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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, 2012

OR

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

For the transition period from                  to                 

Commission file number: 000-15760

Hardinge Inc.

(Exact name of Registrant as specified in its charter)

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.

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, 2012 there were 11,690,275 shares of Common Stock of the registrant outstanding.

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HARDINGE INC. AND SUBSIDIARIES

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

HARDINGE INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In Thousands Except Share and Per Share Data)

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)

See accompanying notes to the consolidated financial statements

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

See accompanying notes to the consolidated financial statements

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HARDINGE INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In Thousands)

See accompanying notes to the consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

June 30, 2012

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, 2011. 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, 2012 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ended December 31, 2012.

Certain amounts in the 2011 consolidated financial statements have been reclassified to conform to the current presentation.

NOTE 2.  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:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 3.  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

NOTE 4.  INTANGIBLE ASSETS

The major components of intangible assets are as follows:

Amortization expense related to these amortizable intangible assets was $0.2 million for the three months ended June 30, 2012 and 2011, and was $0.4 million for the six months ended June 30, 2012 and 2011.

Intangible asset not subject to amortization 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; therefore, the asset has been determined to have an indefinite useful life. The $0.1 million increase in the value of the assets from 2011 was the result of foreign currency exchange.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 5.  INCOME TAXES

We continue to maintain a full valuation allowance on the tax benefits of our U.S., U.K., German, Netherlands, and Canadian net deferred tax assets related to tax loss carryforwards in those jurisdictions, as well as all other deferred tax assets of those entities.

Each quarter, we estimate 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 year-to-date tax expense to reflect our full year anticipated tax rate.  The rate is an estimate based upon projected result 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 20.8% and 22.7% for the three and six months ended June 30, 2012, respectively.

The tax years 2008 to 2011 remain open to examination by United States taxing authorities, and for the other jurisdictions, in which we have business operations, including Switzerland, United Kingdom, Taiwan, Germany, and China, the tax years between 2006 and 2011 generally remain open to routine examination by foreign taxing authorities, subject to the specific requirements of each jurisdiction.

The increase to the accrued liability associated with uncertain tax positions in the three and six months ended June 30, 2012 was not material.  At June 30, 2012 and December 31, 2011, we had a $2.4 million and $2.3 million liability recorded for the respective periods with respect to uncertain income tax positions, which included related interest and penalties of $0.8 million at June 30, 2012, and $0.7 million at December 31, 2011.  If recognized, the uncertain tax benefits, with related penalties and interest, would be recorded as a benefit to income tax expense on the Consolidated Statements of Operations.

NOTE 6.  WARRANTIES

A reconciliation of the changes in our product warranty accrual is as follows:

Warranty liabilities are reported as accrued expenses on our Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 7.  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, 2012 and 2011 is presented below.

A summary of the components of net postretirement benefits costs for the three and six months ended June 30, 2012 and 2011 is presented below.

The Company provides defined benefit plans to eligible domestic and foreign employees. Contributions to the domestic plans for the six months ended June 30, 2012 and June 30, 2011 were $4.8 million and $1.1 million, respectively. Contributions to the foreign plans for the six months ended June 30, 2012 and June 30, 2011 were $1.2 million and $1.2 million, respectively. The expected contributions to be paid during the year ending December 31, 2012 to the domestic and foreign defined benefit plans are $6.0 million and $2.2 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 8.  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:

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 fair value of foreign currency forward contracts is measured using internal models based on observable market inputs such as spot and forward rates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

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 “Other expense” line item on the Consolidated Statements of Operations when the hedged transaction affects earnings.  During the three month ended June 30, 2012, the amount of net loss on these contracts was immaterial, compared to a net loss of $0.2 million recorded in OCI for the three months ended June 30, 2011. During the six months ended June 30, 2012, we recorded a net gain of $0.4 million into OCI related to these contracts, compared to a net loss of $0.1 million for the six months ended June 30, 2011.  As of June 30, 2012, we do not expect that a material amount of the gain or loss will be reclassified from AOCI into other income or 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” in the Consolidated Statements of Operations.

As of June 30, 2012 and December 31, 2011, the notional amounts of the derivative financial instruments not qualifying or otherwise designated as hedges were $36.6 million and $47.6 million, respectively. During the three months ended June 30, 2012, the loss related to this type of derivative financial instruments was immaterial.  During the three months ended June 30, 2011, we recorded a gain of $0.2 million related to this type of derivative financial instruments. During the six months ended June 30, 2012 and 2011, we recorded a gain of $0.2 million and a loss of $0.2 million, respectively, related to this type of derivative financial instruments. The gains and losses were recorded in the “Other expense” line item on the Consolidated Statements of Operations.

