Item 7.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 consolidated financial statements and the notes thereto included elsewhere in this report.
The following MD&A generally focuses on the operating results and year-over-year comparisons between fiscal years 2023 and 2022. Discussion of fiscal year 2021 results and year-over-year comparisons between fiscal years 2022 and 2021 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, filed with the SEC on January 6, 2023.
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.
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The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During fiscal year 2023, approximately 53% 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 is our wholly-owned subsidiary that provides automation solutions. In addition, through our wholly-owned subsidiary in Italy, LCM, we produce high value machine tool components and accessories.
We principally sell our products through approximately 180 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.
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.
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Results of Operations
The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Operations expressed as a percentage of our worldwide sales and service fees and the year-to-year percentage changes in the dollar amounts of those items.
Percentage of Revenues Year-to-Year % Change
’23 vs. ’22 ’22 vs. ’21
Selling, general and administrative expenses 22 % 21 % 20 % (4) % 12 %
Operating income 3 % 5 % 4 % (48) % 24 %
Net income 2 % 3 % 3 % (47) % 22 %
Fiscal Year 2023 Compared to Fiscal Year 2022
Sales and Service Fees. Sales and service fees for fiscal year 2023 were $227.8 million, a decrease of $23.0 million, or 9%, compared to fiscal year 2022, and included an unfavorable currency impact of $2.4 million, or 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.
Net Sales and Service Fees by Geographic Region
The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2023 and 2022 (dollars in thousands):
Fiscal Year Ended October 31, Increase/Decrease
Sales in the Americas for fiscal year 2023 decreased by 8%, compared to fiscal 2022, primarily due to decreased shipments of Hurco and Milltronics machines, particularly the higher-performance VMX machines.
European sales for fiscal year 2023 decreased by 4%, compared to fiscal year 2022, and included an unfavorable currency impact of 1%, 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 electro-mechanical components and accessories manufactured by LCM and increased shipments of Hurco machines in the United Kingdom and Milltronics machines throughout Europe where our customers are located.
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Asian Pacific sales for fiscal year 2023 decreased by 34%, compared to fiscal 2022, and included an unfavorable currency impact of 4%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year decrease in Asian Pacific sales for the fiscal year primarily resulted from a reduced volume of shipments of Takumi machines in China and Hurco machines in Southeast Asia, China, and India, partially offset by an increased volume of shipments of Takumi machines in India.
Net Sales and Service Fees by Product Category
The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2023 and 2022 (dollars in thousands):
Fiscal Year Ended October 31, Increase/Decrease
† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems.
Sales of computerized machine tools for fiscal year 2023 decreased by 11%, compared to fiscal year 2022, primarily due to a decreased volume of shipments of Hurco machines in all regions where our customers are located, except the United Kingdom; Milltronics machines in North America; and Takumi machines in China. Sales of computer control systems and software for fiscal 2023 increased by 6%, compared to fiscal 2022, due to increased sales of software for Hurco machines in North America. Sales of service parts for fiscal year 2023 increased by 1%, compared to fiscal year 2022, due mainly to increased volume of sales of Hurco and ProCobots parts in Europe and North America, mostly offset by a reduction in volume of sales of parts in North America. Service fees increased by 1% for fiscal year 2023, compared to fiscal year 2022, primarily due to increased service of Hurco machines in the United Kingdom, France and Italy, mostly offset by a reduction in service of Hurco machines in North America and Germany. During fiscal year 2023, sales for all product categories included an unfavorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.
Orders and Backlog. Orders for fiscal year 2023 were $209.7 million, a decrease of $31.3 million, or 13%, compared to fiscal 2022, and included an unfavorable currency impact of $2.0 million, or less than 1%, 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 fiscal years ended October 31, 2023 and 2022 (dollars in thousands):
Fiscal Year Ended October 31, Increase/Decrease
Orders in the Americas for fiscal year 2023 decreased by 13%, compared to fiscal year 2022, mainly due to decreased customer orders for Hurco and Milltronics, particularly higher-performance VMX machines, partially offset by increased demand for Takumi machines.
