HURCO COMPANIES INC - Quarter Report: 2008 March (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 January 31, 2008
or
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| o |
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 March 7,
2008 was 6,417,220.
HURCO
COMPANIES, INC.
January
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
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Condensed
Consolidated Statement of Operations ………………………………………..
Three months ended January 31,
2008 and 2007
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3
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Condensed
Consolidated Balance Sheet …………………………………………………..
As of January 31, 2008 and
October 31, 2007
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4
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Condensed
Consolidated Statement of Cash Flows………………………………………..
Three months ended January 31,
2008 and 2007
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5
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Condensed
Consolidated Statement of Changes in Shareholders'
Equity…………………
Three months ended January 31,
2008 and 2007
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6
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Notes
to Condensed Consolidated Financial
Statements…………………………………..
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7
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Item
2.
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Management's
Discussion and Analysis of Financial ……………………………………..
Condition and Results of
Operations
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13
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk …………………………….
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18
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Item
4.
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Controls
and Procedures …………………………………………………………………...
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20
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Part
II - Other Information
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Item
1.
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Legal
Proceedings…………………………………...…………………………………...
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21
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Item
1A.
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Risk
Factors…………..……………………………...…………………………………...
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21
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Item
5.
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Other
Information…..…………… ………………………………………………………
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21
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Item
6.
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Exhibits…..………………………
………………………………………………………
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21
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Signatures
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…………………………………………………………………………………………….
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22
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2
| $ | 60,923 | $ | 46,878 | |||||
| 36,066 | 29,554 | |||||||
| 24,857 | 17,324 | |||||||
| 12,376 | 9,250 | |||||||
| 12,481 | 8,074 | |||||||
| 11 | 82 | |||||||
| 149 | 193 | |||||||
| 172 | 21 | |||||||
| 464 | (187 | ) | ||||||
| 12,327 | 8,393 | |||||||
| 4,522 | 2,998 | |||||||
| $ | 7,805 | $ | 5,395 | |||||
| $ | 1.22 | $ | 0.85 | |||||
| $ | 1.21 | $ | 0.84 | |||||
| 6,401 | 6,362 | |||||||
| 6,433 | 6,418 | |||||||
3
4
| $ | 7,805 | $ | 5,395 | |||||
| (25 | ) | (38 | ) | |||||
| (268 | ) | 77 | ||||||
| 20 | (204 | ) | ||||||
| 683 | 388 | |||||||
| 57 | 308 | |||||||
| (10,019 | ) | (2,587 | ) | |||||
| (2,029 | ) | 3,695 | ||||||
| 982 | (2,634 | ) | ||||||
| (2,003 | ) | (1,797 | ) | |||||
| 1,103 | 306 | |||||||
| (3,694 | ) | 2,909 | ||||||
| 12 | -- | |||||||
| (1,096 | ) | (149 | ) | |||||
| (8,000 | ) | -- | ||||||
| 4,000 | -- | |||||||
| (51 | ) | (505 | ) | |||||
| (106 | ) | (299 | ) | |||||
| (5,241 | ) | (953 | ) | |||||
| -- | (33 | ) | ||||||
| -- | 115 | |||||||
| 54 | 97 | |||||||
| 54 | 179 | |||||||
| 297 | 345 | |||||||
| (8,584 | ) | 2,480 | ||||||
| 29,760 | 29,846 | |||||||
| $ | 21,176 | $ | 32,326 | |||||
5
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|
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|||||||||||||||||||||
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|||||||||||||||||||||||
