Hurco Companies 10Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

⌧ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended July 31, 2023 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	The Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ⌧ No ◻

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

Large accelerated filer ◻	Accelerated filer ⌧
Non-accelerated filer ◻	Smaller reporting company ◻
Emerging growth company ◻

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧

The number of shares of the Registrant’s common stock outstanding as of August 31, 2023 was 6,462,138.

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HURCO COMPANIES, INC.

Form 10-Q Quarterly Report for Fiscal Quarter Ended July 31, 2023

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Part I - Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Statements of Operations Three and Nine Months Ended July 31, 2023 and 2022	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) Three and Nine Months Ended July 31, 2023 and 2022	4

	Condensed Consolidated Balance Sheets as of July 31, 2023 and October 31, 2022	5

	Condensed Consolidated Statements of Cash Flows Three and Nine Months Ended July 31, 2023 and 2022	6

	Condensed Consolidated Statements of Changes in Shareholders’ Equity Three and Nine Months Ended July 31, 2023 and 2022	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	29

Item 4.	Controls and Procedures	30

Part II - Other Information

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 5.	Other Information	31

Item 6.	Exhibits	32

Signatures		33

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PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2023		2022		2023		2022

		(unaudited)				(unaudited)
Sales and service fees	$	53,201	$	57,640	$	161,702	$	187,352

Cost of sales and service		39,753		43,241		122,953		140,444

Gross profit		13,448		14,399		38,749		46,908

Selling, general and administrative expenses		12,436		12,647		35,512		36,859

Operating income		1,012		1,752		3,237		10,049

Interest expense		88		9		159		22

Interest income		122		16		259		69

Investment income (loss), net		11		(11)		47		170

Other income (expense), net		(412)		(22)		(131)		(440)

Income before income taxes		645		1,726		3,253		9,826

Provision for income taxes		385		488		1,286		3,024

Net income	$	260	$	1,238	$	1,967	$	6,802

Income per common share

Basic	$	0.04	$	0.19	$	0.30	$	1.02
Diluted	$	0.04	$	0.18	$	0.30	$	1.01

Weighted average common shares outstanding

Basic		6,462		6,567		6,511		6,585
Diluted		6,469		6,629		6,538		6,637

Dividends paid per share	$	0.16	$	0.15	$	0.47	$	0.44

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

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HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2023		2022		2023		2022

		(unaudited)				(unaudited)
Net income	$	260	$	1,238	$	1,967	$	6,802

Other comprehensive income (loss):

Translation gain (loss) of foreign currency financial statements		(1,315)		(3,079)		8,346		(12,622)

(Gain) / loss on derivative instruments reclassified into operations, net of tax of $(35), $23, $(75) and $93, respectively		(117)		76		(249)		302

Gain / (loss) on derivative instruments, net of tax of $(128), $30, $(430) and $121, respectively		(429)		95		(1,442)		389

Total other comprehensive income (loss)		(1,861)		(2,908)		6,655		(11,931)

Comprehensive income (loss)	$	(1,601)	$	(1,670)	$	8,622	$	(5,129)

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

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HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	July 31,		October 31,
	2023		2022
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	41,030	$	63,922
Accounts receivable, net		33,281		38,444
Inventories, net		178,423		156,207
Derivative assets		169		2,515
Prepaid and other assets		9,060		6,981
Total current assets		261,963		268,069
Property and equipment:
Land		1,046		868
Building		7,392		7,352
Machinery and equipment		27,940		26,532
Leasehold improvements		4,638		4,351
		41,016		39,103
Less accumulated depreciation and amortization		(33,119)		(30,620)
Total property and equipment, net		7,897		8,483
Non–current assets:
Software development costs, less accumulated amortization		7,085		7,302
Intangible assets, net		1,071		1,246
Operating lease - right of use assets, net		10,921		8,460
Deferred income taxes		4,305		3,442
Investments and other assets, net		9,975		9,235
Total non–current assets		33,357		29,685
Total assets	$	303,217	$	306,237
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,338	$	40,707
Customer deposits		5,502		4,839
Derivative liabilities		2,603		3,632
Operating lease liabilities		3,945		3,973
Accrued payroll and employee benefits		8,331		10,751
Accrued income taxes		1,545		2,611
Accrued expenses		4,261		5,397
Accrued warranty expenses		1,318		1,426
Total current liabilities		63,843		73,336
Non–current liabilities:
Deferred income taxes		88		67
Accrued tax liability		1,290		1,281
Operating lease liabilities		7,342		4,814
Deferred credits and other		4,853		4,095
Total non–current liabilities		13,573		10,257
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; 6,553,673 and 6,645,352 shares issued and 6,462,138 and 6,566,994 shares outstanding, as of July 31, 2023 and October 31, 2022, respectively		646		657
Additional paid-in capital		61,274		63,635
Retained earnings		178,751		179,877
Accumulated other comprehensive loss		(14,870)		(21,525)
Total shareholders’ equity		225,801		222,644
Total liabilities and shareholders’ equity	$	303,217	$	306,237

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

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HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2023		2022		2023		2022

		(unaudited)				(unaudited)
Cash flows from operating activities:
Net income	$	260	$	1,238	$	1,967	$	6,802
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for doubtful accounts		(33)		14		29		(179)
Deferred income taxes		(68)		(70)		233		(5)
Equity in (income) loss of affiliates		(117)		(72)		(339)		(462)
Foreign currency (gain) loss		(144)		836		(2,387)		2,018
Unrealized (gain) loss on derivatives		272		152		322		(176)
Depreciation and amortization		1,037		1,049		3,141		2,956
Stock–based compensation		756		791		2,280		2,386
Change in assets and liabilities:
(Increase) decrease in accounts receivable		1,518		(2,154)		7,472		4,408
(Increase) decrease in inventories		(4,150)		(9,518)		(14,621)		(22,194)
(Increase) decrease in prepaid expenses		206		256		(2,450)		5,638
Increase (decrease) in accounts payable		(8,187)		(814)		(5,981)		2,937
Increase (decrease) in customer deposits		(309)		220		404		(1,924)
Increase (decrease) in accrued expenses		(227)		1,195		(2,154)		1,057
Increase (decrease) in accrued payroll and employee benefits		384		667		(2,420)		(1,573)
Increase (decrease) in accrued income tax		(257)		(67)		(1,237)		813
Net change in derivative assets and liabilities		115		104		715		75
Other		(203)		302		(1,156)		(136)
Net cash provided by (used for) operating activities		(9,147)		(5,871)		(16,182)		2,441