European orders for fiscal 2023 decreased by 6%, compared to fiscal 2022, and included an unfavorable currency impact of 1%, when translating foreign orders to U.S. dollars. The year-over-year decrease in European demand was primarily attributable to decreased demand for Hurco machines in Germany and France, partially offset by increased customer demand for Hurco machines in the United Kingdom and Italy, and electro-mechanical components and accessories manufactured by LCM.
Asian Pacific orders for fiscal year 2023 decreased by 45%, compared to fiscal 2022, and included an unfavorable currency impact of 3%, when translating foreign orders to U.S. dollars. The decrease in Asian Pacific orders year-over-year was driven primarily by decreased customer demand for Hurco and Takumi machines in China and Hurco machines in Southeast Asia and India, partially offset by increased demand for Takumi machines in India.
Backlog at October 31, 2023 decreased to $28.3 million from $44.8 million at October 31, 2022, primarily due to decreased customer demand during fiscal year 2023 for Hurco, Milltronics, and Takumi machines in the U.S., Germany, France, China and Southeast Asia. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2023 are expected to be fulfilled in fiscal year 2024.
Gross Profit.Gross profit for fiscal year 2023 was $56.2 million, or 25% of sales, compared to $64.5 million, or 26% of sales, for fiscal 2022. The year-over-year decreases in gross profit and gross profit as a percentage of sales were primarily due to the lower volume of sales of our higher-performance VMX machines and the negative impact of fixed costs on lower sales and production volumes.
Operating Expenses. Selling, general, and administrative expenses for fiscal year 2023 were $49.6 million, or 22% of sales, compared to $51.7 million, or 21% of sales, in fiscal 2022, and included a favorable currency impact of $0.4 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 tradeshow expenses, sales commissions, and employee support costs for our global operations.
Operating Income. Operating income for fiscal year 2023 was $6.6 million, or 3% of sales, compared to $12.7 million, or 5% of sales, for fiscal year 2022. The year-over-year decrease in operating income was primarily due to decreased volume of machine shipments.
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Other Expense, Net. Other expense, net for fiscal year 2023 decreased by $1.3 million from fiscal year 2022, due mainly to a decrease in foreign currency exchange losses and increased gains on sale of property and equipment.
Provision for Income Taxes. We recorded income tax expense of $2.4 million for fiscal year 2023, compared to $3.7 million for fiscal year 2022. Our effective tax rate for fiscal year 2023 was 35%, compared to 31% for fiscal year 2022. The year-over-year increase in the effective tax rate in the full year 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.
Net Income. Net income for fiscal year 2023 was $4.4 million, or $0.66 per diluted share, compared to $8.2 million, or $1.23 per diluted share, for fiscal year 2022. The year-over-year decrease in net income was primarily due to decreased volume of machine shipments.
Liquidity and Capital Resources
At October 31, 2023, we had cash and cash equivalents of $41.8 million, compared to $63.9 million at October 31, 2022. The decrease in cash and cash equivalents was primarily a result of net cash used for payments of outstanding accounts payable, stock repurchases and dividend payments. Approximately 26% of our $41.8 million of cash and cash equivalents is held in the U.S. The balance is attributable to our foreign operations and is held in the local currencies of our various foreign entities, subject to fluctuations in currency exchange rates. We do not believe that the indefinite reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs.
Working capital at October 31, 2023 was $193.3 million, compared to $194.7 million at October 31, 2022. The decrease in working capital was primarily driven by a decrease in cash and cash equivalents, mostly offset by decreases in accounts payable and customer deposits and increases in inventory and accounts receivable.
Inventories, net were $158.0 million at October 31, 2023, compared to $156.2 million at October 31, 2022, and included an unfavorable currency impact of $4.9 million, or 3%, when translating foreign inventories to U.S. dollars for financial reporting purposes. Inventory turns at October 31, 2023 were 1.1 compared to 1.2 at October 31, 2022.
