SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 2002 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
_________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
- ------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for the past 90 days:
Yes X No
--- ---
The number of shares of the Registrant's common stock outstanding as of August
31, 2002 was 5,583,158.
HURCO COMPANIES, INC.
July 2002 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 nine months ended July 31, 2002 and 2001.........3
Condensed Consolidated Balance Sheet -
As of July 31, 2002 and October 31, 2001..........................4
Condensed Consolidated Statement of Cash Flows -
Three months and nine months ended July 31, 2002 and 2001.........5
Condensed Consolidated Statement of Changes in Shareholders' Equity -
Nine months ended July 31, 2002 and 2001..........................6
Notes to Condensed Consolidated Financial Statements..................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........17
Item 4. Controls and Procedures..............................................19
Part II - Other Information
Item 1. Legal Proceedings....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signatures....................................................................21
Certifications................................................................22
PART 1 - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Hurco Companies, Inc.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per-share data)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- --------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales and service fees $18,204 $21,678 $51,719 $71,043
Cost of sales and service 13,823 16,391 40,369 53,169
Cost of sales - restructuring - - 1,083 -
-------- -------- -------- --------
Gross profit 4,381 5,287 10,267 17,874
Selling, general and administrative expenses 4,672 5,896 14,421 17,941
Restructuring expense and other expense, net - 395 1,751 67
-------- -------- -------- --------
Operating loss (291) (1,004) (5,905) (134)
License fee income, net - 3 163 512
Interest expense 159 233 469 612
Other income (expense), net (47) 41 (10) 464
-------- -------- -------- --------
Income (loss) before taxes (497) (1,193) (6,221) 230
Provision for income taxes 154 136 282 669
-------- -------- -------- --------
Net loss $ (651) $ (1,329) $ (6,503) $ (439)
======== ======== ======== ========
Loss per common share
Basic $ (0.12) $ (0.24) $ (1.16) $ (0.08)
======== ======== ======== ========
Diluted $ (0.12) $ (0.24) $ (1.16) $ (0.08)
======== ======== ======== ========
Weighted average common shares outstanding
Basic 5,583 5,581 5,583 5,700
======== ======== ======== ========
Diluted 5,583 5,624 5,583 5,736
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
Hurco Companies, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per-share data)
July 31, October 31,
2002 2001
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,162 $ 3,523
Accounts receivable, net 11,786 14,436
Inventories 23,888 30,319
Other 1,366 1,232
-------- --------
Total current assets 40,202 49,510
-------- --------
Property and equipment:
Land 761 761
Building 7,202 7,187
Machinery and equipment 11,053 11,410
Leasehold improvements 1,175 1,059
Less accumulated depreciation and amortization (11,225) (11,653)
-------- --------
8,966 8,764
-------- --------
Software development costs, less amortization 1,945 3,066
Investments and other assets 3,200 4,877
-------- --------
$ 54,313 $ 66,217
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,618 $ 9,936
Accrued expenses 8,108 8,081
Short-term debt 1,599 200
-------- --------
Total current liabilities 19,325 18,217
Non-current liabilities:
Long-term debt 4,986 11,800
Deferred credits and other obligations 379 732
-------- --------
Total non-current liabilities 5,365 12,532
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; and 5,583,158 and
5,580,658 shares issued, respectively 558 558
Additional paid-in capital 44,717 44,714
Accumulated deficit (8,413) (1,910)
Accumulated other comprehensive income (7,239) (7,894)
-------- --------
Total shareholders' equity 29,623 35,468
-------- --------
$ 54,313 $ 66,217
======== ========
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 Nine Months Ended
July 31, July 31,
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (651) $ (1,329) $ (6,503) $ (439)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Restructuring and other expense (173) 140 2,346 (188)
Equity in (income) loss of affiliates (11) (54) - (366)
