Edgar Filing: HARDINGE INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-15760

Hardinge Inc.

(Exact name of Registrant as specified in its charter)

New York		16-0470200
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Hardinge Inc.

One Hardinge Drive

Elmira, NY 14902

(Address of principal executive offices) (Zip code)

(607) 734-2281

(Registrant’s telephone number including area code)

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. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted to its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “small reporting company” in Rule 12b-2 in the Exchange Act.

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined by Exchange Act Rule 12b-2). Yes o No x

As of June 30, 2013 there were 11,758,543 shares of Common Stock of the registrant outstanding.

Table of Contents

HARDINGE INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page
Part I	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets at June 30, 2013 and December 31, 2012	3

		Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012	4

		Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012	5

		Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

	Item 4.	Controls and Procedures	32

Part II	Other Information

	Item 1.	Legal Proceedings	33

	Item 1A.	Risk Factors	33

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

	Item 3.	Defaults upon Senior Securities	33

	Item 4.	Mine Safety Disclosures	33

	Item 5.	Other Information	33

	Item 6.	Exhibits	34

	Signatures		36

	Certifications		37

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HARDINGE INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands Except Share and Per Share Data)

	June 30,			December 31,
	2013			2012
	(Unaudited)
Assets
Cash and cash equivalents	$	18,716		$	26,855
Restricted cash	2,845			2,634
Accounts receivable, net	55,233			51,871
Inventories, net	130,182			128,000
Other current assets	12,953			12,580
Total current assets	219,929			221,940

Property, plant and equipment, net	74,064			71,035
Goodwill	14,506			8,497
Other intangible assets, net	35,446			21,824
Other non-current assets	2,744			2,358
Total non-current assets	126,760			103,714
Total assets	$	346,689		$	325,654

Liabilities and shareholders’ equity
Accounts payable	$	27,248		$	27,779
Notes payable to bank	17,060			11,500
Accrued expenses	26,051			29,307
Customer deposits	19,592			15,720
Accrued income taxes	650			3,952
Deferred income taxes	3,217			2,980
Current portion of long-term debt	4,835			2,873
Total current liabilities	98,653			94,111

Long-term debt	25,071			5,616
Pension and postretirement liabilities	48,397			50,312
Deferred income taxes	3,617			3,431
Other liabilities	10,959			10,977
Total non-current liabilities	88,044			70,336

Common stock ($0.01 par value, 12,472,992 issued)	125			125
Additional paid-in capital	114,125			114,072
Retained earnings	83,791			81,961
Treasury shares	(9,192		)	(9,442		)
Accumulated other comprehensive loss	(28,857		)	(25,509		)
Total shareholders’ equity	159,992			161,207
Total liabilities and shareholders’ equity	$	346,689		$	325,654

See accompanying notes to the consolidated financial statements

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In Thousands Except Per Share Data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(unaudited)						(unaudited)

Net sales	$	80,814		$	86,320		$	148,033		$	160,970
Cost of sales	57,463			62,348			105,709			115,809
Gross profit	23,351			23,972			42,324			45,161

Selling, general and administrative expenses	20,258			19,047			38,503			36,646
Loss (gain) on sale of assets	31			(12		)	(11		)	(14		)
Other expense	136			99			454			303
Income from operations	2,926			4,838			3,378			8,226

Interest expense	311			269			516			409
Interest income	(14		)	(27		)	(29		)	(51		)
Income before income taxes	2,629			4,596			2,891			7,868

Income tax expense	364			956			586			1,785
Net income	$	2,265		$	3,640		$	2,305		$	6,083

Basic and diluted earnings per share:	$	0.19		$	0.31		$	0.20		$	0.52

Cash dividends declared per share:	$	0.02		$	0.02		$	0.04		$	0.04

See accompanying notes to the consolidated financial statements

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013			2012
	(unaudited)					(unaudited)

Net income	$	2,265	$	3,640		$	2,305		$	6,083
Other comprehensive income (loss), net of tax	1,001		(4,231		)	(3,348		)	577
Comprehensive income (loss), net of tax	$	3,266	$	(591	)	$	(1,043	)	$	6,660

See accompanying notes to the consolidated financial statements

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

	Six Months Ended
	June 30,
	2013			2012
	(Unaudited)

Operating activities
Net income	$	2,305		$	6,083
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	4,350			3,658
Debt issuance amortization	34			32
(Benefit) provision for deferred income taxes	(20		)	1,001
Gain on sale of assets	(11		)	(14		)
Unrealized intercompany foreign currency transaction loss	67			290
Changes in operating assets and liabilities:
Accounts receivable	1,263			11,685
Inventories	311			(10,586		)
Other assets	(49		)	(540		)
Accounts payable	(1,174		)	(2,906		)
Customer deposits	3,901			(2,399		)
Accrued expenses	(8,771		)	(5,732		)
Accrued postretirement benefits	(197		)	(258		)
Net cash provided by operating activities	2,009			314

