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 2024 and 2023. Discussion of fiscal year 2023 results and year-over-year comparisons between fiscal years 2023 and 2022 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, 2023, filed with the SEC on January 5, 2024.
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 most 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 fiscal year 2024, approximately 51% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher-priced VMX series machines. Additionally, approximately 10% of our revenues were attributable to customers in the Asia Pacific region, where we encounter greater pricing pressures.
During a time of global uncertainty and lower sales volumes, we have turned our attention to adjusting overhead expenses and operating expenses to help minimize the impact of the lower volumes of sales on operating income. We implemented cost reductions in the third quarter of fiscal year 2024, adjusted and managed inventories (excluding the impact of foreign currency) and temporary suspended our regular quarterly cash dividend. We used that cashflow to manage our capital allocation strategies to continue investing in new technologies, product development, and necessary capital expenditures to maximize cashflows without incurring any significant indebtedness as we continue to seek new acquisitions and other growth opportunities. The cyclicality of our business requires that we exercise discipline in managing through unexpected changes in the markets and industries in which we operate. We believe that our long history of profitability and the strength of our balance sheet can provide us with stability to manage through these business cycles and we rely on our past experience in making measured decisions for the long-term success of our business.
34
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 swiss 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.
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.
35
Percentage of Revenues Year-to-Year % Change
’24 vs. ’23 ’23 vs. ’22
Selling, general and administrative expenses 25 % 22 % 21 % (7) % (4) %
Operating (loss) income (4) % 3 % 5 % (225) % (48) %
Net (loss) income (9) % 2 % 3 % (478) % (47) %
Fiscal Year 2024 Compared to Fiscal Year 2023
Sales and Service Fees. Sales and service fees for fiscal year 2024 were $186.6 million, a decrease of $41.2 million, or 18%, compared to fiscal year 2023, and included a favorable currency impact of $1.8 million, or less than 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, 2024 and 2023 (dollars in thousands):
Fiscal Year Ended October 31, Increase/Decrease
Sales in the Americas for fiscal year 2024 decreased by 18%, compared to fiscal year 2023, primarily due to decreased shipments of Hurco and Takumi machines. The decrease in sales of these machines was mainly attributable to decreased shipments of Hurco and Takumi 3-axis vertical machines, partially offset by increased sales of higher-performance Hurco 5-axis machines and Milltronics 3-axis vertical machines.
European sales for fiscal year 2024 decreased by 21%, compared to fiscal year 2023, and included a favorable currency impact of 2%, 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 and Takumi machines in Germany, Italy, and the United Kingdom, and of electro-mechanical components and accessories manufactured by LCM, partially offset by an increased volume of shipments of Hurco and Takumi machines in France and increased sales of ProCobots automation solutions.
Asian Pacific sales for fiscal year 2024 increased by 2%, compared to fiscal year 2023, and included an unfavorable currency impact of 1%, when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year increase in Asian Pacific sales for the fiscal year was primarily attributable to increased shipments of Hurco and Takumi machines in India and to one customer with multiple machine orders in China, partially offset by decreased shipments of Hurco and Takumi machines in China and Southeast Asia.
36
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, 2024 and 2023 (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 tools.
Sales of computerized machine tools for fiscal year 2024 decreased by 22%, compared to fiscal year 2023, primarily due to a decreased volume of shipments of Hurco and Takumi machines in all regions where our customers are located, except India and France, partially offset by increased sales of Milltronics vertical machines in North America. Sales of computer control systems and software for fiscal year 2024 decreased by 13%, compared to fiscal year 2023, due to decreased sales of software for Hurco machines in North America and Germany. Sales of service parts for fiscal year 2024 decreased by 3%, compared to fiscal year 2023, due mainly to a decreased volume of aftermarket sales of Hurco and LCM parts in Europe and North America. Service fees increased by 9% for fiscal year 2024, compared to fiscal year 2023, primarily due to increased service of Hurco machines in the United Kingdom, France and North America. During fiscal year 2024, sales for all product categories included a favorable currency impact of less than 1%, when translating foreign sales to U.S. dollars for financial reporting purposes.
Orders and Backlog. Orders for fiscal year 2024 were $198.3 million, a decrease of $11.4 million, or 5%, compared to fiscal year 2023, and included a favorable currency impact of $1.9 million, or less than 1%, when translating foreign orders to U.S. dollars.