Cash flows from investing activities:
Proceeds from sale of property and equipment		—		2		1		103
Purchase of property and equipment		(154)		(320)		(811)		(828)
Software development costs		(191)		(202)		(940)		(800)
Other investments		—		—		273		—
Net cash provided by (used for) investing activities		(345)		(520)		(1,477)		(1,525)

Cash flows from financing activities:
Proceeds from exercise of common stock options		—		—		270		117
Dividends paid		(1,059)		(1,004)		(3,093)		(2,927)
Taxes paid related to net settlement of restricted shares		—		—		(313)		(208)
Stock repurchases		—		—		(4,609)		(2,890)
Net cash provided by (used for) financing activities		(1,059)		(1,004)		(7,745)		(5,908)

Effect of exchange rate changes on cash and cash equivalents		(574)		(1,111)		2,512		(5,535)

Net increase (decrease) in cash and cash equivalents		(11,125)		(8,506)		(22,892)		(10,527)

Cash and cash equivalents at beginning of period		52,155		82,042		63,922		84,063

Cash and cash equivalents at end of period	$	41,030	$	73,536	$	41,030	$	73,536

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

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HURCO COMPANIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, except shares outstanding)


	Three Months Ended July 31, 2023 and 2022
								Accumulated
	Common Stock			Additional				Other
	Shares			Paid–in		Retained		Comprehensive
(unaudited)	Outstanding	Amount		Capital		Earnings		Income (Loss)		Total
Balances, April 30, 2022	6,566,994	$	657	$	62,543	$	179,215	$	(10,764)	$	231,651
Net income (loss)	—		—		—		1,238		—		1,238
Other comprehensive income (loss)	—		—		—		—		(2,908)		(2,908)
Stock–based compensation expense, net of taxes withheld for vested restricted shares	—		—		791		—		—		791
Dividends paid	—		—		—		(1,004)		—		(1,004)
Balances, July 31, 2022	6,566,994	$	657	$	63,334	$	179,449	$	(13,672)	$	229,768

Balances, April 30, 2023	6,462,138	$	646	$	60,518	$	179,550	$	(13,009)	$	227,705
Net income (loss)	—		—		—		260		—		260
Other comprehensive income (loss)	—		—		—		—		(1,861)		(1,861)
Stock–based compensation expense, net of taxes withheld for vested restricted shares	—		—		756		—		—		756
Dividends paid	—		—		—		(1,059)		—		(1,059)
Balances, July 31, 2023	6,462,138	$	646	$	61,274	$	178,751	$	(14,870)	$	225,801


	Nine Months Ended July 31, 2023 and 2022
								Accumulated
	Common Stock			Additional				Other
	Shares			Paid–in		Retained		Comprehensive
	Outstanding	Amount		Capital		Earnings		Income (Loss)		Total
Balances, October 31, 2021	6,617,717	$	662	$	63,924	$	175,574	$	(1,741)	$	238,419
Net income (loss)	—		—		—		6,802		—		6,802
Other comprehensive income (loss)	—		—		—		—		(11,931)		(11,931)
Stock–based compensation expense, net of taxes withheld for vested restricted shares	33,761		3		2,175		—		—		2,178
Exercise of common stock options	5,437		1		116		—		—		117
Stock repurchases	(89,921)		(9)		(2,881)		—		—		(2,890)
Dividends paid	—		—		—		(2,927)		—		(2,927)
Balances, July 31, 2022	6,566,994	$	657	$	63,334	$	179,449	$	(13,672)	$	229,768

Balances, October 31, 2022	6,566,994	$	657	$	63,635	$	179,877	$	(21,525)	$	222,644
Net income (loss)	—		—		—		1,967		—		1,967
Other comprehensive income (loss)	—		—		—		—		6,655		6,655
Stock–based compensation expense, net of taxes withheld for vested restricted shares	49,874		5		1,962		—		—		1,967
Exercise of common stock options	11,559		1		269		—		—		270
Stock repurchases	(166,289)		(17)		(4,592)		—		—		(4,609)
Dividends paid	—		—		—		(3,093)		—		(3,093)
Balances, July 31, 2023	6,462,138	$	646	$	61,274	$	178,751	$	(14,870)	$	225,801

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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

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

The condensed consolidated financial information as of July 31, 2023 and for the three and nine months ended July 31, 2023 and July 31, 2022 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, 2022.

2. REVENUE RECOGNITION

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

We 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, “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 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) the performance obligation to the customer is fulfilled.

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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 operating 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 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.

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 major financial institution.

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

Derivatives Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company sales and purchases denominated in the following foreign currencies: the Pound Sterling, Euro and New Taiwan Dollar. The purpose of these instruments is to mitigate the risk that the U.S. dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments and are recorded in the Condensed Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive 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 (expense), net. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.

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We had forward contracts outstanding as of July 31, 2023, denominated in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from August 2023 through July 2024. The contract amounts, expressed at forward rates in U.S. dollars at July 31, 2023, were $11.6 million for Euros, $5.3 million for Pounds Sterling and $18.3 million for New Taiwan Dollars. At July 31, 2023, we had approximately $1.4 million of loss, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive income (loss). Included in this amount was $0.9 million of unrealized loss, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through July 2024, 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 2022. 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 2023. As of July 31, 2023, we had a realized gain of $1.3 million and an unrealized loss of $0.2 million, 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 in Other income (expense), net in the Condensed Consolidated Statements of Operations consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies.

We had forward contracts outstanding as of July 31, 2023, denominated in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from August 2023 through January 2024. The contract amounts, expressed at forward rates in U.S. dollars at July 31, 2023, totaled $53.6 million.