| 6,346,520 | $ | 635 | $ | 50,011 | $ | 28,480 | $ | (3,751 | ) | $ | 75,375 | |||||||||||||
| -- | -- | -- | 5,395 | -- | 5,395 | |||||||||||||||||||
| -- | -- | -- | -- | 638 | 638 | |||||||||||||||||||
| -- | -- | -- | -- | (235 | ) | (235 | ) | |||||||||||||||||
| -- | -- | -- | -- | -- | 5,798 | |||||||||||||||||||
| 34,000 | 3 | 94 | -- | -- | 97 | |||||||||||||||||||
| -- | -- | 115 | -- | -- | 115 | |||||||||||||||||||
| -- | -- | 308 | -- | -- | 308 | |||||||||||||||||||
| 6,380,520 | $ | 638 | $ | 50,528 | $ | 33,875 | $ | ( 3,348 | ) | $ | 81,693 | |||||||||||||
| 6,392,220 | $ | 639 | $ | 50,971 | $ | 49,369 | $ | (3,376 | ) | $ | 97,603 | |||||||||||||
| -- | -- | -- | 7,805 | -- | 7,805 | |||||||||||||||||||
| -- | -- | -- | -- | 456 | 456 | |||||||||||||||||||
| -- | -- | -- | -- | 30 | 30 | |||||||||||||||||||
| -- | -- | -- | -- | -- | 8,291 | |||||||||||||||||||
| 25,000 | 3 | 51 | -- | -- | 54 | |||||||||||||||||||
| -- | -- | -- | -- | -- | -- | |||||||||||||||||||
| -- | -- | 57 | -- | -- | 57 | |||||||||||||||||||
| 6,417,220 | $ | 642 | $ | 51,079 | $ | 57,174 | $ | (2,890 | ) | $ | 106,005 | |||||||||||||
6
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”. Our auction
rate securities are stated at cost which approximates fair market value and
therefore there were no unrealized gains or losses related to these securities
included in Accumulated Other Comprehensive Loss as of January 31,
2008. All income generated from these auction rate securities was
recorded as Investment Income. As of January 31, 2008 and October 31,
2007, we had $14.0 million and $10.0 million, respectively, of auction rate
securities.
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3.
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HEDGING
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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
January 31, 2008, we had $2.6 million of losses, net of tax, related to cash
flow hedges deferred in Accumulated Other Comprehensive Loss, net of
tax. Of this amount, $1.5 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 January 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 January 31, 2008, were $800,000 compared to net losses of $262,000
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” (SFAS
133), 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 $368,000 for the
quarter ended January 31, 2008 compared to net gains of $16,000 for the same
period in the prior year.
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, net of tax, in the same manner as the underlying hedged net
assets. As of January 31, 2008, we had a gain of $22,000, net of tax,
recorded as a cumulative translation adjustment in Accumulated Other
Comprehensive Loss, net of tax, related to the forward contract.
8
4. STOCK
OPTIONS
In March
2007, the 1997 Stock Option and Incentive Plan, which allowed us to grant awards
of options to purchase shares of our common stock, stock appreciation rights,
restricted shares and performance shares, expired and we may no longer make
awards under this plan. Options granted under the plan prior to March
2007 remain exercisable for a period up to ten years after the date of grant and
vest in equal annual installments as specified by the Compensation Committee of
our Board of Directors at the time of grant. The exercise price of
options intended to qualify as incentive stock options may not be less than 100%
of the fair market value of a share of common stock on the date of
grant. During the first three months of fiscal 2008, options to
purchase 25,000 shares were exercised, resulting in cash proceeds of
approximately $54,000 with no additional tax benefit, compared to 34,000 shares
exercised in the prior year period resulting in cash proceeds of $97,000 and an
additional tax benefit of approximately $115,000. We are submitting a
new equity-based incentive compensation plan to our shareholders at the 2008
annual meeting.
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.
During
the first three months of fiscal 2007, the Compensation Committee granted 40,000
shares under the 1997 plan to certain employees and directors. The
fair value of options awarded 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 contractual term of the
options of ten years and a risk-free interest rate based upon a three-year U.S.
Treasury yield as of the date of grant. The options granted to
employees vest in three equal annual installments and the directors’ options
were granted with immediate vesting as of the date of grant.
