Hurco Companies, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended October 31, 2017. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Hurco designs, manufactures and sells CNC machine tools and related software, parts and services. Its single reportable segment serves metal-cutting customers worldwide.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Sales and service fees | $243.7 million | $227.3 million | +7% |
| Gross profit / margin | $70.6 million / 29% | $70.4 million / 31% | Margin down 2 percentage points |
| SG&A expenses | $49.7 million | $50.8 million | Down 2% |
| Operating income / margin | $20.9 million / 9% | $19.6 million / 9% | +7% |
| Net income | $15.1 million | $13.3 million | +14% |
| Diluted EPS | $2.25 | $1.99 | +13% |
| Cash provided by (used in) operations | $30.4 million | ($6.7 million) | Improved by $37.1 million |
Fourth-quarter FY 2017 sales were $75.9 million, gross margin 31%, operating income $9.0 million and net income $6.7 million (diluted EPS $1.00). Quarterly sales and earnings were higher than in each of the first three quarters.
Liquidity, debt and capital
- Cash and cash equivalents were $66.3 million at year-end, up from $41.2 million; management attributed the increase mainly to lower inventory and receivables, excluding currency effects.
- Working capital was $175.5 million, with a reported current ratio of 3.5. Inventory was $119.9 million, up from $117.0 million; inventory turns improved to 1.5 from 1.4.
- Total debt was $1.5 million, borrowed under the China facility; no other credit-facility borrowings were outstanding. Hurco reported $19.6 million of available borrowing capacity and compliance with its credit covenants.
- FY 2017 capital expenditures were approximately $4.4 million. Management expected FY 2018 capital spending of approximately $8.7 million, funded from cash and operating cash flow.
- Cash dividends paid were $2.6 million; dividends declared were $0.39 per share. The U.S. credit agreement limits annual cash dividends to $5.0 million, subject to its terms.
Changes, outlook and risks
- Orders increased 19% to $260.6 million; year-end backlog rose to $52.0 million from $32.3 million. The company expects that backlog to be fulfilled in FY 2018, but cautions that backlog is not necessarily indicative of future performance.
- Sales grew in all reported regions: Americas 2%, Europe 8% and Asia Pacific 20%. Asia Pacific orders rose 42%. Approximately 71% of revenue came from customers outside the U.S.; Europe represented approximately 55% of revenue.
- Despite higher sales, gross margin fell from 31% to 29%, primarily due to currency translation and a greater mix of entry-level machines in price-competitive regions. Lower SG&A, including reduced trade-show expenses, supported higher operating income.
- The effective tax rate declined to 27% from 30%, mainly reflecting the geographic mix of earnings. U.S. tax legislation enacted in December 2017 could materially affect tax expense, effective tax rate and cash flow; the company was still assessing the impact and provided no clear quantified estimate.
- Management said cash and borrowing capacity were adequate for the next 12 months, dividends and its product-innovation and market-expansion plans. No specific earnings or revenue guidance was provided.
- Principal risks include cyclical machine-tool demand and short order visibility, international and foreign-exchange exposure, dependence on manufacturing sites and key suppliers, competition, raw-material costs, product-development execution, inventory obsolescence and changing tax rules. Hurco uses currency forwards but says hedging may not fully offset exposure.
- Twenty-seven customer-financing guarantees totaled approximately $1.0 million; recorded liabilities were described as insignificant. Ordinary-course litigation was not expected to have a material adverse effect. The independent auditor issued unqualified opinions, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the strong order growth and $52.0 million backlog converted to FY 2018 revenue, given the company’s warning that backlog is a weak predictor.
- Whether gross margin recovered or remained pressured by product mix, regional pricing and currency movements.
- The final effects of the December 2017 U.S. tax legislation, including on foreign earnings and cash flow; the filing does not provide a clear quantified impact.
- Execution and funding of the approximately $8.7 million FY 2018 capital-spending plan, and the effect of the credit-facility maturities and covenant restrictions.
- Inventory quality and turnover, and exposure to manufacturing interruptions, suppliers, foreign exchange and customer-financing guarantees.