Fair Value of Derivative Instruments

We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Condensed Consolidated Balance Sheets. As of July 31, 2023 and October 31, 2022, all derivative instruments were recorded at fair value on our Condensed Consolidated Balance Sheets as follows (in thousands):


	July 31, 2023			October 31, 2022
	Balance Sheet	Fair		Balance Sheet	Fair
Derivatives	Location	Value		Location	Value
Designated as Hedging Instruments:
Foreign exchange forward contracts	Derivative assets	$	7	Derivative assets	$	2,273
Foreign exchange forward contracts	Derivative liabilities	$	1,457	Derivative liabilities	$	2,891

Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Derivative assets	$	162	Derivative assets	$	242
Foreign exchange forward contracts	Derivative liabilities	$	1,146	Derivative liabilities	$	741

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

Derivative instruments had the following effects on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Changes in Shareholders’ Equity and Condensed Consolidated Statements of Operations, net of tax, during the three months ended July 31, 2023 and 2022 (in thousands):


					Location of Gain	Amount of Gain
	Amount of Gain (Loss)				(Loss) Reclassified	(Loss) Reclassified
	Recognized in Other				from Other	from Other
	Comprehensive				Comprehensive	Comprehensive
Derivatives	Income (Loss)				Income (Loss)	Income (Loss)
	Three Months Ended					Three Months Ended
	July 31,					July 31,
	2023		2022			2023		2022
Designated as Hedging Instruments:
(Effective portion)
Foreign exchange forward contracts – Intercompany sales/purchases	$	(429)	$	95	Cost of sales and service	$	117	$	(76)
Foreign exchange forward contract – Net investment	$	14	$	89

We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the three months ended July 31, 2023 or 2022. We recognized the following gains in our Condensed Consolidated Statements of Operations during the three months ended July 31, 2023 and 2022 on derivative instruments not designated as hedging instruments (in thousands):


	Location of Gain
	(Loss) Recognized	Amount of Gain (Loss)
Derivatives	in Operations	Recognized in Operations
		Three Months Ended
		July 31,
		2023		2022
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Other income (expense), net	$	(1,040)	$	1,059

The following table presents the changes in the components of Accumulated other comprehensive income (loss), net of tax, for the three months ended July 31, 2023 (in thousands):


	Foreign Currency		Cash Flow
	Translation		Hedges		Total
Balance, April 30, 2023	$	(11,598)	$	(1,411)	$	(13,009)
Other comprehensive income (loss) before reclassifications		(1,315)		(429)		(1,744)
Reclassifications		—		(117)		(117)
Balance, July 31, 2023	$	(12,913)	$	(1,957)	$	(14,870)

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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 nine months ended July 31, 2023 and 2022 (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
	Income (Loss)				Income (Loss)	Income (Loss)
	Nine Months Ended					Nine Months Ended
	July 31,					July 31,
Derivatives	2023		2022			2023		2022
Designated as Hedging Instruments:
(Effective Portion)
Foreign exchange forward contracts – Intercompany sales/purchases	$	(1,442)	$	389	Cost of sales and service	$	249	$	(302)
Foreign exchange forward contract – Net investment	$	(210)	$	310

We did not recognize any gains or losses as a result of hedges deemed ineffective for either of the nine months ended July 31, 2023 or 2022. We recognized the following gains in our Condensed Consolidated Statements of Operations during the nine months ended July 31, 2023 and 2022 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
		Nine Months Ended
		July 31,
Derivatives		2023		2022
Not Designated as Hedging Instruments:
Foreign exchange forward contracts	Other income (expense), net	$	(2,504)	$	1,838

The following table presents the changes in the components of Accumulated other comprehensive income (loss), net of tax, for the nine months ended July 31, 2023 (in thousands):


	Foreign		Cash
	Currency		Flow
	Translation		Hedges		Total
Balance, October 31, 2022	$	(21,259)	$	(266)	$	(21,525)
Other comprehensive income (loss) before reclassifications		8,346		(1,442)		6,904
Reclassifications		—		(249)		(249)
Balance, July 31, 2023	$	(12,913)	$	(1,957)	$	(14,870)

4. EQUITY INCENTIVE PLAN

In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (as amended as described below, 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 initially was 856,048, which included 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. On March 10, 2022, our shareholders approved the Amended and Restated Hurco Companies, Inc. 2016 Equity Incentive Plan, which, among other items, increased the aggregate number of shares that may be issued under the 2016 Equity Plan by 850,000 shares.

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The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan that are currently outstanding. We have previously granted stock options under the 2008 Equity Plan. 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 nine-month period ended July 31, 2023, is as follows:


		Weighted Average
	Stock Options	Exercise Price
Outstanding at October 31, 2022	11,559	$	23.30
Options granted	—		—
Options exercised	(11,559)		23.30
Options cancelled	—		—
Outstanding at July 31, 2023	—	$	—

As of July 31, 2023, no stock options remained outstanding.

On March 9, 2023, the Compensation Committee granted a total of 17,226 shares of time-based restricted stock to our non-employee directors. The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date, which was $27.86 per share.

On January 3, 2023, 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 year 2023 through fiscal year 2025.

On that date, the Compensation Committee granted a total of 29,376 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 $26.38 per share.

On January 3, 2023, the Compensation Committee also granted a total target number of 47,003 PSUs to our executive officers designated as “PSU – NI”. These PSUs were weighted as approximately 40% of the overall 2023 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average net income over the three-year period of fiscal 2023-2025. Participants will have the ability to earn between 50% of the target number of the PSUs – NI for achieving threshold performance and 200% of the target number of the PSUs – NI for achieving maximum performance. The grant date fair value of the PSUs – NI was based on the closing sales price of our common stock on grant date, which was $26.38 per PSU.

On January 3, 2023, the Compensation Committee also granted a total target number of 41,126 PSUs to our executive officers designated as “PSU –FCF”. These PSUs were weighted as approximately 35% of the overall 2023 executive long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average free cash flow over the three-year period of fiscal 2023-2025. Participants will have the ability to earn between 50% of the target number of the PSUs – FCF for achieving threshold performance and 200% of the target number of the PSUs – FCF for achieving maximum performance. The grant date fair value of the PSUs – FCF was based on the closing sales price of our common stock on the grant date, which was $26.38 per PSU.

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On November 9, 2022, the Compensation Committee granted a total of 12,223 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 $24.53 per share.

A reconciliation of our restricted stock and PSU activity and related information for the nine-month period ended July 31, 2023 is as follows:


		Weighted Average Grant
	Number of Shares	Date Fair Value
Unvested at October 31, 2022	273,103	$	32.90
Shares or units granted	146,954		26.40
Shares or units vested	(49,874)		36.23
Shares or units cancelled	(39,916)		40.22
Shares withheld	(11,950)		37.84
Unvested at July 31, 2023	318,317	$	28.27

During the nine months of fiscal 2023 and 2022, we recorded approximately $2.3 million and $2.4 million, respectively, of stock-based compensation expense, related to grants under the 2016 Equity Plan. As of July 31, 2023, there was an estimated $4.5 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal year 2026.

