2005 ANNUAL REPORT - Hardinge Inc.

2005 ANNUAL REPORTP r e c i s i o n M a c h i n e T o o l s f o r a G l o b a l E c o n o m y

CORPORATEOFFICESHardinge Inc.One Hardinge DriveElmira, NY 14902607.734.2281New OrdersSUBSIDIARIESCanadian Hardinge Machine Tools, Ltd.Toronto, CanadaHardinge China LimitedShanghai, People’s Republic of ChinaHardinge GmbHKrefeld, GermanyHardinge Machine Tools, Ltd.Exeter, EnglandHardinge Machine (Shanghai) Co., Ltd.Shanghai, People’s Republic of ChinaHardinge Taiwan Precision Machinery LimitedNan Tou City, Taiwan, Republic of ChinaHTT Hauser Tripet Tschudin AGBiel, SwitzerlandL. Kellenberger & Co. AGSt. Gallen, SwitzerlandSALES OFFICESUnited States:Cleveland, OhioElgin, IllinoisElmira, New YorkSanta Ana, CaliforniaForeign:Biel, SwitzerlandExeter, EnglandKrefeld, GermanyLeicester, EnglandNan Tou City, Taiwan, Republic of ChinaShanghai, People’s Republic of ChinaSt. Gallen, SwitzerlandCOMPANY WEB SITEFor the most complete and up-to-datenews about Hardinge, visit us on theWeb at www.hardinge.com.Net SalesGross ProfitIncome fromOperationsChart numbers in $millions

Financial HighlightsHardinge Inc. and SubsidiariesAmounts in thousands except per share data.For the years ended December 31, 2005 2004 2003 ¹Net sales $289,925 $232,054 $185,302)Income from operations $15,560 $12,494 $6,873)Net income (loss) $7,006 $4,392 $(11,284)Dividends paid $1,064 $265 $178)Per share data:Weighted average number of common shares outstanding 8,761 8,745 8,708)Basic earnings (loss) per share $.80 $.50 $(1.30)Weighted average number of common shares outstanding 8,822 8,773 8,708)Diluted earnings (loss) per share $.79 $.50 $(1.30)Dividends declared per share $.12 $.03 $.02)1. 2003 results include a non-cash charge for income tax expense of $12,905 to provide a valuation allowance for the Company’sU.S. deferred tax assets as required by FAS 109.

CompanyProfileLetter toShareholdersHardinge Inc. is a leadingprovider of advanced materialcuttingsolutions to theworld. The Company designs,manufactures, and sellscomputer controlled metalcuttinglathes, machiningcenters, and grindingmachines, together withworkholding devices, relatedtooling, and accessories. Ourproducts are of the highestprecision and reliabilitygenerally available in themarket. Hardinge products aredesigned and built to providecustomers with superiorproductivity solutions.J. Patrick Ervin,Chairman of the Board, President,and Chief Executive OfficerDear FellowShareholders,2005 was a year of clear and significant progressfor Hardinge as we realized strong growth insales and net income. In addition, we successfullyintegrated Bridgeport Machine Ltd., acquired inNovember 2004; purchased the shares of theminority partners in Hardinge Taiwan which positionsthe Company for additional growth; andcontinued to introduce innovative new productofferings further solidifying our position as a worldleader in providing a wide range of highly reliableturning, milling, grinding, and workholding solutions.With the acquisition of the intellectual property ofBridgeport Machine, we acquired product designsand a team of experienced design engineering,sales, service, and technical support personnel.This transaction also added a brand name thathas long been associated with quality vertical andhorizontal machining centers, while significantlyexpanding our machining center product offering.

The Bridgeport products equipped withHeidenhain controls have a long and successfulhistory in the European markets.At the conclusion of 2005 we acquired the remaining49% ownership stake in Hardinge Taiwanfrom our minority partners for approximately$9.0 million. This transaction, along with ourwholly owned manufacturing operations in China,positions Hardinge to increase our share of theChinese market, the world’s largest single marketfor machine tool consumption. We also completedthe purchase of the design rights to the Bridgeportknee mill product line, which we have been producingunder license in Elmira, New York.Market ConditionsIn 2005, the key markets driving machine tool consumptionperformed well. The North Americanmarket continued to expand, growing approximately10%. Most European markets were fairly stablethroughout the year, operating at levels conduciveto solid machine tool consumption. China and otherAsian markets continued to operate at a veryhigh level. I’m pleased to report that worldwidemanufacturing activity is robust, and I believe it willcontinue to expand for the foreseeable future. Astrong manufacturing base provides fertile soil forcontinued machine tool industry growth.PerformanceBuilding on the progress made in 2004, Hardingerealized strong sales and earnings growth during2005, and we anticipate continued improvementin 2006. Our sales for 2005 increased by 25% to$290 million from $232 million, and our orderlevel kept pace with shipments at $290 million,an increase of 14% from our $256 million level in2004. Earnings before interest and taxes increased