Depreciation and amortization 485 613 1,475 1,724
Change in assets and liabilities:
(Increase) decrease in accounts receivable (372) 3,493 3,197 622
(Increase) decrease in inventories 1,638 (1,230) 6,391 (7,011)
Increase (decrease) in accounts payable 1,404 (3,776) (430) (761)
Increase (decrease) in accrued expenses 447 203 (568) 1,425
Other (647) 264 (613) (16)
-------- -------- -------- --------
Net cash provided by (used for) operating activities 2,120 (1,676) 5,295 (5,010)
Cash flows from investing activities:
Proceeds from sale of equipment 26 9 71 24
Purchase of property and equipment (480) (461) (1,096) (912)
Software development costs (132) (223) (417) (485)
Proceeds from terminated loan and warrant agreements - - 1,000 -
Other investments 155 (296) 46 (600)
-------- -------- -------- --------
Net cash provided by (used for) investing activities (431) (971) (396) (1,973)
Cash flows from financing activities:
Advances on bank credit facilities 6,450 11,950 19,025 36,600
Repayment on bank credit facilities (8,350) (7,850) (28,925) (24,550)
Proceeds from first mortgage 4,500 --
Repayment on first mortgage (15) - (15) -
Repayment of term debt (1,786)
Proceeds from exercise of common stock options 4 35
Purchase of common stock (1,706)
-------- -------- -------- --------
Net cash provided by (used for) financing activities (1,915) 4,100 (5,411) 8,593
-------- -------- -------- --------
Effect of exchange rate changes on cash 170 (25) 151 (311)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (56) 1,428 (361) 1,299
Cash and cash equivalents at beginning of period 3,218 3,255 3,523 3,384
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 3,162 $ 4,683 $ 3,162 $ 4,683
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
Common Stock
--------------------------- Accumulated
Shares Additional Other
Issued & Stated Paid-In Accumulated Comprehensive
Outstanding Value Capital Deficit Income(loss) Total
-------------- -------- ---------- ------------ ------------- --------
(dollars in thousands)
Balances, October 31, 2000 5,955,359 $ 596 $46,347 $ (313) $ (7,739) $38,891
========= ====== ======= ======= ========= =======
Net income (439) (439)
Translation of foreign currency
financial statements 22 22
Unrealized loss of derivative instruments (120) (120)
------
Comprehensive income (loss) (537)
Exercise of Common Stock Options 16,400 1 34 35
Repurchase of Common Stock (391,101) (39) (1,667) (1,706)
---------- ------ -------- ------- --------- -------
Balances, July 31, 2001 5,580,658 $ 558 $44,714 $ (752) $ (7,837) $36,683
========= ====== ======= ======= ========= =======
Balances, October 31, 2001 5,580,658 $ 558 $44,714 $ (1,910) $ (7,894) $35,468
========= ====== ======= ======= ========= =======
Net loss (6,503) (6,503)
Translation of foreign currency
financial statements 870 870
Unrealized gain on derivative instruments (215) (215)
-------
Comprehensive income (loss) (5,848)
Exercise of Common Stock 2,500 3 3
---------- ------ -------- ------- --------- -------
Balances, July 31, 2002 5,583,158 $ 558 $44,717 $ (8,413) $ (7,239) $29,623
========= ====== ======= ======= ========= =======
The accompanying notes are an integral part of the condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The unaudited Condensed Consolidated Financial Statements include the accounts
of Hurco Companies, Inc. and its consolidated subsidiaries. We design and
produce interactive, personal computer (PC) based, computer control systems and
software and computerized machine tools for sale through a world wide sales,
service and distribution network.
The condensed financial information as of July 31, 2002 and for the nine months
ended July 31, 2002 and July 31, 2001 is unaudited, however, in our opinion, the
interim data includes all normal recurring adjustments necessary for a fair
statement of the results for the interim periods. We suggest that you read these
condensed 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, 2001.
2. LIQUIDITY MATTERS
Our domestic bank credit facility matures June 30, 2003. Effective September 1,
2002, the European credit facility was amended, extending the maturity date to
August 31, 2003. We were in compliance with all of our loan covenants at July
31, 2002. We are currently in discussions with other lenders for a long-term
domestic replacement credit facility, and while we believe that we will be able
to obtain a replacement credit facility in fiscal 2003 under acceptable terms;
no such assurance can be given.
