Hurco Companies, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2015, ended July 31, 2015. Hurco designs and manufactures computerized machine tools and controls, and provides related parts, software, service and training. It operates as a single industrial automation systems segment and sells worldwide.
Financial performance
| Metric | Three months ended July 31, 2015 | Nine months ended July 31, 2015 |
|---|---|---|
| Sales and service fees | $52.5 million, down 5% year over year | $153.7 million, down 4% |
| Gross profit and margin | $16.6 million; 32% (vs. $18.0 million; 33%) | $49.7 million; 32% (vs. $48.6 million; 30%) |
| Operating income | $5.3 million (vs. $6.1 million) | $17.1 million (vs. $14.9 million) |
| Net income | $3.7 million (vs. $4.4 million); diluted EPS $0.55 (vs. $0.66) | $11.4 million (vs. $10.3 million); diluted EPS $1.72 (vs. $1.56) |
| Operating cash flow | $6.4 million (vs. $6.1 million) | $20.9 million (vs. $12.1 million) |
Quarterly revenue declined despite 6% underlying growth, as currency translation reduced reported sales by $6.2 million, or 11%. For the nine-month period, underlying growth was 6%, offset by a $16.1 million, or 10%, currency headwind. In the quarter, foreign exchange translation also reduced gross margin, while pricing pressure in North America and Europe contributed to the margin decline. Year-to-date margin improved, primarily from a higher mix of higher-performance machines.
For the first nine months, investing cash outflow was $20.2 million, including $17.7 million for acquisitions; financing cash outflow was $2.9 million, including $1.5 million of dividends and $1.6 million of debt repayment. Cash fell $3.8 million from October 31, 2014 to $50.0 million. Capital expenditures, excluding acquisitions, were $2.5 million.
Financial position and liquidity
- At July 31, 2015, cash was $50.0 million; current assets were $213.3 million and current liabilities $62.4 million. Working capital excluding cash was $100.9 million, up from $90.1 million at fiscal year-end, primarily due to acquired inventories.
- Inventory was $112.0 million, up from $96.0 million at October 31, 2014. Total shareholders’ equity was $171.7 million.
- Debt was $1.6 million under the China credit facility, down from $3.3 million at fiscal year-end. The company reported $20.5 million of unused credit facilities and compliance with all credit covenants. Its U.S. revolving facility matures in December 2016.
- The company reported dividends of $0.08 per share for the quarter and $0.23 per share year to date.
Material changes and notable items
- Hurco acquired the machine-tool businesses of Milltronics and Taiwan-based Takumi in July 2015 for purchase prices of $12.5 million and $5.1 million, respectively. Preliminary purchase accounting identified no goodwill or intangibles, but allocations remain subject to change. The acquisitions broadened the portfolio to more than 150 models. Post-acquisition revenues through July 31 were $0.9 million for Milltronics and $0.1 million for Takumi.
- Third-quarter orders were $62.8 million, including $14.3 million associated with the acquired businesses. Excluding those businesses, orders declined 14% year over year. Nine-month orders were $160.9 million; excluding acquisitions, they declined 12%. Weakness in Europe and Asia, as well as currency translation, weighed on orders.
- Management recorded $0.4 million, net of tax, of out-of-period corrections in the quarter, increasing current-period net assets and income. The corrections related primarily to prior-period manufacturing overhead errors at a foreign subsidiary. Management concluded the errors were not material to prior periods and did not require restatement.
- Quarterly SG&A included approximately $0.9 million related to Milltronics and Takumi, including $0.6 million of one-time acquisition costs. Year-to-date acquisition-related SG&A was approximately $1.0 million, including $0.7 million of one-time costs.
- Foreign-currency translation losses contributed to other comprehensive loss of $4.0 million year to date. The company uses foreign-exchange forwards to manage currency exposures; derivative notional amounts totaled $109.5 million at July 31.
Outlook, risks and contingencies
No quantified revenue or earnings guidance is provided. Management said cash and available borrowing capacity should provide adequate liquidity to fund operations and support product innovation and targeted expansion in developing markets. It continues to review potential acquisitions. Management cited expected benefits from broader product offerings, shared engineering resources and manufacturing efficiencies, while integration and realization of those benefits remain execution considerations.
Key stated risks include the cyclical machine-tool market, uncertain economic conditions—particularly in Europe—foreign-exchange fluctuations, international operations, reliance on a limited number of manufacturing sources, competition, input-cost increases, technology development and obsolescence, and acquisition integration. Approximately 71% of first-nine-month revenue came from foreign markets. The company had 17 customer-financing payment guarantees totaling approximately $1.3 million; accrued liabilities were insignificant. Management did not expect pending ordinary-course claims to have a material adverse effect and believed losses would not exceed insurance coverage. Disclosure controls were assessed as effective; acquired businesses were excluded from the current internal-control evaluation while integration work proceeds.
Important facts for investors to verify
- Whether order trends, especially in Europe and Asia, improve and how much reported performance continues to be affected by currency movements.
- Final purchase-price allocations for Milltronics and Takumi, integration progress, and whether anticipated portfolio and cost benefits are realized.
- The effect of the $0.4 million out-of-period correction on comparability and the company’s assessment that prior periods were not materially misstated.
- Inventory growth, cash conversion and liquidity after acquisition spending, alongside the limited outstanding debt and available credit capacity.
- Exposure to foreign exchange, pricing pressure, and the higher warranty costs associated with sales of higher-performance machines.