contractions; and
Changes in manufacturing capabilities in developing regions.

Our business is highly competitive, and increased competition could reduce our sales, earnings, and profitability.

The markets in which our machines and other products are sold are extremely competitive and highly fragmented. In marketing our products, we compete primarily with other businesses on quality, reliability, price, value, delivery time, service, and technological characteristics. We compete with a number of U.S., European, and Asian competitors, many of which are larger, have greater financial and other resources, and are supported by governmental or financial institution subsidies. Increased competition could force us to lower our prices or to offer additional product features or services at a higher cost to us, which could reduce our earnings.

The greater financial resources or the lower amount of debt of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Certain competitors may also have the ability to develop product innovations that could put us at a disadvantage. If we are unable to compete successfully against other manufacturers in our marketplace, we could lose customers, and our sales may decline. There can also be no assurance that customers will continue to regard our products favorably, that we will be able to develop new products that appeal to customers, that we will be able to improve or maintain our profit margins on sales to our customers, or that we will be able to continue to compete successfully in our core markets. While we believe our product lines compete effectively in their markets, we may not continue to do so.


12


Our competitive position and prospects for growth may be diminished if we are unable to develop and introduce new and enhanced products on a timely basis that are accepted in the market.

The machine tool industry is subject to technological change, rapidly evolving industry standards, changing customer requirements, and improvements in and expansion of product offerings, especially with respect to computer-controlled products. Our ability to anticipate changes in technology, industry standards, customer requirements and product offerings by competitors, and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, will be significant factors in our ability to compete and grow. Moreover, if technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would be materially adversely affected. Developments by our competitors or others may render our products or technologies obsolete or noncompetitive. Failure to effectively introduce new products or product enhancements on a timely basis could materially adversely affect our business, operating results, and financial condition.

Risks Relating to Our Operations

Our business, financial condition, and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

We manufacture a substantial portion of our products overseas and sell our products throughout the world. In 2017, approximately 71% of our products were manufactured in countries outside of North America and approximately 69% of our products were sold in countries outside of North America. In addition, a majority of our employees are located outside of the United States. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition, results of operations, and cash flows. These factors include:

A prolonged world-wide economic downturn or economic uncertainty in our principal international markets including Asia and Europe;
Changes in political, regulatory, legal, or economic conditions;
Restrictive governmental actions, such as restrictions on the transfer or repatriation of funds and foreign investments and trade protection measures, including export duties and quotas, customs duties and tariffs, or trade barriers erected by either the United States or other countries where we do business;
Disruptions of capital and trading markets;
Changes in import or export licensing requirements;
Transportation delays;
Civil disturbances or political instability;
Geopolitical turmoil, including terrorism or war;
Currency restrictions and exchange rate fluctuations;
Changes in labor standards;
Limitations on our ability under local laws to protect our intellectual property;
Nationalization and expropriation; and
Changes in domestic and foreign tax laws.

We cannot predict the impact of recently enacted U.S. tax reform legislation on our NOLs, business or financial condition.
    
On December 22, 2017, H.R. 1, informally titled the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law in the U.S.  The Tax Act makes major changes to the Code, and includes a number of provisions that affect the taxation of corporations, such as, among other things, lowering the corporate income tax rate from 35% to 21%, modifying the rules regarding limitations on certain deductions for executive compensation, introducing a capital investment deduction in certain circumstances, placing certain limitations on the interest deduction, modifying the rules regarding the usability of certain net operating losses arising in taxable years ending after December 31, 2017, and the migration from a worldwide system of taxation to a modified territorial system with corresponding measures to prevent base erosion. Given that our current deferred tax assets are offset by a full valuation allowance, we do not believe that the Tax Act will result in a material net change to our financial statements, although if we become more profitable, we will obtain a reduced benefit from such deferred tax assets. We continue to examine the impact that the Tax Act will have on us and our business. However, because at this time the overall impact of the Tax Act is uncertain, the ultimate effect of the Tax Act on our business and financial condition is uncertain and could be adverse.


13


Prices of some raw materials, especially steel and iron, fluctuate, which can adversely affect our sales, costs, and profitability.

We manufacture products with a relatively high iron casting or steel content, commodities for which worldwide prices fluctuate. The availability of, and prices for, these and other raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs, and anticipated or perceived shortages. In some cases, raw material cost increases can be passed on to customers in the form of price increases; in other cases, they cannot. If raw material prices increase and we are not able to charge our customers higher prices to compensate, it would adversely affect our business, results of operations, and financial condition.

We rely on a limited number of suppliers to obtain certain components, sub-assemblies, assemblies and products. Delays in deliveries from or the loss of any of these suppliers may cause us to incur additional costs, result in delays in manufacturing and delivering our products or cause us to carry excess or obsolete inventory.

Some components, sub-assemblies, or assemblies we use in the manufacturing of our products are purchased from a limited number of suppliers. Our purchases from these suppliers are generally not made pursuant to long-term contracts and are subject to additional risks associated with purchasing products internationally, including risks associated with potential import restrictions and exchange rate fluctuations, as well as changes in tax laws, tariffs, and freight rates. Although we believe that our relationships with these suppliers are good, there can be no assurance that we will be able to obtain these products from these suppliers on satisfactory terms indefinitely.

We believe that design changes could be made to our machines to allow sourcing of components, sub-assemblies, assemblies, or products from several other suppliers; however, a disruption in the supply from any of our suppliers could cause us to experience a material adverse effect on our operations.

We rely in part on independent distributors and the loss of these distributors could adversely affect our business.

In addition to our direct sales force, we depend on the services of independent distributors and agents to sell our products and provide service and aftermarket support to our customers. We maintain an extensive distributor and agent network worldwide. In 2017, approximately 33% of our sales were through distributors. No distributor accounted for more than 5% of our consolidated sales in 2017. Rather than serving as passive conduits for delivery of product, many of our distributors are active participants in the sale and support of our products. Many of the distributors with whom we transact business offer competitive products and services to our customers. In addition, the distribution agreements we have are typically cancelable by the distributor after a relatively short notice period. The loss of a substantial number of our distributors or an increase in the distributors' sales of our competitors' products to our customers could reduce our sales and profits.

If we are unable to attract and retain skilled employees to work at our manufacturing facilities our operations and growth prospects would be adversely impacted.

We conduct substantially all of our manufacturing operations in less densely populated urban areas which, in many cases, may represent a relatively small market for skilled labor force. Our continued success depends on our ability to attract and retain a skilled labor force at these locations. If we are not able to attract and retain the personnel we require, we may be unable to develop, manufacture, and market our products, or to expand our operations in a manner that best exploits market opportunities and capitalizes on our investment in our business. Failure to achieve these objectives would materially adversely affect our business, operating results and financial condition.

We could face potential product liability claims relating to products we manufacture, which could result in commitments of significant time and expense to defend these claims and to pay material amounts in damages or settlement.

We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage; however, such insurance does not cover all types of damages that could be assessed against us in a product liability claim and the coverage amounts are subject to certain limitations under the applicable policies. We may not be able to obtain product liability insurance on acceptable terms in the future. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations, or prospects. In addition, we believe our business depends on the strong brand reputation we have developed. In the event that our reputation is damaged, we may face difficulty in maintaining our pricing positions with respect to some of our products, which would reduce our sales and profitability.

14



We are subject to environmental laws that could impose significant costs on us and the failure to comply with such laws could subject us to sanctions and material fines and expenses.

Our operations are subject to extensive federal, state, local, and foreign laws and regulations relating to environmental matters. Certain environmental laws can impose joint and several liability for releases or threatened releases of hazardous substances upon certain statutorily defined parties regardless of fault or the lawfulness of the original activity or disposal. Hazardous substances and adverse environmental effects have been identified with respect to real property we own and on adjacent parcels of real property.

We believe, based upon information currently available that, except with respect to the environmental matter concerning the Kentucky Avenue Wellfield Site as described in Part I Item 1. "Business - Environmental Matters", we will not have material liabilities for environmental remediation. Though the foregoing reflects the Company's current assessment as it relates to environmental remediation obligations, it is possible that future remedial requirements or changes in the enforcement of existing laws and regulations, which are subject to extensive regulatory discretion, will result in material liabilities to the Company.

We may be adversely affected by attacks on information technology systems, as well as other cybersecurity risks and business disruptions.

