SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 2004 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
- ------------------------------------ ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
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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 an accelerated filer
(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 June 1,
2004 was 5,901,567.
HURCO COMPANIES, INC.
April 2004 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Item 1. Condensed Financial Statements
Condensed Consolidated Statement of Operations -
Three months and six months ended April 30, 2004 and 2003................................... 3
Condensed Consolidated Balance Sheet -
As of April 30, 2004 and October 31, 2003................................................... 4
Condensed Consolidated Statement of Cash Flows -
Three months and six months ended April 30, 2004 and 2003................................... 5
Condensed Consolidated Statement of Changes in Shareholders' Equity -
Six months ended April 30, 2004 and 2003.................................................... 6
Notes to Condensed Consolidated Financial Statements............................................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 16
Item 4. Controls and Procedures......................................................................... 18
Part II - Other Information
Item 1. Legal Proceedings............................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
Item 5. Other Information............................................................................... 19
Item 6. Exhibits and Reports on Form 8-K................................................................ 20
Signatures.................................................................................................... 21
PART I - FINANCIAL INFORMATION
Item 1. CONDENSED FINANCIAL STATEMENTS
- ------ ------------------------------
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
April 30 April 30
-------------------------------- --------------------------------
2004 2003 2004 2003
- ------------------------------------------------------ -------------- -------------- -------------- --------------
(unaudited) (unaudited)
Sales and service fees............................. $ 24,255 $ 17,453 $ 46,973 $ 33,406
Cost of sales and service.......................... 16,842 12,325 33,029 24,284
-------------- -------------- -------------- --------------
Gross profit................................. 7,413 5,128 13,944 9,122
Selling, general and administrative expenses....... 5,127 4,563 10,054 8,991
-------------- -------------- -------------- --------------
Operating income .......................... 2,286 565 3,890 131
Interest expense................................... 117 150 261 309
Variable options expense........................ 67 -- 322 --
Other income (expense), net........................ 23 (68) (147) 48
-------------- -------------- -------------- --------------
Income (loss) before taxes.................... 2,125 347 3,160 (130)
Provision for income taxes......................... 388 208 754 313
-------------- -------------- -------------- --------------
Net income (loss).................................. $ 1,737 $ 139 $ 2,406 $ (443)
============== ============== ============== ==============
Earnings (loss) per common share
Basic......................................... $ 0.31 $ 0.02 $ 0.43 $ (0.08)
============== ============== ============== ==============
Diluted....................................... $ 0.29 $ 0.02 $ 0.41 $ (0.08)
============== ============== ============== ==============
Weighted average common shares outstanding
Basic......................................... 5,695 5,583 5,641 5,583
============== ============== ============== ==============
Diluted....................................... 5,976 5,583 5,838 5,583
============== ============== ============== ==============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
April 30 October 31
2004 2003
- ---------------------------------------------------------------------------------------- -------------- ----------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 6,193 $ 5,289
Cash - restricted.............................................................. -- 622
Accounts receivable............................................................ 14,725 12,823
Inventories.................................................................... 24,439 22,247
Other.......................................................................... 2,135 1,409
-------------- ----------------
Total current assets....................................................... 47,492 42,390
-------------- ----------------
Property and equipment:
Land........................................................................... 761 761
Building....................................................................... 7,242 7,239
Machinery and equipment........................................................ 10,605 10,568
Leasehold improvements......................................................... 601 544
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19,209 19,112
Less accumulated depreciation and amortization............................. (10,928) (10,730)
-------------- ----------------
8,281 8,382
-------------- ----------------
Software development costs, less amortization....................................... 2,412 1,922
Investments and other assets........................................................ 5,476 5,264
-------------- ----------------
$ 63,661 $ 57,958
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 15,506 $ 9,461
Accrued expenses............................................................... 8,929 10,048
Current portion of long-term debt.............................................. 313 645
-------------- ----------------
Total current liabilities.................................................. 24,748 20,154
-------------- ----------------
Non-current liabilities:
Long-term debt................................................................. 5,017 8,577
Deferred credits and other obligations......................................... 549 486
-------------- ----------------
Total liabilities.......................................................... 30,314 29,217
-------------- ----------------
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000 shares
authorized; no shares issued............................................... -- --
Common stock: no par value; $.10 stated value per share;
