Hurco Companies, Inc. — Q3 FY2011 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2011; comparisons are with the same periods in 2010. Amounts are in U.S. dollars. The company designs and sells computerized machine tools, controls and related services for the global metal-cutting market.
Financial performance
| Metric | Q3 FY2011 | Q3 FY2010 | Nine months FY2011 | Nine months FY2010 |
|---|---|---|---|---|
| Sales and service fees | $50.6 million | $26.5 million | $131.8 million | $71.2 million |
| Gross profit / margin | $15.9 million / 31% | $4.7 million / 18% | $40.2 million / 30% | $13.3 million / 19% |
| Operating income (loss) | $6.5 million | $(2.3) million | $12.8 million | $(7.4) million |
| Net income (loss) | $4.6 million | $(1.2) million | $8.5 million | $(4.6) million |
| Diluted EPS | $0.70 | $(0.18) | $1.30 | $(0.71) |
| Operating cash flow | $1.2 million | $9.8 million | $1.1 million | $18.9 million |
Q3 orders were $39.8 million, up 42%; nine-month orders were $156.7 million, up 98%. In Q3, sales exceeded orders by $10.8 million, partly because customers ordered ahead of a price increase.
Balance sheet and liquidity
- At July 31, cash and cash equivalents were $49.1 million, versus $48.3 million at October 31, 2010. Approximately 56% of cash was U.S.-dollar denominated.
- Current assets were $168.0 million and current liabilities $62.4 million. Working capital excluding cash was $56.4 million, up from $45.7 million at fiscal year-end, primarily reflecting higher receivables and finished-goods inventory.
- Debt was $854,000 under the China facility; there were no borrowings under other facilities. The company reported $24.5 million of unused credit facilities and compliance with covenants.
- Nine-month capital expenditures and software development costs totaled approximately $1.7 million; management said these were funded from operating cash flow.
Material changes and management commentary
- Sales rose sharply across North America, Europe and Asia Pacific, reflecting stronger manufacturing demand and increased production. Europe accounted for 62% of Q3 sales and 61% of nine-month sales; computerized machine tools represented 88% and 87%, respectively.
- Management attributed improved gross margin to a stronger sales mix, including European sales of higher-performance VMX machines, and better production efficiency. Higher metal costs and an appreciated Taiwanese dollar pressured year-to-date gross profit; the company implemented a price increase and said it would adjust prices as needed.
- SG&A increased in dollars with sales commissions, marketing, incentive compensation and wage restoration, but declined as a share of sales: 18% versus 26% in Q3 and 21% versus 29% year to date.
- Nine-month effective tax rate was 30%, compared with 42% a year earlier; management cited geographic income mix and lower statutory rates in certain foreign jurisdictions.
- Operating cash flow fell year over year despite the return to profitability, with cash absorbed by increases in receivables and inventories. Nine-month inventory increased to $75.1 million from $55.9 million at October 31, 2010.
Outlook, risks and contingencies
- The filing provides no quantified revenue or earnings guidance. Management said metal and Taiwanese-dollar-related cost increases were expected to continue and that it would adjust selling prices accordingly. It stated that cash and available borrowing capacity were adequate to fund operations and its product-innovation and market-expansion plans.
- Key risks include the cyclical machine-tool market and possible renewed recession; international operations and foreign-exchange movements; dependence on a limited number of manufacturing sources; raw-material cost increases; competition and technology obsolescence.
- Foreign-exchange forward contracts had a combined U.S.-dollar-equivalent notional value of $127.4 million. The company reported $1.5 million of after-tax cash-flow-hedge losses deferred in accumulated other comprehensive loss, most expected to affect cost of sales through July 2012 as related inventory is sold.
- Twenty-six customer-financing guarantees totaled approximately $1.5 million. The company also carried a $1.8 million warranty reserve; the warranty provision increased with sales volume and a greater number of higher-performance machines.
- Management considered ordinary-course legal claims unlikely to materially affect financial position or results. No material changes to previously disclosed risk factors or contractual obligations were reported.
Important facts for investors to verify
- Whether orders remain strong and convert to sales, particularly given Q3 sales exceeded orders.
- Whether higher metal and Taiwanese-dollar costs can be offset through pricing without weakening demand or margins.
- Whether working-capital growth, especially receivables and finished-goods inventory, converts to cash; nine-month operating cash flow was only $1.1 million.
- The company’s sensitivity to foreign exchange and European demand, and the future income-statement effects of hedge losses.
- Future warranty claims and any losses on customer-financing guarantees.