Investing activities
Acquisition of business, net of cash acquired	(34,250		)	—
Capital expenditures	(1,627		)	(5,364		)
Proceeds on sale of assets	102			22
Net cash used in investing activities	(35,775		)	(5,342		)

Financing activities
Proceeds from short-term notes payable to bank	32,458			35,584
Repayments of short-term notes payable to bank	(26,674		)	(35,726		)
Proceeds from long-term debt	23,000			475
Repayments of long-term debt	(1,432		)	(465		)
Dividends paid	(467		)	(465		)
Other financing activities	(667		)	9
Net cash provided by (used in) financing activities	26,218			(588		)

Effect of exchange rate changes on cash	(591		)	29
Net decrease in cash	(8,139		)	(5,587		)

Cash and cash equivalents at beginning of period	26,855			21,736

Cash and cash equivalents at end of period	$	18,716		$	16,149

See accompanying notes to the consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2013

NOTE 1. BASIS OF PRESENTATION

In these notes, the terms “Hardinge,” “Company,” “we,” “us,” or “our” mean Hardinge Inc. and its predecessors together with its subsidiaries.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2012. The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from our estimates. In our opinion, we made all adjustments that are necessary for a fair presentation, and those adjustments are of a normal recurring nature unless otherwise noted. Due to differing business conditions and some seasonality, our operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2013.

NOTE 2. ACQUISITION

On May 9, 2013, Forkardt Inc. (“Forkardt”, formerly Cherry Acquisition Corporation) and Hardinge Holdings GmbH (“Holdings GmbH”), direct wholly owned subsidiaries of the Company, and Hardinge GmbH, an indirect wholly owned subsidiary of the Company, acquired the Forkardt operations from Illinois Tool Works for $34.5 million, net of cash acquired. The acquisition was funded through $24.3 million in bank debt and $10.0 million in cash. Forkardt is a leading global provider of high-precision, specialty workholding devices with headquarters in Traverse City, Michigan. Forkardt has operations in the U.S., France, Germany, and Switzerland. The results of operations of Forkardt have been included in the consolidated financial statements from the date of acquisition. During the three and six months ended June 30, 2013, we recorded $6.5 million in sales and $0.1million in net loss related to Forkardt. We expensed acquisition related costs of $1.0 million and $1.6 million for the three months and six months ended June 30, 2013 and reported them in selling, general and administration expenses in the Consolidated Statements of Operations.

The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values. The identifiable intangible assets acquired, which primarily consist of customer relationships, trade name and technical know-how, were valued using an income approach. The weighted average life of the acquired identifiable intangible assets subject to amortization was estimated at 17.3 years at the time of acquisition. The excess purchase price over the fair value of the assets acquired and the liabilities assumed was recorded as goodwill, of which $0.3 million is deductible for tax purposes. At June 30, 2013, the purchase price allocation is preliminary pending the finalization of the fair value of the net assets acquired and working capital adjustment, if any.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

The preliminary allocation of purchase price to the assets acquired and liabilities assumed is as follows:

	May 9,
	2013
	(in thousands)

Assets Acquired
Accounts receivable	5,521
Inventory	5,357
Other current assets	1,180
Property, plant and equipment	6,271
Other non-current assets	105
Trade name, customer list, and other intangible assets	14,614
Total assets acquired	33,048
Liabilities Assumed
Accounts payable and other current liabilities	3,342
Other non-current liabilities	1,211
Net assets acquired	28,495
Total estimated purchase price	34,504
Goodwill	$	6,009

Supplemental Pro Forma Information

The following table illustrates the unaudited pro forma effect on operating results as if the Forkardt acquisition had been completed as of January 1, 2012.

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(unaudited)				(unaudited)

Sales	$	85,018	$	98,108	$	162,934	$	185,053
Net income	2,973		4,213		4,162		6,755
Diluted earnings per share	$	0.25	$	0.36	$	0.35	$	0.58

For purposes of the unaudited pro forma disclosures, incremental expenses associated with fixed asset depreciation, intangible asset amortization, inventory step up in basis and interest expense on the borrowings associated with the acquisition have been reflected in the applicable periods. Additionally, expenses associated with the acquisition of Forkardt have been excluded from the three and six months ended June 30, 2013.

The above unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what our results of operations would have been had we completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods. Pro forma adjustments exclude cost savings from any synergies resulting from the acquisition.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 3. NEW FINANCING ARRANGEMENT

On May 9, 2013, the Company, Usach Technologies, Inc. (“Usach”), a direct wholly owned subsidiary of the Company, and Forkardt amended and restated the existing $25.0 million domestic revolving credit agreement (the “Amendment”). The Amendment added Usach and Forkardt as additional borrowers and extended the maturity of the credit facility from March 31, 2014 to May 1, 2018. The revolving credit facility is guaranteed by Hardinge Technology Systems Inc. (“Technology”), a direct wholly owned subsidiary and owner of the real property comprising the Company’s world headquarters in Elmira, New York, and is secured by liens on all of the U.S. assets (exclusive of real property) of the Company, Usach, Forkardt and Technology, a pledge of 65% of the Company’s investment in Holdings GmbH, and a negative pledge on the Company’s world headquarters in Elmira, New York.

