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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 January 31, 2021 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 February 28, 2021 was 6,583,626.

Table of Contents

HURCO COMPANIES, INC.

Form 10-Q Quarterly Report for Fiscal Quarter Ended January 31, 2021

Table of Contents

Part I - Financial Information

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Operations Three months ended January 31, 2021 and 2020

3

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) Three months ended January 31, 2021 and 2020

4

 

 

 

Condensed Consolidated Balance Sheets As of January 31, 2021 and October 31, 2020

5

 

 

 

Condensed Consolidated Statements of Cash Flows Three months ended January 31, 2021 and 2020

6

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity Three months ended January 31, 2021 and 2020

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

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

January 31, 

    

2021

    

2020

Sales and service fees

$

54,115

$

43,660

Cost of sales and service

 

42,568

  

34,501

Gross profit

 

11,547

  

9,159

Selling, general and administrative expenses

 

10,568

  

10,846

Operating income (loss)

 

979

  

(1,687)

Interest expense

 

19

  

18

Interest income

 

16

  

70

Investment income

 

121

  

62

Other income, net

 

112

  

83

Income (loss) before income taxes

 

1,209

(1,490)

Provision (benefit) for income taxes

 

546

  

(597)

Net income (loss)

$

663

$

(893)

Income (loss) per common share

Basic

$

0.10

$

(0.13)

Diluted

$

0.10

$

(0.13)

Weighted average common shares outstanding

Basic

6,575

6,781

Diluted

6,584

6,781

Dividends paid per share

$

0.13

$

0.12

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

January 31, 

    

2021

    

2020

    

Net income (loss)

$

663

$

(893)

Other comprehensive income (loss):

 

  

Translation gain (loss) of foreign currency financial statements

 

4,184

  

283

(Gain) / loss on derivative instruments reclassified into operations, net of tax of $(114) and $(24), respectively

 

(379)

  

(80)

Gain / (loss) on derivative instruments, net of tax of $(166) and $(1), respectively

 

(554)

  

(4)

Total other comprehensive income (loss)

 

3,251

  

199

Comprehensive income (loss)

$

3,914

$

(694)

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)

January 31, 

October 31, 

    

2021

    

2020

    

(unaudited)

ASSETS

 

 

Current assets:

 

  

  

 

Cash and cash equivalents

$

66,553

$

57,859

Accounts receivable, net

 

28,008

  

27,686

Inventories, net

 

147,739

  

149,864

Derivative assets

 

908

  

968

Prepaid assets

 

15,276

  

13,803

Other

 

244

  

1,231

Total current assets

 

258,728

  

251,411

Property and equipment:

 

  

Land

 

868

  

868

Building

 

7,352

  

7,352

Machinery and equipment

 

29,759

  

29,195

Leasehold improvements

 

4,998

  

4,754

 

42,977

  

42,169

Less accumulated depreciation and amortization

 

(31,304)

  

(30,248)

Total property and equipment, net

 

11,673

  

11,921

Non–current assets:

 

  

Software development costs, less accumulated amortization

 

7,822

  

7,840

Intangible assets, net

 

1,796

  

1,846

Operating lease - right of use assets, net

12,199

11,748

Deferred income taxes

 

2,863

  

2,479

Investments and other assets, net

 

8,891

  

8,410

Total non–current assets

 

33,571

  

32,323

Total assets

$

303,972

$

295,655

 

  

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

  

Current liabilities:

 

  

Accounts payable

$

35,560

$

32,999

Derivative liabilities

1,472

872

Operating lease liabilities

4,418

4,132

Accrued payroll and employee benefits

 

6,428

  

6,209

Accrued income taxes

 

548

  

285

Accrued expenses

 

5,013

  

4,740

Accrued warranty expenses

 

1,246

  

1,200

Total current liabilities

 

54,685

  

50,437

Non–current liabilities:

 

  

Deferred income taxes

 

111

  

131

Accrued tax liability

1,934

1,918

Operating lease liabilities

8,173

7,989

Deferred credits and other

 

4,410

  

