Hurco Companies, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended July 31, 2023. Financial statements are unaudited. Hurco designs, manufactures and sells CNC machine tools and related products and services through a global business operating in one segment.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales and service fees | $53.2m | $57.6m | $161.7m | $187.4m |
| Gross profit / margin | $13.4m / 25.3% | $14.4m / 25.0% | $38.7m / 24.0% | $46.9m / 25.0% |
| Operating income / margin | $1.0m / 1.9% | $1.8m / 3.0% | $3.2m / 2.0% | $10.0m / 5.4% |
| Net income | $0.3m | $1.2m | $2.0m | $6.8m |
| Diluted earnings per share | $0.04 | $0.18 | $0.30 | $1.01 |
| Operating cash flow | $(9.1)m | $(5.9)m | $(16.2)m | $2.4m |
Quarterly sales fell 8% year over year; nine-month sales fell 14%. Declines in machine-tool volume and lower production volumes weighed on operating income, while a richer mix of higher-performance machines in Europe helped support gross margin. Q3 orders were $42.1m, down 20%; nine-month orders were $155.5m, down 15%.
Liquidity, balance sheet and capital allocation
- Cash was $41.0m at July 31, 2023, down from $63.9m at October 31, 2022. Nine-month cash declined $22.9m.
- Working capital was $198.1m, versus $194.7m at fiscal year-end. Current assets were $262.0m and current liabilities $63.8m.
- Inventory rose to $178.4m from $156.2m, including finished goods of $115.9m versus $96.3m.
- No borrowings were outstanding under credit facilities; Hurco reported approximately $51.0m of available borrowing capacity and covenant compliance. The $40m unsecured revolving credit agreement was scheduled to mature December 31, 2023.
- Nine-month capital expenditures and software development costs totaled $1.8m. The company paid $3.1m in dividends and repurchased $4.6m of shares during the period. No shares were repurchased in Q3.
Material changes and management commentary
- Q3 sales declined in the Americas (23%) and Asia Pacific (24%), partly offset by 8% growth in Europe. Nine-month sales declined across all regions, most sharply in Asia Pacific (43%).
- Machine-tool sales fell 11% in Q3 and 17% year to date. Service parts and service fees increased year to date, partially offsetting the equipment decline.
- Q3 SG&A was $12.4m, down from $12.6m; nine-month SG&A was $35.5m, down from $36.9m. Lower marketing, sales commission and employee-support costs contributed to the decline.
- The effective tax rate was 60% for Q3 and 40% for the nine-month period, versus 28% and 31%, respectively, in the prior-year periods. Hurco cited geographic income mix, China valuation allowances, stock-compensation items and lower pretax income.
- Management said global cash pooling and available borrowing capacity were adequate to fund operations over the next twelve months and beyond. The filing provides no specific revenue or earnings guidance.
Risks, contingencies and unusual items
- Management cited machine-tool cyclicality, uncertain economic demand, foreign-exchange volatility, supply-chain concentration, input-cost inflation, international operations, competition and technology risks. It also referenced vendor delays, transportation issues, inflation and labor-market pressures.
- Foreign-currency effects were significant: Q3 other income (expense), net was a loss of $0.4m, compared with a loss of $0.02m a year earlier; non-designated currency forwards contributed a $1.0m loss in Q3. The company uses currency forwards to hedge exposures.
- Nine customer-financing guarantees totaled approximately $0.9m; associated accrued liabilities were described as insignificant. The company did not expect routine legal claims to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the December 31, 2023 revolving-credit-facility maturity was renewed, refinanced or otherwise addressed after the filing date.
- Whether falling orders—particularly in the Americas and Asia Pacific—translate into further revenue declines or inventory pressure.
- Cash conversion and the drivers of negative nine-month operating cash flow, including inventory growth and working-capital movements.
- Ongoing foreign-exchange effects, including derivative results, and the effect of currency movements on margins and reported earnings.
- Whether the elevated effective tax rate and China valuation allowances persist, and whether dividends and repurchases remain consistent with liquidity and credit-agreement constraints.