HURCO COMPANIES INC - Quarter Report: 2005 April (Form 10-Q)
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x |
Quarterly
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended April 30, 2005
or |
|
Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from _________ to
_________. |
Commission
File No. 0-9143
HURCO
COMPANIES, INC.
(Exact
name of registrant as specified in its charter)
|
Indiana |
35-1150732 | |
|
(State
or other jurisdiction of |
(I.R.S.
Employer Identification Number) | |
|
incorporation
or organization) |
||
|
One
Technology Way |
||
|
Indianapolis,
Indiana |
46268 | |
|
(Address
of principal executive offices) |
(Zip
code) |
Registrant’s
telephone number, including area code (317)
293-5309
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to the filing requirements for the
past 90 days:
Yes x No o
Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
The
number of shares of the Registrant's common stock outstanding as of June 1, 2005
was 6,201,920.
HURCO
COMPANIES, INC.
April
2005 Form 10-Q Quarterly Report
Table
of Contents
Part
I - Financial Information
|
Item
1. |
Financial
Statements |
|
|
Condensed
Consolidated Statement of Operations
Three
months and six months ended April 30, 2005 and 2004 |
3 | |
|
Condensed
Consolidated Balance Sheet
As
of April 30, 2005 and October 31, 2004 |
4 | |
|
Condensed
Consolidated Statement of Cash Flows
Three
months and six months ended April 30, 2005 and 2004 |
5 | |
|
Condensed
Consolidated Statement of Changes in Shareholders' Equity
Three
months and six months ended April 30, 2005 and 2004 |
6 | |
|
Notes
to Condensed Consolidated Financial Statements |
7 | |
|
Item
2. |
Management's
Discussion and Analysis of Financial
Condition
and Results of Operations |
10 |
|
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk |
16 |
|
Item
4. |
Controls
and Procedures |
18 |
Part
II - Other Information
|
Item
1. |
Legal
Proceedings |
19 |
|
Item
4. |
Submission
of Matters to a Vote of Security Holders |
19 |
|
Item
6. |
Exhibits |
20 |
|
Signatures |
|
21 |
PART
I - FINANCIAL INFORMATION
Item
1. CONDENSED
FINANCIAL STATEMENTS
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(In
thousands, except per share data)
|
Three
Months Ended |
Six
Months Ended |
||||||||||||
|
April
30 |
April
30 |
||||||||||||
|
2005 |
2004 |
2005 |
2004 |
||||||||||
|
(unaudited) |
(unaudited) |
||||||||||||
|
Sales
and service fees |
$ |
30,990 |
$ |
24,255 |
$ |
61,236 |
$ |
46,973 |
|||||
|
Cost
of sales and service |
20,223 |
16,842 |
40,729 |
33,029 |
|||||||||
|
Gross
profit |
10,767 |
7,413 |
20,507 |
13,944 |
|||||||||
|
Selling,
general and administrative expenses |
6,363 |
5,127 |
12,550 |
10,054 |
|||||||||
|
Operating
income |
4,404 |
2,286 |
7,957 |
3,890 |
|||||||||
|
Interest
expense |
86 |
117 |
169 |
261 |
|||||||||
|
Variable
options expense |
-- |
67 |
-- |
322 |
|||||||||
|
Other
income (expense), net |
(238 |
) |
23 |
(309 |
) |
(147 |
) | ||||||
|
Income
before taxes |
4,080 |
2,125 |
7,479 |
3,160 |
|||||||||
|
Provision
for income taxes |
781 |
388 |
1,150 |
754 |
|||||||||
|
Net
income |
$ |
3,299 |
$ |
1,737 |
$ |
6,329 |
$ |
2,406 |
|||||
|
Earnings
per common share |
|||||||||||||
|
Basic |
$ |
0.53 |
$ |
0.31 |
$ |
1.03 |
$ |
0.43 |
|||||
|
Diluted |
$ |
0.52 |
$ |
0.29 |
$ |
1.00 |
$ |
0.41 |
|||||
|
Weighted
average common shares outstanding |
|||||||||||||
|
Basic |
6,193 |
5,695 |
6,131 |
5,641 |
|||||||||
|
Diluted |
6,370 |
5,976 |
6,307 |
5,838 |
|||||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET
(Dollars
in thousands)
|
April
30 |
October
31 |
||||||
|
2005 |
2004 |
||||||
|
(unaudited) |
(audited) |
||||||
ASSETS |
|||||||
Current
assets: |
|||||||
|
Cash
and cash equivalents |
$ |
11,669 |
$ |
8,249 |
|||
|
Cash
- restricted |
-- |
277 |
|||||
|
Accounts
receivable |
18,195 |
17,337 |
|||||
|
Inventories |
33,828 |
28,937 |
|||||
|
Other |
3,494 |
1,672 |
|||||
|
Total
current assets |
67,186 |
56,472 |
|||||
|
Property
and equipment: |
|||||||
|
Land |
761 |
761 |
|||||
|
Building |
7,218 |
7,205 |
|||||
|
Machinery
and equipment |
12,880 |
12,106 |
|||||
|
Leasehold
improvements |
712 |
676 |
|||||
|
21,571 |
20,748 |
||||||
|
Less
accumulated depreciation and amortization |
(13,003 |
) |
(12,512 |
) | |||
|
8,568 |
8,236 |
||||||
|
Software
development costs, less amortization |
3,098 |
2,920 |
|||||
|
Investments
and other assets |
5,825 |
5,818 |
|||||
$ |
84,677 |
$ |
73,446 |
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY |
|||||||
|
Current
liabilities: |
|||||||
|
Accounts
payable |
$ |
20,189 |
$ |
18,361 |
|||
|
Accrued
expenses |
11,493 |
11,447 |
|||||
|
Current
portion of long-term debt |
321 |
317 |
|||||
|
Total
current liabilities |
32,003 |
30,125 |
|||||
|
Non-current
liabilities: |
|||||||
|
Long-term
debt |
4,074 |
4,283 |
|||||
|
Deferred
credits and other obligations |
354 |
583 |
|||||
|
Total
liabilities |
36,431 |
34,991 |
|||||
|
Shareholders’
equity: |
|||||||
|
Preferred
