Hurco Companies, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended January 31, 2023, compared with the three months ended January 31, 2022. Hurco designs, manufactures, and sells CNC machine tools and related products and services through a global network. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Sales and service fees | $54.7 million | $66.9 million |
| Gross profit / gross margin | $12.7 million / 23% | $16.9 million / 25% |
| Operating income / operating margin | $1.2 million / 2% | $5.2 million / 8% |
| Net income | $1.3 million | $3.5 million |
| Diluted earnings per share | $0.20 | $0.53 |
| Operating cash flow | $(8.0) million | $9.4 million |
Cash and cash equivalents were $56.9 million at January 31, 2023, versus $63.9 million at October 31, 2022. Working capital was $204.3 million, up from $194.7 million. Inventories rose to $168.6 million from $156.2 million. Capital expenditures and software development costs totaled approximately $0.6 million.
Hurco had no borrowings under its credit facilities and reported approximately $51.4 million of available borrowing capacity. Its $40 million unsecured revolving facility is scheduled to mature December 31, 2023. The company reported compliance with its credit covenants. Current and non-current operating lease liabilities totaled approximately $9.7 million.
Changes versus prior-year quarter
- Revenue fell 18%, including an unfavorable foreign-currency translation impact of $3.2 million, or 5%. The decline reflected lower machine shipments across regions.
- Regional sales decreased 8% in the Americas, 16% in Europe, and 53% in Asia Pacific. Computerized machine tool sales declined 21%.
- Orders fell 25% to $53.2 million, including an unfavorable currency impact of $3.3 million, or 5%. Orders declined 11% in the Americas, 27% in Europe, and 55% in Asia Pacific.
- Gross margin declined from 25% to 23%; management cited lower vertical milling machine sales, particularly in Europe, and fixed-cost absorption on lower sales and production volumes. SG&A was nearly flat in dollars but increased to 21% of sales from 17%.
- Operating cash flow shifted from $9.4 million provided to $8.0 million used, with working-capital movements including higher inventories and decreases in accounts payable and accrued payroll. Cash declined by $7.0 million overall, partly offset by a $3.3 million favorable foreign-exchange effect.
- Other income was $0.6 million, compared with other expense of $0.3 million, primarily reflecting higher foreign-currency gains. Other comprehensive income included a $10.1 million foreign-currency translation gain; comprehensive income was $11.2 million.
Outlook, risks, and notable items
- The filing provides no specific revenue, earnings, or order guidance. Management said cash pooling and available credit capacity should provide adequate liquidity for global operations over the next 12 months and beyond.
- Management cited continuing exposure to machine-tool industry cyclicality, uncertain demand, COVID-related disruption, supplier and transportation delays, inflation and input costs, foreign-currency volatility, labor-market competition, and political friction. The company said the duration and financial impact of these factors cannot be reasonably estimated.
- Hurco uses foreign-currency forward contracts to manage currency exposure. At January 31, 2023, total derivative notional amounts were approximately $107.0 million; the company does not enter these contracts for trading purposes.
- On January 6, 2023, Hurco announced a share repurchase authorization of up to $25 million through November 10, 2024; no purchases had been made under this new program by quarter-end. Under its prior program, it repurchased approximately 26,819 shares for $0.7 million during the quarter. It also paid $1.0 million in dividends.
- Nine customer-financing payment guarantees totaled approximately $0.7 million, with related accrued liabilities described as insignificant. The company said ordinary-course claims and litigation are not expected to have a material adverse effect. Its German subsidiary was under tax audit for fiscal years 2017–2021.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new orders and shipments stabilize after the quarter’s substantial year-over-year declines, especially in Europe and Asia Pacific.
- Whether gross margins recover as sales volumes and production levels change, and how fixed-cost absorption and input costs affect profitability.
- Whether operating cash flow improves and inventory levels convert to sales without impairments or further working-capital pressure.
- How exchange-rate movements affect reported sales, earnings, and accumulated other comprehensive income, notwithstanding the hedging program.
- Plans for the December 2023 maturity of the revolving credit facility, and continued compliance with facility covenants while funding dividends and repurchases.
- Developments in the German tax audit and any changes to the company’s stated assessment of litigation, guarantees, or other contingencies.