HURCO COMPANIES INC - Quarter Report: 2008 July (Form 10-Q)
UNITED
STATES
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 July 31, 2008
or
|
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Transition
report pursuant to section 13 or 15(d) of the Securities Exchange Act of
1934 for the transition period from _________ to
_________.
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Commission
File No. 0-9143
HURCO
COMPANIES, INC.
(Exact
name of registrant as specified in its charter)
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Indiana
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35-1150732
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification Number)
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|
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incorporation
or organization)
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||
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One
Technology Way
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||
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Indianapolis,
Indiana
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46268
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(Address
of principal executive offices)
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(Zip
code)
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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 .
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a small reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer
[ ] Accelerated
filer [ X ]
Non-accelerated
filer [ ] (Do not
check if a smaller reporting
company) Smaller reporting
company [ ]
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the
Exchange
Act).
Yes [ ] No [X ]
The
number of shares of the Registrant's common stock outstanding as of September 1,
2008 was 6,420,851.
HURCO
COMPANIES, INC.
July 2008
Form 10-Q Quarterly Report
Table
of Contents
Part I - Financial Information
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Item
1.
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Financial
Statements
|
|
|
Condensed
Consolidated Statement of Operations ………………………………………..
Three and
nine months ended July 31, 2008 and 2007
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3
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|
|
Condensed
Consolidated Balance Sheet …………………………………………………..
As of July
31, 2008 and October 31, 2007
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4
|
|
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Condensed
Consolidated Statement of Cash Flows………………………………………..
Three and
nine months ended July 31, 2008 and 2007
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5
|
|
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Condensed
Consolidated Statement of Changes in Shareholders'
Equity…………………
Nine months
ended July 31, 2008 and 2007
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6
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|
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Notes
to Condensed Consolidated Financial
Statements…………………………………..
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7
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|
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Item
2.
|
Management's
Discussion and Analysis of Financial ……………………………………..
Condition
and Results of Operations
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13
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|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk …………………………….
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20
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Item
4.
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Controls
and Procedures …………………………………………………………………...
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22
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Part
II - Other Information
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Item
1.
|
Legal
Proceedings…………………………………...…………………………………...
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23
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Item
1A.
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Risk
Factors…………..……………………………...…………………………………...
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23
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Item
5.
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Other
Information…..…………… ………………………………………………………
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23
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Item
6.
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Exhibits…..………………………
………………………………………………………
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24
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Signatures
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…………………………………………………………………………………………….
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25
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-2-
PART
I - FINANCIAL INFORMATION
|
Item
1.
|
FINANCIAL
STATEMENTS
|
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
(In
thousands, except per share data)
|
Three
Months Ended
|
Nine
Months Ended
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|||||||||||||||
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July
31
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July
31
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|||||||||||||||
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2008
|
2007
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2008
|
2007
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|||||||||||||
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Sales
and service fees
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$ | 57,318 | $ | 48,555 | $ | 176,526 | $ | 137,927 | ||||||||
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Cost
of sales and service
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36,439 | 30,138 | 110,459 | 85,838 | ||||||||||||
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Gross
profit
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20,879 | 18,417 | 66,067 | 52,089 | ||||||||||||
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Selling,
general and administrative expenses
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11,829 | 10,228 | 35,881 | 28,883 | ||||||||||||
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Operating
income
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9,050 | 8,189 | 30,186 | 23,206 | ||||||||||||
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Interest
expense
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25 | 11 | 46 | 165 | ||||||||||||
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Interest
income
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154 | 172 | 436 | 561 | ||||||||||||
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Investment
income
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72 | 113 | 363 | 191 | ||||||||||||
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Other
(income) expense, net
|
471 | (359 | ) | 1,311 | (867 | ) | ||||||||||
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Income
before taxes
|
8,780 | 8,822 | 29,628 | 24,660 | ||||||||||||
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Provision
for income taxes
|
2,954 | 3,659 | 10,530 | 9,421 | ||||||||||||
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Net
income
|
$ | 5,826 | $ | 5,163 | $ | 19,098 | $ | 15,239 | ||||||||
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Earnings
per common share
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||||||||||||||||
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Basic
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$ | 0.91 | $ | 0.81 | $ | 2.98 | $ | 2.39 | ||||||||
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Diluted
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$ | 0.90 | $ | 0.80 | $ | 2.96 | $ | 2.37 | ||||||||
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Weighted
average common shares outstanding
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||||||||||||||||
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Basic
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6,414 | 6,379 | 6,414 | 6,379 | ||||||||||||
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Diluted
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6,439 | 6,440 | 6,445 | 6,435 | ||||||||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
-3-
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEET
(Dollars
in thousands)
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July
31
|
October
31
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|||||||
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2008
|
2007
|
|||||||
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ASSETS
|
||||||||
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Current
assets:
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||||||||
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Cash and
cash
equivalents
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$ | 31,048 | $ | 29,760 | ||||
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Short-term
investments
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1,925 | 10,000 | ||||||
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Accounts
receivable,
net
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29,505 | 25,645 | ||||||
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Inventories,
net
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74,489 | 61,121 | ||||||
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Deferred
tax assets,
net
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9,108 | 8,258 | ||||||
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Other
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7,827 | 4,481 | ||||||
| 153,902 | 139,265 | |||||||
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Property
and equipment:
|
||||||||
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Land
|
782 | 776 | ||||||
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Building
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7,135 | 7,135 | ||||||
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Machinery
and
equipment
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15,674 | 13,629 | ||||||
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Leasehold
improvements
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1,935 | 1,473 | ||||||