The following table sets forth new orders booked by geographic region for the fiscal years ended October 31, 2024 and 2023 (dollars in thousands):
Fiscal Year Ended October 31, Increase/Decrease
Orders in the Americas for fiscal year 2024 decreased by 5%, compared to fiscal year 2023. The decrease in orders was primarily due to decreased customer demand for Hurco 3-axis vertical machines, partially offset by increased demand for Hurco higher-performing 5-axis machines.
37
European orders for fiscal year 2024 decreased by 13%, compared to fiscal year 2023, and included a favorable currency impact of 2%, when translating foreign orders to U.S. dollars. The decrease in orders was driven primarily by decreased customer demand for Hurco and Takumi machines in Germany, France, and Italy, as well as decreased demand for electro-mechanical components and accessories manufactured by LCM, partially offset by increased demand for Hurco higher-performance VMX machines in the United Kingdom and for ProCobots automation solutions sold across the European region.
Asian Pacific orders for fiscal year 2024 increased by 54%, compared to fiscal year 2023, and included an unfavorable currency impact of 2%, when translating foreign orders to U.S. dollars. The increase in Asian Pacific orders was driven primarily by increased customer demand for Hurco and Takumi machines in China, India, and Southeast Asia. The increased customer demand for Hurco machines in China and India for the fiscal year included two customers with multiple machine orders.
Backlog as of October 31, 2024 increased to $40.8 million from $28.3 million as of October 31, 2023, primarily due to increased customer demand during the last six months of fiscal year 2024, compared to the same period in prior year. The increase in backlog was driven primarily by increased demand for higher-performance VMX and 5-axis Hurco machines in the U.S. and Europe, Milltronics toolroom and 3-axis vertical machines in the U.S., and Hurco 3-axis vertical machines and Takumi bridge mills in Asia Pacific. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2024 are expected to be fulfilled in fiscal year 2025.
Gross Profit.Gross profit for fiscal year 2024 was $37.7 million, or 20% of sales, compared to $56.2 million, or 25% of sales, for fiscal year 2023. The year-over-year decrease in gross profit was primarily due to the lower volume of vertical milling machine sales in the Americas and Europe. Additionally, there were decreases in average net selling prices for certain machines during fiscal year 2024 that were designed to penetrate key markets and reduce inventories. The decreases in both sales volume and pricing negatively impacted gross profit in dollars and as a percentage of sales, reducing our leverage of fixed costs, in comparison to fiscal year 2023. Further, certain cost reductions were implemented in the third quarter of fiscal year 2024 to help offset the impact of lower sales volumes and pricing.
Operating Expenses. Selling, general, and administrative expenses for fiscal year 2024 were $46.0 million, or 25% of sales, compared to $49.6 million, or 22% of sales, in fiscal year 2023, and included an unfavorable currency impact of $0.4 million, when translating foreign expenses to U.S. dollars for financial reporting purposes. The year-over-year reduction in selling, general, and administrative expenses was primarily due to cost reductions implemented in the third quarter of fiscal year 2024 to help offset the impact of lower sales volume, partially offset by increased tradeshow costs (for IMTS) in the fourth quarter of fiscal year 2024. Despite the reduction from an absolute dollar perspective, selling, general, and administrative expenses increased as a percentage of sales in fiscal year 2024, compared to fiscal year 2023, due to the lower volume of sales year-over-year.
Operating (Loss) Income. Operating loss for fiscal year 2024 was $8.3 million, or 4% of sales, compared to operating income of $6.6 million, or 3% of sales, for fiscal year 2023. The year-over-year decrease in operating income was primarily due to lower volume of vertical milling machine sales in the Americas and Europe.
Other Expense, Net. Other expense, net for fiscal year 2024 increased by $1.5 million from fiscal year 2023, due mainly to an increase in foreign currency exchange losses.