Our business may be impacted by disruptions to our own or third party information technology systems, which may result from attacks on or failures of such infrastructure. Cybersecurity risks are evolving and include, but are not limited to, attacks on our information technology systems and attacks on the information technology systems of third parties in attempts to gain unauthorized access to our confidential or other proprietary information or information relating to our employees, customers, and other third parties. Cybersecurity risks may also include attacks targeting the security, integrity, and/or reliability of the hardware, software, and information installed, stored, or transmitted in our products, including after the purchase of those products and when they are incorporated into our customers’ facilities and/or infrastructure. Such attacks could potentially result in disruptions to systems, unauthorized release of confidential or otherwise protected information, and corruption of data. We believe that we have adopted appropriate measures to mitigate potential risks to our technology, products, services, and operations from these potential attacks. However, given the unpredictability of the timing, nature, and scope of such attacks or other disruptions, we could potentially be subject to production downtimes, operational delays, other damaging effects on our operations or our ability to provide products and services to our customers, the unintended release of confidential or otherwise protected information, misappropriation, destruction or corruption of data, security breaches, other improper use of our or third party systems, networks or products, financial losses from remedial actions, loss of business or potential liability, and/or damage to our reputation, any of which could have a material adverse effect on our operating results.

Risks Relating to Our Customers

Our customers' activity levels and spending for our products and services could be impacted by future global economic conditions, especially deterioration in the credit markets.

For many of our customers, the purchase of our machines represents a significant capital expenditure. For others, the purchase of our machines is a part of a larger improvement or expansion of manufacturing capability. For all, the purchase represents a long term commitment of capital raised by incurrence of debt, issuance of equity, or use of cash flow from operations. Instability, uncertainty, and doubt as a result of future global economic and financial conditions could reduce the cash flow of our customers and their access to credit and equity markets, which could make it difficult for our customers to commit to larger, long-term capital projects. As a result, such future global economic conditions could negatively impact our operating results.


15


We rely on estimated forecasts of our customers' needs and inaccuracies in such forecasts could adversely affect our business.

We generally sell our products pursuant to individual purchase orders instead of long-term purchase commitments. Therefore, we rely on estimated demand forecasts, based upon input from our customers and the general economic environment, to determine how much material to purchase and product to manufacture. Because our sales are based on purchase orders, our customers may cancel, delay, or otherwise modify their purchase commitments with little or no consequence to them and with little or no notice to us. For these reasons, we generally have limited visibility regarding our customers' actual product needs. The quantities or timing required by our customers for our products could vary significantly. Whether in response to changes affecting the industry or a customer's specific business pressures, any cancellation, delay, or other modification in our customers' orders could significantly reduce our revenue, causing our operating results to fluctuate from period to period and make it more difficult for us to predict our revenue. In the event of a cancellation or reduction of a customer order, we may not have enough time to reduce inventory purchases or our workforce to minimize the effect of the lost revenue on our business. Order cancellations typically average approximately 2% of sales. Cancellations could vary significantly during times of global economic uncertainty.

Major changes in the economic situation of our customer base could require us to write off significant portion of our receivables from customers.

In difficult economic periods, our customers lose work and find it difficult if not impossible to pay for products purchased from us. Although appropriate credit reviews are done at the time of sale, rapidly changing economic conditions can have sudden impacts on customers' ability to pay. We run the risk of bad debt with customers on open account. If we write off significant parts of our customer accounts receivable because of unforeseen changes in their business condition, it would adversely affect our results of operations, financial condition, and cash flows.

Risks Relating to Our Securities

Anti-takeover provisions in our charter documents and under New York law may discourage a third party from acquiring us.

Certain provisions of our certificate of incorporation and bylaws may have the effect of discouraging a third party from making a proposal to acquire us and, as a result, may inhibit a change in control of the Company under circumstances that could give the shareholders the opportunity to realize a premium over the then-prevailing market price of our common shares. These include:

Removal of Directors and Filling of Vacancies. Our certificate of incorporation provides that a member of our Board of Directors may be removed only for cause and upon the affirmative vote of the holders of 75% of the securities entitled to vote at an election of directors. Newly created directorships and Board of Director vacancies resulting from retirement, death, removal, or other causes may be filled only by a majority vote of the then remaining directors. Accordingly, it is more difficult for shareholders, including those holding a majority of our outstanding shares, to force an immediate change in the composition of our Board of Directors.

Supermajority Voting Provision for Certain Business Combinations. Our certificate of incorporation requires the affirmative vote of least 75% of all of the securities entitled to vote and at least 75% of shareholders who are not Major Shareholders (defined as 10% beneficial holders) in order to effect certain mergers, sales of assets, or other business combinations involving the Company. However, if 75% of the Continuing Directors (defined as directors who were on the Board prior to the Major Shareholder crossing the 10% beneficial ownership threshold) approve the proposed merger, sale of assets, or other business combination, then the 75% threshold does not apply. These provisions could have the effect of delaying, deferring, or preventing a change of control of the Company.

Supermajority Voting Provisions for Amendment and Repeal of Bylaws. The affirmative vote of holders representing at least 75% of the voting power of all outstanding shares of common stock must be obtained in order for shareholders to amend or repeal our bylaws. Our bylaws may be amended or repealed by the affirmative vote of at least 75% of the entire Board of Directors.

In addition, as a New York corporation we are subject to provisions of the New York Business Corporation Law which may make it more difficult for a third party to acquire and exercise control over us pursuant to a tender offer or request or invitation for tenders. These provisions could have the effect of deterring or delaying changes in incumbent management, proxy contests or changes in control.

16



Our certificate of incorporation authorizes the issuance of shares of blank check preferred stock.

Our certificate of incorporation provides that our Board of Directors is authorized to issue from time to time, without further stockholder approval, up to 2,000,000 shares of preferred stock (the Board of Directors has already designated 250,000 of such shares of preferred stock as Series A Preferred Stock) in one or more series and to fix and designate the rights, preferences, privileges, and restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, redemption rights, and terms of redemption and liquidation preferences. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. Our issuance of preferred stock may have the effect of delaying or preventing a change in control. Our issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock. The issuance of preferred stock could have the effect of decreasing the market price of our common stock.

Our shareholders may experience further dilution as a result of future equity offerings or issuances.

In order to raise additional capital or pursue strategic transactions, we may in the future offer, issue or sell additional shares of our common stock or other equity securities. Our shareholders may experience significant dilution as a result of future equity offerings or issuances. Investors purchasing shares or other securities in the future could have rights superior to existing shareholders.


Item 1B. Unresolved Staff Comments.

None.


17


Item 2. Properties.

Pertinent information concerning the principal properties of the Company and its subsidiaries is as follows:

Owned Properties:
Location
 
Type of Facility
 
Acreage (Land)
Square Footage
(Building)
Horseheads, New York
 
Manufacturing, Engineering, Turnkey Systems, Marketing, Sales, Demonstration, Service, and Administration
 
80 acres
515,000 sq. ft.
Jiaxing, China
 
Manufacturing, Engineering, Demonstration, and Administration (Buildings and improvements are owned by the Company; land is under 50-year lease expiring in November 2060)
 
7 acres
223,179 sq. ft
St. Gallen, Switzerland
 
Manufacturing, Engineering, Turnkey Systems, Marketing, Sales, Demonstration, Service, and Administration
 
8 acres
162,924 sq. ft.
Nan Tou City, Taiwan
 
Manufacturing, Engineering, Marketing, Sales, Demonstration, Service, and Administration
 
3 acres
123,204 sq. ft.
Romanshorn, Switzerland
 
Manufacturing
 
2 acres
42,324 sq. ft.
Biel, Switzerland
 
Manufacturing, Engineering, Service, and Turnkey Systems
 
4 acres
41,500 sq. ft.
Traverse City, Michigan
 
Manufacturing, Engineering, Marketing, Sales, Service, and Administration
 
2.4 acres
38,800 sq. ft.

Leased Properties:
Location
 
Type of Facility
 
Square Footage
 
Lease
Expiration
Date
Leicester, England
 
Manufacturing, Sales, Marketing, Engineering, Turnkey Systems, Demonstration, Service, and Administration
 
55,000 sq. ft.
 
3/31/19
Reutlingen, Germany
 
Manufacturing, Engineering, Marketing, Sales, Service, and Administration
 
39,547 sq. ft.
 
8/31/19
Shanghai, China
 
Marketing, Engineering, Turnkey Systems, Sales, Service, Demonstration, and Administration
 
38,820 sq. ft.
 