stock: no par value per share; 1,000,000 shares |
|||||||
|
authorized;
no shares issued |
-- |
-- |
|||||
|
Common
stock: no par value; $.10 stated value per share; |
|||||||
|
12,500,000
shares authorized, 6,201,920 and 6,019,594 shares |
|||||||
|
issued,
respectively |
620 |
602 |
|||||
|
Additional
paid-in capital |
47,487 |
46,778 |
|||||
|
Retained
earnings (Accumulated deficit) |
2,887 |
(3,442 |
) | ||||
|
Accumulated
other comprehensive income |
(2,748 |
) |
(5,483 |
) | |||
|
Total
shareholders’ equity |
48,246 |
38,455 |
|||||
$ |
84,677 |
$ |
73,446 |
||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars
in thousands)
|
Three
Months Ended |
Six
Months Ended |
||||||||||||
|
April
30 |
April
30 |
||||||||||||
|
2005 |
2004 |
2005 |
2004 |
||||||||||
|
(unaudited) |
(unaudited) |
||||||||||||
Cash
flows from operating activities: |
|||||||||||||
|
Net
income |
$ |
3,299 |
$ |
1,737 |
$ |
6,329 |
$ |
2,406 |
|||||
|
Adjustments
to reconcile net income to net
cash
provided by (used for) operating activities: |
|||||||||||||
|
Equity
income of affiliates |
(154 |
) |
(92 |
) |
(87 |
) |
(92 |
) | |||||
|
Depreciation
and amortization |
305 |
310 |
622 |
641 |
|||||||||
|
Change
in assets and liabilities: |
|||||||||||||
|
Increase
in accounts receivable |
(1,626 |
) |
(2,254 |
) |
(743 |
) |
(1,620 |
) | |||||
|
Increase
in inventories |
(2,455 |
) |
(1,775 |
) |
(3,942 |
) |
(1,407 |
) | |||||
|
Increase
in accounts payable |
663 |
1,718 |
819 |
5,817 |
|||||||||
|
Increase
(decrease) in accrued expenses |
603 |
1,133 |
530 |
(1,372 |
) | ||||||||
|
Other |
144 |
(477 |
) |
117 |
(575 |
) | |||||||
|
Net
cash provided by operating activities |
779 |
300 |
3,645 |
3,798 |
|||||||||
|
Cash
flows from investing activities: |
|||||||||||||
|
Purchase
of property and equipment |
(254 |
) |
(147 |
) |
(740 |
) |
(354 |
) | |||||
|
Software
development costs |
(198 |
) |
(372 |
) |
(335 |
) |
(636 |
) | |||||
|
Change
in restricted cash |
-- |
1,092 |
277 |
622 |
|||||||||
|
Other
investments |
48 |
9 |
(6 |
) |
(37 |
) | |||||||
|
Net
cash provided by (used for) investing activities |
(404 |
) |
582 |
(804 |
) |
(405 |
) | ||||||
|
Cash
flows from financing activities: |
|||||||||||||
|
Advances
on bank credit facilities |
350 |
6,142 |
4,700 |
19,260 |
|||||||||
|
Repayment
of bank credit facilities |
(350 |
) |
(7,199 |
) |
(4,851 |
) |
(22,828 |
) | |||||
|
Repayment
on first mortgage |
(30 |
) |
(26 |
) |
(59 |
) |
(53 |
) | |||||
|
Repayment
of term debt |
-- |
-- |
-- |
(337 |
) | ||||||||
|
Proceeds
from exercise of common stock options |
64 |
953 |
727 |
1,291 |
|||||||||
|
Net
cash provided by (used for)
financing
activities |
34 |
(130 |
) |
517 |
(2,667 |
) | |||||||
|
Effect
of exchange rate changes on cash |
(43 |
) |
(163 |
) |
62 |
178 |
|||||||
|
Net
increase in cash and
cash
equivalents |
366 |
589 |
3,420 |
904 |
|||||||||
|
Cash
and cash equivalents
at
beginning of period |
11,303 |
5,604 |
8,249 |
5,289 |
|||||||||
|
Cash
and cash equivalents
at
end of period |
$ |
11,669 |
$ |
6,193 |
$ |
11,669 |
$ |
6,193 |
|||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For
the six months ended April 30, 2005 and 2004
|
Common
Stock |
||||||||||||
|
Shares
Issued
&
Outstanding |
Amount |
Additional
Paid-In
Capital |
Retained
Earnings
(Accumulated
Deficit) |
Accumulated
Other
Comprehensive
Income
(Loss) |
Total | |||||||
|
(Dollars
in thousands) |
||||||||||||
|
Balances,
October 31, 2003 |
5,575,987 |
$557 |
$44,695 |
$(9,711) |
$(6,800) |
$28,741 | ||||||
|
Net
income |
-- |
-- |
-- |
2,406 |
-- |
2,406 | ||||||
|
Translation
of foreign currency
financial
statements |
-- |
-- |
-- |
-- |
469 |
469 | ||||||
|
Unrealized
gain on derivative
instruments |
-- |
-- |
-- |
-- |
440 |
440 | ||||||
|
Comprehensive
Income |
-- |
-- |
-- |
-- |
-- |
3,315 | ||||||
|
Exercise
of common stock options |
250,940 |
26 |
1,265 |
-- |
-- |
1,291 | ||||||
|
Balances,
April 30, 2004 |
5,826,927 |
$
583 |
$
45,960 |
$
(7,305) |
$
(5,891) |
$
33,347 | ||||||
|
Balances,
October 31, 2004 |
6,019,594 |
$
602 |
$
46,778 |
$
(3,442) |
$
(5,483) |
$
38,455 | ||||||
|
Net
income |
-- |
-- |
-- |
6,329 |
-- |
6,329 | ||||||
|
Translation
of foreign currency
financial
statements |
-- |
-- |
-- |
-- |
402 |
402 | ||||||
|
Unrealized
gain on derivative
instruments |
-- |
-- |
-- |
-- |
2,333 |
2,333 | ||||||
|
Comprehensive
income |
-- |
-- |
-- |
-- |
-- |
9,064 | ||||||
|
Exercise
of common stock options |
182,326 |
18 |
709 |
-- |
-- |
727 | ||||||
|
Balances,
April 30, 2005 |
6,201,920 |
$
620 |
$
47,487 |
$
2,887 |
$
(2,748) |
$
48,246 | ||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
1. |
GENERAL |
The
unaudited Condensed Consolidated Financial Statements include the accounts of
Hurco Companies, Inc. and its consolidated subsidiaries. We design and produce
computerized machine tools, interactive computer control systems and software
for sale through our distribution network to the worldwide metal cutting market.