Also on May 9, 2013, the Company and Holdings GmbH entered into a term loan agreement with a bank. This term loan agreement, which has a maturity date of May 9, 2018, provides for a $23.0 million senior secured term loan facility for the acquisition of Forkardt. The agreement calls for scheduled annual principal repayment in the amount of $0.8 million, $2.0 million, $3.2 million, $4.0 million, $4.0 million and $9.0 million in 2013, 2014, 2015, 2016, 2017, and 2018 respectively. The term loan is secured by the same collateral as the revolving credit facility and is guaranteed by Usach, Forkardt, and Technology.

The interest rate on the revolving credit facility and the term loan is determined from pricing grids with London Interbank Offered Rate (“Libor”) and base rate options based on the Company’s leverage ratio and is initially set at Libor plus 2.75%. The interest rate was 3.0% at June 30, 2013.

Both the revolving credit facility and term loan have financial covenants requiring a minimum Fixed Charge Coverage Ratio of not less than 1.15 to 1.00 (tested quarterly on a rolling four-quarter basis), a maximum consolidated Total Leverage Ratio of 3.0 to 1.0 (tested quarterly on a rolling four-quarter basis), and maximum annual consolidated capital expenditures of $10,000,000 along with other customary representations, affirmative and negative covenants, prepayment provisions and events of default.

NOTE 4. NET INVENTORIES

Net inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of the cost include materials, labor and overhead.

Net inventories consist of the following:

	June 30,		December 31,
	2013		2012
	(in thousands)
Finished products	$	57,931	$	56,596
Work-in-process	37,713		32,468
Raw materials and purchased components	34,538		38,936
Inventories, net	$	130,182	$	128,000

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

	June 30,			December 31,
	2013			2012
	(in thousands)
Land, buildings and improvements	$	83,267		$	83,032
Machinery, equipment and fixtures	77,593			73,169
Office furniture, equipment and vehicles	17,786			18,058
Construction in progress	388			325
	179,034			174,584
Accumulated depreciation	(104,970		)	(103,549		)
Property, plant and equipment, net	$	74,064		$	71,035

NOTE 6. GOODWILL AND INTANGIBLE ASSETS

A summary of goodwill amount follows:

	Gross Carrying Value		Accumulated Impairment Losses			Net
	(in thousands)

Balance at December 31, 2012	$	32,274	$	(23,777	)	$	8,497
Addition due to acquisition	6,009		—			6,009
Balance at June 30, 2013	$	38,283	$	(23,777	)	$	14,506

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

The major components of intangible assets other than goodwill are as follows:

	June 30,			December 31,
	2013			2012
	(in thousands)

Gross amortizable intangible assets:
Land rights	$	2,803		$	2,784
Patents	3,023			3,006
Technical know-how, customer list, and other	21,584			12,392
Total gross amortizable intangible assets	27,410			18,182

Accumulated amortization:
Land rights	(145		)	(116		)
Patents	(2,850		)	(2,807		)
Technical know-how, customer list, and other	(4,390		)	(3,870		)
Total accumulated amortization	(7,385		)	(6,793		)
Amortizable intangible assets, net	20,025			11,389

Intangible asset not subject to amortization:
Assets associated with Bridgeport acquisition (1)	7,271			7,595
Usach and Forkardt trade names(2)	8,150			2,840
	15,421			10,435
Intangible assets other than goodwill, net	$	35,446		$	21,824

(1) Represents the aggregate value of the trade name, trademarks and copyrights associated with the former worldwide operations of Bridgeport. We use the Bridgeport brand name on all of our machining center lines. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has been determined to have an indefinite useful life. The $0.3 million decrease in the balance from 2012 was the impact of foreign currency exchange.

(2) Represents the value of the trade names associated with Usach and Forkardt which the Company acquired in 2012 and 2013, respectively. We use the Usach trade name on all of the grinding machines and grinding systems manufactured by Usach. We use the Forkardt trade name on all of the workholding products manufactured by Forkardt. After consideration of legal, regulatory, contractual, competitive, economic and other factors, the asset has been determined to have an indefinite useful life.

Amortization expense related to these amortizable intangible assets was $0.4 million and $0.7 million for the three and six months ended June 30, 2013, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2012, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 7. INCOME TAXES

We continue to maintain a valuation allowance against all or a portion of our deferred tax assets in the U.S., Canada, U.K., Germany, Switzerland, and the Netherlands.

Each quarter, we update the estimate of our full year tax rate for jurisdictions not subject to valuation allowances based upon our most recent forecast of full year anticipated results and adjust the year-to-date tax expense to reflect our full year anticipated tax rate. The rate is an estimate based upon projected results for the year, estimated annual permanent differences, the statutory tax rates in the various jurisdictions in which we operate, and the non-recognition of tax benefits for entities with full valuation allowances. The overall effective tax rates were 13.8% and 20.3% for the three and six months ended June 30, 2013, respectively. The effective tax rates for the three and six months ended June 30, 2013 differ from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded, and due to the rate difference between the U.S. and non-US entities.

