UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended January 31, 2020 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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, no par value HURC Nasdaq Global Select Market

 

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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).

Yes x No ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨          Accelerated filer x

Non-accelerated filer ¨            Smaller reporting company ¨

Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the Registrant is a shell company (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 February 28, 2020 was 6,803,163.

 

 

 

 

 

HURCO COMPANIES, INC.

Form 10-Q Quarterly Report for Fiscal Quarter Ended January 31, 2020

 

Table of Contents

 

Part I - Financial Information  
     
Item 1. Financial Statements  
     
  Condensed Consolidated Statements of Operations Three months ended January 31, 2020 and 2019 3
     
  Condensed Consolidated Statements of Comprehensive Income (Loss) Three months ended January 31, 2020 and 2019   4
     
  Condensed Consolidated Balance Sheets As of January 31, 2020 and October 31, 2019 5
     
  Condensed Consolidated Statements of Cash Flows Three months ended January 31, 2020 and 2019 6
     
  Condensed Consolidated Statements of Changes in Shareholders' Equity Three months ended January 31, 2020 and 2019   7
     
  Notes to Condensed Consolidated Financial Statements 8
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 28
     
  Part II - Other Information  
     
Item 1. Legal Proceedings 29
     
Item 1A. Risk Factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 30
     
Signatures   31

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.FINANCIAL STATEMENTS

 

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

   Three Months Ended 
   January 31, 
   2020   2019 
   (Unaudited) 
Sales and service fees   $43,660   $74,213 
           
Cost of sales and service   34,501    52,071 
           
Gross profit   9,159    22,142 
           
Selling, general and administrative expenses   10,846    13,914 
           
Operating income (loss)   (1,687)   8,228 
           
Interest expense   18    12 
           
Interest income   70    82 
           
Investment income   62    242 
           
Other income, net   83    567 
           
Income (loss) before taxes   (1,490)   9,107 
           
Provision for income taxes   (597)   2,453 
           
Net income (loss)  $(893)  $6,654 
           
Income (loss) per common share          
           
Basic  $(0.13)  $0.98 
Diluted  $(0.13)  $0.97 
           
Weighted average common shares outstanding          
           
Basic   6,781    6,735 
Diluted   6,781    6,807 
           
           
Dividends paid per share  $0.12   $0.11 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3

 

 

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

   Three Months Ended 
   January 31, 
   2020   2019 
   (Unaudited) 
Net income (loss)  $(893)  $6,654 
           
Other comprehensive income (loss):          
           
Translation of foreign currency financial statements   283    1,309 
           
(Gain) / loss on derivative instruments reclassified into operations, net of tax of $(24) and $3, respectively   (80)   12 
           
Gain / (loss) on derivative instruments, net of tax of $(1) and $(79), respectively   (4)   (270)
           
Total other comprehensive income (loss)   199    1,051 
           
Comprehensive income (loss)  $(694)  $7,705 
           

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4

 

 

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

   January 31,   October 31, 
   2020   2019 
   (Unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $52,587   $56,943 
Accounts receivable, net   32,133    43,279 
Inventories, net   150,498    148,851 
Derivative assets   621    1,391 
Prepaid assets   11,608    9,414 
Other   2,114    1,983 
Total current assets   249,561    261,861 
Property and equipment:          
Land   868    868 
Building   7,352    7,352 
Machinery and equipment   28,843    28,846 
Leasehold improvements   4,936    4,902 
    41,999    41,968 
Less accumulated depreciation and amortization   (28,642)   (28,055)
Total property and equipment   13,357    13,913 
Non-current assets:          
Software development costs, less accumulated amortization   8,216    8,318 
Goodwill   5,836    5,847 
Intangible assets, net   781    1,096 
Operating lease – right-of-use assets, net   13,208    -- 
Deferred income taxes   1,809    1,846 
Investments and other assets, net   8,222    8,184 
Total non-current assets   38,072    25,291 
Total assets  $300,990   $301,065 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $29,575   $33,969 
Derivative liabilities   375    388 
Operating lease liabilities   4,151    -- 
Accrued payroll and employee benefits   6,347    11,564 
Accrued income taxes   1,316    1,936 
Accrued expenses   4,050    5,015 
Accrued warranty   1,471    1,760 
Total current liabilities   47,285    54,632 
Non-current liabilities:          
Deferred income taxes   194    160 
Accrued tax liability   2,040    2,036 
Operating lease liabilities   9,412    -- 
Deferred credits and other   3,684    3,992 
Total non-current liabilities   15,330    6,188 
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 6,868,950 and 6,824,451 shares issued; and 6,803,163 and 6,767,237 shares outstanding, as of January 31, 2020 and October 31, 2019, respectively   680    677 
Additional paid-in capital   65,985    66,350 
Retained earnings   180,444    182,151 
Accumulated other comprehensive loss   (8,734)   (8,933)
Total shareholders’ equity   238,375    240,245 
Total liabilities and shareholders’ equity  $300,990   $301,065 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5

 

 

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

  

Three Months Ended

January 31,

 
   2020   2019 
   (Unaudited) 
Cash flows from operating activities:          
Net income (loss)  $(893)  $6,654 
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:          
Provision for doubtful accounts   (12)   (47)
Deferred income taxes   108    (38)
Equity in income of affiliates   (43)   (285)
Depreciation and amortization   1,105    939 
Foreign currency (gain) loss   107    (792)
Unrealized (gain) loss on derivatives   666    204 
Stock-based compensation   136    709 
Change in assets and liabilities:          
(Increase) decrease in accounts receivable   11,152    2,059 
(Increase) decrease in inventories   (1,296)   (7,097)
(Increase) decrease in prepaid expenses   (2,125)   (976)
Increase (decrease) in accounts payable   (4,540)   (2,892)
Increase (decrease) in accrued expenses
Net change in derivative assets and liabilities
   

(6,478)

(102)

    

(2,379)

451

 
Net change in operating lease assets and liabilities   355    -- 
Other   (887)   (479)
Net cash provided by (used for) operating activities   (2,747)   (3,969)
           
Cash flows from investing activities:          
Purchase of property and equipment   (186)   (782)
Proceeds from sale of equipment   73    22 
Software development costs   (263)   (461)
Net cash provided by (used for) investing activities   (376)   (1,221)
           
Cash flows from financing activities:          
Dividends paid   (814)   (747)
Taxes paid related to net settlement of restricted shares   (498)   (499)
Repayment of short-term debt   --    (1,454)
Net cash provided by (used for) financing activities   (1,312)   (2,700)
           
Effect of exchange rate changes on cash   79    478 
Net increase (decrease) in cash and cash equivalents   (4,356)   (7,412)
           
Cash and cash equivalents at beginning of period   56,943    77,170 
           
Cash and cash equivalents at end of period  $52,587   $69,758 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6

 

 

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Months Ended January 31, 2020 and 2019

 

(In thousands, except
shares outstanding)
   Common Stock     Additional           Accumulated
Other
       
    Shares
Outstanding
     Amount     Paid-in
Capital
    Retained
Earnings
    Comprehensive
(Loss)
     Total  
Balances, October 31, 2018     6,723,160     $ 672     $ 64,185     $ 167,859     $ (9,863 )   $ 222,853  
                                                 
Net income     --       --       --       6,654       --       6,654  
Other comprehensive income     --       --       --       --       1,051       1,051  
                                                 
Stock-based compensation expense, net of taxes withheld for vested restricted shares     34,963       4       206       --       --       210  
                                                 
Dividends paid     --       --       --       (747 )     --       (747 )
                                                 
Balances, January 31, 2019 (Unaudited)     6,758,123     $ 676     $ 64,391     $ 173,766     $ (8,812 )   $ 230,021  
                                                 
                                                 
Balances, October 31, 2019     6,767,237     $ 677     $ 66,350     $ 182,151     $ (8,933 )   $ 240,245  
                                                 
Net loss     --       --       --       (893 )     --       (893 )
Other comprehensive income     --       --       --       --       199       199  
                                                 
Stock-based compensation expense, net of taxes withheld for vested restricted shares     35,926       3       (365 )     --       --       (362 )
                                                 
Dividends paid     --       --       --       (814 )     --       (814 )
                                                 
Balances, January 31, 2020 (Unaudited)     6,803,163     $ 680     $ 65,985     $ 180,444     $ (8,734 )   $ 238,375  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

7

 

 

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. As used in this report, the words “we”, “us”, “our”, “Hurco” and the “Company” refer to Hurco Companies, Inc. and its consolidated subsidiaries.