5/31/18
Elgin, Illinois
 
Manufacturing, Sales, Marketing, Engineering, Turnkey Systems, Demonstration, Service, and Administration
 
34,000 sq. ft.
 
12/31/18
Krefeld, Germany
 
Sales, Turnkey Systems, Service, Demonstration, and Administration
 
14,402 sq. ft.
 
3/31/20
Hyderabad, India
 
Manufacturing, Engineering, Marketing, Sales, Service, and Administration
 
10,000 sq. ft.
 
9/30/18
Biel, Switzerland
 
Manufacturing, Sales, Engineering, Turnkey Systems, Service, and Administration
 
7,995 sq. ft.
 
4/30/18
Noisy le Sec, France
 
Manufacturing, Engineering, Marketing, Sales, Administration, and Service
 
7,320 sq. ft.
 
12/31/20
Wittenbach, Switzerland
 
Manufacturing
 
20,527 sq. ft.
 
12/31/19
Shanghai, China
 
Sales, Service, Engineering, and Administration
 
521 sq. ft.
 
10/31/18
Bron, France
 
Marketing, Sales, Administration, and Service
 
2,680 sq. ft.
 
4/1/23

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 we are currently involved, individually or in the aggregate, is anticipated to be material to our financial condition, results of operations, or cash flows.
 

18


Item 4. Mine Safety Disclosures.
 
Not Applicable.
 

19


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The following table reflects the highest and lowest values at which our common stock traded in each quarter of the last two years. Our common stock trades on the NASDAQ Global Select Market under the symbol "HDNG". The table also includes dividends per share, by quarter:
 
2017
 
2016
 
High
 
Low
 
Dividends
 
High
 
Low
 
Dividends
Quarter Ended
 

 
 

 
 

 
 

 
 

 
 

March 31,
$
11.96

 
$
9.51

 
$
0.02

 
$
12.64

 
$
7.85

 
$
0.02

June 30,
12.90

 
9.97

 
0.02

 
13.72

 
8.99

 
0.02

September 30,
15.64

 
12.03

 

 
12.64

 
9.09

 
0.02

December 31,
18.00

 
14.75

 

 
12.17

 
8.24

 
0.02

    
At March 6, 2018, there were 209 shareholders of record of our common stock.

Issuer Purchases of Equity Securities

None.


20



Performance Graph

The graph below compares the five-year cumulative total return for Hardinge Inc. common stock with the comparable returns for the NASDAQ Stock Market (U.S.) Index and a group of 14 peer issuers. The companies included in our peer group were selected based on comparability to Hardinge with respect to market capitalization, sales, manufactured products and international presence. Our peer group includes Altra Holding, Inc., Cohu, Inc., Columbus McKinnon Corporation, Dynamic Materials Corporation, Electro Scientific Industries Inc., Global Power Equipment Group Inc., Hurco Companies Inc., Kadant Inc., Nanometrics Inc., NN, Inc., Rudolph Technologies, Inc., Sifco Industries Inc., Transcat Inc., and Twin Disc Inc. Cumulative total return represents the change in stock price and the amount of dividends received during the indicated period, assuming reinvestment of dividends. The graph assumes an investment of $100 on December 31, 2012. The stock performance shown in the graph is included in response to SEC requirements and is not intended to forecast or to be indicative of future performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Hardinge Inc., the NASDAQ Composite Index,
and a Peer Group


chart-e864e8ced588551f9ce.jpg
____________________
*$100 invested on 12/31/12 in stock or index, including reinvestment of dividends.

Fiscal year ended December 31,
2012
 
2013
 
2014
 
2015
 
2016
 
2017
Hardinge Inc. 
$
100.00

 
$
146.42

 
$
121.39

 
$
95.64

 
$
114.59

 
$
180.80

NASDAQ Composite
100.00

 
140.12

 
160.78

 
171.97

 
187.22

 
242.71

Peer Group
100.00

 
136.42

 
126.31

 
101.88

 
146.92

 
211.97


21


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 audited consolidated financial statements, related notes and other information included herein (amounts in thousands except per share data):
 
2017
 
2016
 
2015
 
2014
 
2013
STATEMENT OF OPERATIONS DATA:
 

 
 

 
 

 
 

 
 

Sales
$
317,920

 
$
292,013

 
$
315,249

 
$
311,633

 
$
329,459

Cost of sales
210,352

 
194,486

 
210,711

 
210,851

 
223,760

Gross profit
107,568

 
97,527

 
104,538

 
100,782

 
105,699

Selling, general and administrative expenses
79,950

 
79,647

 
81,271

 
81,045

 
79,533

Research & development
14,543

 
13,514

 
14,140

 
13,904

 
12,460

Restructuring charges(1)
4,506

 
661

 
3,558

 

 

Impairment charges(2)

 

 

 
5,766

 
6,239

Other (income) expense, net
(365
)
 
310

 
632

 
514

 
471

Operating income (loss)
8,934

 
3,395

 
4,937

 
(447
)
 
6,996

Interest expense, net
251

 
328

 
499

 
678

 
1,064

Income (loss) from continuing operations before
   income taxes
8,683

 
3,067

 
4,438

 
(1,125
)
 
5,932

Income taxes
2,837

 
1,843

 
1,828

 
1,233

 
1,537

Income (loss) from continuing operations
5,846

 
1,224

 
2,610

 
(2,358
)
 
4,395

Gain from disposal of discontinued operation, and
   income from discontinued operations, net of tax(3)

 

 

 
218

 
5,532

Net income (loss)
$
5,846

 
$
1,224

 
$
2,610

 
$
(2,140
)
 
$
9,927

PER SHARE DATA:
 

 
 

 
 

 
 

 
 

Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.10

 
$
0.20

 
$
(0.19
)
 
$
0.37

Discontinued operations

 

 

 
0.02

 
0.47

Basic earnings (loss) per share
$
0.45

 
$
0.10

 
$
0.20


$
(0.17
)
 
$
0.37

Weighted average basic shares outstanding
12,900

 
12,824

 
12,776

 
12,661

 
11,801

 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.09

 
$
0.20

 
$
(0.19
)
 
$
0.37

Discontinued operations

 

 

 
0.02

 
0.46

Diluted earnings (loss) per share
$
0.45

 
$
0.09

 
$
0.20

 
$
(0.17
)
 
$
0.83

Weighted average diluted shares outstanding
12,971

 
12,909

 
12,872

 
12,661

 
11,891

 
 

 
 

 
 

 
 

 
 

Cash dividends declared per share
$
0.04

 
$
0.08

 
$
0.08

 
$
0.08

 
$
0.08

BALANCE SHEET DATA:
 

 
 

 
 

 
 

 
 

Working capital
$
145,421

 
$
127,848

 
$
129,310

 
$
134,338

 
$
136,931

Total assets
318,949

 
297,550

 
310,938

 
311,084

 
343,861

Total debt

 
6,596

 
11,606

 
15,989

 
26,314

Shareholders' equity
178,926

 
155,941

 
161,105

 
169,596

 
203,788

____________________
(1)  
In August 2015, the Company's Board of Directors approved a strategic restructuring program with the goals of streamlining the Company's cost structure, increasing operational efficiencies, and improving shareholder returns, which was completed in 2016. In March 2017, the Company's Board of Directors approved a strategic restructuring program with the goals of further increasing operational efficiencies and cash generation, and improving shareholder return. This program is expected to be completed in mid-2018. In September 2017, the Company initiated a global strategic realignment of our selling organization with a focus on unified sales channels, a simplified product offering, and the elimination of redundancies. This program is expected to be completed in 2018.
(2)  
2014 and 2013 results include non-cash charges of $5.8 million and $6.2 million, respectively, for impairment of goodwill and other intangible assets. $5.8 million and $5.1 million in 2014 and 2013, respectively, was related to the impairment in the value of goodwill and the trade name associated with the purchase of Usach, and $1.1 million in 2013 was related to the impairment of the Forkardt trade name as a result of the Forkardt Swiss business divestiture.

22


(3)  
On December 31, 2013, the Company divested its Forkardt Operations in Switzerland for CHF 5.6 million, net of cash sold ($6.3 million equivalent), resulting in a gain of $4.9 million. In March 2014, the Company recognized $0.2 million of additional consideration as a result of final working capital adjustments.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview. We supply high precision computer controlled metalcutting turning machines, grinding machines, vertical machining centers, and repair parts related to those machines. The Company also engineers and supplies high precision, standard and specialty workholding devices, and other machine tool accessories. We believe our products are known for accuracy, reliability, durability, and value. We are geographically diversified with manufacturing facilities in China, France, Germany, India, Switzerland, Taiwan, the United States (“U.S.”), and the United Kingdom (“U.K.”), with sales to most industrialized countries. Approximately 69% of our 2017 sales were to customers outside of North America, 71% of our 2017 products sold were manufactured outside of North America, and 68% of our employees in 2017 were employed outside of North America.