During
the first three months of fiscal 2008, approximately $57,000 of stock-based
compensation expense had been recorded related to options granted under the 1997
plan compared to $308,000 for the same period in the prior year. As
of January 31, 2008, there was approximately $400,000 of total unrecognized
stock-based compensation cost that is expected to be recognized over the next
two years.
A summary
of stock option activity for the three-month period ended January 31, 2008, is
as follows:
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Stock
Options
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Weighted
Average Exercise Price
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|||||||
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Outstanding
at October 31,
2007
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83,000 | $ | 13.24 | |||||
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Options
granted
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-- | -- | ||||||
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Options
exercised
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(25,000 | ) | $ | 2.15 | ||||
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Options
cancelled
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-- | -- | ||||||
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Outstanding
at January 31,
2008
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58,000 | $ | 18.02 | |||||
The total
intrinsic value of stock options exercised during the three-month periods ended
January 31, 2008 and 2007 was approximately $900,000 and $1.0 million,
respectively. The intrinsic value is calculated as the difference
between the stock price as of January 31, 2008 and the exercise price of the
stock option multiplied by the number of shares exercised.
9
Summarized
information about outstanding stock options as of January 31, 2008, that are
already vested and those that we expect to vest, as well as stock options that
are currently exercisable, is as follows:
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Outstanding
Stock Options Already Vested and Expected to Vest
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Options
that are outstanding and Exercisable
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|||||||
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Number
of outstanding
options
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58,000 | 38,000 | ||||||
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Weighted
average remaining contractual life
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7.29 | 5.95 | ||||||
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Weighted
average exercise price per share
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$ | 18.02 | $ | 13.45 | ||||
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Intrinsic
value
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$ | 1,076,000 | $ | 879,000 | ||||
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5.
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EARNINGS
PER SHARE
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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
January 31, 2008 and 2007 was 32,000 and 56,000, respectively.
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6.
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ACCOUNTS
RECEIVABLE
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Accounts
receivable are net of allowance for doubtful accounts of $726,000 as of January
31, 2008 and $751,000 as of October 31, 2007.
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7.
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INVENTORIES
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Inventories,
priced at the lower of cost (first-in, first-out method) or market, are
summarized below (in thousands):
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January 31, 2008
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October 31, 2007
|
|||||||
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Purchased
parts and sub-assemblies
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$ | 11,149 | $ | 10,956 | ||||
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Work-in-process
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10,783 | 11,692 | ||||||
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Finished
goods
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41,897 | 38,473 | ||||||
| $ | 63,829 | $ | 61,121 | |||||
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8.
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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.
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9.
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GUARANTEES
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From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of certain machines to customers that use
financing. At January 31, 2008 we had 52 outstanding third party
guarantees totaling approximately $1.5 million. The terms of our
subsidiaries’ guarantees are consistent with the underlying customer financing
terms. Upon shipment, the customer has the risk of ownership, but
does not obtain title until the machine is paid in full. A retention
of title clause allows us to recover the machine if the customer defaults on the
lease. We believe that the proceeds obtained from liquidation of the
machine would cover any payments required by the guarantee.
10
We
provide warranties on our products with respect to defects in material and
workmanship. The terms of these warranties are generally one year for machines
and shorter periods for service parts. We recognize a reserve with
respect to this obligation at the time of product sale, with subsequent warranty
claims recorded against the reserve. The amount of the warranty reserve is
determined based on historical trend experience and any known warranty issues
that could cause future warranty costs to differ from historical
experience. A reconciliation of the changes in our warranty reserve
is as follows (in thousands):
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Three
months ended
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||||||||
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1/31/08
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1/31/07
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|||||||
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Balance,
beginning of period
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$ | 2,449 | $ | 1,926 | ||||
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Provision
for warranties during the period
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669 | 599 | ||||||
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Charges
to the accrual
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(598 | ) | (517 | ) | ||||
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Impact
of foreign currency translation
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30 | 27 | ||||||
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Balance,
end of period
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$ | 2,550 | $ | 2,035 | ||||
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10.