12,500,000 shares authorized, 5,826,927 and 5,575,987 shares
issued, respectively..................................................... 583 557
Additional paid-in capital..................................................... 45,960 44,695
Accumulated deficit............................................................ (7,305) (9,711)
Accumulated other comprehensive income......................................... (5,891) (6,800)
-------------- ----------------
Total shareholders' equity................................................. 33,347 28,741
-------------- ----------------
$ 63,661 $ 57,958
============== ================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Six Months Ended
April 30 April 30
----------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------- ------------ -----------
Cash flows from operating activities:
Net income (loss) $ 1,737 $ 139 $ 2,406 $ (443)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Equity in (income) loss of affiliates................ (92) (49) (92) (145)
Depreciation and amortization........................ 310 366 641 715
Change in assets and liabilities:
(Increase) decrease in accounts receivable........ (2,254) 1,924 (1,620) 2,820
(Increase) decrease in inventories................ (1,775) (2,142) (1,407) (2,430)
Increase in accounts payable...................... 1,718 1,353 5,817 2,141
Increase (decrease) in accrued expenses........... 1,133 (490) (1,372) (2,025)
Other............................................. (477) 260 (575) (47)
------------ ------------- ------------ -----------
Net cash provided by
operating activities.............................. 300 1,361 3,798 586
------------ ------------- ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment..................... (147) (193) (354) (295)
Software development costs............................. (372) (136) (636) (202)
Change in restricted cash.............................. 1,092 26 622 (1,150)
Other investments...................................... 9 (18) (37) (26)
------------ ------------- ------------ -----------
Net cash provided by (used for)
investing activities................................. 582 (321) (405) (1,673)
------------ ------------- ------------ -----------
Cash flows from financing activities:
Advances on bank credit facilities..................... 6,142 7,100 19,260 13,300
Repayment of bank credit facilities.................... (7,199) (8,145) (22,828) (13,511)
Repayment on first mortgage............................ (26) (24) (53) (49)
Repayment of term debt................................. -- (337) (337) (337)
Proceeds from exercise of common stock options......... 953 -- 1,291 --
------------ ------------- ------------ -----------
Net cash provided by (used for)
financing activities................................. (130) (1,406) (2,667) (597)
------------ ------------- ------------ -----------
Effect of exchange rate changes on cash................... (163) 82 178 274
------------ ------------- ------------ -----------
Net increase (decrease) in cash and
cash equivalents..................................... 589 (284) 904 (1,410)
Cash and cash equivalents
at beginning of period............................... 5,604 3,232 5,289 4,358
------------ ------------- ------------ -----------
Cash and cash equivalents
at end of period..................................... $ 6,193 $ 2,948 $ 6,193 $ 2,948
============ ============= ============ ===========
The accompanying notes are an integral part of the condensed consolidated financial statements.
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended April 30, 2004 and 2003
Common Stock
--------------------------
Accumulated
Shares Additional Other
Issued & Paid-In Accumulated Comprehensive
Outstanding Amount Capital Deficit Income (loss) Total
------------- --------- ------------ ------------- ---------------- -----------
(Dollars in thousands)
Balances, October 31, 2002 5,583,158 $ 558 $ 44,717 $ (10,173) $ (7,085) $ 28,017
- ------------------------------------ ------------- --------- ------------ ------------- ---------------- -----------
Net income (loss).................. -- -- -- (443) -- (443)
Translation of foreign currency
financial statements............ -- -- -- -- 901 901
Unrealized gain (loss) on
derivative
instruments..................... -- -- -- -- (1,132) (1,132)
---------
Comprehensive loss................. -- -- -- -- -- (674)
Exercise of common stock options... -- -- -- -- -- --
------------- --------- ------------ ------------- ---------------- ---------
Balances, April 30, 2003 5,583,158 $ 558 $ 44,717 $ (10,616) $ (7,316) $ 27,343
- ------------------------------------ ============= ========= ============ ============= ================ =========
Balances, October 31, 2003 5,575,987 $ 557 $ 44,695 $ (9,711) $ (6,800) $ 28,741
- ------------------------------------ ------------- --------- ------------ ------------- ---------------- ---------
Net income (loss).................. -- -- -- 2,406 -- 2,406
Translation of foreign currency
financial statements............ -- -- -- -- 469 469
Unrealized gain (loss) on
derivative
instruments..................... -- -- -- -- 440 440
----------
Comprehensive income............... -- -- -- -- -- 3,315
Exercise of common stock options... 250,940 26 1,265 -- -- 1,291
------------- --------- ------------ ------------- ---------------- ----------
Balances, April 30, 2004 5,826,927 583 45,960 (7,305) (5,891) $ 33,347
- ------------------------------------ ============= ========= ============ ============= ================ =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The unaudited Condensed Consolidated Financial Statements include the accounts
of Hurco Companies, Inc. and its consolidated subsidiaries. We design and
produce computerized machine tools, interactive computer control systems and
software for sale through our distribution network to the worldwide metal
cutting market. We also provide software options, computer control upgrades,
accessories and replacement parts for our products, as well as customer service
and training support.
The condensed financial information as of April 30, 2004 and for the three and
six months ended April 30, 2004 and April 30, 2003 is unaudited; however, in our
opinion, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results and
financial position for the interim periods. We suggest that you read these
condensed consolidated financial statements in conjunction with the financial
statements and the notes thereto included in our Annual Report on Form 10-K for
the year ended October 31, 2003.