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

Non-machine sales, which include collets, chucks, accessories, repair parts, and service revenue, accounted for approximately 32% of overall sales in 2017 and are an important part of our business due to an installed base of thousands of machines, and the growing needs demanded by specialty workholding applications. In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.

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

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

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

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

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

Foreign currency exchange rate changes can be significant to reported results for several reasons. Our primary competitors, particularly for the most technologically advanced products, are now, largely, manufacturers in Japan, Germany, Switzerland, Korea, and Taiwan, which causes the worldwide valuation of their respective currencies to be central to competitive pricing in all of our markets. The major functional currencies of our subsidiaries are the British Pound Sterling (“GBP”), Chinese Renminbi (“CNY”), Euro (“EUR”), New Taiwanese Dollar (“TWD”), and Swiss Franc (“CHF”). Under US GAAP, results of foreign subsidiaries are translated into U.S. Dollars (“USD”) at the average exchange rate during the periods presented. Period-to-period changes in the exchange rate between their local currency and the USD may affect comparative

23


data significantly. We also purchase computer controls and other components from suppliers throughout the world, with purchase costs reflecting currency changes.

On February 12, 2018, Hardinge announced that it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hardinge Holdings, LLC, a Delaware limited liability company (“Parent”), and Hardinge Merger Sub, Inc., a New York corporation (“Acquisition Sub”), which are affiliates of Privet Fund LP and Privet Fund Management LLC (collectively, “Privet”). Pursuant to the Merger Agreement, Parent has agreed to acquire the shares of Hardinge that Privet does not beneficially own in an all-cash merger transaction (the “Merger”) for $18.50 per share valued at approximately $245.0 million, subject to approval of Hardinge shareholders and other customary closing conditions.

Results of Operations
 
Presented below is summarized selected financial data for the years ended December 31, 2017 and 2016 (in thousands): 
 
2017
 
% of Sales
 
2016
 
% of Sales
 
$
Change
 
%
Change
Sales
$
317,920

 


 
$
292,013

 
 
 
$
25,907

 
9
 %
Gross profit
107,568

 
33.8
 %
 
97,527

 
33.4
%
 
10,041

 
10
 %
Selling, general and administrative expenses
79,950

 
25.1
 %
 
79,647

 
27.3
%
 
303

 
 %
Research & Development
14,543

 
4.6
 %
 
13,514

 
4.6
%
 
1,029

 
8
 %
Restructuring Charges
4,506

 
1.4
 %
 
661

 
0.2
%
 
3,845

 
582
 %
Other (income) expense, net
(365
)
 
(0.1
)%
 
310

 
0.1
%
 
(675
)
 
(218
)%
Operating Income
8,934

 
2.8
 %
 
3,395

 
1.2
%
 
5,539

 
163
 %
Interest expense (income), net
251

 


 
328

 


 
(77
)
 


Income before income taxes
8,683

 
2.7
 %
 
3,067

 
1.1
%
 
5,616

 
183
 %
Income taxes
2,837

 


 
1,843

 


 
994

 


Net income
$
5,846

 
1.8
 %
 
$
1,224

 
0.4
%
 
$
4,622

 
378
 %


Sales. The table below summarizes sales by each corresponding geographical region for the year ended December 31, 2017 compared to the year ended December 31, 2016 (in thousands):
 
 
2017
 
2016
 
Change
 
$
 
%
 
$
 
%
 
$
 
%
Sales to customers in:
North America
$
99,948

 
31
%
 
$
92,668

 
32
%
 
$
7,280

 
8
 %
Europe
91,329

 
29
%
 
91,382

 
31
%
 
(53
)
 
 %
Asia
126,643

 
40
%
 
107,963

 
37
%
 
18,680

 
17
 %
Total
$
317,920

 
100
%
 
$
292,013

 
100
%
 
$
25,907

 
9
 %

Sales for the year ended December 31, 2017 were $317.9 million, an increase of $25.9 million, or 9% when compared to the prior year. Global demand for machine tools and accessories improved in 2017 as compared to a weak 2016. We had increases in both MMS and ATA sales. Regionally, Asia was up 17%, North America was up 8%, and Europe was flat when compared with the prior year. Favorable foreign currency translation had an impact of approximately $0.1 million.

North America sales were $99.9 million and $92.7 million, respectively, for the years ended December 31, 2017 and 2016, an increase of $7.3 million, or 8%. The current year increase reflects improved industrial market activity, with MMS up 7%, and ATA up 8% from respective prior year sales in the region.
 
Europe sales of $91.3 million and $91.4 million for the years ended December 31, 2017 and 2016, respectively, were relatively flat. MMS was down 1%, and ATA was up 9% from respective prior year sales in the region. The ATA increase is primarily attributed to increased sales in Europe and North America. Favorable foreign currency translation impacted sales by approximately $0.8 million. Excluding the impact of foreign currency translation, sales would have decreased $0.9 million, or 1%, versus the prior year.

24


 
Asia sales were $126.6 million and $108.0 million for the years ended December 31, 2017 and 2016, respectively, an increase of $18.7 million, or 17%. Unfavorable foreign currency translation impacted sales by approximately $0.7 million. Excluding the translation effect, sales improved by $19.3 million, or 18%. Demand from customers in China is the key driver of the performance of the machine tool industry, and Hardinge has been able to increase sales volume in the primary customer segments that it serves.

Sales of machines accounted for approximately 68% of the consolidated sales for the years ended December 31, 2017 and 2016. Sales of non-machine products and services, primarily consisting of collets, chucks, accessories, repair parts, and service revenue, accounted for 32% of the consolidated sales for the years ended December 31, 2017 and 2016
 
Gross Profit. Gross profit was $107.6 million, or 33.8% of sales, for the year ended December 31, 2017, compared to $97.5 million, or 33.4% of sales, in 2016. The increase in gross profit was related to the increase in sales volume. The increase in gross margin over the prior year was due to improved volumes and lower inventory obsolescence charges, partially offset by unfavorable mix.
 
Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $80.0 million, or 25% of net sales, for the year ended December 31, 2017, an increase of $0.3 million, compared to $79.6 million, or 27% of net sales, for the year ended December 31, 2016. SG&A cost increase in 2017 was due to $3.0 million in higher incentive and compensation expenses, largely offset by $0.9 million in restructuring related savings, $0.9 million in reduced commission and other variable selling related expenses, and $0.3 million lower occupancy and insurance costs. Additionally, we had $1.7 million of unusual expenses in both years. The year ended December 31, 2017 included approximately $1.2 million of charges primarily related to our change in CEO, $0.2 million related to our strategic review process, and $0.3 million related to an ERP conversion and other project costs. The year ended December 31, 2016 included severance of $0.7 million, a pension settlement charge of $0.6 million and strategic consulting expenses of $0.4 million.

Research & Development. Research & Development expenses were $14.5 million, or 5% of net sales, for the year ended December 31, 2017, compared to $13.5 million, or 5% of net sales for the year ended December 31, 2016. Spending increased by $0.5 million in both MMS and ATA segments as compared to the prior year.

Restructuring Charges. Restructuring costs were $4.5 million and $0.7 million for the years ended December 31, 2017 and 2016, respectively. In March 2017, management initiated a strategic restructuring program in our MMS segment. In September 2017, we expanded our restructuring efforts in order to improve earnings by optimizing our footprint and improving operational efficiencies to reduce our cost structure. We expect to realize total cost savings related to these programs of approximately $12.0 million to $12.5 million annually. Both of these initiatives are expected to be substantially completed in 2018. For further information regarding restructuring activities, refer to Note 8. "Restructuring Charges" to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K.

In 2016, we completed a restructuring plan initiated in 2015 with charges related to severance payments, a voluntary retirement plan, the closure plan for a facility in Germany, and factory overhead reduction initiative in the Elmira, New York facility.

Operating IncomeAs a result of the foregoing, operating income was $8.9 million for the year ended December 31, 2017, compared to $3.4 million in 2016.