| 25,526 | 23,013 | |||||||
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Less
accumulated depreciation and
amortization
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(12,067 | ) | (11,617 | ) | ||||
| 13,459 | 11,396 | |||||||
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Non-current
assets:
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||||||||
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Software
development costs, less accumulated amortization
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5,475 | 5,960 | ||||||
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Long-term
investments
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4,774 | - | ||||||
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Other
assets
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7,280 | 7,160 | ||||||
| $ | 184,890 | $ | 163,781 | |||||
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
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Current
liabilities:
|
||||||||
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Accounts
payable
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$ | 36,926 | $ | 35,486 | ||||
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Accrued
expenses
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26,182 | 27,729 | ||||||
| 63,108 | 63,215 | |||||||
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Non-current
liabilities:
|
||||||||
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Deferred
tax liability,
net
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1,878 | 1,956 | ||||||
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Deferred
credits and other
obligations
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962 | 1,007 | ||||||
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Total
liabilities
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65,948 | 66,178 | ||||||
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Shareholders’
equity:
|
||||||||
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Preferred
stock: no par value per share; 1,000,000 shares
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||||||||
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authorized;
no shares
issued
|
-- | -- | ||||||
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Common
stock: no par value; $.10 stated value per
share;
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||||||||
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13,250,000
shares authorized, and 6,420,851 and 6,392,220
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||||||||
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shares
issued and outstanding,
respectively
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642 | 639 | ||||||
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Additional
paid-in
capital
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51,633 | 50,971 | ||||||
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Retained
earnings
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68,467 | 49,369 | ||||||
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Accumulated
other comprehensive
loss
|
(1,800 | ) | (3,376 | ) | ||||
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Total
shareholders’
equity
|
118,942 | 97,603 | ||||||
| $ | 184,890 | $ | 163,781 | |||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
-4-
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars
in thousands)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
July
31
|
July
31
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
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Cash
flows from operating activities:
|
||||||||||||||||
|
Net
income
|
$ | 5,826 | $ | 5,163 | $ | 19,098 | $ | 15,239 | ||||||||
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Adjustments
to reconcile net income to
Net cash provided by (used for) operating
activities:
|
||||||||||||||||
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Provision
for doubtful accounts
|
(22 | ) | (83 | ) | (163 | ) | 160 | |||||||||
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Deferred
tax provision
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(310 | ) | 1,190 | (956 | ) | 694 | ||||||||||
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Equity
in (income) loss of affiliates
|
(40 | ) | (352 | ) | (11 | ) | (972 | ) | ||||||||
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Depreciation
and amortization
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777 | 589 | 2,190 | 1,376 | ||||||||||||
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Stock-based
compensation
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364 | 56 | 478 | 422 | ||||||||||||
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Change in
assets and liabilities:
|
||||||||||||||||
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(Increase) decrease in accounts
receivable
|
3,742 | (2,641 | ) | (2,541 | ) | (3,858 | ) | |||||||||
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(Increase) decrease in
inventories
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(6,143 | ) | (8,679 | ) | (10,290 | ) | (9,203 | ) | ||||||||
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Increase (decrease) in accounts
payable
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(826 | ) | 7,798 | (1,559 | ) | 8,934 | ||||||||||
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Increase (decrease) in accrued
expenses
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2,144 | 5,180 | (1,826 | ) | 5,677 | |||||||||||
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Other
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44 | (4,550 | ) | (3,847 | ) | (5,836 | ) | |||||||||
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Net cash
provided by (used for) operating activities
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5,556 | 3,671 | 573 | 12,633 | ||||||||||||
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Cash
flows from investing activities:
|
||||||||||||||||
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Proceeds
from sale of property and equipment
|
-- | -- | 12 | -- | ||||||||||||
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Purchase of
property and equipment
|
(1,306 | ) | (508 | ) | (3,061 | ) | (1,100 | ) | ||||||||
|
Purchase
of investments
|
-- | (8,175 | ) | (9,100 | ) | (20,175 | ) | |||||||||
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Sale
of investments
|
1,725 | -- | 12,075 | 4,000 | ||||||||||||
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Software
development costs
|
(236 | ) | (148 | ) | (395 | ) | (1,198 | ) | ||||||||
|
Other
investments
|
(334 | ) | (163 | ) | (73 | ) | (323 | ) | ||||||||
|
Net cash
provided by (used for) investing activities
|
(151 | ) | (8,994 | ) | (542 | ) | (18,796 | ) | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Repayment on
first mortgage
|
-- | -- | -- | (4,010 | ) | |||||||||||
|
Tax
benefit from exercise of stock options
|
-- | 31 | 36 | 299 | ||||||||||||
|
Proceeds
from exercise of common stock options
|
-- | -- | 151 | 119 | ||||||||||||
|
Net cash
provided by (used for) financing activities
|
-- | 31 | 187 | (3,592 | ) | |||||||||||
|
Effect
of exchange rate changes on cash
|
34 | (121 | ) | 1,070 | 953 | |||||||||||
|
Net increase
(decrease) in cash and
cash
equivalents
|
5,439 | (5,413 | ) | 1,288 | (8,802 | ) | ||||||||||
|
Cash
and cash equivalents
at beginning
of period
|
25,609 | 26,457 | 29,760 | 29,846 | ||||||||||||
|
Cash
and cash equivalents
at end of
period
|
$ | 31,048 | $ | 21,044 | $ | 31,048 | $ | 21,044 | ||||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
-5-
HURCO
COMPANIES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For
the nine months ended July 31, 2008 and 2007
|
(Dollars
in thousands, except
Shares
Issued and Outstanding)
|
Common
Stock
|
Additional
|
Accumulated
Other
Comprehensive
|
|||||||||||||||||||||
|
Shares
Issued
&
Outstanding
|
Amount
|
Paid-In
Capital
|
Retained
Earnings
|
Income
(Loss)
|
Total
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Balances,
October 31, 2006
|
6,346,520 | $ | 635 | $ | 50,011 | $ | 28,480 | $ | (3,751 | ) | $ | 75,375 | ||||||||||||
|
Net
income
|
-- | -- | -- | 15,239 | -- | 15,239 | ||||||||||||||||||
|
Translation
of foreign currency financial statements
|
-- | -- | -- | -- | 1,702 | 1,702 | ||||||||||||||||||
|
Unrealized
loss on derivative instruments, net of tax
|
-- | -- | -- | -- | (1,176 | ) | (1,176 | ) | ||||||||||||||||
|
Comprehensive
income
|
-- | -- | -- | -- | -- | 15,765 | ||||||||||||||||||
|
Exercise
of common stock options
|
43,200 | 4 | 115 | -- | -- | 119 | ||||||||||||||||||
|
Tax
benefit from exercise of stock options
|
-- | -- | 299 | -- | -- | 299 | ||||||||||||||||||
|
Stock-based
compensation expense
|
-- | -- | 422 | -- | -- | 422 | ||||||||||||||||||
|
Balances,
July 31, 2007
|
6,389,720 | $ | 639 | $ | 50,847 | $ | 43,719 | $ | (3,225 | ) | $ | 91,980 | ||||||||||||
|
Balances,
October 31, 2007
|
6,392,220 | $ | 639 | $ | 50,971 | $ | 49,369 | $ | (3,376 | ) | $ | 97,603 | ||||||||||||
|
Net
income
|
-- | -- | -- | 19,098 | -- | 19,098 | ||||||||||||||||||
|
Translation
of foreign currency financial statements
|
-- | -- | -- | -- | 2,261 | 2,261 | ||||||||||||||||||
|
Unrealized
loss on derivative instruments, net of tax
|
-- | -- | -- | -- | (483 | ) | (483 | ) | ||||||||||||||||
|
Unrealized
loss on investments, net of tax
|
-- | -- | -- | -- | (202 | ) | (202 | ) | ||||||||||||||||
|
Comprehensive
income
|
-- | -- | -- | -- | -- | 20,674 | ||||||||||||||||||
|
Exercise
of common stock options
|
28,631 | 3 | 148 | -- | -- | 151 | ||||||||||||||||||
|
Tax
benefit from exercise of stock options
|
-- | -- | 36 | -- | -- | 36 | ||||||||||||||||||
|
Stock-based
compensation expense
|
-- | -- | 478 | -- | -- | 478 | ||||||||||||||||||
|
Balances,
July 31, 2008
|
6,420,851 | $ | 642 | $ | 51,633 | $ | 68,467 | $ | (1,800 | ) | $ | 118,942 | ||||||||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
-6-
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. As used in
this report, and unless the context indicates otherwise, the terms “we”, “us”,
“our” and similar language refer to 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 July 31, 2008 and for the three and nine
months ended July 31, 2008 and July 31, 2007 is unaudited; however, in our
opinion, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of our results for, and
our financial position at the end of 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, 2007.