We also provide software options, computer control upgrades, accessories and
replacement parts for our products, as well as customer service and training
support.
The
condensed financial information as of April 30, 2005 and for the three and six
months ended April 30, 2005 and April 30, 2004 is unaudited; however, in our
opinion, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results and
financial position for the interim periods. We suggest that you read these
condensed consolidated financial statements in conjunction with the financial
statements and the notes thereto included in our Annual Report on Form 10-K for
the year ended October 31, 2004.
|
2. |
HEDGING |
We enter
into foreign currency forward exchange contracts periodically to hedge certain
forecast inter-company product sales and inter-company and third party product
purchases that will be denominated in foreign currencies (primarily the Pound
Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to
mitigate the risk that the U.S. dollar net cash inflows and outflows resulting
from sales and purchases denominated in foreign currencies will be adversely
affected by changes in exchange rates. These forward contracts have been
designated as cash flow hedge instruments, and are recorded in the Condensed
Consolidated Balance Sheet at fair value in Other Current Assets and Accrued
Expenses. Gains and losses resulting from changes in the fair value of these
hedge instruments are deferred in Accumulated Other Comprehensive Income and
recognized as an adjustment to Cost of Sales in the period that the sale of the
product that was the subject of the hedged transaction is recognized, thereby
providing an offsetting economic impact against the corresponding change in the
U.S. dollar value of the inter-company sale or purchase being
hedged.
At April
30, 2005, we had $607,000 of net gains related to cash flow hedges deferred in
Accumulated Other Comprehensive Income. Of this amount, $829,000 represents
unrealized gains related to future cash flow hedge instruments that remain
subject to currency fluctuation risk. These deferred gains will be recorded as
an adjustment to Cost of Sales in the periods through October 2006, in which the
sale of the related hedged item is recognized, as described above. Net losses on
cash flow hedge instruments which we reclassified from Other Comprehensive
Income to Cost of Sales in the quarters ended April 30, 2005 and 2004 were
$212,000 and $598,000, respectively.
We also
enter into foreign currency forward exchange contracts to protect against the
effects of foreign currency fluctuations on receivables and payables denominated
in foreign currencies. These derivative instruments are not designated as hedges
under Statement of Financial Accounting Standards No. 133, “Accounting Standards
for Derivative Instruments and Hedging Activities” (SFAS 133), and, as a result,
changes in fair value are reported currently as Other Income (Expense), Net in
the Consolidated Statement of Operations consistent with the transaction gain or
loss on the related foreign denominated receivable or payable. Such net
transaction losses were $334,000 and $21,000 for the quarters ended April 30,
2005 and 2004, respectively.
|
3. |
STOCK
OPTIONS |
At April
30, 2005, we had two stock-based compensation plans for employees and
non-employee directors, which are described more fully in the notes to the
consolidated financial statements included in our 2004 annual report on Form
10-K. We account for those plans under the recognition and measurement
principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,”
and related Interpretations. No stock based compensation cost is reflected in
net earnings related to those plans, except for certain non-qualified options
subject to variable plan accounting, as all stock options granted had exercise
prices equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, “Accounting for Stock Based Compensation,” to the above
plans.
|
3
Months Ended April 30 |
6
Months Ended April 30 |
||||||||||||
|
2005 |
2004 |
2005 |
2004 |
||||||||||
(dollars
in thousands, except per share data) |
|||||||||||||
Net
income, as reported |
$ |
3,299 |
$ |
1,737 |
$ |
6,329 |
$ |
2,406 |
|||||
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax
effects |
(6 |
) |
(24 |
) |
(12 |
) |
(48 |
) | |||||
|
Pro
forma net income |
$ |
3,293 |
$ |
1,713 |
$ |
6,317 |
$ |
2,358 |
|||||
Earnings
per share: |
|||||||||||||
Basic
as reported |
$ |
0.53 |
$ |
0.31 |
$ |
1.03 |
$ |
0.43 |
|||||
Basic
pro forma |
0.53 |
0.30 |
1.03 |
0.42 |
|||||||||
Diluted
as reported |
$ |
0.52 |
$ |
0.29 |
$ |
1.00 |
$ |
0.41 |
|||||
Diluted
pro forma |
0.52 |
0.29 |
1.00 |
0.40 |
|||||||||
|
4. |
EARNINGS
PER SHARE |
Basic and
diluted earnings per common share are based on the weighted average number of
our shares of common stock outstanding. Diluted earnings per common share give
effect to outstanding stock options using the treasury method. The impact of
stock options for the three months ended April 30, 2005 and 2004 was 177,000
and 281,000, respectively.
