Hurco Companies, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. The filing also reports fourth-quarter results; this is an annual 10-K, not a standalone quarterly filing. Hurco designs, manufactures and sells CNC machine tools and related controls, parts and services. About 71% of FY2018 revenue came from outside the U.S.; Europe accounted for 55% of total revenue.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $300.7 million | $243.7 million | +23% |
| Gross profit / margin | $91.8 million / 31% | $70.6 million / 29% | Margin +2 percentage points |
| Operating income / margin | $33.8 million / 11% | $20.9 million / 9% | +62% |
| Net income | $21.5 million | $15.1 million | +42% |
| Diluted EPS | $3.15 | $2.25 | +40% |
| Cash from operations | $21.0 million | $30.4 million | Down $9.4 million |
| Capital expenditures | $5.9 million | $4.4 million | Up $1.5 million |
Revenue gains were led by computerized machine tools, up 25% to $261.7 million. Revenue increased across all regions: Americas +20%, Europe +24%, and Asia Pacific +26%. Favorable currency translation added $10.5 million, or 4%, to reported revenue. Management attributed higher gross margin and operating income to increased machine sales across regions and product lines, with currency also contributing.
Operating cash flow declined despite higher earnings, primarily amid a $20.4 million cash use from increased inventories and a $5.1 million use from higher receivables; higher payables and accrued liabilities partly offset these uses. Investing cash outflow was $6.6 million, including property and equipment, software development and a $1.2 million business acquisition. Financing cash outflow was $2.6 million, including $2.9 million of dividends.
Liquidity, debt and balance sheet
Cash and cash equivalents were $77.2 million at year-end, up from $66.3 million. Working capital was $194.6 million versus $175.5 million; the current ratio was 3.2 versus 3.5. Inventory rose to $137.6 million from $119.9 million, while inventory turns improved to 1.6 from 1.5. Total debt was $1.4 million, all short-term China facility borrowings; shareholders’ equity was $222.9 million.
After year-end, Hurco entered a new unsecured $40 million revolving credit and letter-of-credit facility, maturing December 31, 2020, and repaid the $1.4 million China borrowing. As of December 31, 2018, it reported no borrowings and $41.7 million of available borrowing capacity. The new agreement includes minimum working capital and tangible net worth covenants and conditions on dividends.
Period comparisons and fourth quarter
FY2018 followed FY2017 revenue growth of 7%; growth accelerated to 23%. Gross margin recovered to 31% from 29% in FY2017, when mix and currency had weighed on margin. Orders reached a record $305.8 million, up 17%; year-end backlog was $55.0 million versus $52.0 million and was expected to be fulfilled in FY2019. Hurco cautions that backlog is not necessarily indicative of future performance.
Fourth-quarter FY2018 revenue was $83.1 million, gross margin 34%, operating income $11.3 million and net income $8.3 million, compared with $75.9 million, 31%, $9.0 million and $6.7 million, respectively, in fourth-quarter FY2017.
Outlook, commentary and risks
- No formal revenue or earnings guidance is provided. Management expected FY2019 capital spending of approximately $15.3 million, funded largely by cash and operating cash flow, and said cash and borrowing capacity were adequate for the next 12 months.
- The effective tax rate was 34%, versus 27% in FY2017. A $2.8 million one-time Tax Cuts and Jobs Act charge comprised $0.6 million for deferred-tax remeasurement and $2.2 million of transition tax; management stated EPS excluding these charges would have been $0.41 higher.
- Key risks include cyclical machine-tool demand and short order visibility, international exposure, foreign-exchange movements, tariffs and trade restrictions, raw-material costs, reliance on manufacturing sites and suppliers, competition, product development, inventory obsolescence, cybersecurity, and tax uncertainty. Approximately 55% of revenue came from Europe and 15% from Asia Pacific.
- Outstanding customer-financing guarantees totaled approximately $0.6 million across 23 guarantees; accrued guarantee liabilities were described as insignificant. Routine litigation was not expected to have a material adverse effect. Warranty reserves increased to $2.5 million from $1.8 million, mainly due to higher machine sales.
- Management and the auditor concluded internal control over financial reporting was effective; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Whether order growth and the $55.0 million backlog convert into FY2019 shipments and cash flow, given the company’s cyclical market and short typical order backlog.
- Whether inventory growth, receivables and working-capital needs continue to constrain operating cash generation.
- How margins perform as product mix, regional demand, currency rates, tariffs and raw-material costs change.
- The ongoing tax effects of the Tax Act, including transition-tax installment payments and treatment of foreign earnings.
- Capacity, covenant and dividend terms under the new $40 million credit agreement, as well as the planned $15.3 million FY2019 capital expenditure program.