Hurco Companies, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Fiscal quarter and nine months ended July 31, 2017. Hurco designs, manufactures and sells CNC machine tools, related software and components, and aftermarket services. It operates in one industrial automation equipment segment.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Sales and service fees | $60.8 million | $52.4 million | $167.7 million | $160.9 million |
| Gross profit / margin | $17.5 million / 29% | $16.1 million / 31% | $47.2 million / 28% | $50.4 million / 31% |
| Operating income | $5.1 million | $4.1 million | $11.9 million | $14.5 million |
| Net income | $3.9 million | $2.7 million | $8.4 million | $10.3 million |
| Diluted earnings per share | $0.58 | $0.40 | $1.25 | $1.54 |
| Operating cash flow | $2.0 million | $(1.1) million | $23.7 million | $(8.0) million |
- Q3 sales increased 16%; orders rose 31% to $62.5 million. Nine-month sales increased 4%; orders rose 23% to $186.9 million.
- Q3 sales grew in the Americas (30%), Europe (8%) and Asia Pacific (23%). Nine-month sales increased in the Americas (10%) and Asia Pacific (15%), while Europe declined 1% as reported; currency translation reduced nine-month revenue by $2.9 million.
- Q3 operating income and net income improved year over year. For the nine months, gross profit, operating income and net income declined despite higher sales. Management attributed the earnings pressure primarily to lower gross margins, foreign currency translation, and a greater mix of entry-level machines in price-competitive markets.
- Cash and cash equivalents were $61.1 million at July 31, 2017, versus $41.2 million at October 31, 2016. Working capital was $170.1 million, up from $160.4 million. Inventories rose to $128.2 million from $117.0 million.
- Capital expenditures, including software development costs, were $3.4 million for the nine months. Dividends paid were $1.9 million; the declared-period dividend rate was $0.10 per share in Q3.
Balance sheet, debt and liquidity
- Total assets were $274.5 million and shareholders’ equity was $197.0 million at July 31, 2017.
- Debt consisted of $1.5 million outstanding under the China credit facility; Hurco reported no other borrowings. It had $19.6 million of unused credit facilities and was in compliance with its credit covenants.
- The U.S. revolving credit facility was $15 million, with maturity extended to December 31, 2018. Management said cash and borrowing capacity were adequate to fund operations and its strategic plan.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management cited continued product innovation, targeted expansion in developing markets, and ongoing review of potential acquisitions.
- Key risks include the cyclical machine-tool market, uncertain economic demand, international operations and currency movements, reliance on limited manufacturing sources, competition, input-cost increases, product-development needs, and technology obsolescence.
- Foreign-currency exposure is significant: approximately 69% of nine-month revenue came from customers outside the Americas. Forward contracts were used to manage currency risks; their notional amount was $128.5 million, with derivative liabilities of $4.7 million at period end.
- There were 27 customer-financing payment guarantees totaling approximately $1.2 million; associated accrued liabilities were described as insignificant. Routine claims and lawsuits were not expected to materially affect results, and management believed losses would remain within insurance coverage.
- The company was under IRS audit for fiscal 2015. Unrecognized tax benefits, including accrued interest, were $1.2 million. Revenue recognition standard Topic 606 was expected to be adopted using the modified retrospective approach; its impact had not yet been determined.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the strong order growth converts into shipments and revenue; the filing does not provide a clear backlog value.
- Whether gross margins recover from the 28% nine-month level, given product mix and currency pressures.
- How cash generation and inventory levels develop as sales and orders fluctuate.
- The earnings and cash-flow sensitivity to foreign exchange movements, including the timing and realized effects of outstanding hedges.
- The eventual financial-statement impact of Topic 606 adoption and the outcome of the fiscal 2015 IRS audit.