Business context and reporting period
Hurco Companies, Inc. (Nasdaq: HURC) filed this Form 10-K for the fiscal year ended October 31, 2019. The company designs, manufactures and sells CNC machine tools and related software, parts, automation solutions and services. It operates as one industrial automation equipment segment and sells internationally through distributors and direct sales organizations. Approximately 64% of fiscal 2019 revenue came from customers outside the U.S.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. Fiscal 2019 compared with fiscal 2018:
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales and service fees | $263.4 | $300.7 |
| Gross profit / margin | $77.2 / 29% | $91.8 / 31% |
| SG&A / revenue | $54.7 / 21% | $58.0 / 19% |
| Operating income / margin | $22.5 / 9% | $33.8 / 11% |
| Net income | $17.5 | $21.5 |
| Diluted EPS | $2.55 | $3.15 |
| Operating cash flow | $(6.4) | $21.0 |
Revenue fell 12%; net income declined 19%. The effective tax rate was 25%, down from 34%, mainly reflecting U.S. tax reform benefits, including the lower federal rate, FDII deduction and foreign tax credits; fiscal 2018 included a $2.9 million one-time tax-reform charge. Fiscal 2019 included $8.5 million of unfavorable currency translation on sales.
Fourth-quarter fiscal 2019 revenue was $60.0 million versus $83.1 million in Q4 2018. Gross margin was 27% versus 34%, operating income was $2.2 million versus $11.3 million, and net income was $2.1 million versus $8.3 million. Q4 2019 diluted EPS was $0.31 versus $1.22; the quarter recorded an income-tax benefit of $0.3 million.
At October 31, 2019, cash was $56.9 million, working capital $207.2 million and the current ratio 4.8. Cash declined from $77.2 million; operating cash flow was negative, with working-capital movements including a $10.5 million inventory cash use and a $23.8 million reduction in accounts payable. Inventory was $148.9 million, up from $137.6 million, and inventory turns declined to 1.3 from 1.6. There were no borrowings under credit facilities, and available borrowing capacity was $51.2 million. Total debt was zero; shareholders’ equity was $240.2 million.
Capital expenditures were $4.9 million in FY2019. The company paid $3.2 million in dividends, or $0.47 per share declared for the year.
Material changes versus the prior comparable period
- Orders fell 21% to $241.1 million; regional orders declined 5% in the Americas, 29% in Europe and 23% in Asia Pacific. Year-end backlog decreased to $32.7 million from $55.0 million and was expected to be fulfilled in fiscal 2020.
- Europe revenue fell 20% and Asia Pacific revenue fell 30%, while the Americas increased 9%. Lower shipments of higher-performance machines in Europe, weaker demand in China and lower LCM component sales were key factors; acquired U.S. distribution activity partly offset declines.
- Computerized machine-tool sales declined 15%. Service parts and service fees increased 1% and 4%, respectively.
- Gross margin contracted by two percentage points, reflecting a less favorable mix of European high-performance machines, lower production volume and competitive pricing. SG&A fell in dollars but increased as a share of revenue.
- Operating cash flow moved from positive $21.0 million to negative $6.4 million. Cash fell by $20.2 million during the year.
- Hurco acquired ProCobots, an automation integration business, in August 2019 for approximately $4.4 million; $3.5 million of goodwill was recorded provisionally.
Outlook, management commentary, risks and unusual items
- Management stated that cash and available credit were adequate for operations over the next 12 months and supported continued product innovation and targeted market expansion. It expected fiscal 2020 capital spending of approximately $12.4 million, funded by cash and operating cash generation. No revenue or earnings guidance was provided.
- Management described the machine-tool market as highly cyclical, with short order visibility and a typical backlog of about 45 days. The $32.7 million year-end backlog was not considered a reliable indicator of future performance.
- Key exposures include global economic and regional demand shifts, trade restrictions and tariffs, foreign-exchange movements, competition and pricing, raw-material costs, supplier or manufacturing interruptions, product-development execution, cybersecurity, and tax uncertainty. Manufacturing and supply operations span Taiwan, China, the U.S. and Italy; the company relies in part on a 35%-owned Taiwanese control-system supplier.
- Foreign-currency forward contracts hedge portions of forecast sales, purchases and foreign net assets; hedging does not eliminate currency or counterparty risk.
- Operating-lease commitments totaled $13.4 million. Adoption of the new lease standard in fiscal 2020 was expected to add approximately $12–14 million of right-of-use assets and lease liabilities to the balance sheet.
- Twenty-one customer-financing guarantees totaled approximately $0.5 million, with recorded fair-value liabilities described as insignificant. The company said routine claims and lawsuits were not expected to have a material adverse effect and believed losses would be covered by insurance.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the sharp decline in orders and backlog continued into fiscal 2020, particularly in Europe and Asia Pacific.
- Whether inventory growth, lower turns and negative operating cash flow reversed, and how working-capital needs affected liquidity.
- Whether gross margins recovered as product mix, production levels and competitive pricing changed.
- ProCobots’ contribution to revenue and earnings, and whether the provisional purchase-price allocation or goodwill assessment changed.
- Actual fiscal 2020 capital spending and the balance-sheet impact of lease accounting adoption.
- Currency, tariff, supplier, cybersecurity and tax developments, along with compliance with credit-agreement covenants and dividend conditions.