3. HEDGING
We enter into foreign currency forward exchange contracts periodically to hedge
certain forecast inter-company sales and forecast inter-company and third-party
purchases denominated in foreign currencies (primarily 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 the 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 Liabilities. Gains and
losses resulting from changes in the fair value of these hedge contracts are
deferred in Accumulated Other Comprehensive Income and recognized as an
adjustment to the related sale or purchase transaction in the period that the
transaction occurs. Net gains on cash flow hedge contracts which we reclassified
from Accumulated Other Comprehensive Income to Cost of Sales in the quarter
ended July 31, 2002 were $47,000.
At July 31, 2002, we had $685,000 of realized and unrealized losses related to
cash flow hedges deferred in Accumulated Other Comprehensive Income, which we
expect to recognize in Cost of Sales within the next twelve months. Cash flow
hedge contracts mature at various dates through November 2002.
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 the Statement of Financial Accounting Standards No.
133, "Accounting Standards for Derivative Instruments and Hedging Activities"
and as a result, changes in fair value are reported currently as Other Income
(Expense) in the Consolidated Statement of Operations consistent with the
transaction gain or loss on the related foreign denominated receivable or
payable. Such net transaction gains and (losses) were $(52,000) and $7,000 for
the quarters ended July 31, 2002 and 2001, respectively.
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 30,000 potentially issuable shares for the nine months ended July 31,
2002 and 3,000 potentially issuable shares for the three months ended July 31,
2002 were excluded from the computation of diluted earnings per share because
their effect would be anti-dilutive.
5. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $876,000 as of July 31, 2002 and
$907,000 as of October 31, 2001.
6. INVENTORIES
Inventories, priced at the lower of cost (first-in, first-out method) or market,
are summarized below (in thousands):
July 31, 2002 October 31, 2001
------------- ----------------
Purchased parts and sub-assemblies $ 6,466 $ 7,853
Work-in-process 1,368 1,256
Finished goods 16,054 21,210
--------- --------
$ 23,888 $ 30,319
========= ========
7. RESTRUCTURING EXPENSE AND OTHER EXPENSE, NET
We recorded charges aggregating $2.5 million in the second quarter of fiscal
2002 for the write-down of assets related to the repositioning of product lines
and severance costs associated with cost reduction programs. These charges,
combined with a severance charge of $356,000 in the first quarter, total $2.8
million for fiscal 2002 year-to-date.
The charges include (in thousands):
Cost of sales - restructuring:
Inventory write-down related to under-performing product lines which
are being discontinued $1,083
Restructuring expense:
Write-off of capitalized software development cost resulting from
termination of development project due to product line repositioning 1,036
Severance cost 827
Other expense (credit):
Foreign lease termination liability (Note 11) 165
Termination of software development agreement (Note 9) (277)
---------
1,751
---------
Total $2,834
=========
The balance of the reserve for Restructuring expense and other expense, net at July 31, 2002 is as follows:
Balance Provision Balance
(in thousands) 10/31/01 (Credit) Used 7/31/02
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Cost of sales - restructuring:
Inventory write-down $-- $1,083 $1,083 $ --
Restructuring expense:
Capitalized software development cost write-off -- 1,036 1,036 --
Severance costs 133 827 600 360
Other expense (credit):
Foreign lease termination liability 60 165 -- 225
Termination of software development agreement -- (277) (277) --
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Total $193 $2,834 $2,442 $585
============ ============= ============ ============
The balance of $ 585,000 at July 31, 2002 represents severance costs related to
employees that will be paid in future periods and the estimated liability for a
foreign lease obligation. The severance provision recorded in the second quarter
of fiscal 2002 represents 46 domestic positions that have been or will be
eliminated in fiscal 2002. At July 31, 2002, 32 employees had been paid the full
amount of their severance while the remaining employees will be paid at
different times through the second quarter of fiscal 2003.
