SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended January 31, 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
--------------
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 March 1,
2004 was 5,693,340.
HURCO COMPANIES, INC.
January 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 ended January 31, 2004 and 2003................................................ 3
Condensed Consolidated Balance Sheet -
As of January 31, 2004 and October 31, 2003................................................. 4
Condensed Consolidated Statement of Cash Flows -
Three months ended January 31, 2004 and 2003................................................ 5
Condensed Consolidated Statement of Changes in Shareholders' Equity -
Three months ended January 31, 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...................................... 15
Item 4. Controls and Procedures......................................................................... 17
Part II - Other Information
Item 1. Legal Proceedings............................................................................... 18
Item 6. Exhibits and Reports on Form 8-K................................................................ 18
Signatures.................................................................................................... 19
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
January 31
2004 2003
- ---------------------------------------------------------------------------- ------------ -------------
(unaudited)
Sales and service fees............................................... $ 22,718 $ 15,953
Cost of sales and service............................................ 16,187 11,959
------------ -------------
Gross profit 6,531 3,994
Selling, general and administrative expenses......................... 4,927 4,428
------------ -------------
Operating income (loss) 1,604 (434)
Interest expense..................................................... 144 159
Variable options expense............................................. 255 --
Other (income) expense, net.......................................... 170 (116)
------------ -------------
Income (loss) before taxes...................................... 1,035 (477)
Provision for income taxes........................................... 366 105
------------ -------------
Net income (loss)............................................. $ 669 $ (582)
============ =============
Earnings (loss) per common share
Basic........................................................... $ 0.12 $ (0.10)
============ =============
Diluted......................................................... $ 0.12 $ (0.10)
============ =============
Weighted average common shares outstanding
Basic........................................................... 5,588 5,583
============ =============
Diluted......................................................... 5,753 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)
January 31 October 31
2004 2003
- ---------------------------------------------------------------------------------------- -------------- ----------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 5,604 $ 5,289
Cash - restricted.............................................................. 1,092 622
Accounts receivable............................................................ 12,734 12,823
Inventories.................................................................... 23,250 22,247
Other.......................................................................... 1,730 1,409
-------------- ----------------
Total current assets....................................................... 44,410 42,390
-------------- ----------------
Property and equipment:
Land........................................................................... 761 761
Building....................................................................... 7,242 7,239
Machinery and equipment........................................................ 10,809 10,568
Leasehold improvements......................................................... 602 544
-------------- ----------------
19,414 19,112
Less accumulated depreciation and amortization............................. (11,018) (10,730)
-------------- ----------------
8,396 8,382
-------------- ----------------
Software development costs, less amortization....................................... 2,113 1,922
Investments and other assets........................................................ 5,357 5,264
-------------- ----------------
$ 60,276 $ 57,958
============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 13,843 $ 9,461
Accrued expenses............................................................... 9,406 10,048
Bank debt...................................................................... 998 --
Current portion of long-term debt.............................................. 310 645
-------------- ----------------
Total current liabilities.................................................. 24,557 20,154
-------------- ----------------
Non-current liabilities:
Long-term debt................................................................. 5,155 8,577
Deferred credits and other obligations......................................... 538 486
-------------- ----------------
Total non-current liabilities.............................................. 30,250 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, and 5,650,687 and 5,575,987
shares issued, respectively............................................... 565 557
Additional paid-in capital..................................................... 45,025 44,695
Accumulated deficit............................................................ (9,042) (9,711)
Accumulated other comprehensive income......................................... (6,522) (6,800)
-------------- ----------------
Total shareholders' equity................................................. 30,026 28,741
-------------- ----------------
$ 60,276 $ 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
January 31
-----------------------------
2004 2003
------------ -------------
Cash flows from operating activities:
Net income (loss) ............................................................. $ 669 $ (582)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Restructuring and other expense.............................................. -- (96)
