Hurco Companies, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended October 31, 2021. The filing also reports fourth-quarter results. Hurco designs, manufactures, and sells CNC machine tools and related software, components, automation, parts, and services for metalworking customers. It operates as one reportable segment and sells globally; approximately 63% of FY2021 revenue came from customers outside the Americas.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Sales and service fees | $235.2 million | $170.6 million |
| Gross profit / margin | $56.2 million / 24% | $36.5 million / 21% |
| Operating income (loss) | $10.2 million / 4% of revenue | $(9.9) million / (6%) |
| Net income (loss) | $6.8 million | $(6.2) million |
| Diluted earnings (loss) per share | $1.01 | $(0.93) |
| Cash provided by operating activities | $32.2 million | $10.9 million |
| Capital expenditures | $2.4 million | $1.7 million |
- Revenue rose 38% year over year, including a favorable $7.7 million currency translation impact. Machine-tool sales, 85% of revenue, increased 42%; all regions and product categories grew.
- Fourth-quarter FY2021 revenue was $69.0 million, gross profit $16.9 million, operating income $3.1 million, and net income $2.1 million, or $0.31 per diluted share.
- Cash and cash equivalents were $84.1 million at year-end, up from $57.9 million. Working capital was $208.7 million; the current ratio was 3.6, compared with 5.0 in FY2020. Cash was generated in part by increases in accounts payable, payroll accruals, and customer deposits.
- Inventory was $148.2 million, slightly below $149.9 million a year earlier; inventory turns improved to 1.2 from 0.9.
- Hurco had no borrowings under its credit facilities and reported $52.2 million of available borrowing capacity. Its $40 million U.S. revolving facility matures December 31, 2023. Total debt was zero.
- Dividends paid were $3.7 million, or $0.55 per share. An authorized $7 million share repurchase program had no repurchases in FY2021.
Material changes versus the prior comparable period
- The business recovered from FY2020’s pandemic-related downturn: orders increased 59% to $265.4 million, and year-end backlog doubled to $60.0 million from $29.9 million. Management expects the October 2021 backlog to be fulfilled in FY2022, but cautions that backlog is not a reliable performance forecast.
- Revenue increased across the Americas (+28%), Europe (+51%), and Asia Pacific (+25%). Europe remained the largest region, at 50% of revenue.
- Gross margin improved from 21% to 24%, reflecting greater fixed-cost absorption, improved pricing, more normalized inventory levels, and favorable currency translation. Higher materials and freight costs partly offset these gains.
- FY2021 operating income included a $2.9 million employee retention credit benefit ($1.2 million reflected in gross profit and $1.7 million in lower SG&A). FY2020 results included a $4.9 million non-cash goodwill impairment charge; no goodwill remained at October 31, 2021.
- Operating cash flow rose to $32.2 million from $10.9 million. Net cash increased $26.2 million during FY2021; operating, investing, and financing cash flows were $32.2 million, $(3.3) million, and $(3.5) million, respectively.
Outlook, management commentary, and risks
- No revenue or earnings guidance is provided. Management expects FY2022 capital spending of approximately $5.8 million, funded with cash on hand and operating cash flow, and states that liquidity should support operations and strategic plans.
- Management reported continuing vendor delays, supply-chain constraints, inflation in materials and components, and sharply higher freight and transportation costs. These could delay shipments and pressure margins if costs cannot be passed through to customers.
- Key exposures include the cyclical machine-tool market; continuing COVID-19 effects; dependence on manufacturing and suppliers in Taiwan and China; geopolitical, trade, tariff, and shipping disruptions; foreign-exchange movements; competition; and the ability to develop products and protect intellectual property. Cybersecurity, data privacy, tax, and acquisition risks are also disclosed.
- Foreign currency forward contracts are used to hedge certain exposures; they reduce but do not eliminate currency risk. Approximately 34% of year-end cash was held in the U.S.; the balance was held in foreign operations and currencies.
- Eight customer-financing guarantees totaled approximately $0.9 million; recorded liabilities were insignificant. The company said ordinary-course claims and lawsuits were not expected to have a material adverse effect and were within insurance coverage.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. Income-tax deferred asset realizability was identified as a critical audit matter.
Important facts for investors to verify
- Whether the 59% order growth and $60.0 million backlog converted to FY2022 shipments and revenue as expected.
- How much of FY2021 earnings and margin improvement is sustainable excluding the $2.9 million employee retention credit and favorable currency effects.
- Whether elevated freight, input costs, and supplier delays affected subsequent delivery performance, pricing, and gross margins.
- Cash-flow quality and working-capital movements, particularly the large increases in accounts payable, customer deposits, and receivables.
- Inventory composition, obsolescence exposure, and whether inventory turns continue to improve.
- Availability of the disclosed $5.4 million tax refund and the realization of tax assets, loss carryforwards, and credits.
- Exposure to manufacturing concentration and geopolitical or trade disruption involving Taiwan and China, as well as compliance with credit-agreement covenants and dividend restrictions.