Certain
prior year amounts have been reclassified to conform to the current year
presentation. These changes had no impact on previously reported net income or
shareholders' equity.
|
2.
|
INVESTMENTS
|
At
January 31, 2008, we made a reclassification in the Condensed Consolidated
Balance Sheet and Condensed Consolidated Statement of Cash Flows to record
investments in auction rate securities as Short-term Investments instead of Cash
and Cash Equivalents, as previously reported. This reclassification
did not have any impact on our Condensed Consolidated Statement of Operations,
cash provided by operating activities, total current assets, working capital,
total assets or shareholders’ equity. The following is a summary of
the effects of this reclassification on our Condensed Consolidated Balance Sheet
as of October 31, 2007 and the Condensed Consolidated Statement of Cash Flows as
of January 31, 2008.
|
Consolidated
Balance Sheet
|
October
31, 2007
|
|||||||
|
(in
thousands)
|
As
previously reported
|
As
reclassified
|
||||||
|
Cash
and cash equivalents
|
$ | 39,760 | $ | 29,760 | ||||
|
Short-term
investments
|
$ | - | $ | 10,000 | ||||
|
Consolidated
Statement of Cash Flows
|
||||||||
|
(in
thousands)
|
As
reported at October 31, 2007
|
As
reclassified January 31, 2008
|
||||||
|
Cash
and cash equivalents, at end of period
|
$ | 39,760 | ||||||
|
Cash
and cash equivalents, at beginning of period
|
$ | 29,760 | ||||||
As of
July 31, 2008 and October 31, 2007, we held $6.7 million and $10.0 million,
respectively, of investments in auction rate securities, which represented
investments in student loan obligations and municipal bonds. These
auction rate securities are intended to provide liquidity via an auction process
that resets the applicable interest rate at predetermined intervals allowing us
to either roll over the holdings or sell the investment at par
value. All income generated from these auction rate securities was
recorded as Investment Income.
The
recent uncertainties in the credit markets have adversely affected the liquidity
of our holdings in auction rate securities, and multiple auctions for these
securities have been unsuccessful. Consequently, approximately $4.8
million of these investments in student loan obligations are currently not
liquid and we will not be able to access these funds until a future auction of
these investments is successful. The remaining $1.9 million of the auction rate
securities, as of July 31, 2008, are in a municipal bond. This municipal
bond has had recent auction sales, at par value, totaling $2.3 million
since January 31, 2008. All of the auction rate securities are “AAA”
rated and were in compliance with our investment policy at the time of the
acquisition. We currently have the ability and intent to hold these
auction rate securities until a recovery of the auction process takes place or
the securities mature, which could be greater than twelve months. As
of July 31, 2008, we have classified the student loan obligations of $4.8
million as long-term investments due to the inability to determine when the
investments will be liquidated, and continue to carry the $1.9 million municipal
bond as a short-term investment based upon the most recent trading
activity.
-7-
We
classify our auction rate securities as “available for sale” in accordance with
the provisions of Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”.
Due to
the lack of observable quotes in the market, we engaged an independent
registered investment advisor to provide expert investment information in order
to estimate the fair value of our auction rate securities. In
estimating the fair value of these securities, each prospectus was researched,
recent auction history was reviewed, and current collateral performance was
examined. The underlying collateral for these securities was compared to other
securities currently trading in the market, as well as, non-auction based debt
with similar characteristics. Although these securities continue to
pay interest according to their stated terms, during the second quarter of
fiscal 2008 we recorded an unrealized loss of $202,000, net of tax in
Accumulated Other Comprehensive Loss, reflecting adjustments to our auction rate
securities to record what we have concluded is a temporary decline in estimated
fair value. We have deemed this impairment as temporary because the underlying
reason for the impairment is primarily related to liquidity, as there has not
been a change in credit risk of the investment since acquisition, the severity
of the impairment is not significant compared to the total investment balance,
and we do not currently expect to sell these investments for less than par
value. The estimated fair value of our auction rate securities as of
July 31, 2008 was $6.7 million compared to par value or stated cost of $7.0
million. At the end of the third quarter, these securities had a
weighted average tax exempt interest rate of approximately 3.6%.
|
3.
|
HEDGING
|
We enter
into foreign currency forward exchange contracts periodically to hedge certain
forecasted inter-company sales and forecasted inter-company and third party
purchases denominated in foreign currencies (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 Sheets at fair value in Other Current Assets and Accrued
Expenses. Gains and losses resulting from changes in the fair value
of these hedge contracts are deferred in Accumulated Other Comprehensive Loss
and recognized as an adjustment to Cost of Sales in the period that the sale
that is the subject of the related hedge contract 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 July
31, 2008, we had $3.1 million of losses, net of tax, related to cash flow hedges
deferred in Accumulated Other Comprehensive Loss, net of tax. Of this
amount, $1.6 million represents unrealized losses, net of tax, related to future
cash flow hedge instruments that remain subject to currency fluctuation
risk. These deferred losses will be recorded as an adjustment to Cost
of Sales in the periods through July 2009, in which the sale that is the subject
of the related hedge contract is recognized, as described above. Net
losses on cash flow hedge contracts, which we reclassified from Accumulated
Other Comprehensive Loss to Cost of Sales in the quarter ended July 31, 2008,
were $978,000 compared to net losses of $337,000 for the same period in the
prior year.
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,” and, as a result, changes in
their fair value are reported currently as Other Expense (Income), Net in the
Condensed Consolidated Statement of Operations consistent with the transaction
gain or loss on the related foreign denominated receivable or payable and
non-hedged foreign currency gains and losses. We recorded net
transaction losses of $462,000 for the quarter ended July 31, 2008, compared to
net gains of $17,000 for the same period in the prior year.
-8-
We are
exposed to foreign currency exchange risk related to our investment in net
assets in foreign countries. To manage this risk, we entered
into a forward contract on November 26, 2007 with a notional amount of €3.0
million. We have designated this forward contract as a hedge of our
net investment in Euro denominated assets. We have selected the
forward method under the guidance of the Derivatives Implementation Group
Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of
Ineffectiveness in a Net Investment Hedge”. The forward method requires all
changes in the fair value of the forward to be reported as a cumulative
translation adjustment in Accumulated Other Comprehensive Loss, net of tax, in
the same manner as the underlying hedged net assets. As of July 31, 2008, we had
a loss of $123,000, net of tax, recorded as a cumulative translation adjustment
in Accumulated Other Comprehensive Loss, net of tax, related to the forward
contract.
|
4.
|
STOCK
OPTIONS
|
In March
2008, we adopted the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008
Plan”), which allows us to grant awards of stock options, Stock Appreciation
Rights settled in stock (SARs), restricted shares, performance shares and
performance units. The 2008 Plan replaced the 1997 Stock Option and
Incentive Plan (the “1997 Plan”) which expired in March 2007. The
Compensation Committee of the Board of Directors has authority to determine the
officers, directors and key employees who will be granted awards; designate the
number of shares subject to each award; determine the terms and conditions upon
which awards will be granted; and prescribe the form and terms of award
agreements. We have granted stock options under both Plans which are
currently outstanding. No stock option may be exercised more than ten
years after the date of grant or such shorter period as the Compensation
Committee may determine at the date of grant. The total number of
shares of our common stock that may be issued as awards under the 2008 Plan is
750,000. The market value of a share of our common stock, for
purposes of the 2008 Plan, is the closing sale price as reported by the Nasdaq
Global Select Market on the date in question or, if not a trading day, on the
last preceding trading date.
During
the first nine months of fiscal 2008, options to purchase 28,631 shares were
exercised, resulting in cash proceeds of approximately $151,000 and an
additional tax benefit of approximately $36,000, compared to 43,200 shares
exercised in the prior year period resulting in cash proceeds of $119,000 and an
additional tax benefit of approximately $299,000.
Effective
November 1, 2005, we adopted SFAS No. 123(R), “Share Based Payment,” using the
modified prospective method, and began applying its provisions to all options
granted, as well as, to the nonvested portion of previously granted options
outstanding at that date. Compensation expense is determined at the
date of grant using the Black-Scholes valuation model.
