Hurco Companies, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 30, 2014; comparative periods ended April 30, 2013. Financial statements are unaudited. Hurco designs and produces computerized machine tools, controls, components and software, and provides parts, service and training for the worldwide metal-cutting market. It reports one operating segment.
Financial performance
Amounts are in millions of U.S. dollars except per-share data and where noted.
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Sales and service fees | $53.7 | $49.6 | $104.7 | $93.7 |
| Gross profit | $16.6 | $15.3 | $30.5 | $28.2 |
| Gross margin | 31% | 31% | 29% | 30% |
| Operating income | $5.4 | $4.6 | $8.7 | $8.6 |
| Net income | $3.5 | $3.2 | $5.9 | $5.4 |
| Diluted EPS | $0.54 | $0.48 | $0.90 | $0.83 |
| Operating cash flow | $(0.7) | $4.7 | $6.1 | $8.8 |
- Quarterly sales increased 8%; six-month sales increased 12%. The reported increases included favorable currency-translation effects of $1.7 million and $2.3 million, respectively.
- Orders were $53.7 million for the quarter, up 10%, and $110.8 million for six months, up 11%.
- Six-month cash from investing activities was a $1.5 million outflow, including $1.4 million for property, equipment and software development. Financing activities used $0.9 million, including $0.8 million of dividends.
- At April 30, cash was $46.7 million, versus $42.8 million at October 31, 2013. Current assets were $191.8 million and current liabilities $56.6 million; working capital excluding cash was $88.6 million.
- Debt was $3.2 million, all under the China credit facility. The company reported approximately $19.5 million of unused borrowing capacity and compliance with credit covenants.
- Dividends were $0.07 per share for the quarter and $0.12 per share for six months; no dividends were reported for the comparable 2013 periods.
Material changes and business drivers
- Europe generated 65% of quarterly sales and 62% of six-month sales. Quarterly sales rose 10% in Europe and 38% in Asia Pacific, while North American sales fell 6%. For six months, Europe rose 14%, Asia Pacific 52%, and North America declined 3%.
- The July 2013 acquisition of Italian machine-tool component business LCM contributed $2.1 million of quarterly European sales and $3.8 million for six months. LCM products also accounted for $2.7 million of quarterly orders and $6.0 million of six-month orders.
- Quarterly gross margin held at 31%. Six-month gross margin fell to 29% from 30%, which management attributed primarily to early-year sales of machines made in the prior year, when fixed costs were spread over lower production.
- SG&A rose to $11.2 million for the quarter and $21.8 million for six months, primarily due to costs associated with LCM. Six-month operating income was nearly flat year over year despite higher sales.
Liquidity, outlook, risks and contingencies
- Management said cash and available credit were adequate to fund operations and support its strategic plans for product innovation and targeted expansion in developing markets. It continues to review potential acquisitions; no quantitative earnings or sales guidance was provided.
- Management noted that North American demand often softens before the International Manufacturing Technology Show, held in September of even-numbered years.
- Key risks include machine-tool industry cyclicality, uncertain economic conditions (particularly in Europe), foreign currency movements, reliance on a limited number of manufacturing sources, competition, raw-material costs, technology and product-development needs, and acquisition integration.
- Foreign-currency exposure is managed in part with forward contracts. Derivative liabilities were $1.7 million at April 30, versus derivative assets of only $0.1 million. Approximately $1.7 million of after-tax cash-flow-hedge losses was deferred in accumulated other comprehensive loss, with most expected to affect cost of sales through April 2015 as related inventory is sold.
- Twenty customer-financing guarantees totaled approximately $1.6 million. The filing states that normal-course legal claims are not expected to materially affect financial position or results. The warranty reserve was $1.8 million; management cited higher sales and a larger mix of higher-performance machines as factors in anticipated claims.
- The six-month effective tax rate declined to 30% from 34%, primarily because of the geographic mix of income. Unrecognized tax benefits were $1.3 million.
Important facts for investors to verify
- Whether order growth, especially in Europe and Asia, converts into sustained sales and cash generation.
- How much reported growth reflects currency translation and the LCM acquisition, and whether LCM contributes profitably after added operating costs.
- Whether the six-month gross-margin decline and lower operating cash flow persist, including the effects of inventory, receivables and payment timing.
- Foreign-exchange exposure and the future income-statement impact of deferred hedge losses.
- Available borrowing capacity, customer-guarantee exposure, warranty claims, and the sustainability of dividend payments.