Hurco Companies, Inc.
Annual Report 2016

Plain-text annual report

Innovative Reliable Adaptable Experts in Manufacturing Technology. Focused on Customer Success. Hurco Companies, Inc. Report to Shareholders Overview Last year was an extraordinary year for Hurco. We launched two new brands of machine tools, Takumi and Milltronics, while continuing to develop new Hurco products and technologies that make our customers all over the world more productive and more profi table. I am very fortunate to lead a company where all of its employees are so dedicated to our customers and shareholders. Our culture at Hurco is and always has been to focus on our customers and to be a reliable, innovative and adaptive company in this ever- changing, fast-paced world. We take pride in our customers’ success and appreciate their contribution to our success, which in turn increases shareholder value. Hurco had a record year in 2016 with revenue exceeding $227 million, a 4 percent increase from last year and $3 million bett er than the previous record set in 2008. When adjusted for the negative impact of currency translation, revenues for 2016 exceeded $234 million. We achieved record revenues even though we did not achieve record unit sales, a testament to our commitment to expand our product off ering to penetrate new markets with competitive and more complex technologies. We successfully expanded our presence in Asia, which can be directly att ributed to the acquisition of the Takumi brand. Even though we were negatively impacted by foreign currency translation in Europe, our market penetration in that region remains strong. The International Manufacturing Technology Show (IMTS) was a key highlight of 2016 as it was the fi rst time we had the opportunity to showcase all three of our brands at one venue. The excitement and customer activity that was generated at the show provided for a strong fi nish to the year, particularly for the Milltronics and Hurco brands, which utilize our proprietary controls. Continuous innovation is at the core of every strategic decision we make here at Hurco. In 2014, we fi led a patent surrounding additive manufacturing, also known as 3D printing. We achieved a major milestone this year as we sold the fi rst commercial units of the Hurco 3D Print Head Adapter. The adapter allows a Hurco customer to utilize his CNC machine as both a 3D printer and machining center, which accelerates the prototyping process. Customers While our products are found in Fortune 500 companies like Google, Apple, Caterpillar, and Boeing, the majority of our customers are entrepreneurs who risked the security of a steady paycheck to start their own business. They are industrious, resilient, and pragmatic. Helping these entrepreneurs increase productivity and profi tability by providing rigid and reliable machine tools equipped with sophisticated control technology is what drives innovation at Hurco. Core Competencies Our core competencies include soft ware and product innovation, effi cient design and manufacture of machine tools with a well-developed supply chain, and targeted expansion of products and markets. Our ability to provide customers with quality machine tools equipped with sophisticated control technologies that make their businesses more profi table is a key diff erentiator. Customers rely on our technology to simplify complex processes due to the user-friendly att ributes of our products. This is especially advantageous in the growing multi-axis space, an area in which we have led the industry. Ultimately, the collaborative relationships we have forged with customers could also be counted as a core competency of Hurco Companies, Inc., as our customers help us improve existing products and provide key input for new products. Profi tability We measure profi tability on several diff erent levels, such as gross profi t, operating income and net income and that means striking a balance in the present period with manufacturing effi ciencies, research and development activities and sales & marketing, but continuing to make investments in these activities that may result in improved profi tability in the future. In a year where it was so important to integrate our recently acquired brands, Milltronics and Takumi, the company was faced with challenging global market changes that impacted our business in ways that could not be foreseen. Hurco responded to these challenges and performed at a respectable level that exceeded our expectations and achieved the balance that will result in continuous improvement and profi tability in the future. In 2016, our operating income was $19.6 million, or 9% of sales, and our net income was $13.3 million. Going Forward While change is constant in any industry, it is occurring at an exponential pace in the machine tool industry as automation becomes critically important to customers. Fortunately, Hurco is positioned to lead the industry in meaningful technology innovation due to our strong cash position, R&D resources, and effi cient supply chain. Additionally, the relationships we have with our customers is advantageous in our pursuit to continuously improve usability, which has been a hallmark of Hurco technology from the beginning. We will continue to expand the product line of all three brands in the Hurco Companies portfolio to meet customer needs while diligently managing expenses as we realize greater effi ciencies on the operational side of the business. On behalf of everyone at Hurco, I would like to thank our existing customers for their loyalty and support through the years and thank our new customers for choosing Hurco, Milltronics and/or Takumi as your CNC machine of choice. We appreciate the trust you have bestowed upon us. Thank you to our shareholders for believing in Hurco and for your enthusiastic approach to the progress we have made. I want to thank our Board of Directors for their insight, guidance and support. I also want to thank our employees around the world for their dedication to our customers and their commitment to continuous improvement, which is critical to sustained growth. Sincerely, Michael Doar Chairman and Chief Executive Offi cer Inventing technology for the metal cutt ing industry that makes our customers more productive and more profi table—that’s mind over metal®. That’s Hurco. Financial Highlights (Dollars in thousands except per share data and number of employees) Sales and service fees Operating income (loss) Net income (loss) Earnings (loss) per common share (diluted) Order intake Working capital Total debt Shareholders’ equity Number of employees Stock price October 31 High Low 2016 $ 227,289 19,616 $ 13,292 $ $ 1.99 $ 219,222 $ 160,413 $ 1,476 $ 185,475 758 26.20 33.65 23.25 $ $ $ 2015 $ 219,383 23,804 $ 16,214 $ $ 2.44 $ 223,186 $ 151,026 $ 1,583 $ 174,568 769 26.87 39.95 24.93 $ $ $ 250 200 150 100 50 0 $222.3 $219.4 $227.3 200 160 $164.6 $174.6 $185.5 120 80 40 0 40 35 30 25 20 15 10 5 0 $23.8 $22.0 $19.6 2014 2015 2016 Sales and Service Fees (Millions) 2014 2015 2016 Shareholders’ Equity (Millions) 2014 2015 2016 Operating Income (Millions)  2012 2011 2010 2009 2008 2007 2006 HURCO COMPANIES, INC. ELEVEN-YEAR SELECTED FINANCIAL DATA (In thousands except per share data and number of employees) Annual Report 2016 For the Fiscal Year Ended Sales and service fees Cost of sales and service Operating expenses (SG&A) Operating income (loss) Other income (expense) Income before taxes Income tax expense (benefit) Net income (loss) Average shares outstanding Basic Diluted/Primary Earnings per share Basic Diluted/Primary Capital expenditures Depreciation and amortization EBITDA Gross profit margin % Operating income as % of sales Net return on sales Return on average equity Stock price range High Low At Fiscal Year End Working capital Current ratio Total assets Total debt Shareholders' equity Total debt to capitalization % Shareholder's equity per share (1) Net operating assets per $ revenue (2) Number of employees (1) Based on shares outstanding at fiscal year end - diluted. (2) Excluding cash, short-term investments, and debt. 2016 $227,289 156,849 50,824 19,616 (731) 18,885 5,593 $13,292 6,569 6,642 $2.01 $1.99 4,177 3,868 22,823 31.0% 8.6% 5.8% 7.4% $33.65 $23.25 2016 $160,413 3.77 $251,949 1,476 185,475 0.8% $27.92 $0.641 758 2015 $219,383 150,292 45,287 23,804 (251) 23,553 7,339 $16,214 2014 $222,303 153,691 46,615 21,997 (636) 21,361 6,218 $15,143 6,543 6,602 $2.46 $2.44 4,533 3,222 26,973 31.5% 10.9% 7.4% 9.6% $39.95 $24.93 2015 $151,026 3.32 $248,577 1,583 174,568 0.9% $26.44 $0.551 769 6,497 6,538 $2.31 $2.30 2,635 3,309 24,934 30.9% 9.9% 6.8% 9.6% $39.64 $23.63 2014 $141,888 3.12 $239,176 3,272 164,645 1.9% $25.18 $0.513 617 2013 $192,804 137,748 41,413 13,643 (1,201) 12,442 4,252 $8,190 6,455 6,497 $1.26 $1.25 2,380 3,392 16,114 28.6% 7.1% 4.2% 5.5% $31.61 $21.22 2013 $127,235 3.28 $212,804 3,665 151,491 2.4% $23.32 $0.583 625 For the Fiscal Year Ended 2016 2015 2014 2013 2012 2011 2010 2009 $203,117 139,936 41,160 22,021 (157) 21,864 6,226 $15,638 6,445 6,470 $2.41 $2.40 3,732 4,126 26,158 31.1% 10.8% 7.7% 11.6% $28.80 $19.15 2012 $122,828 3.49 $197,360 3,206 143,793 2.2% $22.22 $0.548 560 $180,400 124,526 38,493 17,381 (1,762) 15,619 4,495 $11,124 6,441 6,472 $1.72 $1.71 2,842 4,300 20,062 31.0% 9.6% 6.2% 9.2% $35.07 $17.45 2011 $104,154 2.82 $186,870 865 126,212 0.7% $19.50 $0.455 520 $105,893 84,097 29,837 (8,041) (818) (8,859) (3,115) $(5,744) 6,441 6,441 $(0.89) $(0.89) 1,848 3,804 (5,006) 20.6% (7.6%) (5.4%) (5.0%) $20.18 $13.83 2010 $91,501 3.17 $160,959 - 114,740 0.0% $17.81 $0.628 440 $91,016 65,188 30,874 (5,046) 1,234 (3,812) (1,491) $(2,321) 6,429 6,429 $(0.36) $(0.36) 3,699 3,295 (482) 28.4% (5.5%) (2.6%) (1.9%) $24.68 $8.30 2009 $91,567 5.40 $141,994 - 120,376 0.0% $18.72 $1.006 390 Annual Report 2016 2008 $223,994 141,377 46,811 35,806 (1,640) 34,166 11,646 $22,520 6,415 6,444 $3.51 $3.49 5,514 3,023 37,252 36.9% 16.0% 10.1% 20.4% $58.68 $16.92 2008 $94,739 2.85 $183,170 - 123,477 0.0% $19.16 $0.404 430 2007 $188,047 116,965 40,124 30,958 1,807 32,765 11,876 $20,889 6,382 6,440 $3.27 $3.24 4,510 2,106 35,072 37.8% 16.5% 11.1% 24.2% $60.44 $24.61 2007 $67,792 2.07 $164,666 - 97,603 0.0% $15.16 $0.308 380 2006 $148,517 95,192 30,697 22,628 486 23,114 7,635 $15,479 6,317 6,397 $2.45 $2.42 3,301 1,504 24,877 35.9% 15.2% 10.4% 23.0% $37.47 $17.74 2006 $53,774 2.21 $126,666 4,010 75,375 5.1% $11.78 $0.334 320 HURCO COMPANIES BRAND PORTFOLIO With the addition of the Milltronics and Takumi businesses, we now have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused on sophisticated technology. Milltronics is the general purpose brand with a simplifi ed control and straightforward feature sets. Takumi is the industry standard brand since the Hurco – Mind Over Metal Hurco CNC machines are powered by proprietary technology that increases customer productivity and profi tability. The integrated Hurco control is the most versatile in the industry, supporting both Industry Standard programming and Conversational programming. The Hurco brand includes twelve product lines of advanced CNC mills and lathes. Machining Centers Turning Centers LCM Precision Technology LCM Precision Technology LCM Precision Technology LCM designs and manufactures advanced components for machine tools, such as rotary tables, tilt tables, swivel heads, and electrospindles. CNC Rotary Tables Swivel Heads and Electrospindles CNC Tilt Tables HURCO COMPANIES BRAND PORTFOLIO line of vertical machining centers are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics CNC machines. LCM is the fourth brand in the Hurco Companies brand portfolio. LCM produces components and accessories for CNC machine tools. Milltronics – Let’s Invent Milltronics CNC machines are equipped with an interactive computer control system that is compatible with G-codes and M-codes generated from CAD/CAM software and conversational visual aid programming. The Milltronics brand includes seven product lines of general purpose CNC mills and lathes. Machining Centers Turning Centers Takumi – The Art of Productivity Takumi CNC machines are equipped with Industry Standard control systems produced by third parties, such as Fanuc®, Siemens®, Mitsubishi® or Heidenhain®. The Takumi brand includes six product lines of CNC mills. Vertical, High Speed Bridge and Double Column Machining Centers Annual Report 2016 HURCO COMPANIES, INC. LEADERSHIP Board of Directors Corporate Officers and Division Executives Thomas Aaro Managing Partner, BlueBlack, LLC (2) Michael Doar Chairman and Chief Executive Officer Leanor Lin Vice General Manager, Takumi (Taiwan) Robert W. Cruickshank Independent Business Consultant (1,3,4) Gregory S. Volovic President Michael Doar Chairman, Chief Executive Officer Hurco Companies, Inc. Jay Longbottom CEO, Robert Family Holdings (2) Andrew Niner President, Niner Wine Estates(1) Richard Porter Private Equity Manager (1,3) Janaki Sivanesan Attorney, Sivanesan Law (2) Ronald Strackbein Private Investor (2, 3) 1 Nominating and Governance Committee 2 Audit Committee 3 Compensation Committee 4 Presiding Independent Director Sonja K. McClelland Vice President, Secretary, Treasurer and Chief Financial Officer John Donlon Executive Vice President, International Sales/Service Michael Auer General Manager, Hurco GmbH (Germany), Hurco Sp. z o.o. (Poland) Kaushik Bhattacharjee General Manager, Hurco India Private, Ltd. (India) Phillippe Chevalier General Manager, Hurco S.a.r.l. (France) Cory Miller General Manager, Hurco North America Louie Pavlakos General Manager, Milltronics USA Marco Rizzi General Manager, Hurco S.r.l. (Italy) Nicola La Vista General Manager, LCM Precision Technology S.r.l. (Italy) David Waghorn General Manager, Hurco Europe Limited (United Kingdom), Hurco South Africa (PTY) Ltd. (South Africa) Scott Yao General Manager, Ningbo Hurco Trading Co., Ltd. (Shanghai, China Martin Lee, Luke Wang Wai Yip Lee General Manager, Hurco (S.E. Asia) Pte Ltd. (Singapore) Vice General Managers, Hurco Manufacturing Limited (Taiwan) and Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) CORPORATE INFORMATION Annual Meeting All shareholders are invited to attend our annual meeting, which will be held on Thursday, March 9, 2017 at 10 a.m. Eastern Standard Time at Hurco’s Corporate Offices, One Technology Way, Indianapolis, IN. Transfer Agent Computershare Trust Company, N.A., 250 Royall St., Canton, MA 02021 Legal Counsel Corporate Law: Faegre Baker Daniels LLP Patent Law: Faegre Baker Daniels LLP Independent Auditors Ernst & Young LLP, Suite 2600 111 Monument Circle, P.O. Box 44972 Indianapolis, IN 46244 Investor Relations Sonja K. McClelland, Vice President, Secretary, Treasurer and Chief Financial Officer, One Technology Way, Indianapolis, IN 46268 Telephone (317) 293-5309. Stock Market Information Hurco Common Stock is traded on the Nasdaq Global Select Market under the ticker symbol HURC. Stock price quotations are printed daily in major newspapers. The following table sets forth the high and low sales prices of the shares of Common Stock for the periods indicated, as reported by the Nasdaq Global Select Market. Fiscal Quarter Ended 2016 2015 High Low High Low $28.47 $23.90 $39.95 $30.33 $33.40 $23.25 $38.37 $28.22 $33.65 $26.57 $35.77 $30.13 $30.42 $25.45 $31.80 $24.93 January 31 April 30 July 31 October 31 There were approximately 116 holders of record of Hurco Common Stock as of October 31, 2016. Disclosure Concerning Forward- Looking Statements Certain statements made in this annual report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward- looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. These factors include the risks identified in Item 1A of the annual report on form 10K. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 31, 2016 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________. Commission File No. 0-9143 HURCO COMPANIES, INC. (Exact name of registrant as specified in its charter) Indiana (State or other jurisdiction of incorporation or organization) One Technology Way Indianapolis, Indiana (Address of principal executive offices) 35-1150732 (I.R.S. Employer Identification Number) 46268 (Zip code) Registrant’s telephone number, including area code (317) 293-5309 None Securities registered pursuant to Section 12(b) of the Act: Common Stock, No Par Value Securities registered pursuant to Section 12(g) of the Act: (Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d). Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] (Do not check if a smaller reporting company) The aggregate market value of the registrant’s voting stock held by non-affiliates as of April 29, 2016 (the last business day of our most recently completed second quarter) was $212,837,000. The number of shares of the registrant’s common stock outstanding as of December 12, 2016 was 6,573,103. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2017 Annual Meeting of Shareholders (Part III). Forward-Looking Statements This report contains certain statements that are forward-looking statements within the meaning of federal securities laws. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this report, the words “may”, “will”, “should”, “would” ,“could”, “anticipate”, “expect”, “plan”, “seek”, “believe”, “predict”, “estimate”, “potential”, “project”, “target”, “forecast”, “intend”, “strategy”, “future”, “opportunity”, “assume”, “guide”, and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks and other important factors under the heading “Risk Factors” in Part I, Item 1A of this report. You should understand that it is not possible to predict or identify all factors that could cause actual results to differ materially from forward-looking statements. Consequently, you should not consider any list or discussion of such factors to be a complete set of all potential risks or uncertainties. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports and our other filings with the Securities and Exchange Commission (“SEC”). Item 1. BUSINESS General PART I Hurco Companies, Inc. is an international, industrial technology company. We design, manufacture and sell computerized (i.e., Computer Numeric Control (“CNC”) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide sales, service and distribution network. Although the majority of our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components. Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training and applications support. As used in this report, the words “we”, “us”, “our”, “Hurco” and the “Company” refer to Hurco Companies, Inc. and its consolidated subsidiaries. Since our founding in 1968, we have been a leader in the introduction of interactive computer control systems that automate manufacturing processes and improve productivity in the metal parts manufacturing industry. We pioneered the application of microprocessor technology and conversational programming software for use in machine tools. Our computer control systems can be operated by both skilled and unskilled machine tool operators and yet are capable of instructing a machine to perform complex tasks. The combination of microprocessor technology and patented interactive, conversational programming software in our computer control systems enables operators on the production floor to quickly and easily create a program for machining a particular part from a blueprint or computer aided design file and immediately begin machining that part. Our executive offices and principal design and engineering operations are headquartered in Indianapolis, Indiana, U.S. Sales, application engineering and service subsidiaries are located in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and the U.S. We have manufacturing and assembly operations in Taiwan, the U.S., Italy and China, and distribution facilities in the U.S., the Netherlands, and Taiwan. 1 During the third quarter of fiscal 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, Inc. and we are operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics USA, Inc. (“Milltronics”). Milltronics manufactures and sells CNC knee mills, tool room bed mills, vertical machining centers, combination lathes, slant-bed lathes, horizontal machining centers, and bridge mills. During the third quarter of fiscal 2015, we also acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwanese company that designs and manufactures CNC vertical machining centers, double column machining centers, high speed bridge machines and other machine tools, with sales primarily in Taiwan, China and Europe. Takumi machines are equipped with industrial controls from Fanuc®, Siemens®, Mitsubishi® or Heidenhain® which can be used in high-volume parts manufacturing. We are operating this Taiwanese business as a product line through our wholly-owned subsidiary Hurco Manufacturing Limited (“HML”). The Milltronics and Takumi product lines contribute to our efforts to expand our consolidated product range, customer base and global platform, and we believe may accelerate emerging market penetration, particularly in strategic markets such as China and South America. Our strategy is to design, manufacture and sell a comprehensive line of computerized machine tools that help customers in the worldwide metal cutting market increase productivity and profitability. The majority of our machine tools employ proprietary, interactive, computer control technology that increases productivity through ease of operation via interactive conversational and graphical programming software. All of our machine tools deliver high levels of machine performance (speed, accuracy and surface finish quality) that increases productivity. We routinely expand our product offerings to meet customer needs, which has led us to design and manufacture more complex machining centers with advanced capabilities. We bring a disciplined approach to strategically enter new geographic markets, as appropriate. Industry Machine tool products are considered capital goods, which makes them part of an industry that has historically been highly cyclical. Although industry association data for the U.S. machine tool market is available, that market only accounts for approximately 9% of worldwide consumption. Reports available for the U.S. machine tool market include: • United States Machine Tool Consumption – generated by the Association for Manufacturing Technology, this report includes metal cutting machines of all types and sizes, including segments in which we do not compete • Purchasing Manager’s Index - developed by the Institute for Supply Management, this report includes activity levels in U.S. manufacturing plants that purchase machine tools • Capacity Utilization of Manufacturing Companies – issued by the Federal Reserve Board A limited amount of information is available for foreign markets, and different reporting methodologies are used by various countries. Machine tool consumption data, published by Gardner Publications, Inc., calculates machine tool consumption annually by country. It is important to note that data for foreign countries are based on government reports that may lag 6 to 12 months and, therefore, are unreliable for forecasting purposes. ___________ *Fanuc® is a registered trademark of GE Fanuc Automation Americas, Inc. Siemens® is a registered trademark of Siemens AG. Mitsubishi® is a registered trademark of Mitsubishi Electric Corporation. Heidenhain® is a registered trademark of HEIDENHAIN CORPORATION, a wholly owned subsidiary of the German company DR. JOHANNES HEIDENHAIN GmbH. Demand for capital equipment can fluctuate significantly during periods of changing economic conditions. Manufacturers and suppliers of capital goods, such as our company, are often the first to experience these changes in demand. Additionally, since our typical order backlog is approximately 45 days, it is difficult to estimate demand with any reasonable certainty. Therefore, we do not have the benefit of relying on the common leading indicators that other industries use for market analysis and forecasting purposes. Products Our core products consist of general purpose computerized machine tools for the metal cutting industry, principally, vertical machining centers (mills) and turning centers (lathes). The majority of our machine tools are equipped and integrated fully with our proprietary software and computer control systems, while the remaining machine tools are equipped with industry standard controls. Additionally, we produce and distribute software options, control upgrades, hardware accessories and replacement parts for our machine tool product lines, and we provide operator training and support services to our customers. We also produce computer control systems and related software for press brake applications that are sold as retrofit units for installation on existing or new press brake machines. The following table sets forth the contribution of each of our product groups and services to our total revenues during each of the past three fiscal years (in thousands): Net Sales and Service Fees by Product Category Computerized Machine Tools* $195,618 86% $189,712 87% $193,937 87% Year Ended October 31, 2016 2015 2014 2,078 21,908 7,685 1% 10% 3% 3,085 19,375 7,211 1% 9% 3% 3,407 17,391 7,568 2% 8% 3% $227,289 100% $219,383 100% $222,303 100% * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective dates † Amounts shown do not include computer control systems and software sold as an integrated component of computerized Computer Control Systems and Software † Service Parts Service Fees Total of those acquisitions. machine systems. Product Portfolio by Brand We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused on sophisticated technology. Milltronics is the entry level brand with a simplified control and straightforward feature sets. Takumi is an industry standard brand with machines that are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. Typically, manufacturing facilities that use industry standard controls focus on medium to high production, wherein they run large batches of a few types of parts instead of small batches of many different types of parts. In addition, through our wholly–owned subsidiary LCM Precision Technology S.r.l. (“LCM”), we produce machine tool components and accessories. The main product categories of each brand are outlined below. The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different models. The combined machine tool product lines also provide benefits related to the development of product enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven engineering designs that allow us to achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. 2 3 During the third quarter of fiscal 2015, we acquired the assets of the machine tool business of Milltronics During the third quarter of fiscal 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, Inc. and we are operating this U.S. business as a product line through our Manufacturing Company, Inc. and we are operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics USA, Inc. (“Milltronics”). Milltronics manufactures and sells CNC wholly-owned subsidiary, Milltronics USA, Inc. (“Milltronics”). Milltronics manufactures and sells CNC knee mills, tool room bed mills, vertical machining centers, combination lathes, slant-bed lathes, knee mills, tool room bed mills, vertical machining centers, combination lathes, slant-bed lathes, horizontal machining centers, and bridge mills. During the third quarter of fiscal 2015, we also acquired horizontal machining centers, and bridge mills. During the third quarter of fiscal 2015, we also acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwanese the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwanese company that designs and manufactures CNC vertical machining centers, double column machining company that designs and manufactures CNC vertical machining centers, double column machining centers, high speed bridge machines and other machine tools, with sales primarily in Taiwan, China and centers, high speed bridge machines and other machine tools, with sales primarily in Taiwan, China and Europe. Takumi machines are equipped with industrial controls from Fanuc®, Siemens®, Mitsubishi® or Europe. Takumi machines are equipped with industrial controls from Fanuc®, Siemens®, Mitsubishi® or Heidenhain® which can be used in high-volume parts manufacturing. We are operating this Taiwanese Heidenhain® which can be used in high-volume parts manufacturing. We are operating this Taiwanese business as a product line through our wholly-owned subsidiary Hurco Manufacturing Limited (“HML”). business as a product line through our wholly-owned subsidiary Hurco Manufacturing Limited (“HML”). The Milltronics and Takumi product lines contribute to our efforts to expand our consolidated product The Milltronics and Takumi product lines contribute to our efforts to expand our consolidated product range, customer base and global platform, and we believe may accelerate emerging market penetration, range, customer base and global platform, and we believe may accelerate emerging market penetration, particularly in strategic markets such as China and South America. particularly in strategic markets such as China and South America. Our strategy is to design, manufacture and sell a comprehensive line of computerized machine tools that Our strategy is to design, manufacture and sell a comprehensive line of computerized machine tools that help customers in the worldwide metal cutting market increase productivity and profitability. The help customers in the worldwide metal cutting market increase productivity and profitability. The majority of our machine tools employ proprietary, interactive, computer control technology that increases majority of our machine tools employ proprietary, interactive, computer control technology that increases productivity through ease of operation via interactive conversational and graphical programming productivity through ease of operation via interactive conversational and graphical programming software. All of our machine tools deliver high levels of machine performance (speed, accuracy and software. All of our machine tools deliver high levels of machine performance (speed, accuracy and surface finish quality) that increases productivity. We routinely expand our product offerings to meet surface finish quality) that increases productivity. We routinely expand our product offerings to meet customer needs, which has led us to design and manufacture more complex machining centers with customer needs, which has led us to design and manufacture more complex machining centers with advanced capabilities. We bring a disciplined approach to strategically enter new geographic markets, as advanced capabilities. We bring a disciplined approach to strategically enter new geographic markets, as appropriate. appropriate. Industry Industry Machine tool products are considered capital goods, which makes them part of an industry that has Machine tool products are considered capital goods, which makes them part of an industry that has historically been highly cyclical. historically been highly cyclical. Although industry association data for the U.S. machine tool market is available, that market only Although industry association data for the U.S. machine tool market is available, that market only accounts for approximately 9% of worldwide consumption. Reports available for the U.S. machine tool accounts for approximately 9% of worldwide consumption. Reports available for the U.S. machine tool market include: market include: • United States Machine Tool Consumption – generated by the Association for Manufacturing • United States Machine Tool Consumption – generated by the Association for Manufacturing Technology, this report includes metal cutting machines of all types and sizes, including Technology, this report includes metal cutting machines of all types and sizes, including segments in which we do not compete segments in which we do not compete • Purchasing Manager’s Index - developed by the Institute for Supply Management, this report • Purchasing Manager’s Index - developed by the Institute for Supply Management, this report includes activity levels in U.S. manufacturing plants that purchase machine tools includes activity levels in U.S. manufacturing plants that purchase machine tools • Capacity Utilization of Manufacturing Companies – issued by the Federal Reserve Board • Capacity Utilization of Manufacturing Companies – issued by the Federal Reserve Board A limited amount of information is available for foreign markets, and different reporting methodologies A limited amount of information is available for foreign markets, and different reporting methodologies are used by various countries. Machine tool consumption data, published by Gardner Publications, Inc., are used by various countries. Machine tool consumption data, published by Gardner Publications, Inc., calculates machine tool consumption annually by country. It is important to note that data for foreign calculates machine tool consumption annually by country. It is important to note that data for foreign countries are based on government reports that may lag 6 to 12 months and, therefore, are unreliable for countries are based on government reports that may lag 6 to 12 months and, therefore, are unreliable for forecasting purposes. forecasting purposes. ___________ ___________ *Fanuc® is a registered trademark of GE Fanuc Automation Americas, Inc. Siemens® is a registered trademark of Siemens AG. *Fanuc® is a registered trademark of GE Fanuc Automation Americas, Inc. Siemens® is a registered trademark of Siemens AG. Mitsubishi® is a registered trademark of Mitsubishi Electric Corporation. Heidenhain® is a registered trademark of Mitsubishi® is a registered trademark of Mitsubishi Electric Corporation. Heidenhain® is a registered trademark of HEIDENHAIN CORPORATION, a wholly owned subsidiary of the German company DR. JOHANNES HEIDENHAIN GmbH. HEIDENHAIN CORPORATION, a wholly owned subsidiary of the German company DR. JOHANNES HEIDENHAIN GmbH. Demand for capital equipment can fluctuate significantly during periods of changing economic Demand for capital equipment can fluctuate significantly during periods of changing economic conditions. Manufacturers and suppliers of capital goods, such as our company, are often the first to conditions. Manufacturers and suppliers of capital goods, such as our company, are often the first to experience these changes in demand. Additionally, since our typical order backlog is approximately 45 experience these changes in demand. Additionally, since our typical order backlog is approximately 45 days, it is difficult to estimate demand with any reasonable certainty. Therefore, we do not have the days, it is difficult to estimate demand with any reasonable certainty. Therefore, we do not have the benefit of relying on the common leading indicators that other industries use for market analysis and benefit of relying on the common leading indicators that other industries use for market analysis and forecasting purposes. forecasting purposes. Products Products Our core products consist of general purpose computerized machine tools for the metal cutting industry, Our core products consist of general purpose computerized machine tools for the metal cutting industry, principally, vertical machining centers (mills) and turning centers (lathes). The majority of our machine principally, vertical machining centers (mills) and turning centers (lathes). The majority of our machine tools are equipped and integrated fully with our proprietary software and computer control systems, while tools are equipped and integrated fully with our proprietary software and computer control systems, while the remaining machine tools are equipped with industry standard controls. Additionally, we produce and the remaining machine tools are equipped with industry standard controls. Additionally, we produce and distribute software options, control upgrades, hardware accessories and replacement parts for our machine distribute software options, control upgrades, hardware accessories and replacement parts for our machine tool product lines, and we provide operator training and support services to our customers. We also tool product lines, and we provide operator training and support services to our customers. We also produce computer control systems and related software for press brake applications that are sold as produce computer control systems and related software for press brake applications that are sold as retrofit units for installation on existing or new press brake machines. retrofit units for installation on existing or new press brake machines. The following table sets forth the contribution of each of our product groups and services to our total The following table sets forth the contribution of each of our product groups and services to our total revenues during each of the past three fiscal years (in thousands): revenues during each of the past three fiscal years (in thousands): Net Sales and Service Fees by Product Category Net Sales and Service Fees by Product Category 2016 2016 Year Ended October 31, Year Ended October 31, 2015 2015 2014 2014 Computerized Machine Tools* $195,618 Computerized Machine Tools* $195,618 Computer Control Systems Computer Control Systems 86% 86% $189,712 $189,712 87% 87% $193,937 $193,937 87% 87% and Software † and Software † Service Parts Service Parts Service Fees Service Fees Total Total 2,078 2,078 21,908 21,908 7,685 7,685 $227,289 $227,289 1% 1% 10% 10% 3% 3% 100% 100% 3,085 3,085 19,375 19,375 7,211 7,211 $219,383 $219,383 1% 1% 9% 9% 3% 3% 100% 100% 3,407 3,407 17,391 17,391 7,568 7,568 $222,303 $222,303 2% 2% 8% 8% 3% 3% 100% 100% * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective dates * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective dates of those acquisitions. of those acquisitions. † Amounts shown do not include computer control systems and software sold as an integrated component of computerized † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. machine systems. Product Portfolio by Brand Product Portfolio by Brand We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused on sophisticated technology. Milltronics is the entry level brand with a simplified control and focused on sophisticated technology. Milltronics is the entry level brand with a simplified control and straightforward feature sets. Takumi is an industry standard brand with machines that are equipped with straightforward feature sets. Takumi is an industry standard brand with machines that are equipped with industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. industry standard controls instead of the proprietary controls found on Hurco and Milltronics machines. Typically, manufacturing facilities that use industry standard controls focus on medium to high Typically, manufacturing facilities that use industry standard controls focus on medium to high production, wherein they run large batches of a few types of parts instead of small batches of many production, wherein they run large batches of a few types of parts instead of small batches of many different types of parts. In addition, through our wholly–owned subsidiary LCM Precision Technology different types of parts. In addition, through our wholly–owned subsidiary LCM Precision Technology S.r.l. (“LCM”), we produce machine tool components and accessories. The main product categories of S.r.l. (“LCM”), we produce machine tool components and accessories. The main product categories of each brand are outlined below. each brand are outlined below. The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different models. The combined machine tool product lines also provide benefits related to the than 150 different models. The combined machine tool product lines also provide benefits related to the development of product enhancements, technologies and models due to leverage of shared resources and development of product enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven engineering designs that allow us to achieve manufacturing cost reductions cross-utilization of proven engineering designs that allow us to achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. from economies of scale and manufacturing efficiencies. 2 2 3 3 Hurco CNC Machine Tools Five-Axis Product Line Hurco computerized machine tools are equipped with a fully integrated interactive computer control system that features our proprietary WinMax® software. Our computer control system enables a machine tool operator to create complex two-dimensional or three-dimensional machining programs directly from an engineering drawing or computer-aided design geometry file. An operator with little or no machine tool programming experience can successfully create a program with minimal training and begin machining the part in a short period of time. The control features an operator console with active touch, and incorporates an upgradeable personal computer (PC) platform using a high speed processor with solid rendering graphical programming. In addition, WinMax® has a Windows® † based operating system that enables users to improve shop floor flexibility and software productivity. Companies using computer controlled machine tools are better able to: • maximize the efficiency of their human resources; • make more advanced and complex parts from a wide range of materials using multiple processes; incorporate fast moving changes in technology into their operations to keep their competitive • edge; and integrate their business into the global supply chain of their customers by supporting small to medium lot sizes for “just in time” initiatives. • Our Windows® based control facilitates our ability to meet these customer needs. The familiar Windows® operating system coupled with our intuitive conversational style of program creation allows our customers’ operators to create and edit part-making programs without incurring the incremental overhead of specialized computer aided design and computer aided manufacturing programmers. With the ability to transfer most computer aided design data directly into a Hurco program, programming time can be significantly reduced. Machine tool products today are being designed to meet the demand for machining complex parts with greater part accuracies. Our proprietary controls with WinMax® software and high speed processors efficiently handle the large amounts of data these complex part-making programs require, which enable our customers to create parts with higher accuracy at faster speeds. We continue to add technology to our control design as it becomes available. For example, UltiMotion, our patented motion control system, provides significant cycle time reductions and increases the quality of a part’s surface finish. This technology differentiates us in the marketplace and is incorporated into our control. Our offering of Hurco machining centers, currently equipped with either a dual touch-screen console or a single touch-screen console, consists of the following product lines: VM Product Line The VM product line consists of moderately priced vertical machining centers for the entry-level market. The design premise of the machining center with a large work cube and a small footprint optimizes the use of available floor space. The VM line consists of five models in four sizes with X-axis (horizontal) travels of 18, 26, 40, and 50 inches. VMX Product Line The VMX product line consists of higher performing vertical machining centers aimed at manufacturers that require greater part accuracy. It is our flagship series of machining centers. The VMX line consists of 12 models in eight sizes with X-axis travels of 24, 26, 30, 42, 50, 60, 64, and 84 inches. ___________ †Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. HS Product Line HMX Product Line HBMX Product Line TM/TMM Product Line The five-axis product line is targeted at manufacturers seeking to produce multi-sided parts or true five- axis in a single setup. Machines in this product line can yield significant productivity gains for manufacturers that previously had to process each side of a part separately. Additionally, investing in five-axis technology helps our customers to expand their customer base, as they are able to bid on more complex projects that require simultaneous five-axis operations. The five-axis product line consists of 18 models with three different configurations: swivel head, trunnion table, and cantilever. Due to the integral, motorized spindle with a base speed of 18,000 rpm, the HS product line is desirable for the die and mold industry because of that industry’s particular interest in the improvement of surface finish quality and the reduction of cycle time. Additionally, this product line offers us the opportunity to expand our customer base to manufacturers that produce larger batches. The HS product line consists of four models with X-axis travels of 24, 30, 42, and 60 inches. The HMX product line is beneficial to manufacturers entering production manufacturing versus small batch manufacturing. The HMX machines have expanded tool capacity, a comprehensive chip management system, a built-in pallet changer, and a box-in-box design supported at both the top and bottom to increase rigidity for long production runs and heavy cuts. The HMX product line consists of three models in three sizes with X-axis travels of 24, 32, and 41 inches. The HBMX product line is beneficial to manufacturers that build custom machinery and parts for a multitude of industries, such as packaging, pharmaceutical, automotive, energy, and medical. Additionally, boring mills are also used to repair and/or rebuild large components. The HBMX boring mill product line consists of four models with X-axis travels of 55, 79, 94, and 120 inches. The TM/TMM product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There is one TM model in seven sizes, measured by chuck size: the TM6, TM8, TM10, TM12, TM18, TM18L, and TM18BB. The TM18BB big bore turning center targets the energy and aerospace industries because it has a larger chuck diameter and bigger bar capacity for larger parts. We added motorized tooling on the lathe turret to further enhance the capability of the TM turning centers and designated it as the TMM product line. These turning centers with live tooling allow our customers to complete a number of secondary milling, drilling and tapping operations while the part is still held in the chuck after the turning operations are complete, which provides significant productivity gains. The TMM product line consists of three models: TMM8, TMM10, and TMM12. TMX Product Line The TMX product line consists of high performance turning centers. There are six models in two sizes. The TMXMY models are equipped with an additional axis and motorized live tooling while the TMXMYS models also have an additional spindle. DCX Product Line The double column DCX series includes five models in three sizes. These 2-meter, 3-meter, and 4-meter machining centers are designed to facilitate production of large parts and molds often required by the aerospace, energy and custom machinery industries. 