On May
28, 2008, the Compensation Committee granted fully vested options with respect
to 5,000 shares under the 2008 Plan to each of the two new
directors. The fair value of the options was estimated on the date of
grant using a Black-Scholes valuation model with assumptions for expected
volatility based on the historical volatility of our common stock, the ten year
contractual term of the options and a risk-free interest rate based upon a
three-year U.S. Treasury yield as of the date of grant. Based upon
the foregoing factors, the fair value of the options was determined to be $30.71
per share.
During
the first nine months of fiscal 2008, approximately $478,000 of stock-based
compensation expense was recorded related to grants under the Plans compared to
$422,000 for the same period in the prior year. As of July 31, 2008,
there was approximately $286,000 of total unrecognized stock-based compensation
cost that we expect to recognize by the end of fiscal 2009.
-9-
A summary
of stock option activity for the nine-month period ended July 31, 2008, is as
follows:
|
Stock
Options
|
Weighted
Average Exercise Price
|
|||||||
|
Outstanding
at October 31,
2007
|
83,000 | $ | 13.24 | |||||
|
Options
granted
|
10,000 | $ | 35.83 | |||||
|
Options
exercised
|
(28,631 | ) | $ | 5.26 | ||||
|
Options
cancelled
|
-- | -- | ||||||
|
Outstanding
at July 31,
2008
|
64,369 | $ | 20.29 | |||||
The total
intrinsic value of stock options exercised during the nine-month periods ended
July 31, 2008 and 2007 was approximately $685,000 and $1.9 million,
respectively. The intrinsic value is calculated as the difference between the
stock price as of July 31 and the exercise price of the stock option multiplied
by the number of shares exercised.
Summarized
information about outstanding stock options as of July 31, 2008, that are
already vested and those that we expect to vest, as well as stock options that
are currently exercisable, is as follows:
|
Outstanding
Stock Options Already Vested and Expected to Vest
|
Options
Outstanding and Exercisable
|
|||||||
|
Number
of outstanding
options
|
64,369 | 44,369 | ||||||
|
Weighted
average remaining contractual life
|
7.75 | 7.08 | ||||||
|
Weighted
average exercise price per share
|
$ | 20.29 | $ | 17.41 | ||||
|
Intrinsic
value
|
$ | 572,000 | $ | 522,000 | ||||
|
5.
|
EARNINGS
PER SHARE
|
Basic and
diluted earnings per common share are based on the weighted average number of
shares of our common stock outstanding. Diluted earnings per common
share give effect to outstanding stock options using the treasury
method. The dilutive number of shares for the three months ended July
31, 2008 and 2007 was 25,000 and 61,000, respectively.
|
6.
|
ACCOUNTS
RECEIVABLE
|
Accounts
receivable are net of allowances for doubtful accounts of $588,000 as of July
31, 2008 and $751,000 as of October 31, 2007.
|
7.
|
INVENTORIES
|
Inventories,
priced at the lower of cost (first-in, first-out method) or market, are
summarized below (in thousands):
|
July
31, 2008
|
October
31, 2007
|
|||||||
|
Purchased
parts and sub-assemblies
|
$ | 14,963 | $ | 10,956 | ||||
|
Work-in-process
|
11,275 | 11,692 | ||||||
|
Finished
goods
|
48,251 | 38,473 | ||||||
| $ | 74,489 | $ | 61,121 | |||||
-10-
|
8.
|
SEGMENT
INFORMATION
|
We
operate in a single segment: industrial automation systems. We design and
produce interactive computer control systems and software and computerized
machine tools 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.
|
9.
|
GUARANTEES
|
From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of certain machines to customers that use lease
financing. As of July 31, 2008, we had 59 outstanding third party
guarantees totaling approximately $1.8 million. The terms of our subsidiaries’
guarantees are consistent with the underlying customer financing terms. Upon
shipment, the customer has the risk of ownership, but does not obtain title
until the machine lease is paid in full. A retention of title clause
allows us to recover the machine if the customer defaults on the lease. We
believe that the proceeds obtained from liquidation of the machine would cover
any payments required by the guarantee.
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):
|
Nine
months ended
|
||||||||
|
July
31, 2008
|
July
31, 2007
|
|||||||
|
Balance,
beginning of period
|
$ | 2,449 | $ | 1,926 | ||||
|
Provision
for warranties during the period
|
2,447 | 1,836 | ||||||
|
Charges
to the accrual
|
(2,020 | ) | (1,593 | ) | ||||
|
Impact
of foreign currency translation
|
135 | 82 | ||||||
|
Balance,
end of period
|
$ | 3,010 | $ | 2,251 | ||||
|
10.
|
COMPREHENSIVE
INCOME
|
A
reconciliation of our net income to comprehensive income was as follows (in
thousands):
|
Three
months ended
|
||||||||
|
July
31, 2008
|
July
31, 2007
|
|||||||
|
Net
income
|
$ | 5,826 | $ | 5,163 | ||||
|
Translation
of foreign currency financial statements
|
(23 | ) | 337 | |||||
|
Unrealized
gain (loss) on derivative instruments, net of tax
|
212 | 193 | ||||||
|
Comprehensive
income
|
$ | 6,015 | $ | 5,693 | ||||
|
11.
|
DEBT
AGREEMENTS
|
We are
party to a domestic credit agreement that provides us with a $30.0 million
unsecured revolving credit facility, as well as an agreement for an uncommitted
demand credit facility of 100.0 million New Taiwan Dollars. In the event the
Taiwan facility is not available, the domestic credit agreement would enable us
to provide credit enhancement to a replacement lender in Taiwan. We are also
party to a £1.0 million revolving credit agreement in the United
Kingdom. The domestic and U.K. agreements mature on December 7,
2012.
Borrowings
under the domestic agreement may be used for general corporate purposes and bear
interest at a LIBOR-based rate or an alternate base rate plus, in each case, an
applicable margin determined by reference to the ratio of the interest-bearing
debt and the undrawn face amount of all letters of credit outstanding, to
consolidated EBITDA. The domestic agreement contains customary affirmative
and negative covenants and events of default for an unsecured commercial bank
credit facility, including, among other things, limitations on consolidations,
mergers and sales of assets. The financial covenants contained in the domestic
agreement are a minimum quarterly consolidated net income covenant and a
covenant establishing a maximum ratio of consolidated total indebtedness to
total indebtedness and net worth.
-11-
|
12.
|
INCOME
TAXES
|
On
November 1, 2007, we adopted the provisions of Financial Accounting Standards
Board Interpretation No. 48 "Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109," (FIN 48). As a result of
the adoption, there was no change to beginning retained earnings. Our
total balance of unrecognized tax benefits as of July 31, 2008 was approximately
$654,000, which included accrued interest.
We accrue
interest related to unrecognized tax benefits as a component of our income tax
provision. We believe there is substantial support for taking these tax benefits
and therefore have estimated no tax penalties. As of July 31, 2008, we had
approximately $72,000 of accrued interest, which did not include the federal tax
benefit of interest deductions.
We file
income tax returns in U.S. federal jurisdiction and various state, local and
foreign jurisdictions. The statute of limitation will expire between July
2009 and July 2010 with respect to unrecognized tax benefits related to FIN
48.
-12-
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EXECUTIVE
OVERVIEW
Hurco
Companies, Inc. is an industrial technology company operating in a single
segment. 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 cutting market. We also provide
software options, control upgrades, accessories and replacement parts for our
products, as well as customer service and training support.