 

We design, manufacture and sell computerized (i.e., Computer Numeric Control (“CNC”)) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network.  Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components.  Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support.

 

The condensed financial information as of January 31, 2020 and for the three months ended January 31, 2020 and January 31, 2019 is unaudited. However, in our opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of 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, 2019.

 

2.REVENUE RECOGNITION

 

We design, manufacture and sell computerized machine tools.  Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support.

 

We adopted Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) on November 1, 2018, the start of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption. Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606. Therefore, the adoption of ASC 606 did not have an effect on our overall financial statements.

 

We recognize revenues from the sale of machine tools, components and accessories and services and reflect the consideration to which we expect to be entitled.  We record revenues based on a five-step model in accordance with Financial Accounting Standards Board (“FASB”) guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) each of the performance obligation to the customer is fulfilled.  A good or service is transferred when the customer obtains control of that good or service.  Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment.

 

8

 

 

Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and perfunctory. For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process.

 

From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded.  We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant.

 

3.DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk, for which we enter into derivative instruments in the form of foreign currency forward exchange contracts with a few major financial institutions.

 

We enter into these forward exchange contracts to reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, to reduce the impact on gross profit and net earnings from sales and purchases denominated in foreign currencies, and to reduce the impact on our net earnings of foreign currency fluctuations on receivables and payables denominated in foreign currencies that are different than the subsidiaries’ functional currency. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We record all derivative instruments as assets or liabilities at fair value.

 

Derivatives Designated as Hedging Instruments

 

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in the following foreign currencies: the Pound Sterling, Euro and New Taiwan Dollar. The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other income, net. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.

 

9

 

 

We had forward contracts outstanding as of January 31, 2020, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from February 2020 through January 2021. The contract amounts, expressed at forward rates in U.S. Dollars at January 31, 2020, were $12.3 million for Euros, $3.9 million for Pounds Sterling and $15.0 million for New Taiwan Dollars. At January 31, 2020, we had approximately $5,000 of loss, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount were $156,000 of unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through January 2021, when the corresponding inventory that is the subject of the related hedge contracts is sold, as described above.

 

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2019. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2020. As of January 31, 2020, we had a realized gain of $947,000 and an unrealized gain of $10,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to this forward contract.

 

Derivatives Not Designated as Hedging Instruments

 

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 FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Condensed Consolidated Statements of Operations consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

 

We had forward contracts outstanding as of January 31, 2020, denominated in Euros, Pounds Sterling, South African Rand, and New Taiwan Dollar with set maturity dates ranging from February 2020 through January 2021. The contract amounts, expressed at forward rates in U.S. Dollars at January 31, 2020, totaled $52.9 million.

 

Fair Value of Derivative Instruments

 

We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheets. As of January 31, 2020 and October 31, 2019, all derivative instruments were recorded at fair value on our Consolidated Balance Sheets as follows (in thousands):

 

   January 31, 2020  October 31, 2019
   Balance Sheet  Fair   Balance Sheet  Fair 
Derivatives  Location  Value   Location  Value 
Designated as Hedging Instruments:               
Foreign exchange forward contracts  Derivative assets  $347   Derivative assets  $751 
Foreign exchange forward contracts  Derivative liabilities  $154   Derivative liabilities  $99 
                 
Not Designated as Hedging Instruments:                
Foreign exchange forward contracts  Derivative assets  $274   Derivative assets  $640 
Foreign exchange forward contracts  Derivative liabilities  $221   Derivative liabilities  $289 

 

10

 

 

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed Consolidated Statements of Operations

 

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed Consolidated Statements of Operations, net of tax, during the three months ended January 31, 2020 and 2019 (in thousands):

 

   Amount of Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss)
   Location of Gain
(Loss)
Reclassified 
  Amount of Gain
(Loss) Reclassified
from Other
Comprehensive
Income (Loss)
 
   Three Months Ended
January 31,
   from Other 
Comprehensive
  Three Months Ended
January 31,
 
Derivatives  2020   2019   Income (Loss)  2020   2019 
Designated as Hedging Instruments: (Effective portion)                       
Foreign exchange forward contracts                       
– Intercompany sales/purchases  $(4)  $(270)  Cost of sales and service  $80   $(12)
Foreign exchange forward contract                       
– Net investment  $25   $(2)             

 

We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended January 31, 2020 or 2019. We recognized the following losses and gains in our Condensed Consolidated Statements of Operations during the three months ended January 31, 2020 and 2019 on derivative instruments not designated as hedging instruments (in thousands):

 

      Amount of Gain (Loss)
Recognized in Operations
 
   Location of Gain
(Loss) Recognized 
  Three Months Ended
January 31,
 
Derivatives  in Operations  2020   2019 
Not Designated as Hedging Instruments:             
Foreign exchange forward contracts  Other income, net  $156   $(234)

 

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the three months ended January 31, 2020 (in thousands):

 

   Foreign Currency
Translation
   Cash Flow
Hedges
   Total 
Balance, October 31, 2019  $(10,042)  $1,109   $(8,933)
Other comprehensive income (loss) before reclassifications   283    (4)   279 
Reclassifications   --    (80)   (80)
Balance, January 31, 2020  $(9,759)  $1,025   $(8,734)

 

4.EQUITY INCENTIVE PLAN

 

In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights, restricted stock, stock units and other stock-based awards. The 2016 Equity Plan replaced the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008 Plan”) and is the only active plan under which equity awards may be made by us to our employees and non-employee directors. No further awards will be made under our 2008 Plan. The total number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048, which includes 386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan.

 

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The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding, and we have granted stock options under the 2008 Plan that are currently outstanding. No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee may determine at the date of grant. The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date.

 

A summary of stock option activity for the three-month period ended January 31, 2020, is as follows:

 

  

 

Stock Options

  

Weighted Average

Exercise Price

 
Outstanding at October 31, 2019    37,045   $21.69 
Options granted    --    -- 
Options exercised    --    -- 
Options cancelled    --    -- 
Outstanding at January 31, 2020    37,045   $21.69 
           

Summarized information about outstanding stock options as of January 31, 2020, that have already vested and are currently exercisable, are as follows:

 

   Options Already Vested and
Currently Exercisable
 
Number of outstanding options   37,045 
Weighted average remaining contractual life (years)    2.02 
Weighted average exercise price per share  $21.69 
Intrinsic value of outstanding options  $356,000 

 

The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of January 31, 2020 and the exercise price of the option.

 

On November 13, 2019, the Compensation Committee granted a total of 8,052 shares of time-based restricted stock to our non-executive employees. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $35.75 per share.

 

On January 2, 2020, the Compensation Committee determined the degree to which the long-term incentive compensation arrangement approved for the fiscal 2017-2019 performance period was attained, and the resulting payout level relative to the target amount for each of the metrics that were established by the Compensation Committee in 2017. As a result, the Compensation Committee determined that a total of 28,979 PSUs were earned by our executive officers, which performance share units (“PSUs”) vested on January 2, 2020. The vesting date fair value of the PSUs was based on the closing sales price of our common stock on the vesting date, which was $37.79 per share.

