Hurco Companies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2021; comparisons are to the corresponding 2020 periods. Hurco designs, manufactures, and sells CNC machine tools and related products and services through a global network. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales and service fees | $57.9 | $37.1 | $112.0 | $80.8 |
| Gross profit / margin | $14.8 / 26% | $6.7 / 18% | $26.3 / 24% | $15.9 / 20% |
| Operating income (loss) | $3.5 | $(3.9) | $4.5 | $(5.6) |
| Net income (loss) | $2.4 | $(3.9) | $3.1 | $(4.8) |
| Diluted earnings (loss) per share | $0.36 | $(0.58) | $0.46 | $(0.71) |
| Operating cash flow | $8.9 | $(2.1) | $17.9 | $(4.8) |
Growth, cash, debt, and liquidity
- Q2 sales increased 56% year over year; first-half sales increased 39%. Management attributed growth to higher machine shipments across all regions, with Europe particularly strong. Favorable currency translation contributed $2.7 million to Q2 sales and $4.4 million to first-half sales.
- Orders rose 80% in Q2 to $65.7 million and 50% in the first half to $123.0 million. Regional order growth was broad-based; the filing does not provide backlog value.
- At April 30, cash and cash equivalents were $73.9 million, up from $57.9 million at October 31, 2020. Working capital was $206.2 million, versus $201.0 million. Approximately 12% of cash was denominated in U.S. dollars; the rest was held in foreign currencies.
- There were no borrowings under credit facilities. Available borrowing capacity was approximately $52.2 million, and the company reported covenant compliance. The principal $40 million revolving facility was scheduled to mature December 31, 2021.
- First-half investing cash outflow was $1.5 million, including $0.7 million of property and equipment purchases and $0.6 million of software development costs. Financing cash outflow was $2.0 million, including $1.8 million in dividends. Cash increased $16.0 million over the six-month period.
- Total assets were $315.8 million and shareholders’ equity was $236.6 million at April 30, 2021. Current liabilities were $65.2 million. Operating lease liabilities totaled approximately $11.9 million, including current and noncurrent portions.
Material changes and management commentary
- The business rebounded from the pandemic-affected prior-year comparison: first-half sales increased in every region as COVID-related restrictions eased. Q2 sales rose 18% in the Americas, 96% in Europe, and 62% in Asia Pacific.
- Q2 operating income improved by $7.4 million from the prior-year loss. Management cited higher sales volume, improved fixed-cost absorption, better pricing, normalized inventory levels, and favorable currency effects. First-half gross margin improved to 24% from 20%.
- Results included a $1.9 million employee retention credit benefit in Q2, reflected as approximately $0.8 million of gross-profit improvement and $1.1 million of lower SG&A. This is an unusual item that investors may wish to separate from ongoing performance.
- SG&A was $11.3 million in Q2 and $21.8 million for the first half; as a share of sales, it declined to 19% from 29% and 27%, respectively, reflecting higher sales and continued cost management.
- The first-half effective tax rate was 33%, compared with 22% a year earlier. The filing cites geographic income mix, tax-law changes, and discrete tax expense related to unvested stock awards. Q2 effective tax rate was 28%, versus 16%.
- The board authorized a share repurchase program of up to $7.0 million through March 10, 2023; no shares were repurchased in Q2. First-half dividends were $1.8 million, or $0.27 per share. No specific earnings or revenue guidance is provided.
Risks, contingencies, and other items
- Management says COVID-19’s duration and effects remain uncertain. Highlighted risks include the cyclical machine-tool market, uncertain global demand, international operations, currency movements, tariffs and regulation, Brexit, supply-source concentration, raw-material costs, competition, and dependence on product development.
- Foreign currency exposure is managed in part with forward contracts. The company reported $79.1 million of U.S.-dollar-equivalent forward-contract notional value at April 30, 2021; changes in exchange rates can affect reported results and cash flows.
- Thirteen customer-financing guarantees totaled approximately $0.7 million; accrued guarantee liabilities were described as insignificant. Routine claims and lawsuits were not expected to have a material adverse effect, and management expects losses to remain within insurance coverage.
- A Taiwan subsidiary was under tax audit for fiscal 2018. The filing reports $211,000 of unrecognized tax benefits at April 30, 2021.
- Management concluded disclosure controls were effective, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong Q2 orders convert into shipments and revenue, and whether order momentum persists across regions.
- How much of improved profitability reflects sustainable volume, pricing, and cost actions versus the $1.9 million employee retention credit and favorable currency effects.
- Cash generation and working-capital needs as sales expand, including receivables, inventory, and customer deposits.
- Renewal or replacement of the revolving credit facility scheduled to mature December 31, 2021, and ongoing compliance with its covenants.
- Further developments in the COVID-19 recovery, foreign exchange exposure, supply availability and costs, and the Taiwan tax audit.