Hurco(HURC) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Hurco's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements This section presents Hurco Companies, Inc.'s unaudited condensed consolidated financial statements, including statements of operations, comprehensive income (loss), balance sheets, cash flows, and changes in shareholders' equity, along with detailed notes explaining accounting policies, revenue recognition, derivative instruments, equity incentive plans, and other financial details for the three and six months ended April 30, 2023 and 2022 Condensed Consolidated Statements of Operations | (In thousands, except per share data) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Sales and service fees ($) | $ 53,819 | $ 62,825 | $ 108,501 | $ 129,712 | | Gross profit ($) | $ 12,583 | $ 15,602 | $ 25,301 | $ 32,509 | | Operating income ($) | $ 991 | $ 3,087 | $ 2,225 | $ 8,297 | | Net income ($) | $ 377 | $ 2,029 | $ 1,707 | $ 5,564 | | Basic Income per common share ($) | $ 0.06 | $ 0.30 | $ 0.26 | $ 0.83 | | Diluted Income per common share ($) | $ 0.06 | $ 0.30 | $ 0.26 | $ 0.83 | | Dividends paid per share ($) | $ 0.16 | $ 0.15 | $ 0.31 | $ 0.29 | - For the three months ended April 30, 2023, sales and service fees decreased by 14% YoY to $53.8 million, while net income significantly dropped by 81% to $0.377 million; basic and diluted EPS also saw a substantial decline from $0.30 to $0.06[10] - For the six months ended April 30, 2023, sales and service fees decreased by 16% YoY to $108.5 million, and net income fell by 69% to $1.707 million; basic and diluted EPS decreased from $0.83 to $0.26[10] Condensed Consolidated Statements of Comprehensive Income (Loss) | (In thousands) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income ($) | $ 377 | $ 2,029 | $ 1,707 | $ 5,564 | | Total other comprehensive income (loss) ($) | $ (1,367) | $ (7,997) | $ 8,516 | $ (9,023) | | Comprehensive income (loss) ($) | $ (990) | $ (5,968) | $ 10,223 | $ (3,459) | - For the three months ended April 30, 2023, the company reported a comprehensive loss of $0.990 million, a significant improvement from the $5.968 million comprehensive loss in the prior year, primarily due to a reduced negative impact from foreign currency translation[12] - For the six months ended April 30, 2023, the company achieved comprehensive income of $10.223 million, a substantial turnaround from the $3.459 million comprehensive loss in the prior year, driven by a positive foreign currency translation gain[12] Condensed Consolidated Balance Sheets | (In thousands) | April 30, 2023 | October 31, 2022 | | :------------- | :------------- | :--------------- | | Total current assets ($) | $ 272,496 | $ 268,069 | | Total assets ($) | $ 311,802 | $ 306,237 | | Total current liabilities ($) | $ 72,994 | $ 73,336 | | Total liabilities and shareholders' equity ($) | $ 311,802 | $ 306,237 | | Total shareholders' equity ($) | $ 227,705 | $ 222,644 | - As of April 30, 2023, total assets increased to $311.8 million from $306.2 million at October 31, 2022, primarily driven by an increase in inventories[15] - Shareholders' equity increased by approximately $5 million to $227.7 million as of April 30, 2023, compared to October 31, 2022[15] Condensed Consolidated Statements of Cash Flows | (In thousands) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used for) operating activities ($) | $ 951 | $ (837) | $ (7,035) | $ 8,312 | | Net cash provided by (used for) investing activities ($) | $ (533) | $ (432) | $ (1,132) | $ (1,005) | | Net cash provided by (used for) financing activities ($) | $ (4,905) | $ (2,657) | $ (6,686) | $ (4,904) | | Net increase (decrease) in cash and cash equivalents ($) | $ (4,733) | $ (7,987) | $ (11,767) | $ (2,021) | - For the six months ended April 30, 2023, net cash used for operating activities was $7.035 million, a significant decrease from $8.312 million provided in the prior year, primarily due to changes in inventories and accounts receivable[18] - Cash and cash equivalents decreased by $11.767 million for the six months ended April 30, 2023, ending at $52.155 million[18] Condensed Consolidated Statements of Changes in Shareholders' Equity | (In thousands, except shares outstanding) | April 30, 2023 | April 30, 2022 | | :-------------------------------------- | :------------- | :------------- | | Common Stock Outstanding (shares) | 6,462,138 | 6,566,994 | | Total Shareholders' Equity ($) | $ 227,705 | $ 231,651 | - For the six months ended April 30, 2023, total shareholders' equity increased from $222.644 million (October 31, 2022) to $227.705 million, driven by net income and other comprehensive