8. TERMINATION OF AGREEMENTS
During the second quarter of fiscal 2002, we terminated certain software
development and loan agreements previously entered into in fiscal 2001. We
received early repayment of our investment in a secured loan and warrants
totaling $1.0 million. We were also reimbursed for software development fees
previously paid and expensed, resulting in a credit of $277,000 which is
reflected in Restructuring expense and other expense, net in the second quarter
of fiscal 2002. Neither party has any remaining obligations to the other.
9. DEBT AGREEMENTS
On April 30, 2002, we obtained a $4.5 million first mortgage loan on our
Indianapolis corporate headquarters. The loan bears an interest rate of 7?% per
annum and matures in April 2009. We are required to make principal payments over
the seven-year term of the loan, based on a twenty-year amortization schedule.
On September 1, 2002, our 3.0 million Euro bank credit facility, which was
entered into on January 8, 2002, was extended to August 31, 2003. Interest on
the facility is payable at 7.16% per annum or, at the Company's option, 1.75%
above EURIBOR for fixed rate borrowings. The facility is uncollateralized
however, the bank reserves the right of lien and collateral as provided in its
standard terms and conditions. No borrowings were outstanding on the facility
at July 31, 2002.
Effective April 30, 2002, we amended our bank credit agreement, extending the
maturity date to June 30, 2003, and reducing the bank's commitment to $10.0
million at June 30, 2002. Interest rate margins for borrowings under Libor or
the prime rate option are as follows:
Libor Prime
Margin Margin
------------ ----------
------------ ----------
May 1, 2002 - October 31, 2002 2.5% 0.5%
November 1, 2002 - January 31, 2003 3.0% 1.0%
February 1, 2003 - June 30, 2003 3.5% 1.5%
The net worth covenant was amended to require tangible net worth, exclusive of
Accumulated Other Comprehensive Income, to be not less than $32.5 million at
July 31, 2002, and $32.3 million thereafter. Our EBITDA (earnings before
interest, taxes, depreciation and amortization) requirements recorded on a
twelve consecutive month basis cannot be less than negative $2.75 million on
July 31, 2002, increasing to negative $2.15 million on October 31, 2002,
negative $750,000 at January 31, 2003 and positive $1.0 million at April 30,
2003. Other financial covenants were extended to June 30, 2003. A facility fee
previously payable August 1, 2002 was reduced to $50,000 from $100,000 and is
payable March 31, 2003, if we have not obtained a new financing arrangement by
that time.
We were in compliance with all loan covenants at July 31, 2002, and had
additional credit availability of $10.1 million, including $2.9 million under
the European bank credit facility.
10. LEASEHOLD REPAIRS CONTINGENCY
The lease for our facility located in England expired in April 2002 and required
that we make certain repairs to the facility at the conclusion of the lease
resulting from dilapidation of the facility that occurred during the lease term.
The extent of repairs to be completed are being negotiated and, as a result, the
cost of these repairs cannot be estimated. Our maximum liability for the repairs
and fees is believed to be approximately $800,000. However, this amount could be
reduced by statutory limitations or by a negotiated settlement. We believe our
minimum liability is approximately $225,000, which we have accrued at July 31,
2002. We have engaged a firm that specializes in these types of claims and
intend to vigorously contest this matter.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Under SFAS 142, amortization of goodwill will cease and the goodwill
carrying values will be tested periodically for impairment. We are required to
adopt SFAS 142, effective November 1, 2002 for goodwill and intangible assets
acquired prior to July 1, 2001. Goodwill and intangible assets acquired after
June 30, 2001 were subject immediately to the goodwill non-amortization and
intangible provisions of this statement. We believe the impact on our financial
statements will be immaterial.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which is effective for the fiscal year beginning November 1, 2002. SFAS
144 establishes a single model to account for impairment of assets to be held or
disposed of, incorporating guidelines for accounting and disclosure of
discontinued operations. We believe the impact on our financial statements will
be immaterial.