|
5. |
ACCOUNTS
RECEIVABLE |
The
allowance for doubtful accounts was $755,000 as of April 30, 2005 and $723,000
as of October 31, 2004.
|
6. |
INVENTORIES
|
Inventories,
priced at the lower of cost (first-in, first-out method) or market, are
summarized below (in thousands):
|
April
30, 2005 |
October
31, 2004 |
||||||
Purchased
parts and sub-assemblies |
$ |
5,294 |
$ |
4,714 |
|||
Work-in-process |
5,661 |
5,148 |
|||||
|
Finished
goods |
22,873 |
19,075 |
|||||
$ |
33,828 |
$ |
28,937 |
||||
|
7. |
SEGMENT
INFORMATION |
We
operate in a single segment: industrial automation systems. We design
and produce computerized machine tools, interactive computer control systems and
software for sale through our distribution network to the worldwide metal
working market. We also provide software options, computer control upgrades,
accessories and replacement parts for our products, as well as customer service
and training support.
|
8. |
RESTRUCTURING
EXPENSE AND OTHER EXPENSE, NET |
On
November 23, 2004, we entered into a separation and release agreement with Roger
J. Wolf, who retired from his position as Senior Vice President and as Chief
Financial Officer. Under the agreement, we will pay Mr. Wolf severance
compensation totaling $465,000.
A
rollforward of the severance accrual follows (in thousands):
|
Balance |
Provision |
Charges
to |
Balance |
||||||||||
|
Description |
10/31/2004 |
(Credit) |
Accrual |
4/30/2005 |
|||||||||
|
Severance
costs |
$ |
465 |
-- |
$ |
217 |
$ |
248 |
||||||
|
Total |
$ |
465 |
-- |
$ |
217 |
$ |
248 |
||||||
|
9. |
GUARANTEES |
From time
to time, our European subsidiaries guarantee third party lease financing
residuals in connection with the sale of certain machines in Europe. At April
30, 2005 there were 34 third party guarantees totaling approximately $1.8
million. A retention of title clause allows us to obtain the machine if the
customer defaults on its lease. We believe that the proceeds obtained from
liquidation of the machine would exceed our exposure.
We
provide warranties on our products with respect to defects in material and
workmanship. The terms of these warranties are generally one year for machines
and shorter periods for service parts. We recognize a reserve with respect to
this obligation at the time of product sale, with subsequent warranty claims
recorded against the reserve. The amount of the warranty reserve is determined
based on historical trend experience and any known warranty issues that could
cause future warranty costs to differ from historical experience.
A
reconciliation of the changes in our warranty reserve is as follows (in
thousands):
|
Warranty
Reserve |
||||
Balance
at October 31, 2004 |
$ |
1,750 |
||
Provision
for warranties during the period |
893 |
|||
Charges
to the accrual |
(819 |
) | ||
|
Impact
of foreign currency translation |
37 |
|||
|
Balance
at April 30, 2005 |
$ |
1,861 |
||
| 10. |
NEW
ACCOUNTING PRONOUNCEMENTS |
In
December 2004, the FASB issued Statement No. 123R, “Share Based Payment”, that
requires companies to expense the value of employee stock options and similar
awards for interim and annual periods beginning after December 15, 2005 and
applies to all outstanding and unvested stock-based awards at a company’s
adoption date. The adoption of this standard will not have a material effect on
the Consolidated Financial Statements.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
Certain statements made in this report may constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, among others, changes in general economic and business
conditions that affect market demand for machines tools and related computer
control systems, software products, and replacement parts, changes in
manufacturing markets, adverse currency movements, innovations by competitors,
quality and delivery performance by our contract manufacturers and component
suppliers, and governmental actions and initiatives including import and export
restrictions and tariffs.
OVERVIEW
Hurco
Companies, Inc. is an industrial technology company. We design and produce
computerized machine tools, featuring our proprietary computer control systems
and software, for sale through our own distribution network to the worldwide
metal working market. We also provide software options, control upgrades,
accessories and replacement parts for our products, as well as customer service
and training support.
Our
computerized metal cutting machine tools are manufactured in Taiwan to our
specifications by our wholly owned subsidiary, Hurco Manufacturing Limited
(HML), and an affiliate. We sell our products through approximately 230
independent agents and distributors in approximately 50 countries throughout
North America, Europe and Asia. We also have our own direct sales and service
organizations in England, France, Germany, Italy, Singapore and China.
The
machine tool industry is highly cyclical and changes in demand can occur
abruptly. From 1998 through the third quarter of fiscal 2003, we experienced the
adverse effects of a significant decline in global demand. We have introduced
new product models beginning in late fiscal 2002 and throughout fiscal 2003 and
2004. When worldwide manufacturing activity, along with demand for machine
tools, increased in late fiscal 2003, our sales increased significantly. Those
trends were continued through the second quarter of fiscal 2005. As a result, we
reported our highest amounts for sales and service fees and new order
bookings.
