Hurco Companies, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; comparisons are with the three months ended January 31, 2013 unless noted. Dollar amounts are in millions except per-share data. Hurco designs and sells computerized machine tools, controls, components, software, and related services to the worldwide metal-cutting market. It reports one segment.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Sales and service fees | $50.97 | $44.09 | +16% |
| Gross profit / margin | $13.92 / 27% | $12.92 / 29% | Margin down about 2 percentage points |
| Operating income / margin | $3.32 / 6.5% | $4.00 / 9.1% | Operating income down 17% |
| Net income | $2.37 | $2.25 | +5% |
| Diluted EPS | $0.36 | $0.34 | Up $0.02 |
| Operating cash flow | $6.78 | $4.09 | Up $2.69 |
Revenue growth was led by Europe (+19%) and Asia Pacific (+72%); North American sales were essentially flat. Computerized machine-tool sales rose 19%, while service fees, parts, and other sales declined 3%. Orders were $57.1 million, up 12% year over year. The filing attributes $0.6 million of reported sales growth to favorable currency translation.
Operating income fell despite higher sales: management cited lower fixed-cost absorption on machines produced in fiscal 2013 and higher incentive compensation. Gross profit increased, but gross margin declined for similar production-cost reasons. Net income rose as the effective tax rate fell to 28% from 39%, and other expense declined, primarily reflecting lower foreign-currency losses.
Financial position, cash flow, and liquidity
- Cash and cash equivalents were $48.0 million at January 31, 2014, up from $42.8 million at October 31, 2013. About 49% was denominated in U.S. dollars; the balance was held by foreign operations in local currencies.
- Operating cash flow was $6.8 million. Investing activities used $0.6 million, including property and equipment, software development, and other investments. Financing activities used $0.7 million, including $0.3 million of dividends and $0.4 million of debt repayment. Cash increased by $5.2 million.
- Current assets were $188.3 million and current liabilities $57.2 million, for working capital of $131.1 million including cash. Working capital excluding cash was $83.1 million, versus $86.5 million at October 31, 2013.
- Short-term debt was $3.3 million, all under the China credit facility; Hurco reported no other borrowings. Approximately $19.5 million of credit facilities remained available, and the company was in compliance with its covenants.
- Total liabilities were $61.4 million and shareholders’ equity was $152.9 million. The company paid a $0.05-per-share dividend in the quarter; no dividend was paid in the prior-year quarter.
Material changes, outlook, and risks
- The July 2013 acquisition of an Italian machine-tool components business, operated as LCM, contributed $1.7 million of European sales in the quarter. Management also cited LCM-related operating expenses as a factor in higher SG&A.
- Management said cash and available borrowing capacity were adequate to fund operations and support product innovation and targeted growth in developing markets. Hurco continued to review potential acquisitions. The filing provides no specific revenue, earnings, or margin guidance.
- Key risks include the cyclical machine-tool market, uncertain economic conditions—particularly in Europe—foreign-currency movements, reliance on a limited number of manufacturing sources, competition, input-cost increases, technology and product-development needs, and acquisition integration. Currency risk is managed in part with forward contracts; total derivative notional value was $115.8 million at January 31, 2014.
- There were 18 customer-financing guarantees totaling approximately $1.4 million. Management did not expect pending ordinary-course claims or lawsuits to have a material adverse effect. Unrecognized tax benefits, including accrued interest, were $1.3 million.
- The warranty reserve ended at $1.7 million. Warranty provision was $0.9 million, compared with $0.6 million in the prior-year quarter; management said claims on specific warranties were higher than in the prior year.
- Foreign-currency translation and derivative movements contributed to a $0.9 million other comprehensive loss, compared with a $0.7 million loss in the prior-year quarter. Accumulated other comprehensive loss was $2.9 million at quarter-end.
Important facts for investors to verify
- Whether the 12% increase in orders translates into sustained shipments, particularly in Europe and Asia Pacific, and how much growth reflects LCM or individual large orders.
- Whether gross margins recover as production levels and fixed-cost absorption change, given the decline from 29% to 27%.
- LCM’s ongoing contribution to sales, margins, expenses, and cash generation following its acquisition.
- The sensitivity of reported results and foreign-held cash to exchange rates, and the potential effect of outstanding hedges and deferred hedge losses.
- Future warranty claims, customer-guarantee exposure, tax developments, and the availability and terms of credit facilities.