4,032

Total non–current liabilities

 

14,628

  

14,070

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 6,665,033 and 6,636,906 shares issued; and 6,583,626 and 6,565,163 shares outstanding, as of January 31, 2021 and October 31, 2020, respectively

 

658

  

657

Additional paid-in capital

 

61,458

  

60,997

Retained earnings

 

172,282

  

172,484

Accumulated other comprehensive income (loss)

 

261

  

(2,990)

Total shareholders’ equity

 

234,659

  

231,148

Total liabilities and shareholders’ equity

$

303,972

$

295,655

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

January 31, 

    

2021

    

2020

    

Cash flows from operating activities:

  

Net income (loss)

$

663

$

(893)

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

 

Provision for doubtful accounts

 

81

(12)

Deferred income taxes

 

132

108

Equity in loss (income) of affiliates

 

57

(43)

Foreign currency (gain) loss

(956)

107

Unrealized (gain) loss on derivatives

 

229

666

Depreciation and amortization

 

1,066

1,105

Stock–based compensation

 

659

136

Change in assets and liabilities, net of acquisitions:

 

(Increase) decrease in accounts receivable

 

374

11,152

(Increase) decrease in inventories

 

5,714

(1,296)

(Increase) decrease in prepaid expenses

 

(1,587)

(2,125)

Increase (decrease) in accounts payable

 

1,740

(4,540)

Increase (decrease) in accrued expenses

 

214

(6,478)

Net change in derivative assets and liabilities

 

(229)

(102)

Other

 

877

(532)

Net cash provided by (used for) operating activities

 

9,034

(2,747)

 

Cash flows from investing activities:

 

Proceeds from sale of property and equipment

 

80

Purchase of property and equipment

 

(298)

(186)

Software development costs

 

(324)

(263)

Other investments

 

(140)

(7)

Net cash provided by (used for) investing activities

 

(762)

(376)

 

Cash flows from financing activities:

 

Dividends paid

 

(865)

(814)

Taxes paid related to net settlement of restricted shares

 

(197)

(498)

Net cash provided by (used for) financing activities

 

(1,062)

(1,312)

Effect of exchange rate changes on cash and cash equivalents

 

1,484

79

Net increase (decrease) in cash and cash equivalents

 

8,694

(4,356)

 

Cash and cash equivalents at beginning of year

 

57,859

56,943

 

Cash and cash equivalents at end of year

$

66,553

$

52,587

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)

Accumulated

Common Stock

Additional

Other

Shares

Paid–in

Retained

Comprehensive

    

Outstanding

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Total

Balances, October 31, 2019

6,767,237

$

677

$

66,350

$

182,151

$

(8,933)

$

240,245

Net income (loss)

(893)

 

(893)

Other comprehensive income (loss)

 

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

6,803,163

$

680

$

65,985

$

180,444

$

(8,734)

$

238,375

Balances, October 31, 2020

6,565,163

$

657

$

60,997

$

172,484

$

(2,990)

$

231,148

Net income (loss)

663

 

663

Other comprehensive income (loss)

 

3,251

3,251

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

18,463

1

461

 

462

Dividends paid

(865)

 

(865)

Balances, January 31, 2021

6,583,626

$

658

$

61,458

$

172,282

$

261

$

234,659

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

7

Table of Contents

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, 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. During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of coronavirus and the ongoing economic slowdown in Europe, uncertainty surrounding the U.K. Brexit activities, and political friction in the U.S. Many of our customers deferred or eliminated investments in capital equipment last year, which we attributed largely to the uncertainty these events created.  During the first quarter of fiscal 2021, our sales increased year-over-year in all regions, particularly in the Americas and Europe, our primary markets for our higher-performance, higher-priced machines. We also saw global machine tool manufacturers price their excess inventories aggressively to compete in the market recovery. Because of the potential for extended vulnerability, we have closely evaluated the estimates we have made in preparing the financial statements as of January 31, 2021 with the understanding that these estimates could change in the near term. 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 January 31, 2021 and for the three months ended January 31, 2021 and January 31, 2020 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, 2020.

