10-Q: Hurco Companies Reports Wider Net Loss Amidst Sales Decline in Q2 2025, Suspends Quarterly Dividend

Hurco Companies, Inc. reported a wider net loss and decreased sales for the second fiscal quarter and first six months ended April 30, 2025, while suspending its quarterly cash dividend to enhance financial flexibility.

Summary

• For the three months ended April 30, 2025, Hurco Companies, Inc. reported sales and service fees of $40.867 million, a 10% decrease from $45.172 million in the prior year period.
• The company's net loss for the second quarter widened to $4.063 million, or $0.62 per basic and diluted share, compared to a net loss of $3.922 million, or $0.61 per share, in the same period last year.
• For the six months ended April 30, 2025, sales and service fees were $87.281 million, down 3% from $90.231 million in the corresponding prior year period.
• The net loss for the first six months of fiscal 2025 significantly increased to $8.383 million, or $1.29 per basic and diluted share, compared to a net loss of $5.570 million, or $0.86 per share, in the first six months of fiscal 2024.
• Orders for the second quarter decreased by 1% to $43.7 million, while orders for the first six months decreased by 11% to $83.8 million.
• The company announced a temporary suspension of its regular quarterly cash dividend on June 14, 2024.
• Cash and cash equivalents increased to $43.807 million as of April 30, 2025, from $33.330 million at October 31, 2024.
• Net cash provided by operating activities significantly improved to $11.334 million for the first six months of fiscal 2025, compared to cash used of $0.690 million in the prior year period.
• A non-cash valuation allowance of $3.7 million was recorded on Italian, U.S., and Chinese deferred tax assets during the first six months of fiscal 2025, preventing a tax benefit of $2.4 million for pre-tax losses.

Sentiment

Score: 3

Explanation: The sentiment is predominantly negative due to widening net losses, declining sales and orders, and the suspension of dividends. While there are some positives like improved operating cash flow and reduced operating expenses, the overall financial performance indicates significant headwinds and challenges.

Positives

• Operating loss for the three months ended April 30, 2025, improved to $3.068 million from $3.442 million in the prior year, reflecting lower fixed costs and reduced discretionary spending.
• Cash and cash equivalents increased to $43.807 million as of April 30, 2025, from $33.330 million at October 31, 2024.
• Net cash provided by operating activities for the first six months of fiscal 2025 was $11.334 million, a significant improvement from cash used of $0.690 million in the same period of fiscal 2024.
• Selling, general and administrative expenses decreased by $0.564 million for the three months and $1.697 million for the six months ended April 30, 2025, due to lower discretionary spending, reduced sales commissions, and lower employee health insurance costs.
• Asia Pacific orders for the second quarter increased by 74% and for the first six months increased by 28%, driven by increased customer demand for Hurco and Takumi machines in the region.
• The company maintains $50.8 million in available borrowing capacity under its credit facilities and has no outstanding borrowings.

Negatives

• Net loss for the three months ended April 30, 2025, widened to $4.063 million from $3.922 million in the prior year period.
• Net loss for the six months ended April 30, 2025, significantly increased to $8.383 million from $5.570 million in the prior year period.
• Sales and service fees decreased by 10% for the three months and 3% for the six months ended April 30, 2025, primarily due to decreased shipments of Hurco and Takumi machines in the Americas and Europe.
• Overall orders decreased by 1% for the three months and 11% for the six months ended April 30, 2025, with significant declines in the Americas (-17%) and Europe (-15%) for the six-month period.
• Gross profit as a percentage of sales decreased to 18% for the six months ended April 30, 2025, from 20% in the prior year period, mainly due to lower sales volume of higher-performance vertical milling machines.
• The company recorded a $3.7 million non-cash valuation allowance on Italian, U.S., and Chinese deferred tax assets, preventing a tax benefit of $2.4 million for pre-tax losses.
• The company temporarily suspended its regular quarterly cash dividend as of June 14, 2024.