to $15.6 million from $12.5 million, a 25%improvement, and our net income for 2005 was$7.0 million or $0.80 per basic share and $0.79per diluted share compared to $4.4 million or$0.50 per basic and diluted sharein 2004, a 59% improvement.“ Our mission is to be the We sustained our backlog,finishing 2005 at $67 million.leading worldwide supplierof material-cutting solutionsfor turning,Strategic Initiativesmilling,Our mission is to be the leadingworldwide supplier of material-cuttingsolutions for turning,grinding, and workholdingof small- and medium-sized milling, grinding, and workholdingof small- and medium-sized industrialproducts. During 2005 weindustrial products.”made significant progress towardmeeting this objective by increasing our productoffering and expanding the geographic reach of oursales, manufacturing, and engineering capabilities.In the last ten years we have successfully assembleda comprehensive range of products which areamong the most well-known and well-respectedbrands available in the market today. Hardingeproducts are recognized as among the best forturning and workholding; Bridgeport for milling;and Kellenberger, Hauser, Tripet and Tschudinproducts for grinding. With strong brands in eachproduct category, our 2005 revenues are welldiversified between turning products, milling products,grinding products, and workholding / industrialproducts. This diverse range of products, withstrong brand recognition, positions Hardinge Inc.to remain a leading worldwide supplier of materialcuttingsolutions.Along with investing in a greatly expanded productline, we have built a strong and diversified internationalmanufacturing and sales presence. Alongwith our historical North American presence,we are well established in Europe and Asia, andwe distribute machines in all major industrializedcountries of the world. The effects of our investmentin market diversification are evident in our2005 results with 40% of revenue coming fromEurope, another 37% from North America andthe remaining 23% from China and other markets.This is a very healthy distribution of sales acrossthe world.We manufacture products in five locations aroundthe world, in plants totaling over 950,000 squarefeet. These plants are located in Elmira, New York;St. Gallen, Switzerland; Biel, Switzerland; Shanghai,China; and Nan Tou City, Taiwan. Of the productswe sold in 2005, 39% were produced in the U.S.,28% were produced in Europe and 33% were producedin Asia. Clearly, we have built Hardinge Inc.into a diversified international Company in termsof both sales and manufacturing.OperationsOur 2004 acquisition of certain assets and theintellectual property of Bridgeport Machine Ltd.was a pivotal transaction that firmly establishedHardinge as a player in the vertical and horizontalmachining center market. A major challenge during2005 was to ensure that Bridgeport was integratedinto Hardinge, successfully consolidating twodifferent operations, each with its own culture andprocesses. Because of the diligent efforts of many