Depreciation and amortization................................................ 331 349
Change in assets and liabilities:
(Increase) decrease in accounts receivable................................ 634 896
(Increase) decrease in inventories........................................ 368 (288)
Increase (decrease) in accounts payable................................... 4,099 788
Increase (decrease) in accrued expenses................................... (2,505) (1,535)
Other..................................................................... (98) (307)
------------ -------------
Net cash provided by (used for operating activities 3,498 (775)
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment............................................. (207) (102)
Software development costs..................................................... (264) (66)
Change in restricted cash...................................................... (470) (1,176)
Other investments.............................................................. (46) (8)
------------ -------------
Net cash used for investing activities (987) (1,352)
------------ -------------
Cash flows from financing activities:
Advances on bank credit facilities............................................. 13,118 6,200
Repayment on bank credit facilities............................................ (15,629) (5,366)
Repayment on first mortgage.................................................... (27) (25)
Repayment of term debt......................................................... (337) --
Proceeds from exercise of common stock options................................. 338 --
------------ -------------
Net cash provided by (used for) financing activities (2,537) 809
------------ -------------
Effect of exchange rate changes on cash........................................... 341 192
------------ -------------
Net increase (decrease) in cash and cash equivalents 315 (1,126)
Cash and cash equivalents at beginning of period 5,289 4,358
------------ -------------
Cash and cash equivalents at end of period $ 5,604 $ 3,232
============ =============
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 three months ended January 31, 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 loss............................ -- -- -- (582) -- (582)
Translation of foreign currency
financial statements............. -- -- -- -- 648 648
Unrealized loss on derivative
instruments...................... -- -- -- -- (768) (768)
----------
Comprehensive loss.................. -- -- -- -- -- (702)
------------- --------- ------------ ------------- ------------ ----------
Balances, January 31, 2003 5,583,158 $ 558 $ 44,717 $ (10,755) $ (7,205) $ 27,315
- ---------------------------------------- ============= ========= ============ ============= ============ ==========
Balances, October 31, 2003 5,575,987 $ 557 $ 44,695 $ (9,711) $ (6,800) $ 28,741
- ---------------------------------------- ------------- --------- ------------ ------------- ------------ ----------
Net income ......................... -- -- -- 669 -- 669
Translation of foreign currency
financial statements............. -- -- -- -- 869 869
Unrealized loss on derivative
instruments...................... -- -- -- -- (591) (591)
----------
Comprehensive income................ -- -- -- -- --
947
Exercise of common stock options.... 74,700 8 330 -- -- 338
------------- --------- ------------ ------------- ----------- ----------
Balances, January 31, 2004 5,650,687 $ 565 $ 45,025 $ (9,042) $ (6,522) $ 30,026
- ---------------------------------------- ============= ========= ============ ============= =========== ==========
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 January 31, 2004 and for the three
months ended January 31, 2004 and January 31, 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 sales and forecast inter-company and third-party
purchases of product 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
Expenses. 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 Cost of Sales in the period that the sale of the
related hedged item 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 item being hedged.
At January 31, 2004, we had $2,405,000 of losses related to cash flow hedges
deferred in Accumulated Other Comprehensive Income. Of this amount, $1,657,000
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 contracts which we reclassified from Other
Comprehensive Income to Cost of Sales in the quarters ended January 31, 2004 and
2003 were $941,000 and $158,000, 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 $148,000 for the quarter ended
January 31, 2004 and net gains of $37,000 for the quarter ended January 31,
2003.
3. STOCK OPTIONS
At January 31, 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.
Three Months Ended
January 31
---------------------------
2004 2003
------------ ----------
Net income, as reported............................. $ 669 $ (582)
Deduct: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (24) (49)
------------ ----------
Pro forma net income (loss)......................... $ 645 $ (631)
============ ==========
Earnings per share:
Basic as reported.............................. $ 0.12 $ (0.10)
Basic pro forma................................ 0.12 (0.11)
Diluted as reported............................ $ 0.12 (0.10)
Diluted pro forma.............................. 0.11 (0.11)
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 are subject to
variable plan accounting, which resulted in a charge to expense in the quarter
ended January 31, 2004 of $255,000. No expense was recognized during the quarter
ended January 31, 2003. During the first quarter for fiscal 2004, 60,000 options
were 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 January 31, 2004 was 165,000,
while the impact for the three months ended January 31, 2003 was 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 $826,000 as of January 31, 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):
January 31, 2004 October 31, 2003
---------------- ----------------
Purchased parts and sub-assemblies $ 4,467 $ 3,452
Work-in-process 2,961 2,029
Finished goods 15,822 16,766
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$ 23,250 $ 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 machine tool
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.
