Hurco Companies, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended January 31, 2012; comparative period ended January 31, 2011. Hurco designs and sells computerized machine tools, control systems and related services to the worldwide metal-cutting market. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Sales and service fees | $51.1 | $39.7 |
| Gross profit / gross margin | $16.5 / 32% | $11.7 / 29% |
| SG&A expenses | $9.7 | $8.8 |
| Operating income | $6.8 | $2.9 |
| Income before taxes | $6.9 | $2.4 |
| Net income | $4.6 | $1.5 |
| Diluted earnings per share | $0.71 | $0.24 |
| Operating cash flow | $(1.9) | $2.4 |
Revenue increased 29% year over year; machine-tool sales rose 33%, while service fees, parts and other sales increased 2%. Europe contributed 58% of current-quarter sales, North America 30%, and Asia Pacific 12%. The stronger U.S. dollar reduced the sales comparison by approximately $0.4 million. SG&A was 19% of sales versus 22% a year earlier. Other income was $0.1 million, compared with other expense of $0.5 million, principally reflecting foreign-exchange gains. The effective tax rate was 33%, down from 37%.
Balance sheet and liquidity
At January 31, 2012, cash and cash equivalents were $42.7 million, versus $45.0 million at October 31, 2011. Current assets were $167.3 million and current liabilities $54.0 million. Total liabilities were $57.1 million and shareholders’ equity $132.0 million. Short-term borrowings were $1.5 million; the company reported no other borrowings. It had $23.6 million available across credit facilities and was in compliance with facility covenants.
Operating cash flow was negative despite higher earnings, reflecting working-capital movements, including a $4.8 million increase in accounts receivable and decreases in accounts payable and accrued expenses, as well as foreign-currency effects. Investing cash outflow was $0.6 million, including $0.3 million for property and equipment and $0.2 million for software development. Financing provided $0.6 million, primarily from China facility borrowings. Cash decreased by $2.3 million during the quarter.
Material changes and management commentary
- Management attributed improved profit and gross margin mainly to higher sales, especially in Europe and North America, and fixed-cost leverage.
- Orders were $48.9 million, up 10% year over year. Unit orders rose 3% in North America but declined 4% in Europe and 13% in Asia Pacific versus the prior-year quarter. Sequentially, unit orders were 20% and 22% above the third and fourth quarters of FY2011, respectively.
- Management said demand continued to improve, citing recovery in manufacturing markets and increased Asian market penetration. It considered cash and borrowing capacity adequate to fund operations, product innovation and targeted expansion in developing markets.
- No formal earnings or revenue guidance was provided. The filing notes that demand is cyclical and uncertain economic conditions, particularly in Europe, could adversely affect sales.
Risks, contingencies and unusual items
- International sales and manufacturing expose Hurco to foreign-exchange risk. At quarter-end, derivative assets were $3.2 million and derivative liabilities $0.9 million; the company reported substantial forward-contract positions. Foreign-currency gains contributed to the period’s other income.
- Twenty-three customer-financing payment guarantees totaled approximately $1.3 million. The company may recover machines following customer default under retention-of-title provisions; losses are accrued when probable and estimable.
- The warranty reserve was $1.8 million. Warranty provision was $0.9 million versus $0.5 million a year earlier; management cited higher sales volume and a greater number of higher-performance machines with higher claim costs.
- The IRS was examining federal tax returns for 2006–2010; management did not expect significant adjustments with a material effect. Unrecognized tax benefits were $0.3 million.
- Other stated risks include industry cyclicality, dependence on limited manufacturing sources and product innovation, competition, raw-material costs, international operations, and potential technological obsolescence. The company reported no material change in previously disclosed risk factors, no material legal-proceeding exposure, and no material change in contractual commitments.
Important facts for investors to verify
- Whether order growth and the recent sequential recovery persist, particularly given year-over-year unit-order declines in Europe and Asia Pacific.
- Whether higher sales translate into sustained operating cash generation as receivables, payables and other working-capital balances change.
- Exposure to currency movements, the effectiveness and timing of forward contracts, and the impact of foreign-exchange gains on reported results.
- Warranty-claim trends and the adequacy of the reserve as sales of higher-performance machines increase.
- Availability and terms of credit facilities, including facility maturities and compliance with financial covenants.