2. HEDGING
We enter into foreign currency forward exchange contracts periodically to hedge
certain forecast inter-company product sales and inter-company and third party
product purchases that will be denominated in foreign currencies (primarily the
Pound Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is
to mitigate the risk that the U.S. dollar net cash inflows and outflows
resulting from sales and purchases denominated in foreign currencies will be
adversely affected by changes in exchange rates. These forward contracts have
been designated as cash flow hedge instruments, and are recorded in the
Condensed Consolidated Balance Sheet at fair value in Other Current Assets and
Accrued Expenses. Gains and losses resulting from changes in the fair value of
these hedge instruments are deferred in Accumulated Other Comprehensive Income
and recognized as an adjustment to Cost of Sales in the period that the sale of
the product that was the subject of the hedged transaction is recognized,
thereby providing an offsetting economic impact against the corresponding change
in the U.S. dollar value of the inter-company sale or purchase being hedged.
At April 30, 2004, we had $1,374,000 of losses related to cash flow hedges
deferred in Accumulated Other Comprehensive Income. Of this amount, $548,000
represents unrealized losses 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 March 2005, in
which the sale of the related hedged item is recognized, as described above. Net
losses on cash flow hedge instruments which we reclassified from Other
Comprehensive Income to Cost of Sales in the quarters ended April 30, 2004 and
2003 were $598,000 and $193,000, respectively.
We also enter into foreign currency forward exchange contracts to protect
against the effects of foreign currency fluctuations on receivables and payables
denominated in foreign currencies. These derivative instruments are not
designated as hedges under Statement of Financial Accounting Standards No. 133,
"Accounting Standards for Derivative Instruments and Hedging Activities" (SFAS
133), and, as a result, changes in fair value are reported currently as Other
Income (Expense), Net in the Consolidated Statement of Operations consistent
with the transaction gain or loss on the related foreign denominated receivable
or payable. Such net transaction losses were $21,000 and $95,000 for the
quarters ended April 30, 2004 and 2003, respectively.
3. STOCK OPTIONS
At April 30, 2004, we had two stock-based compensation plans for employees and
non-employee directors, which is described more fully in the notes to the
consolidated financial statements included in our 2003 annual report on Form
10-K. We account for those plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. No stock based compensation cost is reflected in
net earnings related to those plans, except for certain non-qualified options
subject to variable plan accounting, as all stock options granted had exercise
prices equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net earnings and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock Based Compensation," to the above plans.
3 Months Ended April 30 6 Months Ended April 30
--------------------------- --------------------------------
2004 2003 2004 2003
----------- ----------- ------------- --------------
(dollars in thousands, except per share data)
Net income (loss), as reported...................... $ 1,737 $ 139 $ 2,406 $ (443)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects.............. (24) (49) (48) (98)
----------- ----------- ------------- --------------
Pro forma net income (loss)......................... $ 1,713 $ 90 $ 2,358 $ (541)
=========== =========== ============= ==============
Earnings (loss) per share:
Basic as reported.............................. $ 0.31 $ 0.02 $ 0.43 $ (0.08)
Basic pro forma................................ 0.30 0.02 0.42 (0.10)
Diluted as reported............................ $ 0.29 $ 0.02 $ 0.41 $ (0.08)
Diluted pro forma.............................. 0.29 0.02 0.40 (0.10)
On November 11, 2001, our former CEO was granted 110,000 options at $2.11 and
all of his previous option grants were cancelled. These options were subject to
variable plan accounting, which resulted in a charge to expense in the first
half of fiscal 2004 of $322,000. As of April 30, 2004, all options subject to
variable plan accounting have been exercised.
4. EARNINGS PER SHARE
Basic and diluted earnings per common share are based on the weighted average
number of our shares of common stock outstanding. Diluted earnings per common
share give effect to outstanding stock options using the treasury method. The
impact of stock options for the three months ended April 30, 2004 was 281,000,
while there was no impact for the three months ended April 30, 2003.
5. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $837,000 as of April 30, 2004 and
$630,000 as of October 31, 2003.
6. INVENTORIES
Inventories, priced at the lower of cost (first-in, first-out method) or market,
are summarized below (in thousands):
April 30, 2004 October 31, 2003
Purchased parts and sub-assemblies $ 4,397 $ 3,452
Work-in-process 2,788 2,029
Finished goods 17,254 16,766
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$ 24,439 $ 22,247
============ ============
7. SEGMENT INFORMATION
We operate in a single segment: industrial automation systems. We design and
produce computerized machine tools, interactive computer control systems and
software for sale through our distribution network to the worldwide metal
working market. We also provide software options, computer control upgrades,
accessories and replacement parts for our products, as well as customer service
and training support.
8. RESTRUCTURING EXPENSE AND OTHER EXPENSE, NET
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. On September 30, 2003, we settled this claim
with the lessor for (pound)684,000 (approximately $1.2 million), which we had
previously accrued. The accrued liability was due and paid in full in the first
quarter of fiscal 2004.
