Hurco Companies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2017. The interim financial statements are unaudited. Hurco designs, manufactures, and sells CNC machine tools and related software, parts, and services to the global metal-cutting industry.
Financial performance
Amounts are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Sales and service fees | $58.2 | $52.0 | $107.0 | $108.5 |
| Gross profit / margin | $17.1 / 29% | $16.6 / 32% | $29.7 / 28% | $34.3 / 32% |
| Operating income | $5.4 | $4.7 | $6.8 | $10.4 |
| Net income | $3.6 | $3.7 | $4.5 | $7.6 |
| Diluted EPS | $0.54 | $0.56 | $0.67 | $1.14 |
| Operating cash flow | $6.2 | $(6.2) | $21.7 | $(6.9) |
- Orders: Q2 orders were $63.4 million, up 19%; six-month orders were $124.4 million, up 19%. Both figures included negative currency translation effects.
- Cash and liquidity: Cash was $60.6 million at April 30, up from $41.2 million at October 31, 2016. Working capital was $166.9 million, versus $160.4 million at year-end. The company attributed the cash increase primarily to lower accounts receivable.
- Debt and facilities: Borrowings were $1.5 million under the China facility; no borrowings were reported under other facilities. Available credit facilities totaled $19.4 million, and the company reported compliance with covenants.
- Capital returns and investment: Dividends paid were $0.10 per share in Q2 and $0.19 per share for the six months. Six-month capital expenditures, including software development costs, were $2.1 million.
Material changes and management commentary
- Q2 sales rose 12%, led by growth in the Americas and Asia Pacific; Europe was slightly lower in reported dollars. For the six months, sales declined 1%, reflecting lower European sales, partly offset by growth elsewhere.
- Gross margin fell to 29% in Q2 and 28% year to date, from 32% in both comparable periods. Management cited unfavorable currency translation and a greater mix of entry-level machines in price-competitive regions.
- Q2 operating income increased despite lower gross margin, with higher sales volume and lower SG&A contributing. Six-month operating income and net income declined year over year.
- Management said the six-month increase in operating cash flow was primarily associated with working-capital movements, including a decrease in accounts receivable; the prior-year period had operating cash outflow.
Outlook, risks, and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management said cash and borrowing capacity were adequate to fund operations and its strategic plans for product innovation and targeted growth in developing markets; it continued to evaluate potential acquisitions.
- Key risks include the cyclical machine-tool market, uncertain regional demand, foreign-currency movements, international operations, reliance on a limited number of manufacturing sources, competition, input-cost inflation, technology and product-development needs, and acquisition and tax risks.
- Foreign-currency exposure is significant: approximately 67% of first-half revenue came from customers outside the Americas. The company uses forward contracts to hedge certain exposures; currency movements affected reported sales, margins, and other expense.
- As of April 30, 2017, 24 customer-financing guarantees totaled approximately $1.1 million; accrued guarantee liabilities were described as insignificant. Management did not expect pending ordinary-course claims to have a material adverse effect and believed losses would not exceed insurance coverage.
- The IRS was auditing the company’s fiscal 2015 federal income tax return. Unrecognized tax benefits, including accrued interest, were $1.2 million. The filing also reports no material changes to risk factors or contractual obligations from the prior annual report.
Important facts for investors to verify
- Whether the strong order growth converts into shipments and revenue, particularly in the Americas and Asia Pacific.
- Whether gross margins recover as product mix and currency effects change; first-half margin was four percentage points below the prior year.
- How foreign-exchange movements and hedging affect reported results, cash balances, and deferred hedge gains.
- Whether working-capital cash generation is sustained, and how foreign-held cash and potential repatriation taxes affect liquidity.
- Developments in the IRS audit, tax exposures, and the outstanding customer-financing guarantees.