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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 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 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 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

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

The number of shares of the Registrant’s common stock outstanding as of August 31, 2020 was 6,565,163.

Table of Contents

HURCO COMPANIES, INC.

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

Table of Contents

Part I - Financial Information

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations Three and nine months ended July 31, 2020 and 2019

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) Three and nine months ended July 31, 2020 and 2019

4

 

 

 

Condensed Consolidated Balance Sheets As of July 31, 2020 and October 31, 2019

5

 

 

 

Condensed Consolidated Statements of Cash Flows Three and nine months ended July 31, 2020 and 2019

6

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity Three and nine months ended July 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

22

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

Item 4.

Controls and Procedures

32

 

 

Part II - Other Information

 

 

Item 1.

Legal Proceedings

33

 

 

Item 1A.

Risk Factors

33

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

 

 

Item 5.

Other Information

34

 

 

Item 6.

Exhibits

35

 

 

Signatures

36

2

Table of Contents

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

Nine Months Ended

July 31, 

July 31, 

2020

    

2019

    

2020

    

2019

Sales and service fees

$

45,382

$

58,501

$

126,168

$

203,388

Cost of sales and service

 

34,313

  

41,312

 

99,231

  

142,420

Gross profit

 

11,069

  

17,189

 

26,937

  

60,968

Selling, general and administrative expenses

 

9,627

  

12,592

 

31,072

  

40,617

Operating income (loss)

 

1,442

  

4,597

 

(4,135)

  

20,351

Interest expense

 

19

  

18

 

69

  

44

Interest income

 

14

  

169

 

104

  

350

Investment income (loss)

 

11

  

(25)

 

76

  

346

Other income (expense), net

 

(223)

  

(77)

 

(933)

  

483

Income (loss) before taxes

 

1,225

4,646

 

(4,957)

21,486

Provision (benefit) for income taxes

 

(937)

  

1,155

 

(2,299)

  

6,089

Net income (loss)

$

2,162

$

3,491

$

(2,658)

$

15,397

Income (loss) per common share

Basic

$

0.32

$

0.51

$

(0.39)

$

2.26

Diluted

$

0.32

$

0.51

$

(0.39)

$

2.24

Weighted average common shares outstanding

Basic

6,595

6,767

6,705

6,756

Diluted

6,604

6,813

6,705

6,815

Dividends paid per share

$

0.13

$

0.12

$

0.38

$

0.35

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

3

Table of Contents

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

Three Months Ended

Nine Months Ended

July 31, 

July 31, 

    

2020

    

2019

    

2020

    

2019

    

Net income (loss)

$

2,162

$

3,491

$

(2,658)

$

15,397

Other comprehensive income (loss):

 

  

 

  

Translation of foreign currency financial statements

 

5,092

  

(1,899)

 

5,240

  

(1,976)

(Gain) / loss on derivative instruments reclassified into operations, net of tax of $(47), $10, $(80), and $1, respectively

 

(158)

  

39

 

(268)

  

3

Gain / (loss) on derivative instruments, net of tax of $(145), $130, $19, and $136, respectively

 

(480)

  

446

 

67

  

465

Total other comprehensive income (loss)

 

4,454

  

(1,414)

 

5,039

  

(1,508)

Comprehensive income

$

6,616

$

2,077

$

2,381

$

13,889

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

4

Table of Contents

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

July 31, 

October 31, 

    

2020

    

2019

(unaudited)

ASSETS

 

Current assets:

 

  

  

Cash and cash equivalents

$

47,089

$

56,943

Accounts receivable, net

32,050

  

43,279

Inventories, net

 

154,823

  

148,851

Derivative assets

 

367

  

1,391

Prepaid assets

 

14,563

  

9,414

Other

 

334

  

1,983

Total current assets

 

249,226

  

261,861

Property and equipment:

 

  

Land

 

868

  

868

Building

 

7,352

  

7,352

Machinery and equipment

 

29,414

  

28,846

Leasehold improvements

 

4,651

  

4,902

 

42,285

  

41,968

Less accumulated depreciation and amortization

 

(29,888)

  

(28,055)

Total property and equipment

 

12,397

  

13,913

Non–current assets:

 

  

Software development costs, less accumulated amortization

 

7,916

  

8,318

Goodwill

 

4,921

  

5,847

Intangible assets, net

 

1,767

  

1,096

Operating lease – right-of-use assets, net

12,431

Deferred income taxes

 

1,961

  

1,846

Investments and other assets, net

 

8,695

  

8,184

Total non–current assets

 

37,691

  

25,291

Total assets

$

299,314

$

301,065

 

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

Current liabilities:

 

  

Accounts payable

$

31,831

$

33,969

Derivative liabilities

1,825

388

Operating lease liabilities

4,157

Accrued payroll and employee benefits

 

6,731

  

11,564

Accrued income taxes

 

  

1,936

Accrued expenses

 

4,744

  

5,015

Accrued warranty

 

1,271

  

1,760

Total current liabilities

 

50,559

  

54,632

Non–current liabilities:

 

  

Deferred income taxes

166

160

Accrued tax liability

 

1,908

  

