| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation . The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly–owned subsidiaries (“we”, “us”, “our”, “Hurco” or the “Company”). We have a 35% ownership interest in a Taiwan affiliate that is accounted for using the equity method. Our investment in that affiliate was approximately $5.0 million and $4.8 million as of October 31, 2022 and 2021, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Inter-company accounts and transactions have been eliminated. Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation. This reclassification has no impact on previously reported net income or shareholders’ equity. Statements of Cash Flows . We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items being hedged. Translation of Foreign Currencies . All balance sheet accounts of non–U.S. subsidiaries are translated at the exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss in shareholders’ equity. Income and expenses are translated at the average exchange rates during the year. Cumulative foreign currency translation adjustments, net of gains related to our net investment hedges, as of October 31, 2022, were a net loss of $21.5 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net. Hedging. 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. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. 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 account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in shareholders’ equity and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts. 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 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 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 are 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 reported in Other expense, net immediately. 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 October 31, 2022, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2022 through October 2023. The contract amount at forward rates in U.S. Dollars at October 31, 2022 for Euros and Pounds Sterling was $18.7 million and $6.1 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $26.0 million at October 31, 2022. At October 31, 2022, we had approximately $0.4 million of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $0.9 million represented 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 October 2023, in which the corresponding inventory that is the subject of the related hedge contract is sold, as described above. We are 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 2021. 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, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2022, and we entered into a new forward contract for the same notional amount that is set to mature in November 2023. As of October 31, 2022, we had a realized gain of $0.9 million and an unrealized gain of $0.4 million, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. Derivatives Not Designated as Hedging Instruments We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company 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 expense, net in the Consolidated Statements of Operations consistent with the transaction gain or loss on the related inter-company receivables, payables and loans denominated in foreign currencies. We had forward contracts outstanding as of October 31, 2022, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2022 through February 2023. The contract amounts at forward rates in U.S. Dollars at October 31, 2022 for Euros and Pounds Sterling totaled $21.0 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $22.0 million at October 31, 2022. Fair Value of Derivative Instruments We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Consolidated Balance Sheets. As of October 31, 2022 and October 31, 2021, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands): 2022 2021 Balance Sheet Fair Balance Sheet Fair Derivatives Location Value Location Value Designated as Hedging Instruments: Foreign exchange forward contracts Derivative assets $ 2,273 Derivative assets $ 646 Foreign exchange forward contracts Derivative liabilities $ 2,891 Derivative liabilities $ 403 Not Designated as Hedging Instruments: Foreign exchange forward contracts Derivative assets $ 242 Derivative assets $ 259 Foreign exchange forward contracts Derivative liabilities $ 741 Derivative liabilities $ 64 Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity, and Statements of Operations, net of tax, during the fiscal years ended October 31, 2022, 2021, and 2020 (in thousands): Location of Amount of Gain (Loss) Gain (Loss) Amount of Gain (Loss) Recognized in Reclassified Reclassified from Other Comprehensive From Other Other Comprehensive Income (Loss) Comprehensive Income (Loss) Derivatives 2022 2021 2020 Income (Loss) 2022 2021 2020 Designated as Hedging Instruments: (Effective Portion) Foreign exchange forward contracts – Intercompany sales/purchases $ (384) $ (477) $ 395 Cost of sales and service $ (191) $ 679 $ 421 Foreign exchange forward contract – Net investment $ 401 $ 43 $ (64) We did no t recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2022, 2021, and 2020. We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2022, 2021, and 2020 on derivative instruments not designated as hedging instruments (in thousands): Amount of Gain (Loss) Location of Gain (Loss) Recognized in Operations Derivatives Recognized in Operations 2022 2021 2020 Not Designated as Hedging Instruments: Foreign exchange forward contracts Other expense, net $ 2,374 $ (313) $ (171) The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2022 and 2021 (in thousands): Foreign Cash Currency Flow Translation Hedges Total Balance, October 31, 2020 $ (4,073) $ 1,083 $ (2,990) Other comprehensive income (loss) before reclassifications 2,405 (477) 1,928 Reclassifications — (679) (679) Balance, October 31, 2021 $ (1,668) $ (73) $ (1,741) Other comprehensive income (loss) before reclassifications (19,591) (384) (19,975) Reclassifications — 191 191 Balance, October 31, 2022 $ (21,259) $ (266) $ (21,525) Inventories . Inventories are stated at the lower of cost or net realizable value, with cost determined using the first–in, first–out method. Provisions are made to reduce excess or obsolete inventories to their estimated realizable value. Property and Equipment . Property and equipment are carried at cost. Depreciation and amortization of assets are provided primarily under the straight–line method over the shorter of the estimated useful lives or the lease terms as follows: Number of Years Land Indefinite Building 40 Machines 7 – 10 Shop and office equipment 3 – 7 Building & leasehold improvements 3 – 40 Total depreciation and amortization expense recognized for property and equipment was $2.3 million for fiscal year 2022, $2.5 million for fiscal year 2021, and $2.7 million for fiscal year 2020. 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 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 FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“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 is 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) the performance obligation to the customer is fulfilled. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand–alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment. Depending upon geographic location, after shipment, a machine may be installed at the customer’s facility 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 immaterial within the context of the contract. For our five-axis machines and automation systems 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 immaterial 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. Allowance for Doubtful Accounts . The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted. Product Warranty . Expected future product warranty claims are recorded to expense when the product is sold. Product warranty estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Warranty claims are influenced by factors such as new product introductions, technological developments, the competitive environment, and the costs of component parts. Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in future periods. See Note 11 of these Notes to Consolidated Financial Statements for further discussion of warranties. Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses. Research and development expenses totaled $3.4 million, $3.2 million, and $3.5 million, in fiscal years 2022, 2021, and 2020, respectively. Software Development Costs. three Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands): Fiscal Year Amortization Expense 2023 $ 1,663 2024 1,905 2025 1,281 2026 1,132 2027 and thereafter 1,321 Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. We had goodwill for our single reporting unit, arising from the acquisitions of ProCobots, LLC (“ProCobots”) ( $2.5 million) in 2019, LCM Precision Technology S.r.l. (“LCM”) ( $2.2 million) in 2013, and our wholly-owned distributor located in Michigan ( $0.2 million) in 2008. The adverse change in the business climate resulting from the COVID-19 pandemic and the net loss for fiscal year 2020 caused the fair value of the reporting unit to fall below our book value of equity as of October 31, 2020, resulting in a full impairment loss of $4.9 million. As such, we have no goodwill as of October 31, 2022. For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified. There were no impairments recognized with respect to the carrying value of intangible assets for the years ended October 31, 2022, 2021, or 2020. As of October 31, 2022, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Average Gross Amortization Intangible Accumulated Net Intangible Period Assets Amortization Assets Tradenames and trademarks indefinite $ 177 $ — $ 177 Tradenames and trademarks 14 years 728 (261) 467 Customer relationships 15 years 367 (243) 124 Technology 13 years 605 (434) 171 Noncompete 5 years 580 (377) 203 Patents 6 years 2,972 (2,884) 88 Other 8 years 387 (371) 16 Total $ 5,816 $ (4,570) $ 1,246 As of October 31, 2021, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Average Gross Amortization Intangible Accumulated Net Intangible Period Assets Amortization Assets Tradenames and trademarks indefinite $ 177 $ — $ 177 Tradenames and trademarks 14 years 763 (234) 529 Customer relationships 15 years 373 (223) 150 Technology 13 years 708 (454) 254 Noncompete 5 years 580 (261) 319 Patents 6 years 2,972 (2,860) 112 Other 8 years 397 (373) 24 Total $ 5,970 $ (4,405) $ 1,565 Intangible asset amortization expense was $272,000 , $273,000 , and $358,000 for fiscal years 2022, 2021, and 2020, respectively. Annual intangible asset amortization expense for the next five years is estimated to be $273,000 for fiscal year 2023, $223,000 for fiscal year 2024, $136,000 for fiscal year 2025, $105,000 for fiscal year 2026, and $45,000 for fiscal year 2027. Impairment of Long–Lived Assets. Annually, or when there are indicators of impairment, we evaluate the carrying value of long–lived assets to be held and used, including property and equipment, software development costs, and intangible assets, including goodwill, when events or circumstances warrant such a review. The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets). We determined that we have a single asset group due to the interdependent nature of our operations. We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group. Based on that review, there was no impairment indications for our long-lived assets for the period ended October 31, 2022. Therefore, there was no impairment recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2022, 2021, or 2020. Earnings Per Share. Basic earnings per share is calculated by dividing net income (loss) by the weighted–average number of common shares actually outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in FASB guidance on “Earnings Per Share.” The following table presents a reconciliation of our basic and diluted earnings per share computation: Fiscal Year Ended October 31, 2022 2021 2020 (in thousands, except per share amounts) Basic Diluted Basic Diluted Basic Diluted Net income (loss) $ 8,226 $ 8,226 $ 6,764 $ 6,764 $ (6,247) $ (6,247) Undistributed earnings (loss) allocated to participating shares (97) (97) (76) (76) 66 66 Net income (loss) applicable to common shareholders $ 8,129 $ 8,129 $ 6,688 $ 6,688 $ (6,181) $ (6,181) Weighted average shares outstanding 6,580 6,580 6,595 6,595 6,670 6,670 Stock options and contingently issuable securities — 52 — 13 — — 6,580 6,632 6,595 6,608 6,670 6,670 Income (loss) per share $ 1.24 $ 1.23 $ 1.01 $ 1.01 $ (0.93) $ (0.93) Income Taxes – We account for income taxes and the related accounts under the asset and liability method. Deferred tax assets and liabilities are measured using enacted income tax rates in each jurisdiction in effect for the year in which the temporary differences are expected to be recovered or settled. These deferred tax assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Net deferred tax assets and liabilities are classified as non-current in the consolidated financial statements. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S. or foreign tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made. The determination of our provision for income taxes requires judgment, the use of estimates, and the interpretation and application of complex federal, state and foreign tax laws. Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions. In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward–looking statements is based on currently effective tax laws. Significant changes in those laws could materially affect these estimates. We operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Our tax positions are subject to audit by taxing authorities across multiple global jurisdictions, and the resolution of such audits may span multiple years. Tax law is complex and often subject to varied interpretations. Accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. Stock Compensation. We account for share–based compensation according to FASB guidance relating to share-based payments, which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date. This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements. Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long–lived asset impairment tests, inventory reserves, product warranties, income taxes and deferred tax valuation allowances, capitalized software development costs, derivative instruments, stock compensation, and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. |