income (loss), partially offset by stock repurchases and dividends paid[20] - The company repurchased 166,289 shares for $4.609 million during the six months ended April 30, 2023[20] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of Hurco's accounting policies, revenue recognition, derivative instruments, equity incentive plans, and other financial details 1. General - Hurco Companies, Inc. designs, manufactures, and sells computerized (CNC) machine tools, primarily vertical machining centers and turning centers, to the metal cutting industry globally[22] - The company's operations have been affected by global disruptions including COVID-19, vendor delays, transportation issues, high inflation, foreign currency volatility, and competitive labor markets[23] 2. Revenue Recognition - Revenue from machine tool sales is recognized upon delivery to the customer or distributor, as control is deemed transferred at shipment, not contingent on customer acceptance[27] - Installation services for three-axis machines are considered immaterial; for five-axis machines, installation revenue is recognized prorata over the installation period[28] - Service fees from maintenance contracts are deferred and recognized prorata over the contract term, while customer discounts and estimated product returns are recorded as revenue reductions[29] 3. Derivative Instruments and Hedging Activities - Hurco uses foreign currency forward exchange contracts to manage foreign currency risk related to net equity investments, gross profit from foreign currency sales/purchases, and foreign currency receivables/payables[30][31] - As of April 30, 2023, the company had $1.0 million of loss, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive income (loss), primarily for Euros, Pounds Sterling, and New Taiwan Dollars[33] Fair Value of Derivative Instruments | (In thousands) | April 30, 2023 Fair Value ($) | October 31, 2022 Fair Value ($) | | :-------------------------------------- | :-------------------------- | :-------------------------- | | Designated as Hedging Instruments: | | | | Foreign exchange forward contracts (assets) | $ 108 | $ 2,273 | | Foreign exchange forward contracts (liabilities) | $ 1,627 | $ 2,891 | | Not Designated as Hedging Instruments: | | | | Foreign exchange forward contracts (assets) | $ 64 | $ 242 | | Foreign exchange forward contracts (liabilities) | $ 650 | $ 741 | 4. Equity Incentive Plan - The 2016 Equity Incentive Plan allows for grants of stock options, restricted stock, and performance units to employees and non-employee directors; in March 2022, shareholders approved an increase of 850,000 shares to the plan[40] - As of April 30, 2023, no stock options were outstanding, as all 11,559 options outstanding at October 31, 2022, were exercised[42] - During the first six months of fiscal 2023, the company granted 17,226 shares of time-based restricted stock to non-employee directors, 29,376 shares of time-based restricted stock to executive officers, and 88,129 PSUs (47,003 PSU-NI and 41,126 PSU-FCF) to executive officers[43][45][46][47] Equity Incentive Plan Activity | (In thousands, except shares) | Number of Shares | Weighted Average Grant Date Fair Value ($) | | :---------------------------- | :--------------- | :------------------------------------- | | Unvested at October 31, 2022 | 273,103 | $ 32.90 |\n| Shares or units granted | 146,954 | $ 26.40 |\n| Shares or units vested | (49,874) | $ 36.23 |\n| Shares or units cancelled | (39,916) | $ 40.22 |\n| Unvested at April 30, 2023 | 318,317 | $ 28.27 | 5. Earnings Per Share | (In thousands, except per share amounts) | Three Months Ended April 30, 2023 | Three Months Ended April 30, 2022 | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net income applicable to common shareholders ($) | $ 372 | $ 2,005 | $ 1,683 | $ 5,499 | | Basic Income per share ($) | $ 0.06 | $ 0.30 | $ 0.26 | $ 0.83 | | Diluted Income per share ($) | $ 0.06 | $ 0.30 | $ 0.26 | $ 0.83 | - Basic and diluted EPS for the three months ended April 30, 2023, were $0.06, down from $0.30 in the prior year, reflecting a decrease in net income[50] - Basic and diluted EPS for the six months ended April 30, 2023, were $0.26, down from $0.83 in the prior year, consistent with the decline in net income[50] 6. Accounts Receivable - Accounts receivable are reported net of allowances for doubtful accounts, which remained consistent at $1.5 million as of April 30, 2023, and October 31, 2022[51] 7. Inventories | (In thousands) | April 30, 2023 | October 31, 2022 | | :------------- | :------------- | :--------------- | | Purchased parts and sub–assemblies ($) | $ 48,551 | $ 46,796 | | Work–in–process ($) | $ 19,686 | $ 16,539 | | Finished goods ($) | $ 111,283 | $ 96,305 | | Inventories, gross ($) | $ 179,520 | $ 159,640 | | Reserve for purchased parts and sub-assemblies ($) | $ (3,689) | $ (3,433) | | Inventories, net ($) | $ 175,831 | $ 156,207 | - Net inventories increased to $175.8 million as of April 30, 2023, from $156.2 million at October 31, 2022, primarily driven by increases in finished goods and work-in-process[52] 8. Leases - The company records a right-of-use asset and lease liability for operating leases with terms over 12 months[54] - Total operating lease expense was $2.6 million for both the six months ended April 30, 2023, and 2022[55] Cash Flow Information for Leases | (In thousands) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------- | :------------------------------ | :------------------------------ | | Cash paid for amounts included in the measurement of lease liabilities ($) | $ 2,511 | $ 2,370 | | Right-of-use assets obtained in exchange for new operating lease liabilities ($) | $ 2,372 | $ 1,515 | 9. Segment Information - Hurco operates in a single segment: industrial automation equipment, focusing on the design, manufacture, and sale of computerized machine tools to the metal cutting industry globally[58] 10. Guarantees and Product Warranties - As of April 30, 2023, the company had nine outstanding third-party payment guarantees totaling approximately $0.9 million, with liabilities accrued at fair value, which are insignificant[59] - The warranty reserve increased year-over-year primarily due to foreign currency translation impact, despite a lower volume of machine sales[61] Warranty Reserve Activity | (In thousands) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------- | :------------------------------ | :------------------------------ | | Balance, beginning of period ($) | $ 1,426 | $ 1,516 | | Provision for warranties during the period ($) | $ 1,417 | $ 1,263 | | Charges to the reserve ($) | $ (1,475) | $ (1,330) | | Impact of foreign currency translation ($) | $ 67 | $ (62) | | Balance, end of period ($) | $ 1,435 | $ 1,387 | 11. Debt Agreements - The 2018 Credit Agreement provides an unsecured revolving credit and letter of credit facility up to $40.0 million, maturing December 31, 2023, with Hurco and Hurco B.V. as borrowers[62] - As of April 30, 2023, there were no borrowings under any of the company's credit facilities, and approximately $51.2 million of available borrowing capacity remained[67] - The credit agreement includes covenants requiring minimum working capital of $125.0 million and minimum tangible net worth of $176.5 million[64] 12. Income Taxes - The effective tax rate for the first six months of fiscal year 2023 increased to 35% from 31% in the prior year, primarily due to changes in the geographic mix of income and loss and a discrete item related to stock compensation[70] - The Inflation Reduction Act of 2022 is not expected to have a material impact on the company's income taxes[69] Provision for Income Taxes | (In thousands) | Six Months Ended April 30, 2023 | Six Months Ended April 30, 2022 | | :------------- | :------------------------------ | :------------------------------ | | Provision for income taxes ($) | $ 901 | $ 2,536 | 13. Financial Instruments - The company uses a three-tier fair value hierarchy (Level 1, 2, 3) for financial instruments; cash and cash equivalents meet Level 1 criteria, while derivatives are Level 2[73][74][76] Fair Value Measurements | (In thousands) | April 30, 2023 Assets ($) | October 31, 2022 Assets ($) | April 30, 2023 Liabilities ($) | October 31, 2022 Liabilities ($) | | :------------- | :-------------------- | :---------------------- | :------------------------- | :--------------------------- | | Level 1: Deferred compensation | $ 2,243 | $ 1,996 | $ — | $ — | | Level 2: Derivatives | $ 172 | $ 2,515 | $ 2,277 | $ 3,632 | - The U.S. dollar equivalent notional amounts of foreign currency forward exchange contracts were $98.5 million at April 30, 2023, down from $102.8 million at October 31, 2022[76] 14. Contingencies and Litigation - The company is involved in various claims and lawsuits in the normal course of business but does not expect them to have a material adverse effect on its financial position or results of operations[78] 15. New Accounting Pronouncements - Recently issued accounting pronouncements are not expected to have a significant impact on the consolidated financial statements as of April 30, 2023[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Hurco's financial condition, liquidity, capital resources, and results of operations for the three and six months