2,036

Operating lease liabilities

8,647

Deferred credits and other

 

3,988

  

3,992

Total non–current liabilities

 

14,709

  

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 6,636,906 and 6,824,451 shares issued and 6,565,163 and 6,767,237 shares outstanding, as of July 31, 2020 and October 31, 2019, respectively

 

657

  

677

Additional paid-in capital

 

60,358

  

66,350

Retained earnings

 

176,925

  

182,151

Accumulated other comprehensive loss

 

(3,894)

  

(8,933)

Total shareholders’ equity

 

234,046

  

240,245

Total liabilities and shareholders’ equity

$

299,314

$

301,065

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

5

Table of Contents

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended

Nine Months Ended

July 31, 

July 31, 

    

2020

    

2019

    

2020

    

2019

    

Cash flows from operating activities:

  

  

Net income (loss)

$

2,162

$

3,491

$

(2,658)

$

15,397

Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:

 

 

Provision (benefit) for doubtful accounts

 

290

(52)

 

417

(191)

Deferred income taxes

 

142

(3)

 

201

(29)

Equity in income (loss) of affiliates

 

(11)

(113)

 

(77)

(521)

Depreciation and amortization

1,246

916

3,418

2,761

Foreign currency (gain) loss

 

(1,603)

433

 

(36)

77

Unrealized (gain) loss on derivatives

 

1,823

(326)

 

1,842

(547)

Stock–based compensation

 

640

664

 

1,419

2,097

Change in assets and liabilities:

 

 

(Increase) decrease in accounts receivable

 

(3,409)

5,768

 

11,595

16,168

(Increase) decrease in inventories

 

3,665

(6,937)

 

(1,093)

(17,507)

(Increase) decrease in prepaid expenses

 

(487)

362

 

(5,055)

(1,000)

Increase (decrease) in accounts payable

 

1,164

(4,376)

 

(3,127)

(11,992)

Increase (decrease) in accrued expenses

 

457

(473)

 

(5,932)

(4,114)

Increase (decrease) in accrued income tax

(526)

(523)

(2,006)

(3,268)

Net change in operating lease assets and liabilities

15

366

Net change in derivative assets and liabilities

 

245

(82)

 

40

294

Other

 

(793)

(221)

 

871

(690)

Net cash provided by (used for) operating activities

 

5,020

(1,472)

 

185

(3,065)

 

 

Cash flows from investing activities:

 

 

Proceeds from sale of equipment

 

1

37

 

128

68

Purchase of property and equipment

 

(89)

(1,328)

 

(478)

(2,609)

Software development costs

 

(236)

(455)

 

(692)

(1,424)

Other investments

 

333

 

333

Net cash provided by (used for) investing activities

 

(324)

(1,413)

 

(1,042)

(3,632)

 

 

Cash flows from financing activities:

 

 

Dividends paid

 

(875)

(818)

 

(2,568)

(2,383)

Taxes paid related to net settlement of restricted shares

 

 

(498)

(499)

Proceeds from exercise of common stock options

67

67

Stock repurchases

(3,088)

(7,000)

Repayment of short-term debt

(1,454)

Net cash provided by (used for) financing activities

 

(3,896)

(818)

 

(9,999)

(4,336)

Effect of exchange rate changes on cash

 

1,022

(374)

 

1,002

(34)

 

Net increase (decrease) in cash and cash equivalents

 

1,822

(4,077)

 

(9,854)

(11,067)

 

 

Cash and cash equivalents at beginning of period

 

45,267

70,180

 

56,943

77,170

 

 

Cash and cash equivalents at end of period

$

47,089

$

66,103

$

47,089

$

66,103

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

6

Table of Contents

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except shares outstanding)

Three Months Ended July 31, 2020 and 2019

Accumulated

Common Stock

Additional

Other

Shares

Paid–in

Retained

Comprehensive

    

Outstanding

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balances, April 30, 2019

6,767,237

$

677

$

65,114

$

178,200

$

(9,957)

$

234,034

Net income

3,491

 

3,491

Other comprehensive income (loss)

 

(1,414)

(1,414)

Stock–based compensation expense, net of taxes withheld for vested restricted shares

664

 

664

Dividends paid

(818)

 

(818)

Balances, July 31, 2019

6,767,237

$

677

$

65,778

$

180,873

$

(11,371)

$

235,957

Balances, April 30, 2020

6,666,226

$

667

$

62,731

$

175,638

$

(8,348)

$

230,688

Net loss

2,162

 

2,162

Other comprehensive income (loss)

 

4,454

4,454

Stock–based compensation expense, net of taxes withheld for vested restricted shares

638

 

638

Exercise of common stock options

3,738

67

67

Stock repurchases

(104,801)

(10)

(3,078)

(3,088)

Dividends paid

(875)

 

(875)

Balances, July 31, 2020

6,565,163

$

657

$

60,358

$

176,925

$

(3,894)

$

234,046

Nine Months Ended July 31, 2020 and 2019

Accumulated

Common Stock

Additional

Other

Shares

Paid–in

Retained

Comprehensive

    

Outstanding

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balances, October 31, 2018

6,723,160

$

672

$

64,185

$

167,859

$

(9,863)