Approximately
80% of worldwide demand for machine tools (measured in U.S. dollars) comes from
outside the United States. During the second quarter of fiscal 2005,
approximately 68% of our sales and service fees were attributable to customers
located abroad. Our sales to foreign customers are denominated, and payments by
those customers are made, in the prevailing currencies—primarily the Euro and
Pound Sterling—in the countries in which those customers are located, and our
product costs are incurred and paid primarily in the New Taiwan Dollar and U.S.
dollars. Changes in currency exchange rates can have a material effect on our
operating results when sales made and expenses incurred in foreign currencies
are translated to U.S. dollars for financial reporting purposes. For example,
when a foreign currency increases in value relative to the U.S. dollar, sales
made (and expenses incurred) in that currency, when translated to U.S. dollars
for reporting in our financial statements, are higher than would be the case
when that currency has a lower value relative to the U.S. dollar. For this
reason, in our comparison of period-to-period results, we customarily set forth
not only the increases or decrease in those results as reported in our financial
statements (which reflect translation to U.S. dollars at actual prevailing
exchange rates), but also the impact of foreign currency-denominated revenue or
expense translated to U.S. dollars at the same rate of exchange in both
periods.
Although
our high levels of foreign manufacturing and sales also subject us to cash flow
risks due to fluctuating currency exchange rates, we mitigate those risks
through the use of various hedging instruments - principally foreign currency
forward exchange contracts.
The
volatility of demand for machine tools can significantly impact our working
capital requirements and, therefore, our cash flow from operations and operating
profits. Because our products are manufactured in Taiwan, manufacturing and
ocean transportation lead times require that we schedule machine tool production
based on forecasts of customer orders for a future period of four or five
months. We monitor market and order activity levels and rebalance our future
production schedules to changes in demand. Nevertheless a significant unexpected
decline in customer orders from forecasted levels would temporarily increase
finished goods inventories and our need for working capital.
We
monitor the U.S. machine tool market activity as reported by the Association of
Manufacturing Technology (AMT), the primary industry group for U.S. machine tool
consumption. We also monitor the PMI (formerly called the Purchasing Manager’s
Index), as reported by the Institute for Supply Management. Our European and
Asian subsidiaries monitor machine tool consumption through various government
and trade publications.
We
monitor key performance indicators such as days sales outstanding for accounts
receivable and inventory turns for the trailing twelve months. We calculate net
assets per dollar of revenue to assess our working capital levels. We also
monitor operating income and selling, general and administrative expenses as a
percentage of sales and service fees.
RESULTS
OF OPERATIONS
Three
Months Ended April 30, 2005 Compared to Three Months Ended April 30,
2004
For the
second quarter of fiscal 2005, we reported net income of $3.3 million, or $.52
per share, compared to $1.7 million, or $.29 per share, for the corresponding
period one year ago.
Sales
and Service Fees. Sales
and service fees for the second quarter of fiscal 2005 were the highest in our
history and totaled $31.0 million, an increase of $6.7 million (28%) from the
$24.3 million reported for the second fiscal quarter of 2004. The increased
sales reflected an improvement in industry demand and the continuing popularity
of our newer machine tool products, which represented 70% of all units shipped
during the quarter.
As noted
below, approximately 62% of our sales and service fees in the second quarter of
fiscal 2005 were derived from European markets. The weighted average exchange
rate between the Euro and the U.S. dollar during the second quarter of fiscal
2005 was $1.30 per €1.00, as compared to $1.22 per €1.00 for the second quarter
of fiscal 2004, an increase of 7%. Approximately $1.2 million (18%) of the
increase in total sales and service fees was attributable to changes in foreign
currency exchange rates when sales denominated in foreign currencies are
translated to U.S. dollars for financial reporting purposes.
The
following tables set forth sales and service fees by geographic region and
product category for the second quarter of 2005 and 2004:
|
Sales
and Service Fees by Geographic Region (dollars
are in thousands) |
|||||||||||||||||||
|
Three
Months Ended April 30, |
Increase
(Decrease) |
||||||||||||||||||
|
2005 |
2004 |
Amount |
% |
||||||||||||||||
North
America |
$ |
9,817 |
32 |
% |
$ |
7,162 |
29 |
% |
$ |
2,655 |
37 |
% | |||||||
Europe |
19,327 |
62 |
% |
15,169 |
63 |
% |
4,158 |
27 |
% | ||||||||||
|
Asia
Pacific |
1,846 |
6 |
% |
1,924 |
8 |
% |
(78 |
) |
(4 |
%) | |||||||||
|
Total |
$ |
30,990 |
100 |
% |
$ |
24,255 |
100 |
% |
$ |
6,735 |
28 |
% | |||||||
Sales and service fees in North America benefited from a 47% increase in unit sales. The lathe product line, which was introduced in the fourth quarter of fiscal 2004, contributed approximately $1.1 million, or 41% of the increase in sales and service fees. Excluding the lathes, unit sales increased 23% in the second quarter of fiscal 2005 compared to the prior year.
The 27%
increase in sales and service fees in Europe reflected an 18% increase in unit
sales and the previously discussed impact of stronger European currencies
relative to the U.S. Approximately $1.1 million (27%) of the increase in
European sales and service fees was attributable to changes in currency exchange
rates.
|
Sales
and Service Fees by Product Category (dollars
are in thousands) |
|||||||||||||||||||
|
Three
Months Ended April 30, |
Increase
|
||||||||||||||||||
|
2005 |
2004 |
Amount |
% |
||||||||||||||||
Computerized
Machine Tools |
$ |
26,316 |
85 |
% |
$ |
20,224 |
83 |
% |
$ |
6,092 |
30 |
% | |||||||
Service
Fees, Parts and Other |
4,674 |
15 |
% |
4,031 |
17 |
% |
643 |
16 |
% | ||||||||||
|
Total |
$ |
30,990 |
100 |
% |
$ |
24,255 |
100 |
% |
$ |
6,735 |
28 |
% | |||||||
Unit sales of computerized machine tools increased 27% in the second quarter of fiscal 2005 compared to the prior year period. Approximately $1.1 million (18%) of the increase was due to changes in currency exchange rates. Sales of lathes contributed $1.4 million, (23%) of the increase in sales of computerized machine tools. Sales of computerized machine tools also benefited from an approximate 2% increase in the average net selling price per unit, when measured in local currencies.