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.

8

Table of Contents

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 Accounting Standard Codification (“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 income (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.  

We had forward contracts outstanding as of January 31, 2021, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from February 2021 through January 2022. The contract amounts, expressed at forward rates in U.S. dollars at January 31, 2021, were $15.8 million for Euros, $4.9 million for Pounds Sterling and $18.4 million for New Taiwan Dollars. At January 31, 2021, we had approximately $554,000 of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive income (loss). Included in this amount was $293,000 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 January 2022, 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 2020. 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 income (loss), net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2021. As of January 31, 2021, we had a realized gain of $813,000 and an unrealized loss of $72,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive income (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 inter-company receivables, payables and loans 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, 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, 2021, denominated in Euros, Pounds Sterling, and New Taiwan Dollar with set maturity dates ranging from February 2021 through October 2021.  The contract amounts, expressed at forward rates in U.S. dollars at January 31, 2021, totaled $43.4 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 January 31, 2021 and October 31, 2020, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):

January 31, 2021

October 31, 2020

Balance Sheet

Fair

Balance Sheet

Fair

Derivatives

    

Location

    

Value

    

Location

    

Value

    

Designated as Hedging Instruments:

  

  

  

  

Foreign exchange forward contracts

Derivative assets

$

275

Derivative assets

$

495

Foreign exchange forward contracts

Derivative liabilities

$

750

Derivative liabilities

$

279

  

 

 

  

Not Designated as Hedging Instruments:

  

 

  

Foreign exchange forward contracts

Derivative assets

$

633

Derivative assets

$

473

Foreign exchange forward contracts

Derivative liabilities

$

722

Derivative liabilities

$

593

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, 2021 and 2020 (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

January 31, 

January 31, 

    

2021

    

2020

    

    

2021

    

2020

Designated as Hedging Instruments:

(Effective portion)

 

  

  

  

 

Foreign exchange forward contracts
– Intercompany sales/purchases

$

(554)

$

(4)

Cost of sales and service

$

379

 

$

80

Foreign exchange forward contract
– Net investment

$

(110)

$

25

  

 

  

  

 

  

We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended January 31, 2021 or 2020. We recognized the following gains and losses in our Condensed Consolidated Statements of Operations during the three months ended January 31, 2021 and 2020 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

January 31, 

    

2021

    

2020

Not Designated as Hedging Instruments:

 

  

 

  

 

Foreign exchange forward contracts

 

Other income, net

$

(813)

 

$

156

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The following table presents the changes in the components of Accumulated other comprehensive income (loss), net of tax, for the three months ended January 31, 2021 (in thousands):

Foreign Currency

Cash Flow

    

Translation

    

Hedges

    

Total

Balance, October 31, 2020

$

(4,073)

  

$

1,083

$

(2,990)

Other comprehensive income (loss) before reclassifications

 

4,184

 

(554)

 

3,630

Reclassifications

 

 

(379)

 

(379)

Balance, January 31, 2021

$

111

  

$

150

$

261

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 Equity 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 Equity 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 Equity Plan as of March 10, 2016, the date our shareholders approved the 2016 Equity Plan.

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 Equity 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, 2021, is as follows:

Weighted Average

    

Stock Options

    

Exercise Price

Outstanding at October 31, 2020

33,307

$

22.09

Options granted

Options exercised

Options cancelled

Outstanding at January 31, 2021

33,307

$

22.09

Summarized information about outstanding stock options as of January 31, 2021, that have already vested and are currently exercisable, are as follows:

Options Already Vested and

    

Currently Exercisable

Number of outstanding options

33,307

Weighted average remaining contractual life (years)

1.21

Weighted average exercise price per share

$

22.09

Intrinsic value of outstanding options

$

244,000

The intrinsic value of an outstanding stock option is calculated as the difference between the stock price as of January 31, 2021 and the exercise price of the option.

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On January 5, 2021, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of time-based restricted shares and performance stock units (“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 2021 through fiscal 2023.