4 5 Hurco computerized machine tools are equipped with a fully integrated interactive computer control Hurco computerized machine tools are equipped with a fully integrated interactive computer control system that features our proprietary WinMax® software. Our computer control system enables a machine system that features our proprietary WinMax® software. Our computer control system enables a machine tool operator to create complex two-dimensional or three-dimensional machining programs directly from tool operator to create complex two-dimensional or three-dimensional machining programs directly from an engineering drawing or computer-aided design geometry file. An operator with little or no machine an engineering drawing or computer-aided design geometry file. An operator with little or no machine tool programming experience can successfully create a program with minimal training and begin tool programming experience can successfully create a program with minimal training and begin machining the part in a short period of time. The control features an operator console with active touch, machining the part in a short period of time. The control features an operator console with active touch, and incorporates an upgradeable personal computer (PC) platform using a high speed processor with solid and incorporates an upgradeable personal computer (PC) platform using a high speed processor with solid rendering graphical programming. In addition, WinMax® has a Windows® rendering graphical programming. In addition, WinMax® has a Windows® † based operating system that † based operating system that enables users to improve shop floor flexibility and software productivity. Companies using computer enables users to improve shop floor flexibility and software productivity. Companies using computer controlled machine tools are better able to: controlled machine tools are better able to: • maximize the efficiency of their human resources; • maximize the efficiency of their human resources; • make more advanced and complex parts from a wide range of materials using multiple processes; • make more advanced and complex parts from a wide range of materials using multiple processes; incorporate fast moving changes in technology into their operations to keep their competitive incorporate fast moving changes in technology into their operations to keep their competitive • • • • edge; and edge; and Our Windows® based control facilitates our ability to meet these customer needs. The familiar Windows® Our Windows® based control facilitates our ability to meet these customer needs. The familiar Windows® operating system coupled with our intuitive conversational style of program creation allows our operating system coupled with our intuitive conversational style of program creation allows our customers’ operators to create and edit part-making programs without incurring the incremental overhead customers’ operators to create and edit part-making programs without incurring the incremental overhead of specialized computer aided design and computer aided manufacturing programmers. With the ability to of specialized computer aided design and computer aided manufacturing programmers. With the ability to transfer most computer aided design data directly into a Hurco program, programming time can be transfer most computer aided design data directly into a Hurco program, programming time can be significantly reduced. significantly reduced. Machine tool products today are being designed to meet the demand for machining complex parts with Machine tool products today are being designed to meet the demand for machining complex parts with greater part accuracies. Our proprietary controls with WinMax® software and high speed processors greater part accuracies. Our proprietary controls with WinMax® software and high speed processors efficiently handle the large amounts of data these complex part-making programs require, which enable efficiently handle the large amounts of data these complex part-making programs require, which enable our customers to create parts with higher accuracy at faster speeds. We continue to add technology to our our customers to create parts with higher accuracy at faster speeds. We continue to add technology to our control design as it becomes available. For example, UltiMotion, our patented motion control system, control design as it becomes available. For example, UltiMotion, our patented motion control system, provides significant cycle time reductions and increases the quality of a part’s surface finish. This provides significant cycle time reductions and increases the quality of a part’s surface finish. This technology differentiates us in the marketplace and is incorporated into our control. technology differentiates us in the marketplace and is incorporated into our control. Our offering of Hurco machining centers, currently equipped with either a dual touch-screen console or a Our offering of Hurco machining centers, currently equipped with either a dual touch-screen console or a single touch-screen console, consists of the following product lines: single touch-screen console, consists of the following product lines: The VM product line consists of moderately priced vertical machining centers for the entry-level market. The VM product line consists of moderately priced vertical machining centers for the entry-level market. The design premise of the machining center with a large work cube and a small footprint optimizes the The design premise of the machining center with a large work cube and a small footprint optimizes the use of available floor space. The VM line consists of five models in four sizes with X-axis (horizontal) use of available floor space. The VM line consists of five models in four sizes with X-axis (horizontal) VM Product Line VM Product Line travels of 18, 26, 40, and 50 inches. travels of 18, 26, 40, and 50 inches. VMX Product Line VMX Product Line The VMX product line consists of higher performing vertical machining centers aimed at manufacturers The VMX product line consists of higher performing vertical machining centers aimed at manufacturers that require greater part accuracy. It is our flagship series of machining centers. The VMX line consists of that require greater part accuracy. It is our flagship series of machining centers. The VMX line consists of 12 models in eight sizes with X-axis travels of 24, 26, 30, 42, 50, 60, 64, and 84 inches. 12 models in eight sizes with X-axis travels of 24, 26, 30, 42, 50, 60, 64, and 84 inches. ___________ ___________ †Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. †Windows® is a registered trademark of Microsoft Corporation in the United States and other countries. Hurco CNC Machine Tools Hurco CNC Machine Tools Five-Axis Product Line Five-Axis Product Line The five-axis product line is targeted at manufacturers seeking to produce multi-sided parts or true five- The five-axis product line is targeted at manufacturers seeking to produce multi-sided parts or true five- axis in a single setup. Machines in this product line can yield significant productivity gains for axis in a single setup. Machines in this product line can yield significant productivity gains for manufacturers that previously had to process each side of a part separately. Additionally, investing in manufacturers that previously had to process each side of a part separately. Additionally, investing in five-axis technology helps our customers to expand their customer base, as they are able to bid on more five-axis technology helps our customers to expand their customer base, as they are able to bid on more complex projects that require simultaneous five-axis operations. The five-axis product line consists of 18 complex projects that require simultaneous five-axis operations. The five-axis product line consists of 18 models with three different configurations: swivel head, trunnion table, and cantilever. models with three different configurations: swivel head, trunnion table, and cantilever. HS Product Line HS Product Line Due to the integral, motorized spindle with a base speed of 18,000 rpm, the HS product line is desirable Due to the integral, motorized spindle with a base speed of 18,000 rpm, the HS product line is desirable for the die and mold industry because of that industry’s particular interest in the improvement of surface for the die and mold industry because of that industry’s particular interest in the improvement of surface finish quality and the reduction of cycle time. Additionally, this product line offers us the opportunity to finish quality and the reduction of cycle time. Additionally, this product line offers us the opportunity to expand our customer base to manufacturers that produce larger batches. The HS product line consists of expand our customer base to manufacturers that produce larger batches. The HS product line consists of four models with X-axis travels of 24, 30, 42, and 60 inches. four models with X-axis travels of 24, 30, 42, and 60 inches. integrate their business into the global supply chain of their customers by supporting small to integrate their business into the global supply chain of their customers by supporting small to medium lot sizes for “just in time” initiatives. medium lot sizes for “just in time” initiatives. HMX Product Line HMX Product Line The HMX product line is beneficial to manufacturers entering production manufacturing versus small The HMX product line is beneficial to manufacturers entering production manufacturing versus small batch manufacturing. The HMX machines have expanded tool capacity, a comprehensive chip batch manufacturing. The HMX machines have expanded tool capacity, a comprehensive chip management system, a built-in pallet changer, and a box-in-box design supported at both the top and management system, a built-in pallet changer, and a box-in-box design supported at both the top and bottom to increase rigidity for long production runs and heavy cuts. The HMX product line consists of bottom to increase rigidity for long production runs and heavy cuts. The HMX product line consists of three models in three sizes with X-axis travels of 24, 32, and 41 inches. three models in three sizes with X-axis travels of 24, 32, and 41 inches. HBMX Product Line HBMX Product Line The HBMX product line is beneficial to manufacturers that build custom machinery and parts for a The HBMX product line is beneficial to manufacturers that build custom machinery and parts for a multitude of industries, such as packaging, pharmaceutical, automotive, energy, and medical. multitude of industries, such as packaging, pharmaceutical, automotive, energy, and medical. Additionally, boring mills are also used to repair and/or rebuild large components. The HBMX boring Additionally, boring mills are also used to repair and/or rebuild large components. The HBMX boring mill product line consists of four models with X-axis travels of 55, 79, 94, and 120 inches. mill product line consists of four models with X-axis travels of 55, 79, 94, and 120 inches. TM/TMM Product Line TM/TMM Product Line The TM/TMM product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job The TM/TMM product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There is one shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There is one TM model in seven sizes, measured by chuck size: the TM6, TM8, TM10, TM12, TM18, TM18L, and TM model in seven sizes, measured by chuck size: the TM6, TM8, TM10, TM12, TM18, TM18L, and TM18BB. The TM18BB big bore turning center targets the energy and aerospace industries because it has TM18BB. The TM18BB big bore turning center targets the energy and aerospace industries because it has a larger chuck diameter and bigger bar capacity for larger parts. We added motorized tooling on the lathe a larger chuck diameter and bigger bar capacity for larger parts. We added motorized tooling on the lathe turret to further enhance the capability of the TM turning centers and designated it as the TMM product turret to further enhance the capability of the TM turning centers and designated it as the TMM product line. These turning centers with live tooling allow our customers to complete a number of secondary line. These turning centers with live tooling allow our customers to complete a number of secondary milling, drilling and tapping operations while the part is still held in the chuck after the turning operations milling, drilling and tapping operations while the part is still held in the chuck after the turning operations are complete, which provides significant productivity gains. The TMM product line consists of three are complete, which provides significant productivity gains. The TMM product line consists of three models: TMM8, TMM10, and TMM12. models: TMM8, TMM10, and TMM12. TMX Product Line TMX Product Line The TMX product line consists of high performance turning centers. There are six models in two sizes. The TMX product line consists of high performance turning centers. There are six models in two sizes. The TMXMY models are equipped with an additional axis and motorized live tooling while the The TMXMY models are equipped with an additional axis and motorized live tooling while the TMXMYS models also have an additional spindle. TMXMYS models also have an additional spindle. DCX Product Line DCX Product Line The double column DCX series includes five models in three sizes. These 2-meter, 3-meter, and 4-meter The double column DCX series includes five models in three sizes. These 2-meter, 3-meter, and 4-meter machining centers are designed to facilitate production of large parts and molds often required by the machining centers are designed to facilitate production of large parts and molds often required by the aerospace, energy and custom machinery industries. aerospace, energy and custom machinery industries. 4 4 5 5 New Product Lines MM/MB/RH Product Line We introduced the HTM30, an open-bed mill that is beneficial for tool room applications. The BX40 is a bridge mill designed for heavy cuts with a high-speed 18K spindle utilizing the frame design of the bridge mill with a trunnion table for 5-axis machining. The HM1700i and HM1700Ri are both horizontal mills that are equipped with a spindle that is ideal for both high and low end torque operations; however, the HM1700Ri has an embedded rotary torque table to facilitate increased production efficiencies. Additionally, we introduced a 3D print head technology that allows a Hurco CNC machine to be used for 3D printing, which is advantageous for prototyping. Milltronics CNC Machine Tools Our Milltronics line of CNC machine tools is designed for excellent value with more standard features for the price versus market leaders. We manufacture and sell these machine tools with fully integrated interactive computer control systems that are also compatible with G & M Code programs (generated from CAD/CAM software) and conversational visual aid programming. These straightforward and easy- to-use control systems are available in two versions, the Series 8200-B for tool room products and the more advanced Series 9000 offered on our new vertical machining centers and bridge mills. The Milltronics portfolio consists of the following product lines: VM General Purpose (GP) Product Line The VM-GP product line consists of attractively-priced vertical machining centers designed for job shops, prototype, R & D and other general machining applications. These belt-driven models are 40-taper and available in four different sizes – all with the Series 9000 control. Customers can choose models with X- axis (horizontal) travels of 25, 30, 40 or 50 inches. VM Inline Performance (IL) Product Line The VM-IL product line consists of moderately-priced performance vertical machining centers for high- speed applications such as tool, die and mold, aerospace or medical machining. Featuring heavier castings, faster motion and inline spindles, these 40-taper machines include the Series 9000 control and are available in four sizes. Models include X-axis travels of 30, 42, 50 or 60 inches. VM Extra Power (XP) Product Line The VM-XP product line consists of moderately-priced vertical machining centers for more demanding metal removal applications such as castings or forgings. These 50-taper models are either gear driven or heavy-duty belt driven and include the Series 9000 control. Customers can choose from three different models with X-axis travels of 43, 50 or 60 inches. BR Product Line The BR product line consists of high-speed bridge mills that are used in pattern shops and the aerospace industry in addition to job shops, due to the large table and travels that support a wide range of part sizes. BR machines have inline spindles and are available as six models in three sizes with X-axis travels of 100, 150, and 200 inches. BR machines offer the Series 9000 control. Products with the MM/MB or RH designation are part of the tool room bed mill category, which are machines that do not have an enclosure, also referred to as open bed machines. Typical applications include general machining, job shops, prototype or maintenance and repair. Available with quill head or rigid head designs, there are six models in four sizes with X-axis travels of 30, 40, 60 and 78 inches. These easy-to-use machines feature the Series 8200-B control. The SL product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There are three models with chuck sizes of 6, 10, and 12 inches. These compact machines feature the Series 8200-B SL Product Line control. ML Product Line The ML product line consists of combination lathes that the customer can configure for either tool room or production applications with the option to add live tooling. There are 17 models available in a variety of thru hole sizes and in the following six swing-over bed diameters: 17, 19, 23, 27, 36, and 39.7 inches. These flexible machines feature the Series 8200-B control. Takumi CNC Machine Tools Our Takumi machine tools feature industry standard CNC controls, including Fanuc®, Siemens®, Mitsubishi® or Heidenhain®. Models include drill and tap machines; three-axis vertical machining centers with linear guides; three-axis vertical machining centers with box ways; high-speed, double column vertical machining centers; and heavy duty, double column machining centers. With the addition of the Takumi brand, we have expanded our customer base to include manufacturers who opt for industrial controls. Generally, manufacturers who use industrial controls have production-oriented operations where they run medium to large batches of just a few different types of parts. The Takumi portfolio consists of the following product lines: The VT Series includes one high-speed drill and tap machine. Model VT500 features fast tool change times and rapid spindle acceleration/deceleration. This three-axis machine is designed for high volume production applications such as automotive parts or electronics components. The VC Series vertical machining centers are fast, three-axis linear guide machining centers designed for customers doing batch or production work. The VC machines are available in two sizes with X-axis VT Series VC Series travels of 34 and 42 inches. V Series The V Series vertical machining centers are heavy duty, box way machines built for tough applications such as roughing cast iron. These three-axis, massive machines feature belt or geared spindles to provide maximum torque. The V Series product line includes eight models with X-axis travels of 39, 43, 47, 60, 70, 78, 86, and 126 inches. 6 7 New Product Lines New Product Lines MM/MB/RH Product Line MM/MB/RH Product Line We introduced the HTM30, an open-bed mill that is beneficial for tool room applications. The BX40 is a We introduced the HTM30, an open-bed mill that is beneficial for tool room applications. The BX40 is a bridge mill designed for heavy cuts with a high-speed 18K spindle utilizing the frame design of the bridge bridge mill designed for heavy cuts with a high-speed 18K spindle utilizing the frame design of the bridge mill with a trunnion table for 5-axis machining. The HM1700i and HM1700Ri are both horizontal mills mill with a trunnion table for 5-axis machining. The HM1700i and HM1700Ri are both horizontal mills that are equipped with a spindle that is ideal for both high and low end torque operations; however, the that are equipped with a spindle that is ideal for both high and low end torque operations; however, the HM1700Ri has an embedded rotary torque table to facilitate increased production efficiencies. HM1700Ri has an embedded rotary torque table to facilitate increased production efficiencies. Additionally, we introduced a 3D print head technology that allows a Hurco CNC machine to be used for Additionally, we introduced a 3D print head technology that allows a Hurco CNC machine to be used for 3D printing, which is advantageous for prototyping. 3D printing, which is advantageous for prototyping. Milltronics CNC Machine Tools Milltronics CNC Machine Tools Our Milltronics line of CNC machine tools is designed for excellent value with more standard features for Our Milltronics line of CNC machine tools is designed for excellent value with more standard features for the price versus market leaders. We manufacture and sell these machine tools with fully integrated the price versus market leaders. We manufacture and sell these machine tools with fully integrated interactive computer control systems that are also compatible with G & M Code programs (generated interactive computer control systems that are also compatible with G & M Code programs (generated from CAD/CAM software) and conversational visual aid programming. These straightforward and easy- from CAD/CAM software) and conversational visual aid programming. These straightforward and easy- to-use control systems are available in two versions, the Series 8200-B for tool room products and the to-use control systems are available in two versions, the Series 8200-B for tool room products and the more advanced Series 9000 offered on our new vertical machining centers and bridge mills. more advanced Series 9000 offered on our new vertical machining centers and bridge mills. The Milltronics portfolio consists of the following product lines: The Milltronics portfolio consists of the following product lines: VM General Purpose (GP) Product Line VM General Purpose (GP) Product Line The VM-GP product line consists of attractively-priced vertical machining centers designed for job shops, The VM-GP product line consists of attractively-priced vertical machining centers designed for job shops, prototype, R & D and other general machining applications. These belt-driven models are 40-taper and prototype, R & D and other general machining applications. These belt-driven models are 40-taper and available in four different sizes – all with the Series 9000 control. Customers can choose models with X- available in four different sizes – all with the Series 9000 control. Customers can choose models with X- axis (horizontal) travels of 25, 30, 40 or 50 inches. axis (horizontal) travels of 25, 30, 40 or 50 inches. VM Inline Performance (IL) Product Line VM Inline Performance (IL) Product Line The VM-IL product line consists of moderately-priced performance vertical machining centers for high- The VM-IL product line consists of moderately-priced performance vertical machining centers for high- speed applications such as tool, die and mold, aerospace or medical machining. Featuring heavier speed applications such as tool, die and mold, aerospace or medical machining. Featuring heavier castings, faster motion and inline spindles, these 40-taper machines include the Series 9000 control and castings, faster motion and inline spindles, these 40-taper machines include the Series 9000 control and are available in four sizes. Models include X-axis travels of 30, 42, 50 or 60 inches. are available in four sizes. Models include X-axis travels of 30, 42, 50 or 60 inches. VM Extra Power (XP) Product Line VM Extra Power (XP) Product Line The VM-XP product line consists of moderately-priced vertical machining centers for more demanding The VM-XP product line consists of moderately-priced vertical machining centers for more demanding metal removal applications such as castings or forgings. These 50-taper models are either gear driven or metal removal applications such as castings or forgings. These 50-taper models are either gear driven or heavy-duty belt driven and include the Series 9000 control. Customers can choose from three different heavy-duty belt driven and include the Series 9000 control. Customers can choose from three different models with X-axis travels of 43, 50 or 60 inches. models with X-axis travels of 43, 50 or 60 inches. BR Product Line BR Product Line The BR product line consists of high-speed bridge mills that are used in pattern shops and the aerospace The BR product line consists of high-speed bridge mills that are used in pattern shops and the aerospace industry in addition to job shops, due to the large table and travels that support a wide range of part sizes. industry in addition to job shops, due to the large table and travels that support a wide range of part sizes. BR machines have inline spindles and are available as six models in three sizes with X-axis travels of BR machines have inline spindles and are available as six models in three sizes with X-axis travels of 100, 150, and 200 inches. BR machines offer the Series 9000 control. 100, 150, and 200 inches. BR machines offer the Series 9000 control. Products with the MM/MB or RH designation are part of the tool room bed mill category, which are Products with the MM/MB or RH designation are part of the tool room bed mill category, which are machines that do not have an enclosure, also referred to as open bed machines. Typical applications machines that do not have an enclosure, also referred to as open bed machines. Typical applications include general machining, job shops, prototype or maintenance and repair. Available with quill head or include general machining, job shops, prototype or maintenance and repair. Available with quill head or rigid head designs, there are six models in four sizes with X-axis travels of 30, 40, 60 and 78 inches. rigid head designs, there are six models in four sizes with X-axis travels of 30, 40, 60 and 78 inches. These easy-to-use machines feature the Series 8200-B control. These easy-to-use machines feature the Series 8200-B control. SL Product Line SL Product Line The SL product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops The SL product line of slant-bed lathes (horizontal turning centers) is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. There are three and contract manufacturers seeking efficient processing of small to medium lot sizes. There are three models with chuck sizes of 6, 10, and 12 inches. These compact machines feature the Series 8200-B models with chuck sizes of 6, 10, and 12 inches. These compact machines feature the Series 8200-B control. control. ML Product Line ML Product Line The ML product line consists of combination lathes that the customer can configure for either tool room The ML product line consists of combination lathes that the customer can configure for either tool room or production applications with the option to add live tooling. There are 17 models available in a variety or production applications with the option to add live tooling. There are 17 models available in a variety of thru hole sizes and in the following six swing-over bed diameters: 17, 19, 23, 27, 36, and 39.7 inches. of thru hole sizes and in the following six swing-over bed diameters: 17, 19, 23, 27, 36, and 39.7 inches. These flexible machines feature the Series 8200-B control. These flexible machines feature the Series 8200-B control. Takumi CNC Machine Tools Takumi CNC Machine Tools Our Takumi machine tools feature industry standard CNC controls, including Fanuc®, Siemens®, Our Takumi machine tools feature industry standard CNC controls, including Fanuc®, Siemens®, Mitsubishi® or Heidenhain®. Models include drill and tap machines; three-axis vertical machining centers Mitsubishi® or Heidenhain®. Models include drill and tap machines; three-axis vertical machining centers with linear guides; three-axis vertical machining centers with box ways; high-speed, double column with linear guides; three-axis vertical machining centers with box ways; high-speed, double column vertical machining centers; and heavy duty, double column machining centers. With the addition of the vertical machining centers; and heavy duty, double column machining centers. With the addition of the Takumi brand, we have expanded our customer base to include manufacturers who opt for industrial Takumi brand, we have expanded our customer base to include manufacturers who opt for industrial controls. Generally, manufacturers who use industrial controls have production-oriented operations where controls. Generally, manufacturers who use industrial controls have production-oriented operations where they run medium to large batches of just a few different types of parts. they run medium to large batches of just a few different types of parts. The Takumi portfolio consists of the following product lines: The Takumi portfolio consists of the following product lines: VT Series VT Series The VT Series includes one high-speed drill and tap machine. Model VT500 features fast tool change The VT Series includes one high-speed drill and tap machine. Model VT500 features fast tool change times and rapid spindle acceleration/deceleration. This three-axis machine is designed for high volume times and rapid spindle acceleration/deceleration. This three-axis machine is designed for high volume production applications such as automotive parts or electronics components. production applications such as automotive parts or electronics components. VC Series VC Series The VC Series vertical machining centers are fast, three-axis linear guide machining centers designed for The VC Series vertical machining centers are fast, three-axis linear guide machining centers designed for customers doing batch or production work. The VC machines are available in two sizes with X-axis customers doing batch or production work. The VC machines are available in two sizes with X-axis travels of 34 and 42 inches. travels of 34 and 42 inches. V Series V Series The V Series vertical machining centers are heavy duty, box way machines built for tough applications The V Series vertical machining centers are heavy duty, box way machines built for tough applications such as roughing cast iron. These three-axis, massive machines feature belt or geared spindles to provide such as roughing cast iron. These three-axis, massive machines feature belt or geared spindles to provide maximum torque. The V Series product line includes eight models with X-axis travels of 39, 43, 47, 60, maximum torque. The V Series product line includes eight models with X-axis travels of 39, 43, 47, 60, 70, 78, 86, and 126 inches. 70, 78, 86, and 126 inches. 6 6 7 7 H Series Designed to produce parts that require high precision and superior surface finishes, H Series machines offer an extremely rigid and thermally stable double column design. These three-axis models feature high-speed direct drive or built-in HSK spindles with up to 20,000 rpm, and offer a 24,000 rpm spindle and 36,000 rpm spindle as options. The H Series product line consists of eight models in seven different sizes with X-axis travels of 30, 35, 40, 53, 63, 86, and 126 inches. G Series Designed specifically for the machining of graphite or copper electrodes used in electrical discharge machining (EDM), G Series machines offer the same extremely rigid and thermally stable double column design of the H Series, featuring high-speed direct drive or built-in HSK spindles with up to 20,000 rpm. The G Series product line consists of two models with X-axis travels of 30 and 40 inches. BC Series The BC Series machine is a double column three-axis machining center designed for heavy cutting and applications that require high power and torque, such as mold and die. This model includes a 6,000 rpm geared-head design with X-axis travels of 82 inches. Other Control Systems and Software The following machine tool computer control systems and software products are sold directly to end-users and/or to original equipment manufacturers. Autobend® Autobend® computer control systems are applied to metal bending press brake machines that form parts from sheet metal and steel plate. They consist of a microprocessor-based computer control and back gauge (an automated gauging system that determines where the bend will be made). We have manufactured and sold the Autobend® product line since 1968. We currently market two models of our Autobend® computer control systems for press brake machines, in combination with six different back gauges as retrofit units for installation on existing or new press brake machines. Software Products In addition to our standard computer control features, we offer software option products for part programming. These products are sold to users of our Hurco computerized machine tools equipped with our dual touch-screen or single touch-screen consoles featuring WinMax® control software. Each international division packages the options as appropriate for its market. The most common options include: Advanced Verification Graphics, Swept Surface, DXF Transfer, UltiMonitor, UltiPocket with Helical Ramp Entry and Insert Pockets, Conversational Part and Tool Probing, Tool and Material Library, NC/Conversational Merge, Job List, Stream Load, Linear Thermal Compensation, Thread Repair, and Simultaneous Five-Axis Contouring. The Advanced Verification Graphics option displays a picture of the rendered part on the screen of the control that can be viewed from any angle. The detail allows the customer to evaluate how the part is programmed to be machined before cutting commences, which eliminates the need to scrap expensive material. Our Swept Surface software option simplifies programming of 3D contours and significantly reduces programming time. The DXF Transfer software option increases operator productivity because it eliminates manual data entry of part features by transferring AutoCAD®* drawing files directly into our computer control or into our desktop programming software, WinMax® Desktop. ____________ * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. UltiMonitor is a web-based productivity, management and service tool that enables customers to monitor, inspect and receive notifications about their Hurco machines from any location where they can access the internet. Customers can transfer part designs, receive event notifications via email or text, access diagnostic data, monitor the machine via webcam and communicate with the machine operator. UltiPocket with Helical Ramp Entry and Insert Pockets automatically calculates the tool path around islands, eliminating the arduous task of plotting these shapes. Islands can also be rotated, scaled and repeated. Conversational Part and Tool Probing options permit the computerized dimensional measurement of machined parts and the associated cutting tools. This “on-machine” technique improves the throughput of the measurement process when compared to traditional “off-machine” approaches. The Tool and Material Library option stores the tool and material information with the machine instead of storing it with each individual part program. The user enters the tool data and geometry one time and chooses the particular tool from the list when it is needed. Additionally, the library reads the part program and automatically locates the tool or displays an alert if the tool does not exist. In addition to saving time, the Tool and Material Library eliminates the need to enter information repeatedly, and can prevent common tool crash conditions. NC/Conversational Merge lets the user incorporate conversational features, such as tool probing, pattern operations, and scaling into existing G-Code programs. Job List provides an intuitive way to group files together and run them sequentially without operator intervention, which promotes automation, lights-out machining, program stitching, file bundling, and adaptive processes. Stream Load allows the user to run very large NC files without the need to upload the entire file into the control’s memory to avoid exceeding memory limits. Linear Thermal Compensation is a feature that allows the user to specify corrections to compensate for the effects of thermal growth in high speed machining applications. Thread Repair is a feature for turning applications that provides an efficient way to repair existing threads, which is especially beneficial for large pipes and other parts manufactured for the oil/energy sector. Simultaneous Five-Axis Contouring software enables a five-axis machine to command motion concurrently on all axes. This allows the user to create continuous tool-paths along complex geometries with only a single machine/part setup, providing increased productivity along with the performance benefits of using shorter cutting tools. The sale of simultaneous five-axis contouring software is subject to government export licensing requirements. LCM Machine Tool Components and Accessories Based in Italy, LCM designs, manufactures and sells mechanical and electro-mechanical components and accessories for machine tools. LCM’s direct drive spindle, swivel head, and rotary torque table are used in our SRT line of five-axis machining centers to achieve simultaneous five-axis machining. CNC Rotary Tables transmission. LCM has five lines of CNC rotary tables for both horizontal and vertical-horizontal positioning. Customers can choose rotary tables with either hydraulic or pneumatic clamping systems. Additionally, LCM offers CNC rotary tables powered by either a torque motor or a high-precision mechanical 8 9 H Series H Series G Series G Series BC Series BC Series Autobend® Autobend® Designed to produce parts that require high precision and superior surface finishes, H Series machines Designed to produce parts that require high precision and superior surface finishes, H Series machines offer an extremely rigid and thermally stable double column design. These three-axis models feature offer an extremely rigid and thermally stable double column design. These three-axis models feature high-speed direct drive or built-in HSK spindles with up to 20,000 rpm, and offer a 24,000 rpm spindle high-speed direct drive or built-in HSK spindles with up to 20,000 rpm, and offer a 24,000 rpm spindle and 36,000 rpm spindle as options. The H Series product line consists of eight models in seven different and 36,000 rpm spindle as options. The H Series product line consists of eight models in seven different sizes with X-axis travels of 30, 35, 40, 53, 63, 86, and 126 inches. sizes with X-axis travels of 30, 35, 40, 53, 63, 86, and 126 inches. Designed specifically for the machining of graphite or copper electrodes used in electrical discharge Designed specifically for the machining of graphite or copper electrodes used in electrical discharge machining (EDM), G Series machines offer the same extremely rigid and thermally stable double column machining (EDM), G Series machines offer the same extremely rigid and thermally stable double column design of the H Series, featuring high-speed direct drive or built-in HSK spindles with up to 20,000 rpm. design of the H Series, featuring high-speed direct drive or built-in HSK spindles with up to 20,000 rpm. The G Series product line consists of two models with X-axis travels of 30 and 40 inches. The G Series product line consists of two models with X-axis travels of 30 and 40 inches. The BC Series machine is a double column three-axis machining center designed for heavy cutting and The BC Series machine is a double column three-axis machining center designed for heavy cutting and applications that require high power and torque, such as mold and die. This model includes a 6,000 rpm applications that require high power and torque, such as mold and die. This model includes a 6,000 rpm geared-head design with X-axis travels of 82 inches. geared-head design with X-axis travels of 82 inches. Other Control Systems and Software Other Control Systems and Software The following machine tool computer control systems and software products are sold directly to end-users The following machine tool computer control systems and software products are sold directly to end-users and/or to original equipment manufacturers. and/or to original equipment manufacturers. Autobend® computer control systems are applied to metal bending press brake machines that form parts Autobend® computer control systems are applied to metal bending press brake machines that form parts from sheet metal and steel plate. They consist of a microprocessor-based computer control and back from sheet metal and steel plate. They consist of a microprocessor-based computer control and back gauge (an automated gauging system that determines where the bend will be made). We have gauge (an automated gauging system that determines where the bend will be made). We have manufactured and sold the Autobend® product line since 1968. We currently market two models of our manufactured and sold the Autobend® product line since 1968. We currently market two models of our Autobend® computer control systems for press brake machines, in combination with six different back Autobend® computer control systems for press brake machines, in combination with six different back gauges as retrofit units for installation on existing or new press brake machines. gauges as retrofit units for installation on existing or new press brake machines. Software Products Software Products In addition to our standard computer control features, we offer software option products for part In addition to our standard computer control features, we offer software option products for part programming. These products are sold to users of our Hurco computerized machine tools equipped with programming. These products are sold to users of our Hurco computerized machine tools equipped with our dual touch-screen or single touch-screen consoles featuring WinMax® control software. Each our dual touch-screen or single touch-screen consoles featuring WinMax® control software. Each international division packages the options as appropriate for its market. The most common options international division packages the options as appropriate for its market. The most common options include: Advanced Verification Graphics, Swept Surface, DXF Transfer, UltiMonitor, UltiPocket with include: Advanced Verification Graphics, Swept Surface, DXF Transfer, UltiMonitor, UltiPocket with Helical Ramp Entry and Insert Pockets, Conversational Part and Tool Probing, Tool and Material Library, Helical Ramp Entry and Insert Pockets, Conversational Part and Tool Probing, Tool and Material Library, NC/Conversational Merge, Job List, Stream Load, Linear Thermal Compensation, Thread Repair, and NC/Conversational Merge, Job List, Stream Load, Linear Thermal Compensation, Thread Repair, and Simultaneous Five-Axis Contouring. Simultaneous Five-Axis Contouring. The Advanced Verification Graphics option displays a picture of the rendered part on the screen of the The Advanced Verification Graphics option displays a picture of the rendered part on the screen of the control that can be viewed from any angle. The detail allows the customer to evaluate how the part is control that can be viewed from any angle. The detail allows the customer to evaluate how the part is programmed to be machined before cutting commences, which eliminates the need to scrap expensive programmed to be machined before cutting commences, which eliminates the need to scrap expensive Our Swept Surface software option simplifies programming of 3D contours and significantly reduces Our Swept Surface software option simplifies programming of 3D contours and significantly reduces The DXF Transfer software option increases operator productivity because it eliminates manual data The DXF Transfer software option increases operator productivity because it eliminates manual data entry of part features by transferring AutoCAD®* drawing files directly into our computer control or into entry of part features by transferring AutoCAD®* drawing files directly into our computer control or into our desktop programming software, WinMax® Desktop. our desktop programming software, WinMax® Desktop. * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. * AutoCAD® is a registered trademark of Autodesk, Inc., and/or its subsidiaries/ affiliates in the U.S. and/or other countries. material. material. programming time. programming time. ____________ ____________ UltiMonitor is a web-based productivity, management and service tool that enables customers to monitor, UltiMonitor is a web-based productivity, management and service tool that enables customers to monitor, inspect and receive notifications about their Hurco machines from any location where they can access the inspect and receive notifications about their Hurco machines from any location where they can access the internet. Customers can transfer part designs, receive event notifications via email or text, access internet. Customers can transfer part designs, receive event notifications via email or text, access diagnostic data, monitor the machine via webcam and communicate with the machine operator. diagnostic data, monitor the machine via webcam and communicate with the machine operator. UltiPocket with Helical Ramp Entry and Insert Pockets automatically calculates the tool path around UltiPocket with Helical Ramp Entry and Insert Pockets automatically calculates the tool path around islands, eliminating the arduous task of plotting these shapes. Islands can also be rotated, scaled and islands, eliminating the arduous task of plotting these shapes. Islands can also be rotated, scaled and repeated. repeated. Conversational Part and Tool Probing options permit the computerized dimensional measurement of Conversational Part and Tool Probing options permit the computerized dimensional measurement of machined parts and the associated cutting tools. This “on-machine” technique improves the throughput of machined parts and the associated cutting tools. This “on-machine” technique improves the throughput of the measurement process when compared to traditional “off-machine” approaches. the measurement process when compared to traditional “off-machine” approaches. The Tool and Material Library option stores the tool and material information with the machine instead The Tool and Material Library option stores the tool and material information with the machine instead of storing it with each individual part program. The user enters the tool data and geometry one time and of storing it with each individual part program. The user enters the tool data and geometry one time and chooses the particular tool from the list when it is needed. Additionally, the library reads the part chooses the particular tool from the list when it is needed. Additionally, the library reads the part program and automatically locates the tool or displays an alert if the tool does not exist. In addition to program and automatically locates the tool or displays an alert if the tool does not exist. In addition to saving time, the Tool and Material Library eliminates the need to enter information repeatedly, and can saving time, the Tool and Material Library eliminates the need to enter information repeatedly, and can prevent common tool crash conditions. prevent common tool crash conditions. NC/Conversational Merge lets the user incorporate conversational features, such as tool probing, pattern NC/Conversational Merge lets the user incorporate conversational features, such as tool probing, pattern operations, and scaling into existing G-Code programs. operations, and scaling into existing G-Code programs. Job List provides an intuitive way to group files together and run them sequentially without operator Job List provides an intuitive way to group files together and run them sequentially without operator intervention, which promotes automation, lights-out machining, program stitching, file bundling, and intervention, which promotes automation, lights-out machining, program stitching, file bundling, and adaptive processes. adaptive processes. Stream Load allows the user to run very large NC files without the need to upload the entire file into the Stream Load allows the user to run very large NC files without the need to upload the entire file into the control’s memory to avoid exceeding memory limits. control’s memory to avoid exceeding memory limits. Linear Thermal Compensation is a feature that allows the user to specify corrections to compensate for Linear Thermal Compensation is a feature that allows the user to specify corrections to compensate for the effects of thermal growth in high speed machining applications. the effects of thermal growth in high speed machining applications. Thread Repair is a feature for turning applications that provides an efficient way to repair existing Thread Repair is a feature for turning applications that provides an efficient way to repair existing threads, which is especially beneficial for large pipes and other parts manufactured for the oil/energy threads, which is especially beneficial for large pipes and other parts manufactured for the oil/energy sector. sector. Simultaneous Five-Axis Contouring software enables a five-axis machine to command motion Simultaneous Five-Axis Contouring software enables a five-axis machine to command motion concurrently on all axes. This allows the user to create continuous tool-paths along complex geometries concurrently on all axes. This allows the user to create continuous tool-paths along complex geometries with only a single machine/part setup, providing increased productivity along with the performance with only a single machine/part setup, providing increased productivity along with the performance benefits of using shorter cutting tools. The sale of simultaneous five-axis contouring software is subject to benefits of using shorter cutting tools. The sale of simultaneous five-axis contouring software is subject to government export licensing requirements. government export licensing requirements. LCM Machine Tool Components and Accessories LCM Machine Tool Components and Accessories Based in Italy, LCM designs, manufactures and sells mechanical and electro-mechanical components and Based in Italy, LCM designs, manufactures and sells mechanical and electro-mechanical components and accessories for machine tools. LCM’s direct drive spindle, swivel head, and rotary torque table are used in accessories for machine tools. LCM’s direct drive spindle, swivel head, and rotary torque table are used in our SRT line of five-axis machining centers to achieve simultaneous five-axis machining. our SRT line of five-axis machining centers to achieve simultaneous five-axis machining. CNC Rotary Tables CNC Rotary Tables LCM has five lines of CNC rotary tables for both horizontal and vertical-horizontal positioning. LCM has five lines of CNC rotary tables for both horizontal and vertical-horizontal positioning. Customers can choose rotary tables with either hydraulic or pneumatic clamping systems. Additionally, Customers can choose rotary tables with either hydraulic or pneumatic clamping systems. Additionally, LCM offers CNC rotary tables powered by either a torque motor or a high-precision mechanical LCM offers CNC rotary tables powered by either a torque motor or a high-precision mechanical transmission. transmission. 