Orders
and Backlog. New
order bookings for the second quarter of fiscal 2005 were also the highest in
our history and totaled $32.9 million, an increase of $10.6 million (47%) from
the $22.3 million reported for the corresponding quarter of fiscal 2004.
Approximately $1.3 million (12%) of the increase was attributable to changes in
currency exchange rates. The dollar value of orders increased in the United
States and Europe by 49% and 61%, respectively. Approximately $1.3 million (12%)
of the increase in orders was attributable to the lathe product line. Backlog
was $11.5 million at April 30, 2005, compared to $9.6 million at January 31,
2005 and $12.7 million at October 31, 2004.
Gross
Margin. Gross
margin for the second quarter of 2005 was 34.7%, an increase over the 30.6%
margin realized in the corresponding 2004 period, due principally to increased
sales of computerized machine tools and the favorable effects of stronger
European currencies.
Operating
Expenses. Selling,
general and administrative expenses during the second quarter of 2005 increased
approximately $1.2 million (24%) from the amount reported for the 2004 period.
The increases are primarily the result of an approximate $200,000 increase due
to currency translation effects, a $500,000 increase in selling and marketing
expenses and a $300,000 increase in research and development spending.
Operating
Income.
Operating income for the second quarter of fiscal 2005 was a record for Hurco
and totaled $4.4 million, or 14% of sales and service fees, compared to $2.3
million, or 9% of sales and service fees in the prior year.
Other
Expense. Other
expense consists of approximately $330,000 of exchange losses in payables and
receivables denominated foreign currencies, primarily the NT Dollar, due to
timing differences between the hedge contract period and when the payables and
receivables were recorded. These losses were partially offset by approximately
$150,000 in gains from our two affiliates accounted for using the equity method.
Income
Tax Expense. The
provision for income taxes is related to the earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions, we
have net operating loss carryforwards for which we have a 100% valuation reserve
at April 30, 2005. The provision for income tax increased in the second fiscal
quarter of 2005 because of increased earnings recorded by our taxable foreign
subsidiaries.
Six
Months Ended April 30, 2005 Compared to Six Months Ended April 30,
2004
For the
first half of fiscal 2005, we reported net income of $6.3 million or $1.00 per
share, compared to $2.4 million, or $.41 per share, for the prior year period.
Sales
and Service Fees. Sales
and service fees for the first half of fiscal 2005 were $61.2 million, an
increase of $14.3 million (30%) from the $47.0 million reported for the first
half of 2004. The increased sales reflected an improvement in industry demand
and the continuing popularity of our newer machine tool products, which
represented 67% of all units shipped during the first half.
Approximately
62% of our sales and service fees in the first half of fiscal 2005 were derived
from European markets. The weighted average exchange rate between the Euro and
the U.S. dollar during the first half of fiscal 2005 was $1.31 per €1.00, as
compared to $1.22 per €1.00 for the first half of fiscal 2004, an increase of
7%. Approximately $2.7 million (19%) of the increase in sales and service fees
was attributable to changes in currency exchange rates.
The
following tables set forth sales and service fees by geographic region and
product category for the first half of 2005 and 2004:
|
Sales
and Service Fees by Geographic Region (dollars
are in thousands) |
|||||||||||||||||||
|
Six
Months Ended April 30, |
Increase |
||||||||||||||||||
|
2005 |
2004 |
Amount |
% |
||||||||||||||||
North
America |
$ |
20,059 |
33 |
% |
$ |
14,337 |
31 |
% |
$ |
5,722 |
40 |
% | |||||||
Europe |
38,001 |
62 |
% |
29,712 |
63 |
% |
8,289 |
28 |
% | ||||||||||
|
Asia
Pacific |
3,176 |
5 |
% |
2,924 |
6 |
% |
252 |
9 |
% | ||||||||||
|
Total |
$ |
61,236 |
100 |
% |
$ |
46,973 |
100 |
% |
$ |
14,263 |
30 |
% | |||||||
Sales and
service fees in North America benefited approximately $1.9 million from the sale
of lathe units and a 30% increase in unit sales of our machining centers. These
increases are attributable to new product models introduced beginning in late
fiscal 2002 and throughout fiscal 2003 and 2004 as well as an approximate 18%
increase in machine tool consumption in the United States. Sales and service
fees in North America also benefited from a $450,000 increase in service
parts.
The 28%
increase in our sales and service fees in Europe is the result of a 15% increase
in unit sales and currency translation. Approximately $2.6 million (31%) of the
increase in European sales and service fees was attributable to changes in
currency exchange rates.
|
Sales
and Service Fees by Product Category (dollars
are in thousands) |
|||||||||||||||||||
|
Six
Months Ended April 30, |
Increase
|
||||||||||||||||||
|
2005 |
2004 |
Amount |
% |
||||||||||||||||
Computerized
Machine Tools |
$ |
52,449 |
86 |
% |
$ |
39,444 |
84 |
% |
$ |
13,005 |
33 |
% | |||||||
Service
Fees, Parts and Other |
8,787 |
14 |
% |
7,529 |
16 |
% |
1,258 |
17 |
% | ||||||||||
|
Total |
$ |
61,236 |
100 |
% |
$ |
46,973 |
100 |
% |
$ |
14,263 |
30 |
% | |||||||
Unit
sales of our computerized machine tools increased 29% in the first half of
fiscal 2005 compared to the prior year period. Approximately $2.4 million (19%)
of the increase in machine tool sales was due to changes in currency exchange
rates. Sales of lathes contributed approximately $2.2 million (17%) of the
increase in computerized machine tools. Sales of computerized machine tools also
benefited from an approximate 2% increase in our average net selling price per
unit, when measured in local currencies.