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 settlement payment was due and paid in the first quarter
of fiscal 2004.
Balance Charges to Balance
Description 10/31/03 Provision Accrual 1/31/04
----------- -------- --------- ------- -------
Foreign lease termination liability 1,189 -- (1,189) --
----------- ---------- ------------- ------------
Total $ 1,189 $ -- $ (1,189) $ --
=========== ========== ============ ============
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 January 31, 2004 there were 25 third party guarantees totaling approximately
$1.4 million. A retention of title clause allows us to obtain the machine if the
customer defaults on its lease. We believe that the proceeds obtained from
liquidation of the machine would cover 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 535
Charges to the accrual (446)
Impact of foreign currency translation 52
---------------------
---------------------
Balance at January 31, 2004 $ 1,157
=====================
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 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, which, together with an improvement in worldwide
manufacturing activity, and a consequent improvement in demand for machine
tools, that began in the fourth quarter of fiscal 2003, contributed to a
significant increase in our sales in the fourth quarter of fiscal 2003 and the
first quarter of fiscal 2004.
Approximately 89% of worldwide demand for machine tools comes from outside the
United States. During fiscal 2003, approximately 70% of our sales and service
fees were attributable to customer 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 when sales
made and expenses incurred in foreign currencies are translated to U.S. dollars
for financial reporting purposes. 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. For this reason, in our comparison of
period-to-period results, we customarily set forth 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 on a
"constant dollar" basis in which items of foreign currency-denominated revenue
or expense are translated to U.S. dollars at the same rate of exchange in both
periods.
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 January 31, 2004 Compared to Three Months Ended
January 31, 2003
For the first quarter of fiscal 2004, we reported net income of $669,000, or
$.12 per share, compared to a net loss of $582,000, or $.10 per share, for the
corresponding period one year ago. We attribute our return to profitability to a
substantial increase in our sales of computerized machine tools particularly in
Europe, which 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 translating sales made in Euros and Pound
Sterling to U.S. dollars.
Sales and service fees for the first quarter of fiscal 2004 were $22.7 million,
an increase of $6.7 million, or 42%, from the $16.0 million reported for the
first fiscal quarter of 2003. When measured at constant exchange rates, sales
and service fees for the 2004 first quarter increased $4.6 million, or 29%, from
the amount reported for the corresponding 2003 period. As noted below,
approximately 64% of our sales and service fees in the first quarter of fiscal
2004 were derived from European markets. Because of continued weakness of the
U.S. dollar in relation to major European currencies, the weighted average
exchange rate between the Euro and the U.S. dollar during the first quarter of
fiscal 2004 was $1.22 per (euro)1.00, as compared to $1.03 per (euro)1.00 for
the first quarter of fiscal 2003, an increase of 18%.
The following tables set forth net sales (in thousands) by geographic region and
product category for the first quarter of 2004 and 2003:
Net Sales and Service Fees by Geographic Region
January 31,
-------------------------------------------------------------
2004 2003
----------------------------- ---------------------------
North America $ 7,175 31.6% $ 5,989 37.5%
Europe 14,543 64.0% 9,720 60.9%
Asia Pacific 1,000 4.4% 244 1.6%
-------------- ------------ ------------ -----------
-------------- ------------ ------------ -----------
Total $22,718 100.0% $15,953 100.0%
============== ============ ============ ===========
Sales and service fees in North America benefited from increased unit sales of
42% for our new entry-level VM product line and 16% for our large VMX machining
center product line. These increases are attributable to new models introduced
in fiscal 2003, an improving domestic economy and the desire of U.S.
manufacturers to take advantage of year-end capital equipment tax incentives.