38
Provision for Income Taxes. Income tax expense for fiscal year 2024 was $6.8 million, compared to $2.4 million for fiscal year 2023. The year-over-year increase in income tax expense was primarily due to an $8.4 million non-cash valuation allowance recorded on U.S. and China deferred tax assets, as well as changes in geographic mix of income and loss that includes jurisdictions with differing tax rates, and discrete items related to unvested stock compensation. Because we have an $8.3 million valuation allowance recorded against our U.S. deferred tax assets, we did not record a tax benefit for our U.S. net losses for fiscal year 2024. The valuation allowance recorded during fiscal year 2024 reflected a full valuation allowance of the U.S. deferred tax assets and was recorded after evaluating changes to tax laws, statutory tax rates, and our cumulative three-year income (loss) levels for the U.S. for fiscal year 2024.
Net (Loss) Income. Net loss for fiscal year 2024 was $16.6 million, or $(2.56) per diluted share, compared to net income of $4.4 million, or $0.66 per diluted share, for fiscal year 2023. The year-over-year decrease in net income was primarily due to decreased volume of machine shipments, as well as the valuation allowance recorded against our U.S. and China deferred tax assets.
Liquidity and Capital Resources
As of October 31, 2024, we had cash and cash equivalents of $33.3 million, compared to $41.8 million as of October 31, 2023. 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 12% of our $33.3 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 as of October 31, 2024 was $180.8 million, compared to $193.3 million as of October 31, 2023. The decrease in working capital was primarily driven by decreases in cash and cash equivalents, inventories, accounts receivable, net, and prepaid and other assets, as well as increases in customer deposits, partially offset by decreases in accounts payable and accrued payroll and employee benefits.
Inventories were $153.0 million as of October 31, 2024, compared to $158.0 million as of October 31, 2023, and included a favorable currency impact of $3.2 million, or 2%, when translating foreign inventories to U.S. dollars for financial reporting purposes. Inventory turns as of October 31, 2024 were 1.0 compared to 1.1 as of October 31, 2023.
Capital expenditures were $2.9 million in fiscal year 2024, compared to $2.6 million in fiscal year 2023. Capital expenditures for fiscal year 2024 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, subject to applicable laws, regulations, and contractual provisions. On September 25, 2024, we announced an extension of the term of this $25.0 million repurchase program from November 10, 2024 to November 10, 2026. 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 2024, we repurchased $1.5 million, or 87,635 shares, under the program, and $21.7 million remained available under the program as of October 31, 2024.
39
During fiscal year 2024, we paid cash dividends to our shareholders of $2.1 million. On June 14, 2024, we announced a temporary suspension of our regular quarterly cash dividend as we seek to enhance our financial flexibility and improve our ability to manage market volatility while focusing on strengthening our balance sheet, reinvesting in our core business and research and development related to emerging technologies, and returning value to shareholders via the appropriate channels in both the near- and long-term. 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.
40
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, 2024, 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 as of October 31, 2024.
As of October 31, 2024, we had an aggregate of approximately $50.9 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, and a balanced capital allocation program.
We continue to receive and review information on businesses and assets for potential acquisition, including intellectual property assets that are available for purchase.
Contractual Obligations and Commitments
The following is a table of contractual obligations and commitments as of October 31, 2024 (in thousands):
Payments Due by Period
More
Less than than
Total 1 Year 1-3 Years 4-5 Years 5 Years
Accrued and deferred taxes and credits 6,239 436 563 — 5,240
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, excluding any interest and penalties, were immaterial for fiscal year 2024 and have been excluded from the table above because we are unable to determine a reasonably reliable estimate of the timing of future payment.
41
We expect capital spending in fiscal year 2025 to be approximately $4.1 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, 2024, 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.
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.
42
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. 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. During fiscal year 2024, we recorded an $8.6 million non-cash valuation allowance on U.S. and China deferred tax assets, of which $8.3 million reflected a full valuation allowance of the U.S. deferred tax assets, and was recorded after evaluating changes to tax laws, statutory tax rates, and our cumulative three-year income (loss) levels for the U.S. for fiscal year 2024. Because we have a valuation allowance recorded against our U.S. deferred tax assets, we did not record a tax benefit for our U.S. net losses for fiscal year 2024.
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.
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. As of October 31, 2024, we had no borrowings outstanding under any of our credit facilities.
Foreign Currency Exchange Risk
In fiscal year 2024, 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.
