The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains information intended to help provide an
understanding of our financial condition and other related matters, including
our liquidity, capital resources and results of operations. The MD&A is provided
as a supplement to, and should be read in conjunction with, our unaudited
financial statements and the notes accompanying our unaudited financial
statements appearing elsewhere in this report, as well as our audited financial
statements, the accompanying notes and the MD&A included in our Annual Report on
Form 10-K for the year ended October 31, 2022.
EXECUTIVE OVERVIEW
Hurco Companies, Inc. is an international, industrial technology company
operating in a single segment. We design, manufacture and sell computerized
(i.e., CNC) machine tools, consisting primarily of vertical machining centers
(mills) and turning centers (lathes), to companies in the metal cutting industry
through a worldwide sales, service and distribution network. Although the
majority of our computer control systems and software products are proprietary,
they predominantly use industry standard personal computer components. Our
computer control systems and software products are primarily sold as integral
components of our computerized machine tool products. We also provide machine
tool components, automation integration equipment and solutions for job shops,
software options, control upgrades, accessories and replacement parts for our
products, as well as customer service, training and applications support.
The following overview is intended to provide a brief explanation of the
principal factors that have contributed to our recent financial performance.
This overview is intended to be read in conjunction with the more detailed
information included in our financial statements and notes thereto that appear
elsewhere in this report.
The market for machine tools is international in scope. We have both significant
foreign sales and significant foreign manufacturing operations. During the
first three months of fiscal 2023, approximately 52% of our revenues were
attributable to customers in Europe, where we typically sell more of our
higher-performance, higher-priced VMX series machines. Additionally,
approximately 8% of our revenues were attributable to customers in the Asia
Pacific region, where we encounter greater pricing pressures.
We have three brands of CNC machine tools in our product portfolio: Hurco is the
technology innovation brand for customers who want to increase productivity and
profitability by selecting a brand with the latest software and motion
technology. Milltronics is the value-based brand for shops that want
easy-to-use machines at competitive prices. The Takumi brand is for customers
that need very high speed, high efficiency performance, such as that required in
the production, die and mold, aerospace, and medical industries. Takumi
machines are equipped with industry standard controls instead of the proprietary
controls found on Hurco and Milltronics machines. These three brands of CNC
machine tools are responsible for the vast majority of our revenue. However, we
have added other non-Hurco branded products to our product portfolio that have
contributed product diversity and market penetration opportunity. These
non-Hurco branded products are sold by our wholly-owned distributors and are
comprised primarily of other general-purpose vertical milling centers and
lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact
horizontal machines, metal cutting saws and CNC swill lathes. ProCobots LLC
("ProCobots") is our wholly-owned subsidiary that provides automation solutions.
In addition, through our wholly-owned subsidiary in Italy, LCM Precision
Technology S.r.l ("LCM"), we produce high value machine tool components and
accessories.
We principally sell our products through approximately 200 independent agents
and distributors throughout the Americas, Europe, and Asia. Although some
distributors carry competitive products, we are the primary line for the
majority of our distributors globally. We also have our own direct sales and
service organizations in China, the Czech Republic, France, Germany, India,
Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom, and
certain parts of the United States, which are among the world's principal
machine tool consuming markets. The vast majority of our machine tools are
manufactured and assembled to our specifications primarily by our wholly-owned
subsidiary in Taiwan, HML. Machine castings to support HML's production are
manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components
to support our SRT line of five-axis machining centers, such as the direct drive
spindle, swivel head, and rotary table, are manufactured by our wholly-owned
subsidiary in Italy, LCM.
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Our sales to foreign customers are denominated, and payments by those customers
are made, in the prevailing currencies in the countries in which those customers
are located (primarily the Euro, Pound Sterling, and Chinese Yuan). 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 financial statements as reported under U.S.
Generally Accepted Accounting Principles. For example, when the U.S. Dollar
weakens in value relative to a foreign currency, 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 the U.S. Dollar is
stronger. In the comparison of our period-to-period results, we discuss the
effect of currency translation on those results, which reflect translation to
U.S. Dollars at exchange rates prevailing during the period covered by those
financial statements.
Our high levels of foreign manufacturing and sales also expose us to cash flow
risks due to fluctuating currency exchange rates. We seek to mitigate those
risks through the use of derivative instruments - principally foreign currency
forward exchange contracts.