Hardinge Inc. Manufacturing FacilitiesLocation Size (Sq. ft.) Products BrandsElmira,New YorkSt. Gallen,SwitzerlandBiel,SwitzerlandShanghai,ChinaNan Tou City,Taiwan515,000Lathes, Knee Mills,WorkholdingHardinge,Bridgeport177,000 Grinders Kellenberger85,000 Grinders53,000123,000Lathes, MachiningCentersLathes, MachiningCentersHauser TripetTschudinHardinge,BridgeportHardinge,Bridgeportrelated to new productdevelopment, technicalsupport, and part sourcing.Our Taiwan operation hassignificant experience in bothnew product developmentand manufacturing, so byhaving our Chinese operationwork closely with ourTaiwan operation we willreduce the learning curvefor our Chinese employees.individuals from both organizations, the integrationproceeded smoothly throughout the year.For the Bridgeport acquisition to be truly successfulwe had to gain the acceptance of their existingcustomer base. We focused on demonstratingour commitment to making Bridgeport a criticalpart of our business going forward. The marketapproved of our actions, and during 2005 customersrewarded us with over $50 million in ordersfor Bridgeport’s traditional products. This acquisitionalso enabled us to strengthen our worldwidesales and distribution effort by consolidating thetwo networks into one, and selecting the bestdistribution alternative in each market. As a result,we have the strongest, most capable sales anddistribution network we have ever had selling andsupporting our products throughout the world.In 2005, we invested $16 million to expand andstrengthen our operations in Taiwan and China.The buyout of our minority partners in HardingeTaiwan will result in a closer working relationshipbetween Hardinge China and Hardinge TaiwanThe expansion of our China-based manufacturing,sales, and technical support operations providesus an expanded presence in China and positionsthe Company to continue growing sales in thiscritical market. We are convinced a company mustproduce product in China to continue to growsales in this market. As we continue to expand thecapability of our China manufacturing operation wewill improve our ability to expand sales in China.Hardinge is committed to“ Hardinge is committedlean operations, and theCompany is constantly striving to lean operations, andto improve the effectivenessthe Company is constantlyand efficiency of operationsthrough the implementation striving to improve theof lean techniques in all ofeffectiveness and efficiencyour facilities. Our employeesare committed to continuous of operations…”improvement as a strategyfor remaining competitive, andit is through their hard work that we are able tocontinue improving our performance worldwide.

New Product DevelopmentIn 2005, we continued to practice our firmly heldbelief that new products are the lifeblood ofcontinued growth in our business. Every year,each of our product areas is challenged to expandtheir market offering by introducing products thataugment the capabilities they can offer to ourcustomers. We believe that commitment to offeringa complete line of products for our customersis what differentiates Hardinge from most other suppliers in the machine tool market. Our productline ranges from basic, cost-effective options tomachine tools that are the most capable and technicallyadvanced in the market today. Our customerscan source product with a focus on price orhigh-end performance. However, regardless ofthe product positioning, all Hardinge products aredesigned and built to be “best inclass” when compared to the competition.This philosophy enables“…all Hardinge products aredesigned and built to be us to serve our customers as theirproduct requirements change.‘best in class’ when comparedIn 2005, we were also able toto the competition.”broaden our business relationshipswith some new key internationalsuppliers, providing additional support in our newproduct development efforts. By integrating keysuppliers into our new product design process weexpand both the level and expertise of our designengineering staff. These partnerships will continueto be an important part of our operations.Looking to the FutureLooking to 2006 and beyond, we believe there ismuch about Hardinge to be excited about. Ourcompany is well positioned to continue expandingby taking advantage of strong market demand, whilebroadening our reach with new customers who arebeing introduced to the Company’s comprehensiveproduct offering. Hardinge has a powerful portfolioof products and brands capable of serving the turning,milling, grinding, and workholding needs of awide range of industries and customers of varioussizes, in any market in the world. The managementand Board of Directors of Hardinge Inc. are fullycommitted to strengthening our operations andinvesting in new products and technologies that willposition the Company to build on its leadershipposition and create additional shareholder value.In closing, I would like to thank the hundredsof Hardinge employees for their hard work anddedication. Our people are our greatest asset, andwith their commitment we will continue growingHardinge as one of the leading worldwide suppliersin the machine tool business.Yes, 2005 was an exciting year, however webelieve that 2006, and beyond, can be even better.Sincerely,J. Patrick ErvinChairman of the Board, President, and Chief Executive Officer