Capital expenditures were $2.6 million in fiscal year 2023, compared to $2.2 million in fiscal year 2022. Capital expenditures for fiscal year 2023 were primarily for software development costs, purchases of factory equipment for production facilities, and purchases of general software and equipment for sales and service divisions. We funded these expenditures with cash flows from operations.
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 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 October 31, 2023.
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Our prior $7.0 million share repurchase program also remained in effect until its scheduled expiration on March 10, 2023. During 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 fiscal year 2023 were approximately $4.6 million.
In addition, during fiscal year 2023, we paid cash dividends to our shareholders equal to $4.1 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 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, January 4, 2023, and December 19, 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, 2025.
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.
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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 and December 2023, NHML and HML, respectively, renewed the above-referenced credit facilities on substantially similar terms and identical maximum aggregate limits.
As of October 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 October 31, 2023.
At October 31, 2023, we had an aggregate of approximately $50.6 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. We remain committed to a balanced capital allocation strategy that prioritizes a strong balance sheet and liquidity position while recognizing the importance of accretive growth and returning value to shareholders through dividends and stock repurchases, where appropriate. As such, we continue to actively evaluate acquisition opportunities that support our long-term strategic plan.
Contractual Obligations and Commitments
The following is a table of contractual obligations and commitments as of October 31, 2023 (in thousands):
Payments Due by Period
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
In addition to the contractual obligations and commitments disclosed above, we also have a variety of other obligations for the procurement of materials and services, none of which subject us to any material non-cancelable commitments. While some of these obligations arise under long-term supply agreements, we are not committed under these agreements to accept or pay for requirements that are not needed to meet our production needs. We have no material minimum purchase commitments or “take-or-pay” type agreements or arrangements. Unrecognized tax benefits in the amount of approximately $0.1 million, excluding any interest and penalties, have been excluded from the table above because we are unable to determine a reasonably reliable estimate of the timing of future payment.
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We expect capital spending in fiscal year 2024 to be approximately $3.8 million, which includes investments for software development, leasehold improvement, factory equipment, and production facilities, as well as general software and equipment for selling facilities. We expect to fund these commitments with cash on hand and cash generated from operations.
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 Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460). As of October 31, 2023, we had nine outstanding third party payment guarantees totaling approximately $1.0 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.
Critical Accounting Estimates
Our discussion and analysis of financial condition and results of operations is based upon our 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 consolidated financial statements and accompanying notes. Our accounting policies 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.
Our 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 and such differences could be material to our financial condition and results of operations. Critical accounting estimates are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.
While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this report, we believe the following discussion addresses our most critical accounting estimates, which involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results.
Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. We have no goodwill as of October 31, 2023. Other indefinite-lived intangible assets primarily consist of trademarks and trade names and are not material to our consolidated financial statements. Finite-lived intangible assets are amortized over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recovered through future net cash flows generated by the assets. We are not aware of any events or changes in circumstances that indicate the carrying value of its finite-lived assets may not be recoverable.
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Impairment of Long-Lived Assets – We are required periodically to review the recoverability of certain assets, including property, plant, and equipment, intangible assets, and goodwill, based on projections of anticipated future cash flows, including future profitability assessments of various product lines. We estimate cash flows using internal budgets based on recent sales data. We are not aware of any events or changes in circumstances that indicate the carrying value of our long-lived assets may not be recoverable.
Inventories and Related Reserves – We determine at each balance sheet date how much, if any, of our inventory may ultimately prove to be either unsalable or unsalable at its carrying cost. Reserves are established to effectively adjust the carrying value of such inventory to lower of cost (first-in, first-out method) or net realizable value. To determine the appropriate level of valuation reserves, we evaluate current stock levels in relation to historical and expected patterns of demand for all of our products. We evaluate the need for changes to valuation reserves based on market conditions, competitive offerings, and other factors on a regular basis. We have not experienced substantive write-offs due to obsolescence.
