Hurco Companies, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended July 31, 2018; comparative periods ended July 31, 2017. Amounts below are in U.S. dollars. Hurco designs, manufactures and sells CNC machine tools, controls, parts and related services globally as a single industrial-automation segment.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Sales and service fees | $78.8 million | $60.8 million | $217.6 million | $167.7 million |
| Gross profit / margin | $24.5 million / 31% | $17.5 million / 29% | $64.0 million / 29% | $47.2 million / 28% |
| Operating income | $9.4 million | $5.1 million | $22.5 million | $11.9 million |
| Net income | $6.5 million | $3.9 million | $13.2 million | $8.4 million |
| Diluted EPS | $0.95 | $0.58 | $1.93 | $1.25 |
| Orders booked | $76.0 million | $62.5 million | $232.8 million | $186.9 million |
| Operating cash flow | $4.0 million | $2.0 million | $17.5 million | $24.2 million |
Q3 sales rose 30%, operating income 82% and net income 67% year over year. For the nine-month period, sales increased 30%, operating income 89% and net income 57%. Q3 sales benefited from $1.8 million of favorable currency translation; nine-month sales benefited by $11.1 million. Gross margin improvement reflected greater machine volume, especially Hurco machines in Europe, and currency effects.
For the nine months, selling, general and administrative expense was $41.4 million, or 19% of sales, versus $35.3 million, or 21%, a year earlier. Management attributed the increase in expense dollars mainly to global marketing, employee incentive compensation and unfavorable currency translation. The nine-month effective tax rate was 40%, compared with 29%; Q3 rates were 28% and 26%, respectively.
Balance sheet, cash flow and liquidity
- At July 31, 2018, cash and cash equivalents were $77.0 million, up from $66.3 million at October 31, 2017; approximately 64% was denominated in U.S. dollars.
- Working capital was $189.5 million, compared with $175.5 million at October 31, 2017. Current assets were $273.0 million and current liabilities $83.5 million.
- Nine-month operating cash flow was $17.5 million, down from $24.2 million. The filing highlights inventory growth as a cash use: inventories increased $17.4 million in the cash-flow statement, and the balance-sheet inventory total rose to $135.9 million from $119.9 million.
- Nine-month investing cash outflow was $4.5 million, including $2.8 million of property and equipment purchases and $1.7 million of software development costs. Financing cash outflow was $2.0 million, including $2.2 million in dividends.
- Debt was $1.5 million under the China credit facility; the company reported no borrowings under its other facilities. It had $19.5 million of unused credit capacity and was in compliance with covenants. The U.S. revolving facility was scheduled to mature December 31, 2018.
- Total shareholders’ equity was $216.1 million. Dividends paid were $0.11 per share in Q3 and $0.32 per share for the nine months.
Business trends and material changes
- Q3 sales increased across all regions: Americas +13%, Europe +31%, and Asia Pacific +55%. For the nine months, the increases were 20%, 33%, and 40%, respectively. Europe represented 55% of nine-month sales.
- Q3 orders grew 21% year over year; nine-month orders grew 25%. Nine-month orders exceeded sales by approximately $15.2 million. The filing does not provide a clear backlog value.
- Computerized machine tools accounted for 87% of nine-month revenue and grew 33%. Management cited demand for vertical milling and lathe machines across regions, particularly in Europe; aftermarket parts and service also increased.
- Foreign customers generated approximately 71% of nine-month revenue, exposing results to currency movements. The company uses foreign-exchange forward contracts to hedge forecast transactions, receivables/payables and a portion of its euro net investment.
Outlook, risks and unusual items
- No numerical revenue, earnings or orders guidance is provided. Management said cash and available borrowing capacity should fund operations for the next twelve months and support product innovation and targeted expansion in developing markets. The company continues to review potential acquisitions.
- The nine-month tax expense included provisional, one-time Tax Cuts and Jobs Act charges of $2.5 million for deemed repatriation and $0.4 million for remeasurement of deferred tax assets. Management said the accounting remained subject to measurement-period adjustments; excluding these charges, diluted EPS would have been $0.43 higher.
- Management identified machine-tool industry cyclicality, uncertain economic conditions, international operations and currency movements, limited manufacturing and supply sources, raw-material costs, technology and product-development needs, competition, cybersecurity, tariffs and tax-law changes among relevant risks. No material changes to the prior 10-K risk factors were reported.
- There were 23 customer-financing guarantees totaling approximately $0.6 million; recorded liabilities were described as insignificant. Routine claims and litigation were not expected to have a material adverse effect, and management believed losses would not exceed insurance coverage.
- The Tax Reform Act’s remaining provisions, including certain deduction changes, were expected to take effect for Hurco beginning in fiscal 2019. The company expected the new revenue-recognition standard, effective in fiscal 2019, to have an overall immaterial impact.
Important facts for investors to verify
- Whether order growth converts into shipments and revenue, and the company’s subsequent backlog and regional demand trends.
- Whether elevated inventories and lower year-to-date operating cash flow normalize as sales grow.
- The effect of currency changes on reported growth, gross margins and hedge results.
- Final Tax Reform Act accounting and the ongoing effective tax rate after one-time charges.
- Renewal or replacement terms for the U.S. credit facility approaching its December 2018 maturity.