Hurco Companies, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 31, 2019; compared with the three months ended January 31, 2018. Figures are unaudited. Hurco designs, manufactures and sells CNC machine tools and related products and services. It reports one segment: industrial automation equipment.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Sales and service fees | $74.2 million | $68.4 million | +8% |
| Gross profit / margin | $22.1 million / 29.8% | $20.1 million / 29.4% | Margin +0.4 percentage points |
| Operating income / margin | $8.2 million / 11.1% | $7.2 million / 10.5% | Higher |
| Net income | $6.7 million | $2.9 million | +126% |
| Diluted EPS | $0.97 | $0.43 | +$0.54 |
| Operating cash flow | $(4.0) million | $14.5 million | Declined |
Sales growth reflected stronger Americas results, particularly U.S. demand for vertical milling machines, and increased service-parts sales. Europe sales declined 7%; Asia Pacific sales rose 3%. Gross margin improved mainly with higher sales volume of vertical milling machines. SG&A was $13.9 million, or 19% of sales, versus $13.0 million, also 19%.
The effective tax rate fell to 27% from 61%. Management attributed the prior-year rate primarily to one-time Tax Cuts and Jobs Act charges, including a $2.5 million transition-tax charge and a $0.4 million deferred-tax remeasurement charge. The lower rate materially contributed to the year-over-year net-income increase.
Liquidity, debt and cash flows
- Cash and cash equivalents were $69.8 million at January 31, 2019, down from $77.2 million at October 31, 2018; approximately 67% was denominated in U.S. dollars.
- Working capital was $201.1 million, compared with $194.6 million at fiscal year-end. Current assets were $281.2 million and current liabilities $80.1 million.
- No borrowings were outstanding at quarter-end. Available borrowing capacity was $41.7 million under existing facilities. The new unsecured revolving facility provides up to $40 million and matures December 31, 2020; covenants include minimum working capital of $125 million and minimum tangible net worth of $170 million.
- Operating cash use was driven in part by a $7.1 million inventory increase and lower accounts payable and accrued expenses. Investing cash use was $1.2 million, including capital expenditures and software development. Financing cash use was $2.7 million, including dividends and repayment of short-term debt.
Material changes, outlook and risks
- New orders were $68.0 million, down 12% year over year, despite higher sales. Americas orders increased 21%, while Europe declined 25% and Asia Pacific declined 18%. The filing does not provide formal revenue or earnings guidance.
- Management said cash and borrowing capacity should fund operations for the next twelve months and support its strategic plan of product innovation and targeted penetration of developing markets. It continues to review potential acquisitions.
- Foreign exchange remains material: currency translation reduced reported sales by $2.5 million, and 61% of revenue came from customers outside the Americas. Hurco uses currency forwards to manage exposure; outstanding derivative notional amounts totaled $143.1 million.
- Other income increased largely because of foreign-currency transaction gains versus losses in the prior-year quarter. The company also reported a $1.3 million foreign-currency translation gain in other comprehensive income.
- Risks cited include machine-tool industry cyclicality, uncertain economic conditions, international operations and currency movements, reliance on a limited number of manufacturing and supply sources, raw-material costs, competition, technology and product-development needs, and tariffs or other government actions. Management reported no material change in the previously disclosed risk factors.
- There were 25 customer-financing payment guarantees totaling approximately $687,000; accrued guarantee liabilities were described as insignificant. Routine claims and lawsuits were not expected to have a material adverse effect. A German subsidiary was under tax audit for fiscal years 2013–2016.
- ASC 606 was adopted November 1, 2018 using the modified retrospective method, with no material impact. Management was assessing the impact of the new lease standard, effective for Hurco in fiscal 2020.
Key facts for investors to verify
- Whether the 12% decline in orders, especially in Europe and Asia Pacific, persists or reverses in subsequent quarters.
- Whether inventory growth and negative quarterly operating cash flow normalize as shipments and working capital change.
- How currency movements affect reported sales, costs, derivative results and cash balances.
- Whether the 27% effective tax rate is sustainable; the filing’s comparison is affected by prior-year one-time tax charges.
- Compliance with credit-facility covenants, availability of borrowing capacity, and the status of the German tax audit and customer guarantees.