43
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, 2024, 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 October 31,
Contracts Currency Rate Date 2024 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, 2024, 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 2024 Maturity Dates
Sale Contracts:
Purchase Contracts:
* New Taiwan Dollars per U.S. dollar
44
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 2023. 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 2024 and we entered into a new forward contract for the same notional amount that is set to mature in November 2025. As of October 31, 2024, we had $1.2 million of realized gain and an immaterial amount of unrealized loss, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts.
Forward contracts designated as net investment hedges under this guidance as of October 31, 2024, 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 October 31, Maturity
Contracts Currency Rate Date 2024 Date
Sale Contracts:
45
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 Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Hurco Companies, Inc. and its subsidiaries (the "Company") as of October 31, 2024, the related consolidated statements of operations, comprehensive income (loss), cash flows, and changes in shareholders' equity for the period ended October 31, 2024, and the related notes and schedule listed in Item 15(a) (collectively referred to as the "financial statements"). We also have audited the Company's internal control over financial reporting as of October 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
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, 2024, and the results of its operations and its cash flows for the period ended October 31, 2024, 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, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
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 these 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 the 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.
46
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 to 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 Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
47
Income Taxes — Realizability of Deferred Tax Assets — Refer to Notes 1 and 6 to the Financial Statements
Critical Audit Matter Description
The Company recognizes deferred income taxes for tax attributes and for differences between the financial statement and tax basis of assets and liabilities at enacted statutory tax rates in effect for the years in which the deferred tax liability or asset is expected to be settled or realized. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Judgments related to the existence of sufficient taxable income and the realization of deferred tax assets include consideration of future profitability and market conditions, changes in U.S. or foreign tax laws and other factors. Management has determined that it is not more likely than not that sufficient taxable income will be generated in the future to realize its U.S. deferred tax assets; therefore, a valuation allowance of $8.3 million was recorded during the year ended October 31, 2024.
Given the determination of whether it is more likely than not that sufficient U.S. taxable income will be generated in the future to realize deferred tax assets requires management to make significant judgments and estimates related to taxable income, performing audit procedures to evaluate the reasonableness of management’s estimates of taxable income required a high degree of auditor judgment and an increased extent of effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the determination of whether it is more likely than not that sufficient taxable income will be generated in the future to realize deferred tax assets included the following, among others:
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
January 10, 2025
We have served as the Company's auditor since 2024.
48
Report of Independent Registered Public Accounting Firm
To the Shareholders
and the Board of Directors
of Hurco Companies, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Hurco Companies, Inc. and its subsidiaries (the Company) as of October 31, 2023, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows, for each of the two years in the period ended October 31, 2023, and the related notes and schedule listed in Item 15(a) (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2023, and the results of their operations and their cash flows for each of the two years in the period ended October 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinions
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements 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 the 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to 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. We believe that our audits provide a reasonable basis for our opinions.
/s/ RSM US LLP
Indianapolis, IN
January 5, 2024
We served as the Company’s auditor from 2017 to 2024.
49
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
(In thousands, except per share amounts)
Investment income, net 80 61 174
Income from equity investments 292 494 733
(Loss) income per common share
Weighted average common shares outstanding
The accompanying notes are an integral part of the consolidated financial statements.
50
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended October 31,
(In thousands)
Other comprehensive (loss) income:
Total other comprehensive (loss) income 4,086 1,321 (19,784)
The accompanying notes are an integral part of the consolidated financial statements.
51
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
October 31, October 31,
ASSETS
Current assets:
Derivative assets 323 740
Prepaid and other assets 5,209 7,789
Property and equipment:
Less accumulated depreciation and amortization (32,404) (30,826)
Total property and equipment, net 8,796 8,859
Non–current assets:
Software development costs, less accumulated amortization 7,044 7,030
Intangible assets, net 763 994
Operating lease - right of use assets 11,313 10,971
Investments and other assets 10,801 9,756
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Derivative liabilities 705 1,821
Operating lease liabilities 3,829 3,712
Accrued payroll and employee benefits 7,786 9,853
Accrued income taxes 866 1,713
Accrued warranty expenses 1,086 1,294
Non–current liabilities:
Deferred income taxes 53 83
Accrued tax liability 537 1,293
Operating lease liabilities 7,852 7,606
Deferred credits and other 5,240 4,403
Commitment and contingencies — —
Shareholders’ equity:
Accumulated other comprehensive loss (16,394) (20,204)
Total liabilities and shareholders’ equity $ 268,643 $ 290,589
The accompanying notes are an integral part of the consolidated financial statements.