 

On January 2, 2020, the Compensation Committee also approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be payable in shares of our common stock if earned and vested. The awards were approximately 25% time-based vesting and approximately 75% performance-based vesting. The three-year performance period for the PSUs is fiscal 2020 through fiscal 2022.

 

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On that date, the Compensation Committee granted a total of 20,837 shares of time-based restricted stock to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant, which was $37.79 per share.

 

On January 2, 2020, the Compensation Committee also granted a total target number of 26,918 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2020 executive long-term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over the three-year period of fiscal 2020-2022, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of the PSUs – TSR for achieving threshold performance and 200% of the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs – TSR was $46.81 per PSU and was calculated using the Monte Carlo approach.

 

On January 2, 2020, the Compensation Committee also granted a total target number of 29,174 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2020 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period of fiscal 2020-2022. Participants will have the ability to earn between 50% of the target number of the PSUs - ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our common stock on the grant date, which was $37.79 per share.

 

A reconciliation of our restricted stock and PSU activity and related information for the three-month period ended January 31, 2020 is as follows:

 

   Number of Shares   Weighted Average
Grant Date
Fair Value
 
Unvested at October 31, 2019   200,482   $39.62 
Shares or units granted   84,981    40.45 
Shares or units vested   (35,926)   37.62 
Shares or units cancelled   (10,164)   40.88 
Shares or units withheld   (13,369)   37.38 
Unvested at January 31, 2020   226,004   $40.33 

 

During the first three months of fiscal 2020 and 2019, we recorded approximately $136,000 and $709,000, respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan. As of January 31, 2020, there was an estimated $4.3 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2023.

 

5.ACQUISITION OF BUSINESS

 

On August 5, 2019, we (through a newly-formed subsidiary, ProCobots, LLC (“ProCobots”)) acquired substantially all of the assets of a U.S.-based automation integration company for approximately $4.4 million.  This acquired business provides automation solutions that can be integrated with any machine tool. The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, and approximated $4.4 million. The allocation of the opening balance sheet of ProCobots as of August 5, 2019 is as follows (in thousands):

 

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Current assets  $349 
Property plant and equipment   452 
Intangibles   148 
Goodwill   3,500 
Total assets   4,449 
      
Current liabilities   96 
Total liabilities   96 
      
Total purchase price and cash expended  $4,353 

 

The acquisition was accounted for in accordance with ASC Topic 805, Business Combinations. Accordingly, the total purchase price was allocated to tangible assets and liabilities based on their fair value and the intangibles and goodwill were allocated on a provisional basis at the date of acquisition. These allocations reflected various provisional estimates that were available at the time and are subject to change during the purchase price allocation period as valuations are in the process of being finalized.

 

The results of operations of ProCobots have been included in the consolidated financial statements from the date of acquisition.

 

6.EARNINGS PER SHARE

 

Per share results have been computed based on the average number of common shares outstanding over the period in question. The computation of basic and diluted net income (loss) per share is determined using net income (loss) applicable to common shareholders as the numerator and the number of shares outstanding as the denominator as follows (in thousands, except per share amounts):

 

   Three Months Ended January 31, 
   2020   2019 
   Basic   Diluted   Basic   Diluted 
Net income (loss)  $(893)  $(893)  $6,654   $6,654 
Undistributed (earnings) loss allocated to participating shares   9   9   (53)   (53)
Net income (loss) applicable to common shareholders  $(884)  $(884)  $6,601   $6,601 
                     
Weighted average shares outstanding   6,781    6,781    6,735    6,735 
Stock options and contingently issuable securities   --    --    --    72 
    6,781    6,781    6,735    6,807 
Income (loss) per share  $(0.13)  $(0.13)  $0.98   $0.97 

 

7.ACCOUNTS RECEIVABLE

 

Accounts receivable are net of allowances for doubtful accounts of $879,000 as of January 31, 2020 and $891,000 million as of October 31, 2019.

 

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8.INVENTORIES

 

Inventories, priced at the lower of cost (first-in, first-out method) or net realizable value, are summarized below (in thousands):

 

   January 31, 2020   October 31, 2019 
Purchased parts and sub-assemblies  $34,007   $32,074 
Work-in-process   15,053    20,901 
Finished goods   101,438    95,876 
   $150,498   $148,851 

 

9.LEASES

 

We adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASC 842”) on November 1, 2019, the start of our 2020 fiscal year, and utilized the transition method allowed. Accordingly, comparative period financial information was not adjusted for the effects of adopting ASC 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date.

 

Upon adoption of ASC 842, we utilized the following elections and practical expedients:

 

·We have elected to combine non-lease components with lease components.
·If at the lease commencement date, a lease has a lease term of 12 months or less and does not include a purchase option that is reasonably certain to be exercised, we have elected not to apply ASC 842 recognition requirements. Nonetheless, we intend to include leases of less than 12 months within the updated footnote disclosures, if material.
·We have elected not to use the portfolio method if we enter into a large number of leases in the same month with the same terms and conditions.
·As we have applied the new transition method allowed per ASU 2018-11, we have elected not to reassess arrangements entered into prior to November 1, 2019 for whether an arrangement is or contains a lease, the lease classification applied or to separate initial direct costs.
·We have elected not to use hindsight in determining the lease term for lease contracts that have historically been renewed or amended.

 

Our lease portfolio includes leased production and assembly facilities, warehouses and distribution centers, office space, vehicles, material handling equipment utilized in our production and assembly facilities, laptops and other information technology equipment, as well as other miscellaneous leased equipment. Most of the leased production and assembly facilities have lease terms ranging from two to five years, although the terms and conditions of our leases can vary significantly from lease to lease. We have assessed the specific terms and conditions of each lease to determine the amount of the lease payments and the length of the lease term, which includes the minimum period over which lease payments are required plus any renewal options that are both within our control to exercise and reasonably certain of being exercised upon lease commencement. In determining whether or not a renewal option is reasonably certain of being exercised, we assessed all relevant factors to determine if sufficient incentives exist as of lease commencement to conclude renewal is reasonably certain. There are no material residual value guarantees provided by us, nor any restrictions or covenants imposed by the leases to which we are a party. In determining the lease liability, we utilize our incremental borrowing rate to discount the future lease payments over the lease term to present value.

 

We record a right-of-use asset and lease liability on our Condensed Consolidated Balance Sheets for all leases for which we are a lessee, in accordance with ASC 842. We have no lease agreements in place for which we are a lessor, and all our leases for which we are a lessee are classified as operating leases under the guidance in Topic 840.

 

We recorded total operating lease expense of $1.3 million and $1.2 million for the three months ended January 31, 2020 and 2019, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations. Operating lease expense includes short-term leases and variable lease payments which are immaterial. There have been no lease costs capitalized on the Condensed Consolidated Balance Sheets as of January 31, 2020.

 

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The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the three months ended January 31, 2020 (in thousands):

 

  

Three Months Ended

January 31, 2020

 
Operating cash flow information:     
    Cash paid for amounts included in the measurement of lease liabilities  $1,140 
Noncash information:     
    Right-of-use assets obtained in exchange for new operating lease liabilities  $879 

 

The following table summarizes the maturities of lease commitments as of October 31, 2019, prior to the adoption of the new lease guidance, as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 (in thousands):

 

2020  $4,015 
2021   3,149 
2022   2,224 
2023   1,482 
2024 and thereafter   2,531 
Total  $13,401 

 

The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of January 31, 2020 (in thousands):

 

Remainder of 2020  $3,351 
2021   3,592 
2022   2,576 
2023   1,731 
2024 and thereafter   2,880 
Total   14,130 
   Less: Imputed interest   (567)
Present value of operating lease liabilities  $13,563 

 

As of January 31, 2020, the weighted-average remaining term of our lease portfolio was approximately 4.0 years and the weighted-average discount rate was approximately 1.5%

 

10.SEGMENT INFORMATION

 

We operate in a single segment: industrial automation equipment. We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network.  Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support.

