Hurco Companies, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012. The filing was signed January 11, 2013. Hurco designs and sells computerized machine tools and related controls, software, parts and service to the global metalworking industry; it reports one operating segment.
Financial performance and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Sales and service fees | $203.1 million | $180.4 million | +12.6% |
| Gross profit / margin | $63.2 million / 31.1% | $55.9 million / 31.0% | +13.1% gross profit |
| Operating income / margin | $22.0 million / 10.8% | $17.4 million / 9.6% | +26.7% |
| Net income | $15.6 million | $11.1 million | +40.6% |
| Diluted EPS | $2.40 | $1.71 | Up $0.69 |
| Cash from operations | $(7.0) million | $(1.2) million | Greater cash use |
Annual revenue growth reflected higher customer demand across regions and higher machine-tool sales. A stronger U.S. dollar reduced the year-over-year reported sales comparison by approximately $7.6 million, or 4%. SG&A increased 6.9% to $41.2 million, but declined to 20.3% of revenue from 21.3%; management attributed operating-income improvement chiefly to higher sales and cost leverage. The effective tax rate was 28.5%.
In the fourth quarter, sales and service fees were $56.1 million versus $48.6 million a year earlier; gross margin was 30.7% versus 32.3%; operating income was $5.35 million versus $4.59 million; net income was $4.09 million versus $2.65 million; and diluted EPS was $0.63 versus $0.41.
At year-end, cash and cash equivalents were $35.8 million, down from $45.0 million. Current assets were $173.4 million, current liabilities $49.4 million, working capital $124.0 million, and the current ratio 3.5. Inventory rose to $91.3 million from $81.1 million, mainly to support sales; receivables also rose with volume. Operating cash use reflected working-capital demands, including inventory and receivables increases and changes in payables.
Total debt was $3.2 million, all short-term borrowings in China, compared with $0.9 million a year earlier. The company reported $25.2 million of unused borrowing capacity under its facilities at October 31 and compliance with its covenants. A December 7, 2012 agreement replaced the principal revolving facility with a $12.5 million unsecured revolver and letter-of-credit facility, maturing December 7, 2014. It requires minimum working capital of $90 million and tangible net worth of $120 million. Capital expenditures were $3.7 million in FY2012.
Material changes and operating indicators
- Revenue increased in all reported regions: North America +21.9%, Europe +7.5% as reported (13.3% excluding adverse currency translation), and Asia Pacific +18.0%. Europe represented 58.8% of revenue; approximately 70% of revenue came from overseas customers.
- Computerized machine tools generated $179.3 million, or 88.3% of revenue, up 14.4%. Parts, service fees and other revenue totaled $23.8 million, up 0.5%.
- New order bookings were $198.1 million, up just 0.6%; orders increased in North America but declined in Europe and Asia Pacific. Year-end backlog fell to $25.8 million from $31.9 million and was expected to be fulfilled in FY2013. Management cautioned that backlog is not considered a reliable indicator of future performance.
- Management reported China unit sales growth of more than 50% year over year and introduced new high-speed, five-axis, horizontal and other machine products at the September 2012 industry show.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said cash and borrowing capacity were adequate for operations over the next twelve months and supported continued product innovation and targeted expansion in developing markets. FY2013 capital spending was expected to be approximately $4.6 million, funded from cash and operating cash flows.
- Demand is cyclical and can change abruptly; management highlighted economic uncertainty, particularly in Europe, where Hurco sells many higher-performance machines. The typical order backlog is only about 30–45 days, limiting visibility.
- Key exposures include foreign-exchange movements (partly hedged with forwards), steel and iron prices, international trade and regulatory risks, and reliance on manufacturing operations in Taiwan and China and key suppliers. Most machine tools are produced in Taiwan; disruption or natural disaster could materially affect operations.
- Inventory obsolescence, product-development execution, competition from larger manufacturers, deferred-tax-asset realization, and potential asset impairment are additional disclosed risks. Approximately $48.7 million of foreign-subsidiary earnings was treated as indefinitely reinvested abroad.
- Off-balance-sheet customer-financing guarantees covered 19 transactions totaling approximately $1.1 million. Product warranty reserves were $1.6 million. The company said ordinary-course claims and lawsuits were not expected to have a material adverse effect.
- Hurco purchased $10.2 million of products from its 35%-owned Taiwan affiliate in FY2012. The filing reported unqualified audit opinions on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the revenue and earnings recovery is sustainable given modest order growth, declining backlog, and the company’s short order visibility.
- Whether working-capital investment—especially inventory and receivables—converts back into positive operating cash flow.
- How Europe’s economic conditions, foreign-exchange rates and currency hedges affect reported sales, margins and cash flows.
- Whether the $12.5 million credit facility’s working-capital and tangible-net-worth covenants remain comfortably satisfied.
- Whether inventory quality, warranty experience, manufacturing continuity in Taiwan and China, and purchases from the related-party affiliate present changing risks.
- Potential U.S. tax consequences if foreign earnings currently treated as permanently reinvested are repatriated.