52
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
(In thousands)
Cash flows from operating activities:
Provision for doubtful accounts (36) 32 (159)
Deferred income tax valuation allowance 8,590 141 412
Equity in (income) loss of affiliates (292) (494) (733)
Foreign currency (gain) loss (426) (2,551) 1,393
Unrealized (gain) loss on derivatives (96) (754) 727
Change in assets and liabilities:
(Increase) decrease in accounts receivable 3,996 (84) 280
(Increase) decrease in inventories 8,383 (648) (24,440)
(Increase) decrease in prepaid and other assets 1,236 (805) 7,022
Increase (decrease) in accounts payable (5,266) (11,767) (2,278)
Increase (decrease) in customer deposits 1,392 (2,179) (3,056)
Increase (decrease) in accrued expenses (97) (1,978) 1,018
Increase (decrease) in accrued income tax (885) (985) 1,698
Increase (decrease) in accrued tax liability (756) 11 (467)
Net change in deferred tax assets and liabilities 481 (1,277) (25)
Net change in derivative assets and liabilities (445) 885 264
Cash flows from investing activities:
Proceeds from sale of property and equipment 18 407 101
Purchase of property and equipment (1,241) (1,286) (1,107)
Other investments 119 273 —
Cash flows from financing activities:
Proceeds from exercise of common stock options — 270 117
Excise tax payable related to stock repurchases — (28) —
Net decrease in cash and cash equivalents (8,454) (22,138) (20,141)
Cash and cash equivalents at beginning of period 41,784 63,922 84,063
Supplemental disclosures:
Cash paid (received) for:
Interest $ — $ — $ —
The accompanying notes are an integral part of the consolidated financial statements.
53
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Common Accumulated
Stock Common Additional Other
(In thousands, Shares Stock Paid–In Retained Comprehensive
except shares outstanding) Outstanding Amount Capital Earnings Loss Total
Net income (loss) — — — 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 ($0.59 per share) — — — (3,923) — (3,923)
Net income (loss) — — — 4,389 — 4,389
Other comprehensive income (loss) — — — — 1,321 1,321
Exercise of common stock options 11,559 1 269 — — 270
Dividends paid ($0.63 per share) — — — (4,142) — (4,142)
Net income (loss) — — — (16,608) — (16,608)
Other comprehensive income (loss) — — — — 4,086 4,086
Stock repurchases (87,635) (8) (1,492) — — (1,500)
Dividends paid ($0.32 per share) — — — (2,094) — (2,094)
The accompanying notes are an integral part of the consolidated financial statements.
54
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 $5.3million and $5.1million as of October 31, 2024 and 2023, 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.
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, 2024, were a net loss of $14.5 million, net of tax, and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and losses are recorded as income or expense as incurred and are recorded in Other expense, net.
Hedging. We are exposed to certain market risks relating to our ongoing business operations, including foreign currency risk, interest rate risk and credit risk. We manage our exposure to these and other market risks through regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk.
We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign exchange rate movements on our net equity investment in one of our foreign subsidiaries, and the gross profit and net earnings of certain of our foreign subsidiaries, we enter into derivative financial instruments in the form of foreign exchange forward contracts with a major financial institution. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars.
We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in shareholders’ equity and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.
55
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, 2024, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2024 through October 2025. The contract amount at forward rates in U.S. dollars as of October 31, 2024 for Euros and Pounds Sterling was $8.2 million and $4.4 million, respectively. The contract amount at forward rates in U.S. dollars for New Taiwan Dollars was $15.6 million as of October 31, 2024. As of October 31, 2024, we had approximately $0.7 million of losses, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $0.2 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 2025, in which the corresponding inventory that is the subject of the related hedge contract is sold, as described above.
We are exposed to foreign currency exchange risk related to our investment in net assets in foreign countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2023. 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 2024, and we entered into a new forward contract for the same notional amount that is set to mature in November 2025. As of October 31, 2024, we had a realized gain of $1.2 million and an immaterial amount of unrealized loss, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to this forward contract.
