Hurco Companies, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended April 30, 2018. Hurco designs, manufactures and sells CNC machine tools and related products and services worldwide. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Sales and service fees | $70.4 | $58.2 | $138.9 | $107.0 |
| Gross profit / margin | $19.3 / 27% | $17.1 / 29% | $39.4 / 28% | $29.7 / 28% |
| Operating income | $6.0 | $5.4 | $13.1 | $6.8 |
| Net income | $3.8 | $3.6 | $6.7 | $4.5 |
| Diluted EPS | $0.55 | $0.54 | $0.98 | $0.67 |
| Operating cash flow | $(1.0) | $6.2 | $13.5 | $22.2 |
- Q2 revenue rose 21%; management attributed approximately 8 percentage points to favorable currency translation. For the first half, revenue rose 30%, including an approximately 9-point currency benefit.
- Q2 gross margin declined to 27% from 29%, reflecting a higher mix of entry-level machines, partly offset by favorable currency effects. First-half gross margin was 28% in both periods. First-half operating income increased substantially on higher sales volume.
- First-half SG&A was $26.3 million, up from $22.9 million, primarily due to currency translation and higher trade-show and exhibition spending.
- Q2 net income was affected by $0.6 million of net other expense, chiefly currency-related losses. First-half effective tax rate was 48% versus 31%, including $2.5 million of provisional transition-tax expense and $0.4 million of non-cash deferred-tax revaluation expense under the Tax Reform Act. Excluding those charges, diluted EPS would have been $0.43 higher, according to management.
Orders, liquidity and balance sheet
- Orders reached a quarterly record of $79.9 million, up 26% year over year, with a 9% favorable currency impact. First-half orders also set a record at $156.8 million, up 26%, including an 8% currency benefit. Europe led the quarterly increase; Americas and Asia Pacific also grew.
- Cash and cash equivalents were $76.4 million at April 30, versus $66.3 million at October 31, 2017. Working capital increased to $185.7 million from $175.5 million. Current assets were $266.6 million and current liabilities $80.9 million.
- First-half operating cash flow of $13.5 million was below the prior-year $22.2 million, principally amid inventory investment and working-capital movements. Inventory increased to $134.9 million from $119.9 million. Q2 operating cash flow was negative $1.0 million.
- Capital expenditures, including software development costs, were $2.9 million for the first half. Cash increased by $10.1 million over that period.
- Debt was limited to $1.6 million under the China facility; no other borrowings were outstanding. The company reported $19.8 million of unused credit facilities and compliance with covenants. Its U.S. revolving facility, with a $15 million commitment, was scheduled to mature December 31, 2018.
- Shareholders’ equity was $212.3 million. Dividends paid were $0.11 per share in Q2 and $0.21 per share for the first half.
Management commentary, outlook and risks
- Management cited improved U.S. market conditions and customer demand across regions, especially for vertical milling machines. Europe accounted for 55% of first-half revenue; Asia Pacific accounted for 14%.
- Management said cash and borrowing capacity were adequate for operations over the next 12 months and supported continued product innovation and targeted growth in developing markets. It continued to review potential acquisitions. No specific revenue or earnings guidance was provided.
- Key exposures include the cyclical machine-tool market, uncertain economic conditions, international operations and foreign-exchange volatility, limited manufacturing and supply sources, raw-material costs, competition, technology and product-development needs, and tax-law changes. The company uses foreign-currency forwards; derivative notional amounts totaled $156.5 million at April 30.
- There were 27 customer-financing payment guarantees totaling approximately $0.9 million; accrued guarantee liabilities were described as insignificant. Warranty reserve was $2.3 million, up from $1.8 million at fiscal year-end, reflecting more machines under warranty and higher average warranty costs on more complex machines.
- Management did not expect pending ordinary-course legal claims to materially affect financial position or results. No material risk-factor changes were reported. Disclosure controls were assessed as effective.
- Revenue standard Topic 606 was expected to have an overall immaterial impact; Hurco planned modified retrospective adoption in fiscal 2019. Tax Reform Act accounting amounts remained provisional and subject to measurement-period adjustment.
Most important facts for investors to verify
- Whether record orders convert into shipments and revenue, and whether growth persists after separating currency effects.
- Whether margins recover as product mix changes, given Q2 gross-margin compression.
- Whether inventory growth and weaker quarterly operating cash flow normalize as sales are fulfilled.
- The final Tax Reform Act accounting and resulting effective tax rate, alongside the $2.5 million transition-tax charge.
- Credit-facility renewal or replacement before the U.S. facility’s December 2018 maturity, plus continuing foreign-exchange and supply-chain exposures.