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 per share is determined using net income 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								Nine Months Ended
	July 31,								July 31,
	2023				2022				2023				2022
	Basic		Diluted		Basic		Diluted		Basic		Diluted		Basic		Diluted
Net income	$	260	$	260	$	1,238	$	1,238	$	1,967	$	1,967	$	6,802	$	6,802
Undistributed earnings allocated to participating shares		(4)		(4)		(15)		(15)		(27)		(27)		(80)		(80)
Net income applicable to common shareholders	$	256	$	256	$	1,223	$	1,223	$	1,940	$	1,940	$	6,722	$	6,722

Weighted average shares outstanding		6,462		6,462		6,567		6,567		6,511		6,511		6,585		6,585
Stock options and contingently issuable securities		—		7		—		62		—		27		—		52
		6,462		6,469		6,567		6,629		6,511		6,538		6,585		6,637
Income per share	$	0.04	$	0.04	$	0.19	$	0.18	$	0.30	$	0.30	$	1.02	$	1.01

6. ACCOUNTS RECEIVABLE

Accounts receivable are net of allowances for doubtful accounts of $1.5 million as of each of July 31, 2023 and October 31, 2022.

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7. INVENTORIES

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


	July 31,		October 31,
	2023		2022
Purchased parts and sub–assemblies	$	46,884	$	46,796
Work–in–process		19,446		16,539
Finished goods		115,852		96,305
Inventories, gross	$	182,182	$	159,640
Reserve for purchased parts and sub-assemblies		(3,759)		(3,433)
Inventories, net	$	178,423	$	156,207

8. LEASES

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 that, at the commencement date, have a lease term of more than 12 months and are classified as operating leases.

We recorded total operating lease expense of $3.9 million and $3.8 million for the nine months ended July 31, 2023 and 2022, respectively, which is classified within Cost of sales and service and Selling, general and administrative expenses within the Condensed Consolidated Statements of Operations. Operating lease expense includes short-term leases and variable lease payments which are immaterial. There have been no lease costs capitalized on the Condensed Consolidated Balance Sheets as of July 31, 2023.

The following table summarizes supplemental cash flow information and non-cash activity related to operating leases for the nine months ended July 31, 2023 and 2022 (in thousands):


		Nine Months Ended		Nine Months Ended
		July 31, 2023		July 31, 2022
Operating cash flow information:
Cash paid for amounts included in the measurement of lease liabilities	$	3,768	$	3,476
Non-cash information:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	6,053	$	2,593

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The following table summarizes the maturities of undiscounted cash flows of lease commitments reconciled to the total lease liability as of July 31, 2023 (in thousands):


Remainder of 2023	$	1,241
2024		3,808
2025		2,290
2026		1,415
2027		1,239
2028 and thereafter		2,075
Total		12,068
Less: Imputed interest		(781)
Present value of operating lease liabilities	$	11,287

As of July 31, 2023, the weighted-average remaining term of our lease portfolio was approximately 4.2 years and the weighted-average discount rate was approximately 2.9%.

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, 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 Guarantees). As of July 31, 2023, we had nine outstanding third party payment guarantees totaling approximately $0.9 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):


	Nine Months Ended
	July 31,
	2023		2022
Balance, beginning of period	$	1,426	$	1,516
Provision for warranties during the period		1,949		2,183
Charges to the reserve		(2,119)		(2,177)
Impact of foreign currency translation		62		(85)
Balance, end of period	$	1,318	$	1,437

The year-over-year decrease in our warranty reserve was primarily due to a lower volume of machine sales.

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11. DEBT AGREEMENTS

On December 31, 2018, we and our subsidiary Hurco B.V. entered into a credit agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020, December 17, 2021, and January 4, 2023 (as amended, the “2018 Credit Agreement”). 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, 2023.

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the secured overnight financing rate (“SOFR”), the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% 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 SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%.

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 $25.0 million; (3) requiring that we maintain a minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net worth of $176.5 million. We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In March 2019, our wholly-owned subsidiaries in Taiwan (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 and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. In February 2023, NHML renewed the above-referenced credit facility on substantially similar terms and an identical maximum aggregate limit.

As a result, as of July 31, 2023, our existing credit facilities consisted of a €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 July 31, 2023, there were no borrowings under any of our credit facilities and there was approximately $51.0 million of available borrowing capacity thereunder. There were also no borrowings under any of our credit facilities as of October 31, 2022.

12. INCOME TAXES

Our provision for income taxes and effective tax rate is 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.

The Inflation Reduction Act of 2022 (the “Inflation Reduction Act” or “IRA”) was signed into law on August 16, 2022. The IRA provides investment in clean energy, promotes reductions in carbon emissions, and extends select Affordable Care Act premium reductions. The IRA is paid for through the implementation of a 15 percent corporate minimum tax on corporations with over $1 billion of financial statement income, budget increases for the Internal Revenue Service, an excise tax on stock repurchases, and changes to Medicare rules. The Company does not currently expect that the Inflation Reduction Act will have a material impact on its income taxes.

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We recorded an income tax expense during the nine months of fiscal year 2023 of $1.3 million compared to an income tax expense of $3.0 million for the same period in 2022. Our effective tax rate for the nine months of fiscal year 2023 was 40%, compared to 31% 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 that includes jurisdictions with differing tax rates, discrete items related to stock compensation and the impact of valuation allowances for our China operations combined with lower levels of consolidated income before taxes.

Our unrecognized tax benefits were $179,000 as of July 31, 2023, and $171,000 as of October 31, 2022, and in each case included accrued interest.

We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. As of July 31, 2023, the gross amount of interest accrued, reported in Accrued expenses, was approximately $41,000, 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 2023 and September 2024.

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.

The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of these instruments, and such instruments meet the Level 1 criteria of the three–tier fair value hierarchy discussed above. The carrying amount of short-term debt approximates fair value due to the variable rate of the interest and the short-term nature of the instrument.

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 July 31, 2023 and October 31, 2022 (in thousands):



	Assets				Liabilities
	July 31, 2023		October 31, 2022		July 31, 2023		October 31, 2022
Level 1
Deferred compensation	$	2,400	$	1,996	$	—	$	—

Level 2
Derivatives	$	169	$	2,515	$	2,603	$	3,632

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 were $93.0 million and $102.8 million at July 31, 2023 and October 31, 2022, 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.