9. GUARANTEES
From time to time, our European subsidiaries guarantee third party lease
financing residuals in connection with the sale of certain machines in Europe.
At April 30, 2004 there were 28 third party guarantees totaling approximately
$1.7 million. A retention of title clause allows us to obtain the machine if the
customer default on its lease. We believe that the proceeds obtained from
liquidation of the machine would exceed our exposure.
We provide warranties on our products with respect to defects in material and
workmanship. The terms of these warranties are generally one year for machines
and shorter periods for service parts. We recognize a reserve with respect to
this obligation at the time of product sale, with subsequent warranty claims
recorded against the reserve. The amount of the warranty reserve is determined
based on historical trend experience and any known warranty issues that could
cause future warranty costs to differ from historical experience.
A reconciliation of the changes in our warranty reserve is as follows (in
thousands):
Warranty
Reserve
--------------
Balance at October 31, 2003 $ 1,016
Provision for warranties during the period 987
Charges to the accrual (937)
Impact of foreign currency translation 24
--------------
Balance at April 30, 2004 $ 1,090
==============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------ -----------------------------------------------------------------------
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
Certain statements made in this report may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. These
factors include, among others, changes in general economic and business
conditions that affect market demand for machines tools and related computer
control systems, software products, and replacement parts, changes in
manufacturing markets, adverse currency movements, innovations by competitors,
quality and delivery performance by our contract manufacturers and component
suppliers, and governmental actions and initiatives including import and export
restrictions and tariffs.
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 working market. We also provide
software options, control upgrades, accessories and replacement parts for our
products, as well as customer service and training support.
Our computerized metal cutting machine tools are manufactured in Taiwan to our
specifications by our wholly owned subsidiary, Hurco Manufacturing Limited
(HML), and an affiliate. We sell our products through approximately 200
independent agents and distributors in approximately 40 countries throughout
North America, Europe and Asia. We also have our own direct sales and service
organizations in England, France, Germany, Italy, Singapore and China.
The machine tool industry is highly cyclical and changes in demand can occur
abruptly. Beginning in the third quarter of fiscal 1998 and continuing through
the third quarter of fiscal 2003, we experienced the adverse effects of a
significant decline in global demand. For example, our customer orders during
the first quarter of fiscal 2003 were at their lowest level in ten years. During
the downturn, we took actions to discontinue the production and sale of
underperforming products, refocus on our core product lines and significantly
reduce our operating costs. We also introduced new product models in late fiscal
2002 and throughout 2003. These new models, which, together with an improvement
in worldwide demand for machine tools that began in the fourth quarter of fiscal
2003, were largely responsible for the significant increase in sales in the
fourth quarter of fiscal 2003 and the first half of fiscal 2004.
Over 80% of worldwide demand for machine tools comes from outside the United
States. During fiscal 2003 and the first half of fiscal 2004, approximately 70%
of our sales and service fees were attributable to customers located abroad. Our
sales to foreign customers are denominated, and payments by those customers are
made, in the prevailing currencies--primarily the Euro and Pound Sterling--in
the countries in which those customers are located, and our product costs are
incurred and paid primarily in the New Taiwan Dollar and U.S. dollars. Changes
in currency exchange rates can have a material effect on our operating results
as reported under 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 decrease in
those results as reported in our financial statements (which reflect translation
to U.S. dollars at actual prevailing exchange rates), but also the effect that
changes in exchange rates had on those results.
Although our high levels of foreign manufacturing and sales also subject us to
cash flow risks due to fluctuating currency exchange rates, we mitigate those
risks through the use of various hedging instruments - principally foreign
currency forward exchange contracts.
The volatility of demand for machine tools can significantly impact our working
capital requirements and, therefore, our cash flow from operations and operating
profits. Because our products are manufactured in Taiwan, manufacturing and
ocean transportation lead times require that we schedule machine tool production
based on forecasts of customer orders for a future period of four or five
months. We continually monitor order activity levels and rebalance future
production schedules to changes in demand, but a significant unexpected decline
in customer orders from forecasted levels can temporarily result in excess
finished goods inventories and a resulting increase in our need for working
capital.
RESULTS OF OPERATIONS
Three Months Ended April 30, 2004 Compared to Three Months Ended April 30, 2003
For the second quarter of fiscal 2004, we reported net income of $1.7 million,
or $.29 per share, compared to $139,000, or $.02 per share, for the
corresponding period one year ago. The improvement in net income was primarily
due to a substantial increase in sales of our computerized machine tools, along
with the benefit of stronger European currencies in relation to the U.S. dollar.