Income Taxes – We account for income taxes and the related accounts under the asset and liability method. Deferred tax assets and liabilities are measured using enacted income tax rates in each jurisdiction in effect for the year in which the temporary differences are expected to be recovered or settled. These deferred tax assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. We operate in multiple jurisdictions through wholly-owned subsidiaries, and our global structure is complex. The estimates of our uncertain tax positions involve judgments and assessment of the potential tax implications. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon examination by relevant taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Accordingly, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, change in U.S. or foreign tax laws, and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income.
Capitalized Software Development Costs – Costs incurred to develop computer software products and significant enhancements to software features of existing products are capitalized as required by FASB guidance relating to accounting for the costs of computer software to be sold, leased, or otherwise marketed, and such capitalized costs are amortized over the estimated product life of the related software. The determination as to when in the product development cycle technological feasibility has been established, and the expected product life, require judgments and estimates by management and can be affected by technological developments, innovations by competitors, and changes in market conditions affecting demand. We periodically review the carrying values of these assets and make judgments as to ultimate realization considering the above-mentioned risk factors.
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Derivative Financial Instruments – Critical aspects of our accounting policy for derivative financial instruments that we designate as hedging instruments include conditions that require that critical terms of a hedging instrument are essentially the same as a hedged forecasted transaction. Another important element of our policy demands that formal documentation be maintained as required by FASB guidance relating to accounting for derivative instruments and hedging activities. Failure to comply with these conditions would result in a requirement to recognize changes in market value of hedge instruments in earnings. We routinely monitor significant estimates, assumptions, and judgments associated with derivative instruments and compliance with formal documentation requirements.
Stock Compensation – We account for share-based compensation according to FASB guidance relating to share-based payments, which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date. This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period.
Item 7A.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 October 31, 2023, we had no borrowings outstanding under any of our credit facilities.
Foreign Currency Exchange Risk
In fiscal year 2023, we derived approximately 61% 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 inter-company receivables, payables, and loans 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 October 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):
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Contract Amount at
Notional Weighted Forward Rates in
Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract October 31,
Contracts Currency Rate Date 2023 Maturity Dates
Sale Contracts:
Purchase Contracts:
*New Taiwan Dollars per U.S. dollar
Forward contracts for the sale or purchase of foreign currencies as of October 31, 2023, which were entered into to protect against the effects of foreign currency fluctuations on inter-company receivables, payables, and loans and are not designated as hedges under this guidance denominated in foreign currencies, 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 October 31,
Contracts Currency Rate Date 2023 Maturity Dates
Sale Contracts:
Purchase Contracts:
* 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 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 the FASB guidance related to the accounting for derivative instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2023 and we entered into a new forward contract for the same notional amount that is set to mature in November 2024. As of October 31, 2023, we had $1.3 million of realized gain and $0.1 million of unrealized loss, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.
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Forward contracts designated as net investment hedges under this guidance as of October 31, 2023, were as follows (in thousands, except weighted average forward rates):
Contract Amount at
Notional Weighted Forward Rates in U.S. Dollars
Forward Amount Avg. Contract October 31, Maturity
Contracts in Foreign Currency Forward Rate Date 2023 Date
Sale Contracts:
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Management’s Annual Report on Internal Control over Financial Reporting
To the Shareholders and
Board of Directors
of Hurco Companies, Inc.
Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Management is responsible for the Company’s financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.
Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In management’s opinion, the Company’s internal control over financial reporting as of October 31, 2023, was effective based on the criteria specified above.
Our independent registered public accounting firm, RSM US LLP (“RSM”), which also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting as of October 31, 2023. RSM has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K.
