Hurco Companies, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2013. Hurco designs and produces computerized machine tools, controls, software, and components for the worldwide metal-cutting market. It reports one segment: industrial automation systems. Financial amounts below are in U.S. dollars; tables use millions except per-share data.
Financial results and liquidity
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Sales and service fees | $45.2 | $50.0 | $138.9 | $147.1 |
| Gross profit / margin | $11.7 / 26% | $16.1 / 32% | $39.9 / 29% | $46.0 / 31% |
| Operating income | $1.7 | $5.8 | $10.3 | $16.7 |
| Net income | $0.9 | $4.0 | $6.3 | $11.6 |
| Diluted EPS | $0.13 | $0.61 | $0.96 | $1.77 |
- Sales fell 10% in Q3 and 6% year to date. Lower machine-tool sales drove the decline; service, parts, and other revenue increased.
- Operating cash flow was $13.4 million for the first nine months, compared with cash use of $8.4 million a year earlier. The 2013 period included a $9.7 million cash inflow from lower receivables and refundable taxes, partly offset by inventory growth.
- Cash and cash equivalents were $44.6 million at July 31, up from $35.8 million at October 31, 2012. Current assets were $183.0 million and current liabilities $57.1 million. Working capital excluding cash was $81.3 million, versus $88.2 million at fiscal year-end.
- Short-term debt was $5.7 million, compared with $3.2 million at October 31, 2012. The company reported $22.6 million of unused credit facilities and compliance with its debt covenants. Total shareholders’ equity was $148.4 million.
- Capital expenditures and software development costs totaled $1.9 million in the first nine months. Hurco paid dividends of $0.05 per share, or $0.3 million, during the period.
Material changes versus the prior comparable period
- European sales declined 11% year over year in Q3 and 19% from Q2 FY2013; Europe represented 57% of Q3 revenue. Asia Pacific sales fell 17% in Q3 and 34% year to date. North American sales were down 5% in Q3 but up 3% year to date.
- Q3 orders were $46.1 million; excluding LCM-related orders, they declined 9% year over year. Nine-month orders were $146.0 million, down 3% excluding LCM.
- Lower sales, European pricing pressure, and less favorable fixed-cost absorption reduced gross margin and operating income. SG&A was down $0.3 million in Q3, but up $0.3 million year to date; year-to-date SG&A included about $0.7 million of one-time LCM acquisition costs.
- Other expense was $0.5 million in Q3 and $0.9 million year to date, primarily reflecting realized and unrealized foreign-currency losses, net of forward contracts. The nine-month effective tax rate rose to 33% from 30%, mainly due to geographic income mix.
Outlook, management commentary, risks, and unusual items
- Outlook: The filing provides no numerical forecast or formal guidance. Management said cash and borrowing capacity were adequate to fund operations and support product innovation and targeted expansion in developing markets. It continued to review potential acquisitions.
- LCM acquisition: Hurco acquired the Italian machine-tool component business on July 1, 2013. The preliminary purchase price was $5.0 million, including $4.6 million of assumed debt and $0.4 million of cash paid net of cash acquired. The preliminary allocation included $2.5 million of goodwill and $1.4 million of intangible assets. Q3 included approximately $0.5 million of LCM sales and $0.6 million of related expenses, including about $0.5 million of acquisition costs.
- Foreign exchange: Hurco uses currency forwards to hedge forecast transactions, receivables/payables, and part of its euro net investment. Derivative liabilities were $1.9 million versus $0.6 million at October 31, 2012; accumulated other comprehensive loss was $3.3 million. Foreign-exchange movements can affect reported results and cash flows.
- Other exposures: Machine-tool demand is cyclical, and management cited uncertain economic conditions—particularly in Europe—international operating risks, currency movements, dependence on product development, competition, raw-material prices, and acquisition integration. Twenty customer-financing guarantees totaled approximately $1.3 million. Management did not expect pending ordinary-course claims to materially affect financial position or results.
- Tax and controls: Unrecognized tax benefits were $1.3 million. Management concluded disclosure controls were effective; LCM was excluded from the 2013 internal-control evaluation while its controls were being assessed and integrated.
Important facts for investors to verify
- Whether European demand and order trends stabilized after the sharp Q3 sequential decline, and whether lower revenue continues to pressure margins.
- LCM’s subsequent contribution to sales, earnings, cash flow, and integration costs, as well as the final purchase-price allocation and goodwill valuation.
- The composition and repayment terms of short-term debt: the filing describes the $2.5 million of LCM-assumed borrowings as “secured” in MD&A but “unsecured” in the debt note.
- Foreign-exchange exposure and the timing of hedge losses expected to be reclassified into cost of sales; also monitor the increase in derivative liabilities.
- Liquidity, unused credit capacity, and continued compliance with the working-capital and tangible-net-worth covenants.