ended April 30, 2023; it covers an executive overview of the business, detailed analysis of sales, orders, gross profit, operating expenses, and income taxes, as well as discussions on liquidity, capital allocation, and risk factors Executive Overview - Hurco is an international industrial technology company specializing in CNC machine tools (mills and lathes) for the metal cutting industry, with significant foreign sales and manufacturing operations[82][84] - Approximately 54% of revenues in the first six months of fiscal year 2023 were from Europe, and 9% from Asia Pacific, with varying pricing pressures[84] - The company's product portfolio includes Hurco (technology innovation), Milltronics (value-based), and Takumi (high-speed performance) brands, along with other non-Hurco branded products and automation solutions via ProCobots LLC[85] - Operations have been impacted by COVID-19, vendor delays, transportation issues, high inflation, foreign currency volatility, and competitive labor markets, leading to increased costs and supply chain challenges[89] Results of Operations This section analyzes Hurco's financial performance, including sales, gross profit, and operating income, for the three and six months ended April 30, 2023, compared to the prior year Three Months Ended April 30, 2023 Compared to Three Months Ended April 30, 2022 Key Financial Metrics | Metric | Q2 FY23 (in thousands) | Q2 FY22 (in thousands) | $ Change (in thousands) | % Change | | :----- | :--------------------- | :--------------------- | :------- | :------- | | Sales and Service Fees ($) | $ 53,819 | $ 62,825 | $ (9,006) | (14)% | | Gross Profit ($) | $ 12,583 | $ 15,602 | $ (3,019) | (19)% | | Operating Income ($) | $ 991 | $ 3,087 | $ (2,096) | (68)% | - Sales and service fees decreased by 14% to $53.8 million, including an unfavorable currency impact of 2%; Americas sales decreased by 18%, Europe by 3%, and Asia Pacific by 42%[90][91][92][93] - Gross profit decreased to 23% of sales from 25% in the prior year, primarily due to lower sales volume of vertical milling machines and the negative impact of fixed costs[99] - Operating income decreased significantly by 68% to $1.0 million, driven by lower sales volume and the impact of fixed costs[101] Geographic Region Sales | Geographic Region | Q2 FY23 Sales (in thousands) | Q2 FY22 Sales (in thousands) | $ Change (in thousands) | % Change | | :---------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Americas ($) | $ 18,324 | $ 22,409 | $ (4,085) | (18)% | | Europe ($) | $ 29,991 | $ 30,882 | $ (891) | (3)% | | Asia Pacific ($) | $ 5,504 | $ 9,534 | $ (4,030) | (42)% | Product Category Sales | Product Category | Q2 FY23 Sales (in thousands) | Q2 FY22 Sales (in thousands) | $ Change (in thousands) | % Change | | :--------------- | :--------------------------- | :--------------------------- | :------- | :------- | | Computerized Machine Tools ($) | $ 43,929 | $ 53,153 | $ (9,224) | (17)% | | Service Parts ($) | $ 7,244 | $ 6,941 | $ 303 | 4% | | Service Fees ($) | $ 2,032 | $ 2,107 | $ (75) | (4)% | - Orders for Q2 FY23 increased by 2% to $60.2 million, despite an unfavorable currency impact of 3%; European orders increased by 18%, while Americas and Asia Pacific orders decreased by 9% and 24% respectively[96][97][98] Six Months Ended April 30, 2023 Compared to Six Months Ended April 30, 2022 Key Financial Metrics | Metric | 6 Months FY23 (in thousands) | 6 Months FY22 (in thousands) | $ Change (in thousands) | % Change | | :----- | :--------------------------- | :--------------------------- | :------- | :------- | | Sales and Service Fees ($) | $ 108,501 | $ 129,712 | $ (21,211) | (16)% | | Gross Profit ($) | $ 25,301 | $ 32,509 | $ (7,208) | (22)% | | Operating Income ($) | $ 2,225 | $ 8,297 | $ (6,072) | (73)% | - Sales and service fees decreased by 16% to $108.5 million, including an unfavorable currency impact of 4%; Americas sales decreased by 13%, Europe by 10%, and Asia Pacific by 48%[104][105][106][107][108] - Gross profit decreased to 23% of sales from 25% in the prior year, primarily due to lower sales volume of vertical milling machines and the negative impact of fixed costs[117] - Operating income decreased significantly by 73% to $2.2 million, driven by lower sales volume and the impact of fixed costs[119] Geographic Region Sales | Geographic Region | 6 Months FY23 Sales (in thousands) | 6 Months FY22 Sales (in thousands) | $ Change (in thousands) | % Change | | :---------------- | :--------------------------------- | :--------------------------------- | :------- | :------- | | Americas ($) | $ 40,337 | $ 46,418 | $ (6,081) | (13)% |\n| Europe ($) | $ 