/s/ Gregory S. Volovic
Gregory S. Volovic
President and Chief Executive Officer
/s/ Sonja K. McClelland
Sonja K. McClelland
Executive Vice President, Treasurer, and Chief Financial Officer
Indianapolis, Indiana
January 5, 2024
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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Shareholders
and the Board of Directors
of Hurco Companies, Inc.
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. and its subsidiaries (the Company) as of October 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2023, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements). We also have audited the Company’s internal control over financial reporting as of October 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2023 and 2022, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinions
The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
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Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Accounting for Income Taxes – Deferred Tax Assets and Liabilities
As described in Notes 1 and 6 to the consolidated financial statements, the Company accounts for income taxes under the asset and liability method. The Company operates in both the U.S. and international tax jurisdictions and has recorded deferred tax assets relating to deductible temporary differences, net operating losses and credit carryforwards of $11.8 million as of October 31, 2023, with an offsetting valuation allowance of $1.8 million. The deferred tax assets are further reduced by $5.3 million deferred tax liabilities in tax jurisdictions to record net deferred tax assets of $4.7 million and net deferred tax liabilities of $83 thousand. The Company reduces its deferred tax assets by a valuation allowance, if based upon all the available evidence, it is more likely than not that some portion, or all of the deferred tax asset will not be realized. Management evaluated the ability to realize the carrying value of deferred tax assets and liabilities, which involved applying complex tax regulations in federal, state, local and international tax jurisdictions. Management applied significant judgement in assessing the value of and realizability of its deferred tax assets and liabilities. In determining the amount of deferred tax assets that are more-likely-than-not to be realized, management considers by jurisdiction all available positive and negative evidence, including future reversals of existing temporary differences, projected future taxable income, ability to utilize future carrybacks, tax planning strategies and recent financial operations.
We identified management’s evaluation of deferred tax assets and liabilities as well as the evaluation of the realizability of deferred tax assets, as a critical audit matter. The evaluation of gross deferred tax assets and liabilities involves complex tax regulations involving multiple tax jurisdictions. Assessing the realizability of deferred tax assets involves complexities of identifying and adhering to tax regulations in multiple jurisdictions, as well as the subjectivity of evaluating the realizability of the deferred tax assets. Auditing these elements required a high degree of auditor judgment and an increased extent of effort, including the need to involve our tax specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the valuation allowance.
Our audit procedures related to the Company’s deferred tax assets and liabilities included the following, among others:
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/s/ RSM US LLP
We have served as the Company's auditor since 2017.
Indianapolis, Indiana
January 5, 2024
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HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
(In thousands, except per share amounts)
Income from equity investments 494 733 203
Income per common share
Weighted average common shares outstanding
Dividends paid per share $ 0.63 $ 0.59 $ 0.55
The accompanying notes are an integral part of the consolidated financial statements.
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HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended October 31,
(In thousands)
Other comprehensive income (loss):
Total other comprehensive income (loss) 1,321 (19,784) 1,249
The accompanying notes are an integral part of the consolidated financial statements.
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HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
As of October 31,
(In thousands, except share
ASSETS and per share data)
Current assets:
Property and equipment:
Less accumulated depreciation and amortization (30,826) (30,620)
Total property and equipment, net 8,859 8,483
Non–current assets:
Software development costs, less accumulated amortization 7,030 7,302
Intangible assets, net 994 1,246
Operating lease - right of use assets, net 10,971 8,460
Investments and other assets, net 9,756 9,235
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable - related party 1,117 1,924
Derivative liabilities 1,821 3,632
Operating lease liabilities 3,712 3,973
Accrued payroll and employee benefits 9,853 10,751
Accrued warranty expenses 1,294 1,426
Non–current liabilities:
Deferred income taxes 83 67
Operating lease liabilities 7,606 4,814
Deferred credits and other 4,403 4,095
Shareholders’ equity:
Accumulated other comprehensive loss (20,204) (21,525)
Total liabilities and shareholders’ equity $ 290,589 $ 306,237
The accompanying notes are an integral part of the consolidated financial statements.
