Hurco Companies, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended January 31, 2015; comparisons are with the three months ended January 31, 2014 unless stated otherwise. Hurco designs and sells computerized machine tools, controls, software, parts, and related services through a global distribution network. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales and service fees | $51.0 | $51.0 |
| Gross profit / margin | $16.5 / 32% | $13.9 / 27% |
| Operating income / margin | $6.1 / 12% | $3.3 / 7% |
| Income before taxes | $5.8 | $3.3 |
| Net income | $3.8 | $2.4 |
| Diluted earnings per share | $0.57 | $0.36 |
| Operating cash flow | $8.5 | $6.8 |
| Capital expenditures and software development | $0.5 | $0.5 |
Revenue was essentially unchanged, but gross profit rose 19% and operating income rose 84%. Management attributed stronger profitability to European shipments of higher-performance machines and improved fixed-cost leverage on higher production levels. SG&A was $10.5 million, approximately 21% of sales, versus $10.6 million and 21% a year earlier. Net income increased despite a higher effective tax rate of 35%, compared with 28%.
Revenue, orders, and regional trends
- Foreign-currency translation reduced reported sales by approximately $3.6 million, or 7%; management said sales would have been higher absent this effect.
- Europe generated $31.8 million, up 9% as reported despite an estimated $3.4 million adverse currency effect. Increased shipments of higher-performance machines in Germany, France, and Italy contributed to growth.
- North American sales fell 9% to $14.9 million; Asian Pacific sales fell 21% to $4.3 million, partly reflecting a large China order in the prior-year quarter.
- Machine-tool sales declined 2% to $43.7 million, while service fees, parts, and other sales rose 12% to $7.2 million.
- Orders fell 21% to $45.0 million. European orders declined 29% to $26.0 million, with management citing softer conditions, particularly in Eastern Europe, and adverse currency translation. North American orders fell 5% and Asia Pacific orders fell 15%.
Cash, liquidity, debt, and balance sheet
- Cash and cash equivalents were $59.9 million at January 31, 2015, up from $53.8 million at October 31, 2014. Approximately 54% of cash was denominated in U.S. dollars; the remainder was held in foreign currencies.
- Operating cash flow was $8.5 million; investing cash outflow was $0.6 million and financing cash outflow was $0.3 million. The exchange-rate effect reduced cash by $1.6 million.
- Working capital excluding cash was $85.8 million, down from $90.1 million at October 31, 2014.
- Borrowings were $3.2 million under the China credit facility; there were no borrowings under other facilities. The company reported $18.3 million of unused borrowing capacity and compliance with all credit covenants.
- Total assets were $233.3 million and shareholders’ equity was $165.3 million. Current assets were $208.2 million and current liabilities $62.5 million.
- The company paid dividends of $0.07 per share, compared with $0.05 per share in the prior-year quarter.
Material changes, risks, and outlook
- Other expense, net, was $0.3 million versus $0.02 million. Management attributed the increase to higher foreign-currency losses. Currency translation also contributed to a $5.1 million other comprehensive loss; comprehensive income was $0.6 million, down from $1.5 million.
- Hurco uses foreign-exchange forward contracts to hedge forecast transactions, foreign-currency receivables and payables, and part of its euro-denominated net investment. Derivative assets were $7.5 million and derivative liabilities $1.3 million at quarter-end. Currency movements remain a significant source of earnings and balance-sheet volatility.
- Warranty reserve was $2.1 million. Management noted higher anticipated claims and a greater mix of higher-performance machines with higher cost per claim.
- There were 17 customer-financing payment guarantees totaling approximately $1.4 million. The company said ordinary-course legal claims were not expected to have a material adverse effect and expected any losses to remain within insurance coverage.
- No quantified earnings or revenue guidance was provided. Management said cash and borrowing capacity were adequate to fund operations and support product innovation and targeted growth in developing markets; it continued to review potential acquisitions.
- Key disclosed risks include machine-tool cyclicality and uncertain demand, particularly in Europe; foreign-exchange volatility; international operations and concentrated manufacturing sources; competition, technology and product-development needs; raw-material costs; and acquisition, tax, cybersecurity, and personnel risks. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the sharp decline in orders, especially in Europe, continues and converts into future sales.
- How much of the reported sales and profit performance reflects underlying demand and product mix versus currency translation and hedging effects.
- Whether the 32% gross margin is sustainable as production levels, regional mix, and machine performance mix change.
- Cash availability by currency and any effects of foreign cash, exchange rates, or credit-facility terms on liquidity.
- Developments in warranty claims, customer-financing guarantees, and the company’s disclosed ordinary-course legal matters.