On that date, the Compensation Committee granted a total of 23,164 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  $28.60 per share.

On January 5, 2021, the Compensation Committee granted a total target number of 39,199 PSUs to our executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall 2021 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 2021-2023, 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 $27.04 per PSU and was calculated using the Monte Carlo approach.

On January 5, 2021, the Compensation Committee granted a total target number of 32,430 PSUs to our executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall 2021 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 2021-2023. 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 $28.60 per share.

On November 12, 2020, the Compensation Committee granted a total of 11,531 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 $29.30 per share.

A reconciliation of our restricted stock and PSU activity and related information for the three-month period ended January 31, 2021 is as follows:

Weighted Average Grant

    

Number of Shares

    

Date Fair Value

Unvested at October 31, 2020

 

231,960

$

39.03

Shares or units granted

 

106,324

 

28.10

Shares or units vested

 

(18,463)

 

38.34

Shares or units cancelled

 

(42,625)

 

43.99

Shares withheld

 

(6,568)

 

38.20

Unvested at January 31, 2021

 

270,628

$

34.02

During the first three months of fiscal 2021 and 2020, we recorded approximately $659,000 and $136,000, respectively, of stock-based compensation expense related to grants under the 2016 Equity Plan. As of January 31, 2021, there was an estimated $4.2 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2024.

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5.    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, 

2021

2020

    

Basic

    

Diluted

    

Basic

    

Diluted

    

Net income (loss)

$

663

$

663

$

(893)

$

(893)

Undistributed earnings (loss) allocated to participating shares

 

(8)

 

(8)

 

9

 

9

Net income (loss) applicable to common  shareholders

$

655

$

655

$

(884)

$

(884)

Weighted average shares outstanding

 

6,575

 

6,575

 

6,781

 

6,781

Stock options and contingently issuable securities

 

 

9

 

 

 

6,575

 

6,584

 

6,781

 

6,781

Income (loss) per share

$

0.10

$

0.10

$

(0.13)

$

(0.13)

6.    ACCOUNTS RECEIVABLE

Accounts receivable are net of allowances for doubtful accounts of $1.5 million as of January 31, 2021 and $1.4 million as of October 31, 2020.

7.    INVENTORIES

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

    

January 31, 

    

October 31, 

    

2021

2020

Purchased parts and sub–assemblies

$

31,331

  

$

30,390

Work–in–process

 

13,804

 

12,635

Finished goods

 

102,604

 

106,839

$

147,739

  

$

149,864

8.    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:

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.

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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 are a lessor in a small number of lease agreements associated with our automation integration equipment for which the impact to our consolidated financial statements is immaterial. 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 for each of the three months ended January 31, 2021 and 2020, 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, 2021.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the three months ended January 31, 2021 (in thousands):

Three Months Ended

    

January 31, 2021

Operating cash flow information:

    Cash paid for amounts included in the measurement of lease liabilities

$

1,297

Noncash information:

    Right-of-use assets obtained in exchange for new operating lease liabilities

$

1,429

The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of January 31, 2021 (in thousands):

Remainder of 2021

$

3,549

2022

3,725

2023

2,291

2024

1,027

2025

752

2026 and thereafter

1,679

Total

13,023

   Less: Imputed interest

(432)

Present value of operating lease liabilities

$

12,591

As of January 31, 2021, the weighted-average remaining term of our lease portfolio was approximately 4.2 years and the weighted-average discount rate was approximately 1.6%.

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9.    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 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.

10.    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, 2021, we had 15 outstanding third party payment guarantees totaling approximately $0.8 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, 

2021

2020

Balance, beginning of year

$

1,200

  

$

1,760

Provision for warranties during the year

 

713

 

492

Charges to the reserve

 

(722)

 

(784)

Impact of foreign currency translation

 

55

 

3

Balance, end of year

$

1,246

  

$

1,471

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

11.  DEBT AGREEMENTS

On December 31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement, which was amended by that certain First Amendment dated March 13, 2020 and that certain Second Amendment dated December 23, 2020 (as amended, 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, 2021.