Sales and service fees for the second quarter of fiscal 2004 were $24.3 million,
an increase of $6.8 million (39%) from the $17.5 million reported for the second
fiscal quarter of 2003. The increased sales reflected an improvement in industry
demand and our recent introduction of an array of new machine tool products, as
well as the benefits of more favorable exchange rates when sales that are
denominated in Euros and Pounds Sterling are translated to U.S. dollars for
financial reporting purposes. As noted below, approximately 63% of our sales and
service fees in the second quarter of fiscal 2004 were derived from European
markets. The weighted average exchange rate between the Euro and the U.S. dollar
during the second quarter of fiscal 2004 was $1.22 per (euro)1.00, as compared
to $1.08 per (euro)1.00 for the second quarter of fiscal 2003, an increase of
13%. Approximately $1.8 million (26%) of the increase in total sales and service
fees was attributable to changes in foreign currency exchange rates.
The following tables set forth sales and service fees by geographic region and
product category for the second quarter of 2004 and 2003:
Sales and Service Fees by Geographic Region (dollars are in thousands)
Three Months Ended April 30, Increase (Decrease)
----------------------------------------------------- -------------------------
2004 2003 Amount %
------------------------ ------------------------- ----------- ----------
North America $ 7,162 29% $ 5,276 30% $1,886 36%
Europe 15,169 63% 11,442 66% 3,727 33%
Asia Pacific 1,924 8% 735 4% 1,189 162%
------------ -------- ----------- ---------- ----------- ----------
Total $ 24,255 100% $ 17,453 100% $6,802 39%
============ ======== =========== ========== =========== ==========
Sales and service fees in North America benefited from a 69% increase in unit
sales of our new entry-level VM product line and a 52% increase in unit sales of
our higher-performing VMX machining center product line. These increases are
attributable to new models introduced in late fiscal 2002 and during fiscal
2003, along with an increase in domestic machine tool demand.
The 33% increase in our sales and service fees in Europe reflected the
previously discussed impact of stronger European currencies relative to the U.S.
dollar and a $2.7 million reduction in our backlog during the second quarter of
fiscal 2004, as new order bookings in Europe during the second quarter decreased
approximately 17% from the amount recorded in the immediately preceding quarter
due to weak market conditions, particularly in France and Italy. Approximately
$1.7 million (46%) of the increase in European sales and service fees was
attributable to changes in currency exchange rates.
The increase in sales and service fees in Asia was due primarily to
strengthening market demand for machine tools in South East Asia (principally in
the semi-conductor industry) and, to a lesser extent, increased sales in China,
and reflected the benefits of improvements made to our distribution network and
selling organization in the region. The impact of currency translation is not
significant on sales and service fees in South East Asia.
Sales and Service Fees by Product Category (dollars are in thousands)
Three Months Ended April 30, Increase (Decrease)
---------------------------------------------------------- ----------------------
2004 2003 Amount %
--------------------------- --------------------------- ----------- -------
Computerized Machine Tools $ 20,224 83% $ 13,973 80% $6,251 45%
Service Fees, Parts and Other 4,031 17% 3,480 20% 551 16%
------------ ---------- ----------- ------------ ----------- -------
Total $ 24,255 100% $ 17,453 100% $6,802 39%
============ ========== =========== ============ =========== =======
Approximately $1.6 million (26%) of the increase in our reported sales of
computerized machine tools was due to changes in currency exchange rates. Unit
sales of our computerized machine tools increased 40% in the second quarter of
fiscal 2004 compared to the prior year period. However, the average net selling
price per unit, measured in local currencies, declined approximately 5% during
the same period due to planned reductions in our net selling prices and to the
higher percentage of units of our more moderately priced VM product line in our
total product mix during the 2004 period. However, the impact of lower net
selling prices was more than offset by the favorable effects of stronger
European currencies when translating European sales and service fees to U.S.
dollars for financial reporting purposes.
New order bookings for the second quarter of fiscal 2004 were $22.3 million, an
increase of $1.8 million (9%) from the $20.6 million reported for the
corresponding quarter of fiscal 2003. Approximately $1.3 million (72%) of the
increase was attributable to changes in currency exchange rates. Orders
increased significantly in the United States and Asia, but these increases were
substantially offset by a decline in orders in Europe. As previously noted,
European orders decreased 17% from the amount booked in the first quarter of
2004, due to weak market conditions, particularly in France and Italy. Compared
to the second quarter of fiscal 2003, new order bookings declined approximately
$1.3 million, or 9%. The year-to-year decline is somewhat distorted by the fact
that new order bookings in Europe were extremely strong, in the second quarter
of fiscal 2003, following a very weak first fiscal quarter. Backlog was $7.4
million at April 30, 2004, compared to $9.5 million at January 31, 2004 and $8.2
million at October 31, 2003.
Gross margin for the second quarter of 2004 was 30.6%, an increase over the
29.4% margin realized in the corresponding 2003 period, due principally to
increased sales of computerized machine tools and the favorable effects of
stronger European currencies.