 

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11.GUARANTEES AND PRODUCT WARRANTIES

 

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of January 31, 2020, we had 23 outstanding third party payment guarantees totaling approximately $0.5 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

 

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):

 

  

Three Months Ended

January 31,

 
   2020   2019 
Balance, beginning of period  $1,760   $2,499 
     Provision for warranties during the period   492    962 
     Charges to the reserve   (784)   (868)
     Impact of foreign currency translation   3    27 
Balance, end of period  $1,471   $2,620 

 

The year-over-year decrease in our warranty reserve was primarily due to a decrease in the number of machines under warranty resulting from decreased sales volume.

 

12.DEBT AGREEMENTS

 

On December 31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the “2018 Credit Agreement”) with Bank of America, N.A., as the lender. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

 

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 0.75%.

 

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $170.0 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

 

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In March 2019, our wholly-owned subsidiaries in Taiwan, Hurco Manufacturing Limited. (“HML”), and China, Ningbo Hurco Machine Tool Co. Ltd. (“NHML”), closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars (the “Taiwan credit facility”) and 32.5 million Chinese Yuan (the “China credit facility”), respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institutions from time to time.

 

As of January 31, 2020, our existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. There were no borrowings under any of our credit facilities and there was $51.3 million of available borrowing capacity thereunder.

 

13.INCOME TAXES

 

In December 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax system from a worldwide system, imposed a tax on deemed repatriation of earnings of foreign subsidiaries and added provisions related to Global Intangible Low Taxed Income (“GILTI”) and Foreign-Derived Intangible Income (“FDII”), among other provisions.

 

The Tax Reform Act created a new requirement that GILTI income earned by Controlled Foreign Corporations (“CFCs”) must be included in the gross income of the CFC’s U.S. shareholder. We have elected the period cost method to account for GILTI tax. The Tax Reform Act also created the FDII for U.S. companies that derive income from the export of tangible and intangible property and services. We have included an estimate for the GILTI and FDII in our annualized effective tax rate used to determine tax expense (benefit) for the three months ended January 31, 2020.

 

We recorded an income tax benefit during the first three months of fiscal 2020 of $597,000 compared to income tax expense of $2.5 million for the same period in fiscal 2019. Our effective tax rate for the first three months of fiscal 2020 was 40% in comparison to 27% for the same period in fiscal 2019. The increase in effective tax rate was primarily due to a shift in geographic mix of income and loss among tax jurisdictions. The shift in geographic mix of income and loss during the quarter created an unfavorable impact of certain U.S. tax reform provisions in the current fiscal year related to deductions for FDII and minimal tax provisions for GILTI.

 

Our unrecognized tax benefits were $228,000 as of January 31, 2020 and $225,000 as of October 31, 2019, and in each case included accrued interest.

 

We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. As of January 31, 2020, the gross amount of interest accrued, reported in Accrued expenses, was approximately $35,000, which did not include the federal tax benefit of interest deductions.

 

We file U.S. federal and state income tax returns, as well as tax returns in several foreign jurisdictions. The statutes of limitations with respect to unrecognized tax benefits will expire between July 2020 and August 2023.

 

14.FINANCIAL INSTRUMENTS

 

FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions.

 

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In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of January 31, 2020 and October 31, 2019 (in thousands):

 

   Assets   Liabilities 
   January 31,
2020
   October 31,
2019
   January 31,
2020
   October 31,
2019
 
Level 1                    
Deferred Compensation  $1,652   $1,991   $--   $-- 
                     
Level 2                    
Derivatives  $621   $1,391   $375   $388 

 

Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices that are readily available.

 

Included in Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying Condensed Consolidated Financial Statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 3 of Notes to the Condensed Consolidated Financial Statements. The U.S. Dollar equivalent notional amounts of these contracts was $87.9 million and $108.6 million at January 31, 2020 and October 31, 2019, respectively.

 

The fair value of our foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility. The counterparties to the forward exchange contracts are substantial and creditworthy financial institutions. We do not consider either the risk of counterparties’ non-performance or the economic consequences of counterparties’ non-performance to be material risks.

 

15.CONTINGENCIES AND LITIGATION

 

From time to time, we are involved in various claims and lawsuits arising in the normal course of business.  Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another.  We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable.  We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations.  We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages.

 

16.NEW ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements:

 

Between February 2016 and February 2019, FASB issued ASU No. 2016-02, Leases (Topic 842), and various related updates, which establish a comprehensive new lease accounting model. Topic 842 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. Under Topic 842, the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases.

 

Topic 842 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application. We adopted Topic 842 on November 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information was not adjusted for the effects of adopting Topic 842 and no cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. See Note 9 of Notes to the Condensed Consolidated Financial Statements for further information.

 

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains information intended to help provide an understanding of our financial condition and other related matters, including our liquidity, capital resources and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited financial statements and the notes accompanying our unaudited financial statements appearing elsewhere in this report, as well as our audited financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2019.

 

EXECUTIVE OVERVIEW

 

Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network.  Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components.  Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support.

 

The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance. This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report.

 

The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During the first three months of fiscal 2020, approximately 46% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines. Additionally, approximately 14% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.

 

We have three brands of CNC machine tools in our product portfolio: Hurco is the technology innovation brand for customers who want to increase productivity and profitability by selecting a brand with the latest software and motion technology. Milltronics is the value-based brand for shops that want easy-to-use machines at competitive prices. The Takumi brand is for customers that need very high speed, high efficiency performance, such as that required in the production, die/mold, aerospace and medical industries. Takumi machines are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. These three brands of CNC machine tools are responsible for the vast majority of our revenue, however, we have added other non-Hurco branded products to the lineup that have contributed product diversity and market penetration opportunity. These non-Hurco branded products are comprised primarily of other general-purpose vertical milling centers and lathes, laser cutting machines, waterjet cutting machines, CNC grinders, compact horizontal machines, metal cutting saws and CNC swill lathes. ProCobots is our wholly-owned subsidiary that provides automation solutions that can be integrated with any machine tool. In addition, through our wholly-owned subsidiary LCM Precision Technology S.r.l. (“LCM”), we produce high value machine tool components and accessories.

 

We principally sell our products through more than 190 independent agents and distributors throughout the Americas, Europe and Asia.  Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally.  We also have our own direct sales and service organizations in China, France, Germany, India, Italy, the Netherlands, Poland, Singapore, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM.

 

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Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound Sterling and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-period results, we discuss the effect of currency translation on those results, which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements.

 

Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of derivative instruments – principally foreign currency forward exchange contracts.

 

RESULTS OF OPERATIONS

 

Three Months Ended January 31, 2020 Compared to Three Months Ended January 31, 2019

 

Sales and Service Fees. Sales and service fees for the first quarter of fiscal 2020 were $43.7 million, a decrease of $30.6 million, or 41%, compared to the corresponding prior year period and included an unfavorable currency impact of $0.3 million, or less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.

