Hurco Companies, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended July 31, 2020. Hurco designs, manufactures and sells CNC machine tools and related automation, parts and services globally. Figures are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Sales and service fees | $45.4 | $58.5 | $126.2 | $203.4 |
| Gross profit / margin | $11.1 / 24% | $17.2 / 29% | $26.9 / 21% | $61.0 / 30% |
| Operating income (loss) | $1.4 | $4.6 | $(4.1) | $20.4 |
| Net income (loss) | $2.2 | $3.5 | $(2.7) | $15.4 |
| Diluted EPS | $0.32 | $0.51 | $(0.39) | $2.24 |
| Operating cash flow | $5.0 | $(1.5) | $0.2 | $(3.1) |
- Q3 revenue fell 22% year over year; nine-month revenue fell 38%. Machine-tool sales were down 23% in Q3 and 41% year to date.
- Orders were $36.1 million in Q3, down 32%, and $118.2 million for nine months, down 37% year over year.
- Q3 SG&A was $9.6 million, down from $12.6 million; nine-month SG&A was $31.1 million versus $40.6 million. Cost reductions included headcount, incentive compensation and discretionary spending.
- Q3 tax benefit was $0.9 million versus $1.2 million tax expense in the prior-year quarter. The nine-month tax benefit was $2.3 million versus $6.1 million tax expense, reflecting tax-law changes, including CARES Act NOL carryback provisions, and geographic income mix.
Financial position and liquidity
- At July 31, 2020, cash and equivalents were $47.1 million, down from $56.9 million at October 31, 2019. Working capital was $198.7 million, down from $207.2 million.
- Total assets were $299.3 million and shareholders’ equity was $234.0 million. Inventory was $154.8 million, up from $148.9 million at fiscal year-end.
- There were no borrowings under credit facilities. Available borrowing capacity was $51.5 million, and the company reported compliance with its covenants. The $40 million main revolving facility was scheduled to mature December 31, 2020.
- Nine-month investing cash outflow was $1.0 million; financing cash outflow was $10.0 million, including $7.0 million of share repurchases and $2.6 million of dividends. The $7.0 million repurchase authorization was fully used and concluded.
- Adoption of lease accounting resulted in $12.4 million of right-of-use assets and $12.8 million of lease liabilities at July 31, 2020.
Material changes, outlook and risks
- COVID-19 materially reduced customer demand and disrupted purchasing cycles. Management said it could not reasonably estimate the pandemic’s duration or financial impact, which could remain material. Q3 sales improved 22% from Q2 as restrictions eased, but orders remained below prior-year levels.
- Regional Q3 sales were down 15% in the Americas and 36% in Europe, while Asia Pacific sales increased 12%. Europe remained particularly weak; management cited lower shipment volumes, excess inventory and pricing pressure.
- Lower sales and production volumes, an unfavorable product mix and fixed-cost under-absorption compressed gross margin. Management had reduced production, delayed capital spending and cut costs; it reported no material supply-chain disruption or complete facility shutdowns to date.
- Foreign-exchange movements affected results; the company uses forward contracts to manage currency exposures. Q3 other expense included foreign-exchange losses. Foreign-currency derivative liabilities were $1.8 million at quarter-end.
- Management reported no impairment of long-lived assets or goodwill in its April review and no new triggering events in Q3. Future impairment remains possible if cash flows differ from assumptions.
- No specific financial guidance was provided. The company cited risks including the pandemic, cyclical demand, international operations and currencies, supplier concentration, competition, raw-material costs, technology and acquisition execution. Ordinary-course litigation was not expected to have a material adverse effect; customer-financing guarantees totaled approximately $0.5 million.
Key investor verification points
- Check subsequent quarterly orders, shipments and margin recovery by region, especially Europe, and the extent to which Q3’s sequential improvement continued.
- Verify renewal, replacement or other resolution of the $40 million credit facility due December 31, 2020, and continued covenant compliance.
- Assess cash conversion, inventory levels and foreign-currency cash exposure; only about 20% of reported cash was denominated in U.S. dollars.
- Review the sustainability of earnings excluding the $0.9 million Q3 tax benefit and the impact of foreign-exchange gains and losses.
- Monitor COVID-19-related assumptions used in impairment testing and any resulting asset charges.