Hurco Companies, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021; comparison is with the three months ended January 31, 2020. Hurco designs, manufactures and sells CNC machine tools and related software, parts, automation solutions and services. It reports one operating segment.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Sales and service fees | $54.1 million | $43.7 million | +24% |
| Gross profit / margin | $11.5 million / 21% | $9.2 million / 21% | Profit increased; margin broadly flat |
| SG&A expenses | $10.6 million | $10.8 million | Down $0.3 million |
| Operating income (loss) | $1.0 million | $(1.7) million | Returned to operating profit |
| Net income (loss) | $0.7 million | $(0.9) million | Returned to profitability |
| Diluted earnings (loss) per share | $0.10 | $(0.13) | Improved |
| Operating cash flow | $9.0 million | $(2.7) million | Improved by $11.8 million |
| Capital expenditures and software development | $0.6 million | $0.4 million | Cash outflow |
| Dividends paid | $0.9 million; $0.13 per share | $0.8 million; $0.12 per share | Higher |
Balance sheet and liquidity: At January 31, 2021, cash and cash equivalents were $66.6 million, up from $57.9 million at October 31, 2020; working capital was $204.0 million, versus $201.0 million. Current assets were $258.7 million and current liabilities $54.7 million. Hurco reported no borrowings under its credit facilities and $52.2 million of available borrowing capacity, and said it was in compliance with covenants. Approximately 15% of cash was denominated in U.S. dollars; the remainder was held in foreign operations and local currencies. Total shareholders’ equity was $234.7 million. Balance-sheet operating lease liabilities totaled $12.6 million; these are not reported as borrowings.
Material changes and operating trends
- Sales rose in all regions: Americas +33% to $23.2 million, Europe +21% to $24.2 million, and Asia Pacific +9% to $6.6 million. Management cited higher machine shipments, particularly in the Americas and Europe. Favorable currency translation added $1.6 million to total sales.
- New orders increased 26% to $57.3 million, with year-over-year growth in each region. Orders exceeded sales by approximately $3.2 million for the quarter; the filing does not provide a clear backlog value in the supplied text.
- Computerized machine tool sales increased 29% to $45.5 million. Service parts rose 6%; standalone computer control/software sales and service fees each declined 6%.
- Gross margin remained near 21% despite higher sales. Management cited aggressive competitor pricing amid excess industry inventories and fixed-cost absorption on lower production volumes.
- SG&A declined primarily due to cost-reduction measures implemented in fiscal 2020, partly offset by higher incentive compensation. Operating performance improved mainly with increased sales volume.
- Cash from operations was supported in part by a $5.7 million inventory decrease and a $1.7 million increase in accounts payable. Foreign-exchange movements increased cash by $1.5 million.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or margin guidance. Management said liquidity and borrowing capacity should fund global operations for the next 12 months and support its strategic priorities, including product innovation, potential acquisitions, market development, dividends and its share repurchase program.
- Management described COVID-19’s effects as material to date, said its duration and financial impact could not be reasonably estimated, and warned the impact could remain material in the near future. It reported no material supply-chain disruptions or complete facility shutdowns to date.
- Competitive pressure from global manufacturers pricing excess inventory, the cyclical machine-tool market, uncertain economic conditions, foreign-exchange exposure, international operations, limited manufacturing and supply sources, raw-material costs and dependence on new product development are among the stated risks.
- Foreign-currency translation and hedging contributed to a $3.3 million increase in other comprehensive income, including a $4.2 million currency translation gain. This lifted accumulated other comprehensive income to $0.3 million from a $3.0 million loss at October 31, 2020; it is distinct from net income.
- The effective tax rate was 45%, versus 40% a year earlier. The company cited geographic income mix, COVID-related tax-law changes and a discrete tax expense on unvested stock awards. A French subsidiary is under tax audit for fiscal 2018 and 2019.
- The $40 million revolving credit agreement matures December 31, 2021 and includes working-capital and tangible-net-worth covenants. Outstanding third-party customer financing guarantees totaled approximately $0.8 million; recorded guarantee liabilities were described as insignificant. The company said ordinary-course claims and litigation were not expected to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether stronger orders translate into sustained shipments, revenue and improved production-volume absorption; the supplied filing text does not state a clear backlog figure.
- How COVID-19, economic conditions and aggressive competitor pricing affect demand, pricing and gross margins in subsequent quarters.
- Cash accessibility and foreign-exchange exposure, given that about 85% of reported cash was held in foreign currencies or foreign operations.
- Renewal or replacement of the revolving credit agreement before its December 31, 2021 maturity, and continued compliance with its covenants.
- Future tax effects, including the French tax audit and changes in tax laws or geographic earnings mix.