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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.

15. NEW ACCOUNTING PRONOUNCEMENTS

We reviewed all recently issued accounting pronouncements and concluded they are either not applicable or not expected to have a significant impact on our condensed consolidated financial statements as of July 31, 2023.

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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, 2022.

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 and notes thereto 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 nine months of fiscal year 2023, approximately 56% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance VMX series machines. Additionally, approximately 8% 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 is our wholly-owned subsidiary that provides automation solutions. 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 approximately 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, the Czech Republic, 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 and assembled to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings to support HML’s production are manufactured at our wholly-owned subsidiary in Ningbo, China, NHML. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head, and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM.

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

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

We operate in the industrial equipment industry and have a global footprint that subjects us to various business risks in many different countries. Our operating results during fiscal years 2020 through 2022 and the nine months of fiscal year 2023 were affected by the international business disruption due to the outbreak of COVID-19, vendor delays, transportation issues, unusually high inflation, volatility of foreign currencies, competitive labor markets, and political friction in the U.S and many regions of the world. We cannot predict the duration or scope of impact of the COVID-19 pandemic, as well as other factors listed above, and the potential impact to our operations and financial results cannot be reasonably estimated. To date, we have experienced some delays 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 have also implemented adjustments in discretionary spending, delayed capital expenditures, and monitored production activities closely in an effort to weather the adverse business climate. We have also received stimulus in various countries to support operations and implemented tax deferrals and provisions that were available to us. We have seen inflationary pressures and input cost increases imposed in our supply chains on components for our products. We have also seen capacity for transportation and freight services limited significantly by container or vessel availability and delays at departing and receiving ports, all of which have contributed to significantly increased costs and prices associated with the global shipment of our products.

RESULTS OF OPERATIONS

Three Months Ended July 31, 2023 Compared to Three Months Ended July 31, 2022

Sales and Service Fees. Sales and service fees for the third quarter of fiscal year 2023 were $53.2 million, a decrease of $4.4 million, or 8%, compared to the corresponding prior year period, and included a favorable currency impact of $0.6 million, or 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.

Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the third quarter ended July 31, 2023 and 2022 (dollars in thousands):


	Three Months Ended
	July 31,
	2023				2022				$ Change		% Change
Americas	$	18,272	34	%	$	23,736	41	%	$	(5,464)	(23)	%
Europe		31,162	59	%		28,932	50	%		2,230	8	%
Asia Pacific		3,767	7	%		4,972	9	%		(1,205)	(24)	%
Total	$	53,201	100	%	$	57,640	100	%	$	(4,439)	(8)	%

Sales in the Americas for the third quarter of fiscal year 2023 decreased by 23%, compared to the corresponding period in fiscal year 2022, primarily due to decreased shipments of Hurco and Milltronics machines, particularly the higher-performance VMX machines.

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European sales for the third quarter of fiscal year 2023 increased by 8%, compared to the corresponding period in fiscal year 2022, and included a favorable currency impact of 2%, when translating foreign sales to U.S. dollars for financial reporting purposes. The increase in European sales was primarily attributable to an increased volume of shipments and improved mix of higher-performance Hurco VMX and five-axis machines in Italy and France, increased European sales of Milltronics machines, and increased sales of electro-mechanical components and accessories manufactured by our wholly owned subsidiary, LCM. Additionally, while the volume of machine sales in the third quarter did not increase year-over-year in the United Kingdom, overall sales in dollars in the U.K. increased due to an improved mix of higher-performance VMX machines.

Asian Pacific sales for the third quarter of fiscal year 2023 decreased by 24%, compared to the corresponding period in fiscal year 2022, and included an unfavorable currency impact of 3%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in Asian Pacific sales primarily resulted from a reduced volume of shipments of Hurco and Takumi machines in China, Southeast Asia, and India.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the third fiscal quarter ended July 31, 2023 and 2022 (dollars in thousands):


	Three Months Ended
	July 31,
	2023				2022				$ Change		% Change
Computerized Machine Tools	$	43,189	81	%	$	48,414	84	%	$	(5,225)	(11)	%
Computer Control Systems and Software †		778	1	%		652	1	%		126	19	%
Service Parts		7,166	14	%		6,588	11	%		578	9	%
Service Fees		2,068	4	%		1,986	4	%		82	4	%
Total	$	53,201	100	%	$	57,640	100	%	$	(4,439)	(8)	%

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

Sales of computerized machine tools for the third quarter of fiscal year 2023 decreased by 11%, compared to the corresponding prior year period, primarily due to a decreased volume of shipments of Hurco and Milltronics machines in the Americas, Hurco and Takumi machines in Asia Pacific and Hurco machines in Germany. Sales of computer control systems and software for the third quarter of fiscal year 2023 increased by 19%, compared to the corresponding prior year period, due mainly to increased aftermarket software sales in the Americas and France. Sales of service parts and services fees for the third quarter of fiscal year 2023 increased by 9% and 4%, respectively, compared to the corresponding prior year period, primarily due to increased aftermarket sales and service of Hurco and ProCobots products in Europe. Sales for all product categories included an aggregate favorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.

Orders. Orders for the third quarter of fiscal year 2023 were $42.1 million, a decrease of $10.8 million, or 20%, compared to the corresponding period in fiscal year 2022, and included a favorable currency impact of $1.1 million, or 2%, when translating foreign orders to U.S. dollars.

The following table sets forth new orders booked by geographic region for the third fiscal quarter ended July 31, 2023 and 2022 (dollars in thousands):


	Three Months Ended
	July 31,
	2023				2022				$ Change		% Change
Americas	$	14,607	35	%	$	21,652	41	%	$	(7,045)	(33)	%
Europe		24,752	59	%		26,429	50	%		(1,677)	(6)	%
Asia Pacific		2,723	6	%		4,801	9	%		(2,078)	(43)	%
Total	$	42,082	100	%	$	52,882	100	%	$	(10,800)	(20)	%

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Orders in the Americas for the third quarter of fiscal year 2023 decreased by 33%, compared to the corresponding period in fiscal year 2022. The decrease in orders was primarily due to decreased customer demand for Hurco and Milltronics machines, particularly higher-performance VMX and five-axis machines.