In June 2002, the Financial Accounting Standards Board issued Statement No. 146
"Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146).
SFAS 146 nullifies Emerging Issues Task Force (EITF 94-3) "Liability Recognition
for Certain Termination Benefits and Other Costs to Exit an Activity." The
principal difference between the two pronouncements is that SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred whereas EITF 94-3 required a liability
for an exit plan to be recognized when an entity commitments to an exit plan. We
believe the impact on our financial statements will be immaterial.
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". 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 machine tools and related computer
control systems, software products, and replacement parts, changes in
manufacturing markets, the success of our plans to reduce inventory and
operating costs, adverse currency movements, innovations by competitors, quality
and delivery performance by our contract manufacturers and governmental actions
and initiatives including import and export restrictions and tariffs.
RESULTS OF OPERATIONS
Three Months Ended July 31, 2002 Compared to Three Months Ended July 31, 2001
- -----------------------------------------------------------------------------
The following tables set forth net sales by geographic region and product
category for the three-months ended July 31, 2002 and 2001 (unaudited, in
millions):
Net Sales by Geographic Region
Three Months Ended
July 31,
--------------------------------
2002 2001
--------------- -------------
United States $ 6,789 $ 7,312
Europe 10,767 13,675
Asia and Other 648 691
--------------- -------------
--------------- -------------
Total $ 18,204 $ 21,678
=============== =============
Net Sales by Product Category
Three Months Ended
July 31,
--------------------------------
2002 2001
--------------- -------------
Computerized Machine Tools $ 14,266 $ 17,239
Computer Control Systems and Software 866 1,363
Service Parts 2,232 2,179
Service Fees 840 897
--------------- -------------
--------------- -------------
Total $ 18,204 $ 21,678
=============== =============
Sales and service fees for the third quarter ending July 31, 2002 were $18.2
million, approximately $3.5 million, or 16%, lower than the corresponding 2001
period primarily due to declines in demand in the European market. European
sales represented 59% of total sales and service fees in the third fiscal
quarter, down somewhat from 63% in the prior year period. The dollar value of
European sales benefited from the stronger values of the Euro and Pound Sterling
currencies in relation to the U.S. dollar during the period. Third quarter sales
and service fees in the U.S. market declined $523,000, or 7%, which is
attributable to a 40% decline in metal forming products, some of which are being
discontinued. However, domestic sales and service fees related to metal cutting
products increased 8% over the prior year period and 23% over the immediately
preceding quarter of 2002, reflecting improving market conditions in the U.S.
New order bookings for the third quarter of fiscal 2002 were $17.6 million, an
increase of 7% from the second quarter of this year, but down 8% from the $19.2
million booked in the corresponding prior year period. New orders for machine
tools declined compared to the prior year period. In the U.S. market, machine
tool orders increased 92% in units and 54% in dollars from the prior year third
quarter, due largely to the successful introduction in the quarter of a new
entry-level machining center model and increased unit sales of discontinued
models at discounted prices. However, the increase in domestic orders was more
than offset by reduced demand in Europe, where new machine tool orders declined
30% in units and 27% in dollars as compared to the prior year period. The dollar
value of European orders benefited somewhat from stronger European currencies in
the most recent quarter. Backlog was $6.6 million at July 31, 2002 compared to
$6.8 million at April 30, 2002 and $9.1 million at October 31, 2001.
Our gross profit margin improved to 24.1% in the third quarter, from 19.8%
(before restructuring charges) in the second quarter, due primarily to our cost
reduction programs. We sold approximately $1.4 million of discontinued product
at substantially reduced margin. The gross profit margin for the 2002 fiscal
quarter approximates the 24.4% gross margin reported for the 2001 third quarter.
Selling, general and administrative expenses for the third quarter of fiscal
2002 were 21% lower than those of the corresponding 2001 period due to
previously announced cost reduction programs.
Interest expense of $159,000 was $74,000, or 32%, lower than the comparable
prior year period primarily due to reduced borrowings.