56
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, 2024, in Euros, Pounds Sterling, and New Taiwan Dollars with set maturity dates ranging from November 2024 through March 2025. The contract amounts at forward rates in U.S. dollars as of October 31, 2024 for Euros and Pounds Sterling totaled $10.4 million. The contract amount at forward rates in U.S. dollars for New Taiwan Dollars was $42.7 million as of October 31, 2024.
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, 2024 and October 31, 2023, 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:
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, 2024, 2023, and 2022 (in thousands):
57
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)
Foreign exchange forward contract
– Net investment (29) (99) 401
We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal years ended October 31, 2024, 2023, and 2022.
We recognized the following gains and losses in our Consolidated Statements of Operations during the fiscal years ended October 31, 2024, 2023, and 2022 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:
The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2024 and 2023 (in thousands):
Foreign Cash
Currency Flow
Translation Hedges Total
Reclassifications — (488) (488)
Deferred income tax valuation allowances — (276) (276)
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.
58
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 $1.7 million for fiscal year 2024, $2.3 million for fiscal year 2023, and $2.3 million for fiscal year 2022.
Revenue Recognition. We design, manufacture, and sell computerized machine tools. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, automation integration equipment and solutions for job shops, software options, control upgrades, accessories, and replacement parts for our products, as well as customer service, training, and applications support.
We recognize revenues from the sale of machine tools, components and accessories and services, and reflect the consideration to which we expect to be entitled. We record revenues based on a five-step model in accordance with FASB guidance codified in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” (“ASC 606”). In accordance with ASC 606, we have defined contracts as agreements with our customers and distributors in the form of purchase orders, packing or shipping documents, invoices, and, periodically, verbal requests for components and accessories. For each contract, we identify our performance obligations, which 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 3-axis machines to be inconsequential and immaterial within the context of the contract. For our 5-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.
59
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 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 material.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of probable credit issues and historical experience. We perform credit evaluations of the financial condition of our customers. No collateral is required for sales made on open account terms. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising our customer base and their dispersion across many geographic areas. We consider trade accounts receivable to be past due when payment is not made by the due date as specified on the customer invoice, and we charge off uncollectible balances when all reasonable collection efforts have been exhausted.
Product Warranty. Expected future product warranty claims are recorded to expense when the product is sold. Product warranty estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Warranty claims are influenced by factors such as new product introductions, technological developments, the competitive environment, and the costs of component parts. Actual payments for warranty claims could differ from the amounts estimated, requiring adjustments to the liabilities in future periods. See Note 11 of these Notes to Consolidated Financial Statements for further discussion of warranties.
Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements, other than software development costs, which are eligible for capitalization per FASB guidance, are expensed as incurred and are included in Selling, general, and administrative expenses. Research and development expenses totaled $3.9 million, $4.2 million, and $3.4 million, in fiscal years 2024, 2023, and 2022, 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 $1.6 million in fiscal year 2024, $1.3 million in fiscal year 2023, and $1.1 million in fiscal year 2022. Amortization expense for software development costs was $1.6 million, $1.6 million, and $1.3 million for the fiscal years ended October 31, 2024, 2023, and 2022, respectively. The gross carrying amount as of October 31, 2024 and 2023 was $32.0 million and $32.3 million, respectively. Accumulated amortization as of October 31, 2024 and 2023 was $24.9 million and $25.3 million, respectively.
60
Estimated amortization expense for the remaining unamortized software development costs, which includes projects still in progress, for the fiscal years ending October 31, is as follows (in thousands):
Fiscal Year Amortization Expense
Intangible Assets. 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, 2024, 2023, or 2022.
As of October 31, 2024, the balances of intangible assets were as follows (in thousands):
Weighted
Average Gross
Amortization Intangible Accumulated Net Intangible
Period Assets Amortization Assets
Tradenames and trademarks indefinite $ 177 $ — $ 177
Noncompete 5 years 580 (580) —
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
61
Intangible asset amortization expense was $237,000, $271,000, and $272,000 for fiscal years 2024, 2023, and 2022, respectively. Annual intangible asset amortization expense for the next five years is estimated to be $143,000 for fiscal year 2025, $118,000 for fiscal year 2026, and $45,000for each of fiscal years 2027 through 2029.
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, 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). There was no impairment recognized with respect to the carrying values of long-lived assets for the years ended October 31, 2024, 2023, or 2022.