The nearly 50% increase in our sales and service fees in Europe reflect a 46%
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. When measured in constant dollars, sales and service fees in
Europe increased $2.7 million, or 28%, from the amount reported for the first
quarter of fiscal 2003.
The increase in sales and service fees in Asia is the result of strengthening
market demand for machine tools as well as improvements made to our distribution
network and selling organization in the region.
Net Sales and Service Fees by Product Category
Three Months Ended
January 31,
------------------------------------------------------------
2004 2003
--------------------------- ---------------------------
Computerized Machine Tools* $ 19,220 84.6% $ 12,871 80.7%
Service Fees, Parts and Other 3,498 15.4% 3,082 19.3%
------------ ----------- ----------- ------------
Total $ 22,718 100.0% $ 15,953 100.0%
============ =========== =========== ============
* When measured in constant exchange rates, sales of computerized machine tools
increased by $4.4 million, or 34%.
Consolidated unit sales of computerized machine tools increased 44% in the first
quarter of fiscal 2004 compared to the prior year period. The average net
selling price per unit (when measured in constant exchange rates) during the
same periods declined 7% due to the higher percentage of sales of units of the
more moderately priced VM product line in the total product mix during the 2004
period. However, when measured using current rates, the average net selling
price increased 3% when translating foreign sales for financial reporting
purposes.
New order bookings for the first quarter of fiscal 2004 were $23.5 million, an
increase of 70% from the $13.9 million reported for the first fiscal quarter of
2003. When measured in constant dollars, new order bookings in the first quarter
of 2004 increased $7.5 million, or 54%, over those in the first quarter of
fiscal 2003, with increases in the United States, Europe and Asia of $2.1
million, $4.6 million and $802,000, respectively. Backlog was $9.5 million at
January 31, 2004, compared to $8.2 million at October 31, 2003.
Gross margin for the first quarter of 2004 was 28.7%, a substantial increase
over the 25.0% margin realized in the corresponding 2003 period, due principally
to increased sales, the favorable effect of stronger European currencies and a
greater percentage of higher-margin European shipments in the total sales mix.
Selling, general and administrative expenses during the first quarter of 2004
increased approximately $500,000, or 11%, from the amount reported for the 2003
period, due to currency translation effects and the increased commissions to
European selling agents associated with the increase in European sales.
Variable option expense of $255,000 is related to certain stock options that are
subject to variable plan accounting. Sixty thousand of the 110,000 options
subject to variable option expense were exercised in the first quarter of fiscal
2004, and as of March 1, 2004, the remaining options were subsequently
exercised. The expense recognized during the second quarter of fiscal 2004
related to those options exercised is expected to be approximately $75,000.
Other (income) expense, net in the first quarter of fiscal 2004 includes
currency exchange losses on inter-company receivables and payables denominated
in foreign currencies, net of gains or losses on related forward contracts, and
other non-operating income and expense items. Other income (expense), net in the
prior year consisted primarily of earnings from two affiliates accounted for
using the equity method.
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 January 31, 2004. The provision for income tax increased in fiscal 2003
because of increased earnings from our taxable foreign subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2004, we had cash and cash equivalents of $5.6 million, exclusive
of $1.1 million of restricted cash related to derivative instruments, compared
to $5.3 million and $622,000, respectively, at October 31, 2003. Cash generated
from operations totaled $3.5 million for the quarter ended January 31, 2004,
compared to cash used by operations of $775,000 in the prior year period.
The weakening of the U.S. dollar in relation to European currencies results in a
temporary increase in restricted cash related to derivative instruments, pending
the liquidation of forward contracts in the normal course. Anticipated cash
losses on these forward contracts will be funded by the increased U.S. dollar
value of the related inter-company sales that are being hedged by those
contracts. As a result, we do not expect cash flow from operations to be
adversely affected.
Working capital, excluding short-term debt, was $21.2 million at January 31,
2004, compared to $22.9 million at October 31, 2003. During the first quarter of
fiscal 2004, cash flow from operations benefited by $4.1 million from an
increase in accounts payable, primarily to increased manufacturing activity.