8 8 9 9 CNC Tilt Tables LCM has seven lines of CNC tilting rotary tables, of which four lines are intended specifically for five- axis machining centers. Each of the seven lines is differentiated by the technology used for clamping (hydraulic or pneumatic) and by the type of transmission (either mechanical transmission or torque motor). Swivel Heads and Electro-spindles LCM has two primary lines of swivel heads that enable the spindle axis to be tilted with continuous motion and one line of electro-spindles (built-in motors for swivel heads). The two lines of swivel heads are differentiated by the type of transmission (either mechanical transmission or torque motor). Parts and Service Our service organization provides installation, warranty, operator training and customer support for our products on a worldwide basis. In the United States, our principal distributors have the primary responsibility for machine installation and warranty service and support for product sales. Our service organization also sells software options, computer control upgrades, accessories and replacement parts for our products. Our after-sales parts and service business strengthens our customer relationships and provides continuous information concerning the evolving requirements of end-users. Manufacturing Our computerized metal cutting machine tools are manufactured and assembled to our specifications primarily by our wholly-owned subsidiaries in Taiwan (HML) and Waconia, Minnesota (Milltronics). HML and Milltronics conduct final assembly operations and are supported by a network of contract suppliers of components and sub-assemblies that manufacture components for our products. Our facility in Ningbo, China, focuses on the machining of castings to support HML’s production in Taiwan. The LCM line of electro-mechanical components and accessories for machine tools is designed and manufactured in Italy. Our facility in Indianapolis, Indiana, also conducts final assembly operations for certain Hurco VMX machines for the American market and manufactures certain electro-spindle components for LCM. We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd. (“HAL”), a Taiwanese company in which we have a 35% ownership interest. This company produces all of our computer control systems to our specifications, sources industry standard computer components and our proprietary parts, performs final assembly and conducts test operations. We work closely with our subsidiaries, key component suppliers and HAL to ensure that their production capacity will be sufficient to meet the projected demand for our machine tool products. Many of the key components used in our machines can be sourced from multiple suppliers. However, any prolonged interruption of operations or significant reduction in the capacity or performance capability at any of our manufacturing facilities, or at any of our key component suppliers, could have a material adverse effect on our operations. Marketing and Distribution We principally sell our products through more than 195 independent agents and distributors throughout North and South America (the Americas), Europe and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. 10 LCM has seven lines of CNC tilting rotary tables, of which four lines are intended specifically for five- LCM has seven lines of CNC tilting rotary tables, of which four lines are intended specifically for five- axis machining centers. Each of the seven lines is differentiated by the technology used for clamping axis machining centers. Each of the seven lines is differentiated by the technology used for clamping (hydraulic or pneumatic) and by the type of transmission (either mechanical transmission or torque (hydraulic or pneumatic) and by the type of transmission (either mechanical transmission or torque CNC Tilt Tables CNC Tilt Tables motor). motor). Swivel Heads and Electro-spindles Swivel Heads and Electro-spindles LCM has two primary lines of swivel heads that enable the spindle axis to be tilted with continuous LCM has two primary lines of swivel heads that enable the spindle axis to be tilted with continuous motion and one line of electro-spindles (built-in motors for swivel heads). The two lines of swivel heads motion and one line of electro-spindles (built-in motors for swivel heads). The two lines of swivel heads are differentiated by the type of transmission (either mechanical transmission or torque motor). are differentiated by the type of transmission (either mechanical transmission or torque motor). Our service organization provides installation, warranty, operator training and customer support for our Our service organization provides installation, warranty, operator training and customer support for our products on a worldwide basis. In the United States, our principal distributors have the primary products on a worldwide basis. In the United States, our principal distributors have the primary responsibility for machine installation and warranty service and support for product sales. Our service responsibility for machine installation and warranty service and support for product sales. Our service organization also sells software options, computer control upgrades, accessories and replacement parts for organization also sells software options, computer control upgrades, accessories and replacement parts for our products. Our after-sales parts and service business strengthens our customer relationships and our products. Our after-sales parts and service business strengthens our customer relationships and provides continuous information concerning the evolving requirements of end-users. provides continuous information concerning the evolving requirements of end-users. Parts and Service Parts and Service Manufacturing Manufacturing Our computerized metal cutting machine tools are manufactured and assembled to our specifications Our computerized metal cutting machine tools are manufactured and assembled to our specifications primarily by our wholly-owned subsidiaries in Taiwan (HML) and Waconia, Minnesota (Milltronics). primarily by our wholly-owned subsidiaries in Taiwan (HML) and Waconia, Minnesota (Milltronics). HML and Milltronics conduct final assembly operations and are supported by a network of contract HML and Milltronics conduct final assembly operations and are supported by a network of contract suppliers of components and sub-assemblies that manufacture components for our products. Our facility suppliers of components and sub-assemblies that manufacture components for our products. Our facility in Ningbo, China, focuses on the machining of castings to support HML’s production in Taiwan. The in Ningbo, China, focuses on the machining of castings to support HML’s production in Taiwan. The LCM line of electro-mechanical components and accessories for machine tools is designed and LCM line of electro-mechanical components and accessories for machine tools is designed and manufactured in Italy. Our facility in Indianapolis, Indiana, also conducts final assembly operations for manufactured in Italy. Our facility in Indianapolis, Indiana, also conducts final assembly operations for certain Hurco VMX machines for the American market and manufactures certain electro-spindle certain Hurco VMX machines for the American market and manufactures certain electro-spindle components for LCM. components for LCM. We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd. We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd. (“HAL”), a Taiwanese company in which we have a 35% ownership interest. This company produces all (“HAL”), a Taiwanese company in which we have a 35% ownership interest. This company produces all of our computer control systems to our specifications, sources industry standard computer components of our computer control systems to our specifications, sources industry standard computer components and our proprietary parts, performs final assembly and conducts test operations. and our proprietary parts, performs final assembly and conducts test operations. We work closely with our subsidiaries, key component suppliers and HAL to ensure that their production We work closely with our subsidiaries, key component suppliers and HAL to ensure that their production capacity will be sufficient to meet the projected demand for our machine tool products. Many of the key capacity will be sufficient to meet the projected demand for our machine tool products. Many of the key components used in our machines can be sourced from multiple suppliers. However, any prolonged components used in our machines can be sourced from multiple suppliers. However, any prolonged interruption of operations or significant reduction in the capacity or performance capability at any of our interruption of operations or significant reduction in the capacity or performance capability at any of our manufacturing facilities, or at any of our key component suppliers, could have a material adverse effect manufacturing facilities, or at any of our key component suppliers, could have a material adverse effect on our operations. on our operations. Marketing and Distribution Marketing and Distribution We principally sell our products through more than 195 independent agents and distributors throughout We principally sell our products through more than 195 independent agents and distributors throughout North and South America (the Americas), Europe and Asia. Although some distributors carry North and South America (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 competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom and certain parts of the United States, which are among the South Africa, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. world's principal machine tool consuming markets. Approximately 91% of the worldwide demand for computerized machine tools and computer control systems is outside of the U.S. In fiscal 2016, approximately 69% of our revenues were derived from customers outside of the U.S. No single end-user or distributor of our products accounted for more than 5% of our total sales and service fees. The end-users of our products are precision tool, die and mold manufacturers, independent job shops, specialized short-run production applications within large manufacturing operations and manufacturing facilities that focus on medium to high run production wherein they run large batches of a few types of parts instead of small batches of many different parts. Industries served include aerospace, defense, medical equipment, energy, automotive/ transportation, electronics and computer industries. We also sell our Autobend® computer control systems to original equipment manufacturers of new metal fabrication machine tools that integrate them with their own products prior to the sale of those products to their own customers, to retrofitters of used metal fabrication machine tools that integrate them with those machines as part of the retrofitting operation, and to end-users that have an installed base of metal fabrication machine tools, either with or without related computer control systems. Demand • • We believe demand for our products is driven by advances in industrial technology and the related demand for automated process improvements. Other factors affecting demand include: the need to continuously improve productivity and shorten cycle time; an aging machine tool installed base which will require replacement with more advanced technology; the industrial development of emerging markets in Latin America, Asia and Eastern Europe; and the declining supply of skilled machinists. • • Demand for our products is also highly dependent upon economic conditions and the general level of business confidence, as well as such factors as production capacity utilization and changes in governmental policies regarding tariffs, corporate taxation, fluctuations in foreign currencies, and other investment incentives. Competition We compete with many other machine tool producers in the United States and foreign countries. Most of our competitors are larger and have greater financial resources than our company. Major worldwide competitors include DMG Mori Seiki Co., Ltd., Mazak, Haas Automation, Inc., Hardinge Inc., Doosan, Okuma Machinery Works Ltd, Hyundai and Feeler. Through our subsidiary LCM, we compete with manufacturers of machine tool components and accessories such as IBAG, Kessler, Peron Speed, GSA Technology Co., LTD and Duplomatic Automation. We strive to compete by developing patentable software and other proprietary features that offer enhanced productivity, technological capabilities and ease of use. We offer our products in a range of prices and capabilities to target a broad potential market. We also believe that our competitiveness is aided by our reputation for reliability and quality, our strong international sales and distribution organization, and our extensive customer service organization. Intellectual Property We consider the majority of our products to be proprietary. Various features of our Hurco and Milltronics control systems and machine tools employ technologies covered by patents and trademarks that are material to our business. We also own additional patents covering new technologies that we have acquired or developed, and that we are planning to incorporate into our control systems in the future. 10 10 11 Research and Development In the fiscal years set forth below, we incurred both (i) non-capitalized research and development expenditures for new products, significant product improvements and (ii) capitalized expenditures related to software development projects as follows (in thousands): Fiscal Year 2016 2015 2014 Non-Capitalized Research and Development $ 4,900 $ 3,900 $ 3,400 Capitalized Software Development $ 2,200 $ 1,400 $ 1,000 Employees We had approximately 758 full-time employees at the end of fiscal 2016, none of whom are covered by a collective-bargaining agreement or represented by a union. We have experienced no employee-generated work stoppages or disruptions, and we consider our employee relations to be satisfactory. Geographic Areas Financial information concerning the geographic areas in which we sell our products is set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 15 of Notes to Consolidated Financial Statements. Some of the risks of doing business on a global basis are described in Item 1A. Risk Factors below. Backlog For information on orders and backlog, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Availability of Reports and Other Information Our website can be found at www.hurco.com. We use this website as a means of disclosing pertinent information about the company, free of charge, including: • Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy materials, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file that material with or furnish it to the SEC; • press releases on quarterly earnings, product announcements, legal developments and other • material news that we may post from time to time; corporate governance information including our Corporate Governance Principles, Code of Business Conduct and Ethics, information concerning our Board of Directors and its committees, including the charters of the Audit Committee, Compensation Committee, Nominating and Governance Committee and other governance-related policies; and • opportunities to sign up for email alerts and RSS feeds to have information provided in real time. The information available on our website is not incorporated by reference in, or a part of, this or any other report we file with, or furnish to, the SEC. Item 1A. RISK FACTORS In this section we describe what we believe to be the material risks related to our business. The risks and uncertainties described below or elsewhere in this report are not the only ones to which we are exposed. Additional risks and uncertainties not presently known and/or risks we currently deem immaterial may also adversely affect our business and operations. If any of the developments included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. The cyclical nature of our business causes fluctuations in our operating results. The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic markets we serve. As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand, have adversely affected our results of operations and financial condition. Uncertain global economic conditions, may adversely affect overall demand. We typically sell the majority of our larger high-performance VMX machines in Europe, which makes us particularly sensitive to economic and market conditions in that region. Economic uncertainty and business downturns in the U.S., European and Asian Pacific markets adversely affect our results of operations and financial condition. Our international operations pose additional risks that may adversely impact sales and earnings. During fiscal 2016, approximately 69% of our revenues were derived from sales to customers located outside of the U.S. In addition, our main manufacturing facilities are located outside of the U.S. Our international operations are subject to a number of risks, including: current and changing regulatory environments affecting the importation and exportation of trade barriers; • • regional economic uncertainty; • differing labor regulation; • governmental expropriation; • domestic and foreign customs and tariffs; • products and raw materials; • difficulty in obtaining distribution support; • difficulty in staffing and managing widespread operations; • differences in the availability and terms of financing; • political instability and unrest; • changes in tax regulations and rates in foreign countries; and changes in the European Union and Asia may adversely affect business activity and economic conditions globally and could continue to contribute to instability in global financial and foreign exchange markets, as well as disrupting the free movement of goods, services and people between • countries. Quotas, tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce prices, increase spending on marketing or product development, withdraw from or not enter certain markets or otherwise take actions that could be adverse to us. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. These factors may adversely affect our future operating results. The vast majority of our products are shipped from our manufacturing facility in Taiwan from the Port of Taichung to four ports of destination: Los Angeles, California, Tacoma, Washington, Venlo, the Netherlands, and Shanghai, China. Changes in customs requirements, as a result of national security or other constraints put upon these ports, may also have an adverse impact on our results of operations. 12 13 Research and Development Research and Development In the fiscal years set forth below, we incurred both (i) non-capitalized research and development In the fiscal years set forth below, we incurred both (i) non-capitalized research and development expenditures for new products, significant product improvements and (ii) capitalized expenditures related expenditures for new products, significant product improvements and (ii) capitalized expenditures related to software development projects as follows (in thousands): to software development projects as follows (in thousands): Fiscal Year Fiscal Year 2016 2016 2015 2015 2014 2014 Non-Capitalized Non-Capitalized Research and Research and Development Development $ 4,900 $ 4,900 $ 3,900 $ 3,900 $ 3,400 $ 3,400 Capitalized Capitalized Software Development Software Development $ 2,200 $ 2,200 $ 1,400 $ 1,400 $ 1,000 $ 1,000 We had approximately 758 full-time employees at the end of fiscal 2016, none of whom are covered by a We had approximately 758 full-time employees at the end of fiscal 2016, none of whom are covered by a collective-bargaining agreement or represented by a union. We have experienced no employee-generated collective-bargaining agreement or represented by a union. We have experienced no employee-generated work stoppages or disruptions, and we consider our employee relations to be satisfactory. work stoppages or disruptions, and we consider our employee relations to be satisfactory. Financial information concerning the geographic areas in which we sell our products is set forth in Item 7. Financial information concerning the geographic areas in which we sell our products is set forth in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 15 Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 15 of Notes to Consolidated Financial Statements. Some of the risks of doing business on a global basis are of Notes to Consolidated Financial Statements. Some of the risks of doing business on a global basis are described in Item 1A. Risk Factors below. described in Item 1A. Risk Factors below. Employees Employees Geographic Areas Geographic Areas Backlog Backlog For information on orders and backlog, see Item 7. Management’s Discussion and Analysis of Financial For information on orders and backlog, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Condition and Results of Operations. Availability of Reports and Other Information Availability of Reports and Other Information Our website can be found at www.hurco.com. We use this website as a means of disclosing pertinent Our website can be found at www.hurco.com. We use this website as a means of disclosing pertinent information about the company, free of charge, including: information about the company, free of charge, including: • Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy materials, Current • Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy materials, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after we electronically file that material with or furnish it to the SEC; as reasonably practicable after we electronically file that material with or furnish it to the SEC; • press releases on quarterly earnings, product announcements, legal developments and other • press releases on quarterly earnings, product announcements, legal developments and other material news that we may post from time to time; material news that we may post from time to time; • • corporate governance information including our Corporate Governance Principles, Code of corporate governance information including our Corporate Governance Principles, Code of Business Conduct and Ethics, information concerning our Board of Directors and its committees, Business Conduct and Ethics, information concerning our Board of Directors and its committees, including the charters of the Audit Committee, Compensation Committee, Nominating and including the charters of the Audit Committee, Compensation Committee, Nominating and Governance Committee and other governance-related policies; and Governance Committee and other governance-related policies; and • opportunities to sign up for email alerts and RSS feeds to have information provided in real time. • opportunities to sign up for email alerts and RSS feeds to have information provided in real time. The information available on our website is not incorporated by reference in, or a part of, this or any other The information available on our website is not incorporated by reference in, or a part of, this or any other report we file with, or furnish to, the SEC. report we file with, or furnish to, the SEC. Item 1A. Item 1A. RISK FACTORS RISK FACTORS In this section we describe what we believe to be the material risks related to our business. The risks and In this section we describe what we believe to be the material risks related to our business. The risks and uncertainties described below or elsewhere in this report are not the only ones to which we are exposed. uncertainties described below or elsewhere in this report are not the only ones to which we are exposed. Additional risks and uncertainties not presently known and/or risks we currently deem immaterial may Additional risks and uncertainties not presently known and/or risks we currently deem immaterial may also adversely affect our business and operations. If any of the developments included in the following also adversely affect our business and operations. If any of the developments included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. be materially adversely affected. The cyclical nature of our business causes fluctuations in our operating results. The cyclical nature of our business causes fluctuations in our operating results. The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic markets we serve. As a result of this cyclicality, we have experienced significant fluctuations in our sales, markets we serve. As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand, have adversely affected our results of operations and financial which, in periods of reduced demand, have adversely affected our results of operations and financial condition. condition. Uncertain global economic conditions, may adversely affect overall demand. Uncertain global economic conditions, may adversely affect overall demand. We typically sell the majority of our larger high-performance VMX machines in Europe, which makes us We typically sell the majority of our larger high-performance VMX machines in Europe, which makes us particularly sensitive to economic and market conditions in that region. Economic uncertainty and particularly sensitive to economic and market conditions in that region. Economic uncertainty and business downturns in the U.S., European and Asian Pacific markets adversely affect our results of business downturns in the U.S., European and Asian Pacific markets adversely affect our results of operations and financial condition. operations and financial condition. Our international operations pose additional risks that may adversely impact sales and earnings. Our international operations pose additional risks that may adversely impact sales and earnings. During fiscal 2016, approximately 69% of our revenues were derived from sales to customers located During fiscal 2016, approximately 69% of our revenues were derived from sales to customers located outside of the U.S. In addition, our main manufacturing facilities are located outside of the U.S. Our outside of the U.S. In addition, our main manufacturing facilities are located outside of the U.S. Our international operations are subject to a number of risks, including: international operations are subject to a number of risks, including: trade barriers; trade barriers; regional economic uncertainty; regional economic uncertainty; • • • • • differing labor regulation; • differing labor regulation; • governmental expropriation; • governmental expropriation; • domestic and foreign customs and tariffs; • domestic and foreign customs and tariffs; current and changing regulatory environments affecting the importation and exportation of current and changing regulatory environments affecting the importation and exportation of products and raw materials; products and raw materials; • • • difficulty in obtaining distribution support; • difficulty in obtaining distribution support; • difficulty in staffing and managing widespread operations; • difficulty in staffing and managing widespread operations; • differences in the availability and terms of financing; • differences in the availability and terms of financing; • political instability and unrest; • political instability and unrest; • • changes in tax regulations and rates in foreign countries; and changes in tax regulations and rates in foreign countries; and changes in the European Union and Asia may adversely affect business activity and economic changes in the European Union and Asia may adversely affect business activity and economic conditions globally and could continue to contribute to instability in global financial and foreign conditions globally and could continue to contribute to instability in global financial and foreign exchange markets, as well as disrupting the free movement of goods, services and people between exchange markets, as well as disrupting the free movement of goods, services and people between countries. countries. • • Quotas, tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce Quotas, tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce prices, increase spending on marketing or product development, withdraw from or not enter certain prices, increase spending on marketing or product development, withdraw from or not enter certain markets or otherwise take actions that could be adverse to us. Also, in some foreign jurisdictions, we may markets or otherwise take actions that could be adverse to us. Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met. These factors may or remit earnings to affiliated companies unless specified conditions are met. These factors may adversely affect our future operating results. The vast majority of our products are shipped from our adversely affect our future operating results. The vast majority of our products are shipped from our manufacturing facility in Taiwan from the Port of Taichung to four ports of destination: Los Angeles, manufacturing facility in Taiwan from the Port of Taichung to four ports of destination: Los Angeles, California, Tacoma, Washington, Venlo, the Netherlands, and Shanghai, China. Changes in customs California, Tacoma, Washington, Venlo, the Netherlands, and Shanghai, China. Changes in customs requirements, as a result of national security or other constraints put upon these ports, may also have an requirements, as a result of national security or other constraints put upon these ports, may also have an adverse impact on our results of operations. adverse impact on our results of operations. 12 12 13 13 Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other foreign laws prohibiting corrupt payments to governmental officials, and anti-competition regulations. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to attract and retain employees, our international operations, our business and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents in foreign countries will not violate our policies. We depend on limited sources for our products. We depend on our wholly-owned subsidiaries, Hurco Manufacturing Limited, Ningbo Hurco Manufacturing Limited, Milltronics USA, Inc., and LCM Precision Technology S.r.l., to produce our machine tools and electro-mechanical components and accessories in Taiwan, China, the U.S. and Italy, respectively. We also depend on our 35% owned affiliate, HAL, and other key third party suppliers to produce our computer control systems and key components, such as motors and drives for our machine tools. An unplanned interruption in manufacturing would have a material adverse effect on our results of operations and financial condition. Such an interruption could result from a change in the political environment or a natural disaster, such as an earthquake, typhoon, or tsunami. Also, any interruption in service by one of our key component suppliers, if prolonged, could have a material adverse effect on our results of operations and financial condition. Fluctuations in the exchange rates between the U.S. Dollar and any of several foreign currencies can increase our costs and decrease our revenues. Our sales to customers located outside of the U.S., which generated approximately 69% of our revenues in fiscal 2016, are invoiced and received in several foreign currencies, primarily the Euro, Pound Sterling and Chinese Yuan. Therefore, our results of operations and financial condition are affected by fluctuations in exchange rates between these currencies and the U.S. Dollar, both for purposes of actual conversion and for financial reporting purposes. In addition, we are exposed to exchange risk associated with our purchases of materials and components for our Taiwan manufacturing operations, which are primarily made in the New Taiwan Dollar and the Euro. We hedge our foreign currency exposure with the purchase of forward exchange contracts. These hedge contracts only mitigate the impact of changes in foreign currency rates that occur during the term of the related contract period and carry risks of counter- party failure. There can be no assurance that our hedges will have their intended effects. Our competitive position and prospects for growth may be diminished if we are unable to develop and introduce new and enhanced products on a timely basis that are accepted in the market. The machine tool industry is subject to technological change, evolving industry standards, changing customer requirements, and improvements in and expansion of product offerings. Our ability to anticipate changes in technology, industry standards, customers’ requirements and competitors’ product offerings and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, are significant factors in maintaining and improving our competitive position and growth prospects. If the technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would be materially adversely affected. Although we believe that we have the technological capabilities to remain competitive, developments by others may render our products or technologies obsolete or noncompetitive. We compete with larger companies that have greater financial resources, and our business could be harmed by competitors’ actions. The markets in which our products are sold are extremely competitive and highly fragmented. In marketing our products, we compete with other manufacturers in terms of quality, reliability, price, value, delivery time, service and technological characteristics. We compete with a number of U.S., European and Asian competitors, most of which are larger, have substantially greater financial resources and have been supported by governmental or financial institution subsidies and, therefore, may have competitive advantages over us. While we believe our product lines compete effectively, our financial resources are limited compared to those of most of our competitors, making it challenging to remain competitive. Fluctuations in the price of raw materials, especially steel and iron, could adversely affect our sales, costs and profitability. We manufacture products with a high iron and steel content. The availability and price for these and other raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs and anticipated or perceived shortages. In some cases, those cost increases can be passed on to customers in the form of price increases; in other cases they cannot. If the prices of raw materials increase and we are not able to charge our customers higher prices to compensate, our results of operations would be adversely affected. Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. The SEC requires disclosure by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires a disclosure report to be filed annually with the SEC, and requires companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of components that are incorporated into our products, including tin, tantalum, gold and tungsten. The number of suppliers that provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. We may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties through our due diligence procedures, which may harm our reputation. We may also encounter challenges to satisfy those customers that require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. Due to future changes in technology, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excessive. The technology within our products evolves, and we periodically bring new versions of our machines to market. The phasing out of an old product involves estimating the amount of inventory required to satisfy the final demand for those machines and to satisfy future repair part needs. Based on changing customer demand and expectations of delivery times for repair parts, we may find that we have either obsolete or excess inventory on hand. Because of unforeseen future changes in technology, market demand or competition, we might have to write off unusable inventory, which would adversely affect our results of operations. Acquisitions could disrupt our operations and harm our operating results. In July 2015, we acquired a CNC machine tool business in Minnesota, U.S. (Milltronics) and a CNC machine tool business in Taiwan (Takumi). We may seek additional opportunities to expand our product offerings or the markets we serve by acquiring other companies, product lines, technologies and personnel. Acquisitions involve numerous risks, including the following: • difficulties integrating the operations, technologies, products, and personnel of an acquired company; • diversion of management’s attention from normal daily operations of the business; • potential difficulties completing projects associated with in-process research and development; 14 15 Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other foreign laws prohibiting corrupt payments Foreign Corrupt Practices Act, the U.K. Bribery Act, and other foreign laws prohibiting corrupt payments to governmental officials, and anti-competition regulations. Violations of these laws and regulations could to governmental officials, and anti-competition regulations. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to attract and retain employees, our international operations, our business and our operating results. attract and retain employees, our international operations, our business and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents in foreign countries and regulations, there can be no assurance that our employees, contractors, or agents in foreign countries will not violate our policies. will not violate our policies. We depend on limited sources for our products. We depend on limited sources for our products. We depend on our wholly-owned subsidiaries, Hurco Manufacturing Limited, Ningbo Hurco We depend on our wholly-owned subsidiaries, Hurco Manufacturing Limited, Ningbo Hurco Manufacturing Limited, Milltronics USA, Inc., and LCM Precision Technology S.r.l., to produce our Manufacturing Limited, Milltronics USA, Inc., and LCM Precision Technology S.r.l., to produce our machine tools and electro-mechanical components and accessories in Taiwan, China, the U.S. and Italy, machine tools and electro-mechanical components and accessories in Taiwan, China, the U.S. and Italy, respectively. We also depend on our 35% owned affiliate, HAL, and other key third party suppliers to respectively. We also depend on our 35% owned affiliate, HAL, and other key third party suppliers to produce our computer control systems and key components, such as motors and drives for our machine produce our computer control systems and key components, such as motors and drives for our machine tools. An unplanned interruption in manufacturing would have a material adverse effect on our results of tools. An unplanned interruption in manufacturing would have a material adverse effect on our results of operations and financial condition. Such an interruption could result from a change in the political operations and financial condition. Such an interruption could result from a change in the political environment or a natural disaster, such as an earthquake, typhoon, or tsunami. Also, any interruption in environment or a natural disaster, such as an earthquake, typhoon, or tsunami. Also, any interruption in service by one of our key component suppliers, if prolonged, could have a material adverse effect on our service by one of our key component suppliers, if prolonged, could have a material adverse effect on our results of operations and financial condition. results of operations and financial condition. Fluctuations in the exchange rates between the U.S. Dollar and any of several foreign currencies can Fluctuations in the exchange rates between the U.S. Dollar and any of several foreign currencies can increase our costs and decrease our revenues. increase our costs and decrease our revenues. Our sales to customers located outside of the U.S., which generated approximately 69% of our revenues Our sales to customers located outside of the U.S., which generated approximately 69% of our revenues in fiscal 2016, are invoiced and received in several foreign currencies, primarily the Euro, Pound Sterling in fiscal 2016, are invoiced and received in several foreign currencies, primarily the Euro, Pound Sterling and Chinese Yuan. Therefore, our results of operations and financial condition are affected by and Chinese Yuan. Therefore, our results of operations and financial condition are affected by fluctuations in exchange rates between these currencies and the U.S. Dollar, both for purposes of actual fluctuations in exchange rates between these currencies and the U.S. Dollar, both for purposes of actual conversion and for financial reporting purposes. In addition, we are exposed to exchange risk associated conversion and for financial reporting purposes. In addition, we are exposed to exchange risk associated with our purchases of materials and components for our Taiwan manufacturing operations, which are with our purchases of materials and components for our Taiwan manufacturing operations, which are primarily made in the New Taiwan Dollar and the Euro. We hedge our foreign currency exposure with primarily made in the New Taiwan Dollar and the Euro. We hedge our foreign currency exposure with the purchase of forward exchange contracts. These hedge contracts only mitigate the impact of changes in the purchase of forward exchange contracts. These hedge contracts only mitigate the impact of changes in foreign currency rates that occur during the term of the related contract period and carry risks of counter- foreign currency rates that occur during the term of the related contract period and carry risks of counter- party failure. There can be no assurance that our hedges will have their intended effects. party failure. There can be no assurance that our hedges will have their intended effects. Our competitive position and prospects for growth may be diminished if we are unable to develop and Our competitive position and prospects for growth may be diminished if we are unable to develop and introduce new and enhanced products on a timely basis that are accepted in the market. introduce new and enhanced products on a timely basis that are accepted in the market. The machine tool industry is subject to technological change, evolving industry standards, changing The machine tool industry is subject to technological change, evolving industry standards, changing customer requirements, and improvements in and expansion of product offerings. Our ability to anticipate customer requirements, and improvements in and expansion of product offerings. Our ability to anticipate changes in technology, industry standards, customers’ requirements and competitors’ product offerings changes in technology, industry standards, customers’ requirements and competitors’ product offerings and to develop and introduce new and enhanced products on a timely basis that are accepted in the and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, are significant factors in maintaining and improving our competitive position and growth market, are significant factors in maintaining and improving our competitive position and growth prospects. If the technologies or standards used in our products become obsolete or fail to gain prospects. If the technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would be materially adversely affected. Although we widespread commercial acceptance, our business would be materially adversely affected. Although we believe that we have the technological capabilities to remain competitive, developments by others may believe that we have the technological capabilities to remain competitive, developments by others may render our products or technologies obsolete or noncompetitive. render our products or technologies obsolete or noncompetitive. We compete with larger companies that have greater financial resources, and our business could be We compete with larger companies that have greater financial resources, and our business could be harmed by competitors’ actions. harmed by competitors’ actions. The markets in which our products are sold are extremely competitive and highly fragmented. In The markets in which our products are sold are extremely competitive and highly fragmented. In marketing our products, we compete with other manufacturers in terms of quality, reliability, price, value, marketing our products, we compete with other manufacturers in terms of quality, reliability, price, value, delivery time, service and technological characteristics. We compete with a number of U.S., European delivery time, service and technological characteristics. We compete with a number of U.S., European and Asian competitors, most of which are larger, have substantially greater financial resources and have and Asian competitors, most of which are larger, have substantially greater financial resources and have been supported by governmental or financial institution subsidies and, therefore, may have competitive been supported by governmental or financial institution subsidies and, therefore, may have competitive advantages over us. While we believe our product lines compete effectively, our financial resources are advantages over us. While we believe our product lines compete effectively, our financial resources are limited compared to those of most of our competitors, making it challenging to remain competitive. limited compared to those of most of our competitors, making it challenging to remain competitive. Fluctuations in the price of raw materials, especially steel and iron, could adversely affect our sales, Fluctuations in the price of raw materials, especially steel and iron, could adversely affect our sales, costs and profitability. costs and profitability. We manufacture products with a high iron and steel content. The availability and price for these and other We manufacture products with a high iron and steel content. The availability and price for these and other raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs and anticipated or perceived shortages. In some cases, inventory levels, exchange rates, production costs and anticipated or perceived shortages. In some cases, those cost increases can be passed on to customers in the form of price increases; in other cases they those cost increases can be passed on to customers in the form of price increases; in other cases they cannot. If the prices of raw materials increase and we are not able to charge our customers higher prices to cannot. If the prices of raw materials increase and we are not able to charge our customers higher prices to compensate, our results of operations would be adversely affected. compensate, our results of operations would be adversely affected. Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. the supply and increase the cost of certain metals used in manufacturing our products. The SEC requires disclosure by public companies of specified minerals, known as conflict minerals, that The SEC requires disclosure by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires a disclosure report to be filed annually with the SEC, and requires manufactured. The rule requires a disclosure report to be filed annually with the SEC, and requires companies to perform due diligence, disclose and report whether or not such minerals originate from the companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of components prices and availability in sufficient quantities of certain minerals used in the manufacture of components that are incorporated into our products, including tin, tantalum, gold and tungsten. The number of that are incorporated into our products, including tin, tantalum, gold and tungsten. The number of suppliers that provide conflict-free minerals may be limited. In addition, there may be material costs suppliers that provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. We changes to products, processes, or sources of supply as a consequence of such verification activities. We may not be able to sufficiently verify the origins of the relevant minerals used in components may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties through our due diligence procedures, which may harm our reputation. We manufactured by third parties through our due diligence procedures, which may harm our reputation. We may also encounter challenges to satisfy those customers that require that all of the components of our may also encounter challenges to satisfy those customers that require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so. to do so. Due to future changes in technology, changes in market demand, or changes in market expectations, Due to future changes in technology, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excessive. portions of our inventory may become obsolete or excessive. The technology within our products evolves, and we periodically bring new versions of our machines to The technology within our products evolves, and we periodically bring new versions of our machines to market. The phasing out of an old product involves estimating the amount of inventory required to satisfy market. The phasing out of an old product involves estimating the amount of inventory required to satisfy the final demand for those machines and to satisfy future repair part needs. Based on changing customer the final demand for those machines and to satisfy future repair part needs. Based on changing customer demand and expectations of delivery times for repair parts, we may find that we have either obsolete or demand and expectations of delivery times for repair parts, we may find that we have either obsolete or excess inventory on hand. Because of unforeseen future changes in technology, market demand or excess inventory on hand. Because of unforeseen future changes in technology, market demand or competition, we might have to write off unusable inventory, which would adversely affect our results of competition, we might have to write off unusable inventory, which would adversely affect our results of operations. operations. Acquisitions could disrupt our operations and harm our operating results. Acquisitions could disrupt our operations and harm our operating results. In July 2015, we acquired a CNC machine tool business in Minnesota, U.S. (Milltronics) and a CNC In July 2015, we acquired a CNC machine tool business in Minnesota, U.S. (Milltronics) and a CNC machine tool business in Taiwan (Takumi). We may seek additional opportunities to expand our product machine tool business in Taiwan (Takumi). We may seek additional opportunities to expand our product offerings or the markets we serve by acquiring other companies, product lines, technologies and offerings or the markets we serve by acquiring other companies, product lines, technologies and personnel. Acquisitions involve numerous risks, including the following: personnel. Acquisitions involve numerous risks, including the following: • difficulties integrating the operations, technologies, products, and personnel of an acquired • difficulties integrating the operations, technologies, products, and personnel of an acquired company; company; • diversion of management’s attention from normal daily operations of the business; • diversion of management’s attention from normal daily operations of the business; • potential difficulties completing projects associated with in-process research and development; • potential difficulties completing projects associated with in-process research and development; 14 14 15 15 • difficulties entering markets in which we have no or limited prior experience, especially when Our continued success depends on our ability to protect our intellectual property. competitors in such markets have stronger market positions; initial dependence on unfamiliar supply chains or relatively small supply partners; insufficient revenues to offset increased expenses associated with acquisitions; the potential loss of key employees of the acquired companies; and • • • • potential for recording goodwill and intangible assets that later can be subject to impairment. Acquisitions may also cause us to: • • • • • issue common stock that would dilute our current shareholders’ percentage ownership; assume liabilities of an acquired company; record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges; incur amortization expenses related to certain intangible assets; incur large acquisition and integration costs, immediate write-offs, and restructuring and other related expenses; and • become subject to litigation. Mergers and acquisitions are inherently risky. No assurance can be given that our acquisitions will be successful. Further, no assurance can be given that an acquisition will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate an acquisition could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance that enhancements to those products will be made in a timely manner or that pre-acquisition due diligence will identify all possible issues that might arise with respect to such products. Risks related to new product development also apply to acquisitions. For additional information, please see the risk factor above entitled, “Due to future changes in technology, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excessive.” Assets may become impaired, requiring us to record a significant charge to earnings. We review our assets, including intangible assets such as goodwill, for indications of impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We could be required to record a significant charge to earnings in our financial statements for the period in which any impairment of these assets is determined, which would adversely affect our results of operations for that period. We may experience negative or unforeseen tax consequences. We may experience negative or unforeseen tax consequences. We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition. We also earn a significant amount of our operating income from outside the U.S., and any repatriation of funds representing earnings of foreign subsidiaries may significantly impact our effective tax rates. In addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational corporations are taxed on domestic and foreign earnings. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material benefit or adverse impact on our tax expense and cash flow. Our future success depends in part upon our ability to protect our intellectual property. We rely principally on nondisclosure agreements, other contractual arrangements, trade secret law, trademark registration and patents to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. Our inability to protect our proprietary information and enforce our intellectual property rights through infringement proceedings could have a material adverse effect on our business, financial condition and results of operations. The unanticipated loss of current members of our senior management team and other key personnel may adversely affect our operating results. The unexpected loss of members of our senior management team or other key personnel could impair our ability to carry out our business plan. We believe that our future success will depend in part on our ability to attract and retain highly skilled and qualified personnel. The loss of senior management or other key personnel may adversely affect our operating results as we incur costs to replace the departed personnel and potentially lose opportunities in the transition of important job functions. If our network and system security measures are breached and unauthorized access is obtained to our data, to our customers’ or vendors’ data, or to our critical information technology systems, we may incur legal and financial exposure and liabilities. As part of our business, we store our data and certain data about our customers and vendors in our information technology systems. If a third party gained unauthorized access to our data, including any data regarding our customers or vendors, the security breach could expose us to risks, including loss of business, litigation and possible liability. Our security measures may be breached as a result of third- party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Although we work closely with industry recognized manufacturers supporting the security measures we have employed in an effort to keep our technology current with the ongoing threats, the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, and therefore we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in: the unauthorized publication of our confidential business or proprietary information; the unauthorized release of customer or vendor data and payment information; a loss of confidence by our customers; damage to our reputation; a disruption to our business; litigation and legal liability; and a negative impact on our future sales. In addition, the cost and operational consequences of implementing further data protection measures could be significant. 16 17 • difficulties entering markets in which we have no or limited prior experience, especially when • difficulties entering markets in which we have no or limited prior experience, especially when Our continued success depends on our ability to protect our intellectual property. Our continued success depends on our ability to protect our intellectual property. • • • • • • • • • • • • • • • • competitors in such markets have stronger market positions; competitors in such markets have stronger market positions; initial dependence on unfamiliar supply chains or relatively small supply partners; initial dependence on unfamiliar supply chains or relatively small supply partners; insufficient revenues to offset increased expenses associated with acquisitions; insufficient revenues to offset increased expenses associated with acquisitions; the potential loss of key employees of the acquired companies; and the potential loss of key employees of the acquired companies; and • potential for recording goodwill and intangible assets that later can be subject to impairment. • potential for recording goodwill and intangible assets that later can be subject to impairment. Acquisitions may also cause us to: Acquisitions may also cause us to: issue common stock that would dilute our current shareholders’ percentage ownership; issue common stock that would dilute our current shareholders’ percentage ownership; assume liabilities of an acquired company; assume liabilities of an acquired company; record goodwill and non-amortizable intangible assets that will be subject to impairment testing record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges; on a regular basis and potential periodic impairment charges; incur amortization expenses related to certain intangible assets; incur amortization expenses related to certain intangible assets; incur large acquisition and integration costs, immediate write-offs, and restructuring and other incur large acquisition and integration costs, immediate write-offs, and restructuring and other related expenses; and related expenses; and • become subject to litigation. • become subject to litigation. Mergers and acquisitions are inherently risky. No assurance can be given that our acquisitions will be Mergers and acquisitions are inherently risky. No assurance can be given that our acquisitions will be successful. Further, no assurance can be given that an acquisition will not adversely affect our business, successful. Further, no assurance can be given that an acquisition will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate an acquisition could operating results, or financial condition. Failure to manage and successfully integrate an acquisition could harm our business and operating results in a material way. Even when an acquired company has already harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance that enhancements to those products will be developed and marketed products, there can be no assurance that enhancements to those products will be made in a timely manner or that pre-acquisition due diligence will identify all possible issues that might made in a timely manner or that pre-acquisition due diligence will identify all possible issues that might arise with respect to such products. arise with respect to such products. Risks related to new product development also apply to acquisitions. For additional information, please Risks related to new product development also apply to acquisitions. For additional information, please see the risk factor above entitled, “Due to future changes in technology, changes in market demand, or see the risk factor above entitled, “Due to future changes in technology, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excessive.” changes in market expectations, portions of our inventory may become obsolete or excessive.” Assets may become impaired, requiring us to record a significant charge to earnings. Assets may become impaired, requiring us to record a significant charge to earnings. We review our assets, including intangible assets such as goodwill, for indications of impairment when We review our assets, including intangible assets such as goodwill, for indications of impairment when events or changes in circumstances indicate the carrying value may not be recoverable. We could be events or changes in circumstances indicate the carrying value may not be recoverable. We could be required to record a significant charge to earnings in our financial statements for the period in which any required to record a significant charge to earnings in our financial statements for the period in which any impairment of these assets is determined, which would adversely affect our results of operations for that impairment of these assets is determined, which would adversely affect our results of operations for that period. period. We may experience negative or unforeseen tax consequences. We may experience negative or unforeseen tax consequences. We may experience negative or unforeseen tax consequences. We review the probability of the We may experience negative or unforeseen tax consequences. We review the probability of the realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. realization of our net deferred tax assets each period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax-planning opportunities and other upon approved business plans, eligible carryforward periods, tax-planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. or foreign relevant considerations. Adverse changes in the profitability and financial outlook in the U.S. or foreign jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets. Such jurisdictions may require the creation of a valuation allowance to reduce our net deferred tax assets. Such changes could result in material non-cash expenses in the period in which the changes are made and could changes could result in material non-cash expenses in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition. We also earn a have a material adverse impact on our results of operations and financial condition. We also earn a significant amount of our operating income from outside the U.S., and any repatriation of funds significant amount of our operating income from outside the U.S., and any repatriation of funds representing earnings of foreign subsidiaries may significantly impact our effective tax rates. In addition, representing earnings of foreign subsidiaries may significantly impact our effective tax rates. In addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational corporations are taxed on domestic and foreign earnings. Although we cannot predict whether or in what corporations are taxed on domestic and foreign earnings. Although we cannot predict whether or in what form this proposed legislation will pass, if enacted it could have a material benefit or adverse impact on form this proposed legislation will pass, if enacted it could have a material benefit or adverse impact on our tax expense and cash flow. our tax expense and cash flow. Our future success depends in part upon our ability to protect our intellectual property. We rely Our future success depends in part upon our ability to protect our intellectual property. We rely principally on nondisclosure agreements, other contractual arrangements, trade secret law, trademark principally on nondisclosure agreements, other contractual arrangements, trade secret law, trademark registration and patents to protect our intellectual property. However, these measures may be inadequate registration and patents to protect our intellectual property. However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the proprietary rights. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws. Our inability to protect our proprietary information and enforce our same extent as do U.S. laws. Our inability to protect our proprietary information and enforce our intellectual property rights through infringement proceedings could have a material adverse effect on our intellectual property rights through infringement proceedings could have a material adverse effect on our business, financial condition and results of operations. business, financial condition and results of operations. The unanticipated loss of current members of our senior management team and other key personnel The unanticipated loss of current members of our senior management team and other key personnel may adversely affect our operating results. may adversely affect our operating results. The unexpected loss of members of our senior management team or other key personnel could impair our The unexpected loss of members of our senior management team or other key personnel could impair our ability to carry out our business plan. We believe that our future success will depend in part on our ability ability to carry out our business plan. We believe that our future success will depend in part on our ability to attract and retain highly skilled and qualified personnel. The loss of senior management or other key to attract and retain highly skilled and qualified personnel. The loss of senior management or other key personnel may adversely affect our operating results as we incur costs to replace the departed personnel personnel may adversely affect our operating results as we incur costs to replace the departed personnel and potentially lose opportunities in the transition of important job functions. and potentially lose opportunities in the transition of important job functions. If our network and system security measures are breached and unauthorized access is obtained to our If our network and system security measures are breached and unauthorized access is obtained to our data, to our customers’ or vendors’ data, or to our critical information technology systems, we may data, to our customers’ or vendors’ data, or to our critical information technology systems, we may incur legal and financial exposure and liabilities. incur legal and financial exposure and liabilities. As part of our business, we store our data and certain data about our customers and vendors in our As part of our business, we store our data and certain data about our customers and vendors in our information technology systems. If a third party gained unauthorized access to our data, including any information technology systems. If a third party gained unauthorized access to our data, including any data regarding our customers or vendors, the security breach could expose us to risks, including loss of data regarding our customers or vendors, the security breach could expose us to risks, including loss of business, litigation and possible liability. Our security measures may be breached as a result of third- business, litigation and possible liability. Our security measures may be breached as a result of third- party action, including intentional misconduct by computer hackers, employee error, malfeasance or party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information to gain access to our disclosing sensitive information such as user names, passwords or other information to gain access to our customers' data or our data, including our intellectual property and other confidential business customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Although we work closely with industry recognized information, or our information technology systems. Although we work closely with industry recognized manufacturers supporting the security measures we have employed in an effort to keep our technology manufacturers supporting the security measures we have employed in an effort to keep our technology current with the ongoing threats, the techniques used to obtain unauthorized access, or to sabotage current with the ongoing threats, the techniques used to obtain unauthorized access, or to sabotage systems, change frequently, and therefore we may be unable to anticipate these techniques or to systems, change frequently, and therefore we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in: the unauthorized implement adequate preventative measures. Any security breach could result in: the unauthorized publication of our confidential business or proprietary information; the unauthorized release of customer publication of our confidential business or proprietary information; the unauthorized release of customer or vendor data and payment information; a loss of confidence by our customers; damage to our or vendor data and payment information; a loss of confidence by our customers; damage to our reputation; a disruption to our business; litigation and legal liability; and a negative impact on our future reputation; a disruption to our business; litigation and legal liability; and a negative impact on our future sales. In addition, the cost and operational consequences of implementing further data protection sales. In addition, the cost and operational consequences of implementing further data protection measures could be significant. measures could be significant. 16 16 17 17 Item 1B. UNRESOLVED STAFF COMMENTS Item 3. LEGAL PROCEEDINGS None. Item 2. PROPERTIES The following table sets forth the principal use, location, and size of each of our facilities: Principal Uses Locations Square Footage Corporate headquarters, design and engineering, product testing, sales and marketing, engineering, application customer service, manufacturing and assembly Indianapolis, Indiana, U.S. (1) 165,000 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Manufacturing, sales, application engineering and customer service assembly, Taichung, Taiwan Waconia, Minnesota, U.S. Castell’Alfero, Italy Manufacturing Ningbo, China Sales, application engineering and customer service High Wycombe, England Benoni, South Africa Paris, France Munich and Verl, Germany Milan, Italy Venlo, the Netherlands Toh Guan, Singapore Shanghai, Dongguan, Shenyang, Kunshan and Beijing, China Chennai, Delhi, Coimbatore, and Pune India Liegnitz, Poland Grand Rapids, Michigan, U.S. Ball Ground, Georgia, U.S. 407,500 97,700 32,300 31,000 16,000 3,200 9,700 20,100 13,800 9,700 3,900 2,800 13,900 2,900 3,700 5,200 (1) Approximately 9,400 square feet is leased to third-parties under leases that will expire February 28, 2017, Volovic was employed by Unisys Corporation. April 30, 2017 and April 30, 2018. We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2017 to March 2024. We believe that all of our facilities are well maintained and are adequate for our needs now and in the foreseeable future. We do not believe that we would experience any difficulty in replacing any of the present facilities if any of our leases were not renewed at expiration. 18 19 We are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. None. Executive Officers of the Registrant Executive officers are elected each year by the Board of Directors following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualified. There are no family relationships between any of our executive officers or between any of them and any of the members of the Board of Directors. The following information sets forth as of October 31, 2016, the name of each executive officer and his or her age, tenure as an officer, principal occupation and business experience: Name Age Position(s) with the Company Michael Doar Gregory S. Volovic Sonja K. McClelland John P. Donlon 61 52 45 59 Chairman of the Board and Chief Executive Officer President Vice President, Secretary, Treasurer and Chief Financial Officer Executive Vice President, International Sales/Service Michael Doar was elected Chairman of the Board and Chief Executive Officer on November 14, 2001. Mr. Doar had held various management positions with Ingersoll Milling Machine Company from 1989 until 2001. Mr. Doar has been a director of Hurco since 2000. Gregory S. Volovic has been employed by us since March 2005 and was elected as our President in March 2013. Mr. Volovic previously held the position of Executive Vice President, Software and Engineering until October 2009. Prior to joining us, Mr. Volovic held various positions with Thomson, Inc. including Director of E-Business, Engineering, and Information Technology. Prior to that, Mr. Sonja K. McClelland has been employed by us since September 1996 and was elected as Vice President, Secretary, Treasurer and Chief Financial Officer in March 2014. Ms. McClelland served as Corporate Accounting Manager from September 1996 to 1999, as Division Controller for Hurco USA from September 1999 to November 2004, and as our Corporate Controller and Assistant Secretary from November 2004 to March 2014. Prior to joining us, Ms. McClelland was employed for three years by an international public accounting firm. John P. Donlon has been employed by us since April 2010 as Executive Vice President, International Sales/Service. Prior to joining us, Mr. Donlon served as the Vice President of Sales for Yaskawa America Robotics since 2008. From 2004 to 2008, Mr. Donlon served as the Vice President of Sales and Marketing for Ansaldo STS, a worldwide supplier of automation technologies to the rail industry. Earlier in his career, Mr. Donlon held executive sales and management positions with other multi-national companies including Honeywell and ABB, and he has significant international experience in the emerging markets of China, Russia and Brazil. The following table sets forth the principal use, location, and size of each of our facilities: The following table sets forth the principal use, location, and size of each of our facilities: Principal Uses Principal Uses Locations Locations Square Footage Square Footage None. None. Item 2. Item 2. PROPERTIES PROPERTIES Corporate headquarters, design and Corporate headquarters, design and engineering, product testing, sales and engineering, product testing, sales and marketing, marketing, application application engineering, engineering, customer service, manufacturing and customer service, manufacturing and assembly assembly Manufacturing, Manufacturing, assembly, assembly, sales, sales, application engineering and customer application engineering and customer service service Taichung, Taiwan Taichung, Taiwan Waconia, Minnesota, U.S. Waconia, Minnesota, U.S. Castell’Alfero, Italy Castell’Alfero, Italy Manufacturing Manufacturing Ningbo, China Ningbo, China Sales, application engineering and Sales, application engineering and customer service customer service High Wycombe, England High Wycombe, England Benoni, South Africa Benoni, South Africa Paris, France Paris, France Munich and Verl, Germany Munich and Verl, Germany Milan, Italy Milan, Italy Venlo, the Netherlands Venlo, the Netherlands Toh Guan, Singapore Toh Guan, Singapore Shanghai, Dongguan, Shenyang, Shanghai, Dongguan, Shenyang, Kunshan and Beijing, China Kunshan and Beijing, China Chennai, Delhi, Coimbatore, and Chennai, Delhi, Coimbatore, and Pune India Pune India Liegnitz, Poland Liegnitz, Poland Grand Rapids, Michigan, U.S. Grand Rapids, Michigan, U.S. Ball Ground, Georgia, U.S. Ball Ground, Georgia, U.S. 407,500 407,500 97,700 97,700 32,300 32,300 31,000 31,000 16,000 16,000 3,200 3,200 9,700 9,700 20,100 20,100 13,800 13,800 9,700 9,700 3,900 3,900 2,800 2,800 13,900 13,900 2,900 2,900 3,700 3,700 5,200 5,200 (1) Approximately 9,400 square feet is leased to third-parties under leases that will expire February 28, 2017, (1) Approximately 9,400 square feet is leased to third-parties under leases that will expire February 28, 2017, April 30, 2017 and April 30, 2018. April 30, 2017 and April 30, 2018. We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2017 to March 2024. We believe that all of our facilities are well maintained dates ranging from January 2017 to March 2024. We believe that all of our facilities are well maintained and are adequate for our needs now and in the foreseeable future. We do not believe that we would and are adequate for our needs now and in the foreseeable future. We do not believe that we would experience any difficulty in replacing any of the present facilities if any of our leases were not renewed at experience any difficulty in replacing any of the present facilities if any of our leases were not renewed at expiration. expiration. Item 1B. UNRESOLVED STAFF COMMENTS Item 1B. UNRESOLVED STAFF COMMENTS Item 3. Item 3. LEGAL PROCEEDINGS LEGAL PROCEEDINGS Indianapolis, Indiana, U.S. (1) Indianapolis, Indiana, U.S. (1) 165,000 165,000 Item 4. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We are involved in various claims and lawsuits arising in the normal course of business. Pursuant to We are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. ultimate resolution of claims for any losses will not exceed our insurance policy coverages. None. None. Executive Officers of the Registrant Executive Officers of the Registrant Executive officers are elected each year by the Board of Directors following the Annual Meeting of Executive officers are elected each year by the Board of Directors following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and Shareholders to serve during the ensuing year and until their respective successors are elected and qualified. There are no family relationships between any of our executive officers or between any of qualified. There are no family relationships between any of our executive officers or between any of them and any of the members of the Board of Directors. them and any of the members of the Board of Directors. The following information sets forth as of October 31, 2016, the name of each executive officer and his or The following information sets forth as of October 31, 2016, the name of each executive officer and his or her age, tenure as an officer, principal occupation and business experience: her age, tenure as an officer, principal occupation and business experience: Name Name Age Age Position(s) with the Company Position(s) with the Company Michael Doar Michael Doar Gregory S. Volovic Gregory S. Volovic Sonja K. McClelland Sonja K. McClelland John P. Donlon John P. Donlon 61 61 52 52 45 45 59 59 Chairman of the Board and Chief Executive Officer Chairman of the Board and Chief Executive Officer President President Vice President, Secretary, Treasurer and Chief Financial Officer Vice President, Secretary, Treasurer and Chief Financial Officer Executive Vice President, International Sales/Service Executive Vice President, International Sales/Service Michael Doar was elected Chairman of the Board and Chief Executive Officer on November 14, 2001. Michael Doar was elected Chairman of the Board and Chief Executive Officer on November 14, 2001. Mr. Doar had held various management positions with Ingersoll Milling Machine Company from 1989 Mr. Doar had held various management positions with Ingersoll Milling Machine Company from 1989 until 2001. Mr. Doar has been a director of Hurco since 2000. until 2001. Mr. Doar has been a director of Hurco since 2000. Gregory S. Volovic has been employed by us since March 2005 and was elected as our President in Gregory S. Volovic has been employed by us since March 2005 and was elected as our President in March 2013. Mr. Volovic previously held the position of Executive Vice President, Software and March 2013. Mr. Volovic previously held the position of Executive Vice President, Software and Engineering until October 2009. Prior to joining us, Mr. Volovic held various positions with Thomson, Engineering until October 2009. Prior to joining us, Mr. Volovic held various positions with Thomson, Inc. including Director of E-Business, Engineering, and Information Technology. Prior to that, Mr. Inc. including Director of E-Business, Engineering, and Information Technology. Prior to that, Mr. Volovic was employed by Unisys Corporation. Volovic was employed by Unisys Corporation. Sonja K. McClelland has been employed by us since September 1996 and was elected as Vice President, Sonja K. McClelland has been employed by us since September 1996 and was elected as Vice President, Secretary, Treasurer and Chief Financial Officer in March 2014. Ms. McClelland served as Corporate Secretary, Treasurer and Chief Financial Officer in March 2014. Ms. McClelland served as Corporate Accounting Manager from September 1996 to 1999, as Division Controller for Hurco USA from Accounting Manager from September 1996 to 1999, as Division Controller for Hurco USA from September 1999 to November 2004, and as our Corporate Controller and Assistant Secretary from September 1999 to November 2004, and as our Corporate Controller and Assistant Secretary from November 2004 to March 2014. Prior to joining us, Ms. McClelland was employed for three years by an November 2004 to March 2014. Prior to joining us, Ms. McClelland was employed for three years by an international public accounting firm. international public accounting firm. John P. Donlon has been employed by us since April 2010 as Executive Vice President, International John P. Donlon has been employed by us since April 2010 as Executive Vice President, International Sales/Service. Prior to joining us, Mr. Donlon served as the Vice President of Sales for Yaskawa Sales/Service. Prior to joining us, Mr. Donlon served as the Vice President of Sales for Yaskawa America Robotics since 2008. From 2004 to 2008, Mr. Donlon served as the Vice President of Sales and America Robotics since 2008. From 2004 to 2008, Mr. Donlon served as the Vice President of Sales and Marketing for Ansaldo STS, a worldwide supplier of automation technologies to the rail industry. Earlier Marketing for Ansaldo STS, a worldwide supplier of automation technologies to the rail industry. Earlier in his career, Mr. Donlon held executive sales and management positions with other multi-national in his career, Mr. Donlon held executive sales and management positions with other multi-national companies including Honeywell and ABB, and he has significant international experience in the emerging companies including Honeywell and ABB, and he has significant international experience in the emerging markets of China, Russia and Brazil. markets of China, Russia and Brazil. 18 18 19 19 2016 Fiscal Quarter Ended: High $28.47 $33.40 $33.65 $30.42 Low $23.90 January 31 .............................................. April 30 .................................................. $23.25 July 31 ................................................... $26.57 $25.45 October 31 ............................................. Declared Dividends $.08 $.09 $.09 $.09 2015 High $39.95 $38.37 $35.77 $31.80 Low $30.33 $28.22 $30.13 $24.93 Declared Dividends $.07 $.08 $.08 $.08 PART II Item 6. SELECTED FINANCIAL DATA Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. The following table sets forth, for the periods indicated, the high and low sale prices as reported by the Nasdaq Global Select Market and declared dividends per share of our common stock. The Selected Financial Data presented below has been derived from our consolidated financial statements for the years indicated and should be read in conjunction with the consolidated financial statements and related notes set forth elsewhere herein and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Statement of Operations (In thousands, except per share amounts) 2016 2015 2014 2013 2012 Year Ended October 31, Data: Selling, general and Sales and service fees ................ $227,289 $219,383 $222,303 $192,804 $203,117 Gross profit ................................ 70,440 69,091 68,612 55,056 63,181 administrative expenses .......... Operating income (loss) ............ 50,824 19,616 45,287 23,804 Other income (expense) ............. (731) (251) Net income (loss) ....................... 13,292 16,214 46,615 21,997 (636) 15,143 41,413 13,643 (1,201) 8,190 41,160 22,021 (157) 15,638 share- diluted ........................... $ 1.99 $ 2.44 $ 2.30 $ 1.25 $ 2.40 shares outstanding-diluted ...... 6,642 6,602 6,538 6,497 6,470 Earnings (loss) per common Weighted average common Dividends declared per common share…………… Balance Sheet Data: 2016 2015 2014 2013 2012 As of October 31, (Dollars in thousands) Current assets * ........................ Current liabilities ..................... Working capital * .................... Current ratio * .......................... Total assets * ............................ Non-current liabilities * ............ Total debt ................................. $218,381 57,968 160,413 3.8 251,949 8,506 1,476 $216,112 65,086 151,026 3.3 248,577 8,923 1,583 $208,691 $182,921 $172,200 66,803 141,888 3.1 7,728 3,272 55,686 127,235 3.3 5,627 3,665 49,372 122,828 3.5 4,194 3,206 239,176 212,804 197,360 Shareholders’ equity ................ 185,475 174,568 164,645 151,491 143,793 _________________ * Certain prior year amounts have been changed to conform to current year’s presentation as a result of the adoption of Accounting Standards Update (“ASU”) No. 2015-17. On December 12, 2016, the closing price of our common stock on the Nasdaq Global Select Market was $33.85. Holders There were 113 holders of record of our common stock as of December 12, 2016. $ .35 $ .31 $ .26 $ .10 -- Dividend Policy We began declaring cash dividends on our common stock in the third quarter of fiscal 2013, and we expect to continue to declare dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion 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. Our payment of dividends is limited by our U.S. credit agreement, as further described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 5 of Notes to Consolidated Financial Statements. Other Information During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. The disclosure under the caption “Equity Compensation Plan Information” is incorporated by reference in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The performance graph information is included in Item 9B. Other Information. 20 21 Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY PART II PART II SECURITIES SECURITIES Market Information Market Information Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. The Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”. The following table sets forth, for the periods indicated, the high and low sale prices as reported by the Nasdaq following table sets forth, for the periods indicated, the high and low sale prices as reported by the Nasdaq Global Select Market and declared dividends per share of our common stock. Global Select Market and declared dividends per share of our common stock. Fiscal Fiscal 2016 2016 Declared Declared 2015 2015 Declared Declared Quarter Ended: Quarter Ended: High High Low Low Dividends Dividends High High Low Low Dividends Dividends January 31 .............................................. January 31 .............................................. $28.47 $28.47 $23.90 $23.90 April 30 .................................................. April 30 .................................................. $33.40 $33.40 $23.25 $23.25 July 31 ................................................... July 31 ................................................... $33.65 $33.65 $26.57 $26.57 October 31 ............................................. October 31 ............................................. $30.42 $30.42 $25.45 $25.45 $.08 $.08 $.09 $.09 $.09 $.09 $.09 $.09 $39.95 $39.95 $30.33 $30.33 $38.37 $38.37 $35.77 $35.77 $31.80 $31.80 $28.22 $28.22 $30.13 $30.13 $24.93 $24.93 $.07 $.07 $.08 $.08 $.08 $.08 $.08 $.08 On December 12, 2016, the closing price of our common stock on the Nasdaq Global Select Market was On December 12, 2016, the closing price of our common stock on the Nasdaq Global Select Market was $33.85. $33.85. Holders Holders Dividend Policy Dividend Policy There were 113 holders of record of our common stock as of December 12, 2016. There were 113 holders of record of our common stock as of December 12, 2016. We began declaring cash dividends on our common stock in the third quarter of fiscal 2013, and we We began declaring cash dividends on our common stock in the third quarter of fiscal 2013, and we expect to continue to declare dividends on a quarterly basis; however, the declaration and amount of any expect to continue to declare dividends on a quarterly basis; however, the declaration and amount of any future cash dividends will be subject to the sole discretion of our Board of Directors and will depend upon future cash dividends will be subject to the sole discretion of our Board of Directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, regulatory and 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 contractual restrictions, our business strategy and other factors deemed relevant by our Board of Directors. Directors. Our payment of dividends is limited by our U.S. credit agreement, as further described in Item 7. Our payment of dividends is limited by our U.S. credit agreement, as further described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 5 Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 5 of Notes to Consolidated Financial Statements. of Notes to Consolidated Financial Statements. Other Information Other Information During the period covered by this report, we did not sell any equity securities that were not registered During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. under the Securities Act of 1933, as amended. The disclosure under the caption “Equity Compensation Plan Information” is incorporated by reference in The disclosure under the caption “Equity Compensation Plan Information” is incorporated by reference in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Matters. The performance graph information is included in Item 9B. Other Information. The performance graph information is included in Item 9B. Other Information. Item 6. Item 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA The Selected Financial Data presented below has been derived from our consolidated financial statements The Selected Financial Data presented below has been derived from our consolidated financial statements for the years indicated and should be read in conjunction with the consolidated financial statements and for the years indicated and should be read in conjunction with the consolidated financial statements and related notes set forth elsewhere herein and Item 7. Management’s Discussion and Analysis of Financial related notes set forth elsewhere herein and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Condition and Results of Operations. Statement Statement Data: Data: of Operations of Operations Sales and service fees ................ Sales and service fees ................ Gross profit ................................ Gross profit ................................ Selling, general and Selling, general and administrative expenses .......... administrative expenses .......... Operating income (loss) ............ Operating income (loss) ............ Other income (expense) ............. Other income (expense) ............. Net income (loss) ....................... Net income (loss) ....................... Earnings (loss) per common Earnings (loss) per common share- diluted ........................... share- diluted ........................... Weighted average common Weighted average common 2016 2016 Year Ended October 31, Year Ended October 31, 2014 2014 (In thousands, except per share amounts) (In thousands, except per share amounts) 2015 2015 2013 2013 2012 2012 $227,289 $227,289 70,440 70,440 $219,383 $219,383 69,091 69,091 $222,303 $222,303 68,612 68,612 $192,804 $192,804 55,056 55,056 $203,117 $203,117 63,181 63,181 50,824 50,824 19,616 19,616 (731) (731) 13,292 13,292 45,287 45,287 23,804 23,804 (251) (251) 16,214 16,214 46,615 46,615 21,997 21,997 (636) (636) 15,143 15,143 41,413 41,413 13,643 13,643 (1,201) (1,201) 8,190 8,190 41,160 41,160 22,021 22,021 (157) (157) 15,638 15,638 $ 1.99 $ 1.99 $ 2.44 $ 2.44 $ 2.30 $ 2.30 $ 1.25 $ 1.25 $ 2.40 $ 2.40 shares outstanding-diluted ...... shares outstanding-diluted ...... 6,642 6,642 6,602 6,602 6,538 6,538 6,497 6,497 6,470 6,470 Dividends declared per Dividends declared per common share…………… common share…………… $ .35 $ .35 $ .31 $ .31 $ .26 $ .26 $ .10 $ .10 -- -- Balance Sheet Data: Balance Sheet Data: 2016 2016 2015 2015 As of October 31, As of October 31, 2014 2014 (Dollars in thousands) (Dollars in thousands) 2013 2013 2012 2012 Current assets * ........................ Current assets * ........................ Current liabilities ..................... Current liabilities ..................... Working capital * .................... Working capital * .................... Current ratio * .......................... Current ratio * .......................... Total assets * ............................ Total assets * ............................ Non-current liabilities * ............ Non-current liabilities * ............ Total debt ................................. Total debt ................................. Shareholders’ equity ................ Shareholders’ equity ................ $218,381 $218,381 57,968 57,968 160,413 160,413 3.8 3.8 251,949 251,949 8,506 8,506 1,476 1,476 185,475 185,475 $216,112 $216,112 65,086 65,086 151,026 151,026 3.3 3.3 248,577 248,577 8,923 8,923 1,583 1,583 174,568 174,568 $208,691 $208,691 66,803 66,803 141,888 141,888 3.1 3.1 239,176 239,176 7,728 7,728 3,272 3,272 164,645 164,645 $182,921 $182,921 55,686 55,686 127,235 127,235 3.3 3.3 212,804 212,804 5,627 5,627 3,665 3,665 151,491 151,491 $172,200 $172,200 49,372 49,372 122,828 122,828 3.5 3.5 197,360 197,360 4,194 4,194 3,206 3,206 143,793 143,793 _________________ _________________ * Certain prior year amounts have been changed to conform to current year’s presentation as a result of the adoption of * Certain prior year amounts have been changed to conform to current year’s presentation as a result of the adoption of Accounting Standards Update (“ASU”) No. 2015-17. Accounting Standards Update (“ASU”) No. 2015-17. 20 20 21 21 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture and sell computerized (i.e., Computer Numeric Control, or 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, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support. The following overview is intended to provide a brief explanation of the principal factors that have contributed to our recent financial performance. This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report. The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During fiscal 2016, approximately 54% 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 11% of our revenues were attributable to customers in Asia, where we sell more of our entry-level, lower-priced machines, but where we also encounter greater price pressures. During the third quarter of fiscal 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, Inc. and we are operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics USA, Inc. (“Milltronics”). Milltronics manufactures and sells CNC knee mills, tool room bed mills, vertical machining centers, combination lathes, slant-bed lathes, horizontal machining centers, and bed mills. During the third quarter of fiscal 2015, we also acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwanese company that designs and manufactures CNC vertical machining centers, double column machining centers, high speed bridge machines and other machine tools, with sales primarily in Taiwan, China and Europe. Takumi machines are equipped with industrial controls from Fanuc®, Siemens®, Mitsubishi® or Heidenhain® which can be used in high-volume parts manufacturing. We are operating this Taiwanese business as a product line through our wholly-owned subsidiary Hurco Manufacturing Limited (“HML”). The Milltronics and Takumi product lines contribute to our efforts to expand our consolidated product range, customer base and global platform, and we believe may accelerate emerging market penetration, particularly in strategic markets such as China and South America. The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different models. The combined machine tool product lines also provide benefits related to the development of product enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven engineering designs that allow us to achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. We sell our products through more than 195 independent agents and distributors throughout North and South America (the Americas), Europe and Asia. Although some distributors carry competitive products, we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings and components to support HML’s production are manufactured at our facility in Ningbo, China. 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 Precision Technology S.r.l. (“LCM”). Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies - primarily the Euro, Pound Sterling and Chinese Yuan - in the countries in which those customers are located. Our product costs are incurred and paid primarily in the New Taiwan Dollar and the Euro. Changes in currency exchange rates may have a material effect on our operating results and consolidated balance sheets 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 subject us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of various 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 Income 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 2016 2015 2014 Increase/Decrease ’16 vs. ’15 ’15 vs. ’14 100% 31% 21% 11% 7% 100% 31% 21% 10% 7% 4% 2% 12% -18% -18% -1% 1% -3% 8% 7% Sales and service fees ............ Gross profit ........................... 100% 31% Selling, general and administrative expenses ..... Operating income (loss) ........ Net income (loss) .................. 22% 9% 6% Fiscal 2016 Compared to Fiscal 2015 Sales and Service Fees. Sales and service fees for fiscal 2016 were $227.3 million, an increase of $7.9 million, or 4%, compared to fiscal 2015 and included a negative currency impact of $6.4 million, or 3%, 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 year ended October 31, 2016 and 2015 (in thousands): Americas Europe Asia Pacific Total $ 74,386 124,070 28,833 $ 227,289 October 31, 2016 2015 33% 54% 13% $ 70,169 129,335 19,879 32% 59% 9% Increase/Decrease Amount % $ 4,217 (5,265) 8,954 6% -4% 45% 4% 100% $219,383 100% $ 7,906 Sales in the Americas for fiscal 2016 increased by 6% compared to fiscal 2015, as a result of year-end promotional activities following the International Manufacturing Technology Show (“IMTS”) in September 2016, as well as the impact of twelve months of Milltronics sales in fiscal 2016 compared to only three months of sales activity from the acquisition of the Milltronics product line in July 2015 until the end of fiscal 2015. Sales in the Americas for fiscal 2016 included $17.9 million of sales from the 22 23 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND RESULTS OF OPERATIONS EXECUTIVE OVERVIEW EXECUTIVE OVERVIEW Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. Hurco Companies, Inc. is an international, industrial technology company operating in a single segment. We design, manufacture and sell computerized (i.e., Computer Numeric Control, or CNC) machine tools, We design, manufacture and sell computerized (i.e., Computer Numeric Control, or CNC) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the 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 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 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 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 are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, software options, control upgrades, accessories and replacement parts for our machine tool components, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support. products, as well as customer service and training support. The following overview is intended to provide a brief explanation of the principal factors that have 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 contributed to our recent financial performance. This overview is intended to be read in conjunction with the more detailed information included in our financial statements that appear elsewhere in this report. the more detailed information included in our financial statements that appear elsewhere in this report. The market for machine tools is international in scope. We have both significant foreign sales and The market for machine tools is international in scope. We have both significant foreign sales and significant foreign manufacturing operations. During fiscal 2016, approximately 54% of our revenues significant foreign manufacturing operations. During fiscal 2016, approximately 54% of our revenues were attributable to customers in Europe, where we typically sell more of our higher-performance, higher- were attributable to customers in Europe, where we typically sell more of our higher-performance, higher- priced VMX series machines. Additionally, approximately 11% of our revenues were attributable to priced VMX series machines. Additionally, approximately 11% of our revenues were attributable to customers in Asia, where we sell more of our entry-level, lower-priced machines, but where we also customers in Asia, where we sell more of our entry-level, lower-priced machines, but where we also encounter greater price pressures. encounter greater price pressures. During the third quarter of fiscal 2015, we acquired the assets of the machine tool business of Milltronics During the third quarter of fiscal 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, Inc. and we are operating this U.S. business as a product line through our Manufacturing Company, Inc. and we are operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics USA, Inc. (“Milltronics”). Milltronics manufactures and sells CNC wholly-owned subsidiary, Milltronics USA, Inc. (“Milltronics”). Milltronics manufactures and sells CNC knee mills, tool room bed mills, vertical machining centers, combination lathes, slant-bed lathes, knee mills, tool room bed mills, vertical machining centers, combination lathes, slant-bed lathes, horizontal machining centers, and bed mills. During the third quarter of fiscal 2015, we also acquired the horizontal machining centers, and bed mills. During the third quarter of fiscal 2015, we also acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwanese company assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwanese company that designs and manufactures CNC vertical machining centers, double column machining centers, high that designs and manufactures CNC vertical machining centers, double column machining centers, high speed bridge machines and other machine tools, with sales primarily in Taiwan, China and Europe. speed bridge machines and other machine tools, with sales primarily in Taiwan, China and Europe. Takumi machines are equipped with industrial controls from Fanuc®, Siemens®, Mitsubishi® or Takumi machines are equipped with industrial controls from Fanuc®, Siemens®, Mitsubishi® or Heidenhain® which can be used in high-volume parts manufacturing. We are operating this Taiwanese Heidenhain® which can be used in high-volume parts manufacturing. We are operating this Taiwanese business as a product line through our wholly-owned subsidiary Hurco Manufacturing Limited (“HML”). business as a product line through our wholly-owned subsidiary Hurco Manufacturing Limited (“HML”). The Milltronics and Takumi product lines contribute to our efforts to expand our consolidated product The Milltronics and Takumi product lines contribute to our efforts to expand our consolidated product range, customer base and global platform, and we believe may accelerate emerging market penetration, range, customer base and global platform, and we believe may accelerate emerging market penetration, particularly in strategic markets such as China and South America. The Hurco, Milltronics and Takumi particularly in strategic markets such as China and South America. The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different models. The product lines represent a comprehensive product portfolio with more than 150 different models. The combined machine tool product lines also provide benefits related to the development of product combined machine tool product lines also provide benefits related to the development of product enhancements, technologies and models due to leverage of shared resources and cross-utilization of enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven engineering designs that allow us to achieve manufacturing cost reductions from economies of proven engineering designs that allow us to achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. scale and manufacturing efficiencies. We sell our products through more than 195 independent agents and distributors throughout North and We sell our products through more than 195 independent agents and distributors throughout North and South America (the Americas), Europe and Asia. Although some distributors carry competitive products, South America (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 we are the primary line for the majority of our distributors globally. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom and certain parts of the United States, which are among the world's Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal machine tool consuming markets. The vast majority of our machine tools are manufactured to principal machine tool consuming markets. The vast majority of our machine tools are manufactured to our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings and our specifications primarily by our wholly-owned subsidiary in Taiwan, HML. Machine castings and components to support HML’s production are manufactured at our facility in Ningbo, China. components to support HML’s production are manufactured at our facility in Ningbo, China. Components to support our SRT line of five-axis machining centers, such as the direct drive spindle, 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 Precision swivel head and rotary table, are manufactured by our wholly-owned subsidiary in Italy, LCM Precision Technology S.r.l. (“LCM”). Technology S.r.l. (“LCM”). Our sales to foreign customers are denominated, and payments by those customers are made, in the Our sales to foreign customers are denominated, and payments by those customers are made, in the prevailing currencies - primarily the Euro, Pound Sterling and Chinese Yuan - in the countries in which prevailing currencies - primarily the Euro, Pound Sterling and Chinese Yuan - in the countries in which those customers are located. Our product costs are incurred and paid primarily in the New Taiwan Dollar those customers are located. Our product costs are incurred and paid primarily in the New Taiwan Dollar and the Euro. Changes in currency exchange rates may have a material effect on our operating results and and the Euro. Changes in currency exchange rates may have a material effect on our operating results and consolidated balance sheets as reported under U.S. Generally Accepted Accounting Principles. For consolidated balance sheets 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 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 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 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. 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. Dollars at exchange rates prevailing during the period covered by those financial statements. Our high levels of foreign manufacturing and sales also subject us to cash flow risks due to fluctuating Our high levels of foreign manufacturing and sales also subject us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of various derivative currency exchange rates. We seek to mitigate those risks through the use of various derivative instruments – principally foreign currency forward exchange contracts. instruments – principally foreign currency forward exchange contracts. Results of Operations Results of Operations The following table presents, for the fiscal years indicated, selected items from the Consolidated The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Income expressed as a percentage of our worldwide sales and service fees and the year-to- Statements of Income 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. year percentage changes in the dollar amounts of those items. Percentage of Revenues Percentage of Revenues 2015 2015 2016 2016 2014 2014 Sales and service fees ............ Sales and service fees ............ Gross profit ........................... Gross profit ........................... Selling, general and Selling, general and administrative expenses ..... administrative expenses ..... Operating income (loss) ........ Operating income (loss) ........ Net income (loss) .................. Net income (loss) .................. 100% 100% 31% 31% 22% 22% 9% 9% 6% 6% Fiscal 2016 Compared to Fiscal 2015 Fiscal 2016 Compared to Fiscal 2015 100% 100% 31% 31% 21% 21% 11% 11% 7% 7% 100% 100% 31% 31% 21% 21% 10% 10% 7% 7% Year-to-Year % Change Year-to-Year % Change Increase/Decrease Increase/Decrease ’16 vs. ’15 ’16 vs. ’15 4% 4% 2% 2% ’15 vs. ’14 ’15 vs. ’14 -1% -1% 1% 1% 12% 12% -18% -18% -18% -18% -3% -3% 8% 8% 7% 7% Sales and Service Fees. Sales and service fees for fiscal 2016 were $227.3 million, an increase of $7.9 Sales and Service Fees. Sales and service fees for fiscal 2016 were $227.3 million, an increase of $7.9 million, or 4%, compared to fiscal 2015 and included a negative currency impact of $6.4 million, or 3%, million, or 4%, compared to fiscal 2015 and included a negative currency impact of $6.4 million, or 3%, when translating foreign sales to U.S. dollars for financial reporting purposes. when translating foreign sales to U.S. dollars for financial reporting purposes. Net Sales and Service Fees by Geographic Region Net Sales and Service Fees by Geographic Region The following table sets forth net sales and service fees by geographic region for the fiscal year ended The following table sets forth net sales and service fees by geographic region for the fiscal year ended October 31, 2016 and 2015 (in thousands): October 31, 2016 and 2015 (in thousands): October 31, October 31, 2016 2016 2015 2015 Americas Americas Europe Europe Asia Pacific Asia Pacific Total Total $ 74,386 $ 74,386 124,070 124,070 28,833 28,833 $ 227,289 $ 227,289 33% 33% 54% 54% 13% 13% 100% 100% $ 70,169 $ 70,169 129,335 129,335 19,879 19,879 $219,383 $219,383 32% 32% 59% 59% 9% 9% 100% 100% Increase/Decrease Increase/Decrease Amount % Amount % $ 4,217 $ 4,217 (5,265) (5,265) 6% 6% -4% -4% 8,954 8,954 $ 7,906 $ 7,906 45% 45% 4% 4% Sales in the Americas for fiscal 2016 increased by 6% compared to fiscal 2015, as a result of year-end Sales in the Americas for fiscal 2016 increased by 6% compared to fiscal 2015, as a result of year-end promotional activities following the International Manufacturing Technology Show (“IMTS”) in promotional activities following the International Manufacturing Technology Show (“IMTS”) in September 2016, as well as the impact of twelve months of Milltronics sales in fiscal 2016 compared to September 2016, as well as the impact of twelve months of Milltronics sales in fiscal 2016 compared to only three months of sales activity from the acquisition of the Milltronics product line in July 2015 until only three months of sales activity from the acquisition of the Milltronics product line in July 2015 until the end of fiscal 2015. Sales in the Americas for fiscal 2016 included $17.9 million of sales from the the end of fiscal 2015. Sales in the Americas for fiscal 2016 included $17.9 million of sales from the 22 22 23 23 Milltronics product line, compared to $6.7 million in fiscal 2015. European sales for fiscal 2016 decreased by 4% compared to fiscal 2015 and included a negative currency impact of 5% when translating foreign sales to U.S. dollars for financial reporting purposes. The slight year-over-year growth in European sales for fiscal 2016, excluding the effect of the negative currency impact, was driven by increased shipments of higher-performance machines in Germany, France and Italy. Asian Pacific sales for fiscal 2016 increased by 45% compared to fiscal 2015 and included a negative currency impact of 3% when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year increase in Asian Pacific sales for fiscal 2016 was primarily attributable to twelve months of Takumi sales included in fiscal 2016 compared to only three months of sales activity from the acquisition of the Takumi product line in July 2015 until the end of fiscal 2015. Asian Pacific sales for fiscal 2016 included $14.6 million of sales from the Takumi product line, compared to $3.3 million for fiscal 2015. 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, 2016 and 2015 (in thousands): October 31, 2016 2015 Increase/ Decrease Amount % Computerized Machine Tools* Computer Control Systems and Software† Service Parts Service Fees Total $195,618 86% $189,712 87% $ 5,906 3% 2,078 1% 3,085 1% (1,007) -33% 21,908 7,685 $227,289 10% 3% 100% 19,375 7,211 $219,383 9% 3% 100% 2,533 474 $ 7,906 13% 7% 4% * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective period income adjustment recorded in fiscal 2015. dates of those acquisitions. † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. Sales of computerized machine tools and service parts increased during fiscal 2016 by 3% and 13%, respectively, compared to fiscal 2015 primarily due to the impact of twelve months of Milltronics and Takumi sales in fiscal 2016 compared to only three months of sales activity from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015, as well as year-end promotional activities following the International Manufacturing Technology Show (“IMTS”) in September 2016. Sales of computer control systems and software decreased by 33% during fiscal 2016 compared to fiscal 2015 as a result of a reduction in sales for the Autobend® product line in the Americas and the United Kingdom. Service fees revenue increased during fiscal 2016 by 7% compared to fiscal 2015 primarily due to increased repair needs from customers in the Americas, the United Kingdom and France. Orders and Backlog. Orders for fiscal 2016 were $219.2 million, a decrease of $4.0 million, or 2%, compared to fiscal 2015 and included a negative currency impact of $6.5 million, or 3%, when translating foreign orders to U.S. dollars for financial reporting purposes. Orders in the Americas for fiscal 2016 were $70.9 million, a decrease of $1.1 million, or 1%, compared to fiscal 2015, reflecting an overall softer market and the impact of pricing pressures in this region, partially offset by the impact of twelve months of Milltronics sales in fiscal 2016 compared to only three months in fiscal 2015. Orders in the Americas for fiscal 2016 included $15.7 million of orders from the Milltronics product line, compared to $10.1 million in fiscal 2015, of which approximately $3.9 million of orders were existing backlog orders acquired with the Milltronics product line in July 2015. European orders for fiscal 2016 were $121.5 million, a decrease of $5.0 million, or 4%, compared to fiscal 2015, primarily due to the negative impact of currency when translating foreign orders to U.S. dollars for financial reporting purposes. Asian Pacific orders for fiscal 2016 were $26.8 million, an increase of $2.1 million, or 9%, compared to fiscal 2015 and 24 25 included a negative currency impact of $1.1 million, or 5%, when translating foreign orders to U.S. dollars for financial reporting purposes. The year-over-year increase in Asian Pacific orders were due primarily to increased customer demand for the Takumi product line in China. Asian Pacific orders for fiscal 2016 included $12.7 million of orders from the Takumi product line, compared to $10.6 million in fiscal 2015, of which approximately $8.6 million of orders were existing backlog orders acquired with the Takumi product line in July 2015. Backlog was $32.3 million at October 31, 2016 compared to $41.2 million at October 31, 2015. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2016 are expected to be fulfilled in fiscal 2017. Gross Profit. Gross profit for fiscal 2016 was $70.4 million, or 31% of sales, which was consistent with gross profit for fiscal 2015 of $69.1 million, or 31% of sales. Operating Expenses. Selling, general and administrative expenses for fiscal 2016 were $50.8 million, or 22% of sales, compared to $45.3 million, or 21% of sales, for fiscal 2015. The year-over-year increase in operating expenses for fiscal 2016 was primarily due to increased trade show expenses, increased employee support costs for global sales operations, and incremental annualized operating expenses associated with the acquisitions of the Milltronics and Takumi product lines since July 2015. Operating Income. Operating income for fiscal 2016 was $19.6 million, or 9% of sales, compared to $23.8 million, or 11% of sales, in fiscal 2015. The year-over-year reduction in operating income was primarily attributable to increased operating expenses associated with increased trade show expenses, increased employee support costs for global sales operations, and incremental operating expenses associated with the acquisitions of the Milltronics and Takumi product lines since July 2015. Other Expense, Net. Other expense, net for fiscal 2016 increased by $0.5 million from fiscal 2015 due mainly to higher foreign currency losses experienced in 2016 and the elimination of a one-time out-of- Provision for Income Taxes. Our effective tax rate for fiscal 2016 was 30% in comparison to 31% for fiscal 2015. The decrease in the effective income tax rate for fiscal 2016 was due primarily to changes in the geographic mix of income or loss among tax jurisdictions. Net Income. Net income for fiscal 2016 was $13.3 million, or $1.99 per diluted share, a decrease of $2.9 million, or 18%, from fiscal 2015 net income of $16.2 million, or $2.44 per diluted share. Fiscal 2015 Compared to Fiscal 2014 Sales and Service Fees. Sales and service fees for fiscal 2015 were $219.4 million, a decrease of $2.9 million, or 1%, compared to fiscal 2014 and included a negative currency impact of $21.2 million, or 10%, compared to fiscal 2014. Sales for fiscal 2015 included $10.0 million of sales activities from the acquisitions of the Takumi and Milltronics product lines in July 2015 until the end of fiscal 2015. 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, 2015 and 2014 (in thousands): October 31, 2015 2014 Americas Europe Asia Pacific Total $ 70,169 129,335 19,879 $219,383 32% 59% 9% 100% $ 62,142 138,201 21,960 $222,303 28% 62% 10% 100% $ (2,920) Increase/Decrease Amount % $ 8,027 (8,866) (2,081) 13% -6% -9% -1% Milltronics product line, compared to $6.7 million in fiscal 2015. European sales for fiscal 2016 Milltronics product line, compared to $6.7 million in fiscal 2015. European sales for fiscal 2016 decreased by 4% compared to fiscal 2015 and included a negative currency impact of 5% when decreased by 4% compared to fiscal 2015 and included a negative currency impact of 5% when translating foreign sales to U.S. dollars for financial reporting purposes. The slight year-over-year growth translating foreign sales to U.S. dollars for financial reporting purposes. The slight year-over-year growth in European sales for fiscal 2016, excluding the effect of the negative currency impact, was driven by in European sales for fiscal 2016, excluding the effect of the negative currency impact, was driven by increased shipments of higher-performance machines in Germany, France and Italy. Asian Pacific sales increased shipments of higher-performance machines in Germany, France and Italy. Asian Pacific sales for fiscal 2016 increased by 45% compared to fiscal 2015 and included a negative currency impact of 3% for fiscal 2016 increased by 45% compared to fiscal 2015 and included a negative currency impact of 3% when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year when translating foreign sales to U.S. dollars for financial reporting purposes. The year-over-year increase in Asian Pacific sales for fiscal 2016 was primarily attributable to twelve months of Takumi sales increase in Asian Pacific sales for fiscal 2016 was primarily attributable to twelve months of Takumi sales included in fiscal 2016 compared to only three months of sales activity from the acquisition of the included in fiscal 2016 compared to only three months of sales activity from the acquisition of the Takumi product line in July 2015 until the end of fiscal 2015. Asian Pacific sales for fiscal 2016 included Takumi product line in July 2015 until the end of fiscal 2015. Asian Pacific sales for fiscal 2016 included $14.6 million of sales from the Takumi product line, compared to $3.3 million for fiscal 2015. $14.6 million of sales from the Takumi product line, compared to $3.3 million for fiscal 2015. Net Sales and Service Fees by Product Category 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 The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2016 and 2015 (in thousands): ended October 31, 2016 and 2015 (in thousands): October 31, October 31, 2016 2016 2015 2015 Increase/ Decrease Increase/ Decrease Amount % Amount % $195,618 $195,618 86% 86% $189,712 $189,712 87% 87% $ 5,906 $ 5,906 3% 3% Computerized Computerized Machine Tools* Machine Tools* and Software† and Software† Service Parts Service Parts Service Fees Service Fees Total Total dates of those acquisitions. dates of those acquisitions. machine systems. machine systems. Computer Control Systems Computer Control Systems 2,078 2,078 1% 1% 3,085 3,085 (1,007) (1,007) -33% -33% 21,908 21,908 7,685 7,685 $227,289 $227,289 10% 10% 3% 3% 19,375 19,375 7,211 7,211 100% 100% $219,383 $219,383 100% 100% 2,533 2,533 474 474 $ 7,906 $ 7,906 13% 13% 7% 7% 4% 4% 1% 1% 9% 9% 3% 3% * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective † Amounts shown do not include computer control systems and software sold as an integrated component of computerized † Amounts shown do not include computer control systems and software sold as an integrated component of computerized Sales of computerized machine tools and service parts increased during fiscal 2016 by 3% and 13%, Sales of computerized machine tools and service parts increased during fiscal 2016 by 3% and 13%, respectively, compared to fiscal 2015 primarily due to the impact of twelve months of Milltronics and respectively, compared to fiscal 2015 primarily due to the impact of twelve months of Milltronics and Takumi sales in fiscal 2016 compared to only three months of sales activity from the acquisitions of the Takumi sales in fiscal 2016 compared to only three months of sales activity from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015, as well as year-end Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015, as well as year-end promotional activities following the International Manufacturing Technology Show (“IMTS”) in promotional activities following the International Manufacturing Technology Show (“IMTS”) in September 2016. Sales of computer control systems and software decreased by 33% during fiscal 2016 September 2016. Sales of computer control systems and software decreased by 33% during fiscal 2016 compared to fiscal 2015 as a result of a reduction in sales for the Autobend® product line in the Americas compared to fiscal 2015 as a result of a reduction in sales for the Autobend® product line in the Americas and the United Kingdom. Service fees revenue increased during fiscal 2016 by 7% compared to fiscal and the United Kingdom. Service fees revenue increased during fiscal 2016 by 7% compared to fiscal 2015 primarily due to increased repair needs from customers in the Americas, the United Kingdom and 2015 primarily due to increased repair needs from customers in the Americas, the United Kingdom and France. France. Orders and Backlog. Orders for fiscal 2016 were $219.2 million, a decrease of $4.0 million, or 2%, Orders and Backlog. Orders for fiscal 2016 were $219.2 million, a decrease of $4.0 million, or 2%, compared to fiscal 2015 and included a negative currency impact of $6.5 million, or 3%, when translating compared to fiscal 2015 and included a negative currency impact of $6.5 million, or 3%, when translating foreign orders to U.S. dollars for financial reporting purposes. Orders in the Americas for fiscal 2016 foreign orders to U.S. dollars for financial reporting purposes. Orders in the Americas for fiscal 2016 were $70.9 million, a decrease of $1.1 million, or 1%, compared to fiscal 2015, reflecting an overall were $70.9 million, a decrease of $1.1 million, or 1%, compared to fiscal 2015, reflecting an overall softer market and the impact of pricing pressures in this region, partially offset by the impact of twelve softer market and the impact of pricing pressures in this region, partially offset by the impact of twelve months of Milltronics sales in fiscal 2016 compared to only three months in fiscal 2015. Orders in the months of Milltronics sales in fiscal 2016 compared to only three months in fiscal 2015. Orders in the Americas for fiscal 2016 included $15.7 million of orders from the Milltronics product line, compared to Americas for fiscal 2016 included $15.7 million of orders from the Milltronics product line, compared to $10.1 million in fiscal 2015, of which approximately $3.9 million of orders were existing backlog orders $10.1 million in fiscal 2015, of which approximately $3.9 million of orders were existing backlog orders acquired with the Milltronics product line in July 2015. European orders for fiscal 2016 were $121.5 acquired with the Milltronics product line in July 2015. European orders for fiscal 2016 were $121.5 million, a decrease of $5.0 million, or 4%, compared to fiscal 2015, primarily due to the negative impact million, a decrease of $5.0 million, or 4%, compared to fiscal 2015, primarily due to the negative impact of currency when translating foreign orders to U.S. dollars for financial reporting purposes. Asian Pacific of currency when translating foreign orders to U.S. dollars for financial reporting purposes. Asian Pacific orders for fiscal 2016 were $26.8 million, an increase of $2.1 million, or 9%, compared to fiscal 2015 and orders for fiscal 2016 were $26.8 million, an increase of $2.1 million, or 9%, compared to fiscal 2015 and included a negative currency impact of $1.1 million, or 5%, when translating foreign orders to U.S. included a negative currency impact of $1.1 million, or 5%, when translating foreign orders to U.S. dollars for financial reporting purposes. The year-over-year increase in Asian Pacific orders were due dollars for financial reporting purposes. The year-over-year increase in Asian Pacific orders were due primarily to increased customer demand for the Takumi product line in China. Asian Pacific orders for primarily to increased customer demand for the Takumi product line in China. Asian Pacific orders for fiscal 2016 included $12.7 million of orders from the Takumi product line, compared to $10.6 million in fiscal 2016 included $12.7 million of orders from the Takumi product line, compared to $10.6 million in fiscal 2015, of which approximately $8.6 million of orders were existing backlog orders acquired with the fiscal 2015, of which approximately $8.6 million of orders were existing backlog orders acquired with the Takumi product line in July 2015. Takumi product line in July 2015. Backlog was $32.3 million at October 31, 2016 compared to $41.2 million at October 31, 2015. We do Backlog was $32.3 million at October 31, 2016 compared to $41.2 million at October 31, 2015. We do not believe backlog is a useful measure of past performance or indicative of future performance. Backlog not believe backlog is a useful measure of past performance or indicative of future performance. Backlog orders as of October 31, 2016 are expected to be fulfilled in fiscal 2017. orders as of October 31, 2016 are expected to be fulfilled in fiscal 2017. Gross Profit. Gross profit for fiscal 2016 was $70.4 million, or 31% of sales, which was consistent with Gross Profit. Gross profit for fiscal 2016 was $70.4 million, or 31% of sales, which was consistent with gross profit for fiscal 2015 of $69.1 million, or 31% of sales. gross profit for fiscal 2015 of $69.1 million, or 31% of sales. Operating Expenses. Selling, general and administrative expenses for fiscal 2016 were $50.8 million, or Operating Expenses. Selling, general and administrative expenses for fiscal 2016 were $50.8 million, or 22% of sales, compared to $45.3 million, or 21% of sales, for fiscal 2015. The year-over-year increase in 22% of sales, compared to $45.3 million, or 21% of sales, for fiscal 2015. The year-over-year increase in operating expenses for fiscal 2016 was primarily due to increased trade show expenses, increased operating expenses for fiscal 2016 was primarily due to increased trade show expenses, increased employee support costs for global sales operations, and incremental annualized operating expenses employee support costs for global sales operations, and incremental annualized operating expenses associated with the acquisitions of the Milltronics and Takumi product lines since July 2015. associated with the acquisitions of the Milltronics and Takumi product lines since July 2015. Operating Income. Operating income for fiscal 2016 was $19.6 million, or 9% of sales, compared to Operating Income. Operating income for fiscal 2016 was $19.6 million, or 9% of sales, compared to $23.8 million, or 11% of sales, in fiscal 2015. The year-over-year reduction in operating income was $23.8 million, or 11% of sales, in fiscal 2015. The year-over-year reduction in operating income was primarily attributable to increased operating expenses associated with increased trade show expenses, primarily attributable to increased operating expenses associated with increased trade show expenses, increased employee support costs for global sales operations, and incremental operating expenses increased employee support costs for global sales operations, and incremental operating expenses associated with the acquisitions of the Milltronics and Takumi product lines since July 2015. associated with the acquisitions of the Milltronics and Takumi product lines since July 2015. Other Expense, Net. Other expense, net for fiscal 2016 increased by $0.5 million from fiscal 2015 due Other Expense, Net. Other expense, net for fiscal 2016 increased by $0.5 million from fiscal 2015 due mainly to higher foreign currency losses experienced in 2016 and the elimination of a one-time out-of- mainly to higher foreign currency losses experienced in 2016 and the elimination of a one-time out-of- period income adjustment recorded in fiscal 2015. period income adjustment recorded in fiscal 2015. Provision for Income Taxes. Our effective tax rate for fiscal 2016 was 30% in comparison to 31% for Provision for Income Taxes. Our effective tax rate for fiscal 2016 was 30% in comparison to 31% for fiscal 2015. The decrease in the effective income tax rate for fiscal 2016 was due primarily to changes in fiscal 2015. The decrease in the effective income tax rate for fiscal 2016 was due primarily to changes in the geographic mix of income or loss among tax jurisdictions. the geographic mix of income or loss among tax jurisdictions. Net Income. Net income for fiscal 2016 was $13.3 million, or $1.99 per diluted share, a decrease of $2.9 Net Income. Net income for fiscal 2016 was $13.3 million, or $1.99 per diluted share, a decrease of $2.9 million, or 18%, from fiscal 2015 net income of $16.2 million, or $2.44 per diluted share. million, or 18%, from fiscal 2015 net income of $16.2 million, or $2.44 per diluted share. Fiscal 2015 Compared to Fiscal 2014 Fiscal 2015 Compared to Fiscal 2014 Sales and Service Fees. Sales and service fees for fiscal 2015 were $219.4 million, a decrease of $2.9 Sales and Service Fees. Sales and service fees for fiscal 2015 were $219.4 million, a decrease of $2.9 million, or 1%, compared to fiscal 2014 and included a negative currency impact of $21.2 million, or million, or 1%, compared to fiscal 2014 and included a negative currency impact of $21.2 million, or 10%, compared to fiscal 2014. Sales for fiscal 2015 included $10.0 million of sales activities from the 10%, compared to fiscal 2014. Sales for fiscal 2015 included $10.0 million of sales activities from the acquisitions of the Takumi and Milltronics product lines in July 2015 until the end of fiscal 2015. acquisitions of the Takumi and Milltronics product lines in July 2015 until the end of fiscal 2015. Net Sales and Service Fees by Geographic Region 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 The following table sets forth net sales and service fees by geographic region for the fiscal years ended October 31, 2015 and 2014 (in thousands): October 31, 2015 and 2014 (in thousands): October 31, October 31, 2015 2015 2014 2014 Americas Americas Europe Europe Asia Pacific Asia Pacific Total Total $ 70,169 $ 70,169 129,335 129,335 19,879 19,879 $219,383 $219,383 32% 32% 59% 59% 9% 9% 100% 100% $ 62,142 $ 62,142 138,201 138,201 21,960 21,960 $222,303 $222,303 Increase/Decrease Increase/Decrease Amount % Amount % $ 8,027 $ 8,027 (8,866) (8,866) (2,081) (2,081) $ (2,920) $ (2,920) 13% 13% -6% -6% -9% -9% -1% -1% 28% 28% 62% 62% 10% 10% 100% 100% 24 24 25 25 Sales in the Americas increased during fiscal 2015 by 13% compared to fiscal 2014 primarily due to three months of sales activity from the acquisition of the Milltronics product line in July 2015 until the end of fiscal 2015. Sales for the Milltronics product line in the Americas for fiscal 2015 were $6.7 million. European sales for fiscal 2015 decreased by 6% compared to fiscal 2014 and included a negative currency impact of 14%. Excluding the negative currency impact, the year-over-year growth in European sales was driven by increased shipments of higher-performance machines in Germany, France and Italy. Asian Pacific sales for fiscal 2015 decreased by 9% compared to fiscal 2014, primarily due to softer markets in China and India and the negative impact of currency. Asian Pacific sales for fiscal 2015 included $3.3 million of sales activity from the acquisition of the Takumi product line in July 2015 until the end of fiscal 2015. 