Risks

• The cyclical nature of the machine tool industry can adversely affect demand.
• Uncertain economic conditions in the Americas, Europe, and Asia Pacific markets may negatively impact overall demand.
• International operations expose the company to risks including political instability, economic downturns, and regulatory changes.
• Governmental actions, initiatives, and regulations, including import and export restrictions, duties, and tariffs, can impact financial results.
• Fluctuations in currency exchange rates can materially affect operating results and financial statements.
• Competition with larger companies possessing greater financial resources poses a challenge.
• Dependence on new product development for sustained growth.
• The need and/or ability to protect intellectual property assets is crucial.
• Limited number of manufacturing and supply chain sources creates vulnerability.
• Increases in the prices of raw materials, particularly steel and iron products, can raise costs.
• The loss of members of senior management and key personnel could adversely affect operations.
• Challenges in integrating acquisitions could disrupt operations and affect results.
• Acquisitions may disrupt operations and affect operating results.
• Failure to comply with data privacy and security regulations could lead to penalties and reputational damage.
• Breaches of network and system security measures could compromise data and operations.
• Possible obsolescence of technology and the continuous need for technological advances.
• Impairment of assets could lead to significant write-downs.
• Negative or unforeseen tax consequences may arise.
• Uncertainty concerning the ability to use tax loss carryforwards.
• Changes in the Secured Overnight Financing Rate (SOFR) can impact interest expenses.
• The impact of the COVID-19 pandemic and other public health epidemics and pandemics on the global economy, business, operations, employees, customers, and suppliers remains a risk.
• Changes in U.S. trade policy, including the imposition of tariffs and retaliatory tariffs, may have a material adverse impact on business, financial condition, and results of operations.

Future Outlook

The company remains committed to its strategic plan, which includes product innovation, acquisitions, targeted penetration of developing markets, and a balanced capital allocation program. Future dividends are subject to Board of Directors' approval and will depend on various factors including financial condition and capital requirements.

Management Comments

• Management noted that the year-over-year increase in gross profit as a percentage of sales for Q2 2025 was primarily due to a higher concentration of European sales contributions to total sales and lower fixed costs allocated to overhead related to cost savings implemented in the second half of fiscal 2024.
• The reduction in selling, general and administrative expenses for the quarter and six-month period reflected lower levels of discretionary spending, reduced sales commissions, and reduced employee health insurance costs.
• The improvement in operating loss was primarily due to lower fixed costs allocated to overhead and operating expenses related to cost savings implemented in the second half of fiscal 2024, partially offset by the lower volume of sales of vertical milling machines.
• The temporary suspension of the regular quarterly cash dividend is intended to enhance financial flexibility, improve the ability to manage market volatility, strengthen the balance sheet, reinvest in core business and R&D, and return value to shareholders via appropriate channels in both the near and long-term.
• The company believes its access to cash pooling and borrowing capacity under credit facilities provide adequate liquidity to fund global operations over the next twelve months and beyond.

Industry Context

Hurco operates in a cyclical machine tool industry with significant international exposure, deriving approximately 50% of its revenues from Europe and 12% from Asia Pacific in the first six months of fiscal 2025. The company faces greater pricing pressures in the Asia Pacific region. Changes in trade policies, tariffs, and import/export regulations did not materially impact results in the reported period but remain a potential negative factor.

Corporate Governance

Legal Proceedings

• The company is involved in various claims and lawsuits arising in the normal course of business, for which it accrues minimum liabilities and maintains insurance policies, not expecting a material adverse effect.
• The manufacturing subsidiary in Italy is currently under tax audit for fiscal year 2021.

Related Party Transactions

• The company's subsidiaries guarantee third-party payment obligations totaling approximately $0.8 million as of April 30, 2025, in connection with machine sales to customers using financing. These are consistent with underlying customer financing terms and allow for machine recovery upon default.

Stakeholder Impact

• Shareholders: Negatively impacted by the temporary suspension of quarterly cash dividends and widening net losses. Positively impacted by the extension of the share repurchase program, though no repurchases occurred in the current period.
• Employees: Affected by stock-based compensation plans, with new grants issued to non-employee directors and executive officers. Also impacted by reduced employee health insurance costs.
• Customers: Experiencing decreased shipments of Hurco and Takumi machines in the Americas and Europe, indicating reduced demand for the company's core products.
• Suppliers: Potentially impacted by decreased sales volume and changes in U.S. trade policy, including tariffs, which could affect procurement costs and supply chain stability.

Next Steps

• Continue to assess the impact of new accounting guidance on Segment Reporting (effective FY2025), Income Taxes (effective FY2026), and Income Statement Reporting (effective FY2028).
• Focus on strengthening the balance sheet, reinvesting in core business and research and development related to emerging technologies.
• Return value to shareholders via appropriate channels in both the near and long-term, with future dividends subject to Board approval.
• Continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets.

Key Dates

Recommendation

Keywords

Machine Tools, CNC, Computer Numeric Control, Manufacturing, Industrial Technology, Metal Cutting, Vertical Machining Centers, Turning Centers, Lathes, Automation, Hurco, Milltronics, Takumi, Financial Results, SEC Filing, Quarterly Report