The tax years 2011 and 2012 remain open to examination by the U.S. federal taxing authorities. The tax years 2008 through 2012 remain open to examination by the U.S. state taxing authorities. For our other major jurisdictions (Switzerland, U.K., Taiwan, Germany, Netherlands and China); the tax years between 2006 and 2012 generally remain open to routine examination by foreign taxing authorities, depending on the jurisdiction.

The increase to the accrued liability associated with uncertain tax positions in the three and six months ended June 30, 2013 was $0.4 million. The increase is primarily attributable to the acquisition of Forkardt. At June 30, 2013 and December 31, 2012, we recorded a $2.9 million and $2.5 million liability, respectively, with respect to uncertain income tax positions, which included related interest and penalties of $1.0 million at June 30, 2013 and $0.9 million at December 31, 2012. If recognized, essentially all of the uncertain tax positions and related interest at June 30, 2013 would be recorded as a benefit to income tax expense on the Consolidated Statement of Operations. It is reasonably possible that certain of our uncertain tax positions pertaining to our foreign operations may change within the next 12 months due to audit settlements and statute of limitations expirations. We estimate the change in uncertain tax positions for these items to be between $0.1 million and $0.8 million.

NOTE 8. WARRANTIES

Warranty liabilities are reported as accrued expenses on our Consolidated Balance Sheets. A reconciliation of the changes in our product warranty accrual is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Balance at the beginning of period	$	3,094		$	3,432		$	3,432		$	3,800
Warranties issued	707			832			1,395			1,494
Warranty settlement costs	(706		)	(481		)	(1,328		)	(1,274		)
Changes in accruals for pre-existing warranties	(183		)	(207		)	(470		)	(551		)
Other adjustments (1)	331			—			331			—
Currency translation adjustment	6			(99		)	(111		)	8
Balance at the end of period	$	3,249		$	3,477		$	3,249		$	3,477

(1) Represents the warranty liabilities assumed in connection with the Forkardt acquisition. Refer to Note 2 - Acquisition for details.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 9. PENSION AND POST RETIREMENT PLANS

A summary of the components of net periodic pension benefit costs for the three and six months ended June 30, 2013 and 2012 is presented below.

	Pension Benefits
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Service cost	$	342		$	310		$	690		$	627
Interest cost	1,835			2,037			3,678			4,085
Expected return on plan assets	(2,352		)	(2,371		)	(4,717		)	(4,756		)
Amortization of prior service cost	(101		)	(13		)	(204		)	(27		)
Amortization of transition asset	(67		)	(67		)	(135		)	(135		)
Amortization of loss	797			602			1,601			1,213
Net periodic benefit cost	$	454		$	498		$	913		$	1,007

A summary of the components of net postretirement benefits costs for the three and six months ended June 30, 2013 and 2012 is presented below.

	Post Retirement Benefits
	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Service cost	$	4		$	4		$	8		$	8
Interest cost	23			28			46			56
Amortization of prior service cost	(64		)	(88		)	(128		)	(176		)
Amortization of loss	(1		)	(2		)	(2		)	(4		)
Net periodic benefit (credit) cost	$	(38	)	$	(58	)	$	(76	)	$	(116	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 10. FAIR VALUE AND DERIVATIVE INSTRUMENTS

Fair Value

The inputs to the valuation techniques used to measure fair value are classified into the following categories:

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Observable inputs other than quoted prices in active markets for similar assets and liabilities.

Level 3 — Inputs for which significant valuation assumptions are unobservable in a market and therefore value is based on the best available data, some of which is internally developed and accounts for risk premiums that a market participant would require.

The following table presents the carrying amount, fair values and classification of our financial instruments measured on a recurring basis:

	June 30, 2013
	Total			Level 1		Level 2			Level 3
	(in thousands)
Cash and cash equivalents	$	18,716		$	18,716	$	—		$	—
Restricted cash	2,845			2,845		—			—
Notes payable to bank	(17,060		)	—		(17,060		)	—
Variable interest rate debt	(29,906		)	—		(29,006		)	—
Contingent purchase price payment	(7,000		)	—		—			(7,000		)
Foreign currency forward contracts, net	(403		)	—		(403		)	—

	December 31, 2012
	Total			Level 1		Level 2			Level 3
	(in thousands)
Cash and cash equivalents	$	26,855		$	26,855	$	—		$	—
Restricted cash	2,634			2,634		—			—
Notes payable to bank	(11,500		)	—		(11,500		)	—
Variable interest rate debt	(8,489		)	—		(8,489		)	—
Contingent purchase price payment	(7,484		)	—		—			(7,484		)
Foreign currency forward contracts, net	(205		)	—		(205		)	—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. The fair value of notes payable to bank and variable interest rate debt are based on the present value of expected future cash flows. Due to the short period to maturity or the nature of the underlying liability, the fair value of notes payable to bank and variable interest rate debt approximates their respective carrying amounts. The contingent purchase price payment represents the contingent liabilities associated with the earn-out provisions from the 2012 acquisition of Usach and 2010 acquisition of Jones & Shipman. During the first quarter of 2013, the contingent purchase price payment related to the Jones & Shipman acquisition was paid. The fair value of the contingent purchase price payment is based on the present value of the estimated aggregated payment amount. The fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates. Based on our continued ability to enter into forward contracts, we consider the markets for our fair value instruments to be active. As of June 30, 2013 and December 31, 2012, there were no transfers in and out of Level 1, Level 2 or Level 3.

