Hurco Companies, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended April 30, 2020. Hurco designs, manufactures and sells CNC machine tools and related products and services worldwide. The filing identifies COVID-19 as a material cause of disrupted demand and operating results.
Financial performance
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Sales and service fees | $37.1 | $70.7 | $80.8 | $144.9 |
| Gross profit | $6.7 | $21.6 | $15.9 | $43.8 |
| Gross margin | 18% | 31% | 20% | 30% |
| Operating income (loss) | $(3.9) | $7.5 | $(5.6) | $15.8 |
| Net income (loss) | $(3.9) | $5.3 | $(4.8) | $11.9 |
| Diluted earnings (loss) per share | $(0.58) | $0.76 | $(0.71) | $1.73 |
| Operating cash flow | $(2.1) | $2.4 | $(4.8) | $(1.6) |
- Q2 orders were $36.6 million, down 46%; six-month orders were $82.1 million, down 39%. Both were below reported sales for the respective periods.
- At April 30, cash and equivalents were $45.3 million, versus $56.9 million at October 31, 2019. Working capital was $195.6 million, down from $207.2 million.
- There were no borrowings under credit facilities. Hurco reported $51.3 million of available borrowing capacity and compliance with its covenants. The main $40 million revolving facility matures December 31, 2020.
- Total assets were $291.4 million and shareholders’ equity was $230.7 million. Operating lease liabilities totaled $12.6 million; these are lease obligations, not credit-facility borrowings.
Material changes and management commentary
- Revenue declined 47% in Q2 and 44% for the first half year over year. Regional Q2 declines were Europe 61%, Americas 30%, and Asia Pacific 35%. Machine-tool sales, Hurco said, were particularly affected by reduced shipment volumes and pandemic restrictions.
- Management attributed lower gross margins to weaker sales, a less favorable regional/product mix, competitive pricing amid excess inventory, and fixed costs spread over lower production volumes.
- SG&A declined year over year to $10.6 million in Q2 and $21.4 million in the first half, reflecting headcount, compensation and discretionary-spending reductions. SG&A nevertheless rose as a share of sales because revenue contracted.
- Hurco said it had not experienced material supply-chain disruption or fully ceased operations at any global facility as of the filing, while noting temporary closures or remote-work arrangements in some sales and service organizations. It reduced headcount and discretionary spending, delayed capital expenditures and reduced production.
- Cash decreased partly alongside negative operating cash flow, $3.9 million of share repurchases and $1.7 million of first-half dividends. A board-approved repurchase program authorized up to $7 million through March 11, 2022; $3.9 million had been repurchased by April 30.
Outlook, risks and unusual items
- No specific revenue, earnings or order guidance was provided. Management said the duration and scope of the pandemic and its future financial impact could not be reasonably estimated, but expected the impact could remain material in the near term.
- COVID-19-related triggering events prompted impairment reviews. Hurco reported no impairment of long-lived assets, goodwill or indefinite-lived assets as of April 30, 2020, but cautioned that differing future cash flows could result in impairment.
- Other income/expense included a net expense of $0.8 million in Q2, which management mainly attributed to increased foreign-currency exchange losses. The filing also reports a $1.4 million foreign-currency loss adjustment in the Q2 cash-flow reconciliation.
- The six-month income-tax benefit was $1.4 million, versus a $4.9 million provision in the prior year. The company was evaluating the CARES Act’s effects.
- Hurco disclosed 23 customer-financing payment guarantees totaling approximately $0.5 million; related accrued liabilities were described as insignificant. It did not expect pending claims or lawsuits to materially affect results or financial position.
- Key risks include pandemic-related demand and operating disruption, the cyclical machine-tool market, international operations and currency changes, limited manufacturing and supply sources, competition, input costs, and potential asset impairment.
Important facts for investors to verify
- Subsequent order trends, customer demand, shipment levels and regional reopening conditions, particularly in Europe.
- Cash generation, inventory levels and the effectiveness and sustainability of cost reductions as sales volumes change.
- Renewal or replacement of the $40 million credit facility before its December 2020 maturity, and continued covenant compliance.
- Progress on share repurchases and dividends relative to liquidity needs and credit-agreement restrictions.
- Assumptions underlying the impairment tests, as well as currency exposure and the effects of CARES Act tax provisions.