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 9.  COMMITMENTS AND CONTINGENCIES

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.  Hazardous substances, including metals and polychlorinated biphenyls, have been detected in sediments in the Pond.

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 Potentially Responsible Parties (the “PRPs”) have agreed to voluntarily participate in the Remedial Investigation and Feasibility Study (“RI/FS”) by signing an Administrative Settlement Agreement and Order on Consent on September 29, 2006. On September 29, 2006, the Director of Emergency and Remedial Response Division of the U.S. Environmental Protection Agency, 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.

In May 2008, the EPA approved the RI/FS Work Plan. The PRPs commenced field work in the spring of 2008 and on September 7, 2011 submitted the draft Remedial Investigation Report to the EPA. The PRPs are continuing to address EPA comments and to perform the tasks required by the RI/FS Work Plan and Administrative Settlement Agreement.

Until receipt of this Special Notice in February 2006, the Company had never been named as a 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 not established a reserve for any potential costs relating to this Site, as it is too early in the process to determine our responsibility as well as to estimate any potential costs to remediate. 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.

Although we believe, based upon information currently available that, except as described in the preceding paragraphs, we will not have material liabilities for environmental remediation, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 10.  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:

During the six months ended June 30, 2012 and 2011, we granted 18,000 and 54,000 RSAs, respectively. The total deferred compensation expense associated with these awards, which were measured based on the fair value at the grant date, were $0.2 million and $0.7 million, respectively. 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, 2012 and December 31, 2011, are as follows:

During the six months ended June 30, 2012, we did not grant any PSIs. During the six months ended June 30, 2011, we granted 54,000 PSIs. The total deferred compensation expenses associated with the 2011 PSI awards, which were measured based on the fair value at the grant date, were $0.7 million, which are being realized into earnings based on passage of time and achievement of performance criteria. All outstanding PSIs are unvested.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2012

NOTE 11.  EARNINGS PER SHARE

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

For the three months ended June 30, 2012 and 2011, 136,910 and 213,536 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, 2012 and 2011, 157,385 and 209,721 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, 2012

NOTE 12.  NEW ACCOUNTING STANDARDS

In May 2011, the FASB issued authoritative guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. This pronouncement changes certain fair value measurement guidance and expands certain disclosure requirements. We adopted this pronouncement on January 1, 2012. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition.

In June 2011, the FASB issued authoritative guidance that requires companies to present items of net income, items of other comprehensive income and total comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity.  We adopted this pronouncement on January 1, 2012. The adoption of this pronouncement did not have a material effect on our consolidated results of operations and financial condition.

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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, 2011.

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 Switzerland, Taiwan, the United States (“U.S.”), China, and the United Kingdom (“U.K.”) with sales to most industrialized countries. Approximately 74% of our 2011 sales were to customers outside of North America, 82% of our 2011 products sold were manufactured outside of North America, and 70% of our employees were 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 (which is considered, in certain respects, to be 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 (“AMT”), 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 Manager’s Index (“PMI”), 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, have typically accounted for approximately 23% of overall sales and are an important part of our business due to an existing installed base of thousands of machines.  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.  Constant product technology development in our industry has led to an average model life of three-to-five years and consequently, 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.

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

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We are also 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 has been considered in the fair value measurements of our foreign currency forward exchange contracts.

We also 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 risks associated with collection 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 predominantly manufacturers based in Japan, Germany, Switzerland, Korea, and Taiwan. The concentration of our competitors in these countries causes the worldwide valuation of their respective currencies to be integral 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 may affect comparative data significantly. During the second quarter of 2012, as compared to the respective average values of these functional currencies in the same period in 2011, the value of USD increased by 11% against EUR, 8% against CHF, 3% against GBP, and 3% against TWD, and decreased by 3% against CNY. On a year to date basis, the value of USD increased by 8% against EUR, 3% against CHF, 2% against GBP, and 2% against TWD, and decreased by 3% against CNY. The change in foreign currency exchange rates resulted in unfavorable currency translation impact of approximately $2.0 million on orders and approximately $2.1 million on sales in the three months ended June 30, 2012, compared to the same period in 2011.  For the six months ended June 30, 2012, the change in foreign currency exchange rates resulted in unfavorable currency translation impact of approximately $1.3 million on orders and approximately $1.3 million on sales, as compared to the same period in 2011. We also purchase computer controls and other components from suppliers throughout the world. Consequently, our purchase costs associated with these components may be affected by fluctuations in the value of currencies.

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Results of Operations

Summarized selected financial data for the three and six months ended June 30, 2012 and 2011: