Hurco Companies, Inc. — Q1 FY2013 Form 10-Q
Business context and reporting period: The quarter ended January 31, 2013. Hurco designs and sells computerized machine tools, control systems and software, and related parts and services for the global metal-cutting market. It reports one operating segment. Financial statements are unaudited; amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales and service fees | $44.1 million | $51.1 million | Down 14% |
| Gross profit / margin | $12.9 million / 29% | $16.5 million / 32% | Margin down 3 percentage points |
| Operating income / margin | $4.0 million / 9% | $6.8 million / 13% | Down 41% |
| Net income | $2.3 million | $4.6 million | Down 51% |
| Diluted earnings per share | $0.34 | $0.71 | Down $0.37 |
| Operating cash flow | $4.1 million | $(1.9) million | Improved |
- Orders rose 5% to $51.1 million, despite lower reported sales. Management attributed the sales decline primarily to shipment timing, particularly in Europe; currency translation had no material effect on the comparison.
- Sales of computerized machine tools fell 17%; service, parts and other revenue increased 14%. Europe sales declined 18%, Asia Pacific declined 46%, and North America increased 6%.
- SG&A decreased 8% to $8.9 million, mainly due to lower variable costs, including commissions and sales and marketing expenses. Other expense was $259,000, compared with other income of $138,000 a year earlier, primarily reflecting foreign-currency effects.
- The effective tax rate was 39%, versus 33%, mainly due to changes in the geographic mix of income. Cash and cash equivalents were $39.1 million at January 31, compared with $35.8 million at October 31, 2012. Working capital excluding cash was $86.6 million.
- Cash provided by operations was $4.1 million; investing activities used $866,000, including $531,000 for property and equipment and $305,000 for software development. Cash ended the quarter at $39.1 million.
- Borrowings were $3.2 million, all under the China facility; no borrowings were outstanding under other facilities. The company reported $22.7 million of unused credit facilities and compliance with its covenants. Net cash exceeded reported borrowings by approximately $35.9 million.
Outlook, risks and unusual items
- No specific revenue, earnings or other numerical guidance is provided. Management said cash and borrowing capacity were adequate for operations and its strategy of product innovation and targeted expansion in developing markets.
- Management cited shipment timing as the main explanation for the year-over-year sales decline; orders increased. The filing does not quantify future shipment timing or provide a forecast for demand.
- Key disclosed risks include the cyclical machine-tool industry, uncertain economic conditions—particularly in Europe—international operations and foreign-exchange fluctuations, reliance on a limited number of manufacturing sources, product-development and technology risks, competition, raw-material costs, and possible tax or regulatory changes.
- Hurco uses foreign-currency forward contracts. At quarter-end, derivative liabilities were $2.9 million, versus $569,000 at October 31, 2012; management noted that currency movements can affect reported results and cash flows.
- The company had 18 customer-financing payment guarantees totaling approximately $1.1 million. It reported no expectation that ordinary-course claims and lawsuits would materially affect its financial position or results.
- Warranty reserves were $1.6 million, down from $1.8 million a year earlier; the filing attributes the decrease to lower-than-anticipated claims on specific prior-year accruals. The new unsecured revolving credit and letter-of-credit facility has a $12.5 million capacity and matures December 7, 2014.
Important facts for investors to verify
- Whether the increase in orders converts into shipments and revenue, particularly in Europe, and whether the stated shipment-timing effect reverses.
- Whether gross margin recovers from 29% and the extent to which lower sales, product mix, pricing or manufacturing utilization affected profitability.
- How foreign-exchange movements and outstanding hedges affect subsequent earnings, margins and other comprehensive income.
- Whether cash, available credit and covenant compliance remain adequate, including the terms and ongoing use of the China facility.
- Whether warranty claims and the $1.1 million of customer-financing guarantees result in costs beyond recorded reserves.