Hurco Companies, Inc. — FY2011 Form 10-K
Business context and reporting period. Hurco designs and sells computerized machine tools, primarily mills and lathes, with proprietary controls and software, plus parts and services. This annual filing covers the fiscal year ended October 31, 2011; it is not a standalone fourth-quarter filing. Hurco operates in one segment and sells through a global distribution and service network. More than 70% of FY2011 revenue came from outside the United States.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Sales and service fees | $180.4 million | $105.9 million |
| Gross profit / margin | $55.9 million / 31.0% | $21.8 million / 20.6% |
| SG&A expenses | $38.5 million | $29.8 million |
| Operating income (loss) | $17.4 million | $(8.0) million |
| Net income (loss) | $11.1 million | $(5.7) million |
| Diluted EPS | $1.71 | $(0.89) |
| Cash from operating activities | $(1.2) million | $21.8 million |
Sales rose 70.4%, reflecting a recovery in global manufacturing, higher demand, and increased production. Management attributed the stronger gross margin to higher sales volume and better production efficiency; higher metal costs and appreciation of the New Taiwan Dollar were offsets. SG&A increased in dollars, mainly from sales commissions, marketing, and compensation, but declined to 21.3% of revenue from 28.2%.
Operating cash flow turned negative despite the return to profitability, primarily as inventory increased to $81.1 million from $55.9 million to support production and demand. Capital expenditures were $2.8 million. Cash and cash equivalents were $45.0 million, versus $48.3 million a year earlier. Working capital was $106.8 million and the current ratio was 2.9, down from 3.2.
Debt was $865,000 at year-end, with no other borrowings; $24.3 million was available under credit facilities, and Hurco reported compliance with facility covenants. Total assets were $186.5 million and shareholders’ equity was $126.2 million. Hurco does not pay a dividend and said it intends to retain earnings for working capital and capital expenditures.
Fiscal 2011 fourth-quarter sales were $48.6 million, gross margin was 32.3%, operating income was $4.6 million, net income was $2.7 million, and diluted EPS was $0.41. In the fourth quarter of FY2010, sales were $34.7 million, gross margin 24.4%, operating loss $0.6 million, net loss $1.2 million, and diluted loss per share $0.18.
Changes versus the prior year
- Hurco returned to profitability after losses in FY2010 and FY2009, with operating income of $17.4 million and net income of $11.1 million in FY2011.
- Order bookings increased 70.8% to $197.0 million. Year-end backlog more than doubled to $31.9 million from $15.6 million; management expected these backlog orders to be fulfilled in FY2012, while cautioning backlog is not necessarily indicative of future performance.
- Revenue increased in all reported regions: North America 78.4%, Europe 69.1%, and Asia Pacific 58.8%. Europe remained the largest market, accounting for 61.6% of revenue.
- Inventory rose $25.3 million, and operating cash flow declined from positive $21.8 million to negative $1.2 million, primarily due to the inventory build and working-capital needs.
Outlook, risks, and unusual items
Hurco gave no specific revenue or earnings guidance. It expected FY2012 capital spending of approximately $2.5 million, funded from cash and operating cash generation. Management described the global demand recovery as substantial but cautioned that sustained recovery was uncertain, particularly given Europe’s sovereign-debt crisis; the company had not returned to pre-recession levels.
- Cyclicality and geographic exposure: Machine-tool demand can fall abruptly. Europe represented about 62% of FY2011 revenue, and more than 70% of revenue was international.
- Manufacturing concentration: Most machines are produced in Taiwan, with operations and suppliers also in China. Political disruption, natural disasters, or supplier interruptions could impair production.
- Currency and input costs: Revenue and costs are exposed to foreign exchange movements, particularly the Euro, Pound Sterling, and New Taiwan Dollar. Forward contracts reduce but do not eliminate exposure. Higher steel and iron costs may pressure margins.
- Inventory and product risks: Changing technology or demand could make inventory excess or obsolete. Warranty costs may also differ from estimates; the year-end warranty reserve was $1.7 million.
- Guarantees and legal matters: There were 23 customer-financing payment guarantees totaling about $1.2 million. Hurco reported ordinary-course claims and lawsuits that it did not expect to materially affect financial position or results.
- Tax and commitments: Foreign earnings of approximately $43.8 million were treated as indefinitely reinvested abroad. The filing identifies tax uncertainty and possible valuation-allowance changes as risks. Contractual obligations totaled $8.4 million, including $6.4 million of operating leases.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the FY2011 demand recovery and $197.0 million of bookings convert into shipments, revenue, and cash during FY2012.
- Whether inventory levels and negative operating cash flow improve as production and sales normalize.
- How Europe’s economic conditions, regional revenue concentration, and foreign-exchange movements affect demand and margins.
- Whether metal costs, production efficiency, warranty claims, and product mix sustain or erode the 31.0% gross margin.
- The renewal and availability of credit facilities, and the potential exposure from customer-financing guarantees and tax matters.