58,583 | $ 65,000 | $ (6,417) | (10)% |\n| Asia Pacific ($) | $ 9,581 | $ 18,294 | $ (8,713) | (48)% | Product Category Sales | Product Category | 6 Months FY23 Sales (in thousands) | 6 Months FY22 Sales (in thousands) | $ Change (in thousands) | % Change | | :--------------- | :--------------------------------- | :--------------------------------- | :------- | :------- | | Computerized Machine Tools ($) | $ 89,346 | $ 110,360 | $ (21,014) | (19)% | | Computer Control Systems and Software ($) | $ 1,138 | $ 1,365 | $ (227) | (17)% | | Service Parts ($) | $ 13,935 | $ 13,908 | $ 27 | 0% | | Service Fees ($) | $ 4,082 | $ 4,079 | $ 3 | 0% | - Orders for the first six months of FY23 decreased by 13% to $113.5 million, including an unfavorable currency impact of 4%; Americas orders decreased by 10%, Europe by 8%, and Asia Pacific by 41%[111][112][114][115][116] Liquidity and Capital Resources - Cash and cash equivalents decreased to $52.2 million at April 30, 2023, from $63.9 million at October 31, 2022, with approximately 18% denominated in U.S. dollars[122] - Working capital increased to $199.5 million at April 30, 2023, from $194.7 million at October 31, 2022, driven by increases in inventories and prepaid assets, offset by decreases in cash and accounts receivable[123] - The company announced a new $25.0 million share repurchase program in January 2023, with $24.5 million remaining available as of April 30, 2023; total repurchases under all programs during the first six months of FY23 amounted to $4.6 million[125][126] - Cash dividends of $2.0 million were paid to shareholders during the six months ended April 30, 2023[127] - As of April 30, 2023, the company had no borrowings under its $40.0 million revolving credit facility or other international credit facilities, with $51.2 million available for borrowing[132][133] Critical Accounting Estimates - There were no material changes to the company's critical accounting estimates during the first six months of fiscal year 2023, as described in the Annual Report on Form 10-K for the year ended October 31, 2022[137] Contractual Obligations and Commitments - No material changes to contractual obligations and commitments were reported from the information provided in the Annual Report on Form 10-K for the fiscal year ended October 31, 2022[138] Off Balance Sheet Arrangements - As of April 30, 2023, the company had nine outstanding third-party payment guarantees totaling approximately $0.9 million, which are accrued at fair value and considered insignificant[139] Cautionary Statement Concerning Forward-Looking Statements - The report contains forward-looking statements subject to known and unknown risks, including the impact of COVID-19, cyclical nature of the machine tool industry, uncertain economic conditions, international operations risks, currency exchange rate changes, and competition[140][141][147] - Readers are cautioned not to place undue reliance on these statements, and the company disclaims any obligation to update or revise them[145] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details Hurco's exposure to market risks, specifically interest rate risk and foreign currency exchange risk, and the strategies employed to manage them, including the use of derivative instruments Interest Rate Risk - Interest on borrowings under the company's bank credit agreements is tied to prevailing domestic and foreign interest rates; as of April 30, 2023, there were no outstanding borrowings[148] Foreign Currency Exchange Risk - Approximately 63% of revenues in the first six months of fiscal year 2023 were from non-Americas customers, invoiced in various foreign currencies, exposing the company to foreign currency exchange risk[149] - The company uses foreign currency forward exchange contracts to hedge cash flow risk from inter-company sales and purchases (primarily Euro, Pound Sterling, New Taiwan Dollar) and to protect against fluctuations on receivables and payables[151] Foreign Currency Forward Exchange Contracts | Forward Contracts (Designated as Hedges) | Notional Amount in Foreign Currency | Weighted Avg. Forward Rate | Contract Amount at April 30, 2023 (in thousands) | Maturity Dates | | :--------------------------------------- | :---------------------------------- | :------------------------- | :----------------------------------------------- | :------------- | | Sale Contracts: Euro | 12,850 | 1.0718 | $ 14,265 | May 2023 - Apr 2024 | | Sale Contracts: Sterling | 4,850 | 1.2114 | $ 6,103 | May 2023 - Apr 2024 | | Purchase Contracts: New Taiwan Dollar | 670,000 | 29.5060 * | $ 22,159 | May 2023 - Apr 2024 | | * New Taiwan Dollars per U.S. dollar