Selected Financial DataThe following selected financial data is derived from the audited consolidated financial statements of the Company. The data should beread in conjunction with the consolidated financial statements, related notes, and other information included in the enclosed Form 10K.Hardinge Inc. and Subsidiaries (dollar amounts in thousands except per share data)Statement of Operations Data 2005 2004) 2003) 2002) 2001)Net sales $289,925 $232,054 $185,302) $169,014) $209,522)Cost of sales 199,642 162,376 130,698) 117,403) 145,508)Unusual charge² — — —) —) 27,237)Gross profit 90,283 69,678 54,604) 51,611) 36,777)Selling, general and administrative expense³ 72,561 56,450 47,638) 44,900) 53,209)Provision for doubtful accounts² 2,162 734 93) 1,548) 6,676)Impairment charge² — — —) —) 5,519)Operating income (loss) 15,560 12,494 6,873) 5,163) (28,627)Interest expense 4,284 2,660 2,917) 3,978) 3,656)Interest (income) (569) (533) (500) (496) (509)Income (loss) before income taxes, minority interest in (profit) of consolidatedsubsidiary, and profit (loss) in investment of equity company11,845 10,367 4,456) 1,681) (31,774)Income taxes (benefits)¹ 2,373 3,542 14,667) (868) (10,245)Minority interest in (profit) of consolidated subsidiary (2,466) (2,433) (1,257) (566) (642)Profit in investment of equity company — —) 184) 17) 318)Net income (loss)¹ , ² $ 7,006 $ 4,392 $ (11,284)) $ 2,000 $(21,853)PER SHARE DATAWeighted average number of common shares outstanding — basic 8,761 8,745 8,708) 8,687) 8,695)Basic earnings (loss) per share $.80 $.50 $(1.30) $.23) $(2.51)Weighted average number of common shares outstanding — diluted 8,822 8,773 8,708) 8,687) 8,695)Diluted earnings (loss) per share $.79 $.50 $(1.30) $.23) $(2.51)Cash dividends declared per share $.12 $.03 $.02) $.10) $.53)BALANCE SHEET DATAWorking capital $126,421 $122,181 $103,280) $103,864) $61,837)Total assets 300,276 286,311 245,707) 256,285) 257,872)Total debt 67,114 42,868 23,301) 42,002) 60,558)Shareholders’ equity 138,993 150,000 139,086) 145,786) 141,215)1. 2003 results included a non-cash charge for income tax expense of $12,905 to provide a valuation allowance for the Company’s U.S. deferred tax assets as requiredby FAS 109.2. 2001 results include an unusual charge of $27,237 for inventory write-downs for underperforming product lines; a one time additional provision for doubtfulaccounts of $5,200; and $5,519 for impairment of goodwill and other underutilized assets. The after tax impact of those unusual items was $26,455 in aggregate.3. 2001 SG&A included amortization of goodwill of $826, whereas 2005, 2004, 2003 and 2002 had no amortization expense due to the adoption of Statement ofFinancial Accounting Standards No. 142.

TurningPrecision, reliability, productivity—Hardinge lathes have it allWhen it comes to precision, reliability, andproductivity, Hardinge lathes have a strongtradition for providing metal-cutting solutionsfor the global manufacturing market.Hardinge turning machines offer precision,predictability, and superior results. The lineincludes the broad offerings under the Questseries CNC horizontal turning machine, theQuest GT gang tooling machine, the QuestLMC (lean manufacturing cell), the EliteCNC performance series, and the TalentCNC value lathes. From super-precision,high-performance capability to a focus onaffordability, Hardinge’s lathes are designedto add value for our customers.

MillingThe most diverse millingproduct line in the industryHardinge offers a very broad and diverse millingproduct line under the Bridgeport brandname. We offer vertical machining centers inboth performance and extreme performancemodels, full five-axis machining centers, highspeed graphite-die/mold machining centers,horizontal machining centers, and thetraditional knee mill models. Prior to 2004Hardinge sold its milling products under theHardinge brand name. Since the Bridgeportacquisition, Hardinge elected tomarket its entire line of millingproducts under the Bridgeportbrand. The Bridgeport productline is now the most diversemilling product line offered byany company in the machinetool industry.Over the last 80 yearsBridgeport has been atthe forefront ofmachine tool technologicaldevelopments.Our products, combinedwith our unwavering commitment tohelping our customers improve their productivityand business performance, have contributedto our large, and loyal, customer base.

GrindingThe highest possible grindingperformance in the industrymedium and hightechnology. Whereverhighly accurategrinding is required,Kellen berger precisiongrindingmachines are in use.The Hardinge grinding group offers a richportfolio of capabilities ranging from universalgrinders and production automated ODand ID grinders to jig grinders. Our grindingsolutions offer the highest possible performancein the industry, with Swiss precisionand experience built into every grindingmachine. With more than 75 years of grindingexperience, we offer the most comprehensiveapplications expertise in the industry.HTT’s product offeringis very diverse,serving manydifferent grindingapplications. Hauserjig grinders, combinedwith Tripet’sID cylindrical grindersand Tschuden’sID/OD cylindricalgrinding products,allow HTT to offer customers multipleproducts to meet their grinding needs.Kellenberger specializes in the developmentand production of hydraulically and numericallycontrolled precision grinding machinesand systems for applications in the field of