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HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
(In thousands)
Cash flows from operating activities:
Provision for doubtful accounts 32 (159) 244
Deferred income taxes 21 (631) (112)
Equity in (income) loss of affiliates (494) (733) (203)
Foreign currency (gain) loss (2,551) 1,393 31
Unrealized (gain) loss on derivatives (754) 727 (316)
Change in assets and liabilities, net of acquisitions:
(Increase) decrease in accounts receivable (84) 280 (15,188)
(Increase) decrease in inventories (648) (24,440) 2,165
Increase (decrease) in accounts payable (11,767) (2,278) 20,617
Increase (decrease) in customer deposits (2,179) (3,056) 3,111
Increase (decrease) in accrued expenses (1,978) 1,018 2,142
Increase (decrease) in accrued income tax (985) 1,698 900
Net change in deferred tax assets and liabilities (1,277) (25) (325)
Net change in derivative assets and liabilities 885 264 (135)
Cash flows from investing activities:
Proceeds from sale of property and equipment 407 101 3
Purchase of property and equipment (1,286) (1,107) (1,260)
Other investments 273 — (979)
Cash flows from financing activities:
Proceeds from exercise of common stock options 270 117 350
Stock repurchases (4,609) (2,890) —
Excise tax payable related to stock repurchases (28) — —
Cash and cash equivalents at beginning of period 63,922 84,063 57,859
Supplemental disclosures:
Cash paid for (provided by):
Interest $ — $ — $ —
The accompanying notes are an integral part of the consolidated financial statements.
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HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Accumulated
Stock Common Additional Other
Shares Stock Paid–In Retained Comprehensive
Net income — — — 6,764 — 6,764
Other comprehensive income — — — — 1,249 1,249
Exercise of common stock options 16,311 2 348 — — 350
Dividends paid — — — (3,674) — (3,674)
Net income — — — 8,226 — 8,226
Other comprehensive income (loss) — — — — (19,784) (19,784)
Exercise of common stock options 5,437 1 116 — — 117
Stock repurchases (89,921) (9) (2,881) (2,890)
Dividends paid — — — (3,923) — (3,923)
Net income — — — 4,389 — 4,389
Other comprehensive income — — — — 1,321 1,321
Exercise of common stock options 11,559 1 269 270
Dividends paid — — — (4,142) — (4,142)
The accompanying notes are an integral part of the consolidated financial statements.
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HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly–owned subsidiaries (“we”, “us”, “our”, “Hurco” or the “Company”). We have a 35% ownership interest in a Taiwan affiliate that is accounted for using the equity method. Our investment in that affiliate was approximately $5.1million and $5.0million as of October 31, 2023 and 2022, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Inter-company accounts and transactions have been eliminated.
Reclassifications. Certain prior year amounts have been reclassified to conform to the current year presentation. This reclassification has no impact on previously reported net income or shareholders’ equity.
Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items being hedged.
Translation of Foreign Currencies. All balance sheet accounts of non–U.S. subsidiaries are translated at the exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded as a component of Accumulated other comprehensive loss in shareholders’ equity. Income and expenses are translated at the average exchange rates during the year. Cumulative foreign currency translation adjustments, net of gains related to our net investment hedges, as of October 31, 2023, were a net loss of $20.2 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net.
Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk.
We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars.
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We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in shareholders’ equity and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (the “FASB”), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative trading purposes. We only enter into derivatives with one counterparty, which is among one of the largest U.S. banks (ranked by assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations under such contracts.
Derivatives Designated as Hedging Instruments
We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter–company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro, and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts is deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. dollar value of the inter–company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is immediately reported in Other expense, net. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default.