 

 

Sales and Service Fees by Geographic Region

 

The following table sets forth net sales and service fees by geographic region for the first quarter ended January 31, 2020 and 2019 (dollars in thousands):

 

   Three Months Ended 
   January 31, 
   2020   2019   $
Change
   %
Change
 
Americas  $17,479    40%  $29,156    39%  $(11,677)   -40%
Europe   20,085    46%   35,711    48%   (15,626)   -44%
Asia Pacific   6,096    14%   9,346    13%   (3,250)   -35%
 Total  $43,660    100%  $74,213    100%  $(30,553)   -41%

 

Since the beginning of fiscal 2020, our operating results have been adversely affected by the ongoing economic slowdown in Germany, trade tensions between U.S. and China, political friction in the U.S., the U.K. Brexit activities and more recently the international business disruption due to the outbreak of coronavirus. Many of our customers deferred or eliminated investments in capital equipment, which we attribute largely to the uncertainty these events created.  During the first quarter of fiscal 2020, sales declined in all regions, particularly in Europe and the Americas, our primary markets for our higher-performance, higher-priced machines. Additionally, global machine tool manufacturers have priced their excess inventories more competitively in order to realign inventory levels with current demand.

 

Sales in the Americas for the first quarter of fiscal 2020 decreased by 40%, compared to the corresponding period in fiscal 2019, primarily due to a reduced volume of shipments of Hurco, Milltronics and Takumi machines. Sales in the Americas in the first quarter of fiscal 2019 also benefitted from strong demand and backlog coming off fiscal 2018, a record sales year for Hurco.

 

21

 

 

 

European sales for the first quarter of fiscal 2020 decreased by 44%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact of less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in European sales for the first quarter of fiscal 2020 was primarily attributable to a reduced volume of shipments of Hurco and Takumi machines in Germany and the United Kingdom, as well as a decrease in sales of electro-mechanical components and accessories manufactured by our wholly-owned subsidiary in Italy, LCM. Sales in Europe in the first quarter of fiscal 2019 also benefitted from higher demand and backlog from the fourth quarter of fiscal 2018.

 

Asian Pacific sales for the first quarter of fiscal 2020 decreased by 35%, compared to the corresponding period in fiscal 2019, and included a negative currency impact of less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year reduction in Asian Pacific sales primarily resulted from a reduced volume of shipments of Hurco vertical milling and lathe machines in China, India and Southeast Asia, as well as lower sales of Takumi vertical milling machines in China.

 

Sales and Service Fees by Product Category

 

The following table sets forth net sales and service fees by product category for the quarter ended January 31, 2020 and 2019 (dollars in thousands):

 

   Three Months Ended 
   January 31, 
   2020   2019   $ Change   % Change 
Computerized Machine Tools  $35,214    81%  $64,232    86%  $(29,018)   -45%
Computer Control Systems and Software †   558    1%   733    1%   (175)   -24%
Service Parts   5,901    13%   7,130    10%   (1,229)   -17%
Service Fees   1,987    5%   2,118    3%   (131)   -6%
  Total  $43,660    100%  $74,213    100%  $(30,553)   -41%

 

Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems.

 

Sales of computerized machine tools and computer control systems and software for the first quarter of fiscal 2020 decreased by 45% and 24%, respectively, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%. The year-over-year decreases were a result of decreased shipments of Hurco and Milltronics machines across all regions. Sales of service parts decreased by 17% during the first quarter of 2020, compared to the corresponding prior year period, reflecting decreased aftermarket sales of service parts in North America, Germany, France and the United Kingdom. Service fees for the first quarter of fiscal 2020 decreased by 6%, compared to the corresponding prior year period, due primarily to a decrease in aftermarket service of Hurco products in Germany.

 

22

 

 

Orders. Orders for the first quarter of fiscal 2020 were $45.6 million, a decrease of $22.4 million, or 33%, compared to the corresponding period in fiscal 2019, and included an unfavorable currency impact of $0.2 million, or less than 1%, when translating foreign orders to U.S. dollars.

 

The following table sets forth new orders booked by geographic region for the first quarter ended January 31, 2020 and 2019 (dollars in thousands):

 

   Three Months Ended 
   January 31, 
   2020   2019   $ Change   % Change 
Americas  $18,162    40%  $24,730    36%  $(6,568)   -27%
Europe   21,746    48%   33,310    49%   (11,564)   -35%
Asia Pacific   5,672    12%   9,967    15%   (4,295)   -43%
Total  $45,580    100%  $68,007    100%  $(22,427)   -33%

 

Orders in the Americas for the first quarter of fiscal 2020 decreased by 27%, compared to the corresponding period in fiscal 2019, primarily due to decreased customer demand for Hurco, Milltronics and Takumi machines.

 

European orders for the first quarter of fiscal 2020 decreased by 35%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S. dollars. The year-over-year decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany and the United Kingdom.

 

Asian Pacific orders for the first quarter of fiscal 2020 decreased by 43%, compared to the corresponding prior year period, and included a favorable currency impact of less than 1%, when translating foreign orders to U.S. dollars. The year-over-year decrease in Asian Pacific orders was driven primarily by a reduction in customer demand for Hurco machines in China and Southeast Asia.

 

Gross Profit. Gross profit for the first quarter of fiscal 2020 was $9.2 million, or 21% of sales, compared to $22.1 million, or 30% of sales, for the corresponding prior year period. The year-over-year decrease in gross profit as a percentage of sales were primarily due to lower sales of more higher-priced, higher-performance machines across all sales regions, particularly the European sales region, and competitive pricing pressures on a global basis due to excess inventory levels. Additionally, gross profit was negatively impacted by the allocation of fixed costs on lower sales and production volumes.

 

Operating Expenses. Selling, general and administrative expenses for the first quarter of fiscal 2020 were $10.8 million, or 25% of sales, compared to $13.9 million, or 19% of sales, in the corresponding period in fiscal 2019, and included a favorable currency impact of $0.1 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year reduction in selling, general and administrative expenses was primarily due to a decrease in incentive and variable employee compensation, employee benefits and other operating expense reductions implemented during the first quarter of fiscal 2020, partially offset by increased operating expenses associated with ProCobots, the U.S.-based automation integration business acquired by Hurco in the fourth quarter of fiscal 2019.

 

Operating Income (Loss). Operating loss for the first quarter of fiscal 2020 was $1.7 million compared to operating income of $8.2 million for the corresponding period in fiscal 2019. The decrease in operating income (loss) year-over-year was primarily driven by the decreased volume of sales.

 

Other Income, Net. Other income, net in the first quarter of fiscal 2020 decreased by $0.5 million from the corresponding period in fiscal 2019 primarily due to a reduction in foreign currency exchange gains in fiscal 2020, compared to the corresponding period in fiscal 2019.

 

Income Taxes. The effective tax rates for the first quarter of fiscal 2020 was 40%, compared to 27% in the corresponding prior year period. The year-over-year increase in the effective tax rate was primarily due to a shift in geographic mix of income and loss among tax jurisdictions. The shift in geographic mix of income and loss during the quarter created an unfavorable impact of certain U.S. tax reform provisions in the current fiscal year related to deductions for FDII and minimal tax provisions for GILTI.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

At January 31, 2020, we had cash and cash equivalents of $52.6 million, compared to $56.9 million at October 31, 2019. Approximately 24% of the $52.6 million of cash and cash equivalents is denominated in U.S. Dollars. The balance is attributable to our foreign operations and is held in the local currencies of our various foreign entities, subject to fluctuations in currency exchange rates. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.

 

Working capital was $202.3 million at January 31, 2020 compared to $207.2 million at October 31, 2019. The decrease in working capital was primarily driven by decreases in accounts receivable and increases in operating lease liabilities, partially offset by decreases in accrued payroll, employee benefits and accounts payables.  Pursuant to the adoption of Accounting Standards Update No. 2016-02, “Leases” (Topic 842) right of use assets were all recorded as noncurrent, but the lease liabilities were allocated between current and noncurrent.  This created a current liability for operating leases, which resulted in a reduction to our working capital of $4.2 million for the three months ended January 31, 2020.