We operate in the industrial equipment industry and have a global footprint that
subjects us to various business risks in many different countries. Our operating
results during fiscal years 2020 through 2022 and the first three months of
fiscal year 2023 were affected by the international business disruption due to
the outbreak of COVID-19 and lockdowns in certain markets, vendor delays,
transportation issues, unusually high inflation, volatility of foreign
currencies, competitive labor markets, and political friction in the U.S and
many regions of the world. We cannot predict the duration or scope of impact of
the COVID-19 pandemic, as well as other factors listed above, and the potential
impact to our operations and financial results cannot be reasonably estimated.
To date, we have experienced some delays in our supply chain and have not
completely ceased operations at any of our global facilities, but have
implemented remote working capabilities, as appropriate or otherwise required
under local law. We have also implemented adjustments in discretionary spending,
delayed capital expenditures, and monitored production activities closely in an
effort to weather the adverse business climate. We have also received stimulus
in various countries to support operations and implemented tax deferrals and
provisions that were available to us. More recently, we have begun to see
inflationary pressures and input cost increases imposed in our supply chains on
components for our products. We have also seen capacity for transportation and
freight services limited significantly by container or vessel availability and
delays at departing and receiving ports, all of which have contributed to
significantly increased costs and prices associated with the global shipment of
our products.
RESULTS OF OPERATIONS
Three Months Ended January 31, 2023 Compared to Three Months Ended January 31,
2022
Sales and Service Fees. Sales and service fees for the first quarter of fiscal
year 2023 were $54.7 million, a decrease of $12.2 million, or 18%, compared to
the corresponding prior year period, and included an unfavorable currency impact
of $3.2 million, or 5%, when translating foreign sales to U.S. dollars for
financial reporting purposes.
Sales and Service Fees by Geographic Region
The following table sets forth net sales and service fees by geographic region
for the first quarter ended January 31, 2023 and 2022 (dollars in thousands):
Three Months Ended
January 31,
2023 2022 $ Change % Change
Americas $ 22,013 40 % $ 24,009 36 % $ (1,996) (8) %
Europe 28,592 52 % 34,118 51 % (5,526) (16) %
Asia Pacific 4,077 8 % 8,760 13 % (4,683) (53) %
Total $ 54,682 100 % $ 66,887 100 % $ (12,205) (18) %
Sales in the Americas for the first quarter of fiscal year 2023 decreased by 8%,
compared to the corresponding period in fiscal year 2022, primarily due to a
decreased volume of shipments of Hurco and Takumi machines.
European sales for the first quarter of fiscal year 2023 decreased by 16%,
compared to the corresponding period in fiscal year 2022, and included an
unfavorable currency impact of 8%, when translating foreign sales to U.S.
dollars for financial reporting purposes. The decrease in European sales for
the first quarter of fiscal year 2023 was primarily attributable to a decreased
volume of shipments of
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Hurco and Takumi machines across the European region, partially offset by
increased European sales of Milltronics machines and electro-mechanical
components and accessories manufactured by our wholly owned subsidiary, LCM.
Asian Pacific sales for the first quarter of fiscal year 2023 decreased by 53%,
compared to the corresponding period in fiscal year 2022, and included an
unfavorable currency impact of 5%, when translating foreign sales to U.S.
dollars for financial reporting purposes. The decrease in Asian Pacific sales
primarily resulted from a reduced volume of shipments of Hurco and Takumi
machines in China, Southeast Asia, and India.
Sales and Service Fees by Product Category
The following table sets forth net sales and service fees by product category
for the first quarter ended January 31, 2023 and 2022 (dollars in thousands):
Three Months Ended
January 31,
2023 2022 $ Change % Change
Computerized Machine
Tools $ 45,417 83 % $ 57,207 86 % $ (11,790) (21) %
Computer Control
Systems and Software † 524 1 % 741 1 % (217) (29) %
Service Parts 6,691 12 % 6,967 10 % (276) (4) %
Service Fees 2,050 4 % 1,972 3 % 78 4 %
Total $ 54,682 100 % $ 66,887 100 % $ (12,205) (18) %
† Amounts shown do not include computer control systems and software sold as an
integrated component of computerized machine tools.