Income Taxes. The provision for income taxes was $2.8 million and $1.8 million for the years ended December 31, 2017 and 2016, respectively. The effective tax rates were 32.7% for the year ended December 31, 2017, compared to 60.1% in 2016, which differ from the U.S. statutory rate primarily due to the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded. The 2017 tax rate was also impacted by the estimated transition tax related to the Tax Cuts and Jobs Act (the “Tax Act”) as discussed below.

We continually assess all available positive and negative evidence in accordance with ASC Topic 740 to evaluate whether deferred tax assets are realizable. To the extent that it is more likely than not that all or a portion of our deferred tax assets in a particular jurisdiction will not be realized, a valuation allowance is recorded. We currently maintain a valuation allowance against all or a portion of our deferred tax assets in the U.S., U.K., Germany, and the Netherlands.

On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax

25


deferred, and creates new taxes on certain foreign-sourced earnings. A provisional amount for the one-time transition tax has been calculated and $1.2 million has been included in income tax expense for 2017 as a reasonable estimate in accordance with the SEC Staff Accounting Bulletin 118 (“SAB 118”). We expect to complete the analysis of the one-time transition tax within the measurement period of one year from the date of enactment. For further information regarding income taxes refer to Note 10. "Income Taxes" to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K.

Net Income. As a result of the foregoing, net income for the year ended December 31, 2017 was $5.8 million, or 2% of net sales, compared to net income of $1.2 million, or less than 1% of net sales, in 2016. Basic and diluted income per share for the year ended December 31, 2017 were both $0.45 per share, compared to basic and diluted earnings per share of $0.10 and $0.09, respectively, for the year ended December 31, 2016.

Business Segment Information — Comparison of the years ended December 31, 2017 and 2016
 
Metalcutting Machine Solutions Segment (MMS) (in thousands):
 
Year Ended 
 December 31,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
$
251,906

 
$
230,705

 
$
21,201

 
9
%
Segment income
5,803

 
3,060

 
2,743

 
90
%
 
MMS sales increased by $21.2 million, or 9%, in the year ended December 31, 2017 when compared with 2016. We experienced increased sales in Asia and North America which were up 18% and 7%, respectively. These increases were offset slightly by a 1% decline in sales to Europe as compared with the prior year. This overall increase includes unfavorable foreign currency translation of approximately $0.2 million.

Segment income was $5.8 million for the year ended December 31, 2017, an increase of $2.7 million compared to 2016 segment income. The increase in segment income was due to higher gross profit on higher sales volume, lower inventory obsolescence charges, partially offset by higher sales commissions, an unfavorable sales mix and lower overhead absorption. The increase in segment income would have been $3.2 million higher if not for higher restructuring expenses of $3.6 million in 2017, partially offset by incremental restructuring savings of $0.4 million.

Aftermarket Tooling and Accessories Segment (ATA) (in thousands):
 
Year Ended 
 December 31,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Sales
$
66,551

 
$
61,647

 
$
4,904

 
8
%
Segment income
11,122

 
6,910

 
4,212

 
61
%
 
 ATA sales for the year ended December 31, 2017 were $66.6 million, an increase of $4.9 million, or 8%, when compared to 2016. ATA sales increased by 9% and 8%, in Europe and North America, respectively. These increases were offset slightly by a decrease in ATA sales to Asia of 1% as compared with the prior year. This overall increase includes favorable foreign currency translation of approximately $0.3 million.

Segment income for the year ended December 31, 2017 was $11.1 million, a $4.2 million improvement over 2016 segment income. The increase was due to higher gross profit on higher sales volume, a favorable sales mix, higher net restructuring savings, lower inventory obsolescence charges, partially offset by higher sales expenses.


26


Segment Summary For the Year Ended December 31, 2017 (in thousands):
 
Year Ended December 31, 2017
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
251,906

 
$
66,551

 
$
(537
)
 
$
317,920

Segment income
5,803

 
11,122

 
 

 
16,925

Unallocated corporate expense
 

 
 

 
 

 
(7,991
)
Interest expense, net
 

 
 

 
 

 
(251
)
Income from continuing operations, before income taxes
 
 
 
 
 
 
$
8,683


Comparison of the years ended December 31, 2016 and 2015

Presented below is summarized selected financial data for the years ended December 31, 2016 and 2015 (in thousands): 
 
2016
 
% of Sales
 
2015
 
% of Sales
 
$
Change
 
%
Change
Sales
$
292,013

 
 
 
$
315,249

 
 
 
$
(23,236
)
 
(7
)%
Gross profit
97,527

 
33.4
%
 
104,538

 
33.2
%
 
$
(7,011
)
 
(7
)%
Selling, general and administrative expenses
79,647

 
27.3
%
 
81,271

 
25.8
%
 
$
(1,624
)
 
(2
)%
Research & development
13,514

 
4.6
%
 
14,140

 
4.5
%
 
$
(626
)
 
(4
)%
Restructuring
661

 
0.2
%
 
3,558

 
1.1
%
 
$
(2,897
)
 
(81
)%
Other expense, net
310

 
0.1
%
 
632

 
0.2
%
 
$
(322
)
 
(51
)%
Income from operations
3,395

 
1.2
%
 
4,937

 
1.6
%
 
$
(1,542
)
 
(31
)%
Interest expense, net
328

 


 
499

 


 
$
(171
)
 


Income before income taxes
3,067

 
1.1
%
 
4,438

 
1.4
%
 
$
(1,371
)
 
(31
)%
Income taxes
1,843

 


 
1,828

 


 
$
15

 


Net income
$
1,224

 
0.4
%
 
$
2,610

 
0.8
%
 
$
(1,386
)
 
(53
)%

Sales. The table below summarizes sales by each corresponding geographical region for the year ended December 31, 2016 compared to the year ended December 31, 2015 (in thousands):
 
 
2016
 
2015
 
Change
 
$
 
%
 
$
 
%
 
$
 
%
Sales to customers in:
North America
$
92,668

 
32
%
 
$
108,470

 
34
%
 
$
(15,802
)
 
(15
)%
Europe
91,382

 
31
%
 
97,269

 
31
%
 
$
(5,887
)
 
(6
)%
Asia
107,963

 
37
%
 
109,510

 
35
%
 
$
(1,547
)
 
(1
)%
Total
$
292,013

 
100
%
 
$
315,249

 
100
%
 
$
(23,236
)
 
(7
)%

Sales for the year ended December 31, 2016 were $292.0 million, a decrease of $23.2 million, or 7%, when compared to the prior year. Global demand for machine tools and accessories continued to be weak in 2016, especially in North America and Europe, which drove the year over year decline. In Asia, we have been able to maintain stable sales volume levels in the primary customer segments that we serve. Unfavorable foreign currency translation had an impact of approximately $6.9 million, primarily in Asia. Excluding the impact of foreign currency translation, sales would have decreased $16.3 million, or 5%, over the prior year.
  
North America sales were $92.7 million and $108.5 million, respectively, for the years ended December 31, 2016 and 2015, a decrease of $15.8 million, or 15%. The current year decrease reflects industrial market weakness with MMS down 22%, and ATA down 4% from respective prior year sales in the region.

Europe sales were $91.4 million and $97.3 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $5.9 million, or 6%. This decline reflects industrial market weakness with MMS down 4%, and ATA down 15%

27


from respective prior year sales in the region. The ATA decline is primarily attributed to the restructuring of our operations in this region. Unfavorable foreign currency translation impacted sales by approximately $2.0 million. Excluding the impact of foreign currency translation, sales would have decreased $3.9 million, or 4%, versus the prior year.

Asia sales were $108.0 million and $109.5 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $1.5 million, or 1%. Unfavorable foreign currency translation impacted sales by approximately $4.9 million. Excluding the translation effect, sales grew by $3.4 million, or 3%. Demand from customers in China is the key driver of the performance of the machine tool industry, and Hardinge has been able to maintain stable sales volume levels in the primary customer segments that it serves.

Sales of machines accounted for approximately 67% of the consolidated sales for the years ended December 31, 2016 and 2015. Sales of non-machine products and services, primarily consisting of collets, chucks, accessories, repair parts, and service revenue, accounted for 33% of the consolidated sales for the years ended December 31, 2016 and 2015. 

Gross Profit. Gross profit was $97.5 million, or 33.4% of sales, for the year ended December 31, 2016, compared to $104.5 million, or 33.2% of sales, in 2015. The decrease in gross profit was related to the decrease in sales volume, and the unfavorable impact of foreign currency translation of approximately $2.4 million.

