Hurco Companies, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended April 30, 2023. Hurco designs, manufactures and sells CNC machine tools and related products and services through global operations. The company reports one operating segment.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2022 periods.
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Sales and service fees | $53.8 | $62.8 | $108.5 | $129.7 |
| Gross profit | $12.6 | $15.6 | $25.3 | $32.5 |
| Gross margin | 23% | 25% | 23% | 25% |
| Operating income | $1.0 | $3.1 | $2.2 | $8.3 |
| Net income | $0.4 | $2.0 | $1.7 | $5.6 |
| Diluted EPS | $0.06 | $0.30 | $0.26 | $0.83 |
| Operating cash flow | $1.0 | $(0.8) | $(7.0) | $8.3 |
Q2 sales fell 14%; six-month sales declined 16%. Management attributed lower gross margin and operating income mainly to lower machine-tool sales and the effect of fixed costs on lower sales and production volumes. SG&A declined in dollars, but rose as a share of revenue: 22% versus 20% in Q2 and 21% versus 19% for the half year. Net margin was approximately 0.7% in Q2 and 1.6% for the six-month period, versus 3.2% and 4.3%, respectively.
Q2 orders increased 2% to $60.2 million, including 18% growth in Europe, offset by declines in the Americas and Asia Pacific. Six-month orders fell 13% to $113.5 million, with declines across all regions, particularly Asia Pacific (down 41%). The filing does not provide a clear backlog value.
Liquidity, capital and balance sheet
- Cash and equivalents were $52.2 million at April 30, down from $63.9 million at October 31, 2022; approximately 18% was held in U.S. dollars, with the remainder in foreign operations’ currencies.
- Working capital was $199.5 million, up from $194.7 million. Inventory increased to $175.8 million from $156.2 million.
- Hurco reported no borrowings under its credit facilities and approximately $51.2 million of available borrowing capacity. The $40 million unsecured revolving credit agreement matures December 31, 2023; the filing reports compliance with its covenants. Other facilities include uncommitted Taiwan and China lines and a German facility.
- Six-month investing cash outflow was $1.1 million. Financing cash outflow was $6.7 million, including $4.6 million of share repurchases and $2.0 million of dividends. Cash declined by $11.8 million over the six months, including the effect of exchange rates.
- Operating lease liabilities totaled $9.1 million. Separately, the company disclosed no financial-facility borrowings at period end.
Outlook, risks and unusual items
No specific revenue, earnings or other formal financial guidance is provided. Management said cash-pooling arrangements and available borrowing capacity should provide adequate liquidity for global operations over the next twelve months and beyond, while continuing planned investment, dividends and repurchases. The company is also reviewing potential acquisition opportunities.
Management cited machine-tool industry cyclicality, uncertain demand, international operating exposure, currency volatility, supply-chain constraints, transportation costs, inflation and input-cost increases, competition, and dependence on product development among key risks. Foreign-exchange movements affected reported results; the company uses forward contracts to hedge selected exposures. Q2 other expense included a larger foreign-currency exchange loss, while first-half other income benefited from currency gains. First-half other comprehensive income was $8.5 million, driven chiefly by foreign-currency translation, in contrast to a $9.0 million comprehensive loss in the prior-year period.
The company had nine third-party customer-financing guarantees totaling approximately $0.9 million; related accrued liabilities were described as insignificant. Management did not expect pending ordinary-course claims and lawsuits to have a material adverse effect. No material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective as of April 30, 2023.
Important facts for investors to verify
- Whether the Q2 improvement in orders, particularly in Europe, develops into higher shipments and revenue; six-month orders remained materially lower year over year.
- Whether inventory growth and negative six-month operating cash flow reverse as shipments recover, and how working capital converts to cash.
- The status and terms of the $40 million revolving facility approaching its December 2023 maturity, including any renewal or replacement.
- Foreign-exchange and supply-chain effects on margins, as well as the impact of lower production volumes and fixed-cost absorption.
- Future repurchases and dividends relative to cash generation: the company had a $25 million repurchase authorization, with $24.5 million remaining under that program at April 30, 2023.