We had forward contracts outstanding as of October 31, 2023, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2023 through October 2024. The contract amount at forward rates in U.S. dollars at October 31, 2023 for Euros and Pounds Sterling was $13.2 million and $5.0 million, respectively. The contract amount at forward rates in U.S. dollars for New Taiwan Dollars was $20.1 million at October 31, 2023. At October 31, 2023, we had approximately $1.5 million of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $0.6 million represented unrealized loss, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred losses will be recorded as an adjustment to Cost of sales and service in periods through October 2024, in which the corresponding inventory that is the subject of the related hedge contract is sold, as described above.
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We are exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 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, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured in November 2023, and we entered into a new forward contract for the same notional amount that is set to mature in November 2024. As of October 31, 2023, we had a realized gain of $1.3 million and an unrealized loss of $0.1 million, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.
Derivatives Not Designated as Hedging Instruments
We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on inter-company receivables and payables denominated in foreign currencies. These derivative instruments are not designated as hedges under FASB guidance and, as a result, changes in their fair value are reported currently as Other expense, net in the Consolidated Statements of Operations consistent with the transaction gain or loss on the related inter-company receivables, payables and loans denominated in foreign currencies.
We had forward contracts outstanding as of October 31, 2023, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2023 through March 2024. The contract amounts at forward rates in U.S. dollars at October 31, 2023 for Euros and Pounds Sterling totaled $17.9 million. The contract amount at forward rates in U.S. dollars for New Taiwan Dollars was $35.7 million at October 31, 2023.
Fair Value of Derivative Instruments
We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our Consolidated Balance Sheets. As of October 31, 2023 and October 31, 2022, all derivative instruments were recorded at fair value on our Consolidated Balance Sheets as follows (in thousands):
Balance Sheet Fair Balance Sheet Fair
Derivatives Location Value Location Value
Designated as Hedging Instruments:
Not Designated as Hedging Instruments:
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Effect of Derivative Instruments on the Consolidated Balance Sheets, Consolidated Statements of Changes in Shareholders’ Equity, and Consolidated Statements of Operations
Derivative instruments had the following effects on our Consolidated Balance Sheets, Consolidated Statements of Changes in Shareholders’ Equity, and Consolidated Statements of Operations, net of tax, during the fiscal years ended October 31, 2023, 2022, and 2021 (in thousands):
Location of
Amount of Gain (Loss) Gain (Loss) Amount of Gain (Loss)
Recognized in Reclassified Reclassified from
Other Comprehensive From Other Other Comprehensive
Income (Loss) Comprehensive Income (Loss)
Designated as Hedging Instruments:
(Effective Portion)
We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2023, 2022, and 2021.
We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2023, 2022, and 2021 on derivative instruments not designated as hedging instruments (in thousands):
Amount of Gain (Loss)
Location of Gain (Loss) Recognized in Operations
Not Designated as Hedging Instruments:
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The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2023 and 2022 (in thousands):
Foreign Cash
Currency Flow
Translation Hedges Total
Reclassifications — 191 191
Reclassifications — (488) (488)
Inventories. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first–in, first–out method. Provisions are made to reduce excess or obsolete inventories to their estimated realizable value.
Property and Equipment. Property and equipment are carried at cost. Depreciation and amortization of assets are provided primarily under the straight–line method over the shorter of the estimated useful lives or the lease terms as follows:
Number of Years
Land Indefinite
Building 40
Shop and office equipment 3 – 7
Building & leasehold improvements 3 – 40
Total depreciation and amortization expense recognized for property and equipment was $2.3 million for fiscal year 2023, $2.3 million for fiscal year 2022, and $2.5 million for fiscal year 2021.
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.
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We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which 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. A good or service is transferred when the customer obtains control of that good or service. Our computerized machine tools are general purpose computer-controlled machine tools that are typically used in stand–alone operations. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. We deem that the customer obtains control upon delivery of the product and that obtaining control is not contingent upon contractual customer acceptance. Therefore, we recognize revenue from sales of our machine tool systems upon delivery of the product to the customer or distributor, which is normally at the time of shipment.