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 1.25% 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 1.25%.

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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 (a) 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 and (b) payments made to repurchase shares of our common stock, except that we may repurchase shares of our common stock as long as we are not in default before and after giving effect to such repurchases and the aggregate amount of payments made by us for all such repurchases during any fiscal year does not exceed $10.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; (4) requiring that we maintain a minimum tangible net worth of $170.0 million; and (5) providing that if the total amount of indebtedness outstanding owed by the Company and its Taiwanese and Chinese subsidiaries to the lender or its affiliates (the “Specified Outstanding Amount”) exceeds $25.0 million, then the Company will not permit the amount of unrestricted cash-on-hand of the Company and its subsidiaries to be less than the Specified Outstanding Amount.  We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand, we repaid in full the $1.4 million outstanding under, and terminated, our credit facility in China and (2) we terminated our United Kingdom credit facility. In March 2019, our wholly-owned subsidiaries in Taiwan (Hurco Manufacturing Limited (“HML”)) and China (Ningbo Hurco Machine Tool, 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 a result, as of January 31, 2021, our existing credit facilities consisted 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.

As of January 31, 2021, there were no borrowings under any of our credit facilities and there was $52.2 million of available borrowing capacity thereunder.

12.  INCOME TAXES

Our provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other events that are not consistent from period to period, such as changes in income tax laws.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020.  The CARES Act includes several provisions that provide economic relief for individuals and businesses. The CARES Act, among other things, includes tax provisions relating to refundable payroll tax credits, the deferral of employer’s social security payments, and modifications to net operating loss carryback provisions.

The Consolidated Appropriations Act of 2021 (the “CAA”) was signed into law on December 27, 2020. The CAA provides further COVID-19 economic relief by providing an expansion of the employee retention tax credit.  At this time, we are still evaluating the impact of the CAA on our results and will monitor any additional legislation related to COVID-19 and its impact on our results.

During the first quarter of fiscal 2021, we assessed and recorded the estimated year-to-date impact of recent changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic.  The CARES Act included economic relief and modifications, most notably the net operating loss carryback provisions for the U.S.  For the first quarter of fiscal 2021, we recorded an income tax expense of $546,000 compared to income tax benefit of $597,000 for the same period in fiscal 2020. Our effective tax rate for the first quarter of fiscal 2021 was 45%, compared to 40% in the corresponding prior year period. The year-over-year increase in the effective tax rate was primarily due to changes in geographic mix of income and loss which includes jurisdictions with differing tax rates and other events that are not consistent from period to period, such as changes in income tax laws to address the unfavorable impact of the COVID-19 pandemic and a discrete income tax expense related to unvested stock awards in the first three months of fiscal 2021.

Our unrecognized tax benefits were $221,000 as of January 31, 2021 and $204,000 as of October 31, 2020, and in each case included accrued interest.

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We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. As of January 31, 2021, the gross amount of interest accrued, reported in Accrued expenses, was approximately $38,000, 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 August 2021 and August 2024.

Currently, our subsidiary in France is under tax audit for the fiscal years 2018 and 2019.  

13.  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, 2021 and October 31, 2020 (in thousands):

Assets

Liabilities

    

January 31, 2021

    

October 31, 2020

    

January 31, 2021

    

October 31, 2020

    

Level 1

 

  

  

 

  

 

Deferred compensation

$

2,140

  

$

1,868

 

$

$

Level 2

 

 

 

 

 

 

Derivatives

$

908

  

$

968

 

$

1,472

$

872

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 $84.5 million and $70.8 million at January 31, 2021 and October 31, 2020, 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.

14.  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.

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15.  NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements:

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments.  This standard modifies the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses.  This standard is effective for our fiscal year 2021. We adopted this standard on November 1, 2020.  This standard did not have a significant effect on our accounting policies or on our consolidated financial statements and related disclosures.

New Accounting Pronouncements:

In December 2019, FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which allows for companies to remove certain exceptions and clarifies certain requirements regarding franchise taxes, goodwill, consolidated tax expenses, and annual effective tax rate calculations.  This standard is effective for our fiscal year 2022, with early adoption permitted. We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.  