Sales of
service fees, parts and other increased approximately $1.3 million (17%) in the
first half of fiscal 2005 compared to the prior year. The increase was due
primarily to a $700,000 (17%) increase in sales of service parts and a $205,000
(21%) increase in software sales.
Orders
and Backlog. New
order bookings for the first half of fiscal 2005 were $59.8 million, an increase
of $13.9 million (30%) from the $45.9 million reported for the first half of
fiscal 2004. New order bookings increased in the United States and Europe by
$6.0 million (42%) and $8.3 million (30%), respectively. Approximately $2.4
million (29%) of the reported increase in new order bookings in Europe was
attributable to the changes in currency exchange rates.
Gross
Margin. Gross
margin for the first half of fiscal 2005 was 33.5%, an increase over the 29.7%
margin realized in the corresponding 2004 period, due principally to increased
sales of computerized machine tools and the favorable effects of stronger
European currencies.
Operating
Expenses. Selling,
general and administrative expenses during the first half of 2005 increased
approximately $2.5 million (25%) from the amount reported for the 2004 period.
The increases are primarily the result of an approximate $400,000 increase due
to currency translation effects, a $1.5 million increase in selling and
marketing expenses and a $500,000 increase in research and development spending.
Operating
Income.
Operating income for the first half of fiscal 2005 was $8.0 million, or 13% of
sales and service fees, compared to $3.9 million, or 8% of sales and service
fees in the prior year.
Other
Expense. Other
expense primarily consists of approximately $350,000 of exchange losses in
payables and receivables denominated foreign currencies, primarily the NT
Dollar, due to timing differences between the hedge contract period and when the
payable and receivables were recorded. These losses were partially offset by
approximately $90,000 in gains from our two affiliates accounted for using the
equity method.
Variable
option expense of $322,000 reported in fiscal 2004 is related to certain stock
options that were subject to variable plan accounting. The stock options subject
to variable plan accounting have all been exercised and no additional variable
option expense is expected.
Income
Tax Expense. The
provision for income taxes is related to the earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions, we
have net operating loss carryforwards for which we have a 100% valuation reserve
at April 30, 2005. The provision for income tax increased in fiscal 2005 because
of increased earnings from our taxable foreign subsidiaries.
LIQUIDITY
AND CAPITAL RESOURCES
At April
30, 2005, we had cash and cash equivalents of $11.7 million compared to $8.5
million at October 31, 2004. Cash generated from operations totaled $3.6 million
for the first half of fiscal 2005, compared to $3.8 million in the prior year
period.
Working
capital, excluding short-term debt, was $35.5 million at April 30, 2005 compared
to $26.7 million at October 31, 2004. During the first half of fiscal 2005, cash
flow from operations was unfavorably effected by a $3.9 million increase in
inventory, which was partially offset by an approximate $800,000 increase
in accounts payable. The increase in inventory was the result of an increase in
production at our principal manufacturing facility in Taiwan, which was
disproportionate to the increase in our machine sales. We have moderately
reduced our machine production and expect inventory levels to decline in the
last half of fiscal 2005. Accounts payable increased as the result of the
increase in inventory. We expect our working capital requirements to continue to
increase in fiscal 2005, as sales increase.
Capital
investments during the first half included approximately $350,000 for enterprise
resource planning software in the United States and normal expenditures for
software development projects and purchases of equipment. We funded these
expenditures from operating cash flow.
Total
debt at April 30, 2005 was $4.4 million, representing 8% of capitalization,
which totaled $52.6 million, compared to $4.6 million, or 11% of capitalization,
at October 31, 2004. Total debt primarily consists of the outstanding balance of
a term loan secured by our Indianapolis facility. We were in compliance with all
loan covenants and had unused credit availability of $11.0 million at April 30,
2005. We believe that cash flow from operations and borrowings available under
our credit facilities will be sufficient to meet our anticipated cash
requirements for the balance of fiscal 2005 and fiscal 2006.
CRITICAL
ACCOUNTING POLICIES
Our
accounting policies, which are described in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2004, require management to make significant
estimates and assumptions using information available at the time the estimates
are made. These estimates and assumptions significantly affect various reported
amounts of assets, liabilities, revenues and expenses. If our future experience
differs materially from these estimates and assumptions, our results of
operations and financial condition could be affected. There were no material
changes to our critical accounting policies during the second quarter of 2005.
CONTRACTUAL
OBLIGATIONS AND COMMITMENTS
There
have been no material changes from the information provided in our Annual Report
on Form 10-K for the fiscal year ended October 31, 2004.
OFF
BALANCE SHEET ARRANGEMENTS
From time
to time, our German subsidiary guarantees third party lease financing residuals
in connection with the sale of certain machines in Europe. At April 30, 2005,
there were 34 third party guarantees totaling approximately $1.8 million. A
retention of title clause allows our German subsidiary to obtain the machine if
the customer defaults on its lease. We believe that the proceeds obtained from
liquidation of the machine would cover any payments required under the
guarantee.
Item
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Interest
on our bank borrowings and economic development bond are affected by changes in
prevailing U.S. and European interest rates. At April 30, 2005, there were no
outstanding borrowings under these credit facilities. The remaining outstanding
indebtedness of $4.4 million is at a fixed rate of interest.