Sales of computerized machine tools for the first quarter of fiscal year 2023
decreased by 21%, compared to the corresponding prior year period, primarily due
to decreased volume of shipments of Hurco and Takumi machines across all the
regions where our customer are located. Sales of computer control systems and
software for the first quarter of fiscal year 2023 decreased by 29%, compared to
the corresponding prior year period, primarily due to decreased sales of Hurco
software in Europe and Asia. Sales of service parts for the first quarter of
fiscal year 2023 decreased by 4%, compared to the corresponding prior year
period, due mainly to decreased aftermarket sales and service of Hurco products
in Germany and France. Service fees increased by 4% due mainly to increase in
aftermarket services provided for Hurco and Takumi products in North America.
Sales for all product categories included an aggregate unfavorable currency
impact of 5%, when translating foreign sales to U.S. Dollars for financial
reporting purposes.
Orders. Orders for the first quarter of fiscal year 2023 were $53.2 million, a
decrease of $17.6 million, or 25%, compared to the corresponding period in
fiscal year 2022, and included an unfavorable currency impact of $3.3 million,
or 5%, when translating foreign orders to U.S. dollars.
The following table sets forth new orders booked by geographic region for the
first fiscal quarter ended January 31, 2023 and 2022 (dollars in thousands):
Three Months Ended
January 31,
2023 2022 $ Change % Change
Americas $ 19,687 37 % $ 22,116 31 % $ (2,429) (11) %
Europe 29,886 56 % 40,665 57 % (10,779) (27) %
Asia Pacific 3,657 7 % 8,074 12 % (4,417) (55) %
Total $ 53,230 100 % $ 70,855 100 % $ (17,625) (25) %
Orders in the Americas for the first quarter of fiscal year 2023 decreased by
11%, compared to the corresponding period in fiscal year 2022, primarily due to
decreased customer demand for Hurco and Milltronics machines.
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European orders for the first quarter of fiscal year 2023 decreased by 27%,
compared to the corresponding prior year period, and included an unfavorable
currency impact of 7%, when translating foreign orders to U.S. dollars. The
decrease in orders was driven primarily by decreased customer demand for Hurco
and Takumi machines in Germany and France, partially offset by increased
customer demand for Hurco machines in Italy and the United Kingdom.
Asian Pacific orders for the first quarter of fiscal year 2023 decreased by 55%,
compared to the corresponding prior year period, and included an unfavorable
currency impact of 4%, when translating foreign orders to U.S. dollars. The
decrease in Asian Pacific orders was driven primarily by a decrease in customer
demand for Hurco and Takumi machines in China, Southeast Asia, and India.
Gross Profit. Gross profit for the first quarter of fiscal year 2023 was $12.7
million, or 23% of sales, compared to $16.9 million, or 25% of sales, for the
corresponding prior year period. The year-over-year decrease in gross profit as
a percentage of sales was primarily due to the lower volume of sales of vertical
milling machines across all sales regions, particularly the European sales
region where we typically sell more of our higher-performance, higher-priced VMX
series machines. Additionally, gross profit was negatively impacted by the
allocation of fixed costs on lower sales and production volumes.
Operating Expenses. Selling, general, and administrative expenses for the first
quarter of fiscal year 2023 were $11.5 million, or 21% of sales, compared to
$11.7 million, or 17% of sales, in the corresponding fiscal year 2022 period,
and included a favorable currency impact of $0.6 million, when translating
foreign expenses to U.S. dollars for financial reporting purposes.
Operating Income. Operating income for the first quarter of fiscal year 2023 was
$1.2 million compared to $5.2 million for the corresponding period in fiscal
year 2022. The decrease in operating income was primarily due to lower volume
of sales and negative impact of allocation of fixed costs on lower sales and
production volume.
Other Income (Expense), Net. Other income (expense), net for the first quarter
of fiscal year 2023 increased by $0.9 million compared to the corresponding
period in fiscal year 2022, due mainly to an increase in foreign currency
exchange gains in the first three months of fiscal year 2023 compared to the
same period in fiscal year 2022.