Selling, General and Administrative Expenses. Selling, general and administrative (“SG&A”) expenses were $79.6 million, or 27.3% of net sales, for the year ended December 31, 2016, a decrease of $1.6 million, or 2%, compared to $81.3 million, or 25.8% of net sales, for the year ended December 31, 2015. We had $1.7 million of additional charges in the year ended December 31, 2016 as compared to the year ended December 31, 2015, including severance of $0.7 million, pension settlement of $0.6 million and strategic consulting expenses of $0.4 million. Foreign currency translation had a favorable impact of approximately $2.1 million. Adjusting for the impacts in severance, pension settlement, strategic review related charges, and foreign currency translation, SG&A would have decreased $1.2 million in the current year as compared to the prior year period. The decrease was due mainly to savings generated as a result of the restructuring initiatives announced in 2015 and completed in 2016.

Research & Development. Research & Development expenses were $13.5 million, or 4.6% of net sales, for the year ended December 31, 2016, compared to $14.1 million, or 4.5% of net sales for the year ended December 31, 2015.

Restructuring Charges. In 2016, we completed a restructuring plan initiated in 2015 with charges related to severance payments, a voluntary retirement plan, the closure plan for a facility in Germany, and factory overhead reduction initiative in the Elmira, New York facility. A total of $0.7 million and $3.6 million were recorded for the years ended December 31, 2016 and 2015, respectively.

Operating IncomeAs a result of the foregoing, operating income was $3.4 million for the year ended December 31, 2016, compared to $4.9 million in 2015.

Income Taxes. The provision for income taxes were $1.8 million for both years ended December 31, 2016 and 2015. The effective tax rates were 60.1% for the year ended December 31, 2016, compared to 41.2% in 2015, which differ from the U.S. statutory rate primarily due to the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded.

We continually assess all available positive and negative evidence in accordance with ASC Topic 740 to evaluate whether deferred tax assets are realizable. To the extent that it is more likely than not that all or a portion of our deferred tax assets in a particular jurisdiction will not be realized, a valuation allowance is recorded. We currently maintain a valuation allowance against all or a portion of our deferred tax assets in the U.S., U.K., Germany, and the Netherlands.

Net Income. As a result of the foregoing, net income for the year ended December 31, 2016 was $1.2 million, or 0.4% of net sales, compared to net income of $2.6 million, or 0.8% of net sales, in 2015. Basic and diluted income per share for the year ended December 31, 2016 were $0.10 and $0.09, respectively, compared to basic and diluted earnings per share of $0.20 for the year ended December 31, 2015.


28


Business Segment Information — Comparison of the years ended December 31, 2016 and 2015
 
Metalcutting Machine Solutions Segment (MMS) (in thousands):
 
Year Ended 
 December 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Sales
$
230,705

 
$
250,854

 
$
(20,149
)
 
(8
)%
Segment income
3,060

 
7,365

 
(4,305
)
 
(58
)%
 
MMS sales decreased by $20.1 million, or 8%, in the year ended December 31, 2016 when compared with 2015. We experienced decreased demand across product lines and regions with the exception of grinding sales in Asia, which were up 13% over the prior year. This overall segment decrease includes unfavorable foreign currency translation of approximately $6.7 million.

Segment income was $3.1 million for the year ended December 31, 2016, or $4.3 million below 2015 segment income. The decrease in segment income was due to the impact of lower sales volumes, partially offset by a $1.8 million reduction in operating expenses due in part to restructuring initiatives completed in 2016.
 
Aftermarket Tooling and Accessories Segment (ATA) (in thousands):
 
Year Ended 
 December 31,
 
 
 
 
 
2016
 
2015
 
$ Change
 
% Change
Sales
$
61,647

 
$
65,128

 
$
(3,481
)
 
(5
)%
Segment income
6,910

 
3,372

 
3,538

 
105
 %
 
ATA sales for the year ended December 31, 2016 were $61.6 million, a decrease of $3.5 million when compared to 2015. ATA sales decreases in Europe of 15% and North America of 4% were partially offset by increases in Asia of 12%. The decrease in Europe was primarily attributed to our restructuring efforts in that region.

Segment income for the year ended December 31, 2016 was $6.9 million, or $3.5 million above 2015 segment income. We had $3.2 million of additional restructuring expenses, an inventory valuation adjustment, and charges related to the Company's strategic review initiative in the year ended December 31, 2015 as compared to the year ended December 31, 2016. The remaining increase in segment income was due to a $1.5 million reduction in operating expenses due primarily to restructuring initiatives completed in 2016, offset in part by the impact of lower sales volumes.

Segment Summary For the Year Ended December 31, 2016 (in thousands):
 
Year Ended December 31, 2016
 
MMS
 
ATA
 
Inter-Segment
Eliminations
 
Total
Sales
$
230,705

 
$
61,647

 
$
(339
)
 
$
292,013

Segment income
3,060

 
6,910

 
 

 
9,970

Unallocated corporate expense
 

 
 

 
 

 
(6,575
)
Interest expense, net
 

 
 

 
 

 
(328
)
Income from continuing operations, before income taxes
 
 
 
 
 
 
$
3,067



29


Liquidity and Capital Resources

The Company's principal capital requirements are to fund its operations, including working capital, to purchase and fund improvements to its facilities, machines and equipment, and to fund acquisitions.

At December 31, 2017, cash and cash equivalents were $45.0 million, compared to $28.3 million at December 31, 2016. The current ratio at December 31, 2017 was 2.75:1 compared to 2.76:1 at December 31, 2016.

At December 31, 2017 and 2016, total debt outstanding, including notes payable, was $0.0 million and $6.0 million, respectively.

Summary of Cash Flows for the Year Ended December 31, 2017, 2016, and 2015
 
Summary of cash flow data (in thousands):

 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
Net cash provided by operating activities
 
$
25,115

 
$
5,297

 
$
26,727

Net cash used in investing activities
 
$
(2,623
)
 
$
(2,361
)
 
$
(4,141
)
Net cash used in financing activities
 
$
(7,441
)
 
$
(6,475
)
 
$
(5,702
)

Cash Flows from Operating Activities:

During the year ended December 31, 2017, we generated $25.1 million net cash from operating activities. The net cash generated was driven by a net income of $5.8 million, non-cash adjustments of $8.9 million for depreciation and amortization, $1.4 million for inventory impairment, and total changes in operating assets and liabilities of $9.6 million.

During the year ended December 31, 2016, we generated $5.3 million net cash from operating activities. The net cash generated was driven by a net income of $1.2 million and non-cash adjustments of $8.8 million for depreciation and amortization, partially offset by use of cash for changes to total operating assets and liabilities of $6.0 million.

During the year ended December 31, 2015, we generated $26.7 million net cash in operating activities. The net cash generated was driven by a net income of $2.6 million, non-cash depreciation and amortization expense of $8.8 million, and cash provided by total changes in operating assets and liabilities of $15.5 million.

Cash Used in Investing Activities:

Net cash used in investing activities was $2.6 million for the year ended December 31, 2017. Net cash used in investing activities was $2.4 million for the year ended December 31, 2016. Net cash used in investing activities was $4.1 million for the year ended December 31, 2015. The primary uses of cash in all years presented were for capital expenditures and general maintenance during the year.

Cash Used in Financing Activities:

Net cash flow used by financing activities was $7.4 million for the year ended December 31, 2017. Cash used was primarily attributable to $6.1 million of payments on long-term debt and $0.5 million of dividends paid to shareholders.

Net cash flow used by financing activities was $6.5 million for the year ended December 31, 2016. Cash used was primarily attributable to $5.8 million of scheduled payments on long-term debt and $1.1 million of dividends paid to shareholders.

During the year ended December 31, 2015, net cash used by financing activities was $5.7 million. Cash used was primarily attributable to $4.5 million of scheduled payments on long-term debt and $1.0 million of dividends paid to shareholders.


30


Credit Facilities and Financing Arrangements

Financing arrangements are maintained with several financial institutions. These financing arrangements are in the form of long term loans, credit facilities, and lines of credit. The credit facilities allow the Company to borrow up to $68.6 million at December 31, 2017, of which $51.3 million can be borrowed for working capital needs. As of December 31, 2017, $59.6 million was available for borrowing under these arrangements of which $50.8 million was available for working capital needs. There were no borrowings outstanding at December 31, 2017. Total consolidated term borrowings outstanding, net of unamortized debt issuance fees, were $5.9 million at December 31, 2016. Additionally, the Company had borrowings under revolving credit facilities of $0.7 million at December 31, 2016. Details of these financing arrangements are discussed in Note 7: "Financing Arrangements" to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K.