Foreign
Currency Exchange Risk
In the
second quarter of fiscal 2005, approximately 68% of our sales and service fees
were derived from foreign markets. All of our computerized machine tools and
computer numerical control systems, as well as certain proprietary service
parts, are sourced by our U.S.-based engineering and manufacturing division and
re-invoiced to our foreign sales and service subsidiaries, primarily in their
functional currencies.
Our
products are manufactured primarily in Taiwan, to our specifications, by our
wholly owned subsidiary and an affiliate. The predominant portion of our
exchange rate risk associated with product costs relates to the New Taiwan
Dollar.
We enter
into forward foreign exchange contracts from time to time to hedge the cash flow
risk related to forecast inter-company sales, and forecast inter-company and
third-party purchases denominated in, or based on, foreign currencies. We also
enter into foreign currency forward exchange contracts to hedge against the
effects of foreign currency fluctuations on receivables and payables denominated
in foreign currencies. We do not speculate in the financial markets and,
therefore, do not enter into these contracts for trading purposes.
Forward
contracts for the sale or purchase of foreign currencies as of April 30, 2005
which are designated as cash flow hedges under SFAS No. 133 were as
follows:
|
Notional
Amount |
Weighted
Avg. |
Contract
Amount at Forward Rates in
U.S.
Dollars |
||||||||||||||
|
Forward
Contracts |
in
Foreign
Currency |
Forward
Rate |
At
Date of Contract |
April
30, 2005 |
Maturity
Dates |
|||||||||||
Sale
Contracts: |
||||||||||||||||
Euro |
25,550,000 |
1.2955 |
33,100,025 |
33,181,717 |
May
2005 - October 2006 |
|||||||||||
Sterling |
1,400,000 |
1.7932 |
2,510,480 |
2,657,992 |
May
2005 -
November
2005 |
|||||||||||
Purchase
Contracts: |
||||||||||||||||
New
Taiwan Dollar |
670,000,000 |
32.27* |
20,762,318 |
21,819,646 |
May
2005 - February 2006 |
|||||||||||
* NT
Dollars per U.S. Dollar
Forward
contracts for the sale of foreign currencies as of April 30, 2005, which were
entered into to protect against the effects of foreign currency fluctuations on
receivables and payables denominated in foreign currencies were as
follows:
|
Notional
Amount |
Weighted
Avg. |
Contract
Amount at Forward Rates in U.S. Dollars |
||||||||||||||
|
Forward
Contracts |
in
Foreign Currency |
Forward
Rate |
At
Date of Contract |
April
30, 2005 |
Maturity
Dates |
|||||||||||
Sale
Contracts: |
||||||||||||||||
Euro |
5,898,747 |
1.3008 |
7,673,090 |
7,594,664 |
May
2005 -
June
2005 |
|||||||||||
Singapore
Dollar |
7,083,234 |
1.6349* |
4,332,518 |
4,336,739 |
May
2005 -
October
2005 |
|||||||||||
Sterling |
1,097,781 |
1.8819 |
2,065,914 |
2,089,228 |
May
2005 -
June
2005 |
|||||||||||
Purchase
Contracts: |
||||||||||||||||
New
Taiwan Dollar |
267,000,000 |
31.05* |
8,599,034 |
8,597,373 |
May
2005 -
June
2005 |
|||||||||||
* NT
Dollars per U.S. Dollar
Item
4. CONTROLS
AND PROCEDURES
We
carried out an evaluation under the supervision and with participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of April 30, 2005 pursuant to Rule 13a-15(b) under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of the evaluation
date.
There
have been no changes in our internal controls over financial reporting that
occurred during the quarter ended April 30, 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
We are
involved in various claims and lawsuits arising in the normal course of
business. We believe it is remote that any of these claims will have a material
adverse effect on our consolidated financial position or results of operations.
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
annual meeting of the shareholders of the Company was held on March 16, 2005.
There were two matters submitted to a vote of the shareholders, the election of
seven directors to the Board of Directors and the amendment to the Company’s
1997 Stock Option Incentive Plan.
The
following table sets forth the results of voting on those matters.
|
Election
of Directors
Name |
Number
of Votes FOR |
Number
of Votes AGAINST or WITHHELD |
Abstentions
or Broker Non-Votes | |||
|
Stephen
H. Cooper |
5,324,729 |
611,397 |
232,961 | |||
|
Robert
W. Cruickshank |
5,313,859 |
622,267 |
232,961 | |||
|
Michael
Doar |
5,338,633 |
597,493 |
232,961 | |||
|
Richard
T. Niner |
5,339,433 |
596,693 |
232,961 | |||
|
O.
Curtis Noel |
5,296,317 |
639,809 |
232,961 | |||
|
Charles
E. Mitchell Rentschler |
5,335,683 |
600,443 |
232,961 | |||
|
Gerald
V. Roch |
5,336,029 |
600,097 |
232,961 | |||
|
Amendment
to the Company’s 1997 Stock Option Incentive Plan |
3,328,110 |
514,775 |
2,326,202 |
There are no directors, other than the directors elected at the annual meeting,
whose terms of office as directors continued after the annual
meeting.
Item
6. EXHIBITS
|
|
11
Statement re: Computation of Per Share
Earnings |
31.1 Certification
by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities
and Exchange Act of 1934, as amended.
31.2 Certification
by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities
and Exchange Act of 1934, as amended.
32.1 Certification
by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification
by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
HURCO
COMPANIES, INC.
By:
/s/ Stephen J. Alesia
Stephen J. Alesia
Vice
President and
Chief
Financial Officer
By: /s/ Sonja K.
McClelland
Sonja K. McClelland
Corporate Controller and
Principal Accounting Officer
June 8,
2005