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COMPREHENSIVE
INCOME
|
A
reconciliation of our net income to comprehensive income was as follows (in
thousands):
|
Three
months ended
|
||||||||
|
1/31/08
|
1/31/07
|
|||||||
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Net
income
|
$ | 7,805 | $ | 5,395 | ||||
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Translation
of foreign currency financial statements
|
456 | 638 | ||||||
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Unrealized
gain (loss) on derivative instruments
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30 | (235 | ) | |||||
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Comprehensive
income
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$ | 8,291 | $ | 5,798 | ||||
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11.
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DEBT
FACILITIES
|
On
December 7, 2007, we entered into a new domestic credit agreement that provides
us with a $30.0 million unsecured revolving credit facility and a separate
letter of credit facility in the amount of 100.0 million New Taiwan
Dollars. On the same day, we entered into a Taiwan revolving credit
agreement of 100.0 million New Taiwan Dollars which is an uncommitted demand
credit facility. In the event the Taiwan facility is not available, the Taiwan
letter of credit facility available under the domestic credit agreement would
enable us to provide credit enhancement to a replacement lender in Taiwan. We
also entered into a £1.0 million revolving credit facility in the United
Kingdom.
The new
domestic and U.K. facilities, which mature on December 7, 2012, replace our
prior agreements, which would have matured on January 31, 2008. We
incurred no early termination or prepayment penalties in connection with
replacement of these prior facilities.
Borrowings
under the new domestic facility may be used for general corporate purposes and
will bear interest at a LIBOR-based rate or an alternate base rate, in each
case, plus an applicable margin determined by reference to the ratio of the
interest-bearing debt and obligations and the undrawn face amount of all letters
of credit outstanding, on a consolidated basis, to consolidated EBITDA.
Based on the most recent determination of that ratio, the applicable margin
under the new domestic facility will be less than it would have been under the
prior facility. The credit agreement for the new domestic facility 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 credit 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. Other covenants are not
materially different from those contained in the prior facility, except that
there are no covenants relating to collateral and minimum collateral valuations,
as the new domestic facility is unsecured. The fixed charge coverage ratio,
minimum consolidated net worth financial covenants, and the borrowing base
restrictions that were part of the prior facility are also no longer
applicable.
11
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12.
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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
January 31, 2008 was approximately $615,000, which included accrued
interest.
We
accrued 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 January 31, 2008, we had approximately $37,000 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
13
Our
financial results for the first quarter of fiscal 2008 reflect increased
revenues and operating income compared to the corresponding period of the prior
year as a result of significant improvement in foreign markets, primarily
Europe, as well as increased shipments of our larger and higher-priced machines
in those markets. The first 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 January
31, 2008 Compared to Three Months Ended January 31, 2007
Sales and Service
Fees. Sales and service fees for the first quarter of fiscal
2008 were $60.9 million, an increase of $14.0 million, or 30%, over the first
quarter of fiscal 2007. The growth of first quarter revenues was
primarily the result of significant improvement in demand, primarily Europe, as
well as increased shipments of our larger, higher-priced machines in that
market. As noted below, approximately 74% of our sales during the
first 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 first quarter of fiscal 2008 were
approximately $4.6 million, or 10%, 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 quarter of 2007.
The
following tables set forth net sales (in thousands) by geographic region and
product category for the first quarter of 2008 and 2007:
|
Net
Sales and Service Fees by Geographic Region
|
||||||||||||||||||||||||
|
January
31,
|
Increase
|
|||||||||||||||||||||||
|
2008
|
2007
|
Amount
|
%
|
|||||||||||||||||||||
|
North
America
|
$ | 13,079 | 21.5 | % | $ | 13,223 | 28.2 | % | $ | (144 | ) | -1.1 | % | |||||||||||
|
Europe
|
45,052 | 73.9 | % | 31,494 | 67.2 | % | 13,558 | 43.0 | % | |||||||||||||||
|
Asia
Pacific
|
2,792 | 4.6 | % | 2,161 | 4.6 | % | 631 | 29.2 | % | |||||||||||||||
|
Total
|
$ | 60,923 | 100.0 | % | $ | 46,878 | 100.0 | % | 14,045 | 30.0 | % | |||||||||||||
Growth
was primarily driven by strong demand in existing European markets, expansion
into Eastern European markets, and increased shipments of the higher end VMX
product line. Growth in the Asia Pacific region was primarily due to
India, a new market we targeted for expansion last year. The effect
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
14% in Europe and 8% in the Asia Pacific market. Sales in North
America reflected continued market softness.