WorkholdingThe world’s most complete lineof workholding productsHardinge offers the world’s most completelineup of workholding products. We provideworkholding or gripping solutions formetal cutting, pharmaceutical capsule processing,glass processing, crimping applications,friction welding, and many other miscellaneousindustrial applications. Hardingeprovides workholding for all brands oflathes, mills, grinding machines, automaticscrew machines, rotary transfer machines,turret lathes, and automation and assemblyoperations.Drawing upon over 100 years of applicationsknowledge, special solutions that meetcustomer specific requirements are also providedon very short lead-time ranging fromone day to three weeks depending upon thecomplexity of the task.The unique combination of an experiencedmachine tool builder with universal workholdingexpertise provides a valuable customerresource not available anywhere elsein the world.Although best known for workholdingrelated to metal turning processes, Hardingeis becoming known as a high-quality sourcefor indexing systems and collet block fixturesused on machining center tables. The indexingsystems developed by Hardinge incorporatethe spindle precision utilized in its latheproducts to provide the market with a systemthat sets a new benchmark for precision andaccuracy.Hardinge maintains over 36,000 standardproducts in stock for immediate delivery.Cellular manufacturing incorporating theprinciples of lean manufacturing ensuresreplenishment of standard products withworld-class customer responsiveness.

DirectorsOfficersJ. Patrick ErvinChairman of the Board, President,and Chief Executive OfficerDaniel J. BurkePresident and Chief Executive Officer—Swift Glass Co., Inc.Douglas A. GreenleeCoordinator Life Skills—Way Station, Inc.J. Philip HunterAttorney—Sayles & EvansJohn J. PerrottiPresident and Chief Executive Officer—Gleason CorporationMitchell I. QuainFormer Chairman—Register.com, Inc.Kyle H. SeymourChairman, President and Chief ExecutiveOfficer—Xtek, Inc.Stock Transfer Agent and RegistrarJ. Patrick ErvinChairman of the Board, President,and Chief Executive OfficerJoseph T. ColvinVice President, General Manager—Workholding OperationsGregory P. GroganVice President, General Manager—North American Machine OperationsRichard B. HendrickTreasurerJ. Philip HunterSecretaryJürg KellenbergerVice President—Grinding(President—L. Kellenberger & Co. AG)Douglas C. TifftSenior Vice President—AdministrationCharles R. Trego, Jr.Senior Vice President andChief Financial OfficerShareholders requiring a change of name,address or ownership of stock, as well asinformation about shareholder records,lost or stolen certificates, dividend checks,dividend direct deposit, and dividendreinvestment should contact:Computershare Investor Services LLC2 North LaSalle, Chicago, IL 60602Phone (toll-free): 888-294-8217Fax: 312-601-4332E-mail: web.queries@computershare.comWeb: www.computershare.comInvestor ContactFinancial analysts and other investmentprofessionals should direct inquiries to:Charles R. Trego, Jr.Senior Vice President and Chief FinancialOfficerPhone: 607-378-4202E-mail: ctrego@hardinge.com

Forward-Looking StatementsThis report contains statements of a forward-lookingnature relating to the financial performance ofHardinge Inc. Such statements are based uponinformation known to management at this time.The Company cautions that such statementsnecessarily involve uncertainties and risk and dealwith matters beyond the Company’s ability tocontrol, and in many cases the Company cannotpredict what factors would cause actual resultsto differ materially from those indicated. Amongthe many factors that could cause actual results todiffer from those set forth in the forward-lookingstatements are fluctuations in the machine toolbusiness cycles, changes in general economic conditionsin the U.S. or internationally, the mix ofproducts sold and the profit margins thereon, therelative success of the Company’s entry into newproduct and geographic markets, the Company’sability to manage its operating costs, actionstaken by customers such as order cancellations orreduced bookings by customers or distributors,competitors’ actions such as price discounting ornew product introductions, governmental regulationsand environmental matters, changes in theavailability and cost of materials and supplies, theimplementation of new technologies, and currencyfluctuations. Any forward-looking statementshould be considered in light of these factors.The Company undertakes no obligation to reviseits forward-looking statements if unanticipatedevents alter their accuracy.

Hardinge Inc.One Hardinge DriveElmira, NY 14902607.734.2281www.hardinge.com5M FRA 0306 Printed in U.S.A.