HURCO COMPANIES INC annual report, FY2014

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Hurco Companies, Inc. — FY2014 Form 10-K

Reporting period: Fiscal year ended October 31, 2014; includes unaudited fourth-quarter results. Hurco designs and sells computerized machine tools, controls, software, components, and related services to the global metalworking industry. Approximately 72% of FY2014 revenue came from outside the United States.

Financial performance

  • FY2014 revenue: $222.3 million, up 15% from $192.8 million in FY2013. Growth reflected higher machine-tool volume, a more favorable product mix, LCM component sales, and $3.3 million of favorable currency translation.
  • Profitability: Gross profit was $68.6 million (31% margin), versus $55.1 million (29%) in FY2013. Operating income was $22.0 million (10% margin), versus $13.6 million (7%). Net income was $15.1 million, or $2.30 diluted EPS, compared with $8.2 million, or $1.25 per diluted share.
  • Fourth quarter: Revenue was $62.2 million, gross profit $20.1 million (32% margin), operating income $7.1 million, and net income $4.9 million ($0.74 diluted EPS). In Q4 FY2013, those figures were $53.9 million, $15.1 million (28%), $3.3 million, and $1.9 million ($0.29), respectively.
  • Orders and backlog: FY2014 orders were $232.5 million, up 17%; backlog at year-end was $39.8 million, including $5.2 million for LCM. Management expected year-end backlog to be fulfilled in FY2015 and cautioned backlog is not necessarily indicative of future performance.
  • Cash flow and investment: Operating cash flow was $16.3 million, compared with $14.4 million in FY2013. Investing cash outflow was $2.6 million, including $1.7 million for property and equipment and $1.0 million for software development. Capital expenditures were reported as $2.6 million.
  • Liquidity and debt: Cash and equivalents were $53.8 million, up from $42.8 million. Current assets were $210.8 million and current liabilities $66.8 million; working capital was $144.0 million and the current ratio 3.2. Total debt was $3.3 million, all under the China facility; $18.7 million of borrowing capacity was available. Shareholders’ equity was $164.6 million.
  • Other metrics: SG&A was $46.6 million, or 21% of revenue. The effective tax rate was 29%, down from 34%. Dividends declared were $0.26 per share for FY2014, versus $0.10 in FY2013.

Changes versus the prior year

  • Revenue rose across all reported regions: Europe increased 20%, Asia Pacific 28%, and North America 2% in management’s regional sales table. Europe remained the largest market and principal market for higher-performance machines.
  • Machine-tool sales increased 16% to $193.9 million; service fees, parts, and other revenue increased 9% to $28.4 million.
  • Higher volume and production efficiencies lifted gross margin by about two percentage points. SG&A increased 13%, mainly due to LCM operating costs, trade-show spending, and incentive compensation.
  • Foreign currency losses were lower than in FY2013. A stronger euro and pound also increased reported revenue through translation.
  • Cash increased by $11.0 million. Inventory was broadly flat at $96.0 million, while accounts receivable increased to $45.4 million from $36.1 million.

Outlook, risks, and notable items

  • Management expected FY2015 capital spending of approximately $4.5 million, funded from cash and operating cash flow, and stated liquidity was adequate for the next 12 months, dividends, and planned product innovation and market expansion. No specific revenue or earnings guidance was provided.
  • The business is highly cyclical, with a typical order backlog of about 45 days. Risks include economic weakness—particularly in Europe—foreign-exchange movements, competition, raw-material costs, and dependence on manufacturing in Taiwan, China, and Italy and on key suppliers.
  • Hurco hedges certain currency exposures with forward contracts; hedges may not fully offset currency movements and introduce counterparty risk. Approximately $65.4 million of foreign-subsidiary earnings was treated as indefinitely reinvested offshore.
  • At year-end, customer-financing guarantees totaled approximately $1.5 million across 18 guarantees. Operating lease commitments totaled $9.9 million. Management said ordinary-course litigation was not expected to have a material adverse effect.
  • The company acquired LCM in July 2013 for approximately $5.0 million, including assumed debt; LCM contributed $7.7 million of FY2014 European sales. The filing reported an unqualified audit opinion and effective internal control over financial reporting.

Key investor verification points

  • Track whether FY2015 orders and shipments convert the $39.8 million backlog into sustained revenue and margins; management itself cautioned backlog is not a reliable performance predictor.
  • Assess the durability of FY2014 margin improvement and the contribution of higher-performance machines, LCM, and production efficiencies.
  • Review receivables growth, inventory quality and turnover, and the cash conversion of reported earnings.
  • Evaluate foreign-exchange exposure, hedge coverage and maturities, and the implications of offshore cash and indefinitely reinvested earnings.
  • Confirm ongoing compliance with credit-facility covenants and the dividend allowance, and monitor manufacturing concentration and customer-financing guarantees.