Selling, general and administrative expenses during the second quarter of 2004
increased approximately $564,000 (12%) from the amount reported for the 2003
period, primarily due to currency translation effects and increased commissions
to European selling agents associated with the increase in European sales.
The provision for income taxes is related to the earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions, we
have net operating loss carryforwards for which we have a 100% valuation reserve
at April 30, 2004. The provision for income tax increased in the second fiscal
quarter of 2004 because of increased earnings recorded by our taxable foreign
subsidiaries.
Six Months Ended April 30, 2004 Compared to Six Months Ended April 30, 2003
For the first half of fiscal 2004, we reported net income of $2,406,000, or $.41
per share, compared to a net loss of $443,000, or $.08 per share, for the
corresponding period one year ago.
Sales and service fees for the first half of fiscal 2004 were $47.0 million, an
increase of $13.6 million (41%) from the $33.4 million reported for the first
half of 2003. Approximately 63% of our sales and service fees in the first half
of fiscal 2004 were derived from European markets. The weighted average exchange
rate between the Euro and the U.S. dollar during the first half of fiscal 2004
was $1.22 per (euro)1.00, as compared to $1.06 per (euro)1.00 for the first half
of fiscal 2003, an increase of 15%. Approximately $3.9 million (29%) of the
increase in sales and service fees was attributable to changes in currency
exchange rates.
The following tables set forth sales and service fees by geographic region and
product category for the first half of 2004 and 2003:
Sales and Service Fees by Geographic Region (dollars are in thousands)
Six Months Ended April 30, Increase (Decrease)
--------------------------------------------------------- -------------------------
2004 2003 Amount %
-------------------------- --------------------------- ------------ ---------
North America $ 14,337 31% $11,266 34% $ 3,071 27%
Europe 29,712 63% 21,161 63% 8,551 40%
Asia Pacific 2,924 6% 979 3% 1,945 199%
------------ ---------- ------------- ---------- ------------ ---------
Total $ 46,973 100% $33,406 100% $13,567 41%
============ ========== ============= ========== ============ =========
Sales and service fees in North America benefited from a 54% increase in unit
sales of our new entry-level VM product line and a 31% increase in unit sales of
our higher-performing VMX machining center product line. These increases are
attributable to new models introduced in late fiscal 2002 and during fiscal
2003, an improving domestic economy and, to a lesser extent, U.S. capital
equipment tax incentives that stimulated orders in our first fiscal quarter.
The 40% increase in our sales and service fees in Europe reflect a 34% increase
in unit sales, which was experienced most strongly in Germany, due in large
measure to continuing acceptance of and demand for our new product models, as
well as the previously discussed impact of an increasingly strong Euro relative
to the U.S. dollar when translating European sales for financial reporting
purposes. Approximately $3.9 million (46%) of the increase in European sales and
service fees was attributable to changes in currency exchange rates.
The increase in sales and service fees in Asia is the result of strengthening
market demand for machine tools in South East Asia (primarily in the
semi-conductor industry) and increased sales in China, as well as improvements
made to our distribution network and selling organization in the region.
Sales and Service Fees by Product Category (dollars are in thousands)
Six Months Ended April 30, Increase (Decrease)
------------------------------------------------------ ------------------------
2004 2003 Amount %
------------------------- ------------------------ ----------- ---------
Computerized Machine Tools $ 39,444 84% $ 26,844 80% $ 12,600 47%
Service Fees, Parts and Other 7,529 16% 6,562 20% 967 15%
------------ ---------- ----------- --------- ----------- ---------
Total $ 46,973 100% $ 33,406 100% $ 13,567 41%
============ ========== =========== ========= =========== =========
Approximately $3.5 million (28%) of the increase in machine tool sales was due
to changes in currency exchange rates. Unit sales of our computerized machine
tools increased 43% in the first half of fiscal 2004 compared to the prior year
period. However, our average net selling price per unit , measured in local
currencies declined approximately 6%, during the same periods, due to planned
reductions in our net selling prices and to the higher percentage of units of
the more moderately priced VM product line in our total product mix during the
2004 period. The impact of lower net selling prices was more than offset by the
favorable effects of stronger European currencies when translating European
sales and service fees to U.S. dollars.
New order bookings for the first half of fiscal 2004 were $45.9 million, an
increase of $11.5 million, or 33% , from the $34.4 million reported for the
first half of fiscal 2003. New order bookings increased in the United States,
Europe and Asia by $4.0 million, $5.5 million and $2.0 million, respectively.
Approximately $3.6 million (65%) of the reported increase in new order bookings
in Europe was attributable to the changes in currency exchange rates. In
addition, the increase reflects the unusually low level of new orders in the
first quarter of fiscal 2003. As previously noted, orders in Europe during the
second quarter of fiscal 2004 declined $2.6 million, or 17%, from the $15.2
million booked in the first quarter of 2004, and were $1.3 million, or 9%, lower
than the $20.3 million booked in the second quarter of 2003. Backlog was $7.4
million at April 30, 2004, compared to $8.2 million at October 31, 2003.
