HURCO COMPANIES INC annual report, FY2022

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Business context and reporting period

Hurco Companies, Inc. designs, manufactures, and sells CNC machine tools and related controls, software, automation, parts, and services to the metal-cutting industry. This Form 10-K covers the fiscal year ended October 31, 2022; it is an annual report, not a quarterly filing. Hurco operates as one business segment and sells globally through distributors and its own sales and service organizations.

Financial performance and liquidity

  • Revenue: Sales and service fees were $250.8 million, up 7% from $235.2 million. Foreign-currency translation reduced reported sales by $13.9 million. Computerized machine tools contributed $211.8 million (85% of revenue); service parts contributed $28.2 million.
  • Profit and margins: Gross profit was $64.5 million (26% of revenue), versus $56.2 million (24%) in 2021. Operating income was $12.7 million (5%), versus $10.2 million (4%). Net income was $8.2 million, or $1.23 per diluted share, compared with $6.8 million, or $1.01 per diluted share.
  • Cash flow: Operating cash flow was negative $4.0 million, versus positive $32.2 million in 2021. The main use of cash was a $24.4 million increase in inventories. Investing cash outflow was $2.1 million; financing cash outflow was $6.9 million, including $3.9 million of dividends and $2.9 million of share repurchases.
  • Liquidity and debt: Cash and equivalents were $63.9 million, down from $84.1 million; working capital was $194.7 million, down from $208.7 million. Inventory was $156.2 million, up from $148.2 million. Hurco had no borrowings under its credit facilities and reported $50.6 million of available borrowing capacity. Total assets were $306.2 million and shareholders’ equity was $222.6 million.
  • Capital returns: Dividends paid were $0.59 per share for the year. In January 2023, the Board authorized an additional share repurchase program of up to $25 million.

Material changes versus the prior comparable period

  • Revenue growth reflected inflationary price increases and higher shipments of higher-performance machines, especially in Europe and North America. Americas revenue increased 11% and Europe increased 7%; Asia-Pacific revenue declined 8%, partly due to COVID-related restrictions in China.
  • Orders fell 9% to $240.9 million, including an unfavorable currency impact of $14.3 million. Orders declined 4% in the Americas, 8% in Europe, and 27% in Asia-Pacific. Year-end backlog fell to $44.8 million from $60.0 million; management expected it to be fulfilled in fiscal 2023 and cautioned that backlog is not a reliable indicator of future performance.
  • Gross margin improved despite the absence of the prior-year employee retention credit, benefiting from product mix, fixed-cost leverage, and price increases. SG&A rose 12% to $51.7 million, driven by trade-show and marketing expenses, commissions, compensation and benefits, and one-time administrative costs. Other expense increased by $1.3 million, mainly due to foreign-exchange losses.
  • Cash declined by $20.1 million, including a $7.2 million adverse effect from exchange-rate changes. Comprehensive income was negative $11.6 million, primarily reflecting a $19.6 million foreign-currency translation loss.

Outlook, risks, and unusual items

  • No specific revenue or earnings guidance is provided. Management expected fiscal 2023 capital expenditures of approximately $3.7 million, funded from cash and operating cash generation, and stated that available liquidity supports operations and strategic plans.
  • The business is cyclical, with short order backlogs and demand sensitive to economic conditions. Key exposures include currency movements, inflation in steel and other inputs, freight and supply constraints, and dependence on manufacturing and suppliers in Taiwan and China. The filing also highlights geopolitical tensions involving China and Taiwan, the war in Ukraine, competition, technology and product-development risks, and cyber and data-security risks.
  • Fiscal 2021 included $2.9 million of employee retention credit benefit; Hurco did not qualify in 2022. Fiscal 2020 included a $4.9 million non-cash goodwill impairment; Hurco reported no goodwill at October 31, 2022.
  • At year-end, nine customer-financing guarantees totaled approximately $0.7 million; recorded liabilities were insignificant. The company said ordinary-course litigation was not expected to materially affect its financial position or results.

Important facts for investors to verify

  • Whether lower orders and backlog translate into reduced shipments or weaker margins in fiscal 2023.
  • Whether inventory levels and working-capital demands improve, given negative operating cash flow and the year-over-year cash decline.
  • The durability of price increases and higher-performance product mix in offsetting input, freight, and currency pressures.
  • Liquidity and covenant capacity, including the December 31, 2023 maturity of the principal $40 million revolving facility and the terms of its January 2023 amendment.
  • Potential effects of China/Taiwan geopolitical developments and continued foreign-exchange movements on production, delivery, earnings, and equity.