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, 2015 and 2014 (in thousands): Computerized Machine Tools* Computer Control Systems and Software† Service Parts Service Fees Total October 31, 2015 2014 $189,712 87% $193,937 87% Increase/Decrease Amount % -2% $(4,225) 3,085 1% 3,407 2% (322) -9% 19,375 7,211 $219,383 9% 3% 100% 17,391 7,568 $222,303 8% 3% 100% 1,984 (357) $(2,920) 11% -5% -1% * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective dates of those acquisitions. † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. Sales of computerized machine tools decreased during fiscal 2015 by 2% compared to fiscal 2014 and included a negative currency impact of 9% when translating foreign sales to U.S. dollars for financial reporting purposes. Excluding the negative currency impact, the year-over-year increase in computerized machine tools was due to increased shipments of higher-performance machines in Germany and France, as well as the impact of three months of sales activity from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015. Sales of computer control systems and software decreased by 9% during fiscal 2015 compared to fiscal 2014 due primarily to decreased shipments of Autobend® press brake machines and optional software products in the Americas. Sales of service parts increased by 11% during fiscal 2015 compared to fiscal 2014 due mainly to three months of sales activity from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015. Service fees revenue for fiscal 2015 decreased by 5% compared to fiscal 2014 primarily due to the negative impact of currency when translating foreign sales to U.S. dollars for financial reporting purposes. Orders and Backlog. Orders for fiscal 2015 were $223.2 million, a decrease of $9.3 million, or 4%, compared to fiscal 2014 and included a negative currency impact of $21.2 million, or 9%, when translating foreign orders into U.S. dollars for financial reporting purposes. Orders in the Americas for fiscal 2015 were $72.0 million, an increase of $8.6 million, or 14%, compared to fiscal 2014. Orders in the Americas for fiscal 2015 included $10.1 million of orders related to the Milltronics product line. Excluding the orders related to the Milltronics product line, orders for the Americas decreased during fiscal 2015 compared to fiscal 2014 since promotional activities related to the International Manufacturing Technology Show held in September 2014 led to an increase in orders in fiscal 2014. European orders for fiscal 2015 were $126.5 million, a decrease of $22.0 million, or 15%, compared to fiscal 2014 and included a negative currency impact of $20.4 million, or 14%. Excluding the negative impact of currency, the slight year-over-year reduction in European orders was primarily driven by foreign currency weakness in the United Kingdom and fluctuating customer demand for electro- mechanical components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2015 were $24.7 million, an increase of $4.1 million, or 20%, compared to fiscal 2014. Asian Pacific orders for fiscal 2015 included $10.6 million of orders related to the Takumi product line. Excluding the orders related to the Takumi product line, Asian Pacific orders for fiscal 2015 decreased primarily due to softer market conditions in China and India. Backlog was $41.2 million at October 31, 2015 (which included $10.6 million of backlog for Milltronics and Takumi products) compared to $39.8 million at October 31, 2014. We do not believe backlog is a useful measure of past performance or indicative of future performance. Gross Profit. Gross profit for fiscal 2015 was $69.1 million, or 31% of sales, compared to $68.6 million, or 31% of sales, for fiscal 2014. The year-over-year improvement in gross profit was primarily attributable to increased sales of higher-performance machines across all regions, net of the pricing pressure and the negative impact of currency. Operating Expenses. Selling, general and administrative expenses for fiscal 2015 were $45.3 million, or 21% of sales, compared to $46.6 million, or 21% of sales, for fiscal 2014. Fiscal year 2015 expenses included approximately $2.4 million related to Milltronics and Takumi, of which $0.7 million represented one-time acquisition costs. Selling, general and administrative expenses for fiscal 2015 included a positive impact of approximately $3.2 million, or 1% of sales, when translating foreign expenses to U.S. dollars for financial reporting purposes. Operating Income. Operating income for fiscal 2015 was $23.8 million, or 11% of sales, compared to $22.0 million, or 10% of sales, in fiscal 2014. The year-over-year improvement in operating income was primarily attributable to increased sales of higher-performance machines across all regions. Other Expense, Net. Other expense, net for fiscal 2015 decreased by $0.4 million from fiscal 2014 as a result of a one-time out-of-period income adjustment recorded in fiscal 2015. Provision for Income Taxes. Our effective tax rate for fiscal 2015 was 31% in comparison to 29% for fiscal 2014. The increase in the effective income tax rate in fiscal 2015 was due primarily to changes in the geographic mix of income or loss among tax jurisdictions. Net Income. Net income for fiscal 2015 was $16.2 million, or $2.44 per diluted share, an increase of $1.1 million, or 7%, from fiscal 2014 net income of $15.1 million, or $2.30 per diluted share. Liquidity and Capital Resources At October 31, 2016, we had cash and cash equivalents of $41.2 million compared to $55.2 million at October 31, 2015. Approximately 54% of our $41.2 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 (including cash and cash equivalents) was $160.4 million at October 31, 2016 compared to $151.0 million at October 31, 2015. The increase in working capital was primarily due to increased inventories, which were $117.0 million at October 31, 2016, compared to $106.3 million at October 31, 2015. The increase in inventories was primarily due to a reduction in orders during fiscal 2016, as well as incremental computerized machine tools for the Milltronics and Takumi product lines, which contributed to our efforts in expanding our consolidated product range to meet customers’ needs. Inventory turns at October 31, 2016 were 1.4 compared to 1.6 turns at October 31, 2015. Capital expenditures were $4.2 million in fiscal 2016 compared to $4.5 million in fiscal 2015. Capital expenditures for fiscal 2016 were primarily for software development costs, purchases of factory 26 27 Sales in the Americas increased during fiscal 2015 by 13% compared to fiscal 2014 primarily due to three Sales in the Americas increased during fiscal 2015 by 13% compared to fiscal 2014 primarily due to three months of sales activity from the acquisition of the Milltronics product line in July 2015 until the end of months of sales activity from the acquisition of the Milltronics product line in July 2015 until the end of fiscal 2015. Sales for the Milltronics product line in the Americas for fiscal 2015 were $6.7 million. fiscal 2015. Sales for the Milltronics product line in the Americas for fiscal 2015 were $6.7 million. European sales for fiscal 2015 decreased by 6% compared to fiscal 2014 and included a negative currency European sales for fiscal 2015 decreased by 6% compared to fiscal 2014 and included a negative currency impact of 14%. Excluding the negative currency impact, the year-over-year growth in European sales impact of 14%. Excluding the negative currency impact, the year-over-year growth in European sales was driven by increased shipments of higher-performance machines in Germany, France and Italy. Asian was driven by increased shipments of higher-performance machines in Germany, France and Italy. Asian Pacific sales for fiscal 2015 decreased by 9% compared to fiscal 2014, primarily due to softer markets in Pacific sales for fiscal 2015 decreased by 9% compared to fiscal 2014, primarily due to softer markets in China and India and the negative impact of currency. Asian Pacific sales for fiscal 2015 included $3.3 China and India and the negative impact of currency. Asian Pacific sales for fiscal 2015 included $3.3 million of sales activity from the acquisition of the Takumi product line in July 2015 until the end of million of sales activity from the acquisition of the Takumi product line in July 2015 until the end of fiscal 2015. fiscal 2015. Net Sales and Service Fees by Product Category 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 The following table sets forth net sales and service fees by product group and services for the fiscal years ended October 31, 2015 and 2014 (in thousands): ended October 31, 2015 and 2014 (in thousands): Computerized Computerized Machine Tools* Machine Tools* Computer Control Computer Control Systems and Software† Systems and Software† Service Parts Service Parts Service Fees Service Fees Total Total dates of those acquisitions. dates of those acquisitions. machine systems. machine systems. October 31, October 31, 2015 2015 2014 2014 Increase/Decrease Increase/Decrease Amount % Amount % $189,712 $189,712 87% 87% $193,937 $193,937 87% 87% $(4,225) $(4,225) 3,085 3,085 19,375 19,375 7,211 7,211 $219,383 $219,383 1% 1% 9% 9% 3% 3% 3,407 3,407 17,391 17,391 7,568 7,568 2% 2% 8% 8% 3% 3% (322) (322) 1,984 1,984 (357) (357) 100% 100% $222,303 $222,303 100% 100% $(2,920) $(2,920) -2% -2% -9% -9% 11% 11% -5% -5% -1% -1% * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective † Amounts shown do not include computer control systems and software sold as an integrated component of computerized † Amounts shown do not include computer control systems and software sold as an integrated component of computerized Sales of computerized machine tools decreased during fiscal 2015 by 2% compared to fiscal 2014 and Sales of computerized machine tools decreased during fiscal 2015 by 2% compared to fiscal 2014 and included a negative currency impact of 9% when translating foreign sales to U.S. dollars for financial included a negative currency impact of 9% when translating foreign sales to U.S. dollars for financial reporting purposes. Excluding the negative currency impact, the year-over-year increase in computerized reporting purposes. Excluding the negative currency impact, the year-over-year increase in computerized machine tools was due to increased shipments of higher-performance machines in Germany and France, machine tools was due to increased shipments of higher-performance machines in Germany and France, as well as the impact of three months of sales activity from the acquisitions of the Milltronics and Takumi as well as the impact of three months of sales activity from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015. Sales of computer control systems and software product lines in July 2015 until the end of fiscal 2015. Sales of computer control systems and software decreased by 9% during fiscal 2015 compared to fiscal 2014 due primarily to decreased shipments of decreased by 9% during fiscal 2015 compared to fiscal 2014 due primarily to decreased shipments of Autobend® press brake machines and optional software products in the Americas. Sales of service parts Autobend® press brake machines and optional software products in the Americas. Sales of service parts increased by 11% during fiscal 2015 compared to fiscal 2014 due mainly to three months of sales activity increased by 11% during fiscal 2015 compared to fiscal 2014 due mainly to three months of sales activity from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal from the acquisitions of the Milltronics and Takumi product lines in July 2015 until the end of fiscal 2015. Service fees revenue for fiscal 2015 decreased by 5% compared to fiscal 2014 primarily due to the 2015. Service fees revenue for fiscal 2015 decreased by 5% compared to fiscal 2014 primarily due to the negative impact of currency when translating foreign sales to U.S. dollars for financial reporting negative impact of currency when translating foreign sales to U.S. dollars for financial reporting purposes. purposes. Orders and Backlog. Orders for fiscal 2015 were $223.2 million, a decrease of $9.3 million, or 4%, Orders and Backlog. Orders for fiscal 2015 were $223.2 million, a decrease of $9.3 million, or 4%, compared to fiscal 2014 and included a negative currency impact of $21.2 million, or 9%, when compared to fiscal 2014 and included a negative currency impact of $21.2 million, or 9%, when translating foreign orders into U.S. dollars for financial reporting purposes. Orders in the Americas for translating foreign orders into U.S. dollars for financial reporting purposes. Orders in the Americas for fiscal 2015 were $72.0 million, an increase of $8.6 million, or 14%, compared to fiscal 2014. Orders in fiscal 2015 were $72.0 million, an increase of $8.6 million, or 14%, compared to fiscal 2014. Orders in the Americas for fiscal 2015 included $10.1 million of orders related to the Milltronics product line. the Americas for fiscal 2015 included $10.1 million of orders related to the Milltronics product line. Excluding the orders related to the Milltronics product line, orders for the Americas decreased during Excluding the orders related to the Milltronics product line, orders for the Americas decreased during fiscal 2015 compared to fiscal 2014 since promotional activities related to the International fiscal 2015 compared to fiscal 2014 since promotional activities related to the International Manufacturing Technology Show held in September 2014 led to an increase in orders in fiscal 2014. Manufacturing Technology Show held in September 2014 led to an increase in orders in fiscal 2014. European orders for fiscal 2015 were $126.5 million, a decrease of $22.0 million, or 15%, compared to European orders for fiscal 2015 were $126.5 million, a decrease of $22.0 million, or 15%, compared to fiscal 2014 and included a negative currency impact of $20.4 million, or 14%. Excluding the negative fiscal 2014 and included a negative currency impact of $20.4 million, or 14%. Excluding the negative impact of currency, the slight year-over-year reduction in European orders was primarily driven by impact of currency, the slight year-over-year reduction in European orders was primarily driven by foreign currency weakness in the United Kingdom and fluctuating customer demand for electro- foreign currency weakness in the United Kingdom and fluctuating customer demand for electro- mechanical components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2015 mechanical components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2015 were $24.7 million, an increase of $4.1 million, or 20%, compared to fiscal 2014. Asian Pacific orders were $24.7 million, an increase of $4.1 million, or 20%, compared to fiscal 2014. Asian Pacific orders for fiscal 2015 included $10.6 million of orders related to the Takumi product line. Excluding the orders for fiscal 2015 included $10.6 million of orders related to the Takumi product line. Excluding the orders related to the Takumi product line, Asian Pacific orders for fiscal 2015 decreased primarily due to softer related to the Takumi product line, Asian Pacific orders for fiscal 2015 decreased primarily due to softer market conditions in China and India. market conditions in China and India. Backlog was $41.2 million at October 31, 2015 (which included $10.6 million of backlog for Milltronics Backlog was $41.2 million at October 31, 2015 (which included $10.6 million of backlog for Milltronics and Takumi products) compared to $39.8 million at October 31, 2014. We do not believe backlog is a and Takumi products) compared to $39.8 million at October 31, 2014. We do not believe backlog is a useful measure of past performance or indicative of future performance. useful measure of past performance or indicative of future performance. Gross Profit. Gross profit for fiscal 2015 was $69.1 million, or 31% of sales, compared to $68.6 million, Gross Profit. Gross profit for fiscal 2015 was $69.1 million, or 31% of sales, compared to $68.6 million, or 31% of sales, for fiscal 2014. The year-over-year improvement in gross profit was primarily or 31% of sales, for fiscal 2014. The year-over-year improvement in gross profit was primarily attributable to increased sales of higher-performance machines across all regions, net of the pricing attributable to increased sales of higher-performance machines across all regions, net of the pricing pressure and the negative impact of currency. pressure and the negative impact of currency. Operating Expenses. Selling, general and administrative expenses for fiscal 2015 were $45.3 million, or Operating Expenses. Selling, general and administrative expenses for fiscal 2015 were $45.3 million, or 21% of sales, compared to $46.6 million, or 21% of sales, for fiscal 2014. Fiscal year 2015 expenses 21% of sales, compared to $46.6 million, or 21% of sales, for fiscal 2014. Fiscal year 2015 expenses included approximately $2.4 million related to Milltronics and Takumi, of which $0.7 million represented included approximately $2.4 million related to Milltronics and Takumi, of which $0.7 million represented one-time acquisition costs. Selling, general and administrative expenses for fiscal 2015 included a one-time acquisition costs. Selling, general and administrative expenses for fiscal 2015 included a positive impact of approximately $3.2 million, or 1% of sales, when translating foreign expenses to U.S. positive impact of approximately $3.2 million, or 1% of sales, when translating foreign expenses to U.S. dollars for financial reporting purposes. dollars for financial reporting purposes. Operating Income. Operating income for fiscal 2015 was $23.8 million, or 11% of sales, compared to Operating Income. Operating income for fiscal 2015 was $23.8 million, or 11% of sales, compared to $22.0 million, or 10% of sales, in fiscal 2014. The year-over-year improvement in operating income was $22.0 million, or 10% of sales, in fiscal 2014. The year-over-year improvement in operating income was primarily attributable to increased sales of higher-performance machines across all regions. primarily attributable to increased sales of higher-performance machines across all regions. Other Expense, Net. Other expense, net for fiscal 2015 decreased by $0.4 million from fiscal 2014 as a Other Expense, Net. Other expense, net for fiscal 2015 decreased by $0.4 million from fiscal 2014 as a result of a one-time out-of-period income adjustment recorded in fiscal 2015. result of a one-time out-of-period income adjustment recorded in fiscal 2015. Provision for Income Taxes. Our effective tax rate for fiscal 2015 was 31% in comparison to 29% for Provision for Income Taxes. Our effective tax rate for fiscal 2015 was 31% in comparison to 29% for fiscal 2014. The increase in the effective income tax rate in fiscal 2015 was due primarily to changes in fiscal 2014. The increase in the effective income tax rate in fiscal 2015 was due primarily to changes in the geographic mix of income or loss among tax jurisdictions. the geographic mix of income or loss among tax jurisdictions. Net Income. Net income for fiscal 2015 was $16.2 million, or $2.44 per diluted share, an increase of $1.1 Net Income. Net income for fiscal 2015 was $16.2 million, or $2.44 per diluted share, an increase of $1.1 million, or 7%, from fiscal 2014 net income of $15.1 million, or $2.30 per diluted share. million, or 7%, from fiscal 2014 net income of $15.1 million, or $2.30 per diluted share. Liquidity and Capital Resources Liquidity and Capital Resources At October 31, 2016, we had cash and cash equivalents of $41.2 million compared to $55.2 million at At October 31, 2016, we had cash and cash equivalents of $41.2 million compared to $55.2 million at October 31, 2015. Approximately 54% of our $41.2 million of cash and cash equivalents is held in the October 31, 2015. Approximately 54% of our $41.2 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 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 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. reinvestment of these funds offshore impairs our ability to meet our domestic working capital needs. Working capital (including cash and cash equivalents) was $160.4 million at October 31, 2016 compared Working capital (including cash and cash equivalents) was $160.4 million at October 31, 2016 compared to $151.0 million at October 31, 2015. The increase in working capital was primarily due to increased to $151.0 million at October 31, 2015. The increase in working capital was primarily due to increased inventories, which were $117.0 million at October 31, 2016, compared to $106.3 million at October 31, inventories, which were $117.0 million at October 31, 2016, compared to $106.3 million at October 31, 2015. The increase in inventories was primarily due to a reduction in orders during fiscal 2016, as well as 2015. The increase in inventories was primarily due to a reduction in orders during fiscal 2016, as well as incremental computerized machine tools for the Milltronics and Takumi product lines, which contributed incremental computerized machine tools for the Milltronics and Takumi product lines, which contributed to our efforts in expanding our consolidated product range to meet customers’ needs. Inventory turns at to our efforts in expanding our consolidated product range to meet customers’ needs. Inventory turns at October 31, 2016 were 1.4 compared to 1.6 turns at October 31, 2015. October 31, 2016 were 1.4 compared to 1.6 turns at October 31, 2015. Capital expenditures were $4.2 million in fiscal 2016 compared to $4.5 million in fiscal 2015. Capital Capital expenditures were $4.2 million in fiscal 2016 compared to $4.5 million in fiscal 2015. Capital expenditures for fiscal 2016 were primarily for software development costs, purchases of factory expenditures for fiscal 2016 were primarily for software development costs, purchases of factory 26 26 27 27 equipment for production facilities, and purchases of general software and equipment for selling facilities. We funded these expenditures with cash flows from operations. On December 6, 2016, we amended our U.S. credit agreement, among other things, to increase the unsecured revolving credit facility from $12.5 million to $15.0 million, to increase the cash dividend allowance from $4.0 million per calendar year to $5.0 million per calendar year, and to extend the scheduled maturity date to December 31, 2018. We also amended the U.S. credit agreement to increase the minimum working capital and minimum tangible net worth requirements from $90.0 million to $105.0 million and $120.0 million to $125.0 million, respectively. Borrowings under the U.S. credit agreement bear interest either at a LIBOR-based rate or a floating rate, in each case with an interest rate floor of 0.00%. The floating rate equals the greatest of (a) a one month LIBOR-based rate plus 1.00% per annum, (b) the federal funds effective rate plus 0.50% per annum, (c) the prevailing prime rate, and (d) 0.00%. The rate paid for the unutilized portion of the U.S. credit agreement is 0.05% per annum. The U.S. credit agreement contains customary financial covenants, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $5.0 million), (2) requiring that we maintain a minimum working capital of $105.0 million, and (3) requiring that we maintain a minimum tangible net worth of $125.0 million. The U.S. credit agreement permits us to pay cash dividends in an amount not to exceed $5.0 million per calendar year, so long as we are not in default before and after giving effect to such dividends. We have a £1.0 million revolving credit facility in England and a €1.5 million revolving credit facility in Germany. We also have a 40.0 million Chinese Yuan (approximately $5.9 million) credit facility in China that was renewed on February 17, 2016 with an expiration date of February 16, 2017. At October 31, 2016, we had $1.5 million of borrowings under our China credit facility. We had no other debt or borrowings under any of our other credit facilities. At October 31, 2016, we were in compliance with the covenants contained in all of our credit facilities and had $19.8 million of available borrowing capacity under those facilities. We believe our cash position and borrowing capacity under our credit facilities provides adequate liquidity to fund our operations over the next twelve months, pay quarterly cash dividends and execute our strategic plan for product innovation and targeted penetration of developing markets. We continue to receive and review information concerning businesses and assets, including intellectual property assets, available for potential acquisition. Contractual Obligations and Commitments The following is a table of contractual obligations and commitments as of October 31, 2016 (in thousands): Total $ 1,476 Short-term debt ............................. Operating leases ............................ 6,347 Other… ......................................... 4,212 $ 12,035 Total .............................................. Payments Due by Period Less than 1 Year $ 1,476 2,930 -- $ 4,406 1-3 Years $ -- 2,485 963 $ 3,448 3-5 Years $ -- 589 -- $ 589 More than 5 Years $ -- 343 3,249 $ 3,592 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 $1.1 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. We expect capital spending in fiscal 2017 to be approximately $5.9 million, which includes investments for capitalized software and capital equipment for all of our production and 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, 2016, we had 26 outstanding third party payment guarantees totaling approximately $1.2 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. Critical Accounting Policies and 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 require us to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Those judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates. Our accounting policies, including those described below, are frequently evaluated as our judgment and estimates are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Revenue Recognition - We recognize revenue from sales of our machine tool systems upon delivery of the product to the customer, which is normally at the time of shipment, because persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. Our computerized machine tools are general-purpose computer controlled machine tools that are typically used in stand-alone operations. Transfer of ownership and risk of loss are not contingent upon contractual customer acceptance. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process to be inconsequential and perfunctory. 28 29 equipment for production facilities, and purchases of general software and equipment for selling facilities. equipment for production facilities, and purchases of general software and equipment for selling facilities. We funded these expenditures with cash flows from operations. We funded these expenditures with cash flows from operations. On December 6, 2016, we amended our U.S. credit agreement, among other things, to increase the On December 6, 2016, we amended our U.S. credit agreement, among other things, to increase the unsecured revolving credit facility from $12.5 million to $15.0 million, to increase the cash dividend unsecured revolving credit facility from $12.5 million to $15.0 million, to increase the cash dividend allowance from $4.0 million per calendar year to $5.0 million per calendar year, and to extend the allowance from $4.0 million per calendar year to $5.0 million per calendar year, and to extend the scheduled maturity date to December 31, 2018. We also amended the U.S. credit agreement to increase scheduled maturity date to December 31, 2018. We also amended the U.S. credit agreement to increase the minimum working capital and minimum tangible net worth requirements from $90.0 million to the minimum working capital and minimum tangible net worth requirements from $90.0 million to $105.0 million and $120.0 million to $125.0 million, respectively. $105.0 million and $120.0 million to $125.0 million, respectively. Borrowings under the U.S. credit agreement bear interest either at a LIBOR-based rate or a floating rate, Borrowings under the U.S. credit agreement bear interest either at a LIBOR-based rate or a floating rate, in each case with an interest rate floor of 0.00%. The floating rate equals the greatest of (a) a one month in each case with an interest rate floor of 0.00%. The floating rate equals the greatest of (a) a one month LIBOR-based rate plus 1.00% per annum, (b) the federal funds effective rate plus 0.50% per annum, (c) LIBOR-based rate plus 1.00% per annum, (b) the federal funds effective rate plus 0.50% per annum, (c) the prevailing prime rate, and (d) 0.00%. The rate paid for the unutilized portion of the U.S. credit the prevailing prime rate, and (d) 0.00%. The rate paid for the unutilized portion of the U.S. credit agreement is 0.05% per annum. agreement is 0.05% per annum. The U.S. credit agreement contains customary financial covenants, including covenants (1) restricting us The U.S. credit agreement contains customary financial covenants, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $5.0 million), (2) requiring that we maintain a minimum working investments in subsidiaries of up to $5.0 million), (2) requiring that we maintain a minimum working capital of $105.0 million, and (3) requiring that we maintain a minimum tangible net worth of capital of $105.0 million, and (3) requiring that we maintain a minimum tangible net worth of $125.0 million. The U.S. credit agreement permits us to pay cash dividends in an amount not to exceed $125.0 million. The U.S. credit agreement permits us to pay cash dividends in an amount not to exceed $5.0 million per calendar year, so long as we are not in default before and after giving effect to such $5.0 million per calendar year, so long as we are not in default before and after giving effect to such dividends. dividends. We have a £1.0 million revolving credit facility in England and a €1.5 million revolving credit facility in We have a £1.0 million revolving credit facility in England and a €1.5 million revolving credit facility in Germany. We also have a 40.0 million Chinese Yuan (approximately $5.9 million) credit facility in China Germany. We also have a 40.0 million Chinese Yuan (approximately $5.9 million) credit facility in China that was renewed on February 17, 2016 with an expiration date of February 16, 2017. that was renewed on February 17, 2016 with an expiration date of February 16, 2017. At October 31, 2016, we had $1.5 million of borrowings under our China credit facility. We had no other At October 31, 2016, we had $1.5 million of borrowings under our China credit facility. We had no other debt or borrowings under any of our other credit facilities. At October 31, 2016, we were in compliance debt or borrowings under any of our other credit facilities. At October 31, 2016, we were in compliance with the covenants contained in all of our credit facilities and had $19.8 million of available borrowing with the covenants contained in all of our credit facilities and had $19.8 million of available borrowing capacity under those facilities. capacity under those facilities. We believe our cash position and borrowing capacity under our credit facilities provides adequate We believe our cash position and borrowing capacity under our credit facilities provides adequate liquidity to fund our operations over the next twelve months, pay quarterly cash dividends and execute liquidity to fund our operations over the next twelve months, pay quarterly cash dividends and execute our strategic plan for product innovation and targeted penetration of developing markets. our strategic plan for product innovation and targeted penetration of developing markets. We continue to receive and review information concerning businesses and assets, including intellectual We continue to receive and review information concerning businesses and assets, including intellectual property assets, available for potential acquisition. property assets, available for potential acquisition. Contractual Obligations and Commitments Contractual Obligations and Commitments The following is a table of contractual obligations and commitments as of October 31, 2016 (in The following is a table of contractual obligations and commitments as of October 31, 2016 (in thousands): thousands): Total Total Short-term debt ............................. Short-term debt ............................. $ 1,476 $ 1,476 Operating leases ............................ Operating leases ............................ 6,347 6,347 Other… ......................................... 4,212 Other… ......................................... 4,212 Total .............................................. Total .............................................. $ 12,035 $ 12,035 Payments Due by Period Payments Due by Period Less than Less than 1 Year 1 Year $ 1,476 $ 1,476 2,930 2,930 -- -- 1-3 1-3 Years Years 3-5 3-5 Years Years $ -- $ -- $ -- $ -- 2,485 2,485 963 963 589 589 -- -- More than More than 5 Years 5 Years $ -- $ -- 343 343 3,249 3,249 $ 4,406 $ 4,406 $ 3,448 $ 3,448 $ 589 $ 589 $ 3,592 $ 3,592 In addition to the contractual obligations and commitments disclosed above, we also have a variety of 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 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, 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 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 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 $1.1 million, agreements or arrangements. Unrecognized tax benefits in the amount of approximately $1.1 million, excluding any interest and penalties, have been excluded from the table above because we are unable to 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. determine a reasonably reliable estimate of the timing of future payment. We expect capital spending in fiscal 2017 to be approximately $5.9 million, which includes investments We expect capital spending in fiscal 2017 to be approximately $5.9 million, which includes investments for capitalized software and capital equipment for all of our production and selling facilities. We expect for capitalized software and capital equipment for all of our production and selling facilities. We expect to fund these commitments with cash on hand and cash generated from operations. to fund these commitments with cash on hand and cash generated from operations. Off Balance Sheet Arrangements Off Balance Sheet Arrangements From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale 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 of machines to customers that use financing. We follow Financial Accounting Standards Board (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“FASB”) guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460). As of October 31, 2016, we had 26 outstanding third party payment guarantees totaling (“ASC”) 460). As of October 31, 2016, we had 26 outstanding third party payment guarantees totaling approximately $1.2 million. The terms of these guarantees are consistent with the underlying customer approximately $1.2 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. value, which amounts are insignificant. Critical Accounting Policies and Estimates Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations is based upon our 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 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 Accounting Principles. The preparation of financial statements in conformity with those accounting principles require us to make judgments and estimates that affect the amounts reported in the consolidated principles require us to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Those judgments and estimates have a significant effect on financial statements and accompanying notes. Those judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ from those estimates. Our accounting matters that are inherently uncertain. Actual results could differ from those estimates. Our accounting policies, including those described below, are frequently evaluated as our judgment and estimates are policies, including those described below, are frequently evaluated as our judgment and estimates are based upon historical experience and on various other assumptions that are believed to be reasonable based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances. under the circumstances. Revenue Recognition - We recognize revenue from sales of our machine tool systems upon delivery of the Revenue Recognition - We recognize revenue from sales of our machine tool systems upon delivery of the product to the customer, which is normally at the time of shipment, because persuasive evidence of an product to the customer, which is normally at the time of shipment, because persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. Our computerized machine tools are general-purpose computer controlled machine reasonably assured. Our computerized machine tools are general-purpose computer controlled machine tools that are typically used in stand-alone operations. Transfer of ownership and risk of loss are not tools that are typically used in stand-alone operations. Transfer of ownership and risk of loss are not contingent upon contractual customer acceptance. Prior to shipment, we test each machine to ensure the contingent upon contractual customer acceptance. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. machine’s compliance with standard operating specifications. Depending upon geographic location, after shipment, a machine may be installed at the customer’s Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our service technicians. In most instances facilities by a distributor, independent contractor or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or 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 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 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 to that it is performing within the standard specifications. We consider the machine installation process to be inconsequential and perfunctory. be inconsequential and perfunctory. 28 28 29 29 affecting demand. We periodically review the carrying values of these assets and make judgments as to ultimate realization considering the above-mentioned risk factors. 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. Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the term of the contract. Sales related to software products are recognized when shipped in conformity with U.S. Generally Accepted Accounting Principles as promulgated by FASB related to software revenue recognition that requires at the time of shipment, persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. The software does not require production, modification or customization. Inventories – 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 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. 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. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S. or foreign tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made. The determination of our provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions. We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested abroad. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward-looking statements is based on currently effective tax laws. Significant changes in those laws could materially affect these estimates. We 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. 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. 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 30 31 affecting demand. We periodically review the carrying values of these assets and make judgments as to affecting demand. We periodically review the carrying values of these assets and make judgments as to ultimate realization considering the above-mentioned risk factors. ultimate realization considering the above-mentioned risk factors. Derivative Financial Instruments – Critical aspects of our accounting policy for derivative financial 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 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 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 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 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 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 earnings. We routinely monitor significant estimates, assumptions, and judgments associated with derivative instruments, and compliance with formal documentation requirements. derivative instruments, and compliance with formal documentation requirements. Stock Compensation – We account for share-based compensation according to FASB guidance relating to 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 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. 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 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 recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. requisite service period. Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the term of the contract. Sales related to software products are recognized when shipped in conformity the term of the contract. Sales related to software products are recognized when shipped in conformity with U.S. Generally Accepted Accounting Principles as promulgated by FASB related to software with U.S. Generally Accepted Accounting Principles as promulgated by FASB related to software revenue recognition that requires at the time of shipment, persuasive evidence of an arrangement exists, revenue recognition that requires at the time of shipment, persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. The software does not require production, modification or customization. The software does not require production, modification or customization. Inventories – We determine at each balance sheet date how much, if any, of our inventory may ultimately Inventories – 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 prove to be either unsalable or unsalable at its carrying cost. Reserves are established to effectively adjust the carrying value of such inventory to net realizable value. To determine the appropriate level of the carrying value of such inventory to net realizable value. To determine the appropriate level of valuation reserves, we evaluate current stock levels in relation to historical and expected patterns 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 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. conditions, competitive offerings and other factors on a regular basis. Income Taxes – We account for income taxes and the related accounts under the asset and liability 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 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 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 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. Our judgment more likely than not that some portion or all of the deferred tax assets will not be realized. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S. or foreign tax laws and other factors. These changes, if any, may require conditions, changes in U.S. or foreign tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made. income in the period when such determinations are made. The determination of our provision for income taxes requires judgment, the use of estimates and the The determination of our provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions. We have not provided for any U.S. income taxes on the undistributed earnings of our jurisdictions. We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested abroad. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were abroad. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these earnings are later distributed to the U.S., such approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. foreign tax credits. In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward-looking statements is based on currently effective tax laws. Significant changes in those laws forward-looking statements is based on currently effective tax laws. Significant changes in those laws could materially affect these estimates. could materially affect these estimates. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained 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 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 amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. being realized upon ultimate settlement. Impairment of Long-Lived Assets – We are required periodically to review the recoverability of certain 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 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 anticipated future cash flows, including future profitability assessments of various product lines. We estimate cash flows using internal budgets based on recent sales data. estimate cash flows using internal budgets based on recent sales data. Capitalized Software Development Costs – Costs incurred to develop computer software products and 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 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 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. 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 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 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 affected by technological developments, innovations by competitors and changes in market conditions 30 30 31 31 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables and are not designated as hedges under this guidance denominated in foreign currencies, were as follows: Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2016, we had $1.5 million of borrowings under our China credit facility. We had no other debt or borrowings under any of our other credit facilities. Foreign Currency Exchange Risk In fiscal 2016, we derived approximately 69% of our revenues from customers located outside of the U.S. All of our computerized machine tools and computer control systems assembled in Taiwan, 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, U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar and the Euro. We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows: Notional Amount in Foreign Currency Weighted Avg. Forward Rate Contract Amount at Forward Rates in U.S. Dollars Contract Date October 31, 2016 Maturity Dates 25,000,000 1.1202 $28,004,935 $27,600,641 Nov 2016-Oct 2017 4,925,000 1.3934 $ 6,862,675 $ 6,050,529 Nov 2016-Oct 2017 Forward Contracts Sale Contracts: Euro Sterling Purchase Contracts: New Taiwan Dollar 685,000,000 32.07* $21,361,677 $21,753,310 Nov 2016-Oct 2017 *NT Dollars per U.S. Dollar Notional Amount in Foreign Currency Weighted Contract Amount at Avg. Forward Rates in U.S. Dollars Forward Contract October 31, Rate Date 2016 Maturity Dates Forward Contracts Sale Contracts: Euro Purchase Contracts: * NT Dollars per U.S. Dollar 33,047,215 1.0998 $ 36,346,017 $ 36,469,657 Nov 2016-Apr 2017 Pound Sterling 1,634,180 1.2162 $ 1,987,522 $ 2,003,054 Nov 2016-Dec 2016 South African Rand 14,831,600 0.0698 $ 1,034,522 $ 1,062,494 Apr 2017 New Taiwan Dollar 838,537,514 31.32* $ 26,769,329 $ 26,593,682 Nov 2016–Feb 2017 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 2015. 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 derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated Other Comprehensive Loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matured in November 2016 and we entered into a new forward contract for the same notional amount that is set to mature in November 2017. As of October 31, 2016, we had a realized gain of $803,000 and an unrealized loss of $39,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which are designated as net investment hedges under this guidance were as follows: Notional Amount in Foreign Currency Weighted Avg. Forward Rate Contract Amount at Forward Rates in U.S. Dollars October 31, Contract Date 2016 Maturity Date Forward Contracts Sale Contracts: Euro 3,000,000 1.0775 $ 3,232,500 $ 3,292,170 Nov 2016 32 33 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Interest Rate Risk Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which were Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables and entered into to protect against the effects of foreign currency fluctuations on receivables and payables and are not designated as hedges under this guidance denominated in foreign currencies, were as follows: are not designated as hedges under this guidance denominated in foreign currencies, were as follows: Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest rates. At October 31, 2016, we had $1.5 million of borrowings under our China credit facility. interest rates. At October 31, 2016, we had $1.5 million of borrowings under our China credit facility. We had no other debt or borrowings under any of our other credit facilities. We had no other debt or borrowings under any of our other credit facilities. Foreign Currency Exchange Risk Foreign Currency Exchange Risk In fiscal 2016, we derived approximately 69% of our revenues from customers located outside of the U.S. In fiscal 2016, we derived approximately 69% of our revenues from customers located outside of the U.S. All of our computerized machine tools and computer control systems assembled in Taiwan, as well as All of our computerized machine tools and computer control systems assembled in Taiwan, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division 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. 