Our
strategy is to design and manufacture a comprehensive line of computerized
machine tools that incorporates our proprietary, interactive computer control
technology and sell those machine tools on a global basis. We design our
technology to enhance the machine tool user's productivity through ease of
operation and higher levels of machine performance (speed, accuracy and surface
finish quality). We use an open software architecture that permits our computer
control systems and software to be produced using standard PC hardware. We have
emphasized a “user-friendly” design that employs both interactive conversational
and graphical programming software. Each year since 2002, we have expanded our
product offering to meet customer needs, which has led us to design and
manufacture more complex machining centers with advanced
capabilities. We utilize a disciplined approach to strategically
enter new geographic markets, as appropriate. Our introduction of
new, technologically advanced products, combined with our expansion into new
markets, has resulted in our significant growth over the last several
years. In addition to this strong organic growth, our recent
performance and current financial strength also provide us with the capability
to pursue opportunistic acquisitions that are consistent with our strategic
focus to expand our product line and enter new markets.
Our
computerized metal cutting machine tools are manufactured in Taiwan to our
specifications by our wholly owned subsidiary, Hurco Manufacturing Limited
(HML), and by an affiliated contract manufacturer. We sell our products through
more than 170 independent agents and distributors in countries throughout North
America, Europe and Asia. We also have our own direct sales and service
organizations in Canada, England, France, Germany, Italy, Singapore and
China.
Approximately
89% of the worldwide demand for machine tools comes from outside the United
States. In recent years, approximately two-thirds of our revenues
have been attributable to customers located abroad. Since the
beginning of fiscal 2008, deteriorating conditions in the United States economy
have significantly reduced demand for machine tools in the North American
market, while demand has remained strong in the European and Asia Pacific
markets. As a result, during the past nine months the percentage of
our revenues attributable to customers located abroad has been approximately
80%. Our sales to foreign customers are denominated, and paid, in the
currencies—primarily the Euro and Pound Sterling—prevailing in the markets where
sold. Our product costs are incurred and paid primarily in the New
Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates
may have a material effect on our operating results and consolidated balance
sheets as reported under U.S. Generally Accepted Accounting
Principles. 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. In our comparison of
period-to-period results, we discuss not only the increases or decreases in
those results as reported in our financial statements (which reflect translation
to U.S. Dollars at prevailing exchange rates), but also the effect that changes
in exchange rates had on those results.
Our high
levels of foreign manufacturing and sales also subject us to cash flow risks due
to fluctuating currency exchange rates. We seek to mitigate those
risks through the use of various derivative instruments, principally, foreign
currency forward exchange contracts.
The
volatility of demand for machine tools affects our working capital requirements
and, therefore, our cash flow from operations and our operating profits. Because
our products are produced 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 continually
monitor order activity levels and adjust future production schedules to reflect
changes in demand, but a significant unexpected decline
in customer orders from forecasted levels can increase our finished goods
inventories and our use of working capital.
-13-
Our
financial results for the third quarter of fiscal 2008 reflect increased
revenues and operating income compared to the corresponding period of the prior
year because of strong demand in European markets and targeted expansion into
the Asia Pacific region, which offset a marked decrease in demand in the North
American region. The third quarter results also reflect the benefit
of a weaker U.S. Dollar when translating foreign sales for financial reporting
purposes.
RESULTS
OF OPERATIONS
Three
months Ended July 31, 2008 Compared to Three months Ended July 31,
2007
Sales
and Service Fees. Sales and service fees for the third quarter
of fiscal 2008 were $57.3 million, an increase of $8.7 million, or 18%, over the
third quarter of fiscal 2007 despite a 19% decrease in the North American
region, which accounts for approximately 13% of the worldwide machine tool
market. The growth of revenues was primarily the result of strong
demand in European and Asia Pacific markets combined with targeted expansion
into Eastern Europe, China and India. As noted below, approximately
75% of our sales during the third quarter of fiscal 2008 were derived from
Europe. Due to the effects of a weaker U.S. Dollar when translating foreign
sales for financial reporting purposes, sales and service fees for the third
quarter of fiscal 2008 were approximately 10%, or $5.1 million, more than would
have been the case if foreign sales had been translated at the same rate of
exchange that was utilized for the third quarter of
2007.
The
following tables set forth net sales (in thousands) by geographic region and
product category for the third quarter of 2008 and 2007:
|
Net
Sales and Service Fees by Geographic Region
|
||||||||||||||||||||||||
|
July
31,
|
Increase
(Decrease)
|
|||||||||||||||||||||||
|
2008
|
2007
|
Amount
|
%
|
|||||||||||||||||||||
|
North
America
|
$ | 10,643 | 18.6 | % | $ | 13,086 | 26.9 | % | $ | (2,443 | ) | (18.7 | %) | |||||||||||
|
Europe
|
43,071 | 75.1 | % | 33,044 | 68.1 | % | 10,027 | 30.3 | % | |||||||||||||||
|
Asia
Pacific
|
3,604 | 6.3 | % | 2,425 | 5.0 | % | 1,179 | 48.6 | % | |||||||||||||||
|
Total
|
$ | 57,318 | 100.0 | % | $ | 48,555 | 100.0 | % | $ | 8,763 | 18.0 | % | ||||||||||||
Unit
shipments for the third quarter increased in European and Asia Pacific markets
by 9% and 54%, respectively over the third quarter of fiscal
2007. The effects of a weaker U.S. Dollar when translating foreign
sales into U.S. Dollars for financial reporting purposes had a favorable impact
of approximately 14% on the year-over-year increase in both the European and
Asia Pacific markets. Sales in North America reflected continued market weakness
throughout the United States due to customer concerns over unfavorable economic
conditions. Unit shipments for the third quarter decreased in North America by
29% compared to the same period in the prior year, but the decrease was
partially offset by a more favorable sales mix of larger machines.
|
Net
Sales and Service Fees by Product Category
|
||||||||||||||||||||||||
|
July
31,
|
Increase
|
|||||||||||||||||||||||
|
2008
|
2007
|
Amount
|
%
|
|||||||||||||||||||||
|
Computerized
Machine Tools
|
$ | 50,991 | 89.0 | % | $ | 42,959 | 88.5 | % | $ | 8,032 | 18.7 | % | ||||||||||||
|
Service
Fees, Parts and Other
|
6,327 | 11.0 | % | 5,596 | 11.5 | % | 731 | 13.1 | % | |||||||||||||||
|
Total
|
$ | 57,318 | 100.0 | % | $ | 48,555 | 100.0 | % | $ | 8,763 | 18.0 | % | ||||||||||||
Sales of
computerized machine tools during the third quarter of fiscal 2008 increased 19%
over the corresponding period in fiscal 2007. The year-over-year increase was
primarily attributable to increased unit shipments in European and Asia Pacific
markets and the favorable impact of a weaker U.S. Dollar when translating
foreign sales into U.S. Dollars for financial reporting purposes.
-14-
Orders. New
order bookings in the third quarter of fiscal 2008, were $52.5 million, an
increase of $3.8 million, or 8%, over the prior year period. European
orders increased $6.0 million, or 19%, during the third quarter of fiscal 2008
compared to the same period in the prior year, and included a favorable impact
of a weaker U.S. Dollar when translating foreign orders into U.S. Dollars of
approximately $4.3 million, or 13%. Asia Pacific orders increased $.8 million,
or 33%, during the third quarter of fiscal 2008 compared to the same period in
the prior year, and included a favorable impact of a weaker U.S. Dollar when
translating foreign orders into U.S. Dollars of approximately $0.3 million, or
12%. Orders in North America during the third quarter of fiscal 2008
were $3.0 million, or 22%, below those in the third quarter of fiscal 2007. The
decline in orders in North America reflected the deteriorating conditions in the
United States economy.
