Hurco Companies, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 31, 2018; comparative period is the three months ended January 31, 2017. Hurco designs, manufactures, and sells CNC machine tools and related products and services worldwide. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Sales and service fees | $68.4 | $48.7 | +40% |
| Gross profit / margin | $20.1 / 29% | $12.6 / 26% | Margin +3 percentage points |
| Operating income / margin | $7.2 / 10% | $1.4 / 3% | Higher by $5.7 |
| Net income | $2.9 | $0.9 | Higher by $2.1 |
| Diluted EPS | $0.43 | $0.13 | +$0.30 |
| Cash provided by operations | $14.5 | $16.0 | Down $1.5 |
Gross-margin improvement reflected higher sales volume, particularly of Hurco machines in Europe, and favorable currency translation. SG&A was $13.0 million, up from $11.2 million, but declined to 19% of sales from 23%.
Orders, regions, and liquidity
- Quarterly orders reached a record $76.9 million, up 26% year over year; reported orders included a favorable $5.0 million currency impact. Europe orders rose 37%, Asia Pacific 46%, and Americas 1%.
- Sales increased in all regions: Europe +50% to $38.3 million, Asia Pacific +41% to $9.1 million, and Americas +26% to $21.0 million. Foreign currency translation contributed $4.4 million to reported sales growth.
- Cash and cash equivalents were $80.2 million at January 31, 2018, versus $66.3 million at October 31, 2017. Working capital was $183.2 million, compared with $175.5 million.
- Operating cash flow was $14.5 million; investing cash outflow was $1.4 million and financing cash outflow was $0.7 million. Capital expenditures and software development costs totaled approximately $1.5 million.
- Debt was $1.6 million under the China credit facility; no borrowings were outstanding under other facilities. Available credit was $19.9 million, and the company reported compliance with its covenants. The U.S. revolving facility was scheduled to mature December 31, 2018.
- Quarterly dividend was $0.10 per share, versus $0.09 a year earlier.
Taxes, unusual items, and outlook
- The effective tax rate was 61%, versus 38% a year earlier. Q1 FY2018 tax expense included provisional, one-time charges of $2.5 million for the Tax Reform Act transition tax on deemed repatriated foreign earnings and $0.4 million for remeasurement of deferred tax balances. The transition-tax estimate remained subject to adjustment during the measurement period.
- Management stated that, excluding these tax charges, diluted EPS would have been $0.43 higher than reported. The filing does not provide a separately stated adjusted EPS figure.
- Foreign currency affected sales, expenses, earnings, cash, and comprehensive income. Other comprehensive income included a $5.1 million currency translation gain, while derivative positions produced gains and losses; cash-flow hedge losses were largely expected to be recognized in cost of sales through January 2019.
- Management said cash and borrowing capacity were adequate for operations over the next 12 months and supported product innovation and targeted expansion in developing markets. It provided no quantified sales or earnings guidance and said it continued to review potential acquisitions.
- Principal risks cited include machine-tool industry cyclicality, uncertain regional demand, international operations and currency movements, reliance on a limited number of manufacturing sources, input-cost increases, competition, technology obsolescence, and tax or regulatory changes.
Other matters
The company reported 27 customer-financing guarantees totaling approximately $1.0 million, with related accrued liabilities described as insignificant. Warranty reserves rose to $2.0 million from $1.8 million; management attributed the increase primarily to higher unit sales and a shift toward more complex, higher-performance machines. Ordinary-course litigation was not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether record orders convert into sustained sales and margins, particularly in Europe and Asia Pacific.
- How much reported growth and earnings remain after currency effects and the unusual tax charges.
- Final measurement-period adjustments to the $2.5 million transition-tax estimate and deferred-tax remeasurement.
- Foreign-exchange exposure, hedge outcomes, and the timing of deferred hedge losses entering cost of sales.
- Inventory growth, cash conversion, customer demand, and renewal or replacement of credit facilities as maturities approach.