European orders for the third quarter of fiscal year 2023 decreased by 6%, compared to the corresponding prior year period, and included a favorable currency impact of 4%, when translating foreign orders to U.S. dollars. The decrease in orders was driven primarily by decreased customer demand for Hurco machines in Germany and Italy, partially offset by increased customer demand for Hurco machines in France, Milltronics machines in Europe and electro-mechanical components and accessories manufactured by LCM. Additionally, while the volume of machine orders in the third quarter of fiscal 2023 did not increase year-over-year in the United Kingdom, overall orders in dollars in the U.K. increased due to an improved mix of higher-performance VMX and five-axis machines.

Asian Pacific orders for the third quarter of fiscal year 2023 decreased by 43%, compared to the corresponding prior year period, and included an unfavorable currency impact of less than 1%, when translating foreign orders to U.S. dollars. The reduction in Asian Pacific orders was driven primarily by a decrease in customer demand for Hurco and Takumi machines in China, India, and Southeast Asia.

Gross Profit. Gross profit for the third quarter of fiscal year 2023 was $13.4 million, or 25% of sales, compared to $14.4 million, or 25% of sales, for the corresponding prior year period. The year-over-year decrease in gross profit was primarily due to the lower volume of sales of vertical milling machines and the negative impact of fixed costs on lower sales and production volumes. Gross profit as a percentage of sales for the third quarter of fiscal 2023 was relatively unchanged year-over year despite the reduced volume as sales reflected an increased mix of higher-performance VMX and five-axis machines sold in Europe.

Operating Expenses. Selling, general, and administrative expenses for the third quarter of fiscal year 2023 were $12.4 million, or 23% of sales, compared to $12.6 million, or 22% of sales, in the corresponding fiscal year 2022 period, and included an unfavorable currency impact of $0.1 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year decrease in selling, general and administrative expenses in absolute dollar terms was primarily attributable to lower costs related to marketing and tradeshow expenses, and employee support costs for the global operations.

Operating Income. Operating income for the third quarter of fiscal year 2023 was $1.0 million, compared to $3.2 million for the corresponding period in fiscal year 2022. The decrease in operating income was primarily due to lower volume of sales of vertical milling machines and the negative impact of fixed costs on lower sales and production volumes

Other Income (Expense), Net. Other income (expense), net for the third quarter of fiscal year 2023 decreased by $0.4 million compared to the corresponding period in fiscal year 2022, due mainly to an increase in foreign currency exchange loss in the third fiscal quarter of fiscal year 2023 compared to the same period in fiscal year 2022.

Income Taxes. The effective tax rate for the third quarter of fiscal year 2023 was 60%, compared to 28% 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 that includes jurisdictions with differing tax rates and the impact of valuation allowances for our China operations combined with lower levels of consolidated income before taxes.

Nine Months Ended July 31, 2023 Compared to Nine Months Ended July 31, 2022

Sales and Service Fees. Sales and service fees for the nine months of fiscal year 2023 were $161.7 million, a decrease of $25.7 million, or 14%, compared to the corresponding prior year period, and included an unfavorable currency impact of $4.1 million, or 2%, when translating foreign sales to U.S. dollars for financial reporting purposes.

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Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the nine months ended July 31, 2023 and 2022 (dollars in thousands):


	Nine Months Ended
	July 31,
	2023				2022				$ Change		% Change
Americas	$	58,609	36	%	$	70,154	38	%	$	(11,545)	(16)	%
Europe		89,745	56	%		93,932	50	%		(4,187)	(4)	%
Asia Pacific		13,348	8	%		23,266	12	%		(9,918)	(43)	%
Total	$	161,702	100	%	$	187,352	100	%	$	(25,650)	(14)	%

Sales in the Americas for the nine months of fiscal year 2023 decreased by 16%, compared to the corresponding period in fiscal year 2022, primarily due to decreased shipments of Hurco and Milltronics machines, particularly the higher-performance VMX machines.

European sales for the nine months of fiscal year 2023 decreased by 4%, compared to the corresponding period in fiscal year 2022, and included an unfavorable currency impact of 3%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year decrease in European sales was primarily attributable to a decreased volume of shipments of Hurco machines in Germany, France, and Italy, partially offset by increased sales of higher-performance Hurco VMX machines in the United Kingdom, increased European sales of Milltronics machines, and increased sales of electro-mechanical components and accessories manufactured by LCM.

Asian Pacific sales for the nine months of fiscal year 2023 decreased by 43%, compared to the corresponding period in fiscal year 2022, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S. dollars for financial reporting purposes. The decrease in Asian Pacific sales primarily resulted from a reduced volume of shipments of Hurco and Takumi machines in China, Southeast Asia, and India.

Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the nine months ended July 31, 2023 and 2022 (dollars in thousands):


	Nine Months Ended
	July 31,
	2023				2022				$ Change		% Change
Computerized Machine Tools	$	132,535	82	%	$	158,774	85	%	$	(26,239)	(17)	%
Computer Control Systems and Software †		1,916	1	%		2,017	1	%		(101)	(5)	%
Service Parts		21,101	13	%		20,496	11	%		605	3	%
Service Fees		6,150	4	%		6,065	3	%		85	1	%
Total	$	161,702	100	%	$	187,352	100	%	$	(25,650)	(14)	%

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

Sales of computerized machine tools for the nine months of fiscal year 2023 decreased by 17%, compared to the corresponding prior year period, primarily due to decreased volume of shipments of Hurco and Milltronics machines in the Americas, Hurco and Takumi machines in Asia Pacific and Hurco machines in Germany, France and Italy. Sales of computer control systems and software for the nine months of fiscal year 2023 decreased by 5%, compared to the corresponding prior year period, due mainly to decreased aftermarket software sales in Europe and Southeast Asia. Sales of service parts for the nine months of fiscal year 2023 increased by 3%, compared to the corresponding prior year period, primarily due to increased aftermarket sales of Hurco and ProCobots products in the United Kingdom and Milltronics and ProCobots products in the Americas. Sales for all product categories included an aggregate unfavorable currency impact of 2%, when translating foreign sales to U.S. dollars for financial reporting purposes.

Orders. Orders for the nine months of fiscal year 2023 were $155.5 million, a decrease of $27.1 million, or 15%, compared to the corresponding period in fiscal year 2022, and included an unfavorable currency impact of $4.0 million, or 2%, when translating foreign orders to U.S. dollars.