Gross
Margin. Gross margin for the third quarter of fiscal 2008 was
36%, compared to 38% for the 2007 period. The reduction in gross
margin was attributable to recent price increases for raw materials, which have
significantly affected the machine tool industry. However, the impact of those
increases was partially offset by a more favorable mix of sales by product and
region.
Operating
Expenses. Selling, general and administrative expenses were
$11.8 million for the third quarter of fiscal 2008, an increase of $1.6 million
over the 2007 period, reflecting greater expenditures for global market
expansion and product development. The increase also reflected the unfavorable
effects of a weaker U.S. Dollar during the 2008 period when translating foreign
operating expenses for financial reporting purposes, as well as, stock-based
compensation expense recorded for the grant of stock options to two new
directors.
Operating
Income. Operating income was $9.1 million, or 16% of sales and
service fees for the third quarter of fiscal 2008, compared to $8.2 million, or
17% of sales and service fees, for the prior year period. The increase in
operating income year over year primarily reflected growth in foreign sales and
service fees, offset by recent price increases for raw materials and increased
operating expenses for global market expansion, product development and
stock-based compensation recorded for new directors.
Other
(Income) Expense, net. The decrease in other income is
primarily the result of $0.5 million in net transaction losses on foreign
currency forward exchange contracts during the third quarter of fiscal 2008
compared to the prior year period. The decrease represents the difference at the
balance sheet date between the fair value of receivables and payables
denominated in foreign currencies and the foreign exchange contract rates at
which the hedges were placed. Additionally, we had reduced income of
approximately $0.3 million during the third quarter of fiscal 2008 compared to
the prior year as a result of the sale of our equity investment in a Taiwan
contract manufacturer, which occurred in the fourth quarter of fiscal
2007.
Income
Taxes. Our effective tax rate for the third quarter of fiscal
2008 was 34% compared to 41% for the same period in the prior year. The lower
effective tax rate for the third quarter of fiscal 2008 reflected the increased
percentage of foreign income, which is taxable at lower rates, compared to the
prior year period. Additionally, the effective tax rate for the third
quarter of fiscal 2007 included an adjustment of approximately 3% for the
estimated tax liability related to the sale of our minority interest in Quaser,
which occurred in the fourth quarter of fiscal 2007.
Nine
months Ended July 31, 2008 Compared to Nine months Ended July 31,
2007
Sales
and Service Fees. Sales and service fees for the first nine
months of fiscal 2008 were $176.5 million, an increase of $38.6 million, or 28%,
over the first nine months of fiscal 2007. The growth of revenues was primarily
the result of strong demand in European and Asia Pacific markets combined with
ongoing expansion into Eastern Europe, China and India. As noted
below, approximately 74% of our sales during the first nine months of fiscal
2008 were derived from Europe. Due to the effects of a weaker U.S. Dollar when
translating foreign sales for financial reporting purposes, sales and service
fees for the first nine months of fiscal 2008 were approximately 11%, or $9.8
million, more than would have been the case if foreign sales had been translated
at the same rate of exchange that was utilized for the first nine months of
2007.
-15-
The
following tables set forth net sales (in thousands) by geographic region and
product category for the first nine months of 2008 and 2007:
|
Net
Sales and Service Fees by Geographic Region
|
||||||||||||||||||||||||
|
July
31,
|
Increase
(Decrease)
|
|||||||||||||||||||||||
|
2008
|
2007
|
Amount
|
%
|
|||||||||||||||||||||
|
North
America
|
$ | 35,427 | 20.1 | % | $ | 37,890 | 27.5 | % | $ | (2,463 | ) | (6.5 | %) | |||||||||||
|
Europe
|
130,776 | 74.1 | % | 93,233 | 67.6 | % | 37,543 | 40.3 | % | |||||||||||||||
|
Asia
Pacific
|
10,323 | 5.8 | % | 6,804 | 4.9 | % | 3,519 | 51.7 | % | |||||||||||||||
|
Total
|
$ | 176,526 | 100.0 | % | $ | 137,927 | 100.0 | % | $ | 38,599 | 28.0 | % | ||||||||||||
Unit
shipments for the first nine months of fiscal 2008 increased in European and
Asia Pacific markets by 10% and 50% respectively, over the same period in fiscal
2007. The effects of a weaker U.S. Dollar when translating fiscal
2008 foreign sales into U.S. Dollars for financial reporting purposes had a
favorable impact of approximately 15% in Europe and 12% in the Asia Pacific
market. Sales in North America reflected continued market weakness
throughout the United States due to customer concerns over unfavorable economic
conditions. Unit shipments for the first nine months of fiscal 2008
decreased in North America by 14% compared to the same period in the prior year,
but the decrease was partially offset by a more favorable sales mix of larger
machines.
|
Net
Sales and Service Fees by Product Category
|
||||||||||||||||||||||||
|
July
31,
|
Increase
|
|||||||||||||||||||||||
|
2008
|
2007
|
Amount
|
%
|
|||||||||||||||||||||
|
Computerized
Machine Tools
|
$ | 157,977 | 89.5 | % | $ | 121,952 | 88.4 | % | $ | 36,025 | 29.5 | % | ||||||||||||
|
Service
Fees, Parts and Other
|
18,549 | 10.5 | % | 15,975 | 11.6 | % | 2,574 | 16.1 | % | |||||||||||||||
|
Total
|
$ | 176,526 | 100.0 | % | $ | 137,927 | 100.0 | % | $ | 38,599 | 28.0 | % | ||||||||||||
Sales of
computerized machine tools during the first nine months of fiscal 2008 increased
30% over the corresponding period in fiscal 2007. The increase was attributable
to an increase in unit shipments in Europe and Asia Pacific and the favorable
impact of a weaker U.S. Dollar when translating foreign sales into U.S. Dollars
for financial reporting purposes.
Orders. New
order bookings in the first nine months of fiscal 2008, were $172.5 million, an
increase of $28.3 million, or 20%, over the prior year
period. European orders increased $31.2 million, or 32%, during the
first nine months fiscal 2008 compared to the same period in the prior year, and
included a favorable impact of a weaker U.S. Dollar when translating foreign
orders into U.S. Dollars of approximately $13.8 million, or 14%. Asia
Pacific orders increased $1.2 million, or 15%, during the first nine months of
fiscal 2008 compared to the same period in the prior year, and included a
favorable impact of a weaker U.S. Dollar when translating foreign orders into
U.S. Dollars of approximately $0.8 million, or 9%. North American
orders decreased $4.1 million, or 11%, during the first nine months of fiscal
2008 compared to the same period in the prior year. The decline in
orders in North America reflected the deteriorating conditions in the United
States economy.
Gross
Margin. Gross margin for the first nine months of fiscal 2008
was down slightly compared to the first nine months of fiscal 2007 at 37% and
38%, respectively. The reduction in gross margin was attributable to recent
price increases for raw materials which have significantly affected the machine
tool industry. The recent price increases for raw materials were
partially offset by a more favorable mix of sales by product and
region.
Operating
Expenses. Selling, general and administrative expenses were
$35.9 million for the first nine months of fiscal 2008, an increase of $7.0
million over the 2007 period, reflecting greater expenditures for sales, product
development and market expansion. The increase also reflected the unfavorable
effects of a weaker U.S. Dollar during the 2008 period when translating foreign
operating expenses for financial reporting purposes.