|
Net
Sales and Service Fees by Product Category
|
||||||||||||||||||||||||
|
January
31,
|
Increase
|
|||||||||||||||||||||||
|
2008
|
2007
|
Amount
|
%
|
|||||||||||||||||||||
|
Computerized
Machine Tools
|
$ | 54,924 | 90.2 | % | $ | 41,746 | 89.1 | % | $ | 13,178 | 31.6 | % | ||||||||||||
|
Service
Fees, Parts and Other
|
5,999 | 9.8 | % | 5,132 | 10.9 | % | 867 | 16.9 | % | |||||||||||||||
|
Total
|
$ | 60,923 | 100.0 | % | $ | 46,878 | 100.0 | % | 14,045 | 30.0 | % | |||||||||||||
Sales of
computerized machine tools during the first quarter of fiscal 2008 increased 32%
over the corresponding period in fiscal 2007. The increase was driven by a 10%
increase in overall unit shipments combined with the impact of a favorable
product mix, particularly higher-priced VMX machines.
Orders. New order bookings in the
first quarter of fiscal 2008, were $61.1 million, an increase of $14.1 million,
or 30%, over the prior year period. Of that increase, Europe and Asia
Pacific orders increased $14.2 million, or 44%, and $.6 million, or 27%,
respectively. North American bookings declined by $.8 million or
6%.
14
Gross
Margin. Gross margin for the first quarter of fiscal 2008 was
41%, compared to 37% for the 2007 period. The improvement was
attributable to increased sales of higher margin VMX products in Europe, as well
as the impact of a continuing decline in the value of the U.S. Dollar when
European sales results are translated to U.S. Dollars for financial reporting
purposes.
Operating
Expenses. Selling, general and administrative expenses were
$12.4 million for the first quarter of fiscal 2008, an increase of $3.1 million
over the 2007 period, reflecting greater expenditures for sales, product
development and market expansion. The increase also reflected the
unfavorable effect of a weaker U.S. Dollar during the 2008 period when
translating foreign operating expenses for financial reporting
purposes.
Operating
Income. Operating income was $12.5 million, or 21% of sales
and service fees, compared to $8.1 million, or 17% of sales and service fees,
for the prior year period.
Other (Income) Expense,
net. The decrease in other income is primarily the result of
net transaction losses on foreign currency forward exchange contracts due to 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
from our investment in a Taiwan contract manufacturer in which we have a
minority interest accounted for under the equity method.
Income Taxes. Our
provision for income taxes during the first quarter of fiscal 2008 was
approximately $1.5 million higher than in the same period in fiscal 2007 as a
result of the increase in operating income. Our effective tax rate
for the first quarter of fiscal 2008 was 37% compared to 36% for the first
quarter of 2007.
LIQUIDITY
AND CAPITAL RESOURCES
At
January 31, 2008, we had cash and short-term investments of $35.2 million,
compared to $39.8 million at October 31, 2007. Cash used for
operations totaled $3.7 million for the quarter ended
January 31, 2008, compared to cash generated of $2.9 million in the prior year
period. The increased use of cash during the first quarter of fiscal
2008 primarily reflects increased inventory due to growth in product demand.
Approximately 58% of the $35.2 million of cash and short-term investments is
denominated in U.S. Dollars. The remaining balances are held outside
the U.S. in the local currencies of our various foreign entities and are subject
to fluctuations in currency exchange rates.
