Hurco Companies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended April 30, 2012. Hurco designs and produces computerized machine tools and control systems for the global metal-cutting market, with related parts, software, service and training. It reports one operating segment.
Financial performance
| Metric | Three months ended April 30, 2012 | Year-over-year change | Six months ended April 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Sales and service fees | $46.0 million | Up 11% | $97.1 million | Up 19% |
| Gross profit / margin | $13.4 million / 29% | $12.7 million / 30% | $29.9 million / 31% | $24.3 million / 30% |
| Operating income | $4.1 million | $3.4 million | $10.9 million | $6.3 million |
| Net income | $3.0 million | $2.3 million | $7.6 million | $3.9 million |
| Diluted EPS | $0.45 | $0.36 | $1.16 | $0.60 |
| Operating cash flow | $(2.3) million | $(4.2) million |
- SG&A was $9.3 million in Q2 and $19.0 million for six months; each represented 20% of sales, compared with 22% in the respective prior-year periods. Management attributed improved operating income chiefly to higher sales and fixed-cost leverage.
- Six-month cash used in investing was $1.3 million, including $894,000 for property and equipment and $416,000 for software development. Financing provided $1.1 million, primarily from short-term borrowing. Cash declined $4.8 million during the six months.
- At April 30, cash was $40.1 million, current assets $176.0 million and current liabilities $58.5 million. Inventory was $92.9 million, up $11.8 million from October 31, 2011. Working capital excluding cash was $77.5 million, versus $61.9 million.
- Debt was $2.0 million, borrowed under the China facility. No borrowings were outstanding under the other credit facilities; $23.2 million of aggregate borrowing capacity remained. Hurco reported compliance with facility covenants.
- Effective tax rate was 27% for Q2 and 31% for the six-month period, compared with 31% and 33%, respectively, in 2011. Management cited increased allowable tax credits.
Material changes and business trends
- Six-month sales increased across all regions: North America 21%, Europe 16% and Asia Pacific 31%. Asia Pacific shipments rose 36%; total computerized machine-tool shipments increased 13%.
- Q2 sales rose 11% despite an approximately $1.4 million adverse currency-translation effect. North America sales increased 31% and Asia Pacific 42%, while Europe sales declined 2%. A weaker euro and European debt-crisis uncertainty weighed on European sales.
- Orders were $51.1 million in Q2, down 30% year over year, and $100.0 million for six months, down 14%. Management said prior-year comparisons were elevated by customer orders placed ahead of a price increase. Q2 orders increased 4% sequentially from Q1.
- Q2 gross margin declined to 29% from 30%, which management attributed primarily to a lower share of European sales, where larger, higher-performance machines are more prevalent. Six-month gross margin improved to 31% from 30% on higher sales and fixed-cost leverage.
- Cash fell as Hurco increased production and inventory to support demand. Approximately 65% of cash was held in U.S. dollars; the remainder was held abroad and exposed to exchange-rate movements.
Outlook, risks and unusual items
- The filing provides no numerical revenue, earnings or other formal guidance. Management said cash and available borrowing capacity were adequate for operations and its product-innovation and targeted-market-penetration strategy.
- Management described demand as improved but identified uncertainty surrounding Europe’s debt crisis. Key risks include the cyclical machine-tool industry, international operations, foreign-exchange volatility, dependence on a limited number of manufacturing sources, technology and product-development needs, competition, and raw-material cost increases.
- Hurco uses foreign-currency forwards to manage exposures; total U.S.-dollar-equivalent notional forward contracts were $120.1 million. Q2 foreign-currency translation reduced reported sales by about $1.4 million; the six-month adverse impact was about $1.8 million.
- Twenty customer-financing guarantees totaled approximately $1.2 million. Management stated that claims and lawsuits in the ordinary course were not expected to materially affect financial position or results. The IRS was examining 2006–2010 federal returns; Hurco did not expect significant adjustments.
- Warranty provision for the first six months rose to $1.6 million from $1.3 million, reflecting higher sales, anticipated claims and a greater number of higher-performance machines with higher claim costs. The ending warranty reserve was $1.7 million.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sharp year-over-year order decline reflects mainly the prior-year price-increase pull-forward or weakening underlying demand, especially in Europe.
- Whether inventory growth and negative operating cash flow reverse as orders convert to shipments and working capital normalizes.
- How European demand, currency movements and regional sales mix affect revenue and gross margins in subsequent quarters.
- Whether available credit capacity, covenant compliance and cash balances remain adequate as production and investment needs change.
- Whether warranty costs, foreign-exchange exposures, customer guarantees or the IRS examination result in material additional expense or liability.