Gross margin for the first half of fiscal 2004 was 29.7%, an increase over the
27.3% margin realized in the corresponding 2003 period, due principally to
increased machine sales volume, the favorable effect of stronger European
currencies.
Selling, general and administrative expenses during the first half of 2004
increased approximately $1.1 million (12%) from the amount reported for the 2003
period, due primarily to currency translation effects and the increased
commissions to European selling agents associated with the increase in European
sales.
Variable option expense of $322,000 is related to certain stock options that
were subject to variable plan accounting. The stock options subject to variable
plan accounting have all been exercised and no additional variable option
expense is expected.
The provision for income taxes is related to the earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions, we
have net operating loss carryforwards for which we have a 100% valuation reserve
at April 30, 2004. The provision for income tax increased in fiscal 2004 because
of increased earnings from our taxable foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2004, we had cash and cash equivalents of $6.2 million compared to
$5.9 million at October 31, 2003. Cash generated from operations totaled $3.8
million for the first half of fiscal 2004, compared to $586,000 in the prior
year period.
Working capital, excluding short-term debt, was $23.1 million at April 30, 2004,
slightly higher than the $22.9 million at October 31, 2003. Although accounts
receivable and inventory combined increased $3.0 million during the first half
of fiscal 2004, this increase was more than funded by a $5.8 million increase in
accounts payable. The increase in accounts payable was primarily due to
increased manufacturing activity, accompanied by longer payment terms from our
suppliers in Taiwan. Additionally, a reduction of accrued expenses of $1.4
million resulted from a $1.2 million payment in the first fiscal quarter for the
settlement of a foreign lease liability and the timing of payments for normal
year-end accruals. As our sales increase in 2004, we expect our working capital
requirements to increase accordingly.
Capital investments during the first half of fiscal 2004 consisted of normal
expenditures for software development projects and purchases of equipment. We
funded these expenditures with cash flow from operations.
Total debt at April 30, 2004 was $5.3 million, representing 14% of our total
capitalization, compared to $9.2 million, or 24% of our total capitalization, at
October 31, 2003. We were in compliance with all loan covenants and had unused
credit availability of $10.9 million at April 30, 2004. We believe that cash
flow from operations and borrowings available under our credit facilities are
sufficient to meet our anticipated cash requirements for the balance of fiscal
2004.
NEW ACCOUNTING PRONOUNCEMENTS
In the first quarter of fiscal 2004, we adopted the Financial Accounting
Standards Board Interpretation No. 46 (FIN 46) Consolidation of Variable
Interest Entities. This Interpretation requires existing unconsolidated variable
interest entities to be consolidated by their primary beneficiaries if the
entities do not effectively disperse risks among parties. The adoption of this
standard did not have a material effect on the Consolidated Financial
Statements.
In December 2002, the Financial Accounting Standards Board issued Statement No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS No. 123, Accounting for Stock-Based Compensation" (SFAS 148).
The Standard provides for (1) alternative methods of transition for an entity
that voluntarily changes to the fair-value method of accounting for stock-based
compensation; (2) requires more prominent disclosure of the effects of an
entity's accounting policy decisions with respect to stock-based compensation on
reported income; and (3) amends APB Opinion No. 28, "Interim Financial
Reporting", to require disclosure of those effects in interim financial
information. SFAS No. 148 is effective for fiscal years ending after December
15, 2003, and for financial reports containing condensed financial statements
for interim periods beginning after December 15, 2003. We do not expect the
adoption of SFAS 148 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, 2003, require our management to make
significant estimates and assumptions using information available at the time
the estimates are made. These estimates and assumptions significantly affect
various reported amounts of assets, liabilities, revenues and expenses. If our
future experience differs materially from these estimates and assumptions, our
results of operations and financial condition could be affected. There were no
material changes to our critical accounting policies during the second quarter
of 2004.
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, 2003.
OFF BALANCE SHEET ARRANGEMENTS
From time to time, our German subsidiary guarantees third party lease financing
residuals in connection with the sale of certain machines in Europe. At April
30, 2004 there were 28 third party guarantees totaling approximately $1.7
million. A retention of title clause allows our German subsidiary to obtain the
machine if the customer defaults on its lease. We believe that the proceeds
obtained from liquidation of the machine would cover any payments required under
the guarantee.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
Interest Rate Risk
Interest on our bank borrowings and economic development bond are affected by
changes in prevailing U.S. and European interest rates. At April 30, 2004,
outstanding borrowings under these credit facilities were $1.0 million. The
remaining outstanding indebtedness of $4.3 million is at a fixed rate of
interest.
Foreign Currency Exchange Risk
In the second quarter of fiscal 2004, approximately 70% of our sales and service
fees were derived from foreign markets. All of our computerized machine tools
and computer numerical control systems, as well as certain proprietary service
parts, are sourced by our U.S.-based engineering and manufacturing division and
re-invoiced to our foreign sales and service subsidiaries, primarily in their
functional currencies.