In March 2020, FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting.  This standard provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR.  This standard is effective for all entities beginning March 12, 2020 through December 31, 2022.  We are assessing the impact this new accounting standard will have on our consolidated financial statements and related disclosures.  

There have been no other significant changes in the Company’s critical accounting policies and estimates during the three months ended January 31, 2021.

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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, 2020.

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, 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 2021, approximately 45% 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 12% 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 and 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 our product portfolio that have contributed product diversity and market penetration opportunity.  These non-Hurco branded products are sold by our wholly-owned distributors and 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 LLC (“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 in Italy, LCM Precision Technology S.r.l. (“LCM”), we produce high value machine tool components and accessories.

We principally sell our products through more than 200 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.  

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. We cannot predict the duration or scope of 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 and could continue to be material in the near future. To date, we have not experienced material disruptions in our supply chain and have not completely ceased operations at any of our global facilities, but have implemented remote working capabilities, as appropriate or otherwise required under local law. We will continue to evaluate and disclose any 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.

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, 2021 Compared to Three Months Ended January 31, 2020

Sales and Service Fees.  Sales and service fees for the first quarter of fiscal 2021 were $54.1 million, an increase of $10.5 million, or 24%, compared to the corresponding prior year period, and included a favorable currency impact of $1.6 million, or 4%, when translating foreign sales to U.S. dollars for financial reporting purposes.  

During fiscal 2020, our operating results were adversely affected by the international business disruption due to the outbreak of coronavirus and the ongoing economic slowdown in Europe, uncertainty surrounding the U.K. Brexit activities, and political friction in the U.S. Many of our customers deferred or eliminated investments in capital equipment last year, which we attributed largely to the uncertainty these events created.  During the first quarter of fiscal 2021, our sales increased year-over-year in all regions, particularly in the Americas and Europe, our primary markets for our higher-performance, higher-priced machines. We also saw global machine tool manufacturers price their excess inventories aggressively to compete in the market recovery.

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, 2021 and 2020 (dollars in thousands):

    

Three Months Ended

January 31, 

    

2021

    

2020

    

$ Change

    

% Change

Americas

$

23,248

    

43

%  

$

17,479

    

40

%  

$

5,769

 

33

%

Europe

 

24,246

 

45

%  

 

20,085

 

46

%  

 

4,161

 

21

%

Asia Pacific

 

6,621

 

12

%  

 

6,096

 

14

%  

 

525

 

9

%

Total

$

54,115

 

100

%  

$

43,660

 

100

%  

$

10,455

 

24

%

Sales in the Americas for the first quarter of fiscal 2021 increased by 33%, compared to the corresponding period in fiscal 2020, primarily due to an increased volume of shipments of Hurco machines.  The increased machine shipments reflected higher sales volumes of lathes and VM and VMX machines, particularly in the southeast and midwest regions of the U.S.

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European sales for the first quarter of fiscal 2021 increased by 21%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 7%, when translating foreign sales to U.S. dollars for financial reporting purposes.  The increase in European sales for the first quarter of fiscal 2021 was primarily attributable to an increased volume of shipments of Hurco machines in the United Kingdom and Germany, partially offset by reduced volumes in France and Italy.

Asian Pacific sales for the first quarter of fiscal 2021 increased by 9%, compared to the corresponding period in fiscal 2020, and included a favorable currency impact of 5%, when translating foreign sales to U.S. dollars for financial reporting purposes.  The year-over-year increase in Asian Pacific sales primarily resulted from an increased volume of shipments of Hurco vertical milling machines in China and Southeast Asia, partially offset by reduced volume of shipments of Hurco machines in India and Takumi 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 first quarter ended January 31, 2021 and 2020 (dollars in thousands):

    

Three Months Ended

January 31, 

    

2021

    

2020

    

$ Change

    

% Change

Computerized Machine Tools

$

45,450

    

84

%  

$

35,214

    

81

%