Hurco Companies, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended April 30, 2013; comparisons are with the corresponding 2012 periods. Hurco designs and sells computerized machine tools, controls and software, and provides related parts, service and training. It reports one operating segment.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Sales and service fees | $49.6 | $46.0 | $93.7 | $97.1 |
| Gross profit / margin | $15.3 / 30.8% | $13.4 / 29.1% | $28.2 / 30.1% | $29.9 / 30.8% |
| Operating income / margin | $4.6 / 9.3% | $4.1 / 8.9% | $8.6 / 9.2% | $10.9 / 11.2% |
| Net income | $3.2 | $3.0 | $5.4 | $7.6 |
| Diluted EPS | $0.48 | $0.45 | $0.83 | $1.16 |
| Operating cash flow | $4.7 | $(2.3) | $8.8 | $(4.2) |
- Q2 sales increased 8%; six-month sales declined 3%. Six-month orders were $99.9 million, approximately unchanged year over year; Q2 orders fell 5% to $48.8 million.
- At April 30, cash and cash equivalents were $43.3 million, versus $35.8 million at October 31, 2012. Working capital excluding cash was $85.7 million, down from $88.2 million.
- Debt was $3.2 million, entirely under the China facility. Hurco reported $22.7 million of unused credit facilities and compliance with all credit covenants. Total liabilities were $51.2 million and shareholders’ equity was $148.3 million.
Material changes and management commentary
- Q2 growth was driven by European shipments from prior-quarter orders: Europe sales rose 20% to $31.9 million. North America rose 9% to $13.1 million, while Asia Pacific fell 37% to $4.6 million.
- For the first six months, Asia Pacific sales declined 41% to $7.8 million, while North America rose 7% and Europe was essentially flat. Management attributed weakness in Asia Pacific to slower economies and tighter credit delaying customers’ capital-equipment purchases.
- Q2 gross margin improved to 31% from 29%, reflecting the European mix of larger, higher-performance machines. For six months, lower sales reduced gross profit, while SG&A increased by $0.6 million, partly due to the rebranding initiative. Q2 SG&A rose by $1.4 million, primarily due to the timing of incentive-compensation accruals.
- Management stated that cash and borrowing capacity were adequate to fund operations and support product innovation and targeted expansion in developing markets. The filing provides no specific earnings or revenue guidance.
Liquidity, risks and contingencies
- Six-month capital expenditures and software development costs totaled $1.3 million and were funded from cash on hand. Approximately 49% of cash was denominated in U.S. dollars; the balance was held in foreign currencies.
- Foreign-currency exposure is significant. Hurco uses forward contracts to hedge forecast transactions, foreign-currency receivables and payables, and part of its euro net investment. The filing reported $97.3 million of total forward-contract notional value and net derivative liabilities of $1.2 million at April 30. Currency movements affected reported results and other comprehensive income.
- Key stated risks include the cyclical machine-tool market, uncertain economic conditions, international operations and exchange rates, dependence on limited manufacturing sources and new product development, competition, raw-material prices, and technology obsolescence.
- Hurco had 19 customer-financing payment guarantees totaling approximately $1.2 million. The warranty reserve was $1.6 million. Management did not expect ordinary-course litigation to materially affect financial position or results.
- Six-month effective tax rate was 34%, versus 31% a year earlier, primarily reflecting geographic income mix. Management reported no material changes to critical accounting policies or risk factors.
Important facts for investors to verify
- Whether the Q2 sales improvement and higher gross margin can persist, given the 5% decline in quarterly orders and weaker Asia Pacific demand.
- Whether foreign-exchange effects, hedging outcomes and the concentration of European revenue materially affect future margins, cash flows or reported equity.
- Whether the $43.3 million cash balance and $22.7 million of available facilities remain accessible and sufficient, including in light of credit-agreement covenants and offshore cash holdings.
- Whether customer-financing guarantees, warranty claims or other contingencies change materially from the amounts disclosed.