 

Capital expenditures of $0.4 million during the first three months of fiscal 2020 were primarily for capital improvements in existing facilities and software development costs. We funded these expenditures with cash on hand. The purchase price for the ProCobots acquisition has been preliminarily allocated to the assets acquired and the liabilities assumed based on their fair values, which approximated $4.4 million.

 

On December 31, 2018, we and our subsidiary Hurco B.V. entered into the 2018 Credit Agreement with Bank of America, N.A., as the lender. The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million. Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

 

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75% per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 0.75%.

 

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain payments, including cash dividends, except that we may pay cash dividends as long as immediately before and after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and after giving effect to such dividend payments; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $170.0 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

 

In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time.

 

24

 

 

As of January 31, 2020, our existing credit facilities consist of our €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. We had no debt or borrowings under any of our credit facilities at January 31, 2020.

 

At January 31, 2020, we had an aggregate of $51.3 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

 

We believe our cash position and borrowing capacity under our credit facilities provide adequate liquidity to fund our operations over the next twelve months and allow us to remain committed to our strategic plan of product innovation, strategic acquisitions and targeted penetration of developing markets.

 

We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase.

 

CRITICAL ACCOUNTING POLICIES

 

Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019, require 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 would be affected. There were no material changes to our critical accounting policies during the first three months of fiscal 2020.

 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

There have been no material changes related to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.

 

OFF BALANCE SHEET ARRANGEMENTS

 

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of January 31, 2020, we had 23 outstanding third party payment guarantees totaling approximately $0.5 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

 

25

 

 

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

Certain statements made in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements. These risks, uncertainties and other factors include, but are not limited to:

 

·         The cyclical nature of the machine tool industry;

·         Uncertain economic conditions, which may adversely affect overall demand, in the Americas, Europe and Asia Pacific markets;

·         The risks of our international operations;

·         The limited number of our manufacturing and supply chain sources;

·         The effects of changes in currency exchange rates;

·         Our dependence on new product development;

·         Possible obsolescence of our technology and the need to make technological advances;

·         Competition with larger companies that have greater financial resources;

·         Increases in the prices of raw materials, especially steel and iron products;

·         Acquisitions that could disrupt our operations and affect operating results;

·         Impairment of our assets;

·         Negative or unforeseen tax consequences;

·         The need and/or ability to protect our intellectual property assets;

·         Our ability to integrate acquisitions;

·         Uncertainty concerning our ability to use tax loss carryforwards;

·         Breaches of our network and system security measures;

·         The effect of the loss of members of senior management and key personnel; and

·         Governmental actions, initiatives and regulations, including import and export restrictions, duties and tariffs and changes to tax laws. 

 

We discuss these and other important risks and uncertainties that may affect our future operations in Part I, Item 1A – Risk Factors in our most recent Annual Report on Form 10-K and may update that discussion in Part II, Item 1A – Risk Factors in this report or a Quarterly Report on Form 10-Q we file hereafter.

 

Readers are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement is applicable to all forward-looking statements contained in this report.

 

26

 

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk

 

Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At January 31, 2020, we had no borrowings outstanding under any of our credit facilities.

 

Foreign Currency Exchange Risk

 

In the first three months of fiscal 2020, we derived approximately 60% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer 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 subsidiaries in Taiwan, the U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some 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 the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro.

 

We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). 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. 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, 2020, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows (in thousands, except weighted average forward rates):

 

   Notional Amount   Weighted   

Contract Amount at

Forward Rates in

U.S. Dollars

    

Forward

Contracts

 

in Foreign

Currency

   Average
Forward Rate
  

Contract

Date

  

January 31,

2020

   Maturity Dates
Sale Contracts:                       
Euro   11,025    1.1366    12,531    12,310   Feb 2020 - Jan 2021
Pound Sterling   2,975    1.2986    3,863    3,940   Feb 2020 - Jan 2021
                        
Purchase Contracts:                       
New Taiwan Dollar*   450,000    30.0371*   14,981    15,040   Feb 2020 - Jan 2021

 

*New Taiwan Dollars per U.S. Dollar

 

27

 

 

Forward contracts for the sale or purchase of foreign currencies as of January 31, 2020, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies and are not designated as hedges under FASB guidance, were as follows (in thousands, except weighted average forward rates):

 

   Notional
Amount
   Weighted
Avg.
   Contract Amount at
Forward Rates in
U.S. Dollars
    
Forward
Contracts
  in Foreign
Currency
   Forward
Rate
   Contract Date   January 31,
2020
   Maturity Dates
Sale Contracts:                       
Euro   28,453    1.1266    32,055    31,851   Feb 2020 - Jan 2021
Pound Sterling   1,745    1.3008    2,270    2,304   Feb 2020 – Mar 2020
South African Rand   3,351    0.0664    223    225   Mar 2020
                        
Purchase Contracts:                       
New Taiwan Dollar   556,723    29.9245*   18,604    18,479   Feb 2020 - May 2020

 

* New Taiwan Dollars per U.S. Dollar

 

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we have maintained a forward contract with a notional amount of €3.0 million. We designated this forward contract as a hedge of our net investment in Euro-denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2020. As of January 31, 2020, we had a realized gain of $947,000 and an unrealized gain of $10,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss related to the hedging of our net investment in Euro-denominated assets. Forward contracts for the sale or purchase of foreign currencies as of January 31, 2020, which are designated as net investment hedges under this guidance were as follows (in thousands, except weighted average forward rates):

 

   Notional
Amount
   Weighted
Avg.
   Contract Amount at
Forward Rates in
U.S. Dollars
    
Forward
Contract
  in Foreign
Currency
   Forward
Rate
   Contract
Date
   January 31,
2020
   Maturity Date
Sale Contracts:                       
Euro   3,000    1.1231    3,369    3,379   Nov 2020

 

Item 4.CONTROLS AND PROCEDURES

 

We conducted 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, 2020, 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 were no changes in our internal control over financial reporting during the three months ended January 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

28

 

 

PART II - OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

From time to time, we are involved in various claims and lawsuits arising in the normal course of business.  Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another.  We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable.  We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations.  We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages.

 

Item 1A.  RISK FACTORS

 

There have been no material changes from the risk factors disclosed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended October 31, 2019.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table summarizes the purchases of common stock made by us during the three months ended January 31, 2020:

 

   Total
Number of
Shares
Purchased
   Average
Price Paid
per Share
   Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs(1)
   Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under Plans
or Programs(1)
 
November 2019   193(2)  $40.01    0   $0 
December 2019   0   $0    0   $0 
January 2020   13,176(2)  $37.35(2)   0   $0 
Total   13,369   $37.38    0   $0 

 

 

(1)The Company does not have any publicly announced share repurchase plans or programs.
(2)Represents shares of our common stock that were withheld to satisfy the income tax obligations of recipients of awards of 35,926 restricted shares and earned performance stock units granted under the 2016 Equity Plan in connection with the vesting of such awards.

 

Item 5.  OTHER INFORMATION

 

During the period covered by this report, the Audit Committee of our Board of Directors engaged our independent registered public accounting firm to perform non-audit, tax planning services. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

 

29

 

 

Item 6. EXHIBITS

 

EXHIBIT INDEX

 

  3.1 Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 1997.
     
  3.2 Amended and Restated By-Laws of the Registrant as amended through November 16, 2017, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 17, 2017.
     