-16-
Operating
Income. Operating income was $30.2 million, or 17% of sales
and service fees for the first nine months of fiscal 2008, compared to $23.2
million, or 17% of sales and service fees, for the prior year period. The
increase in operating income year over year primarily reflected growth in
foreign sales and service fees, offset by recent price increases for raw
materials and increased operating expenses for global market expansion and
product development.
Other
(Income) Expense, net. The decrease in other income was
primarily the result of $1.1 million in net transaction losses on foreign
currency forward exchange contracts during the first nine months of fiscal 2008
compared to the prior year period and represents the difference at the balance
sheet date between the fair value of receivables and payables denominated in
foreign currencies and the foreign exchange contract rates at which the hedges
were placed. Additionally, the prior year period had income of approximately
$1.0 million as a result of the sale of our equity investment in a Taiwan
contract manufacturer, which occurred in the fourth quarter of fiscal
2007.
Income
Taxes. Our effective tax rate for the first nine months of
fiscal 2008 was 36% compared to 38% for the same period in the prior year. The
higher effective tax rate for the first nine months of fiscal 2007 was primarily
a result of an adjustment for estimated tax liability related to the sale of our
minority interest in Quaser, which occurred in the fourth quarter of fiscal
2007.
LIQUIDITY
AND CAPITAL RESOURCES
At July
31, 2008, we had cash of $31.0 million, compared to $29.8 million at October 31,
2007. Cash generated from operations totaled $0.6 million for
the nine months ended July 31, 2008, compared to cash generated from operations
of $12.6 million in the prior year period. The year-over-year
reduction in cash flow from operations was primarily due to payments made to
vendors to support increased production levels.
As of
July 31, 2008 and October 31, 2007, we held $6.7 million and $10.0 million,
respectively, of investments in auction rate securities, which represented
investments in student loan obligations and municipal bonds. These
auction rate securities are intended to provide liquidity via an auction process
that resets the applicable interest rate at predetermined intervals allowing us
to either roll over the holdings or sell the investment at par
value.
The
recent uncertainties in the credit markets have affected the liquidity of our
holdings in auction rate securities, and multiple auctions for these securities
have been unsuccessful. Consequently, approximately $4.8 million of
these investments in student loan obligations are currently not liquid and we
will not be able to access these funds until a future auction of these
investments is successful. The remaining $1.9 million of the auction
rate securities, as of July 31, 2008, are in a municipal bond that has had
recent auction sales, at par value, totaling $2.3 million since January 31,
2008. All of the auction rate securities are “AAA” rated and were in
compliance with our investment policy at the time of the
acquisition. We currently have the ability and intent to hold these
auction rate securities until a recovery of the auction process or until
maturity, which could be greater than 12 months. As of July 31, 2008,
we classified the student loan obligations of $4.8 million as long-term
investments due to the inability to determine when the investments will settle,
and continue to carry the $1.9 million municipal bond as a short-term investment
based upon the most recent trading activity.
Working
capital, excluding cash and short-term investments, was $57.8 million at July
31, 2008, compared to $36.3 million at October 31, 2007. The
increased working capital, excluding cash and short-term investments, was
primarily driven by increased accounts receivable and inventory primarily due to
growth in product demand and the forthcoming launch of new
products.
Capital
expenditures were primarily for purchases of equipment related to expansion of
our manufacturing facilities, software development projects, and an integrated
computer system. We funded these expenditures with cash flow from
operations.
As of
July 31, 2008, we had no outstanding debt or borrowings under our domestic and
foreign bank credit agreements.
We have
an effective SEC “shelf” registration statement on Form S-3 that allows us to
offer and sell from time to time, in one or more transactions, a variety of
securities, including common stock, preferred stock, warrants, depositary
shares, and debt securities up to an aggregate amount of $200.0 million if, and
when, authorized by the Board of Directors. We have not made any
offerings under the shelf registration statement.
-17-
Although
we have not made any significant acquisitions in the recent past, we continue to
receive and evaluate information on businesses and assets, including
intellectual property assets that are being sold. Should attractive
opportunities arise, we believe that our earnings, cash flow from operations,
borrowings under our bank credit agreements, and the sale of securities from our
shelf registration would provide sufficient resources to finance any such
possible acquisitions.
NEW
ACCOUNTING PRONOUNCEMENTS
In July
2006, the FASB released Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes,” an interpretation of FASB Statement No. 109, which clarifies
the accounting and reporting for uncertainties in income taxes. The
interpretation prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. During the first quarter of
fiscal 2008, we adopted FIN 48. The adoption of this standard did not
have a material effect on the consolidated financial statements.
During
2006, the FASB released Statement No. 157, “Fair Value Measurements,” a new
standard which provides further guidance on using fair value to measure assets
and liabilities, the information used to measure fair value and the effect of
fair value measurements on earnings. Statement 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value, but does not expand the use of fair value in any new
circumstances. The changes to current practice resulting from the
adoption of this statement relate to defining fair value, the methods used to
measure fair value and expanding our financial statement disclosures about our
fair value measurements. We will be required to adopt and report the
impact of Statement 157 in the first quarter of fiscal 2009. In February 2008,
the FASB issued Staff Position (FSP) 157-2, “Effective Date of FASB Statement
No. 157.” This FSP delays the effective date of Statement 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008. Although we have not adopted
this statement, we have assessed the potential impact and have concluded that
its adoption will not have a material effect on our financial position or
results of operations.
In March
2008, the FASB released Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” an amendment of SFAS No.
133.” Statement 161 will require increased disclosure of our
derivative and hedging activities, including how derivative and hedging
activities affect our consolidated statement of operations, balance sheet, and
cash flows. Statement 161 is effective for fiscal years beginning on or after
December 15, 2008, and interim periods within those fiscal years. The
adoption of Statement 161 will increase the required disclosure of our
derivative and hedging activities, but is not expected to have a material impact
on our financial position or results of operations.
CRITICAL
ACCOUNTING POLICIES
Our
accounting policies, which are described in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2007, 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 would be affected. There were no material
changes to our critical accounting policies during the first nine months of
fiscal 2008.
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, 2007. As of July
31, 2008, our FIN 48 liabilities were $654,000. The periods in which the FIN 48
liabilities will be paid cannot be reliably estimated and are, therefore,
excluded from our contractual obligations.
-18-
OFF
BALANCE SHEET ARRANGEMENTS
From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of certain machines to customers that use
financing. As July 31, 2008, we had 59 outstanding third party
guarantees totaling approximately $1.8 million. The terms of our
subsidiaries’ guarantees are consistent with the underlying customer financing
terms. Upon shipment, the customer has the risk of ownership, but
does not obtain title until the machine is paid in full. A retention
of title clause allows us to recover the machine if the customer defaults on the
lease. We believe that the proceeds obtained from liquidation of the
machine would cover any payments required by the guarantee.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain
statements made in this report constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to known and unknown risks, uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different from those expressed or implied by the statements.
These risks, uncertainties and other factors include:
|
·
|
The
cyclical nature of the machine tool
industry;
|
|
·
|
The
risks of our international
operations;
|
|
·
|
The
limited number of our manufacturing
sources;
|
|
·
|
The
effects of changes in currency exchange
rates;
|
|
·
|
Our
dependence on new product
development;
|
|
·
|
The
need to make technological
advances;
|
|
·
|
Competition
with larger companies that have greater financial
resources;
|
|
·
|
Changes
in the prices of raw materials, especially steel and iron
products;
|
|
·
|
Possible
obsolescence of our technology;
|
|
·
|
Acquisitions
that could disrupt our operations and affect operating
results;
|
|
·
|
Impairment
of our goodwill or other assets;
|
|
·
|
The
need to protect our intellectual property
assets;
|
|
·
|
The
impact of the continuing downturn in the U.S.
economy;
|
|
·
|
The
impact of ongoing disruptions in the credit markets on our investment
securities; and
|
|
·
|
The
effect of the loss of key
personnel.
|
We
discuss these and other important risks and uncertainties that may affect our
future operation in Part I, Item 1A – Risk Factors in our most recent Annual
Report on Form 10-K and may update that discussion in Part II, Item 1A – Risk
Factors in this or a Quarterly Report on Form 10-Q we file
hereafter.