Other Commitments

We lease space for some of our manufacturing, sales, and service operations with lease terms up to 7 years and use certain office equipment and automobiles under lease agreements expiring at various dates. Rent expense under these leases totaled $2.9 million, $3.0 million, and $3.3 million during the years ended December 31, 2017, 2016, and 2015, respectively.

The following table shows our future commitments in effect as of December 31, 2017 (in thousands):
    
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Operating lease obligations
$
3,103

 
$
2,076

 
$
1,211

 
$
983

 
$
795

 
$
726

 
$
8,894

Purchase commitments
30,169

 

 

 

 

 

 
30,169

Standby letters of credit
8,975

 
115

 

 

 

 

 
9,090

Total
$
42,247

 
$
2,191

 
$
1,211

 
$
983

 
$
795

 
$
726

 
$
48,153

    

We have not included the liabilities for uncertain tax positions in the above table as we cannot make a reliable estimate of the period of cash settlement. We have not included pension obligations in the above table as we cannot make a reliable estimate of the timing of employer contributions. For the year ended December 31, 2018, the expected Company contributions to be paid to the qualified defined benefit domestic plan are $4.0 million and the expected Company contributions to the foreign defined benefit pension plans are $2.4 million.

We believe that the current available funds and credit facilities, along with internally generated funds from operations, will provide sufficient financial resources for ongoing operations throughout 2018.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Change in Accounting Policy

There were no significant changes to accounting policies in 2017.


31


Discussion of Critical Accounting Policies

The preparation of our 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 that were reviewed with our audit committee, and which we feel are most susceptible to such interpretation.

Accounts Receivable. We assess the collectability of our trade accounts receivable using a combination of methods. We review large individual accounts for evidence of circumstances that suggest a collection problem might exist. Such situations include, but are not limited to, the customer's history of payments, its current financial condition as evidenced by credit ratings, financial statements or other sources, and recent collection activities. We provide a reserve for losses based on current payment trends in the economies where we hold concentrations of receivables and provide a reserve for what we believe to be the most likely risk of collectability. In order to make these allowances, we rely on assumptions regarding economic conditions, equipment resale values, and the likelihood that previous performance will be indicative of future results.

Inventories. We use a number of assumptions and estimates in determining the value of our inventory. An allowance is provided for the value of inventory quantities of specific items that are deemed to be excessive based on an annual review of past usage and anticipated future usage. While we feel 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 metalcutting technology can render certain products obsolete or reduce their market value. We continually evaluate changes in technology and adjust our products and inventory carrying values accordingly, either by write-off or by price reductions. Changes in market conditions and realizable selling prices for our machines could reduce the value of our inventory. We continually evaluate the carrying value of our machine inventory against the estimated selling price, less related costs to sell and adjust our inventory carrying values accordingly. However, the possibility exists that a future technological development, currently unanticipated, might affect the marketability of specific products produced by the Company.

We include in the cost of our inventories a component to cover the estimated cost of manufacturing overhead activities associated with production of our products.

We believe that being able to offer immediate delivery on many of our products is critical to our competitive success. Likewise, we believe that maintaining an inventory of service parts, with a particular emphasis on purchased parts, is especially important to support our policy of maintaining serviceability of our products. Consequently, we maintain significant inventories of repair parts on many of our machine models, some of which are no longer in production. Our ability to accurately determine which parts are needed to maintain this serviceability is critical to our success in managing this element of our business.

Goodwill Impairment Testing. We review goodwill for impairment at least annually or when indicators of impairment are present. These events or circumstances could include a significant long-term adverse change in the business climate, poor indicators of operating performance, or a sale or disposition of a significant portion of a reporting unit.

We test goodwill at the reporting unit level, which is one level below our operating segments. We identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components. We also aggregate components that have similar economic characteristics into single reporting units (for example, similar products and/or services, similar long-term financial results, product processes, classes of customers, etc.). We have two reporting units, only one of which currently has goodwill. Our ATA reporting unit had goodwill totaling $6.7 million as of December 31, 2017.

When we evaluate the potential for goodwill impairment, we assess a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we proceed to a two-step impairment test.

Our annual goodwill impairment review was performed as of October 1, 2017. As a result of this assessment we determined that the fair value of our reporting units that have goodwill exceeded the carrying value.

32



Net Deferred Tax Assets. We regularly review the recent results and projected future results of our operations, as well as other relevant factors, to reconfirm the likelihood that existing deferred tax assets in each tax jurisdiction would be fully recoverable.

A valuation allowance is established when it is more likely than not that all, or a portion of deferred tax assets are not expected to be realized. The Company assesses all available positive and negative evidence to determine whether a valuation allowance is needed. Positive and negative evidence to be considered includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. Supporting a conclusion that a valuation allowance is not necessary is difficult when there is negative evidence such as cumulative losses in recent years.

A full valuation allowance is maintained on the tax benefits of the U.S. net deferred tax assets and it is expected that a full valuation allowance on future tax benefits will be recorded until an appropriate level of profitability in the U.S. is sustained. A valuation allowance is also maintained on the U.K., German, and Dutch deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

The calculation of the tax liabilities requires significant judgment, the use of estimates and the interpretation, and application of complex tax laws. The provision for income taxes reflects a combination of income earned and taxed in the U.S. and the various states, as well as federal and provincial jurisdictions in Switzerland, U.K., Germany, France, the Netherlands, China, Taiwan, and India. Jurisdictional tax law changes, increases or decreases in permanent differences between book and tax items, accruals or adjustments of accruals for tax contingencies or valuation allowances, and the change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate.

Retirement Plans. We sponsor various defined benefit pension plans, defined contribution plans, and two postretirement benefit plans, all as described in Note 13. "Employee Benefits" to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K. The calculation of our plan expenses and liabilities require the use of a number of critical accounting estimates. Changes in the assumptions can result in different plan expense and liability amounts, and actual experience can differ from the assumptions. We believe that the most critical assumptions are the discount rate and the expected rate of return on plan assets.

We annually review the discount rate to be used for retirement plan liabilities. In the U.S., we use bond pricing models based on high grade U.S. corporate bonds constructed to match the projected liability benefit payments. We discounted our future plan liabilities for our U.S. plan using rates of 3.86% and 4.39% at our plan measurement dates of December 31, 2017 and 2016, respectively. We discounted our future plan liabilities for our foreign plans using rates appropriate for each country, which resulted in blended rates of 0.87% and 0.89% at their measurement dates of December 31, 2017 and 2016, respectively. A change in the discount rate can have a significant effect on retirement plan obligations. For example, a decrease of one percent would increase U.S. pension obligations by approximately $13.5 million. Conversely, an increase of one percent would decrease U.S. pension obligations by approximately $11.2 million. A decrease of one percent in the discount rate would increase the Swiss pension obligations by approximately $20.7 million. Conversely, an increase of one percent would decrease the Swiss pension obligations by approximately $17.2 million.

A change in the discount rate can also have an effect on retirement plan expense. For example, a decrease of one percent would decrease U.S. 2018 pension expense by approximately $0.1 million. Conversely, an increase of one percent would increase U.S. 2018 pension expense by approximately $0.08 million. A decrease of one percent would increase the Swiss pension expense by approximately $1.6 million. Conversely, an increase of one percent would decrease the Swiss pension expense by approximately $1.2 million.

The expected rate of return on plan assets varies based on the investment mix of each particular plan and reflects the long-term average rate of return expected on funds invested or to be invested in each pension plan to provide for the benefits included in the pension liability. We review our expected rate of return annually based upon information available to us at that time, including the current level of expected returns on risk free investments (primarily government bonds in each market), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested, and the expectations for future returns of each asset class. The expected return for each asset class is then weighted based on the asset allocation to develop the expected long-term rate of return on assets assumption. For our domestic plans, the expected rate of return during fiscal 2018 is 7.50%, which is the same rate used for fiscal 2017. For our foreign plans, we used rates of return appropriate for each country which resulted in a blended expected rate of return of 3.14% for fiscal 2018, compared to 3.91%



33


for fiscal 2017. A change in the expected return on plan assets can also have a significant effect on retirement plan expense. For example, a decrease of one percent would increase U.S. pension expense by approximately $0.8 million. Conversely, an increase of one percent would decrease U.S. pension expense by approximately $0.8 million. A decrease of one percent would increase the Swiss pension expense by approximately $1.0 million. Conversely, an increase of one percent would decrease the Swiss pension expense by approximately $1.0 million.