This was accomplished without increasing inventory. Cash flow from operations
was unfavorably impacted by a $2.5 million reduction in accruals resulting from
a $1.2 million payment for a foreign lease liability in the United Kingdom and
the timing of payments for normal year-end accruals. We expect our working
capital requirements to increase in fiscal 2004, as our sales increase.
Capital investments during the first quarter consisted of normal expenditures
for software development projects and purchases of equipment. We funded these
expenditures with cash flow from operations.
Total debt at January 31, 2004 was $6.5 million, representing 18% 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 $9.9 million at January 31, 2004. We believe that cash
flow from operations and borrowings available to us under our credit facilities
will be sufficient to meet our anticipated cash requirements for the balance of
fiscal 2004.
NEW ACCOUNTING PRONOUCEMENTS
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 2003, 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 first quarter of
2003.
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.
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. At January 31, 2004, outstanding borrowings under our
bank credit facilities were $1.7 million and our total indebtedness was $6.5
million.
Foreign Currency Exchange Risk
In the first 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 sourced 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 January
31, 2004 which are designated as cash flow hedges under SFAS No. 133 were as
follows:
Contract Amount at
Forward Rates in
U.S. Dollars
------------
Notional Amount Weighted Avg At Date of January 31,
Forward Contracts in Foreign Currency Forward Rate Contract 2004 Maturity Dates
----------------- ------------------ ------------- --------- ---- --------------
Sale Contracts:
Euro 14,500,000 1.1442 16,590,900 18,001,261 February 2004 -
December 2004
Sterling 1,720,000 1.6535 2,844,020 3,090,952 February 2004 -
December 2004
Forward contracts for the sale of foreign currencies as of January 31, 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 Rates in
U.S. Dollars
------------
Notional Amount Weighted Avg At Date of January 31,
Forward Contracts in Foreign Currency Forward Rate Contract 2004 Maturity Dates
----------------- ------------------ ------------- --------- ---- --------------
Sale Contracts:
Euro 3,369,088 1.2501 4,211,697 4,193,819 February 2004 - April 2004
Singapore Dollar 2,615,231 1.7015* 1,537,015 1,545,333 February 2004 - May 2004
Sterling 745,800 1.8099 1,349,823 1,352,760 February 2004 - April 2004
Purchase Contracts:
New Taiwan Dollar 32,700,000 33.16* 986,128 983,543 February 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 January 31, 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 January 31, 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 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 2003.
32.2 Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2003.
(b) Reports on Form 8-K:
Report filed on December 10, 2003 furnishing items under Item 12,
Results of Operations and Financial Condition. A copy of a press
release containing information on earnings for the fiscal year
ended October 31, 2003 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
March 11, 2004
Exhibit 11
Statement Re: Computation of Per Share Earnings
Three Months Ended
January 31,
----------------------------------------------
2004 2003
----------------------------------------------
(in thousands, except per share data)
Basic Diluted Basic Diluted
----------------------------------------------
Net income (loss)............................................ $ 669 $ 669 $ (582) $ (582)
Weighted average shares
outstanding............................................. 5,588 5,588 5,583 5,583
Dilutive effect of stock options............................. -- 165 -- --
----------------------------------------------
5,583 5,753 5,583 5,583
Earnings (loss) per common share............................. $ 0.12 $ 0.12 $ (0.10) $ (0.10)
==============================================
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
March 9, 2004
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
March 9, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
In connection with the Quarterly Report of Hurco Companies, Inc. (the "Company")
on Form 10-Q for the period ending January 31, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned
hereby certifies, pursuant to ss. 906 of the Sarbanes-Oxley Act of 2003, 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
March 9, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2003
In connection with the Quarterly Report of Hurco Companies, Inc. (the "Company")
on Form 10-Q for the period ending January 31, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned
hereby certifies, pursuant to ss. 906 of the Sarbanes-Oxley Act of 2003, 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
March 9, 2004