Hurco Companies, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended April 30, 2015; interim financial statements are unaudited. Hurco designs and sells computerized machine tools, controls and software, and related service and parts to the global metalworking market.
Key financial results
Amounts are in U.S. dollars; income statement and cash flow figures are in millions unless otherwise noted.
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Sales and service fees | $50.2 | $53.7 | $101.2 | $104.7 |
| Gross profit / margin | $16.6 / 33% | $16.6 / 31% | $33.1 / 33% | $30.5 / 29% |
| Operating income | $5.7 | $5.4 | $11.8 | $8.7 |
| Net income | $4.0 | $3.5 | $7.7 | $5.9 |
| Diluted earnings per share | $0.60 | $0.54 | $1.17 | $0.90 |
| Operating cash flow | Not separately emphasized | Not separately emphasized | $14.5 | $6.1 |
- Q2 selling, general and administrative expenses were $10.9 million versus $11.2 million; they were 22% of sales versus 21% a year earlier. Six-month expenses were $21.3 million versus $21.8 million.
- Six-month investing cash outflow was $1.7 million, including $1.1 million of property and equipment purchases and $0.6 million of software development costs. Dividends paid were $1.0 million; dividends per share were $0.15 versus $0.12 in the prior-year period.
- At April 30, cash and equivalents were $64.7 million, compared with $53.8 million at October 31, 2014. Current assets were $208.8 million and current liabilities $58.4 million. Working capital excluding cash was $85.7 million, down from $90.1 million at October 31.
- Debt was $3.2 million, all under the China credit facility; no borrowings were outstanding under other facilities. The company reported $18.5 million of unused credit facilities and compliance with all covenants. Total assets were $234.4 million and shareholders’ equity was $170.4 million.
Material changes and operating trends
- Q2 sales declined 7% year over year. Management attributed the decline to a 12% unfavorable currency translation impact, partly offset by 5% underlying growth. For the six months, sales declined 3%, reflecting 6% growth offset by a 9% currency impact.
- Q2 North American sales rose 12%, while European sales fell 8% as 9% growth was more than offset by a 17% currency impact. Asia Pacific sales fell 32%, primarily reflecting softer conditions in China. For the six months, North American sales were essentially flat, European sales decreased 1%, and Asia Pacific sales decreased 27%.
- Orders were $53.1 million in Q2, down 1% year over year; underlying growth of 12% was offset by a 13% currency impact. Six-month orders were $98.1 million, down 11%, reflecting a 2% reduction and 9% negative currency impact. Six-month European orders fell 20%, and Asia Pacific orders fell 15%; North American orders rose 14%.
- Management credited higher sales of higher-performance machines, particularly in Europe and North America, for stronger gross margins and operating income. Q2 gross profit was nearly unchanged in dollars, while the margin increased to 33% from 31%; six-month gross profit rose to $33.1 million from $30.5 million.
- Foreign exchange remained significant: approximately 72% of first-half revenue came from foreign markets. First-half foreign currency translation contributed to a $4.0 million other comprehensive loss. Currency-forward contracts reduced exposure but do not eliminate it.
Outlook, risks and contingencies
- The filing provides no quantified revenue or earnings guidance. Management said cash and available borrowing capacity were adequate to fund operations and its strategic focus on product innovation and targeted growth in developing markets. It continued to review potential acquisitions, including intellectual property assets.
- Key cited risks include the cyclical machine-tool market, uncertain economic conditions—particularly in Europe—currency movements, dependence on a limited number of manufacturing sources, competition, raw-material costs, technology and product-development needs, and risks from international operations and acquisitions.
- As of April 30, 19 customer-financing payment guarantees totaled approximately $1.5 million; related accrued liabilities were described as insignificant. Warranty reserves were $2.1 million, up from $1.8 million a year earlier; management cited higher sales and a greater mix of higher-performance machines with higher claim costs.
- The company reported ordinary-course claims and lawsuits and did not expect them to have a material adverse effect; it believed losses would not exceed insurance coverage. No material changes to reported risk factors or contractual commitments were disclosed.
- The six-month effective tax rate increased to 34% from 30%, primarily due to changes in the geographic mix of income. Unrecognized tax benefits, including accrued interest, were $1.1 million.
- Management concluded disclosure controls were effective as of April 30, 2015, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether order trends and underlying demand—especially in Europe and China—improve, and how orders convert into sales.
- The extent to which currency movements continue to affect reported revenue, margins, earnings and accumulated other comprehensive loss; also review forward-contract maturities and hedge results.
- Whether higher-performance machine mix can sustain gross margins as sales volumes and regional demand change.
- Cash generation, inventory and receivables trends, and continued compliance with credit-facility covenants and dividend limits.
- Warranty claim experience, customer-financing guarantees, tax exposures and the outcome of ordinary-course legal matters.