Nine Months Ended July 31, 2002 Compared to Nine Months Ended July 31, 2001
- ---------------------------------------------------------------------------
The net loss for the nine months ended July 31, 2002 was attributed to
substantially lower sales and charges aggregating $2.8 million recorded in the
first and second fiscal quarters.
The charges consisted of: (a) non cash write downs of inventories of
approximately $1.1 million and capitalized software development costs of
approximately $1.0 million related to under-performing product lines that are
being discontinued and (b) severance costs of $827,000 related to additional
personnel reductions, including a change in senior management. Also included in
the Restructuring expense and other expense, net is $165,000 for a contingency
related to termination of a foreign lease and a credit of $277,000 due to a
refund of software development fees resulting from the termination of a software
development agreement during the second fiscal quarter.
The following tables set forth net sales by geographic region and product
category for the nine-months ended July 31, 2002 and 2001 (unaudited, in
millions):
Net Sales by Geographic Region
Nine Months Ended
July 31,
--------------------------------
2002 2001
--------------- -------------
United States $ 18,020 $ 27,619
Europe 32,204 41,560
Asia and Other 1,495 1,864
--------------- -------------
--------------- -------------
Total $ 51,719 $ 71,043
=============== =============
Net Sales by Product Category
Nine Months Ended
July 31,
--------------------------------
2002 2001
--------------- -------------
Computerized Machine Tools $ 40,634 $ 56,608
Computer Control Systems and Software 2,750 4,539
Service Parts 5,984 7,111
Service Fees 2,352 2,785
-------------- -------------
-------------- -------------
Total $ 51,719 $ 71,043
============== =============
Sales and service fees for the first nine months of fiscal 2002 were $51.7
million, approximately $19.3 million, or 27%, lower than those recorded in the
corresponding 2001 period. Sales and service fees in the U.S. market during the
period declined 35% to $18.0 million reflecting the continuing weakness in
industrial equipment spending and reduced consumption of machine tools. In
Europe, sales and service fees declined 23% to $32.2 million due to a 28%
decline in new orders. Non-machine revenues declined 23% and represented 21% of
total sales and service fees.
New order bookings for the first nine months of fiscal 2002 were $49.6 million
compared to $68.4 million in the prior year, a 28% decline. New orders for
computerized machine tools declined 29% in U.S. dollars worldwide. In the U.S.
market, machine tool orders declined 26% reflecting a sharp decrease in orders
for vertical machining centers, our primary product line, offset partially by
increased unit sales of discontinued models which are being discounted. New
orders in Europe were 29% lower than the comparable prior year period reflecting
weaker demand in fiscal 2002 in those markets.
Gross profit margin for the first nine months of fiscal 2002, exclusive of the
restructuring inventory write-down, declined to 21.9%, from 25.2% in the same
period a year ago, due to the decline in sales and service fees and the sale of
approximately $4.2 million in discontinued non-performing products at discounted
prices. These unfavorable effects more than offset the favorable impact of the
cost reduction programs we had initiated during the past thirteen months.
Selling, general and administrative expenses for the first nine months of fiscal
2002 of $14.4 million were $3.5 million, or 20%, lower than those of the
corresponding 2001 period due to our cost reduction programs. During the second
quarter of 2002, we recorded a severance provision related to the elimination of
46 domestic positions. We expect to save approximately $3.5 million on an annual
basis, the full benefit of which will not be realized until the end of the
fiscal year.
Interest expense of $469,000 was $143,000, or 23%, lower than the comparable
prior year period primarily due to reduced borrowings.
The decrease in other income for the first nine months of fiscal 2002 is the
result of a decrease in earnings of foreign affiliates accounted for using the
equity method and a decrease in license fee income.
The decrease in income tax expense is the result of a decline in earnings of a
wholly owned foreign subsidiary.
