Hurco Companies, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017; financial statements are unaudited. Hurco designs, manufactures, and sells CNC machine tools and related controls, parts, software, and services to the metal-cutting industry. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Financial performance and liquidity
- Revenue: $48.7 million, down 14% from $56.5 million. Management attributed the decline to customer delivery timing and availability of requested inventory models; unfavorable currency translation reduced revenue by $1.5 million.
- Gross profit and margin: $12.6 million and 26%, compared with $17.7 million and 31% a year earlier. The decline primarily reflected lower sales volume.
- Operating income: $1.4 million, versus $5.7 million. Net income was $0.9 million, versus $3.9 million; diluted EPS was $0.13, versus $0.58. The effective tax rate rose to 38% from 31%, principally due to the geographic mix of taxable income and losses.
- Cash flow: Operating cash flow was $15.5 million, compared with cash used of $0.7 million in Q1 FY2016. The current-period inflow included a $16.5 million decrease in accounts receivable. Investing cash outflow was $1.3 million, including capital expenditures and software development; dividends paid were $0.6 million.
- Cash and working capital: Cash was $55.1 million at January 31, up from $41.2 million at October 31, 2016. Working capital was $161.8 million, versus $160.4 million. About 37% of cash was denominated in U.S. dollars; the remainder was held in foreign currencies.
- Debt and facilities: Short-term debt was $1.5 million, consisting of China facility borrowings; the company reported no other borrowings. It had $22.2 million of unused credit facilities and was in covenant compliance. In December 2016, the U.S. revolving facility increased to $15 million, its maturity was extended to December 31, 2018, and the permitted annual cash dividend allowance rose to $5 million.
- Balance sheet: Total assets were $251.8 million and shareholders’ equity was $186.5 million at January 31, 2017. Current assets were $218.0 million and current liabilities $56.2 million.
Changes and operating trends
- Sales declined across all regions: Americas 12%, Europe 12%, and Asia Pacific 24%. Computerized machine-tool sales fell 16%; service-parts sales rose 11%, while service fees fell 14%.
- Orders increased 19% to $61.0 million, despite a $2.2 million unfavorable currency impact. Orders rose 21% in the Americas, 13% in Europe, and 43% in Asia Pacific. Management cited stronger demand across regions, including a $2.8 million multiple-machine order from a U.K. customer. The filing does not provide a backlog value.
- SG&A declined to $11.2 million from $12.0 million, including a favorable $0.3 million currency impact.
- Comprehensive income was $1.3 million, versus $0.7 million. Other comprehensive income included a $0.4 million net benefit, compared with a $3.2 million loss in the prior-year quarter, reflecting foreign-currency translation and derivative movements.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said cash and borrowing capacity were adequate to fund operations and support product innovation and targeted expansion in developing markets. The company continued to review potential acquisitions.
- Management identified machine-tool industry cyclicality, uncertain economic conditions, international operations, currency movements, limited manufacturing sources, competition, raw-material costs, product-development and technology risks, and acquisition-related risks, among other factors.
- Foreign-currency exposure is managed partly through forward contracts. The company reported $109.0 million in derivative notional amounts at January 31, 2017; derivative assets were $2.0 million and liabilities $0.5 million. A $0.8 million loss was recognized on non-designated forwards, while $0.1 million of losses resulted from hedges deemed ineffective.
- Twenty-three third-party customer-financing guarantees totaled approximately $1.1 million; related accrued liabilities were described as insignificant. Routine claims and lawsuits were not expected to have a material adverse effect, and management believed losses would not exceed insurance coverage.
- Unrecognized tax benefits, including accrued interest, were $1.2 million. The company had not provided U.S. tax on certain undistributed foreign-subsidiary earnings it considered indefinitely reinvested; future distributions could create additional U.S. tax.
- A China credit facility was reduced from 40 million yuan to 20 million yuan and renewed on February 16, 2017, after quarter-end. Management reported no material changes to contractual obligations or risk factors from its FY2016 Form 10-K.
Important facts for investors to verify
- Whether the higher order intake converts into shipments and revenue, given the quarter’s delivery-timing and inventory-availability issues.
- How gross margin and operating income respond as sales volumes change, and whether the regional and product mix improves.
- Whether the strong operating cash flow is repeatable; the quarter’s result was materially aided by receivables collection.
- Exposure to foreign exchange movements, including the location and currency denomination of cash and the effectiveness of hedges.
- Compliance with credit-facility covenants and the impact of the amended China facility and U.S. credit terms.
- Potential tax consequences of foreign earnings distributions, unresolved tax positions, customer guarantees, and ordinary-course litigation.