Hurco Companies, Inc. — Q2 FY2016 Form 10-Q
Business and period: Hurco designs, manufactures and sells CNC machine tools and related parts, software, service and support to the metal-cutting industry. This unaudited report covers the quarter and six months ended April 30, 2016; comparisons are with the same periods in 2015. All dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Sales and service fees | $52.0 | $50.2 | $108.5 | $101.2 |
| Gross profit / margin | $16.6 / 32% | $16.6 / 33% | $34.3 / 32% | $33.1 / 33% |
| Operating income | $4.7 | $5.7 | $10.4 | $11.8 |
| Net income | $3.7 | $4.0 | $7.6 | $7.7 |
| Diluted EPS | $0.56 | $0.60 | $1.14 | $1.17 |
| Operating cash flow | $(6.2) | $6.0 | $(6.9) | $14.5 |
- Q2 revenue rose 4% as reported and 5% excluding a $0.7 million unfavorable currency impact. First-half revenue rose 7% as reported and 11% excluding a $4.0 million unfavorable currency impact.
- First-half orders were $104.5 million, versus $98.1 million, up 10% excluding currency impact. Q2 orders were nearly flat at $53.2 million versus $53.1 million; excluding currency impact, they increased 1%.
- Cash and cash equivalents were $45.3 million at April 30, down from $55.2 million at October 31, 2015. First-half cash use reflected, among other items, a $16.3 million increase in inventories. Inventories were $122.7 million, up from $106.3 million.
- Working capital excluding cash was $110.1 million, compared with $95.8 million at October 31, 2015. Current assets were $221.2 million and current liabilities $65.8 million.
- Debt was $1.5 million, all under the China facility; no borrowings were outstanding under the other facilities. Hurco reported $20.3 million of unused credit facilities and compliance with covenants. Its U.S. revolving facility was scheduled to mature December 7, 2016.
- Dividends paid were $0.09 per share in Q2 and $0.17 per share for the first half. Capital expenditures and software development costs totaled $2.3 million in the first half.
Material changes and management commentary
- Reported revenue growth included contributions from Milltronics and Takumi, acquired in July 2015: together they contributed $4.5 million of Q2 sales and $15.5 million in the first half. Management cited broader product range, customer reach and potential manufacturing efficiencies as strategic benefits.
- Operating income and earnings declined despite higher revenue. Management attributed lower gross margin to the mix of lower-priced Milltronics and Takumi products, pricing pressure and currency effects; higher SG&A also reflected acquisition-related costs.
- Underlying regional demand was uneven. Q2 North American orders fell 23% including Milltronics, and declined 40% excluding Milltronics. First-half non-Takumi Asian Pacific orders fell 19%, with weaker demand in China and Southeast Asia. European first-half orders increased 4% as reported, or 9% excluding currency.
- The first-half effective tax rate was 28%, versus 34% in the prior year, primarily because of changes in the geographic mix of income and loss.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said cash and borrowing capacity were adequate to fund operations and support product innovation and targeted expansion in developing markets; it also continued to review potential acquisitions.
- Key disclosed risks include cyclical machine-tool demand, uncertain economic conditions—particularly in Europe and Asia—foreign exchange movements, dependence on limited manufacturing sources, competitive and pricing pressures, input costs, technology and product-development needs, and acquisition integration and execution.
- Foreign-market exposure was significant: approximately 69% of first-half revenue came from foreign markets. Cash totaled $45.3 million, of which approximately 29% was denominated in U.S. dollars. Foreign-currency forwards had $126.0 million of U.S.-dollar-equivalent notional value; derivative liabilities were $2.3 million versus derivative assets of $0.6 million.
- Hurco had 16 customer-financing payment guarantees totaling approximately $1.1 million; related accrued liabilities were described as insignificant. Management did not expect ordinary-course claims or litigation to have a material adverse effect and believed losses would not exceed insurance coverage.
- First-half operating cash flow was negative, alongside inventory growth. Management identified increased inventories as the primary reason working capital excluding cash rose.
Important facts for investors to verify
- Whether order trends—especially North America excluding Milltronics and Asia Pacific excluding Takumi—improved after quarter-end, and how orders convert into shipments.
- Whether inventory growth is supported by demand and can be converted to cash without discounting or excess-stock charges.
- How acquisition contributions, product mix, pricing and related expenses affect margins and operating income in subsequent quarters.
- Available liquidity and covenant headroom, including the status and terms of the U.S. credit facility approaching its December 2016 maturity.
- Potential effects of currency movements and outstanding hedges, including losses deferred in accumulated other comprehensive loss.