Foreign Currency Risk Management
We manage our foreign currency exposure through the use of foreign currency
forward exchange contracts. We do not speculate in the financial markets and,
therefore, do not enter into these contracts for trading purposes. We also
moderate our currency risk related to significant purchase commitments with
certain foreign vendors through price adjustment agreements that provide for a
sharing of, or otherwise limit, the potential adverse effect of currency
fluctuations on the costs of purchased products. See Item 3 below and Note 3 to
the Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2002, we had cash and cash equivalents of $3.2 million compared to
$3.5 million at October 31, 2001. Cash provided by operations totaled $5.3
million for the nine months ended July 31, 2002 compared to cash used for
operations of $5.0 million in the prior year. The net loss in fiscal 2002,
exclusive of non-cash charges, was more than offset by a reduction in working
capital in fiscal 2002.
Net working capital, excluding short-term debt, was $22.5 million at July 31,
2002 compared to $31.5 million at October 31, 2001. The decrease in working
capital was the result of a $3.2 million reduction in accounts receivable, and a
$6.4 million planned reduction in inventory, partially offset by a $1.0 million
reduction in accounts payable and accrued expenses. The reduction in accounts
receivable was due to lower sales and improved collections
Capital investments for the nine months ended July 31, 2002 consisted
principally of expenditures for software development projects and purchases of
equipment. During the second quarter, we terminated certain agreements resulting
in an early repayment of an investment we had made totaling $1.0 million.
On April 30, 2002, we obtained a $4.5 million first mortgage loan on our
Indianapolis corporate headquarters. The loan bears an interest rate of 7?% and
matures in April 2009. We are required to make principal payments over the
seven-year term of the loan, based on a twenty-year amortization schedule. The
proceeds from the first mortgage loan, together with other available cash, were
used to repay bank debt. After giving effect to the repayment and cash flow from
operations, our bank debt was reduced to $1.3 million at July 31, 2002 from
$11.2 million at October 31, 2001.
Effective April 30, 2002, we amended our bank credit agreement, extending the
maturity date to June 30, 2003, and reducing the bank's commitment to $10.0
million at June 30, 2002. We were in compliance with all loan covenants at July
31, 2002, and had an additional credit availability of $10.1 million, including
$2.9 million under a European bank facility.
On September 1, 2002, our 3.0 million Euro bank credit facility, which was
entered into on January 8, 2002, was extended to August 31, 2003. Interest on
the facility is payable at 7.16% per annum or, at the Company's option, 1.75%
above EURIBOR for fixed rate borrowings. The facility is uncollateralized
however, the bank reserves the right of lien and collateral as provided in its
standard terms and conditions. No borrowings were outstanding on the facility
at July 31, 2002.
Our cash flow from operations for the first nine months of fiscal 2002 was
consistent with our business plan. However, market demand in the U.S. and Europe
for the first nine months of fiscal 2002 has been less than expected in our
business plan. As a result, we implemented additional cost reduction actions in
the second quarter, which involved a 20% reduction in our domestic workforce,
and which we expect will generate an annual cost savings of approximately $3.5
million. Our plans call for further reductions in inventory to improve cash flow
from operations over the remainder of fiscal 2002 and first half of fiscal 2003.
The inventory reductions will result in part from the sale of discounted
products related to the discontinued under-performing products. We are currently
in discussions with other lenders for a long-term domestic replacement credit
facility, and while we believe that we will be able to obtain a replacement
credit facility in fiscal 2003 under acceptable terms; no such assurance can be
given.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Interest Rate Risk
Interest on our bank borrowings is affected by changes in prevailing U.S. and
European interest rates and/or Libor. At July 31, 2002, outstanding borrowings
under our bank credit facilities were $1.3 million and our total indebtedness
was $6.6 million. The interest rate on the Libor portion of our bank debt was
Libor plus 2.5%, which increases to 3.0% effective November 1, 2002.