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The following table sets forth new orders booked by geographic region for the nine months ended July 31, 2023 and 2022 (dollars in thousands):


	Nine Months Ended
	July 31,
	2023				2022				$ Change		% Change
Americas	$	56,548	37	%	$	68,189	37	%	$	(11,641)	(17)	%
Europe		87,632	56	%		94,964	52	%		(7,332)	(8)	%
Asia Pacific		11,355	7	%		19,442	11	%		(8,087)	(42)	%
Total	$	155,535	100	%	$	182,595	100	%	$	(27,060)	(15)	%

Orders in the Americas for the nine months of fiscal year 2023 decreased by 17%, compared to the corresponding period in fiscal year 2022. The decrease in orders was primarily due to decreased customer demand for Hurco and Milltronics machines, particularly higher-performance VMX and five-axis machines.

European orders for the nine months of fiscal year 2023 decreased by 8%, compared to the corresponding prior year period, and included an unfavorable currency impact of 4%, when translating foreign orders to U.S. dollars. The decrease in orders was driven primarily by decreased customer demand for Hurco machines in Germany and France, partially offset by increased customer demand for higher-performance Hurco VMX machines in the United Kingdom and Italy, and for electro-mechanical components and accessories manufactured by LCM.

Asian Pacific orders for the nine months of fiscal year 2023 decreased by 42%, compared to the corresponding prior year period, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. dollars. The reduction in Asian Pacific orders was driven primarily by a decrease in customer demand for Hurco and Takumi machines in China, India, and Southeast Asia.

Gross Profit. Gross profit for the nine months of fiscal year 2023 was $38.7 million, or 24% of sales, compared to $46.9 million, or 25% of sales, for the corresponding prior year period. The year-over-year decrease in gross profit was primarily due to the lower volume of sales of vertical milling machines and the negative impact of fixed costs on lower sales and production volumes. Gross profit as a percentage of sales for the nine months of fiscal 2023 was relatively unchanged year-over year despite the reduced volume as sales reflected an increased mix of higher-performance VMX and five-axis machines sold in Europe.

Operating Expenses. Selling, general, and administrative expenses for the nine months of fiscal year 2023 were $35.5 million, or 22% of sales, compared to $36.9 million, or 20% of sales, in the corresponding fiscal year 2022 period, and included a favorable currency impact of $0.7 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year decrease in selling, general and administrative expenses in absolute dollar terms was primarily attributable to lower costs related to sales commissions, marketing and tradeshow expenses, and employee support costs for the global operations.

Operating Income. Operating income for the nine months of fiscal year 2023 was $3.2 million, compared to $10.0 million for the corresponding period in fiscal year 2022. The decrease in operating income was primarily due to the lower volume of sales of vertical milling machines and the negative impact of fixed costs on lower sales and production volumes.

Other Income (Expense), Net. Other income (expense), net for the nine months of fiscal year 2023 increased by $0.3 million compared to the corresponding period in fiscal year 2022, due mainly to a reduction in foreign currency exchange loss in the nine months of fiscal year 2023 compared to the same period in fiscal year 2022.

Income Taxes. The effective tax rate for the nine months of fiscal year 2023 was 40%, compared to 31% 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 that includes jurisdictions with differing tax rates, discrete items related to stock compensation and the impact of valuation allowances for our China operations combined with lower levels of consolidated income before taxes.

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LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2023, we had cash and cash equivalents of $41.0 million, compared to $63.9 million at October 31, 2022. Approximately 21% of the $41.0 million of cash and cash equivalents was denominated in U.S. dollars. The balance was attributable to our foreign operations and is held in the local currencies of our various foreign entities, subject to fluctuations in currency exchange rates. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.

Working capital was $198.1 million at July 31, 2023, compared to $194.7 million at October 31, 2022. The increase in working capital was primarily driven by increases in inventories, net and prepaid and other assets and decreases in accounts payable and accrued payroll and employee benefits, partially offset by decreases in cash and cash equivalents and accounts receivable, net.

Capital expenditures of $1.8 million during the nine months of fiscal year 2023 were primarily for capital improvements in existing facilities and software development costs. We funded these expenditures with cash on hand.

On January 6, 2023, we announced a share repurchase program in an aggregate amount of up to $25.0 million. Repurchases under the program may be made in the open market or through privately negotiated transactions from time to time through November 10, 2024, subject to applicable laws, regulations, and contractual provisions. The program may be amended, suspended, or discontinued at any time and does not commit us to repurchase any shares of our common stock. During the nine months of fiscal year 2023, approximately 67,513 shares were repurchased at an aggregate value of approximately $1.8 million under that program, resulting in $23.2 million remaining available under the program as of July 31, 2023.

Our prior $7.0 million share repurchase program also remained in effect until its scheduled expiration on March 10, 2023 During the nine months of fiscal year 2023, approximately 98,776 shares were repurchased at an aggregate value of approximately $2.8 million under that program. Aggregate repurchases under all programs during the nine months of fiscal year 2023 were approximately $4.6 million.

In addition, during the nine months ended July 31, 2023, we paid cash dividends to our shareholders of $3.1 million. Future dividends are subject to approval of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors deemed relevant by our Board of Directors from time to time.

On December 31, 2018, we and our subsidiary Hurco B.V. entered into the 2018 Credit Agreement with Bank of America, N.A., as the lender, which was subsequently amended on each of March 13, 2020, December 23, 2020, December 17, 2021, and January 4, 2023. 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, 2023.

Borrowings under the 2018 Credit Agreement bear interest at floating rates based on, at our option, either (i) a rate based upon the SOFR, the Sterling Overnight Index Average Reference Rate, the Euro Interbank Offering Rate, or another alternative currency-based rate approved by the lender, depending on the term of the loan and the currency in which such loan is denominated, plus 1.00% 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 SOFR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of 1.00%.

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In March 2019, our wholly-owned subsidiaries in Taiwan, HML, and China, NHML, closed on uncommitted revolving credit facilities with maximum aggregate amounts of 150 million New Taiwan Dollars and 32.5 million Chinese Yuan, respectively. As uncommitted facilities, both the Taiwan and China credit facilities are subject to review and termination by the respective underlying lending institution from time to time. In February 2023, NHML renewed the above-referenced credit facility on substantially similar terms and an identical maximum aggregate limit.

