Hurco Companies, Inc. — Q3 FY2019 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2019. Hurco designs, manufactures and sells CNC machine tools and related products and services. Results are unaudited; financial amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Sales and service fees | $58.5m | $78.8m | $203.4m | $217.6m |
| Gross profit / margin | $17.2m / 29% | $24.5m / 31% | $61.0m / 30% | $64.0m / 29% |
| Operating income | $4.6m | $9.4m | $20.4m | $22.5m |
| Net income | $3.5m | $6.5m | $15.4m | $13.2m |
| Diluted EPS | $0.51 | $0.95 | $2.24 | $1.93 |
| Operating cash flow | $(1.5)m | $3.8m | $(3.1)m | $17.3m |
Liquidity and balance sheet
- At July 31, 2019, cash and cash equivalents were $66.1m, down from $77.2m at October 31, 2018. Working capital was $206.7m, compared with $194.6m.
- Current assets were $270.8m and current liabilities $64.1m. Inventory rose to $153.7m from $137.6m, including finished goods of $93.8m versus $76.5m.
- No borrowings were outstanding under credit facilities; available borrowing capacity was $51.2m. The company reported compliance with its covenants. The principal revolving facility has a $40.0m maximum and matures December 31, 2020.
- Nine-month investing cash outflow was $3.6m; property and equipment purchases plus software development costs totaled approximately $4.0m. Dividends paid were $2.4m.
Changes versus comparable periods
- Q3 sales declined 26% year over year; nine-month sales declined 7%. Q3 operating income fell about 51%, and net income fell about 46%. Nine-month net income increased about 17%, while operating income declined about 10%.
- Order bookings weakened: down 30% in Q3 to $53.0m and down 19% for nine months to $188.2m. European orders fell 39% in Q3 and 28% for nine months; Asia Pacific orders fell 37% and 25%, respectively.
- In Q3, Americas sales increased 8%, while Europe fell 31% and Asia Pacific fell 53%. For nine months, Americas sales grew 19%, while Europe declined 14% and Asia Pacific 28%.
- Management attributed weaker sales primarily to lower machine shipments, particularly Hurco vertical mills and Takumi bridge mills in Europe and Asia. Foreign currency translation reduced sales by $1.9m in Q3 and $7.3m for nine months.
- Gross margin was lower in Q3 but higher for the nine-month period. Management cited product mix, larger higher-priced machine sales and contributions from a distributor acquired in FY2018 as support for gross profit despite lower volume.
Management commentary, outlook and risks
- Management said cash and borrowing capacity were adequate for operations over the next twelve months and supported continued product innovation and targeted expansion in developing markets. No specific earnings or revenue guidance was provided.
- Management cited lower variable employee compensation and other expense reductions as factors in lower SG&A, partly offset by costs associated with the acquired distributor.
- On August 5, 2019, after quarter-end, Hurco acquired substantially all assets of a U.S. robotics integration company for approximately $4.5m. The business sells robotic machine-tending systems and will operate as a wholly owned subsidiary.
- Key disclosed risks include the cyclical machine-tool market and uncertain demand, international operations and currency movements, limited manufacturing and supply sources, tariffs and other government actions, raw-material costs, competition, technology and product-development needs, cybersecurity, and acquisition integration.
- Foreign-currency forward contracts had a total U.S.-dollar equivalent notional amount of $114.0m at July 31, 2019. The company uses them to manage currency exposures, not for trading.
- Twenty-four customer-financing guarantees totaled approximately $0.6m; recorded guarantee liabilities were described as insignificant. The company did not expect ordinary-course claims and lawsuits to have a material adverse effect.
Important facts for investors to verify
- Whether order bookings and demand stabilize, particularly in Europe and Asia Pacific, and how they translate into future shipments and revenue.
- Whether elevated inventory, especially finished goods, converts to sales without added discounting or write-downs; operating cash flow was negative for the nine-month period.
- Whether gross margins can be sustained as sales volumes change and as product, geographic and currency mix shifts.
- The robotics acquisition’s integration, cash requirements and contribution to results; the filing provides no post-acquisition performance data.
- Foreign-exchange exposure, available credit capacity and continued compliance with credit-agreement covenants.