Our products are manufactured primarily in Taiwan, to our specifications, by our
wholly owned subsidiary and an affiliate. The predominant portion of our
exchange rate risk associated with product costs relates to the New Taiwan
Dollar.
We enter into forward foreign exchange contracts from time to time to hedge the
cash flow risk related to forecast inter-company sales, and forecast
inter-company and third-party purchases denominated in, or based on, foreign
currencies. We also enter into foreign currency forward exchange contracts to
provide a natural hedge against the effects of foreign currency fluctuations on
receivables and payables denominated in foreign currencies. We do not speculate
in the financial markets and, therefore, do not enter into these contracts for
trading purposes.
Forward contracts for the sale or purchase of foreign currencies as of April 30,
2004 which are designated as cash flow hedges under SFAS No. 133 were as
follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
in Foreign Forward At Date of April 30,
Forward Contracts Currency Rate Contract 2004 Maturity Dates
----------------- --------------- ---------- --------- ------------- --------------
Sale Contracts:
Euro 10,000,000 1.1640 11,640,000 11,955,051 May 2004 - December 2004
Sterling 1,340,000 1.6589 2,222,926 2,359,444 May 2004 - December 2004
Purchase Contracts:
New Taiwan Dollar 240,000,000 32.79* 7,319,305 7,223,574 May 2004 - October 2004
* per U. S. Dollars
Forward contracts for the sale of foreign currencies as of April 30, 2004, which
were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables denominated in foreign currencies were
as follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
in Foreign Forward At Date of April 30,
Forward Contracts Currency Rate Contract 2004 Maturity Dates
----------------- --------------- ---------- --------- ------------- --------------
Sale Contracts:
Euro 5,543,420 1.1995 6,649,332 6,634,974 May 2004 - June 2004
Singapore Dollar 3,963,226 1.6924* 2,341,779 2,332,030 May 2004 - October 2004
Sterling 329,739 1.7807 587,166 583,772 May 2004 - June 2004
Purchase Contracts:
New Taiwan Dollar 95,870,000 32.94* 2,910,443 2,885,299 May 2004 - June 2004
* per U.S. Dollars
Item 4. CONTROLS AND PROCEDURES
- ------ -----------------------
We carried out an evaluation under the supervision and with participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of April 30, 2004 pursuant to Rule 13a-15(b) under the Securities
Exchange Act of 1934, as amended. Based upon that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of the evaluation
date.
There have been no changes in our internal controls over financial reporting
that occurred during the quarter ended April 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are involved in various claims and lawsuits arising in the normal course of
business. We believe it is remote that any of these claims will have a material
adverse effect on our consolidated financial position or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the shareholders of the Company was held on March 11,
2004. The only matter submitted to a vote of the shareholders was the election
of six directors to the Board of Directors.
The following table sets forth the results of voting on this matter.
Number of Votes AGAINST
Matter Number of Votes FOR or WITHHELD
- ---------------------------------------------------------------- ------------------------ -------------------------
Election of Robert W. Cruickshank as Director 5,233,463 247,450
Election of Michael Doar as Director 5,250,946 239,967
Election of Richard T. Niner as Director 5,237,146 254,767
Election of O. Curtis Noel as Director 5,127,592 363,321
Election of Charles E. Mitchell Rentschler as Director 5,232,963 257,950
Election of Gerald V. Roch as Director 5,249,322 241,591
There are no directors, other than the directors elected at the annual meeting,
whose terms of office as directors continued after the annual meeting.
Item 5. OTHER INFORMATION
During the period covered by this Quarterly Report on Form 10-Q, the Audit
Committee of our Board of Directors did not approve the engagement of
PricewaterhouseCoopers LLP, our independent auditors, to perform any non-audit
services. This disclosure is made pursuant to Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of Sarbanes-Oxely Act
of 2002.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) Exhibits:
11 Statement re: Computation of Per Share Earnings
31.1 Certification by the Chief Executive Officer, pursuant
to Rule 13a-14(a) under the Securities and Exchange Act of
1934, as amended.
31.2 Certification by the Chief Financial Officer, pursuant to
Rule 13a-14(a) under the Securities and Exchange Act of
1934, as amended.
32.1 Certification by the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Report furnished on February 20, 2004 under Item 12, Results of
Operations and Financial Condition reporting that on February 18,
2004 the Company issued a press release containing earnings
information for the quarter ended January 31, 2004. A copy of the
press release was included as an exhibit.
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/ Roger J. Wolf
------------------
Roger J. Wolf
Senior Vice President and
Chief Financial Officer
By: /s/ Stephen J. Alesia
--------------------------
Stephen J. Alesia
Corporate Controller and
Principal Accounting Officer
June 10, 2004