As described in Note 2, Acquisition, the Company completed the acquisition of Forkardt in May 2013. The fair value measurements for the acquired intangible assets were calculated using discounted cash flow analysis which rely upon significant unobservable Level 3 inputs which include the following:

Unobservable inputs		Range
Discount rate		19.0% - 20.0%
Royalty rate		2.0% - 3.0%
Long term growth rate		3.0%

Derivative Instruments

We utilize foreign currency forward contracts to mitigate the impact of currency fluctuations on assets and liabilities denominated in foreign currencies as well as on forecasted transactions denominated in foreign currencies. These contracts are considered derivative instruments and are recognized as either assets or liabilities and measured at fair value. For contracts that are designated and qualify as cash flow hedges, the gain or loss on the contracts is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into “Sales” or “Other expense” line items on the Consolidated Statements of Operations when the hedged transaction affects earnings. As of June 30, 2013, we do not expect material amount of the gain or loss will be reclassified from AOCI into “Sales” or “Other expense” in the next 12 months. For contracts that are not designated as hedges, the gain and loss on the contract is recognized in current earnings as “Other expense” line item on the Consolidated Statements of Operations.

As of June 30, 2013 and December 31, 2012, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $48.2 million and $60.5 million, respectively. For the three and six months ended June 30, 2013, we recorded losses of $0.7 million and $1.3 million, respectively, related to this type of derivative financial instruments. For three months and six months ended June 30, 2012, we recorded an immaterial loss and $0.2 million gain related to this type of derivative financial instruments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

Derivative financial instruments qualifying and designated as hedges are as follows:

	June 30, 2013				December 31, 2012
	Notional Amount		Unrealized Loss		Notional Amount		Unrealized Loss
	(in thousands)
Foreign currency forwards	$	41,212	$	115	$	49,750	$	22

The following table presents the fair value on our Consolidated Balance Sheets of the foreign currency forward contracts:

	June 30,			December 31,
	2012			2012
	(in thousands)
Foreign currency forwards designated as hedges:
Other current assets	$	257		$	191
Accrued expenses	(372		)	(213		)
Foreign currency forwards not designated as hedges:
Other current assets	166			284
Accrued expenses	(454		)	(467		)
Foreign currency forwards, net	$	(403	)	$	(205	)

NOTE 11. COMMITMENTS AND CONTINGENCIES

The Company is a defendant in various lawsuits as a result of normal operations and in the ordinary course of business. Management believes the outcome of these lawsuits will not have a material effect on our financial position or results of operations.

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 liabilities 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.

In particular, our 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

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 our 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 our operations or property have contributed or are contributing to the contamination. We have notified all appropriate insurance carriers and are actively cooperating with them, but whether coverage will be available has not yet been determined and possible insurance recovery cannot now be estimated with any degree of certainty.

A substantial portion of the Pond is located on our 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., the PRPs, have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order of Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the EPA, Region II, approved and executed the Agreement on behalf of the EPA. The PRPs also signed a PRP Member Agreement, agreeing to share the cost of the RI/FS study on a per capita basis.

The EPA approved the RI/FS Work Plan in May of 2008. On September 7, 2011, the PRPs submitted the draft Remedial Investigation Report to the EPA and on January 10, 2013, the draft Feasibility Study. The PRPs are currently working with the EPA to finalize the Feasibility Study.

The draft Feasibility Study identified alternative remedial actions with estimated life-cycle costs ranging from $0.7 million to $3.4 million. We estimate that our portion of the potential costs range from $0.1 million to $0.5 million. Based on the current estimated costs of the various remedial alternatives now under consideration by the EPA, we have recorded a reserve of $0.2 million for the Company’s share of remediation expenses at the Pond. This reserve is reported as an accrued expense on the Consolidated Balance Sheets.

We believe, based upon information currently available that, except as described in the preceding paragraphs, 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.

NOTE 12. STOCK BASED COMPENSATION

All of our stock based compensation to employees is recorded as selling, general and administrative expenses in our Consolidated Statements of Operations based on the fair value at the grant date of the award. These non-cash compensation costs were included in the depreciation and amortization amounts in the Consolidated Statements of Cash Flows.