Income Taxes. The effective tax rate for the first quarter of fiscal year 2023
was 31%, compared to 32% in the corresponding prior year period. The
year-over-year decrease in the effective tax rate was primarily due to changes
in geographic mix of income and loss that include jurisdictions with differing
tax rates and a discrete item related to stock compensation.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2023, we had cash and cash equivalents of $56.9 million, compared
to $63.9 million at October 31, 2022. Approximately 30% of the $56.9 million of
cash and cash equivalents was denominated in U.S. Dollars. The balance was
attributable to our foreign operations and is held in the local currencies of
our various foreign entities, subject to fluctuations in currency exchange
rates. We do not believe that the indefinite reinvestment of these funds
offshore impairs our ability to meet our domestic working capital needs.
Working capital was $204.3 million at January 31, 2023, compared to $194.7
million at October 31, 2022. The increase in working capital was primarily
driven by increases in inventories, net and prepaid assets and decreases in
accrued payroll and employee benefits and accounts payable, partially offset by
decreases in cash and cash equivalents and accounts receivable, net.
Capital expenditures of $0.6 million during the first three months of fiscal
year 2023 were primarily for capital improvements in existing facilities and
software development costs. We funded these expenditures with cash on hand.
On January 6, 2023, we announced a share repurchase program in an aggregate
amount of up to $25.0 million. Repurchases under the program may be made in the
open market or through privately negotiated transactions from time to time
through November 10, 2024, subject to applicable laws, regulations, and
contractual provisions. The program may be amended, suspended, or discontinued
at any time and does not commit us to repurchase any shares of our common stock.
No amounts had been purchased under this program as of January 31, 2023.
Our prior $7.0 million share repurchase program also remains in effect until its
scheduled expiration on March 10, 2023 During the first quarter of fiscal 2023,
approximately 26,819 shares were repurchased at an aggregate value of
approximately $0.7 million under that program, resulting in $3.4 million
remaining available under that program as of January 31, 2023.
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In addition, during the three months ended January 31, 2023, we paid cash
dividends to our shareholders of $1.0 million. Future dividends are subject to
approval of our Board of Directors and will depend upon many factors, including
our results of operations, financial condition, capital requirements, regulatory
and contractual restrictions, our business strategy and other factors deemed
relevant by our Board of Directors from time to time.
On December 31, 2018, we and our subsidiary Hurco B.V. entered into the 2018
Credit Agreement with Bank of America, N.A., as the lender, which was
subsequently amended on each of March 13, 2020, December 23, 2020, December 17,
2021, and January 4, 2023. The 2018 Credit Agreement provides for an unsecured
revolving credit and letter of credit facility in a maximum aggregate amount of
$40.0 million. The 2018 Credit Agreement provides that the maximum amount of
outstanding letters of credit at any one time may not exceed $10.0 million, the
maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one
time may not exceed $20.0 million, and the maximum amount of all outstanding
loans denominated in alternative currencies at any one time may not exceed $20.0
million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and
certain of our other subsidiaries are guarantors. The scheduled maturity date of
the 2018 Credit Agreement is December 31, 2023.
Borrowings under the 2018 Credit Agreement bear interest at floating rates based
on, at our option, either (i) a rate based upon the SOFR, the Sterling Overnight
Index Average Reference Rate, the Euro Interbank Offering Rate, or another
alternative currency-based rate approved by the lender, depending on the term of
the loan and the currency in which such loan is denominated, plus 1.00% per
annum, or (ii) a base rate (which is the highest of (a) the federal funds rate
plus 0.50%, (b) the prime rate or (c) the one month SOFR-based rate plus 1.00%),
plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of
1.00%.
The 2018 Credit Agreement contains customary affirmative and negative covenants
and events of default, including covenants (1) restricting us from making
certain investments, loans, advances and acquisitions (but permitting us to make
investments in subsidiaries of up to $10.0 million); (2) restricting us from
making certain payments, including (a) cash dividends, except that we may pay
cash dividends as long as immediately before and after giving effect to such
payment, the sum of the unused amount of the commitments under the 2018 Credit
Agreement plus our cash on hand is not less than $10.0 million, and as long as
we are not in default before and after giving effect to such dividend payments
and (b) payments made to repurchase shares of our common stock, except that we
may repurchase shares of our common stock as long as we are not in default
before and after giving effect to such repurchases and the aggregate amount of
payments made by us for all such repurchases during any fiscal year does not
exceed $25.0 million; (3) requiring that we maintain a minimum working capital
of $125.0 million; and (4) requiring that we maintain a minimum tangible net
worth of $176.5 million. We may use the proceeds from advances under the 2018
Credit Agreement for general corporate purposes.
