Hurco Companies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended October 31, 2020; filed January 8, 2021. Hurco designs, manufactures, and sells CNC machine tools and related software, parts, services, and automation solutions. Results reflect severe COVID-19-related disruption to global customer demand and operations.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales and service fees | $170.6 million | $263.4 million |
| Gross profit / margin | $36.5 million / 21% | $77.2 million / 29% |
| Operating income (loss) | $(9.9) million | $22.5 million |
| Net income (loss) | $(6.2) million | $17.5 million |
| Diluted EPS | $(0.93) | $2.55 |
| Cash provided by (used for) operations | $10.9 million | $(6.4) million |
| Capital expenditures | $1.7 million | $4.9 million |
| Cash and cash equivalents at year-end | $57.9 million | $56.9 million |
| Working capital / current ratio | $201.0 million / 5.0 | $207.2 million / 4.8 |
| Total debt at year-end | None | None |
FY2020 gross margin was approximately 21.4%, down from 29.3%. The company recorded a $4.9 million non-cash goodwill impairment. The income tax benefit was $4.6 million, including the benefit associated with carrying back U.S. tax losses under the CARES Act. Cash flow from operations was supported in part by a $15.9 million reduction in accounts receivable. Cash was $57.9 million; $51.8 million was available to borrow under credit facilities, with no borrowings outstanding. Inventory was $149.9 million, and inventory turns fell to 0.9 from 1.3.
Material changes and operating trends
- Sales declined 35% year over year. Machine-tool revenue fell 38%; service parts declined 19% and service fees 23%.
- Revenue fell across all regions: Americas down 32%, Europe down 42%, and Asia Pacific down 18%. Europe remained the largest region at 46% of sales.
- Orders declined 31% to $166.9 million. Year-end backlog was $29.9 million, down from $32.7 million; management expects it to be fulfilled in FY2021 and cautions that backlog is not a reliable indicator of future performance.
- Fourth-quarter FY2020 sales were $44.5 million, versus $60.0 million in the prior-year quarter. The quarter included the $4.9 million goodwill impairment and a net loss of $3.6 million. European and Asia Pacific orders reached their fiscal-year highs in Q4; Americas orders improved slightly from Q2 and Q3.
- SG&A fell to $41.4 million from $54.7 million, but increased as a share of sales to 24% from 21%. Cost reductions included headcount changes, lower incentive compensation, and reduced discretionary spending.
- The company repurchased $7.0 million of shares during FY2020, completing its authorized program, and paid $3.4 million in dividends. Dividends remain subject to board approval and credit-agreement limits.
Outlook, risks, and notable items
- Management provided no specific revenue or earnings guidance and said the pandemic’s duration and financial effects could not be reasonably estimated. It described continued uncertainty and potential material effects on demand, operations, and cash flows.
- Management expects FY2021 capital spending of approximately $9.7 million, funded from cash on hand and operating cash flow. It cited investments in real estate development, software, factory equipment, and production facilities.
- Management reported cost controls, delayed capital spending, reduced production activity, and use of available stimulus and tax deferrals. It stated that, to date, the company had not experienced material supply-chain disruption or completely ceased operations at any global facility.
- Principal risks include COVID-19 and the cyclical machine-tool market; weak demand and short order visibility (typical backlog about 45 days); foreign currency movements; international trade, tariffs, and Brexit-related effects; supplier or manufacturing disruption; raw-material costs; cybersecurity and privacy compliance; and competition from larger companies.
- The goodwill impairment followed lower cash-flow projections and a delayed recovery outlook; goodwill was fully written down to zero. Management also identified possible future impairment and tax-asset valuation risks.
- Fourteen customer-financing guarantees totaled approximately $0.4 million; recorded liabilities were described as insignificant. Routine litigation was not expected to materially affect the company, and management believed losses would not exceed insurance coverage.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management and auditor reported effective internal control over financial reporting.
Investor verification points
- Review subsequent quarterly filings for order trends, backlog conversion, and whether the Q4 improvement in European and Asia Pacific orders continued.
- Assess whether the lower sales base, 21% gross margin, and reduced inventory turns indicate ongoing pressure on profitability or production utilization.
- Confirm operating cash-flow quality, particularly the contribution from receivables collection, and monitor inventory levels and obsolescence reserves.
- Check execution and funding of the approximately $9.7 million FY2021 capital-spending plan, while noting the company’s pandemic-related uncertainty and lack of earnings guidance.
- Monitor liquidity, the December 2021 maturity of the $40 million revolving credit agreement, covenant headroom, and foreign-currency exposure.
- Review the assumptions behind the goodwill impairment and the recoverability of deferred tax assets as demand and cash-flow forecasts evolve.