A summary of stock based compensation expense is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Restricted stock/unit awards (“RSA”)	$	92	$	118	$	191	$	241
Performance share incentives (“PSI”)	43		66		61		101
	$	135	$	184	$	252	$	342

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

We did not grant any RSAs during the six months ended June 30, 2013. We granted 18,000 RSAs during the six months ended June 30, 2012. The fair value of the 2012 grant was $0.2 million. The deferred compensation is being amortized on a straight-line basis over the specified service period. Unrecognized compensation and the expected weighted-average recognition periods with respect to the outstanding RSAs as of June 30, 2013 and December 31, 2012, are as follows:

	June 30,		December 31,
	2013		2012
Unrecognized compensation cost, in thousands	$	755	$	945

Expected weighted-average recognition period for unrecognized compensation cost, in years	2.4		2.6

We did not grant any PSIs during the six months ended June 30, 2013 and 2012, respectively. The deferred compensation with respect to the PSI is being recognized into earnings based on the passage of time and achievement of performance targets. All outstanding PSIs are unvested.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 13. EARNINGS PER SHARE

Details of the computation of earnings per share are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
	(in thousands except per share data)
Basic earnings per share computation:
Net income	$	2,265	$	3,640	$	2,305	$	6,083
Less income allocated to participating awards	1		23		1		48
Net income applicable to common shareholders	$	2,264	$	3,617	$	2,304	$	6,035

Weighted average common shares outstanding	11,663		11,562		11,662		11,543
Basic earnings per share	$	0.19	$	0.31	$	0.20	$	0.52

Diluted earnings per share computation:
Net income	$	2,265	$	3,640	$	2,305	$	6,083
Less income allocated to participating awards	1		23		1		48
Net income applicable to common shareholders	$	2,264	$	3,617	$	2,304	$	6,035

Weighted average common shares outstanding	11,663		11,562		11,662		11,543
Assumed exercise of stock options	27		24		27		24
Assumed satisfaction of RSA conditions	64		14		60		11
Weighted average common shares outstanding	11,754		11,600		11,749		11,578
Diluted earnings per share	$	0.19	$	0.31	$	0.20	$	0.52

For the three months ended June 30, 2013 and 2012, 49,166 and 136,910 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive. For the six months ended June 30, 2013 and 2012, 56,390 and 157,385 shares, respectively, of certain stock-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the three months ended June 30, 2013 are as follows:

	Three Months Ended June 30, 2013
	Foreign currency translation adjustment		Retirement plan related adjustment			Unrealized gain (loss) on cash flow hedges			Accumulated other comprehensive loss
	(in thousands)
Beginning balance, net of tax	$	31,309	$	(61,115	)	$	(52	)	$	(29,858	)
Other comprehensive income before reclassifications	215		1,048			138			1,401
Less income reclassified from AOCI	—		564			80			644
Net other comprehensive (loss) income	215		484			58			757
Income tax benefit (expense)	322		(26		)	(52		)	244
Ending balance, net of tax	$	31,846	$	(60,657	)	$	(46	)	$	(28,857	)

Changes in accumulated other comprehensive income (loss) (“AOCI”) by component for the six months ended June 30, 2013 are as follows:

	Six Months Ended June 30, 2013
	Foreign currency translation adjustment			Retirement plan related adjustment			Unrealized gain (loss) on cash flow hedges			Accumulated other comprehensive loss
	(in thousands)
Beginning balance, net of tax	$	36,830		$	(62,375	)	$	36		$	(25,509	)
Other comprehensive (loss) income before reclassifications	(4,844		)	3,060			(108		)	(1,892		)
Less income (loss) reclassified from AOCI	—			1,132			(10		)	1,122
Net other comprehensive (loss) income	(4,844		)	1,928			(98		)	(3,014		)
Income tax (expense) benefit	(140		)	(210		)	16			(334		)
Ending balance, net of tax	$	31,846		$	(60,657	)	(46		)	(28,857		)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

Details about reclassification out of AOCI for the three months ended June 30, 2013 are as follows:

	Three Months Ended June 30, 2013
Details of AOCI components	Amount reclassified from AOCI			Affected line item on the Consolidated Statement of Operations
	(in thousands)
Unrealized gain (loss) on cash flow hedges:
	$	55		Sales
	25			Other expense
	80			Total before tax
	(13		)	Tax expense
	$	67		Net of tax
Retirement plan related adjustment:
Amortization of prior service cost	$	(165	)	(a)
Amortization of transition asset	(67		)	(a)
Amortization of actuarial loss	796			(a)
	564			Total before tax
	(42		)	Tax expense
	$	522		Net of tax

Details about reclassification out of AOCI for the six months ended June 30, 2013 are as follows:

	Six Months Ended June 30, 2013
Details of AOCI components	Amount reclassified from AOCI			Affected line item on the Consolidated Statement of Operations
	(in thousands)
Unrealized gain (loss) on cash flow hedges:
	$	(44	)	Sales
	34			Other expense
	(10		)	Total before tax
	5			Tax benefit
	$	(5	)	Net of tax
Retirement plan related adjustment:
Amortization of prior service cost	$	(332	)	(a)
Amortization of transition asset	(135		)	(a)
Amortization of actuarial loss	1,599			(a)
	1,132			Total before tax
	(85		)	Tax expense
	$	1,047		Net of tax

(a) These AOCI components are included in the computation of net period pension and post retirement costs. See Note 9 - Pension and Post Retirement Plans for details.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

NOTE 15. NEW ACCOUNTING STANDARDS

In December 2011, Financial Accounting Standards Board (the “FASB”) issued authoritative guidance on the presentation of netting assets and liabilities as a single amount in the balance sheet. This pronouncement amends and expands current disclosure requirements on offsetting and requires companies to disclose information about offsetting and related arrangements. We adopted this pronouncement on January 1, 2013. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition.