In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML,
closed on uncommitted revolving credit facilities with maximum aggregate amounts
of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively.
As uncommitted facilities, both the Taiwan and China credit facilities are
subject to review and termination by the respective underlying lending
institution from time to time. In February 2023, NHML renewed the
above-referenced credit facility on substantially similar terms and an identical
maximum aggregate limit.
As of January 31, 2023, our existing credit facilities consisted of a €1.5
million revolving credit facility in Germany, the 150 million New Taiwan Dollars
Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and
the $40.0 million revolving credit facility under the 2018 Credit Agreement. We
had no debt or borrowings under any of our credit facilities at January 31,
2023.
At January 31, 2023, we had an aggregate of approximately $51.4 million
available for borrowing under our credit facilities and were in compliance with
all covenants relating thereto.
We have an international cash pooling strategy that generally provides access to
available cash deposits and credit facilities when needed in the U.S., Europe or
Asia Pacific. We believe our access to cash pooling and our borrowing capacity
under our credit facilities provide adequate liquidity to fund our global
operations over the next twelve months and beyond, and allow us to remain
committed to our strategic plan of product innovation, acquisitions, targeted
penetration of developing markets, payment of dividends and our stock repurchase
program.
We continue to receive and review information on businesses and assets for
potential acquisition, including intellectual property assets that are available
for purchase.
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CRITICAL ACCOUNTING ESTIMATES
Our MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with U.S. Generally Accepted Accounting
Principles. The preparation of financial statements in conformity with those
accounting principles requires us to make judgments and estimates that affect
the amounts reported in the condensed consolidated financial statements and
accompanying notes. Those judgments and estimates have a significant effect on
the financial statements because they result primarily from the need to make
estimates about the effects of matters that are inherently uncertain. Actual
results could differ from those estimates. Our critical accounting estimates,
which are described in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2022, are frequently evaluated as our judgment and estimates are
based upon historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. During the first three months
of fiscal 2023, there were no material changes to our critical accounting
estimates as described in the MD&A included in our Annual Report on Form 10-K
for the year ended October 31, 2022.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no material changes related to our contractual obligations and
commitments from the information provided in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2022.
OFF BALANCE SHEET ARRANGEMENTS
From time to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of machines to customers that use financing. We follow
FASB guidance for accounting for guarantees (codified in ASC 460). As of January
31, 2023, we had nine outstanding third party payment guarantees totaling
approximately $0.7 million. The terms of these guarantees are consistent with
the underlying customer financing terms. Upon shipment of a machine, the
customer assumes the risk of ownership. The customer does not obtain title,
however, until the customer has paid for the machine. A retention of title
clause allows us to recover the machine if the customer defaults on the
financing. We accrue liabilities under these guarantees at fair value, which
amounts are insignificant.
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, but are not limited to:
The impact of the COVID 19 pandemic and other public health epidemics and
• pandemics on the global economy, our business and operations, our employees and
the business, operations and economies of our customers and suppliers;
•The cyclical nature of the machine tool industry;
•Uncertain economic conditions, which may adversely affect overall demand, in
the Americas, Europe and Asia Pacific markets;
•The risks of our international operations;
• Governmental actions, initiatives and regulations, including import and export
restrictions, duties and tariffs and changes to tax laws;
•The effects of changes in currency exchange rates;
•Competition with larger companies that have greater financial resources;
•Our dependence on new product development;
•The need and/or ability to protect our intellectual property assets;
•The limited number of our manufacturing and supply chain sources;
•Increases in the prices of raw materials, especially steel and iron products;
•The effect of the loss of members of senior management and key personnel;
•Our ability to integrate acquisitions;
•Acquisitions that could disrupt our operations and affect operating results;
•Failure to comply with data privacy and security regulations;
•Breaches of our network and system security measures;
•Possible obsolescence of our technology and the need to make technological
advances;
•Impairment of our assets;
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•Negative or unforeseen tax consequences; and
•Uncertainty concerning our ability to use tax loss carryforwards.
We discuss these and other important risks and uncertainties that may affect our
future operations 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 report or in 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. We expressly disclaim any
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. This cautionary statement
is applicable to all forward-looking statements contained in this report.
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HURCO COMPANIES, INC. 