Hurco Companies, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016; balance-sheet figures are as of January 31, 2016, compared with October 31, 2015. Unaudited. Hurco designs, manufactures and sells CNC machine tools and related services worldwide, operating as one industrial automation equipment segment.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 / comparison |
|---|---|---|
| Sales and service fees | $56.5 million | $51.0 million; up 11% reported, or 18% excluding $3.5 million negative currency impact |
| Gross profit / margin | $17.7 million / 31% | $16.5 million / 32% |
| Operating income | $5.7 million | $6.1 million |
| Net income | $3.9 million; diluted EPS $0.58 | $3.8 million; diluted EPS $0.57 |
| Operating cash flow | $(0.7) million | $8.5 million |
| Capital expenditures and software development | $1.1 million | $0.5 million |
SG&A was $12.0 million versus $10.5 million, or 21% of sales in both periods. Cash and cash equivalents were $51.8 million, down from $55.2 million at October 31, 2015. Total current assets were $213.4 million and current liabilities were $62.5 million. Inventory was $109.3 million, up from $106.3 million.
Debt was $1.5 million under the China facility; Hurco reported no other borrowings. It had $20.1 million of unused credit facilities and was in compliance with covenants. Shareholders’ equity was $175.1 million. The company paid $0.08 per share in dividends.
Material changes and drivers
- Sales included $11.0 million from the Milltronics and Takumi businesses acquired in July 2015. Orders were $51.3 million, up 14% reported and 22% excluding a $3.4 million currency impact; acquired businesses contributed $6.2 million of orders.
- North American sales rose 28%, primarily from Milltronics; Europe declined 9% reported, reflecting 1% growth offset by 10% unfavorable currency; Asia Pacific rose 98%, primarily from Takumi. Excluding acquisitions, North American and Asia Pacific orders declined 8% and 30%, respectively, while European orders rose 10% reported.
- Gross margin declined one percentage point. Management cited the mix of lower-priced Milltronics and Takumi products, pricing pressure and currency effects. Operating income fell as SG&A increased, including acquired-company costs and higher commissions, marketing, trade-show and support expenses.
- Operating cash flow turned negative, principally reflecting a $6.3 million inventory cash outflow and lower accrued expenses, partly offset by collection of receivables. Cash also declined by $1.1 million from exchange-rate effects.
- Other comprehensive loss was $3.2 million, largely reflecting foreign-currency translation and derivative-related movements.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said cash and borrowing capacity were adequate to fund operations and support product innovation and targeted expansion in developing markets. The company continues to review potential acquisitions.
Key disclosed risks include the cyclical machine-tool market; uncertain demand, particularly in Europe and Asia; foreign-exchange exposure; reliance on a limited number of manufacturing sources; pricing and raw-material pressures; competition and technology changes; and acquisition integration and execution risks. Hurco uses foreign-currency forward contracts; outstanding derivative notional amounts totaled $113.7 million, and fair values were $1.6 million in assets and $1.6 million in liabilities.
Hurco reported 16 customer-financing guarantees totaling approximately $1.1 million, with liabilities described as insignificant. It stated that ordinary-course claims and lawsuits were not expected to have a material adverse effect and believed losses would not exceed insurance coverage. There were no material changes to reported risk factors or contractual commitments.
Investor verification priorities
- Assess the sustainability of reported sales and order growth after separating acquisition contributions and foreign-exchange effects, especially given weaker underlying orders in North America and Asia Pacific.
- Track gross margin and operating income as the product mix, pricing pressure and integration of Milltronics and Takumi evolve.
- Review inventory growth and working-capital movements for effects on future operating cash flow.
- Evaluate foreign-currency exposures, hedge maturities and the impact of currency translation on reported results and equity.
- Reconcile the filing’s effective-tax-rate descriptions: the tax note reports 31%, while MD&A reports 30% for Q1 FY2016.