In February 2013, the FASB issued authoritative guidance that requires companies to report, in one place, information about reclassification of items out of accumulated other comprehensive income. We adopted this pronouncement on January 1, 2013. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition other than additional disclosure provided in Note 14 - Changes in Accumulated Other Comprehensive Income (Loss).

NOTE 16. SUBSEQUENT EVENTS

New Credit Facilities

On July 12, 2013, Holdings GmbH and L. Kellenberger & Co. AG, an indirect wholly-owned subsidiary of the Company (“Kellenberger”, and together with Holdings GmbH, the “Borrower”), entered into a Credit Facilities Agreement with Credit Suisse AG (the “Lender”) whereby the Lender has made available CHF 2,550,000 (approximately $2.7 million) mortgage loan facility (“Facility A”) and a CHF 18,000,000 (approximately $19.0 million) multi-currency revolving working capital facility (“Facility B”) for the purposes described below.

Facility A is to be used by Kellenberger and replaces an existing mortgage loan that Kellenberger maintained with the Lender. Interest on Facility A accrues at a fixed rate of 2.50% per annum, compared to 2.65% fixed interest rate on the existing mortgage loan. Effective as of December 2013, payments of principal in the amount of CHF 150,000 (approximately $0.2 million) will due on June 30 and December 31 in each year of the term, with the remaining outstanding balance of principal and accrued interest due in full at the final maturity date of December 23, 2016.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2013

Facility B is to be used by Holdings GmbH and its subsidiaries (collectively, the “Holdings Group”) for general corporate and working capital purposes, including without limitation standby letters of credits and standby letters of guarantee. In addition to Swiss Francs, loan proceeds available under Facility B can be drawn upon in Euros, British Pounds Sterling and United States Dollars (“Optional Currencies”). Under the terms of Facility B, the maximum amount of borrowings available to Holdings Group (on an aggregate basis) under the facility for working capital purposes shall not exceed CHF 8,000,000 (approximately $8.4 million) or its equivalent in Optional Currencies, as applicable. The interest rate on the borrowings drawn in the form of fixed term advances (excluding Euro-based fixed term advances) is calculated based on the applicable London Interbank Offered Rate (“LIBOR”). With respect to fixed term advances in Euros, the interest rate on borrowings is calculated based on the applicable Euro Interbank Offered Rate (“EURIBOR”), plus an applicable margin, (initially set at 2.25% per annum) that is determined by the Lender based on the financial performance of the Borrower.

The terms of the credit facilities also contain customary representations, affirmative, negative and financial covenants and events of default. The credit facilities are also secured by a series of mortgage notes in an aggregate amount of CHF 9,175,000 on two buildings owned by Kellenberger. In addition to the mortgage notes provided by Kellenberger to the Lender, Holdings GmbH serves as a guarantor with respect to Facility B.

“At-The-Market” Stock Offering

On August 6, 2013, the Company's Board of Directors authorized the Company to enter into a sales agreement with an agent pursuant to which we may sell shares of our common stock with an aggregate price of up to $25.0 million in sales deemed to be “at-the-market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended. Sales of our common stock pursuant to the agreement, if any, will be made from time to time. There can be no assurance that we will sell any shares of our common stock under the sales agreement. Also, we may elect to sell less than the $25.0 million maximum amount under the agreement.

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PART I - ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview. The following Management’s Discussion and Analysis (“MD&A”) contains information that the Company believes is necessary to an understanding of the Company’s financial condition and associated matters, including the Company’s liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements, the accompanying notes to the financial statements (“Notes”) appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2012.

Our primary business is designing, manufacturing, and distributing high-precision computer controlled metal-cutting turning, grinding, and milling machines and related accessories. We are geographically diversified with manufacturing facilities in China, France, Germany, Switzerland, Taiwan, the United States (“U.S.”), and the United Kingdom (“U.K.”) with sales to most industrialized countries. Approximately 75% of our 2012 sales were to customers outside of North America, 80% of our 2012 products sold were manufactured outside of North America, and 69% of our employees were employed outside of North America.

Our machine products are considered to be capital goods and are part of what has historically been a highly cyclical industry. Our management believes that a key performance indicator is our order level as compared to industry measures of market activity levels.

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

Non-machine sales, which include collets, accessories, repair parts and service revenue, historically account for approximately 24% of overall sales and are an important part of our business due to an installed base of thousands of machines. We believe that the acquisition of Forkardt in May 2013 will increase non-machine sales to overall sales by 8% to 10% on a full year basis. In the past, sales of these products and services have not fluctuated on a year-to-year basis as significantly as the sales of our machines have from time to time, but demand for these products and services typically track the direction of the related machine metrics.

