Hurco Companies, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. The filing is an annual report, not a standalone quarterly filing; fourth-quarter figures are included below where relevant. Hurco designs and sells CNC machine tools, controls, software, components and related services worldwide.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Sales and service fees | $192.8 million | $203.1 million |
| Gross profit / margin | $55.1 million / 29% | $63.2 million / 31% |
| Operating income / margin | $13.6 million / 7% | $22.0 million / 11% |
| Net income | $8.2 million | $15.6 million |
| Diluted EPS | $1.25 | $2.40 |
| Cash from operations | $14.4 million | $(7.0) million |
| Cash and cash equivalents | $42.8 million | $35.8 million |
| Total debt | $3.7 million | $3.2 million |
| Working capital / current ratio | $129.3 million / 3.3 | $124.0 million / 3.5 |
Capital expenditures were $2.4 million, funded with operating cash flow. Inventory was $95.3 million, up from $91.3 million, and inventory turns declined from 1.5 to 1.4. The company paid dividends of $0.10 per share in FY2013, beginning quarterly distributions during the year.
FY2013 fourth quarter: Sales were $53.9 million, gross margin 28%, operating income $3.3 million, net income $1.9 million and diluted EPS $0.29. In the prior-year fourth quarter, sales were $56.1 million, gross margin 31%, operating income $5.4 million, net income $4.1 million and diluted EPS $0.63.
Changes versus the prior year
- Annual sales declined 5%; computerized machine-tool sales fell 7%, while parts, service fees and other revenue increased 9%.
- Europe sales fell 4% and Asia-Pacific sales fell 26%; North America was essentially flat. Management attributed the overall decline chiefly to weak European conditions and continued Asia-Pacific weakness.
- Gross margin fell two percentage points, reflecting lower volume, European pricing pressure and less absorption of fixed costs. Operating income declined 38% and net income declined 48%.
- Other expense increased, primarily because of higher foreign-currency losses. The effective tax rate rose to 34% from 28%, mainly due to valuation allowances on tax-loss and credit carryforwards.
- Operating cash flow improved to $14.4 million from a $7.0 million outflow in FY2012. Cash increased by $7.0 million during the year.
Business developments, outlook and risks
- Hurco acquired an Italian machine-tool components business in July 2013 and operates it as LCM. LCM contributed $2.4 million of sales after acquisition; Hurco recorded approximately $0.7 million of acquisition-related costs. Acquisition-related goodwill was approximately $2.5 million.
- FY2013 order bookings were $197.9 million, approximately level with FY2012; LCM orders offset lower orders in other product lines. Backlog was $31.3 million at year-end, including $3.3 million for LCM, and was expected to be fulfilled in FY2014. Management cautions that backlog is not a reliable indicator of future performance.
- No formal revenue or earnings guidance is provided. Management expects FY2014 capital spending of approximately $3.5 million, including software, equipment and continued implementation of an integrated computer system. It considers cash and borrowing capacity adequate for the next twelve months, operations, dividends and planned investment.
- Liquidity includes a $12.5 million unsecured revolving credit and letter-of-credit facility, subject to working-capital and tangible-net-worth covenants. Hurco reported covenant compliance and $22.8 million of available borrowing capacity at year-end. The facility’s stated maturity was December 7, 2014.
- Key risks include the cyclical machine-tool market, particular exposure to Europe, international operations and currency movements, concentrated manufacturing and supplier dependencies, competition from larger companies, raw-material costs, product obsolescence and acquisition integration. Hurco uses foreign-exchange forwards but cannot eliminate currency risk.
- Off-balance-sheet customer-financing guarantees totaled approximately $1.6 million across 20 guarantees. Routine litigation was not expected by management to have a material adverse effect. The warranty reserve was $1.8 million; the filing notes higher-than-expected claims on certain prior-year warranties.
- Management and the auditor reported effective internal control over financial reporting, but the assessment and audit excluded LCM, which represented $12.2 million of assets and $2.4 million of sales from acquisition through year-end. The financial-statement and internal-control audit opinions were unqualified.
Important facts for investors to verify
- Whether demand, pricing and margins recover in Europe and Asia-Pacific, and whether order bookings translate into sales.
- LCM’s ongoing revenue, profitability, integration progress and assumed obligations; reconcile the acquisition disclosures with year-end debt balances.
- Inventory levels and turnover, warranty claims, and cash generation as the company moves into FY2014.
- Compliance with credit-facility covenants, facility availability and maturity, and the sustainability of dividends under the facility’s limits.
- Foreign-currency exposure and hedge effectiveness, deferred tax-asset realizability, and the treatment of foreign earnings described as indefinitely reinvested.