Readers
are cautioned not to place undue reliance on these forward-looking
statements. While we believe the assumptions on which the
forward-looking statements are based are reasonable, there can be no assurance
that these forward-looking statements will prove to be accurate. This cautionary
statement is applicable to all forward-looking statements contained in this
report.
-19-
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Interest
Rate Risk
|
|
Interest
on borrowings on our bank credit agreements are tied to prevailing U.S. and
European interest rates. At July 31, 2008, there were no outstanding
borrowings under our bank credit agreements.
Foreign
Currency Exchange Risk
In fiscal
2008, we derived more than two-thirds of our revenues, including export sales,
from foreign markets. All of our computerized machine tools and
computer 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 sourced from foreign suppliers or built to our specifications by
either our wholly owned subsidiary in Taiwan or an affiliated contract
manufacturer. Our purchases are predominantly in foreign currencies and in some
cases our arrangements with these suppliers include foreign currency risk
sharing agreements, which reduce (but do not eliminate) the effects of currency
fluctuations on product costs. The predominant portion of the exchange rate risk
associated with our product purchases relates to the New Taiwan
Dollar.
We enter
into foreign currency forward exchange contracts from time to time to hedge the
cash flow risk related to forecasted inter-company sales and forecasted
inter-company and third party purchases denominated in, or based on, foreign
currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). 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. 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 July 31, 2008,
which are designated as cash flow hedges under FASB Statement 133, “Accounting
Standards for Derivative Instruments and Hedging Activities” were as
follows:
|
Notional
Amount
|
Weighted
Avg.
|
Contract
Amount at Forward Rates in
U.S.
Dollars
|
|||||||||||||||
|
Forward
Contracts
|
in
Foreign Currency
|
Forward Rate
|
Contract Date
|
July
31,
2008
|
Maturity
Dates
|
||||||||||||
|
Sale
Contracts:
|
|||||||||||||||||
|
Euro
|
39,450,000 | 1.4841 | 58,547,745 | 61,016,505 |
August
2008 – July 2009
|
||||||||||||
|
Pound
Sterling
|
5,105,000 | 1.9676 | 10,044,598 | 10,002,257 |
August
2008 – July 2009
|
||||||||||||
|
Purchase
Contracts:
|
|||||||||||||||||
|
New
Taiwan Dollar
|
1,112,000,000 | 30.42 | * | 36,553,696 | 36,572,448 |
August
2008 – July 2009
|
|||||||||||
*NT
Dollars per U.S. Dollar
-20-
Forward
contracts for the sale or purchase of foreign currencies as of July 31, 2008,
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables and are not designated as hedges under
Statement 133 denominated in foreign currencies, were as follows:
|
Contract
Amount at Forward Rates in
U.S.
Dollars
|
|||||||||||||||||
|
Forward
Contracts
|
Notional Amount in
Foreign Currency
|
Weighted Avg.
Forward Rate
|
Contract Date
|
July
31, 2008
|
Maturity
Dates
|
||||||||||||
|
Sale
Contracts:
|
|||||||||||||||||
|
Euro
|
16,619,350 | 1.5546 | 25,836,441 | 25,794,307 |
August
2008 – February 2009
|
||||||||||||
|
Pound
Sterling
|
1,215,575 | 1.9649 | 2,388,483 | 2,404,907 |
August
2008 – September 2008
|
||||||||||||
|
Singapore
Dollar
|
2,444,567 | 1.3568 | 1,801,715 | 1,793,464 |
August
2008 – November 2008
|
||||||||||||
|
Purchase
Contracts:
|
|||||||||||||||||
|
New
Taiwan Dollar
|
330,608,000 | 30.37 | * | 10,884,967 | 10,784,153 |
August
2008 – September 2008
|
|||||||||||
* NT
Dollars per U.S. Dollar
We are
exposed to foreign currency exchange risks related to our investment in net
assets in foreign countries. To manage this risk, we entered
into a forward contract on November 26, 2007, with a notional amount of €3.0
million. We have designated this forward contract as a hedge of our
net investment in Euro denominated assets. We have selected the
forward method under the guidance of the Derivatives Implementation Group
Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of
Ineffectiveness in a Net Investment Hedge.” The forward method requires all
changes in the fair value of the forward to be reported as a cumulative
translation adjustment in Accumulated Other Comprehensive Loss in the same
manner as the underlying hedged net assets. As of July 31, 2008, we
had a loss of $123,000, net of tax, recorded as a cumulative translation
adjustment in Accumulated Other Comprehensive Loss related to the forward
contract.
Forward
contracts for the sale or purchase of foreign currencies as of July 31, 2008,
which are designated as net investment hedges under Statement 133 were as
follows:
|
Notional
Amount
|
Weighted
Avg.
|
Contract
Amount at Forward Rates in
U.S.
Dollars
|
|||||||||||||||
|
Forward
Contracts
|
in
Foreign Currency
|
Forward Rate
|
Contract Date
|
July
31, 2008
|
Maturity
Date
|
||||||||||||
|
Sale
Contracts:
|
|||||||||||||||||
|
Euro
|
3,000,000 | 1.4837 | 4,451,100 | 4,650,756 |
November
2008
|
||||||||||||
-21-
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 July 31, 2008, 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
were no changes in our internal controls over financial reporting during the
quarter ended July 31, 2008 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
-22-
PART
II - OTHER INFORMATION
|
Item
1.
|
LEGAL
PROCEEDINGS
|
We are
involved in various claims and lawsuits arising in the normal course of our
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
1A. RISK
FACTORS
Except as
set forth below, there have been no material changes from the risk factors
disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year
ended October 31, 2007.
Our
investments in auction rate securities do not currently provide us a liquid
source of cash.
As of
July 31, 2008, we held approximately $6.7 million of investments which were
auction rate securities. Recently, there have been disruptions in the
market for auction rate securities. Approximately 71.6% of the
auction rate securities in our portfolio had unsuccessful auctions, and we may
not be able to sell these securities in a timely manner to meet a liquidity
need. If the credit markets do not improve, we may be unable to sell
the underlying securities at or above our carrying value, or at
all.
Item
5. OTHER
INFORMATION
During
the period covered by this report, the Audit Committee of our Board of Directors
did not engage our independent registered public accounting firm to perform any
non-audit services. This disclosure is made pursuant to Section
10A9(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of
the Sarbanes-Oxley Act of 2002.
-23-
|
Item
6.
|
EXHIBITS
|
|
11
|
Computation
of per share earnings.
|
|
|
31.1
|
Certification
by the Chief Executive Officer, pursuant to Rule 13a-15(b) under the
Securities and Exchange Act of 1934, as amended.
|
|
|
31.2
|
Certification
by the Chief Financial Officer, pursuant to Rule 13a-15(b) 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.
|
-24-
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/
John G. Oblazney
John G.
Oblazney
Vice President
and
Chief
Financial Officer
By: /s/
Sonja K. McClelland
Sonja K.
McClelland
Corporate
Controller and
Principal
Accounting Officer
September
9, 2008
-25-