  31.1 Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
     
  31.2 Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
     
  32.1 Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
  32.2 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
  101.INS     XBRL Instance Document
  101.SCH   XBRL Taxonomy Extension Schema Document
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase
  101.LAB XBRL Taxonomy Extension Label Linkbase Document
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
  101.DEF  XBRL Taxonomy Extension Definition Linkbase Document

 

30

 

 

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/ Sonja K. McClelland
    Sonja K. McClelland
    Executive Vice President, Secretary, Treasurer & Chief Financial Officer

 

March 6, 2020

 

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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)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)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

 

(d)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 and Chief Executive Officer  
March 6, 2020  

 

 

 

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

 

I, Sonja K. McClelland, 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)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)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

 

(d)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/ Sonja K. McClelland  
Sonja K. McClelland  
Executive Vice President, Secretary, Treasurer & Chief Financial Officer  
March 6, 2020  

 

 

 

 

Exhibit 32.1

 

CERTIFICATION 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 ended January 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to § 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 and Chief Executive Officer  
March 6, 2020  
   

 

 

 

Exhibit 32.2

 

CERTIFICATION 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 ended January 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to § 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/ Sonja K. McClelland  
Sonja K. McClelland  
Executive Vice President, Secretary, Treasurer & Chief Financial Officer    
March 6, 2020  

 

 

 

v3.19.3.a.u2
ACCOUNTS RECEIVABLE (Details) - USD ($)
Jan. 31, 2020
Oct. 31, 2019
ACCOUNTS RECEIVABLE    
Allowance for Doubtful Accounts Receivable $ 879,000 $ 891,000
v3.19.3.a.u2
LEASES - Schedule of future payments required under operating leases (Details)
$ in Thousands
Oct. 31, 2019
USD ($)
OPERATING LEASES  
2020 $ 4,015
2021 3,149
2022 2,224
2023 1,482
2024 and thereafter 2,531
Total $ 13,401
v3.19.3.a.u2
EQUITY INCENTIVE PLAN (Tables)
3 Months Ended
Jan. 31, 2020
EQUITY INCENTIVE PLAN  
Summary of stock option activity

A summary of stock option activity for the three-month period ended January 31, 2020, is as follows:

 

 

 

 

 

 

 

 

 

Stock 

 

Weighted Average

 

    

Options

    

Exercise Price

Outstanding at October 31, 2019

 

37,045

 

$

21.69

Options granted

 

 —

 

 

 —

Options exercised

 

 —

 

 

 —

Options cancelled

 

 —

 

 

 —

Outstanding at January 31, 2020

 

37,045

 

$

21.69

 

Summary of outstanding stock options

Summarized information about outstanding stock options as of January 31, 2020, that have already vested and are currently exercisable, are as follows:

 

 

 

 

 

 

 

Options Already Vested and 

 

    

Currently Exercisable

Number of outstanding options

 

 

37,045

Weighted average remaining contractual life (years)

 

 

2.02

Weighted average exercise price per share

 

$

21.69

Intrinsic value of outstanding options

 

$

356,000

 

Summary of reconciliation of our restricted stock, performance share and PSU activity and related information

A reconciliation of our restricted stock and PSU activity and related information for the three-month period ended January 31, 2020 is as follows:

 

 

 

 

 

 

 

 

    

 

    

Weighted Average 

 

 

 

 

Grant Date 

 

 

Number of Shares

 

Fair Value

Unvested at October 31, 2019

 

200,482

 

$

39.62

Shares or units granted

 

84,981

 

 

40.45

Shares or units vested

 

(35,926)

 

 

37.62

Shares or units cancelled

 

(10,164)

 

 

40.88

Shares or units withheld

 

(13,369)

 

 

37.38

Unvested at January 31, 2020

 

226,004

 

$

40.33

 

v3.19.3.a.u2
FINANCIAL INSTRUMENTS
3 Months Ended
Jan. 31, 2020
FINANCIAL INSTRUMENTS  
FINANCIAL INSTRUMENTS

14.  FINANCIAL INSTRUMENTS

FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions.

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of January 31, 2020 and October 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Liabilities

 

 

January 31, 

 

October 31, 

 

January 31, 

 

October 31, 

 

    

2020

    

2019

    

2020

    

2019

Level 1

 

 

  

 

 

  

 

 

  

 

 

  

Deferred Compensation

 

$

1,652

 

$

1,991

 

$

 —

 

$

 —

 

 

 

 

 

 

  

 

 

  

 

 

  

Level 2

 

 

 

 

 

  

 

 

  

 

 

  

Derivatives

 

$

621

 

$

1,391

 

$

375

 

$

388

 

Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices that are readily available.

Included in Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying Condensed Consolidated Financial Statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 3 of Notes to the Condensed Consolidated Financial Statements. The U.S. Dollar equivalent notional amounts of these contracts was $87.9 million and $108.6 million at January 31, 2020 and October 31, 2019, respectively.

The fair value of our foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility.  The counterparties to the forward exchange contracts are substantial and creditworthy financial institutions.  We do not consider either the risk of counterparties’ non-performance or the economic consequences of counterparties’ non-performance to be material risks.

v3.19.3.a.u2
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - Fair value of derivative instruments (Details) - USD ($)
$ in Thousands
Jan. 31, 2020
Oct. 31, 2019
Derivatives, Fair Value [Line Items]    
Derivative assets $ 621 $ 1,391
Derivative liabilities 375 388
Foreign Exchange Forward | Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Derivative assets 347 751
Derivative liabilities 154 99
Foreign Exchange Forward | Not Designated as Hedging Instrument    
Derivatives, Fair Value [Line Items]    
Derivative assets 274 640
Derivative liabilities $ 221 $ 289
v3.19.3.a.u2
EQUITY INCENTIVE PLAN - Stock option activity (Details) - Employee Stock Option
3 Months Ended
Jan. 31, 2020
$ / shares
shares
Stock Options  
Outstanding at October 31, 2019 | shares 37,045
Options granted | shares 0
Options exercised | shares 0
Options cancelled | shares 0
Outstanding at January 31, 2020 | shares 37,045
Weighted Average Exercise Price  
Outstanding at October 31, 2019 | $ / shares $ 21.69
Options granted | $ / shares 0.00
Options exercised | $ / shares 0.00
Options cancelled | $ / shares 0.00
Outstanding at January 31, 2020 | $ / shares $ 21.69
v3.19.3.a.u2
SEGMENT INFORMATION
3 Months Ended
Jan. 31, 2020
SEGMENT INFORMATION  
SEGMENT INFORMATION

10.    SEGMENT INFORMATION

We operate in a single segment: industrial automation equipment.  We design, manufacture and sell computerized (i.e., CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network.  Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support.

 

v3.19.3.a.u2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Jan. 31, 2020
Oct. 31, 2019
Current assets:    
Cash and cash equivalents $ 52,587 $ 56,943
Accounts receivable, net 32,133 43,279
Inventories, net 150,498 148,851
Derivative assets 621 1,391
Prepaid assets 11,608 9,414
Other 2,114 1,983
Total current assets 249,561 261,861
Property and equipment:    
Land 868 868
Building 7,352 7,352
Machinery and equipment 28,843 28,846
Leasehold improvements 4,936 4,902
Property and equipment, gross 41,999 41,968
Less accumulated depreciation and amortization (28,642) (28,055)
Total property and equipment 13,357 13,913
Non-current assets:    
Software development costs, less accumulated amortization 8,216 8,318
Goodwill 5,836 5,847
Intangible assets, net 781 1,096
Operating lease - right-of-use assets, net 13,208 0
Deferred income taxes 1,809 1,846
Investments and other assets, net 8,222 8,184
Total non-current assets 38,072 25,291
Total assets 300,990 301,065
Current liabilities:    
Accounts payable 29,575 33,969
Derivative liabilities 375 388
Operating lease liabilities 4,151 0
Accrued payroll and employee benefits 6,347 11,564
Accrued income taxes 1,316 1,936
Accrued expenses 4,050 5,015
Accrued warranty 1,471 1,760
Total current liabilities 47,285 54,632
Non-current liabilities:    
Deferred income taxes 194 160
Accrued tax liability 2,040 2,036
Operating lease liabilities 9,412 0
Deferred credits and other 3,684 3,992
Total non-current liabilities 15,330 6,188
Shareholders' equity:    
Preferred stock: no par value per share, 1,000,000 shares authorized; no shares issued 0 0
Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized 6,868,950 and 6,824,451 shares issued; and 6,803,163 and 6,767,237 shares outstanding, as of January 31, 2020 and October 31, 2019, respectively 680 677
Additional paid-in capital 65,985 66,350
Retained earnings 180,444 182,151
Accumulated other comprehensive loss (8,734) (8,933)
Total shareholders' equity 238,375 240,245
Total liabilities and shareholders' equity $ 300,990 $ 301,065
v3.19.3.a.u2
Document And Entity Information - shares
3 Months Ended
Jan. 31, 2020
Feb. 28, 2020
Document And Entity Information [Abstract]    
Document Type 10-Q  
Document Period End Date Jan. 31, 2020  
Entity Registrant Name HURCO COMPANIES INC  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   6,803,163
Entity Central Index Key 0000315374  
Current Fiscal Year End Date --10-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Trading Symbol HURC  
v3.19.3.a.u2
GENERAL
3 Months Ended
Jan. 31, 2020
GENERAL  
GENERAL