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

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

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

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

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

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

Below is a summary of the percentage changes for the average rates of our functional currencies for the three and six months ended June 30, 2013 as compared to their respective USD equivalents during the same periods in 2012:

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

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

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Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The difference in effective tax rates between these two periods was driven by the mix of earnings by country and by the non-recognition of tax benefits for certain entities in a loss position for which a full valuation allowance has been recorded.

Each quarter, an estimate of the full year tax rate for jurisdictions not subject to a full valuation allowance is developed based upon anticipated annual results and an adjustment is made, if required, to the year-to-date income tax expense to reflect the full year anticipated effective tax rate.

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

The effective tax rate for the six months ended June 30, 2013 of 20.3% differs from the U.S. statutory rate primarily due to no tax benefit being recorded for certain entities in a loss position for which a full valuation allowance has been recorded, and due to the rate difference between the U.S. and non-US entities.

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

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

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

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

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

During the six months ended June 30, 2012, we generated $0.3 million net cash from operating activities. Net cash was primarily provided by collections on accounts receivables. The cash inflow was offset by cash used in inventory purchases to support production, vendor payments, and contributions to the pension plans.

Net cash used in investing activities was $35.8 million for the six months ended June 30, 2013 compared to $5.3 million for the same period in 2012. In May of 2013, we used $34.3 million net cash to acquire Forkardt. Excluding this use of cash, net cash used in investing activities decreased by $3.8 million due to lower capital expenditures as we completed our facility expansion projects in Switzerland and China in 2012.

Net cash flow provided by financing activities was $26.2 million for the six months ended June 30, 2013 compared to $0.6 million net cash used in financing activities for the same period in 2012. The increase was primarily due to $23.0 million in term loan proceeds used to partially fund the acquisition of Forkardt as well as additional borrowings under our existing credit facilities to align financing activities to current working capital needs.

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Liquidity and Capital Resources

Our liquidity requirements primarily include funding for operations, including working capital requirements, and funding for capital investments and acquisitions. We expect to meet these requirements in the long term through cash provided by operating activities and availability under various credit facilities and other financing arrangements. Cash flows from operating activities are primarily driven by earnings before noncash charges and change in working capital needs. During the six months ended June 30, 2013, cash flows from operating activities and available cash were sufficient to fund our normal investment activities, primarily capital expenditures for property, plant and equipment and other productive assets. We had additional borrowing capacity of $44.3 million at June 30, 2013, and $54.3 million at December 31, 2012, available under various credit facilities maintained by the Company and certain Company subsidiaries.

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

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

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PART I.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

There have been no material changes to our market risk exposures during the first six months of 2013. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risks, contained in our 2012 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Management of the Company, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2013, as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, and determined that these controls and procedures were effective.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2013 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1.A RISK FACTORS

There is no change to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

3.1		Restated Certificate of Incorporation of Hardinge Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 15, 2010 (File No. 001-34639)).

3.2		Certificate of Amendment of the Restated Certificate of Incorporation of Hardinge Inc. (incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 23, 2010 (File No. 000-15760)).

3.3		By-Laws of Hardinge Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 14, 2012 (File No. 001-34639)).

4.1		Specimen of certificate for shares of Common Stock, par value $.01 per share, of Hardinge Inc. (incorporated by reference to Exhibit 3 to Registrant’s Registration Statement on Form 8-A, filed with the Securities and Exchange Commission on May 19, 1995 (File No. 000-15760)).

10.1		Amended and Restated Credit Agreement, dated May 9, 2013, by and among M&T Bank, Hardinge Inc., Cherry Acquisition Corporation (n/k/a Forkardt Inc.) and Usach Technologies, Inc.

10.2		Replacement Standard LIBOR Grid Note, dated May 9, 2013, issued by Hardinge, Inc., Cherry Acquisition Corporation (n/k/a Forkardt Inc.) and Usach Technologies, Inc. for the benefit of M&T Bank.

10.3		General Security Agreement, dated May 9, 2013, by and between Hardinge Inc. and M&T Bank.

10.4		Schedule Required by Instruction 2 to Item 601 of Regulation S-K.

10.5		Credit Agreement, dated May 9, 2013, by and between Hardinge Inc., Hardinge Holdings GmbH and M&T Bank.

10.6		Term Note, dated May 9, 2013, issued by Hardinge Inc. and Hardinge Holdings GmbH for the benefit of M&T Bank.

10.7		General Security Agreement, dated May 9, 2013, by and between Hardinge Inc. and M&T Bank.

10.8		Schedule Required by Instruction 2 to Item 601 of Regulation S-K.

31.1		Chief Executive Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer Certification pursuant to Rule 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

*In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Hardinge Inc.

August 8, 2013	By:	/s/ Richard L. Simons
Date		Richard L. Simons
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)


August 8, 2013	By:	/s/ Edward J. Gaio
Date		Edward J. Gaio.
		Vice President and Chief Financial Officer
		(Principal Financial Officer)


August 8, 2013	By:	/s/ Douglas J. Malone
Date		Douglas J. Malone
		Corporate Controller and Chief Accounting Officer
		(Principal Accounting Officer)