Hurco Companies, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended July 31, 2012; comparisons are with the corresponding 2011 periods. Hurco designs and sells computerized machine tools and related controls, software, parts, service, and training to the worldwide metalworking market. It reports one operating segment.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are rounded to millions except per-share data.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales and service fees | $50.0m | $50.6m | $147.1m | $131.8m |
| Gross profit / margin | $16.1m / 32% | $15.9m / 31% | $46.0m / 31% | $40.2m / 30% |
| Operating income / margin | $5.8m / 11.6% | $6.5m / 12.9% | $16.7m / 11.3% | $12.8m / 9.7% |
| Net income | $4.0m | $4.6m | $11.6m | $8.5m |
| Diluted earnings per share | $0.61 | $0.70 | $1.77 | $1.30 |
| Net cash from operating activities | $(4.3)m | $1.2m | $(8.4)m | $1.1m |
Material changes and operating trends
- Q3 sales fell 1% year over year; a $3.7m adverse currency-translation effect was cited. North American sales rose 18%, while Europe declined 7% and Asia Pacific declined 12%. Machine-tool unit shipments fell 6% overall.
- Q3 gross profit increased modestly, but operating income and net income declined, principally reflecting higher selling, general and administrative costs from global sales and marketing initiatives and investment in sales channels.
- Nine-month sales increased 12%, with growth in all regions and the strongest percentage increase in North America. The reported comparison included a $5.5m adverse currency-translation impact. Gross margin improved to 31%, and operating income rose 30%, helped by higher sales and fixed-cost leverage.
- Orders were $46.3m in Q3, up 16%; nine-month orders were $146.3m, down 7%. Management cautioned that prior-year comparisons were affected by customer orders pulled forward ahead of a price increase. Nine-month unit orders declined 15% in Europe and 25% in Asia Pacific, while rising 10% in North America.
Cash, debt, and liquidity
- Cash and cash equivalents were $35.1m at July 31, 2012, down from $45.0m at October 31, 2011. Approximately 57% of cash was held in U.S. dollars; the remainder was held abroad and exposed to currency movements.
- Nine-month operating cash flow was negative $8.4m, versus positive $1.1m in 2011. Inventory increased $17.6m from October 2011 as production was raised to meet expected demand; the cash-flow statement also shows a $17.6m inventory-related use of cash.
- Short-term debt was $3.1m, borrowed under the China facility; there were no borrowings under the other facilities. Hurco reported $21.8m of aggregate borrowing availability and compliance with facility covenants. Domestic and U.K. facilities were scheduled to mature December 7, 2012; the China facility had been increased to 40m yuan and extended for 12 months as of February 2012.
- Working capital excluding cash was $85.2m, compared with $61.9m at October 31, 2011. Nine-month capital expenditures and software development costs totaled approximately $2.6m.
Management commentary, risks, and contingencies
- Management stated that cash and available borrowing capacity should provide adequate liquidity to fund operations and its strategic plans, including product innovation and targeted growth in developing markets. The filing provides no quantified revenue or earnings guidance.
- Management cited continuing European debt-crisis uncertainty and slowing Asian conditions. Key disclosed risks include the cyclical machine-tool market, international operations, foreign exchange, reliance on limited manufacturing sources, competition, input costs, and the need for continued product and technology development.
- Foreign-exchange exposure is material: Hurco uses forward contracts to hedge forecast transactions and certain foreign-currency receivables, payables, and net investment. Nine-month results included a $6.3m foreign-currency loss adjustment in the cash-flow reconciliation; the filing also reports gains on certain derivative contracts. Derivative fair values were $3.1m in assets and $0.4m in liabilities at July 31.
- Twenty customer-financing payment guarantees totaled approximately $1.1m. Management accrues for losses when probable and estimable; it described the risk of material adverse effect from ordinary-course litigation as remote.
- The warranty reserve ended the nine-month period at $1.6m. Warranty provisions increased year over year, which management attributed to higher sales, anticipated claims, and a greater proportion of higher-performance machines with higher claim costs.
- Management reported effective disclosure controls as of July 31, 2012, and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether order trends, especially the nine-month declines in Europe and Asia Pacific, translated into subsequent sales and whether the Q3 order increase was sustained.
- Whether inventory growth converted to sales and operating cash flow; nine-month cash generation was negative despite higher earnings.
- The effects of euro, Taiwan dollar, and other currency movements, including the extent to which hedges offset operating exposure.
- Availability and renewal terms of credit facilities, particularly the disclosed December 2012 maturities of the domestic and U.K. facilities.
- Potential warranty and customer-guarantee costs, and the impact of European economic uncertainty on demand.