Foreign Currency Exchange Risk
In fiscal 2002, approximately 67% of our sales and service fees, including
export sales, 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 sourced primarily from foreign suppliers or built to our
specifications by either our wholly owned subsidiary in Taiwan, or contract
manufacturers overseas. These purchases are predominantly in foreign currencies
and in many cases our arrangements with these suppliers include foreign currency
risk sharing agreements, which reduce (but do not eliminate) the effects of
currency fluctuations on product costs. The predominant portion of our exchange
rate risk associated with product purchases 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 July 31,
2002 which are designated as cash flow hedges under SFAS No. 133 were as
follows:
Contract Amount at
Forward Rate in
Weighted U.S. Dollars
Notional Amount Avg. -----------------------------
in Foreign Forward Contract July 31,
Forward Contracts Currency Rate Date 2002 Maturity Dates
----------------- --------------- ------------ ----------- ---------- ----------------------
Sale Contracts:
Euro 6,800,000 .9442 $6,420,630 $6,625,004 August - November 2002
Sterling 1,150,000 1.5580 $1,791,655 $1,790,708 August - November 2002
Purchase Contracts:
New Taiwan Dollar 160,000,000 32.85 $4,870,088 $4,749,028 August - November 2002
Forward contracts for the sale of foreign currencies as of July
31, 2002, 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 Rate in
Weighted U.S. Dollars
Notional Amount Avg. -----------------------------
in Foreign Forward Contract July 31,
Forward Contracts Currency Rate Date 2002 Maturity Dates
----------------- --------------- ------------ ----------- ---------- ----------------------
Sale Contracts:
Euro 6,006,512 .9869 $5,928,114 $5,858,811 August - September 2002
Singapore Dollar 1,883,250 1.7800 $1,058,014 $1,068,795 August - September 2002
Sterling 395,000 1.5590 $615,811 $615,906 August - September 2002
Purchase Contracts:
New Taiwan Dollar 75,000,000 33.22 $2,257,804 $2,223,749 August - September 2002
Item 4. CONTROLS AND PROCEDURES
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are involved in various claims and lawsuits arising in the ordinary course of
business, none of which, in the opinion of management, is expected to have a
material adverse effect on our consolidated financial position or results of
operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Statement re: Computation of Per Share Earnings
99.1 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Financial Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
On June 3, 2002, we filed a Current Report on Form 8-K reporting under
Item 5 that we had dismissed Arthur Andersen LLP as our independent
accountants.
On July 1, 2002, we filed a Current Report on Form 8-K reporting under
Item 4 that our Board of Directors approved the recommendation of its
Audit Committee to engage Pricewaterhouse Coopers LLP as our
independent accountants.
SIGNATURES
Pursuant to the requirements of the Securities and 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
September 13, 2002
CERTIFICATIONS
I, Michael Doar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hurco Companies, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
September 13, 2002
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
Hurco Companies, Inc.
I, Roger J. Wolf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hurco Companies, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
September 13, 2002
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
Hurco Companies, Inc.
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Nine months Ended
July 31, July 31,
----------------------------------------- -------------------------------------------
2002 2001 2002 2001
----------------- -------------------- --------------------- --------------------
(in thousands, except per share amount)
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
-------- -------- ----------- -------- --------- -------- ------- ---------
Net loss $(651) $(651) $(1,329) $ (1,329) $ (6,503) $ (6,503) $ (439) $(439)
Weighted average shares
outstanding 5,583 5,583 5,581 5,581 5,583 5,583 5,700 5,700
Dilutive effect of stock options -- -- -- 43 -- -- -- 36
------- ------- ---------- -------- --------- -------- ------ ---------
5,583 5,583 5,581 5,624 5,583 5,583 5,700 5,736
Loss per common share $ (0.12) $ (0.12) $ (0.24) $ (0.24) $ (1.16) $ (1.16) $ (0.08) $ (0.08)
======= ======= ========== ======== ========= ========= ====== =========
exhibit 99.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Hurco Companies, Inc., (the
"Company") on Form 10-Q for the period ending July 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Michael
Doar, Chairman and Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
Hurco Companies, Inc.
September 13, 2002
exhibit 99.2
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Hurco Companies, Inc., (the
"Company") on Form 10-Q for the period ending July 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Roger
J. Wolf, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
Hurco Companies, Inc.
September 13, 2002