Hurco Companies, Inc. — Q3 Fiscal 2021 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2021; comparisons are with the corresponding 2020 periods. Hurco designs, manufactures, and sells CNC machine tools and related software, parts, service, and automation solutions. It reports one operating segment.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Sales and service fees | $54.2 million | $45.4 million | $166.2 million | $126.2 million |
| Gross profit | $13.0 million | $11.1 million | $39.3 million | $26.9 million |
| Operating income (loss) | $2.6 million | $1.4 million | $7.1 million | $(4.1) million |
| Net income (loss) | $1.6 million | $2.2 million | $4.7 million | $(2.7) million |
| Diluted earnings (loss) per share | $0.23 | $0.32 | $0.70 | $(0.39) |
| Cash from operating activities | $8.5 million | $5.0 million | $26.4 million | $0.2 million |
- Gross margin was approximately 24% in Q3, unchanged year over year; for the nine months it was approximately 24%, versus 21% in 2020. Nine-month operating margin improved to approximately 4% from a 3% loss.
- Q3 sales rose 19%; nine-month sales rose 32%. Nine-month sales increased across all regions, led by Europe (+50%), the Americas (+19%), and Asia Pacific (+14%).
- New orders were $66.7 million in Q3, up 85%, and $189.8 million for the nine months, up 61%. Q3 orders increased in each region, with Europe up 140%.
- Cash and cash equivalents were $80.5 million at July 31, 2021, versus $57.9 million at October 31, 2020. Working capital was $207.3 million, versus $201.0 million.
- There were no borrowings under credit facilities at quarter-end; approximately $52.2 million of borrowing capacity was available. The company reported no debt borrowings, apart from lease liabilities.
Material changes and drivers
- Revenue growth reflected higher machine shipments and demand for Hurco, Takumi, and Milltronics products, alongside increased component, service, and automation sales. Europe was the largest sales region in the nine-month period.
- Management attributed improved gross profit to higher volume and fixed-cost absorption, improved pricing, currency translation, and normalized inventory levels. Inflation in material costs and elevated global freight costs partly offset the improvement.
- Operating income for the nine months included a $2.9 million employee retention credit benefit, allocated between cost of sales and SG&A. The credit is an unusual contributor to reported results.
- Q3 net income declined despite higher sales and operating income; the prior-year quarter included a $937,000 income-tax benefit, while Q3 2021 recorded a $1.1 million tax provision.
- Cash from operations for the nine months increased to $26.4 million from $0.2 million, with working-capital movements contributing to cash generation. Investing activities used $2.0 million and dividends used $2.7 million.
Liquidity, debt, outlook, and risks
- The $40 million unsecured revolving credit agreement was scheduled to mature December 31, 2021. The filing states the company was in compliance with its covenants at July 31, 2021. The credit facilities include financial and payment restrictions.
- Management believed cash pooling and available borrowing capacity provided adequate liquidity for global operations over the next 12 months and supported its strategic plans, including product innovation, potential acquisitions, dividends, and share repurchases. No numerical earnings or revenue guidance was provided.
- Management described continuing COVID-19 restrictions, supplier delays, logistics constraints, and inflationary material costs. It cautioned that the pandemic’s duration, variants, and future effects were uncertain.
- Other principal risks include the cyclical machine-tool market, foreign exchange movements, international operations and trade measures, dependence on product development and limited supply sources, competition, and raw-material prices. Approximately 63% of nine-month revenue came from outside the Americas.
- The company had 12 customer-financing guarantees totaling approximately $1.0 million; related accrued liabilities were insignificant. It said ordinary-course claims and lawsuits were not expected to have a material adverse effect. A Taiwan subsidiary was under tax audit for fiscal 2018.
- Foreign currency forwards had total U.S.-dollar-equivalent notional amounts of $93.6 million at quarter-end. These instruments mitigate, but do not eliminate, currency exposure; nine-month results included an $801,000 loss on derivatives not designated as hedges.
Important facts for investors to verify
- Whether the sharp increase in orders converts into shipments and revenue, and how order trends develop by region.
- How much future profitability depends on the $2.9 million employee retention credit and whether margin gains persist amid inflation and freight costs.
- The renewal or replacement terms for the $40 million credit agreement ahead of its December 31, 2021 maturity.
- Cash availability by currency and geography, foreign-exchange exposure, and the performance and cost of hedging contracts.
- Whether COVID-19 disruption, supplier delays, and logistics constraints affect production, delivery timing, and customer demand.