Depending upon geographic location, after shipment, a machine may be installed at the customer’s facility by a distributor, independent contractor, or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process for our three-axis machines to be inconsequential and immaterial within the context of the contract. For our five-axis machines and automation systems that we install, we estimate the fair value of the installation performance obligation and recognize that installation revenue on a prorata basis over the period of the installation process.
From time to time, and depending upon geographic location, we may provide training or freight services. We consider these services to be immaterial within the context of the contract, as the value of these services typically does not rise to a material level as a component of the total contract value. Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term of the contract and are generally sold on a stand-alone basis. Customer discounts and estimated product returns are considered variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. We have reviewed the overall sales transactions for variable consideration and have determined that these amounts are not significant.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted.
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Product Warranty. Expected future product warranty claims are recorded to expense when the product is sold. Product warranty estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Warranty claims are influenced by factors such as new product introductions, technological developments, the competitive environment, and the costs of component parts. Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in future periods. See Note 11 of these Notes to Consolidated Financial Statements for further discussion of warranties.
Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses. Research and development expenses totaled $4.2 million, $3.4 million, and $3.2 million, in fiscal years 2023, 2022, and 2021, respectively.
Software Development Costs. We sell software products that are essential to our machine tools. Costs incurred to develop computer software products and significant enhancements to software features of existing products to be sold or otherwise marketed are capitalized, after technological feasibility is established. Software development costs are amortized on a straight–line basis over the estimated product life of the related software, which ranges from three to five years. We capitalized costs related to software development projects of $1.3 million in fiscal year 2023, $1.1 million in fiscal year 2022, and $1.1 million in fiscal year 2021. Amortization expense for software development costs was $1.6 million, $1.3 million, and $1.4 million for the fiscal years ended October 31, 2023, 2022, and 2021, respectively. Accumulated amortization at October 31, 2023 and 2022 was $25.3 million and $23.7 million, respectively.
Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands):
Fiscal Year Amortization Expense
Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be reviewed for impairment annually as of the last day of our third fiscal quarter, or more frequently, if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized for that excess, but only to the extent of the goodwill amount allocated to that reporting unit. We had no goodwill as of October 31, 2023.
For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss is recognized in an amount equal to that excess. Intangible assets that are determined to have a finite life are amortized over their estimated useful lives and are also subject to review for impairment if indicators of impairment are identified. There were no impairments recognized with respect to the carrying value of intangible assets for the years ended October 31, 2023, 2022, or 2021.
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As of October 31, 2023, the balances of intangible assets, other than goodwill, were as follows (in thousands):
Weighted
Average Gross
Amortization Intangible Accumulated Net Intangible
Period Assets Amortization Assets
Tradenames and trademarks indefinite $ 177 $ — $ 177
As of October 31, 2022, the balances of intangible assets, other than goodwill, were as follows (in thousands):
Weighted
Average Gross
Amortization Intangible Accumulated Net Intangible
Period Assets Amortization Assets
Tradenames and trademarks indefinite $ 177 $ — $ 177
Intangible asset amortization expense was $271,000, $272,000, and $273,000 for fiscal years 2023, 2022, and 2021, respectively. Annual intangible asset amortization expense for the next five years is estimated to be $235,000 for fiscal year 2024, $141,000 for fiscal year 2025, $109,000 for fiscal year 2026, $45,000 for fiscal year 2027, and $45,000 for fiscal year 2028.
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Impairment of Long–Lived Assets. Annually, or when there are indicators of impairment, we evaluate the carrying value of long–lived assets to be held and used, including property and equipment, software development costs, and intangible assets, including goodwill, when events or circumstances warrant such a review. The carrying value of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets). We determined that we have a single asset group due to the interdependent nature of our operations. We estimated the cash flows during the remaining useful life of the primary asset, and our undiscounted cash flow was in excess of the book value of our single asset group. Based on that review, there was no impairment indications for our long-lived assets for the period ended October 31, 2023. Therefore, there were no impairments recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2023, 2022, or 2021.