Hurco Companies, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020; compared with the three months ended January 31, 2019. Hurco designs, manufactures and sells CNC machine tools and related products and services through a global sales and distribution network. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change / context |
|---|---|---|---|
| Sales and service fees | $43.66 | $74.21 | Down 41%; unfavorable currency impact was less than 1% |
| Gross profit / margin | $9.16 / 21% | $22.14 / 30% | Lower volume, product mix, pricing pressure and fixed-cost under-absorption |
| SG&A | $10.85 | $13.91 | Down primarily from lower incentive compensation, benefits and cost reductions |
| Operating income (loss) / margin | $(1.69) / (3.9)% | $8.23 / 11.1% | Shifted to operating loss |
| Net income (loss) | $(0.89) | $6.65 | Basic and diluted EPS: $(0.13), versus $0.98 basic and $0.97 diluted |
| Operating cash flow | $(2.75) | $(3.97) | Accounts receivable reduction was a major cash source; inventory and other working-capital changes used cash |
| Cash and cash equivalents | $52.59 | $56.94 at Oct. 31, 2019 | Down $4.36 during the quarter |
Sales fell across all regions: Europe $20.09 million (down 44%), Americas $17.48 million (down 40%), and Asia Pacific $6.10 million (down 35%). Computerized machine tools, the largest product category, declined 45% to $35.21 million. Orders were $45.58 million, down 33% year over year, with declines in each region.
Balance sheet, liquidity and capital
- At January 31, 2020, total assets were $300.99 million, current assets $249.56 million and current liabilities $47.29 million; working capital was $202.3 million.
- Hurco reported no borrowings under its credit facilities. Available borrowing capacity was $51.3 million, and the company reported compliance with all covenants. Its $40 million unsecured revolving facility matures December 31, 2020; additional facilities are in Germany, Taiwan and China.
- Cash dividends paid were $0.12 per share ($0.81 million total), compared with $0.11 per share in the prior-year quarter. Capital expenditures and software development costs totaled approximately $0.45 million.
- Adoption of lease accounting (ASC 842) in fiscal 2020 added $13.21 million of right-of-use assets and $13.56 million of operating lease liabilities at quarter-end. Lease liabilities included $4.15 million current and $9.41 million noncurrent.
- Approximately 24% of cash was denominated in U.S. dollars; the balance was held by foreign operations in local currencies.
Management commentary, outlook and risks
- Management attributed weaker results to the machine-tool market slowdown, uncertainty associated with U.S.-China trade tensions, Brexit and U.S. political friction, and, more recently, business disruption from the coronavirus outbreak. Customers deferred or cancelled capital-equipment investments; competitors also priced excess inventory more aggressively.
- Lower shipments of higher-priced, higher-performance machines—particularly in Europe and the Americas—along with global pricing pressure and lower production volumes reduced gross margin. Cost reductions helped lower SG&A, partly offset by expenses from the ProCobots automation business acquired in August 2019.
- No quantitative earnings or revenue guidance was provided. Management stated that cash and borrowing capacity were adequate for operations over the next 12 months and supported its strategic plans, including product innovation, targeted market penetration and potential acquisitions.
- Key disclosed risks include cyclical and uncertain demand, international operations and foreign-exchange movements, reliance on limited manufacturing and supply sources, competition, raw-material costs, product-development and technology risks, tariffs and regulation, and acquisition integration. The filing reported no material change to previously disclosed risk factors.
- At January 31, 2020, 23 customer-financing payment guarantees totaled approximately $0.5 million; related accrued liabilities were described as insignificant. The company said routine claims and litigation were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether orders and demand stabilize after the reported 33% decline, particularly in Europe and the Americas.
- Whether lower shipment volumes, competitive pricing and product mix continue to pressure gross margins and profitability.
- The effects of coronavirus-related disruption and other macroeconomic uncertainty on customers, supply chains and subsequent-period results.
- The renewal or replacement of the $40 million revolving facility before its December 31, 2020 maturity, and continued covenant compliance.
- Foreign-currency exposure and the location and currency denomination of cash; the effectiveness and accounting effects of currency hedges.
- ProCobots integration and acquisition performance, and the company’s capacity to sustain dividends and strategic investment if operating cash flow remains negative.