$

222,853

Net income

15,397

 

15,397

Other comprehensive income (loss)

 

(1,508)

(1,508)

Stock–based compensation expense, net of taxes withheld for vested restricted shares

44,077

5

1,593

 

1,598

Dividends paid

(2,383)

 

(2,383)

Balances, July 31, 2019

6,767,237

$

677

$

65,778

$

180,873

$

(11,371)

$

235,957

Balances, October 31, 2019

6,767,237

$

677

$

66,350

$

182,151

$

(8,933)

$

240,245

Net loss

(2,658)

 

(2,658)

Other comprehensive income (loss)

 

5,039

5,039

Stock–based compensation expense, net of taxes withheld for vested restricted shares

47,750

5

916

 

921

Exercise of common stock options

3,738

67

67

Stock repurchases

(253,562)

(25)

(6,975)

(7,000)

Dividends paid

(2,568)

 

(2,568)

Balances, July 31, 2020

6,565,163

$

657

$

60,358

$

176,925

$

(3,894)

$

234,046

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

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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.

We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. The COVID-19 pandemic has had a significant impact on our business and industry during fiscal 2020. Beginning in early 2020, governmental authorities in many of the major global machine tool markets implemented mandatory stay-at-home or shelter orders requiring most businesses to close or to significantly limit operations, resulting in a sudden decrease in demand for many goods and services. Although the mandatory stay-at-home or shelter orders in many jurisdictions permitted our local operations to continue as an essential business or a supplier to critical infrastructure industries or otherwise with remote work capabilities, many of our customers experienced, and continue to experience, significant disruptions in their business operations and normal purchasing cycles. Because of this disruption in demand and the potential for extended vulnerability during the remainder of this fiscal year, we have closely evaluated the estimates we have made in preparing the financial statements as of July 31, 2020 with the understanding that these estimates could change in the near term. We cannot predict the duration or scope of the impact of the COVID-19 pandemic, and the negative financial impact to our results cannot be reasonably estimated, but we believe the impact has been material thus far with regard to revenues, income from operations, and cash flow from operations and could continue to be material in the near future. We will continue to evaluate and disclose any uncertainty associated with key assumptions underlying fair value estimates, trends and uncertainties that have had, or are reasonably expected to have, a material effect on our consolidated financial position, results of operations, changes in shareholders' equity and cash flows for and at the end of each interim period.

The condensed financial information as of July 31, 2020 and for the three and nine months ended July 31, 2020 and July 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.

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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 obligations 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.

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.

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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 (expense), 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.  

We had forward contracts outstanding as of July 31, 2020, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from August 2020 through July 2021. The contract amounts, expressed at forward rates in U.S. dollars at July 31, 2020, were $5.6 million for Euros, $2.5 million for Pounds Sterling and $11.8 million for New Taiwan Dollars. At July 31, 2020, we had approximately $67,000 of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Included in this amount was $102,000 of unrealized loss, 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 July 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 July 31, 2020, we had a realized gain of $947,000 and an unrealized loss of $118,000, 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 FASB guidance and, as a result, changes in their fair value are reported currently as Other income (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 July 31, 2020, denominated in Euros, Pounds Sterling, and New Taiwan Dollar with set maturity dates ranging from August 2020 through July 2021.  The contract amounts, expressed at forward rates in U.S. dollars at July 31, 2020, totaled $43.3 million.

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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 July 31, 2020 and October 31, 2019, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):

July 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

$

187

Derivative assets

$

751

Foreign exchange forward contracts

Derivative liabilities

$

496

Derivative liabilities

$

99

  

 

 

  

Not Designated as Hedging Instruments:

  

 

  

Foreign exchange forward contracts

Derivative assets

$

180

Derivative assets

$

640

Foreign exchange forward contracts

Derivative liabilities

$

1,329

Derivative liabilities

$

289

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 July 31, 2020 and 2019 (in thousands):

Location of Gain

Amount of Gain

Amount of Gain (Loss)

 (Loss) Reclassified

 (Loss) Reclassified

Recognized in Other

from Other

from Other

 Comprehensive

Comprehensive

Comprehensive

Derivatives

Income (Loss)

Income (Loss)

Income (Loss)

Three Months Ended

Three Months Ended

July 31, 

July 31, 

    

2020

    

2019

    

    

2020

    

2019

Designated as Hedging Instruments:

(Effective portion)

 

  

  

  

 

Foreign exchange forward contracts
– Intercompany sales/purchases

$

(480)

$

446

Cost of sales and service

$

158

 

$

(39)

Foreign exchange forward contract
– Net investment

$

(193)

$

41

  

 

  

  

 

  

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

Location of Gain 

(Loss) Recognized

Amount of Gain (Loss)

Derivatives

    

 in Operations

Recognized in Operations

Three Months Ended

July 31, 

    

2020

    

2019

Not Designated as Hedging Instruments:

 

  

 

  

 

Foreign exchange forward contracts

 

Other income (expense), net

$

(1,784)

 

$

138

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

Foreign Currency

Cash Flow

    

Translation

    

Hedges

    

Total

Balance, April 30, 2020

$

(9,894)

  

$

1,546