Hurco Companies, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Fiscal quarter and nine months ended July 31, 2016; comparisons are with the periods ended July 31, 2015 unless stated otherwise. Hurco designs, manufactures and sells CNC machine tools and related software, parts and services worldwide. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Sales and service fees | $52.4m | $52.5m | $160.9m | $153.7m |
| Gross profit / margin | $16.1m / 31% | $16.6m / 32% | $50.4m / 31% | $49.7m / 32% |
| Operating income | $4.1m | $5.3m | $14.5m | $17.1m |
| Net income | $2.7m | $3.7m | $10.3m | $11.4m |
| Diluted earnings per share | $0.40 | $0.55 | $1.54 | $1.72 |
| Orders | $47.6m | $62.8m | $152.1m | $160.9m |
Quarterly sales were essentially flat, while nine-month sales rose 5%. The nine-month increase reflected fuller-period contributions from the Milltronics and Takumi product lines, acquired in July 2015; reported sales also absorbed negative currency translation impacts of $1.1m for the quarter and $5.1m for the nine months. Orders fell 24% in the quarter and 5% year to date. Quarterly operating income declined 22%; nine-month operating income declined 15%.
Management attributed lower gross margin and operating income primarily to reduced sales of higher-performance machines, pricing pressure and unfavorable currency translation. SG&A increased to $12.0m for the quarter and $35.9m year to date, mainly reflecting costs associated with the acquired product lines. Service, parts and other revenue increased 17% in the quarter and 11% year to date. Asia Pacific sales rose substantially year over year, primarily because of Takumi’s inclusion for a full period; North American sales and orders showed weakness.
Cash flow, balance sheet and liquidity
- Cash: $42.2m at July 31, 2016, down from $55.2m at October 31, 2015. About 26% was denominated in U.S. dollars; the rest was held in foreign operating currencies.
- Cash flow: Nine-month operating cash flow was negative $8.0m, versus positive $20.9m a year earlier. Inventory growth used $21.9m of cash. Q3 operating cash flow was negative $1.1m, versus positive $6.4m. Investing cash use was $3.0m for the nine months; capital expenditures, including software development, totaled $3.3m. Dividends paid were $1.7m.
- Working capital: $116.0m excluding cash, compared with $95.8m at October 31, 2015; management linked the increase primarily to higher inventory amid lower orders. Current assets were $219.3m and current liabilities $61.2m at quarter-end.
- Debt and facilities: $1.5m borrowed under the China facility; no borrowings under other facilities. The company reported $20.0m of available credit and compliance with all covenants. The U.S. revolving agreement was scheduled to mature December 7, 2016; the China facility was renewed through February 16, 2017.
- Capital and dividends: Shareholders’ equity was $182.9m. The quarterly dividend was $0.09 per share, versus $0.08 in the prior-year quarter.
Outlook, risks and unusual items
The filing gives no quantified revenue, earnings or order guidance. Management stated that cash and borrowing capacity were adequate to fund operations and support product innovation and targeted expansion in developing markets, and that it continued to review potential acquisitions.
Key risks identified include machine-tool industry cyclicality, uncertain economic conditions—particularly in Europe and Asia—foreign-currency movements, international operations, reliance on a limited number of manufacturing sources, competition, raw-material costs, product-development and technology risks, and acquisition integration. The company reported that existing litigation was not expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors.
Fiscal 2016 nine-month effective tax rate was 28%, compared with 32% a year earlier. In Q3 the company recorded $0.3m of aggregate out-of-period tax corrections, reducing quarterly and year-to-date net income by that amount. Foreign exchange effects were notable: the quarter included $0.2m of other expense, compared with $0.01m in Q3 FY2015. The company uses foreign-exchange forwards; outstanding contracts and currency exposures can affect reported earnings and accumulated other comprehensive income.
Other disclosures: 22 customer-financing guarantees totaled approximately $1.3m, with recorded fair-value liabilities described as insignificant. The warranty reserve was $1.8m, down from $2.2m at October 31, 2015; management cited fewer machines under warranty, partly reflecting reduced Hurco sales in several markets. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether declining orders—especially in North America and Asia Pacific—translate into lower sales, and how orders and backlog develop after quarter-end.
- Whether elevated finished-goods inventory and negative operating cash flow reverse, and the related impact on cash and working capital.
- Whether gross-margin pressure, pricing and sales mix improve, and whether Milltronics and Takumi contribute sustainably after acquisition-related costs.
- The sensitivity of earnings, cash and equity to currency movements and the effectiveness and timing of foreign-exchange hedges.
- The status and terms of the U.S. credit facility as its stated December 2016 maturity approached, and whether tax corrections or tax exposures lead to further adjustments.