Working
capital, excluding cash and short-term investments, was $48.9 million at January
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 due to growth in
product demand and a reduction in accrued expenses for payments made to
employees related to fiscal 2007 year-end performance bonuses.
Capital
expenditures were primarily for an integrated computer system, software
development projects and purchases of equipment related to expansion of our
manufacturing facilities. We funded these expenditures with cash flow
from operations.
As of
January 31, 2008, we had no debt or borrowings outstanding under our domestic
and foreign bank credit facilities.
On July
12, 2007, we filed with the SEC a registration statement on Form S-3 utilizing
the “shelf” registration process. The registration statement was
declared effective on July 26, 2007. This registration statement
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.
Although
we have not made any significant acquisitions in the recent past, we continue to
receive 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 facilities, and the sale of securities from our shelf registration would
provide sufficient resources to finance any such possible
acquisitions.
15
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
expect to be taken in a tax return. FIN No. 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 FASB Interpretation No. 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. We will be required to adopt and report the impact of
Statement 157 by the end of fiscal 2008. Although we have not adopted
this statement, we have assessed the potential impact and conclude that its
adoption will not have a material effect on the consolidated financial
statements.
In
February 2007, the FASB released Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”, a new standard that permits an
entity to choose to measure many financial instruments and certain other items
at fair value. The objective of this statement is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. We will be required to consider adoption of Statement No.
159 by the end of fiscal 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 the consolidated financial
statements.
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 quarter of 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
January 31, 2008, our FIN 48 liabilities were $615,000. The periods in which the
FIN 48 liabilities will be paid cannot be reliably estimated and are, therefore,
excluded from our contractual obligations.
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. At January 31, 2008 we had 52 outstanding third party
guarantees totaling approximately $1.5 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.
16
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 effect operating
results;
|
|
·
|
Impairment
of our goodwill or other assets;
|
|
·
|
The
need to protect our intellectual property assets;
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.
17
Interest Rate Risk
|
Amount
|
Avg.
|
U.S. Dollars
|
|||||||||||||||
| 44,350,000 | 1.4145 | 62,733,075 | 65,579,417 | ||||||||||||||
| 5,475,000 | 2.0080 | 10,993,800 | 10,801,461 | ||||||||||||||
| 1,127,000,000 | 31.93 | * | 35,293,970 | 35,513,253 | |||||||||||||
18
Forward
contracts for the sale or purchases of foreign currencies as of January 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
SFAS 133, “Accounting Standards for Derivative Instruments and Hedging
Activities” 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
|
January
31, 2008
|
Maturity Dates
|
||||||||||||
|
Sale
Contracts:
|
|||||||||||||||||
|
Euro
|
19,229,770 | 1.4570 | 28,017,775 | 28,539,846 |
February
– July 2008
|
||||||||||||
|
Pound
Sterling
|
1,454,820 | 1.9770 | 2,876,179 | 2,887,166 |
February
– March 2008
|
||||||||||||
|
Singapore
Dollar
|
8,542,274 | 1.4149 | 6,037,369 | 6,066,063 |
March
– July 2008
|
||||||||||||
|
Purchase
Contracts:
|
|||||||||||||||||
|
New
Taiwan Dollar
|
503,333,676 | 32.05 | * | 15,703,169 | 15,702,152 |
February
– April 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 January 31, 2008, we had a gain of $22,000, net of tax,
recorded as a cumulative translation adjustment in Accumulated Other
Comprehensive Loss related to the forward contract.
Forward
contract for the sale or purchase of foreign currencies as of January 31, 2008
which are designated as net investment hedge 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
|
Contract
Date
|
January
31, 2008
|
Maturity Date
|
||||||||||||
|
Sale
Contracts:
|
|||||||||||||||||
|
Euro
|
3,000,000 | 1.4837 | 4,451,100 | 4,415,274 |
November
2008
|
||||||||||||
19
20
21
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
March 11,
2008
22