1.    GENERAL

The unaudited Condensed Consolidated Financial Statements include the accounts of Hurco Companies, Inc. and its consolidated subsidiaries.  As used in this report, the words “we”, “us”, “our”, “Hurco” and the “Company” refer to Hurco Companies, Inc. and its consolidated subsidiaries.

We design, manufacture and sell computerized (i.e., Computer Numeric Control (“CNC”)) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network.  Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components.  Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support.

The condensed financial information as of January 31, 2020 and for the three months ended January 31, 2020 and January 31, 2019 is unaudited.  However, in our opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, results of operations, changes in shareholders’ equity and cash flows for and at the end of 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, 2019.

v3.19.3.a.u2
EARNINGS PER SHARE
3 Months Ended
Jan. 31, 2020
EARNINGS PER SHARE  
EARNINGS PER SHARE

6.    EARNINGS PER SHARE

Per share results have been computed based on the average number of common shares outstanding over the period in question.  The computation of basic and diluted net income (loss) per share is determined using net income (loss) applicable to common shareholders as the numerator and the number of shares outstanding as the denominator as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended January 31, 

 

 

 

2020

 

2019

 

 

    

Basic

    

Diluted

    

Basic

    

Diluted

    

Net income (loss)

 

$

(893)

 

$

(893)

 

$

6,654

 

$

6,654

 

Undistributed (earnings) loss allocated to participating shares

 

 

 9

 

 

 9

 

 

(53)

 

 

(53)

 

Net income (loss) applicable to common shareholders

 

$

(884)

 

$

(884)

 

$

6,601

 

$

6,601

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

Weighted average shares outstanding

 

 

6,781

 

 

6,781

 

 

6,735

 

 

6,735

 

Stock options and contingently issuable securities

 

 

 —

 

 

 —

 

 

 —

 

 

72

 

 

 

 

6,781

 

 

6,781

 

 

6,735

 

 

6,807

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

Income (loss) per share

 

$

(0.13)

 

$

(0.13)

 

$

0.98

 

$

0.97

 

 

v3.19.3.a.u2
REVENUE RECOGNITION
3 Months Ended
Jan. 31, 2020
REVENUE RECOGNITION  
REVENUE RECOGNITION

2.    REVENUE RECOGNITION

We design, manufacture and sell computerized machine tools.  Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories and replacement parts for our products, as well as customer service, training and applications support.

We adopted Accounting Standards Codification (“ASC”) 606 “Revenue from Contracts with Customers” (“ASC 606”) on November 1, 2018, the start of our 2019 fiscal year, and elected the modified retrospective method as of the date of adoption.  Prior to the adoption of ASC 606, our revenues were already recognized in the same manner as that required by ASC 606.  Therefore, the adoption of ASC 606 did not have an effect on our overall financial statements.

We recognize revenues from the sale of machine tools, components and accessories and services and reflect the consideration to which we expect to be entitled.  We record revenues based on a five-step model in accordance with Financial Accounting Standards Board (“FASB”) guidance codified in ASC 606. In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories.  For each contract, we identify our performance obligations, which are delivering goods or services, determine the transaction price, allocate the contract transaction price to each of the performance obligations (when applicable), and recognize the revenue when (or as) each of the performance obligation to the customer is fulfilled.  A good or service is transferred when the customer obtains control of that good or service.  Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand-alone operations.  Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications.  We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance.  Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. 

Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our service technicians.  In most instances where a machine is sold through a distributor, we have no installation involvement.  If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications.  We consider the machine installation process for our three-axis machines to be inconsequential and perfunctory.  For our five-axis machines that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process.

From time to time, and depending upon geographic location, we may provide training or freight services.  We consider these services to be perfunctory within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value.  Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis.  Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded.  We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant.

 

v3.19.3.a.u2
INCOME TAXES (Details) - USD ($)
1 Months Ended 3 Months Ended
Dec. 31, 2017
Jan. 31, 2020
Jan. 31, 2019
Oct. 31, 2019
INCOME TAXES        
Unrecognized Tax Benefits Expiration Term   expire between July 2020 and August 2023    
Unrecognized tax benefits, interest accrued   $ 35,000    
Income Tax Expense (Benefit)   $ (597,000) $ 2,453,000  
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent 35.00% 21.00%    
Unrecognized Tax Benefits   $ 228,000   $ 225,000
Effective Income Tax Rate Reconciliation, Percent   40.00% 27.00%  
v3.19.3.a.u2
FINANCIAL INSTRUMENTS (Tables)
3 Months Ended
Jan. 31, 2020
FINANCIAL INSTRUMENTS  
Schedule of fair value hierarchy for financial assets and liabilities measured at fair value

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of January 31, 2020 and October 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

Liabilities

 

 

January 31, 

 

October 31, 

 

January 31, 

 

October 31, 

 

    

2020

    

2019

    

2020

    

2019

Level 1

 

 

  

 

 

  

 

 

  

 

 

  

Deferred Compensation

 

$

1,652

 

$

1,991

 

$

 —

 

$

 —

 

 

 

 

 

 

  

 

 

  

 

 

  

Level 2

 

 

 

 

 

  

 

 

  

 

 

  

Derivatives

 

$

621

 

$

1,391

 

$

375

 

$

388

 

v3.19.3.a.u2
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - Additional Information (Details)
€ in Millions
3 Months Ended
Jan. 31, 2020
USD ($)
Nov. 30, 2019
EUR (€)
Oct. 31, 2019
USD ($)
Derivative financial instruments:      
Notional principal of foreign exchange contracts $ 87,900,000   $ 108,600,000
Loss, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss 5,000    
Unrealized gain (loss), net of tax, to be reclassified in next 12 months 156,000    
Not Designated as Hedging Instrument      
Derivative financial instruments:      
Notional principal of foreign exchange contracts 52,900,000    
Forward Contracts | Designated as Hedging Instrument      
Derivative financial instruments:      
Notional principal of foreign exchange contracts | €   € 3.0  
Realized gain, net of tax, recorded as cumulative translation adjustments in Accumulated Other Comprehensive Loss 947,000    
Unrealized gain, net of tax, recorded as cumulative translation adjustments in Accumulated Other Comprehensive Loss 10,000    
Euros | Designated as Hedging Instrument      
Derivative financial instruments:      
Notional principal of foreign exchange contracts 12,300,000    
Pounds Sterling | Designated as Hedging Instrument      
Derivative financial instruments:      
Notional principal of foreign exchange contracts 3,900,000    
New Taiwan Dollars | Designated as Hedging Instrument      
Derivative financial instruments:      
Notional principal of foreign exchange contracts $ 15,000,000