Accounting Guidance Not Yet Adopted

We are currently assessing the financial impact to our consolidated financial statements of accounting guidance not yet adopted. For further information on accounting guidance not yet adopted, refer to Note 19. "New Accounting Standards" to the Consolidated Financial Statements set forth in Item 8 of this Form 10-K.
 
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995,
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Accordingly, there can be no assurance that our expectations will be realized. Such statements are based upon information known to management at this time. The Company cautions that such statements necessarily involve uncertainties and risk and deal with matters beyond the Company’s ability to control, and in many cases the Company cannot predict what factors would cause actual results to differ materially from those indicated. Among the many factors that could cause actual results to differ from those set forth in the forward-looking statements are the possibility that the proposed Merger is delayed or does not close, including due to the failure to receive required shareholder approval, the taking of governmental action (including the passage of legislation) to block the proposed Merger, the failure of Privet to obtain the equity and debt financing or other funds required to finance the proposed Merger, or the failure of other closing conditions, the possibility that the expected financial impacts will not be realized, or will not be realized within the expected time period, 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 "Overview" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", of this Form 10-K.
 

34


Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Hardinge Inc.

We have audited the accompanying consolidated balance sheets of Hardinge Inc. and Subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 9, 2018, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1984.

Buffalo, New York
March 9, 2018


35


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
December 31,
2017
 
December 31,
2016
Assets
 

 
 

Cash and cash equivalents
$
44,958

 
$
28,255

Restricted cash
2,717

 
2,923

Accounts receivable, net
61,800

 
55,573

Inventories, net
104,502

 
107,018

Other current assets
9,076

 
6,926

Assets held for sale
5,647

 

Total current assets
228,700

 
200,695

 
 
 
 
Property, plant and equipment, net
50,790

 
56,961

Goodwill
6,677

 
6,579

Other intangible assets, net
26,386

 
26,730

Other non-current assets
6,396

 
6,585

Total non-current assets
90,249

 
96,855

Total assets
$
318,949

 
$
297,550

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Accounts payable
$
26,362

 
$
24,920

Accrued expenses
31,695

 
25,629

Customer deposits
23,852

 
18,215

Accrued income taxes
1,370

 
1,160

Current portion of long-term debt

 
2,923

Total current liabilities
83,279

 
72,847

 
 
 
 
Long-term debt

 
2,970

Pension and postretirement liabilities
49,122

 
58,840

Deferred income taxes
5,217

 
3,800

Other liabilities
2,405

 
3,152

Total non-current liabilities
56,744

 
68,762

Commitments and contingencies (see Note 11)


 


Common stock (par value $0.01 per share; shares authorized 20,000,000; Shares issued 12,963,164 and 12,903,037)
130

 
129

Additional paid-in capital
122,140

 
121,015

Retained earnings
94,882

 
89,557

Treasury shares (at cost, 0 and 9,243)

 
(104
)
Accumulated other comprehensive loss
(38,226
)
 
(54,656
)
Total shareholders’ equity
178,926

 
155,941

Total liabilities and shareholders’ equity
$
318,949

 
$
297,550

 










See accompanying notes to the consolidated financial statements.

36


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Sales
$
317,920

 
$
292,013

 
$
315,249

Cost of sales
210,352

 
194,486

 
210,711

Gross profit
107,568

 
97,527

 
104,538

 
 
 
 
 
 
Selling, general and administrative expenses
79,950

 
79,647

 
81,271

Research & development
14,543

 
13,514

 
14,140

Restructuring charges
4,506

 
661

 
3,558

Other (income) expense, net
(365
)
 
310

 
632

Income from operations
8,934

 
3,395

 
4,937

 
 
 
 
 
 
Interest expense
417

 
555

 
655

Interest income
(166
)
 
(227
)
 
(156
)
Income from continuing operations before
income taxes
8,683

 
3,067

 
4,438

Income taxes
2,837

 
1,843

 
1,828

Net income
$
5,846

 
$
1,224

 
$
2,610

 
 
 
 
 
 
Per share data:
 

 
 

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.45

 
$
0.10

 
$
0.20

 
 
 
 
 
 
Diluted earnings per share
$
0.45

 
$
0.09

 
$
0.20

 
 
 
 
 
 
Cash dividends declared per share:
$
0.04

 
$
0.08

 
$
0.08

 









See accompanying notes to the consolidated financial statements.


37


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
 
Year Ended December 31,
 
2017
 
2016
 
2015
Net income
$
5,846

 
$
1,224

 
$
2,610

Other comprehensive income (loss):
 

 
 

 
 
Foreign currency translation adjustments
9,660

 
(4,811
)
 
(4,598
)
Retirement plans related adjustments
7,720

 
(899
)
 
(5,945
)
Unrealized (loss) gain on cash flow hedges
(456
)
 
138

 

Other comprehensive income (loss) before tax
16,924

 
(5,572
)
 
(10,543
)
Income tax expense (benefit)
494

 
371

 
(631
)
Other comprehensive income (loss), net of tax
16,430

 
(5,943
)
 
(9,912
)
Total comprehensive income (loss)
$
22,276

 
$
(4,719
)
 
$
(7,302
)
 






































See accompanying notes to the consolidated financial statements.


38


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Year Ended December 31,
 
2017
 
2016
 
2015
Operating activities
 

 
 
 
 
Net income
$
5,846

 
$
1,224

 
$
2,610

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 
Impairment charge
1,401

 

 

Depreciation and amortization
8,905

 
8,789

 
8,824

Debt issuance costs amortization
155

 
131

 
134

Deferred income taxes
376

 
689

 
(768
)
Gain on sale of assets
(38
)
 
(38
)
 
(26
)
Gain on dissolution of subsidiary
(833
)
 

 

Unrealized foreign currency transaction loss
(296
)
 
524

 
404

Changes in operating assets and liabilities, net of businesses acquired:
 

 
 

 
 

Accounts receivable
(2,993
)
 
(284
)
 
3,942

Restricted cash
411

 
(927
)
 
827

Inventories
6,451

 
252

 
(1,442
)
Other assets
(925
)
 
(372
)
 
834

Accounts payable
611

 
141

 
450

Customer deposits
4,421

 
(776
)
 
7,762

Accrued expenses
1,658

 
(3,964
)
 
3,250

Accrued pension and postretirement liabilities
(35
)
 
(92
)
 
(74
)
Net cash provided by operating activities
25,115

 
5,297

 
26,727

 
 
 
 
 
 
Investing activities
 

 
 

 
 
Capital expenditures
(3,207
)
 
(2,479
)
 
(4,210
)
Deposit on assets held for sale
516

 

 

Proceeds from sales of assets
68

 
118

 
69

Net cash used in investing activities
(2,623
)
 
(2,361
)
 
(4,141
)
 
 
 
 
 
 
Financing activities
 

 
 

 
 
Proceeds from short-term notes payable to bank
20,987

 
42,820

 
32,502

Repayments of short-term notes payable to bank
(21,734
)
 
(42,114
)
 
(32,502
)
Repayments of long-term debt
(6,088
)
 
(5,761
)
 
(4,464
)
Dividends paid
(526
)
 
(1,052
)
 
(1,037
)
Purchases of treasury stock
(80
)
 
(368
)
 
(201
)
Net cash used in financing activities
(7,441
)
 
(6,475
)
 
(5,702
)
Effect of exchange rate changes on cash
1,652

 
(980
)
 
(403
)
Net increase (decrease) in cash
16,703

 
(4,519
)
 
16,481

 
 
 
 
 
 
Cash and cash equivalents at beginning of period
28,255

 
32,774

 
16,293

 
 
 
 
 
 
Cash and cash equivalents at end of period
$
44,958

 
28,255

 
$
32,774




See accompanying notes to the consolidated financial statements.

39


HARDINGE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Total Shareholders' Equity
Balance at December 31, 2014
$
128

 
$
120,538

 
$
87,777

 
$
(46
)
 
$
(38,801
)
 
$
169,596

Net Income

 

 
2,610

 

 

 
2,610

Other comprehensive loss, net of tax

 

 

 

 
(9,912
)
 
(9,912
)
Dividends declared

 

 
(1,019
)
 

 

 
(1,019
)
Common shares issued

 
257

 

 

 

 
257

Stock based compensation

 
(267
)
 

 
(18
)