As of July 31, 2023, our existing credit facilities consisted of a €1.5 million revolving credit facility in Germany, the 150 million New Taiwan Dollars Taiwan credit facility, the 32.5 million Chinese Yuan China credit facility and the $40.0 million revolving credit facility under the 2018 Credit Agreement. We had no debt or borrowings under any of our credit facilities at July 31, 2023.

At July 31, 2023, we had an aggregate of approximately $51.0 million available for borrowing under our credit facilities and were in compliance with all covenants relating thereto.

We have an international cash pooling strategy that generally provides access to available cash deposits and credit facilities when needed in the U.S., Europe or Asia Pacific. We believe our access to cash pooling and our borrowing capacity under our credit facilities provide adequate liquidity to fund our global operations over the next twelve months and beyond, and allow us to remain committed to our strategic plan of product innovation, acquisitions, targeted penetration of developing markets, payment of dividends and our stock repurchase program.

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

CRITICAL ACCOUNTING ESTIMATES

Our MD&A is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles. The preparation of financial statements in conformity with those accounting principles requires us to make judgments and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Those judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates. Our critical accounting estimates, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, are frequently evaluated as our judgment and estimates are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances. During the nine months of fiscal year 2023, there were no material changes to our critical accounting estimates as described in the MD&A included in our Annual Report on Form 10-K for the year ended October 31, 2022.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes related to our contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.

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OFF BALANCE SHEET ARRANGEMENTS

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of July 31, 2023, we had nine outstanding third party payment guarantees totaling approximately $0.9 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however, until the customer has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements made in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements.

These risks, uncertainties and other factors include, but are not limited to:

•

The cyclical nature of the machine tool industry;

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

•The risks of our international operations;

•

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

•The effects of changes in currency exchange rates;

•Competition with larger companies that have greater financial resources;

•Our dependence on new product development;

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

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

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

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

•Our ability to integrate acquisitions;

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

•Failure to comply with data privacy and security regulations;

•Breaches of our network and system security measures;

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

•Impairment of our assets;

•Negative or unforeseen tax consequences;

•Uncertainty concerning our ability to use tax loss carryforwards;

•Changes in the SOFR rate; and

•

The impact of the COVID -19 pandemic and other public health epidemics and pandemics on the global economy, our business and operations, our employees and the business, operations and economies of our customers and suppliers.

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

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

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At July 31, 2023, we had no borrowings outstanding under any of our credit facilities.

Foreign Currency Exchange Risk

In the nine months of fiscal year 2023, we derived approximately 64% of our revenues from customers located outside of the Americas, where we invoiced and received payments in several foreign currencies. All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.

Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, the U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro.

We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes.

Forward contracts for the sale or purchase of foreign currencies as of July 31, 2023, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows (in thousands, except weighted average forward rates):


				Contract Amount at
	Notional	Weighted		Forward Rates in
	Amount	Avg.		U.S. Dollars
Forward	in Foreign	Forward		Contract	July 31,
Contracts	Currency	Rate		Date	2023	Maturity Dates
Sale Contracts:
Euro	10,500	1.0888		11,432	11,643	Aug 2023 - Jul 2024
Sterling	4,100	1.2210		5,006	5,267	Aug 2023 - Jul 2024

Purchase Contracts:
New Taiwan Dollar	565,000	29.6782	*	19,038	18,291	Aug 2023 - Jul 2024

* New Taiwan Dollars per U.S. dollar

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Forward contracts for the sale or purchase of foreign currencies as of July 31, 2023, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies and are not designated as hedges under FASB guidance, were as follows (in thousands, except weighted average forward rates):


				Contract Amount at
	Notional	Weighted		Forward Rates in
	Amount	Avg.		U.S. Dollars
Forward	in Foreign	Forward		Contract	July 31,
Contracts	Currency	Rate		Date	2023	Maturity Dates
Sale Contracts:
Euro	16,296	1.0998		17,922	18,024	Aug 2023 - Jan 2024
Sterling	815	1.2929		1,053	1,048	Aug 2023

Purchase Contracts:
New Taiwan Dollar	1,080,500	30.4941	*	35,433	34,514	Aug 2023 - Sep 2023

* New Taiwan Dollars per U.S. dollar

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we have maintained a forward contract with a notional amount of €3.0 million. We designated this forward contract as a hedge of our net investment in Euro-denominated assets. We selected the forward method under FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive income (loss), net of tax, in the same manner as the underlying hedged net assets. This forward contract matures in November 2023. As of July 31, 2023, we had a realized gain of $1.3 million and an unrealized loss of $0.2 million, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive income (loss) related to the hedging of our net investment in Euro-denominated assets. Forward contracts for the sale or purchase of foreign currencies as of July 31, 2023, which are designated as net investment hedges under this guidance were as follows (in thousands, except weighted average forward rates):



	Notional	Weighted	Contract Amount at Forward Rates in
	Amount	Avg.	U.S. Dollars
Forward	in Foreign	Forward	Contract	July 31,	Maturity
Contracts	Currency	Rate	Date	2023	Date
Sale Contracts:
Euro	3,000	1.0275	3,083	3,314	Nov 2023

Item 4. CONTROLS AND PROCEDURES

We conducted an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2023, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the evaluation date.

There were no changes in our internal control over financial reporting during the three months ended July 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended October 31, 2022.

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

We did not repurchase any shares of our common stock in the third quarter of fiscal 2023.

Item 5. OTHER INFORMATION

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

During the three months ended July 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act or any non-Rule 10b5-1 trading arrangement (as defined in the Security Exchange Commission’s rules).

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Item 6. EXHIBITS

EXHIBIT INDEX

3.1		Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 1997.

3.2		Amended and Restated By-Laws of the Registrant as amended through March 12, 2021, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 12, 2021.

31.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Operations; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iii) Condensed Consolidated Balance Sheets; (iv) Condensed Consolidated Statements of Cash Flows; (v) Condensed Consolidated Statements of Changes in Shareholders’ Equity; and (vi) Notes to Condensed Consolidated Financial Statements.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HURCO COMPANIES, INC.


	By:	/s/ Sonja K. McClelland
		Sonja K. McClelland
		Executive Vice President, Treasurer & Chief Financial Officer
		September 8, 2023

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Hurco Companies (HURC) 10-Q2023 Q3 Quarterly report

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