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 Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned subsidiaries in Taiwan, U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our subsidiaries in Taiwan, 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 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 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 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. 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 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 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 (primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which are Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which are designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and hedging activities, were as follows: hedging activities, were as follows: Notional Notional Amount Amount in Foreign in Foreign Currency Currency Weighted Weighted Avg. Avg. Forward Forward Rate Rate Contract Amount at Forward Contract Amount at Forward Rates in U.S. Dollars Rates in U.S. Dollars Contract Contract October 31, October 31, Date Date 2016 2016 Maturity Dates Maturity Dates 25,000,000 25,000,000 1.1202 1.1202 $28,004,935 $27,600,641 Nov 2016-Oct 2017 $28,004,935 $27,600,641 Nov 2016-Oct 2017 4,925,000 4,925,000 1.3934 1.3934 $ 6,862,675 $ 6,050,529 Nov 2016-Oct 2017 $ 6,862,675 $ 6,050,529 Nov 2016-Oct 2017 New Taiwan Dollar New Taiwan Dollar 685,000,000 685,000,000 32.07* 32.07* $21,361,677 $21,753,310 Nov 2016-Oct 2017 $21,361,677 $21,753,310 Nov 2016-Oct 2017 Forward Forward Contracts Contracts Sale Contracts: Sale Contracts: Euro Euro Sterling Sterling Purchase Contracts: Purchase Contracts: *NT Dollars per U.S. Dollar *NT Dollars per U.S. Dollar Forward Forward Contracts Contracts Sale Contracts: Sale Contracts: Euro Euro Notional Notional Amount Amount in Foreign in Foreign Currency Currency Weighted Weighted Avg. Avg. Forward Forward Rate Rate Contract Amount at Contract Amount at Forward Rates in U.S. Dollars Forward Rates in U.S. Dollars Contract Contract Date Date October 31, October 31, 2016 2016 Maturity Dates Maturity Dates 33,047,215 33,047,215 1.0998 1.0998 $ 36,346,017 $ 36,346,017 $ 36,469,657 Nov 2016-Apr 2017 $ 36,469,657 Nov 2016-Apr 2017 Pound Sterling Pound Sterling 1,634,180 1,634,180 1.2162 1.2162 $ 1,987,522 $ 1,987,522 $ 2,003,054 Nov 2016-Dec 2016 $ 2,003,054 Nov 2016-Dec 2016 South African Rand South African Rand 14,831,600 14,831,600 0.0698 0.0698 $ 1,034,522 $ 1,034,522 $ 1,062,494 Apr 2017 $ 1,062,494 Apr 2017 Purchase Contracts: Purchase Contracts: New Taiwan Dollar New Taiwan Dollar 838,537,514 838,537,514 31.32* 31.32* $ 26,769,329 $ 26,769,329 $ 26,593,682 Nov 2016–Feb 2017 $ 26,593,682 Nov 2016–Feb 2017 * NT Dollars per U.S. Dollar * NT Dollars per U.S. Dollar We are exposed to foreign currency exchange risk related to our investment in net assets in foreign 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 countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2015. We designated this forward contract as a hedge of our net investment in Euro in November 2015. 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 denominated assets. We selected the forward method under the FASB guidance related to the accounting for derivatives instruments and hedging activities. The forward method requires all changes in the fair for derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated Other value of the contract to be reported as a cumulative translation adjustment in Accumulated Other Comprehensive Loss, net of tax, in the same manner as the underlying hedged net assets. This forward Comprehensive Loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matured in November 2016 and we entered into a new forward contract for the same notional contract matured in November 2016 and we entered into a new forward contract for the same notional amount that is set to mature in November 2017. As of October 31, 2016, we had a realized gain of amount that is set to mature in November 2017. As of October 31, 2016, we had a realized gain of $803,000 and an unrealized loss of $39,000, net of tax, recorded as cumulative translation adjustments in $803,000 and an unrealized loss of $39,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. Accumulated other comprehensive loss, related to these forward contracts. Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which are Forward contracts for the sale or purchase of foreign currencies as of October 31, 2016, which are designated as net investment hedges under this guidance were as follows: designated as net investment hedges under this guidance were as follows: Notional Notional Amount Amount in Foreign in Foreign Currency Currency Weighted Weighted Avg. Avg. Forward Forward Rate Rate Contract Amount at Contract Amount at Forward Rates in U.S. Dollars Forward Rates in U.S. Dollars October 31, October 31, 2016 2016 Contract Contract Date Date Maturity Date Maturity Date Forward Forward Contracts Contracts Sale Contracts: Sale Contracts: Euro Euro 3,000,000 3,000,000 1.0775 1.0775 $ 3,232,500 $ 3,232,500 $ 3,292,170 $ 3,292,170 Nov 2016 Nov 2016 32 32 33 33 Management’s Annual Report on Internal Control over Financial Reporting Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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, 2016, 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 these 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, 2016, was effective based on the criteria specified above. Our independent registered accounting firm, Ernst & Young LLP, who also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting as of October 31, 2016. Ernst & Young has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K. /s/ Michael Doar Michael Doar, Chairman of the Board and Chief Executive Officer /s/ Sonja K. McClelland Sonja K. McClelland Vice President, Secretary, Treasurer and Chief Financial Officer Indianapolis, Indiana January 6, 2017 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Hurco Companies, Inc. We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. as of October 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2016. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hurco Companies, Inc. at October 31, 2016 and 2015 and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2016 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hurco Companies, Inc.’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 6, 2017 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Indianapolis, Indiana January 6, 2017 34 35 Management’s Annual Report on Internal Control over Financial Reporting Management’s Annual Report on Internal Control over Financial Reporting Item 8. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA To the Shareholders and To the Shareholders and Board of Directors Board of Directors of Hurco Companies, Inc. of Hurco Companies, Inc. Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2016, based on criteria established Company’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Management is responsible for these financial Treadway Commission (2013 framework) (COSO). Management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. effectiveness of internal control over financial reporting. Because of its inherent limitations, the Company’s internal control over financial reporting may not 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 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 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. 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, 2016, In management’s opinion, the Company’s internal control over financial reporting as of October 31, 2016, was effective based on the criteria specified above. was effective based on the criteria specified above. Our independent registered accounting firm, Ernst & Young LLP, who also audited our consolidated Our independent registered accounting firm, Ernst & Young LLP, who also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting as of financial statements, audited the effectiveness of our internal control over financial reporting as of October 31, 2016. Ernst & Young has issued their attestation report, which is included in Part II, Item 8 October 31, 2016. Ernst & Young has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K. of this Annual Report on Form 10-K. Chairman of the Board and Chief Executive Officer Chairman of the Board and Chief Executive Officer Vice President, Secretary, Treasurer and Chief Financial Officer Vice President, Secretary, Treasurer and Chief Financial Officer /s/ Michael Doar /s/ Michael Doar Michael Doar, Michael Doar, /s/ Sonja K. McClelland /s/ Sonja K. McClelland Sonja K. McClelland Sonja K. McClelland Indianapolis, Indiana Indianapolis, Indiana January 6, 2017 January 6, 2017 Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm To the Shareholders and To the Shareholders and Board of Directors Board of Directors of Hurco Companies, Inc. of Hurco Companies, Inc. We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. as of We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. as of October 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, October 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2016. Our audits also included the financial statement schedule listed at Item 15(a). These financial 2016. Our audits also included the financial statement schedule listed at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hurco Companies, Inc. at October 31, 2016 and 2015 and the consolidated financial position of Hurco Companies, Inc. at October 31, 2016 and 2015 and the consolidated results of its operations and its cash flows for each of the three years in the period ended consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2016 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, October 31, 2016 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hurco Companies, Inc.’s internal control over financial reporting as of October 31, Board (United States), Hurco Companies, Inc.’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Commission 2016, based on criteria established in Internal Control – Integrated Framework issued by the Commission of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated January 6, 2017 expressed an unqualified opinion thereon. January 6, 2017 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP /s/ Ernst & Young LLP Indianapolis, Indiana Indianapolis, Indiana January 6, 2017 January 6, 2017 34 34 35 35 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Hurco Companies, Inc. We have audited Hurco Companies, Inc.’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Hurco Companies, Inc.’s management is responsible 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 internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 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. In our opinion, Hurco Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2016, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hurco Companies, Inc. as of October 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2016 of Hurco Companies, Inc. and our report dated January 6, 2017 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Indianapolis, Indiana January 6, 2017 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME Year Ended October 31, 2016 2015 2014 (In thousands, except per share amounts) Sales and service fees ................................................................. $ 227,289 $219,383 $222,303 Cost of sales and service ............................................................. 156,849 150,292 153,691 Gross profit ............................................................................ 70,440 69,091 68,612 Selling, general and administrative expenses .............................. 50,824 45,287 46,615 Operating income ................................................................... 19,616 23,804 21,997 Interest expense ........................................................................... 72 198 264 Interest income ............................................................................ 40 76 78 Investment income ...................................................................... 149 78 42 Income from equity investments ................................................. 466 474 444 Other expense, net ....................................................................... 1,314 681 936 Income before income taxes ........................................................ 18,885 23,553 21,361 Provision for income taxes .......................................................... 5,593 7,339 6,218 Net income ............................................................................... $ 13,292 $ 16,214 $ 15,143 Income per common share – basic .............................................. $ 2.01 $ 2.46 $ 2.31 Weighted average common shares outstanding – basic............... 6,569 6,543 6,497 Income per common share – diluted ........................................... $ 1.99 $ 2.44 $ 2.30 Weighted average common shares outstanding – diluted ............ 6,642 6,602 6,538 Dividends paid per share ............................................................. $ .35 $ .31 $ .26 The accompanying notes are an integral part of the consolidated financial statements. 36 37 2016 2016 2014 2014 Year Ended October 31, Year Ended October 31, 2015 2015 (In thousands, except per share amounts) (In thousands, except per share amounts) HURCO COMPANIES, INC. HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm To the Shareholders and To the Shareholders and Board of Directors Board of Directors of Hurco Companies, Inc. of Hurco Companies, Inc. We have audited Hurco Companies, Inc.’s internal control over financial reporting as of October 31, We have audited Hurco Companies, Inc.’s internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Hurco Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Hurco Companies, Inc.’s management is responsible for maintaining effective internal control over financial Companies, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included 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 in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. our audit. opinion. opinion. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our A company’s internal control over financial reporting is a process designed to provide reasonable 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 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 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 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 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 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, 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 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 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 or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect 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 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 risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. compliance with the policies or procedures may deteriorate. In our opinion, Hurco Companies, Inc. maintained, in all material respects, effective internal control over In our opinion, Hurco Companies, Inc. maintained, in all material respects, effective internal control over financial reporting as of October 31, 2016, based on the COSO criteria. financial reporting as of October 31, 2016, based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hurco Companies, Inc. as of October 31, 2016 Board (United States), the consolidated balance sheets of Hurco Companies, Inc. as of October 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in and 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2016 of shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2016 of Hurco Companies, Inc. and our report dated January 6, 2017 expressed an unqualified opinion thereon. Hurco Companies, Inc. and our report dated January 6, 2017 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP /s/ Ernst & Young LLP Indianapolis, Indiana Indianapolis, Indiana January 6, 2017 January 6, 2017 Sales and service fees ................................................................. Sales and service fees ................................................................. $ 227,289 $ 227,289 $219,383 $219,383 $222,303 $222,303 Cost of sales and service ............................................................. Cost of sales and service ............................................................. 156,849 156,849 150,292 150,292 153,691 153,691 Gross profit ............................................................................ Gross profit ............................................................................ 70,440 70,440 69,091 69,091 68,612 68,612 Selling, general and administrative expenses .............................. Selling, general and administrative expenses .............................. 50,824 50,824 45,287 45,287 46,615 46,615 Operating income ................................................................... Operating income ................................................................... 19,616 19,616 23,804 23,804 21,997 21,997 Interest expense ........................................................................... Interest expense ........................................................................... 72 72 198 198 264 264 Interest income ............................................................................ Interest income ............................................................................ 40 40 76 76 78 78 Investment income ...................................................................... Investment income ...................................................................... 149 149 78 78 42 42 Income from equity investments ................................................. Income from equity investments ................................................. 466 466 474 474 444 444 Other expense, net ....................................................................... Other expense, net ....................................................................... 1,314 1,314 681 681 936 936 Income before income taxes ........................................................ Income before income taxes ........................................................ 18,885 18,885 23,553 23,553 21,361 21,361 Provision for income taxes .......................................................... Provision for income taxes .......................................................... 5,593 5,593 7,339 7,339 6,218 6,218 Net income ............................................................................... Net income ............................................................................... $ 13,292 $ 13,292 $ 16,214 $ 16,214 $ 15,143 $ 15,143 Income per common share – basic .............................................. Income per common share – basic .............................................. $ 2.01 $ 2.01 $ 2.46 $ 2.46 $ 2.31 $ 2.31 Weighted average common shares outstanding – basic............... Weighted average common shares outstanding – basic............... 6,569 6,569 6,543 6,543 6,497 6,497 Income per common share – diluted ........................................... Income per common share – diluted ........................................... $ 1.99 $ 1.99 $ 2.44 $ 2.44 $ 2.30 $ 2.30 Weighted average common shares outstanding – diluted ............ Weighted average common shares outstanding – diluted ............ 6,642 6,642 6,602 6,602 6,538 6,538 Dividends paid per share ............................................................. Dividends paid per share ............................................................. $ .35 $ .35 $ .31 $ .31 $ .26 $ .26 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 36 36 37 37 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS Year Ended October 31, 2015 2014 2016 (In thousands) Cash and cash equivalents ................................................................... $ 41,217 $ 55,237 As of October 31, 2016 2015 (In thousands, except share and per share data) Net Income .................................................................................. $ 13,292 $ 16,214 $ 15,143 Other comprehensive income (loss): Translation gain (loss) of foreign currency financial statements . (1,441) (6,333) (3,535) (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(906), $(431), and $621, respectively . (1,647) (784) 1,129 Gain / (loss) on derivative instruments, net of tax of $787, $712, and $458, respectively ................................................................. 1,431 1,291 830 Total other comprehensive income (loss) (1,657) (5,826) (1,576) Comprehensive income ........................................................... $ 11,635 $ 10,388 $ 13,567 ASSETS Current assets: Accounts receivable, less allowance for doubtful accounts of $664 in 2016 and $739 in 2015 ................................................ Inventories, net .................................................................................... Derivative assets .................................................................................. Prepaid assets ...................................................................................... Other .................................................................................................... Total current assets ........................................................................ Property and equipment: Land .................................................................................................... Building .............................................................................................. Machinery and equipment .................................................................. Leasehold improvements .................................................................... Less accumulated depreciation and amortization ............................... Total property and equipment, net Non-current assets: Software development costs, less accumulated amortization ............. Goodwill .............................................................................................. Intangible assets, net............................................................................ Deferred income taxes ......................................................................... Investments and other assets, net ......................................................... Total non-current assets Total assets Current liabilities: Accounts payable ................................................................................ Accounts payable-related parties ........................................................ Accrued expenses and other ............................................................... Accrued warranty expenses ................................................................ Derivative liabilities ........................................................................... Short-term debt ................................................................................... Total current liabilities .................................................................. Non-current liabilities: Deferred income taxes ......................................................................... Accrued tax liability ............................................................................ Deferred credits and other ................................................................... Total non-current liabilities ........................................................... Shareholders’ equity: Preferred stock: no par value per share, 1,000,000 shares Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized, 6,720,453 and 6,650,517 shares issued; and 6,573,103 and 6,551,718 shares outstanding, as of October 31, 2016 and October 31, 2015, respectively ...................................... Additional paid-in capital ................................................................... Retained earnings ................................................................................ Accumulated other comprehensive loss .............................................. Total shareholders’ equity ............................................................. Total liabilities and shareholders’ equity 48,631 117,025 1,725 8,207 1,576 218,381 841 7,352 23,515 3,487 35,195 (22,898) 12,297 4,926 2,314 1,150 6,138 6,743 21,271 $ 251,949 $ 35,210 1,990 17,231 1,523 538 1,476 57,968 4,294 963 3,249 8,506 41,766 106,308 1,228 9,769 1,804 216,112 841 7,314 24,026 3,323 35,504 (22,362) 13,142 3,905 2,319 1,289 4,721 7,089 19,323 $ 248,577 $ 41,678 1,780 16,788 2,186 1,071 1,583 65,086 3,998 953 3,972 8,923 657 59,119 136,742 (11,043) 185,475 $ 251,949 655 57,539 125,760 (9,386) 174,568 $ 248,577 authorized, no shares issued .......................................................... -- -- LIABILITIES AND SHAREHOLDERS’ EQUITY The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 38 39 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS CONSOLIDATED BALANCE SHEETS Year Ended October 31, Year Ended October 31, 2016 2016 2015 2015 (In thousands) (In thousands) 2014 2014 Net Income .................................................................................. Net Income .................................................................................. $ 13,292 $ 13,292 $ 16,214 $ 16,214 $ 15,143 $ 15,143 Other comprehensive income (loss): Other comprehensive income (loss): Translation gain (loss) of foreign currency financial statements . Translation gain (loss) of foreign currency financial statements . (1,441) (1,441) (6,333) (6,333) (3,535) (3,535) (Gain) / loss on derivative instruments reclassified into (Gain) / loss on derivative instruments reclassified into operations, net of tax of $(906), $(431), and $621, respectively . operations, net of tax of $(906), $(431), and $621, respectively . (1,647) (1,647) (784) (784) 1,129 1,129 Gain / (loss) on derivative instruments, net of tax of $787, $712, Gain / (loss) on derivative instruments, net of tax of $787, $712, and $458, respectively ................................................................. and $458, respectively ................................................................. 1,431 1,431 1,291 1,291 830 830 Total other comprehensive income (loss) Total other comprehensive income (loss) (1,657) (1,657) (5,826) (5,826) (1,576) (1,576) Comprehensive income ........................................................... Comprehensive income ........................................................... $ 11,635 $ 11,635 $ 10,388 $ 10,388 $ 13,567 $ 13,567 ASSETS ASSETS Current assets: Current assets: Cash and cash equivalents ................................................................... Cash and cash equivalents ................................................................... Accounts receivable, less allowance for doubtful accounts Accounts receivable, less allowance for doubtful accounts of $664 in 2016 and $739 in 2015 ................................................ of $664 in 2016 and $739 in 2015 ................................................ Inventories, net .................................................................................... Inventories, net .................................................................................... Derivative assets .................................................................................. Derivative assets .................................................................................. Prepaid assets ...................................................................................... Prepaid assets ...................................................................................... Other .................................................................................................... Other .................................................................................................... Total current assets ........................................................................ Total current assets ........................................................................ Property and equipment: Property and equipment: Land .................................................................................................... Land .................................................................................................... Building .............................................................................................. Building .............................................................................................. Machinery and equipment .................................................................. Machinery and equipment .................................................................. Leasehold improvements .................................................................... Leasehold improvements .................................................................... Less accumulated depreciation and amortization ............................... Less accumulated depreciation and amortization ............................... Total property and equipment, net Total property and equipment, net Non-current assets: Non-current assets: Software development costs, less accumulated amortization ............. Software development costs, less accumulated amortization ............. Goodwill .............................................................................................. Goodwill .............................................................................................. Intangible assets, net............................................................................ Intangible assets, net............................................................................ Deferred income taxes ......................................................................... Deferred income taxes ......................................................................... Investments and other assets, net ......................................................... Investments and other assets, net ......................................................... Total non-current assets Total non-current assets Total assets Total assets As of October 31, As of October 31, 2016 2016 2015 2015 (In thousands, except share and per share data) (In thousands, except share and per share data) $ 55,237 $ 55,237 $ 41,217 $ 41,217 48,631 48,631 117,025 117,025 1,725 1,725 8,207 8,207 1,576 1,576 218,381 218,381 841 841 7,352 7,352 23,515 23,515 3,487 3,487 35,195 35,195 (22,898) (22,898) 12,297 12,297 4,926 4,926 2,314 2,314 1,150 1,150 6,138 6,138 6,743 6,743 21,271 21,271 $ 251,949 $ 251,949 $ 35,210 $ 35,210 1,990 1,990 17,231 17,231 1,523 1,523 538 538 1,476 1,476 57,968 57,968 4,294 4,294 963 963 3,249 3,249 8,506 8,506 41,766 41,766 106,308 106,308 1,228 1,228 9,769 9,769 1,804 1,804 216,112 216,112 841 841 7,314 7,314 24,026 24,026 3,323 3,323 35,504 35,504 (22,362) (22,362) 13,142 13,142 3,905 3,905 2,319 2,319 1,289 1,289 4,721 4,721 7,089 7,089 19,323 19,323 $ 248,577 $ 248,577 $ 41,678 $ 41,678 1,780 1,780 16,788 16,788 2,186 2,186 1,071 1,071 1,583 1,583 65,086 65,086 3,998 3,998 953 953 3,972 3,972 8,923 8,923 -- -- -- -- 657 657 59,119 59,119 136,742 136,742 (11,043) (11,043) 185,475 185,475 $ 251,949 $ 251,949 655 655 57,539 57,539 125,760 125,760 (9,386) (9,386) 174,568 174,568 $ 248,577 $ 248,577 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current liabilities: Accounts payable ................................................................................ Accounts payable ................................................................................ Accounts payable-related parties ........................................................ Accounts payable-related parties ........................................................ Accrued expenses and other ............................................................... Accrued expenses and other ............................................................... Accrued warranty expenses ................................................................ Accrued warranty expenses ................................................................ Derivative liabilities ........................................................................... Derivative liabilities ........................................................................... Short-term debt ................................................................................... Short-term debt ................................................................................... Total current liabilities .................................................................. Total current liabilities .................................................................. Non-current liabilities: Non-current liabilities: Deferred income taxes ......................................................................... Deferred income taxes ......................................................................... Accrued tax liability ............................................................................ Accrued tax liability ............................................................................ Deferred credits and other ................................................................... Deferred credits and other ................................................................... Total non-current liabilities ........................................................... Total non-current liabilities ........................................................... Shareholders’ equity: Shareholders’ equity: Preferred stock: no par value per share, 1,000,000 shares Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued .......................................................... authorized, no shares issued .......................................................... Common stock: no par value, $.10 stated value per share, 12,500,000 Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized, 6,720,453 and 6,650,517 shares issued; and shares authorized, 6,720,453 and 6,650,517 shares issued; and 6,573,103 and 6,551,718 shares outstanding, as of October 31, 6,573,103 and 6,551,718 shares outstanding, as of October 31, 2016 and October 31, 2015, respectively ...................................... 2016 and October 31, 2015, respectively ...................................... Additional paid-in capital ................................................................... Additional paid-in capital ................................................................... Retained earnings ................................................................................ Retained earnings ................................................................................ Accumulated other comprehensive loss .............................................. Accumulated other comprehensive loss .............................................. Total shareholders’ equity ............................................................. Total shareholders’ equity ............................................................. Total liabilities and shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 38 38 39 39 HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY HURCO COMPANIES, INC. Cash flows from operating activities: Net income ............................................................................... Adjustments to reconcile net income to net cash provided by (used for) operating activities, net of acquisitions: Provision for doubtful accounts .......................................... Deferred income taxes ........................................................ Equity in income of affiliates ............................................. Foreign currency (gain) loss ............................................... Unrealized (gain) loss on derivatives ................................. Depreciation and amortization ........................................... Stock-based compensation ................................................. Change in assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable ..................... (Increase) decrease in inventories ................................... (Increase) decrease in prepaid expenses ......................... Increase (decrease) in accounts payable ......................... Increase (decrease) in accrued expenses ......................... Net change in derivative assets and liabilities ................. Other ............................................................................... Net cash provided by (used for) operating activities Cash flows from investing activities: Proceeds from sale of property and equipment ........................ Purchase of property and equipment ........................................ Software development costs ..................................................... Other investments ..................................................................... Acquisition of business, net of cash acquired ........................... Net cash provided by (used for) investing activities ...... Cash flows from financing activities: Proceeds from exercise of common stock options .................. Dividends paid ......................................................................... Tax benefit from exercise of stock options ............................. Repayment on short-term debt ................................................ Net cash provided by (used for) financing activities ...... 2016 Year Ended October 31, 2015 (In thousands) 2014 $ 13,292 $ 16,214 $ 15,143 (75) (225) (466) (139) (1,013) (474) 338 (874) (444) 1,850 3,223 2,260 393 3,868 1,607 (8,141) (13,881) 809 (6,001) (90) (245) 442 (6,863) 264 (1,972) (2,205) -- -- (3,913) 147 3,222 1,193 3,666 2,852 383 (1,028) (962) 1,081 179 28,544 62 (3,127) (1,406) 308 (17,650) (21,813) 208 3,309 921 (11,653) (4,971) (4,646) 8,642 5,257 2,842 3 16,335 125 (1,680) (955) (76) -- (2,586) -- (2,310) -- -- (2,310) 257 (2,034) 119 (1,605) (3,263) 359 (1,693) -- (379) (1,713) Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents .... (934) (14,020) (2,077) 1,391 (994) 11,042 Cash and cash equivalents at beginning of year ..................... 55,237 53,846 42,804 Cash and cash equivalents at end of year ................................ $ 41,217 $ 55,237 $ 53,846 Supplemental disclosures: ....................................................... Cash paid for: Interest ................................................................................ Income taxes, net ................................................................ $ 56 $ 4,328 $ 156 $ 9,890 $ 167 $ 5,782 (In thousands, except shares outstanding) Common Stock Shares Outstanding Common Stock Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Balances, October 31, 2013 6,465,054 $ 647 $ 54,698 $ 98,130 $ (1,984) $ 151,491 Net income .................................................................. 15,143 -- 15,143 Other comprehensive income (loss) ............................. -- (1,576) (1,576) -- -- -- -- Exercise of common stock options……….. 20,306 2 357 -- -- 359 Stock-based compensation expense ..................................................................... 23,520 2 919 -- -- 921 Dividends paid ..................................................................................................... -- -- -- (1,693) -- (1,693) Balances, October 31, 2014 6,508,880 $ 651 $ 55,974 $ 111,580 $ (3,560) $ 164,645 Net income .................................................................. 16,214 -- 16,214 Other comprehensive income (loss) ............................. -- (5,826) (5,826) Exercise of common stock options .............................. 15,300 1 -- -- 257 Stock-based compensation expense ..................................................................... 27,538 3 -- 1,193 Tax benefit (expense) from stock option activities Dividends paid……………………………. -- 119 (2,034) -- (2,034) Balances, October 31, 2015 6,551,718 $ 655 $ 57,539 $ 125,760 $ (9,386) $ 174,568 Net income .................................................................. 13,292 -- 13,292 Other comprehensive income (loss) ............................. (1,657) (1,657) Stock-based compensation expense ..................................................................... 21,385 2 -- 1,607 Tax benefit (expense) from stock option activities -- (25) Dividends paid ..................................................................................................... -- -- -- (2,310) -- (2,310) Balances, October 31, 2016 6,573,103 $ 657 $ 59,119 $ 136,742 $ (11,043) $ 185,475 -- -- -- -- -- -- -- -- -- 256 1,190 119 -- -- -- 1,605 (25) -- -- -- -- -- -- -- -- -- -- -- -- -- -- The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 40 41 HURCO COMPANIES, INC. HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY HURCO COMPANIES, INC. HURCO COMPANIES, INC. Cash flows from operating activities: Cash flows from operating activities: Net income ............................................................................... Net income ............................................................................... $ 13,292 $ 13,292 $ 16,214 $ 16,214 $ 15,143 $ 15,143 Year Ended October 31, Year Ended October 31, 2016 2016 2015 2015 (In thousands) (In thousands) 2014 2014 Foreign currency (gain) loss ............................................... Foreign currency (gain) loss ............................................... 1,850 1,850 3,223 3,223 2,260 2,260 (In thousands, except shares (In thousands, except shares outstanding) outstanding) Common Common Stock Stock Shares Shares Outstanding Outstanding Common Common Stock Stock Amount Amount Additional Additional Paid-In Paid-In Capital Capital Retained Retained Earnings Earnings Accumulated Accumulated Other Other Comprehensive Comprehensive Loss Loss Total Total Balances, October 31, 2013 Balances, October 31, 2013 6,465,054 6,465,054 $ 647 $ 647 $ $ 54,698 54,698 $ 98,130 $ 98,130 $ (1,984) $ (1,984) $ 151,491 $ 151,491 Net income .................................................................. Net income .................................................................. Other comprehensive income (loss) ............................. Other comprehensive income (loss) ............................. -- -- -- -- -- -- -- -- -- -- -- -- 15,143 15,143 -- -- 15,143 15,143 -- -- (1,576) (1,576) (1,576) (1,576) Exercise of common stock options……….. Exercise of common stock options……….. 20,306 20,306 2 2 357 357 -- -- -- -- 359 359 Stock-based compensation expense ..................................................................... Stock-based compensation expense ..................................................................... 23,520 23,520 2 2 919 919 -- -- -- -- 921 921 Dividends paid ..................................................................................................... Dividends paid ..................................................................................................... -- -- -- -- -- -- (1,693) (1,693) -- -- (1,693) (1,693) Balances, October 31, 2014 Balances, October 31, 2014 6,508,880 6,508,880 $ 651 $ 651 $ $ 55,974 55,974 $ 111,580 $ 111,580 $ (3,560) $ (3,560) $ 164,645 $ 164,645 Net income .................................................................. Net income .................................................................. Other comprehensive income (loss) ............................. Other comprehensive income (loss) ............................. -- -- -- -- -- -- -- -- Exercise of common stock options .............................. Exercise of common stock options .............................. 15,300 15,300 1 1 Stock-based compensation expense ..................................................................... Stock-based compensation expense ..................................................................... 27,538 27,538 3 3 Tax benefit (expense) from stock option Tax benefit (expense) from stock option activities activities Dividends paid……………………………. Dividends paid……………………………. -- -- -- -- -- -- -- -- -- -- -- -- 256 256 1,190 1,190 119 119 -- -- 16,214 16,214 -- -- 16,214 16,214 -- -- (5,826) (5,826) (5,826) (5,826) -- -- -- -- 257 257 -- -- -- -- -- -- 1,193 1,193 -- -- 119 119 (2,034) (2,034) -- -- (2,034) (2,034) Balances, October 31, 2015 Balances, October 31, 2015 6,551,718 6,551,718 $ 655 $ 655 $ $ 57,539 57,539 $ 125,760 $ 125,760 $ (9,386) $ (9,386) $ 174,568 $ 174,568 Net income .................................................................. Net income .................................................................. Other comprehensive income (loss) ............................. Other comprehensive income (loss) ............................. -- -- -- -- -- -- -- -- Stock-based compensation expense ..................................................................... Stock-based compensation expense ..................................................................... 21,385 21,385 2 2 Tax benefit (expense) from stock option Tax benefit (expense) from stock option activities activities -- -- -- -- -- -- -- -- 1,605 1,605 (25) (25) 13,292 13,292 -- -- 13,292 13,292 -- -- -- -- -- -- (1,657) (1,657) (1,657) (1,657) -- -- 1,607 1,607 -- -- (25) (25) Adjustments to reconcile net income to net cash Adjustments to reconcile net income to net cash provided by (used for) operating activities, net of acquisitions: provided by (used for) operating activities, net of acquisitions: Provision for doubtful accounts .......................................... Provision for doubtful accounts .......................................... Deferred income taxes ........................................................ Deferred income taxes ........................................................ Equity in income of affiliates ............................................. Equity in income of affiliates ............................................. Unrealized (gain) loss on derivatives ................................. Unrealized (gain) loss on derivatives ................................. Depreciation and amortization ........................................... Depreciation and amortization ........................................... Stock-based compensation ................................................. Stock-based compensation ................................................. Change in assets and liabilities, net of acquisitions: Change in assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable ..................... (Increase) decrease in accounts receivable ..................... (Increase) decrease in inventories ................................... (Increase) decrease in inventories ................................... (Increase) decrease in prepaid expenses ......................... (Increase) decrease in prepaid expenses ......................... Increase (decrease) in accounts payable ......................... Increase (decrease) in accounts payable ......................... Increase (decrease) in accrued expenses ......................... Increase (decrease) in accrued expenses ......................... Net change in derivative assets and liabilities ................. Net change in derivative assets and liabilities ................. Other ............................................................................... Other ............................................................................... Net cash provided by (used for) operating activities Net cash provided by (used for) operating activities Cash flows from investing activities: Cash flows from investing activities: Proceeds from sale of property and equipment ........................ Proceeds from sale of property and equipment ........................ Purchase of property and equipment ........................................ Purchase of property and equipment ........................................ Software development costs ..................................................... Software development costs ..................................................... Other investments ..................................................................... Other investments ..................................................................... Acquisition of business, net of cash acquired ........................... Acquisition of business, net of cash acquired ........................... (139) (139) (1,013) (1,013) (474) (474) 147 147 3,222 3,222 1,193 1,193 3,666 3,666 2,852 2,852 383 383 (1,028) (1,028) (962) (962) 1,081 1,081 179 179 28,544 28,544 62 62 (3,127) (3,127) (1,406) (1,406) 308 308 (17,650) (17,650) (21,813) (21,813) 338 338 (874) (874) (444) (444) 208 208 3,309 3,309 921 921 (11,653) (11,653) (4,971) (4,971) (4,646) (4,646) 8,642 8,642 5,257 5,257 2,842 2,842 3 3 16,335 16,335 125 125 (1,680) (1,680) (955) (955) (76) (76) -- -- (2,586) (2,586) (75) (75) (225) (225) (466) (466) 393 393 3,868 3,868 1,607 1,607 (8,141) (8,141) (13,881) (13,881) 809 809 (6,001) (6,001) (90) (90) (245) (245) 442 442 (6,863) (6,863) 264 264 (1,972) (1,972) (2,205) (2,205) -- -- -- -- -- -- -- -- Net cash provided by (used for) investing activities ...... Net cash provided by (used for) investing activities ...... (3,913) (3,913) Cash flows from financing activities: Cash flows from financing activities: Proceeds from exercise of common stock options .................. Proceeds from exercise of common stock options .................. Dividends paid ......................................................................... Dividends paid ......................................................................... Tax benefit from exercise of stock options ............................. Tax benefit from exercise of stock options ............................. Repayment on short-term debt ................................................ Repayment on short-term debt ................................................ -- -- (2,310) (2,310) 257 257 (2,034) (2,034) 119 119 (1,605) (1,605) 359 359 (1,693) (1,693) -- -- (379) (379) Effect of exchange rate changes on cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents .... Net increase (decrease) in cash and cash equivalents .... (934) (934) (14,020) (14,020) (2,077) (2,077) 1,391 1,391 (994) (994) 11,042 11,042 Cash and cash equivalents at beginning of year ..................... Cash and cash equivalents at beginning of year ..................... 55,237 55,237 53,846 53,846 42,804 42,804 Cash and cash equivalents at end of year ................................ Cash and cash equivalents at end of year ................................ $ 41,217 $ 41,217 $ 55,237 $ 55,237 $ 53,846 $ 53,846 Supplemental disclosures: ....................................................... Supplemental disclosures: ....................................................... Cash paid for: Cash paid for: Interest ................................................................................ Interest ................................................................................ $ 56 $ 56 $ 156 $ 156 $ 167 $ 167 Income taxes, net ................................................................ Income taxes, net ................................................................ $ 4,328 $ 4,328 $ 9,890 $ 9,890 $ 5,782 $ 5,782 Net cash provided by (used for) financing activities ...... Net cash provided by (used for) financing activities ...... (2,310) (2,310) (3,263) (3,263) (1,713) (1,713) Balances, October 31, 2016 Balances, October 31, 2016 6,573,103 6,573,103 $ 657 $ 657 $ $ 59,119 59,119 $ 136,742 $ 136,742 $ (11,043) $ (11,043) $ 185,475 $ 185,475 The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. The accompanying notes are an integral part of the consolidated financial statements. 40 40 41 41 Dividends paid ..................................................................................................... Dividends paid ..................................................................................................... -- -- (2,310) (2,310) -- -- (2,310) (2,310) -- -- -- -- HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Derivatives Designated as Hedging Instruments Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly-owned subsidiaries. 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 $3.6 million and $3.0 million as of October 31, 2016 and 2015, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Intercompany 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, 2016 were a net loss of $12.3 million 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, South African Rand, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. For derivative instruments designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Accumulated other comprehensive loss in shareholders’ equity and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (FASB guidance), 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. We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter- company sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is reported in Other (income) expense, net immediately. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis whether there have been adverse developments regarding the risk of a counterparty default. We had forward contracts outstanding as of October 31, 2016, in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from November 2016 through October 2017. The contract amount at forward rates in U.S. Dollars at October 31, 2016 for Euros and Pounds Sterling was $27.6 million and $6.1 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $21.8 million at October 31, 2016. At October 31, 2016, we had approximately $1.3 million of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $1.0 million represented unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through October 2017, 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 2015. 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 derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matured in November 2016 and we entered into a new forward contract for the same notional amount that is set to mature in November 2017. As of October 31, 2016, we had a realized gain of $803,000 and an unrealized loss of $39,000, 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 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 Income consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies. 42 43 HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Derivatives Designated as Hedging Instruments Derivatives Designated as Hedging Instruments Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and its wholly-owned subsidiaries. We have a 35% ownership interest in a Taiwan affiliate Indiana corporation) and its wholly-owned subsidiaries. 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 $3.6 million that is accounted for using the equity method. Our investment in that affiliate was approximately $3.6 million and $3.0 million as of October 31, 2016 and 2015, respectively. That investment is included in Investments and and $3.0 million as of October 31, 2016 and 2015, respectively. That investment is included in Investments and other assets, net on the accompanying Consolidated Balance Sheets. Intercompany accounts and transactions other assets, net on the accompanying Consolidated Balance Sheets. Intercompany accounts and transactions have been eliminated. have been eliminated. the items being hedged. the items being hedged. Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of 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 purchase of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with Translation of Foreign Currencies. All balance sheet accounts of non-U.S. subsidiaries are translated at the 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 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 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 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, 2016 were a net loss of $12.3 adjustments, net of gains related to our net investment hedges, as of October 31, 2016 were a net loss of $12.3 million and are included in Accumulated other comprehensive loss. Foreign currency transaction gains and million 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. 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 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 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 regular operating and financing activities. Currently, the only risk that we manage through the use of derivative instruments is foreign currency risk. 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 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 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 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 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 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 primarily exposed to foreign currency exchange rate risk with respect to transactions and net assets denominated in Euros, Pounds Sterling, Indian Rupee, South African Rand, Singapore Dollars, Chinese Yuan, Polish Zloty, in Euros, Pounds Sterling, Indian Rupee, South African Rand, Singapore Dollars, Chinese Yuan, Polish Zloty, and New Taiwan Dollars. and New Taiwan Dollars. We account for derivative instruments as either assets or liabilities and carry them at fair value. The accounting 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 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 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 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 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 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. 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. 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 For derivative instruments that are not designated as accounting hedges under the Derivatives and Hedging Topic of the Financial Accounting Standards Board (FASB guidance), changes in fair value are recognized in Topic of the Financial Accounting Standards Board (FASB guidance), changes in fair value are recognized in earnings in the period of change. We do not hold or issue derivative financial instruments for speculative 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. 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 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. financial obligations under such contracts. We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter- 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 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 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 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 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 are recorded in the Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts are effective portion of the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service 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, 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 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 the inter-company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes in the fair value of these hedge contracts is reported in Other (income) expense, net immediately. We changes in the fair value of these hedge contracts is reported in Other (income) expense, net immediately. We perform quarterly assessments of hedge effectiveness by verifying and documenting the critical terms of the 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 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. 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, 2016, in Euros, Pounds Sterling and New Taiwan We had forward contracts outstanding as of October 31, 2016, in Euros, Pounds Sterling and New Taiwan Dollars with set maturity dates ranging from November 2016 through October 2017. The contract amount at Dollars with set maturity dates ranging from November 2016 through October 2017. The contract amount at forward rates in U.S. Dollars at October 31, 2016 for Euros and Pounds Sterling was $27.6 million and $6.1 forward rates in U.S. Dollars at October 31, 2016 for Euros and Pounds Sterling was $27.6 million and $6.1 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $21.8 million, respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $21.8 million at October 31, 2016. At October 31, 2016, we had approximately $1.3 million of gains, net of tax, million at October 31, 2016. At October 31, 2016, we had approximately $1.3 million of gains, net of tax, related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $1.0 million related to cash flow hedges deferred in Accumulated other comprehensive loss. Of this amount, $1.0 million represented unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency represented unrealized gains, net of tax, related to cash flow hedge instruments that remain subject to currency fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and fluctuation risk. The majority of these deferred gains will be recorded as an adjustment to Cost of sales and service in periods through October 2017, in which the corresponding inventory that is the subject of the related service in periods through October 2017, in which the corresponding inventory that is the subject of the related hedge contract is sold, as described above. 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. 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 To manage this risk, we entered into a forward contract with a notional amount of €3.0 million in November 2015. We designated this forward contract as a hedge of our net investment in Euro denominated assets. We 2015. 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 derivatives instruments and selected the forward method under the FASB guidance related to the accounting for derivatives instruments and hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a hedging activities. The forward method requires all changes in the fair value of the contract to be reported as a cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as cumulative translation adjustment in Accumulated other comprehensive loss, net of tax, in the same manner as the underlying hedged net assets. This forward contract matured in November 2016 and we entered into a new the underlying hedged net assets. This forward contract matured in November 2016 and we entered into a new forward contract for the same notional amount that is set to mature in November 2017. As of October 31, 2016, forward contract for the same notional amount that is set to mature in November 2017. As of October 31, 2016, we had a realized gain of $803,000 and an unrealized loss of $39,000, net of tax, recorded as cumulative we had a realized gain of $803,000 and an unrealized loss of $39,000, net of tax, recorded as cumulative translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. translation adjustments in Accumulated other comprehensive loss, related to these forward contracts. Derivatives Not Designated as Hedging Instruments Derivatives Not Designated as Hedging Instruments We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency We enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. These derivative instruments are fluctuations on 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 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 Income consistent with the transaction gain currently as Other expense, net in the Consolidated Statements of Income consistent with the transaction gain or loss on the related receivables and payables denominated in foreign currencies. or loss on the related receivables and payables denominated in foreign currencies. 42 42 43 43 We recognized a gain of $18,000 during the fiscal year ended October 31, 2016 and a gain of $14,000 during the fiscal year ended October 31, 2015 as a result of contracts closed early that were deemed ineffective for financial reporting and did not qualify as cash flow hedges. Derivatives Location of Gain (Loss) Recognized in Operations Amount of Gain (Loss) Recognized in Operations 2016 2015 (in thousands) Not Designated as Hedging Instruments: Foreign exchange forward contracts Other expense, net $ 536 $ 2,571 The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2016 and 2015 (in thousands): Foreign Currency Translation Cash Flow Hedges Total Balance, October 31, 2014……………………………....... $ (4,551) $ 991 $ (3,560) Other comprehensive income (loss) before reclassifications (6,333) 1,291 (5,042) Reclassifications …………………………………………… -- (784) (784) Balance, October 31, 2015 ………………………………… $ (10,884) $ 1,498 $ (9,386) Other comprehensive income (loss) before reclassifications (1,441) 1,431 (10) Reclassifications …………………………………………… -- (1,647) (1,647) Balance, October 31, 2016 ………………………………… $ (12,325) $ 1,282 $ (11,043) Inventories. Inventories are stated at the lower of cost or market, 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: HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. We had forward contracts outstanding as of October 31, 2016, in Euros, Pounds Sterling, South African Rand and New Taiwan Dollars with set maturity dates ranging from November 2016 through April 2017. The contract amounts at forward rates in U.S. Dollars at October 31, 2016 for Euros, Pounds Sterling and South African Rand totaled $39.5 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $26.6 million at October 31, 2016. 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, 2016 and October 31, 2015, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands): Derivatives Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Not Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts 2016 2015 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivative assets Derivative liabilities $ 1,721 Derivative assets $ 1,079 $ 173 Derivative liabilities $ 1,027 Derivative assets Derivative liabilities $ 4 Derivative assets $ 149 $ 365 Derivative liabilities $ 44 Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity and Statements of Income Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity and Statements of Income, net of tax, during the fiscal years ended October 31, 2016 and 2015 (in thousands): Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) 2016 2015 Location of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) Amount of Gain (Loss) Reclassified from Other Comprehensive Income (Loss) 2016 2015 Land Building Machines Shop and office equipment Leasehold improvements Number of Years Indefinite 40 7 – 10 3 – 7 3 – 40 Derivatives Designated as Hedging Instruments: (Effective Portion) Foreign exchange forward contracts – Intercompany sales/purchases $ 1,431 $ 1,291 Cost of sales and service $ 1,647 $ 784 Foreign exchange forward contract – Net Investment $ 28 $ 304 Total depreciation and amortization expense recognized for property and equipment for the fiscal years ended October 31, 2016, 2015 and 2014 was $2.5 million, $2.2 million, and $2.2 million, respectively. 44 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued We had forward contracts outstanding as of October 31, 2016, in Euros, Pounds Sterling, South African Rand We had forward contracts outstanding as of October 31, 2016, in Euros, Pounds Sterling, South African Rand and New Taiwan Dollars with set maturity dates ranging from November 2016 through April 2017. The and New Taiwan Dollars with set maturity dates ranging from November 2016 through April 2017. The contract amounts at forward rates in U.S. Dollars at October 31, 2016 for Euros, Pounds Sterling and South contract amounts at forward rates in U.S. Dollars at October 31, 2016 for Euros, Pounds Sterling and South African Rand totaled $39.5 million. The contract amount at forward rates in U.S. Dollars for New Taiwan African Rand totaled $39.5 million. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $26.6 million at October 31, 2016. Dollars was $26.6 million at October 31, 2016. Fair Value of Derivative Instruments Fair Value of Derivative Instruments We recognize the fair value of derivative instruments as assets and liabilities on a gross basis on our 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, 2016 and October 31, 2015, all derivative instruments were Consolidated Balance Sheets. As of October 31, 2016 and October 31, 2015, all derivative instruments were recorded at fair value on the balance sheets as follows (in thousands): recorded at fair value on the balance sheets as follows (in thousands): Derivatives Derivatives 2016 2016 2015 2015 Balance Sheet Balance Sheet Location Location Fair Fair Value Value Balance Sheet Balance Sheet Location Location Fair Fair Value Value Designated as Hedging Instruments: Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Foreign exchange forward contracts Foreign exchange forward contracts Derivative liabilities Derivative liabilities $ 173 $ 173 Derivative liabilities Derivative liabilities $ 1,027 $ 1,027 Derivative assets Derivative assets $ 1,721 $ 1,721 Derivative assets Derivative assets $ 1,079 $ 1,079 Not Designated as Hedging Not Designated as Hedging Instruments: Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Derivative assets Derivative assets $ 4 $ 4 Derivative assets Derivative assets $ 149 $ 149 Foreign exchange forward contracts Foreign exchange forward contracts Derivative liabilities Derivative liabilities $ 365 $ 365 Derivative liabilities Derivative liabilities $ 44 $ 44 Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Effect of Derivative Instruments on the Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity and Statements of Income Equity and Statements of Income Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Derivative instruments had the following effects on our Consolidated Balance Sheets, Statements of Changes in Shareholders’ Equity and Statements of Income, net of tax, during the fiscal years ended October 31, 2016 and Shareholders’ Equity and Statements of Income, net of tax, during the fiscal years ended October 31, 2016 and 2015 (in thousands): 2015 (in thousands): Derivatives Derivatives Designated as Hedging Instruments: Designated as Hedging Instruments: (Effective Portion) (Effective Portion) Foreign exchange forward contracts Foreign exchange forward contracts – Intercompany sales/purchases – Intercompany sales/purchases Amount of Gain (Loss) Amount of Gain (Loss) Recognized in Other Recognized in Other Comprehensive Income Comprehensive Income (Loss) (Loss) 2016 2016 2015 2015 Location of Gain Location of Gain (Loss) Reclassified (Loss) Reclassified from Other from Other Comprehensive Comprehensive Income (Loss) Income (Loss) Amount of Gain (Loss) Amount of Gain (Loss) Reclassified from Other Reclassified from Other Comprehensive Income Comprehensive Income (Loss) (Loss) 2016 2016 2015 2015 $ 1,431 $ 1,431 $ 1,291 $ 1,291 $ 1,647 $ 1,647 $ 784 $ 784 Cost of sales Cost of sales and service and service Foreign exchange forward contract Foreign exchange forward contract – Net Investment – Net Investment $ 28 $ 28 $ 304 $ 304 We recognized a gain of $18,000 during the fiscal year ended October 31, 2016 and a gain of $14,000 during the We recognized a gain of $18,000 during the fiscal year ended October 31, 2016 and a gain of $14,000 during the fiscal year ended October 31, 2015 as a result of contracts closed early that were deemed ineffective for fiscal year ended October 31, 2015 as a result of contracts closed early that were deemed ineffective for financial reporting and did not qualify as cash flow hedges. financial reporting and did not qualify as cash flow hedges. Derivatives Derivatives Location of Gain (Loss) Location of Gain (Loss) Recognized in Operations Recognized in Operations Amount of Gain (Loss) Amount of Gain (Loss) Recognized in Operations Recognized in Operations 2016 2016 2015 2015 (in thousands) (in thousands) Not Designated as Hedging Instruments: Not Designated as Hedging Instruments: Foreign exchange forward contracts Foreign exchange forward contracts Other expense, net Other expense, net $ 536 $ 536 $ 2,571 $ 2,571 The following table presents the changes in the components of Accumulated other comprehensive loss, net of The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax, for the fiscal years ended October 31, 2016 and 2015 (in thousands): tax, for the fiscal years ended October 31, 2016 and 2015 (in thousands): Balance, October 31, 2014……………………………....... Balance, October 31, 2014……………………………....... Other comprehensive income (loss) before reclassifications Other comprehensive income (loss) before reclassifications Reclassifications …………………………………………… Reclassifications …………………………………………… Balance, October 31, 2015 ………………………………… Balance, October 31, 2015 ………………………………… Other comprehensive income (loss) before reclassifications Other comprehensive income (loss) before reclassifications Reclassifications …………………………………………… Reclassifications …………………………………………… Balance, October 31, 2016 ………………………………… Balance, October 31, 2016 ………………………………… Foreign Foreign Currency Currency Translation Translation $ (4,551) $ (4,551) (6,333) (6,333) -- -- $ (10,884) $ (10,884) (1,441) (1,441) -- -- $ (12,325) $ (12,325) Cash Flow Cash Flow Hedges Hedges Total Total $ 991 $ 991 1,291 1,291 (784) (784) $ 1,498 $ 1,498 1,431 1,431 (1,647) (1,647) $ 1,282 $ 1,282 $ (3,560) $ (3,560) (5,042) (5,042) (784) (784) $ (9,386) $ (9,386) (10) (10) (1,647) (1,647) $ (11,043) $ (11,043) Inventories. Inventories are stated at the lower of cost or market, with cost determined using the first-in, first- Inventories. Inventories are stated at the lower of cost or market, with cost determined using the first-in, first- out method. Provisions are made to reduce excess or obsolete inventories to their estimated realizable value. 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 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 are provided primarily under the straight-line method over the shorter of the estimated useful lives or the lease terms as follows: terms as follows: Land Land Building Building Machines Machines Shop and office equipment Shop and office equipment Leasehold improvements Leasehold improvements Number of Years Number of Years Indefinite Indefinite 40 40 7 – 10 7 – 10 3 – 7 3 – 7 3 – 40 3 – 40 Total depreciation and amortization expense recognized for property and equipment for the fiscal years ended Total depreciation and amortization expense recognized for property and equipment for the fiscal years ended October 31, 2016, 2015 and 2014 was $2.5 million, $2.2 million, and $2.2 million, respectively. October 31, 2016, 2015 and 2014 was $2.5 million, $2.2 million, and $2.2 million, respectively. 44 44 45 45 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. Revenue Recognition. We recognize revenue from sales of our machine tool systems upon delivery of the product to the customer, which is normally at the time of shipment, because persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. Our computerized machine tools are general-purpose computer controlled machine tools that are typically used in stand-alone operations. Transfer of ownership and risk of loss are not contingent upon contractual customer acceptance. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our service technicians. In most instances where a machine is sold through a distributor, we have no installation involvement. If sales are direct or through sales agents, we will typically complete the machine installation, which consists of the reassembly of certain parts that were removed for shipping and the re-testing of the machine to ensure that it is performing within the standard specifications. We consider the machine installation process to be inconsequential and perfunctory. Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the term of the contract. Sales related to software products are recognized when shipped in conformity with U.S. Generally Accepted Accounting Principles as promulgated by FASB guidance related to software revenue recognition that requires at the time of shipment, persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. The software does not require production, modification or customization. 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 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 12 of 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 $4.9 million, $3.9 million, and $3.4 million, in fiscal 2016, 2015, and 2014, respectively. Software Development Costs. 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 of $2.2 million in fiscal 2016, $1.4 million in fiscal 2015, and $1.0 million in fiscal 2014 related to software development projects. Amortization expense for software development costs was $1.2 million, $1.0 million, and $1.2 million, for the fiscal years ended October 31, 2016, 2015, and 2014, respectively. Accumulated amortization at October 31, 2016 and 2015 was $16.5 million and $15.3 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 2017 2018 2019 2020 2021 Amortization Expense $ 1,200 1,275 750 700 625 Goodwill and Intangible Assets. Goodwill and other separately recognized intangible assets with indefinite lives are not subject to amortization. At least once annually or when indicators of impairment exist, we perform an impairment test for goodwill. Goodwill is allocated to various reporting units. We use a qualitative approach to test goodwill and indefinite-lived assets for impairment. 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. For fiscal years 2016 and 2015, using the qualitative approach to test for impairment, we concluded that goodwill and other intangible assets were not impaired. As of October 31, 2016, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Average Amortization Period 13 years indefinite 15 years 13 years 6 years 8 years Gross Intangible Assets Accumulated Amortization Net Intangible Assets $ 231 $ (59) $ 172 60 254 672 2,972 373 -- (114) (172) (2,741) 140 500 60 231 (326) 47 $ 4,562 $ (3,412) $ 1,150 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Patents Other Total 46 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued Revenue Recognition. We recognize revenue from sales of our machine tool systems upon delivery of the Revenue Recognition. We recognize revenue from sales of our machine tool systems upon delivery of the product to the customer, which is normally at the time of shipment, because persuasive evidence of an product to the customer, which is normally at the time of shipment, because persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. Our computerized machine tools are general-purpose computer controlled machine tools reasonably assured. Our computerized machine tools are general-purpose computer controlled machine tools that are typically used in stand-alone operations. Transfer of ownership and risk of loss are not contingent upon that are typically used in stand-alone operations. Transfer of ownership and risk of loss are not contingent upon contractual customer acceptance. Prior to shipment, we test each machine to ensure the machine’s compliance contractual customer acceptance. Prior to shipment, we test each machine to ensure the machine’s compliance with standard operating specifications. with standard operating specifications. Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a Depending upon geographic location, after shipment, a machine may be installed at the customer’s facilities by a distributor, independent contractor or by one of our service technicians. In most instances where a machine is 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 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 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 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 to be inconsequential and perfunctory. specifications. We consider the machine installation process to be inconsequential and perfunctory. Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the term of the contract. term of the contract. Sales related to software products are recognized when shipped in conformity with U.S. Generally Accepted Sales related to software products are recognized when shipped in conformity with U.S. Generally Accepted Accounting Principles as promulgated by FASB guidance related to software revenue recognition that requires Accounting Principles as promulgated by FASB guidance related to software revenue recognition that requires at the time of shipment, persuasive evidence of an arrangement exists, delivery has occurred, the selling price is at the time of shipment, persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and collectability is reasonably assured. The software does not require production, fixed and determinable and collectability is reasonably assured. The software does not require production, modification or customization. modification or customization. Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on our best estimate of 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 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 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 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 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 charge off uncollectible balances payment is not made by the due date as specified on the customer invoice, and charge off uncollectible balances when all reasonable collection efforts have been exhausted. 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. 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 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, 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 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 for warranty claims could differ from the amounts estimated requiring adjustments to the liabilities in future periods. See Note 12 of Notes to Consolidated Financial Statements for further discussion of warranties. periods. See Note 12 of Notes to Consolidated Financial Statements for further discussion of warranties. Research and Development Costs. The costs associated with research and development programs for new 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 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 capitalization per FASB guidance, are expensed as incurred and are included in Selling, general and administrative expenses. Research and development expenses totaled $4.9 million, $3.9 million, and $3.4 administrative expenses. Research and development expenses totaled $4.9 million, $3.9 million, and $3.4 million, in fiscal 2016, 2015, and 2014, respectively. million, in fiscal 2016, 2015, and 2014, respectively. Software Development Costs. Costs incurred to develop computer software products and significant Software Development Costs. 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 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 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 the estimated product life of the related software, which ranges from three to five years. We capitalized costs of $2.2 million in fiscal 2016, $1.4 million in fiscal 2015, and $1.0 million in fiscal 2014 related to software of $2.2 million in fiscal 2016, $1.4 million in fiscal 2015, and $1.0 million in fiscal 2014 related to software development projects. Amortization expense for software development costs was $1.2 million, $1.0 million, development projects. Amortization expense for software development costs was $1.2 million, $1.0 million, and $1.2 million, for the fiscal years ended October 31, 2016, 2015, and 2014, respectively. Accumulated and $1.2 million, for the fiscal years ended October 31, 2016, 2015, and 2014, respectively. Accumulated amortization at October 31, 2016 and 2015 was $16.5 million and $15.3 million, respectively. Estimated amortization at October 31, 2016 and 2015 was $16.5 million and $15.3 million, respectively. Estimated amortization expense for the remaining unamortized software development costs for the fiscal years ending amortization expense for the remaining unamortized software development costs for the fiscal years ending October 31, is as follows (in thousands): October 31, is as follows (in thousands): Fiscal Year Fiscal Year 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 Amortization Amortization Expense Expense $ 1,200 $ 1,200 1,275 1,275 750 750 700 700 625 625 Goodwill and Intangible Assets. Goodwill and other separately recognized intangible assets with indefinite lives Goodwill and Intangible Assets. Goodwill and other separately recognized intangible assets with indefinite lives are not subject to amortization. At least once annually or when indicators of impairment exist, we perform an are not subject to amortization. At least once annually or when indicators of impairment exist, we perform an impairment test for goodwill. Goodwill is allocated to various reporting units. We use a qualitative approach to impairment test for goodwill. Goodwill is allocated to various reporting units. We use a qualitative approach to test goodwill and indefinite-lived assets for impairment. Intangible assets that are determined to have a finite life test goodwill and indefinite-lived assets for impairment. 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 are amortized over their estimated useful lives and are also subject to review for impairment, if indicators of impairment are identified. For fiscal years 2016 and 2015, using the qualitative approach to test for impairment, impairment are identified. For fiscal years 2016 and 2015, using the qualitative approach to test for impairment, we concluded that goodwill and other intangible assets were not impaired. we concluded that goodwill and other intangible assets were not impaired. As of October 31, 2016, the balances of intangible assets, other than goodwill, were as follows (in thousands): As of October 31, 2016, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Weighted Average Average Amortization Amortization Period Period Tradenames and trademarks Tradenames and trademarks Tradenames and trademarks Tradenames and trademarks Customer relationships Customer relationships Technology Technology Patents Patents Other Other Total Total 13 years 13 years indefinite indefinite 15 years 15 years 13 years 13 years 6 years 6 years 8 years 8 years Gross Gross Intangible Intangible Assets Assets $ 231 $ 231 60 60 254 254 672 672 2,972 2,972 373 373 $ 4,562 $ 4,562 Accumulated Accumulated Amortization Amortization $ (59) $ (59) -- -- (114) (114) (172) (172) (2,741) (2,741) (326) (326) $ (3,412) $ (3,412) Net Net Intangible Intangible Assets Assets $ 172 $ 172 60 60 140 140 500 500 231 231 47 47 $ 1,150 $ 1,150 46 46 47 47 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. As of October 31, 2015, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Average Amortization Period 13 years indefinite 15 years 13 years 6 years 8 years Gross Intangible Assets $ 231 60 254 674 2,972 373 $ 4,564 Accumulated Amortization Net Intangible Assets $ (41) -- (97) (121) (2,717) (299) $ (3,275) $ 190 60 157 553 255 74 $ 1,289 Tradenames and trademarks Tradenames and trademarks Customer relationships Technology Patents Other Total Intangible asset amortization expense was $137,000, $207,000, and $412,000 for fiscal 2016, 2015 and 2014, respectively. Annual intangible asset amortization expense is estimated to be $115,000 per year for fiscal years 2017 through 2021. Impairment of Long-Lived Assets. We periodically 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) in accordance with FASB guidance related to accounting for the impairment or disposal of long-lived assets. Earnings Per Share. Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares actually outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in FASB guidance on “Earnings Per Share”. The following table presents a reconciliation of our basic and diluted earnings per share computation: 2016 Fiscal Year Ended October 31, 2015 2014 (in thousands, except per share amounts) Basic Diluted Basic Diluted Basic Diluted Net income Undistributed earnings allocated to participating shares Net income applicable to common shareholders Weighted average shares outstanding Stock options and contingently issuable securities Income per share $ 13,292 $ 13,292 $ 16,214 $ 16,214 $ 15,143 $ 15,143 (76) (76) (93) (93) (121) (121) $ 13,216 6,569 $ 13,216 6,569 $ 16,121 $ 16,121 6,543 6,543 $ 15,022 6,497 $ 15,022 6,497 -- 6,569 $ 2.01 73 6,642 $ 1.99 59 -- 6,602 6,543 $ 2.46 $ 2.44 -- 6,497 $ 2.31 41 6,538 $ 2.30 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. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S. or foreign tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made. The determination of our provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions. We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested abroad. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward- looking statements is based on currently effective tax laws. Significant changes in those laws could materially affect these estimates. We 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. Stock Compensation. We account for share-based compensation according to FASB guidance relating to share- based payments, which requires the measurement and recognition of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date. This guidance requires that we estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements. Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long- lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. 2. BUSINESS OPERATIONS Nature of Business. We design, manufacture and sell computerized CNC machine tools, computer control systems and software products, machine tool components, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support, to companies in the metal cutting industry through a worldwide sales, service and distribution network. The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic markets we serve. As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand, have adversely affected our results of operations and financial condition. The end market for our products consists primarily of precision tool, die and mold manufacturers, independent job shops, and specialized short-run production applications within large manufacturing operations. Industries 48 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued As of October 31, 2015, the balances of intangible assets, other than goodwill, were as follows (in thousands): As of October 31, 2015, the balances of intangible assets, other than goodwill, were as follows (in thousands): Weighted Weighted Average Average Amortization Amortization Period Period Gross Gross Intangible Intangible Assets Assets Accumulated Accumulated Amortization Amortization Net Intangible Net Intangible Assets Assets Tradenames and trademarks Tradenames and trademarks Tradenames and trademarks Tradenames and trademarks Customer relationships Customer relationships Technology Technology Patents Patents Other Other Total Total 13 years 13 years indefinite indefinite 15 years 15 years 13 years 13 years 6 years 6 years 8 years 8 years $ 231 $ 231 $ (41) $ (41) $ 190 $ 190 60 60 254 254 674 674 2,972 2,972 -- -- (97) (97) (121) (121) (2,717) (2,717) 157 157 553 553 60 60 255 255 373 373 (299) (299) 74 74 $ 4,564 $ 4,564 $ (3,275) $ (3,275) $ 1,289 $ 1,289 Intangible asset amortization expense was $137,000, $207,000, and $412,000 for fiscal 2016, 2015 and 2014, Intangible asset amortization expense was $137,000, $207,000, and $412,000 for fiscal 2016, 2015 and 2014, respectively. Annual intangible asset amortization expense is estimated to be $115,000 per year for fiscal years respectively. Annual intangible asset amortization expense is estimated to be $115,000 per year for fiscal years 2017 through 2021. 2017 through 2021. Impairment of Long-Lived Assets. We periodically evaluate the carrying value of long-lived assets to be held Impairment of Long-Lived Assets. We periodically evaluate the carrying value of long-lived assets to be held and used, including property and equipment, software development costs and intangible assets, including 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 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 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 undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the asset (or group of assets) in accordance with FASB guidance related to accounting for the impairment or disposal of group of assets) in accordance with FASB guidance related to accounting for the impairment or disposal of long-lived assets. long-lived assets. Earnings Per Share. Basic earnings per share is calculated by dividing net income by the weighted-average Earnings Per Share. Basic earnings per share is calculated by dividing net income by the weighted-average number of common shares actually outstanding during the period. Diluted earnings per share assumes the number of common shares actually outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock upon exercise of all outstanding stock options and contingently issuance of additional shares of common stock upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in FASB issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in FASB guidance on “Earnings Per Share”. guidance on “Earnings Per Share”. The following table presents a reconciliation of our basic and diluted earnings per share computation: The following table presents a reconciliation of our basic and diluted earnings per share computation: Fiscal Year Ended October 31, Fiscal Year Ended October 31, 2016 2016 2015 2015 2014 2014 (in thousands, except per share amounts) (in thousands, except per share amounts) Basic Basic Diluted Diluted Basic Basic Diluted Diluted Basic Basic Diluted Diluted Net income Net income Undistributed earnings allocated to Undistributed earnings allocated to participating shares participating shares Net income applicable to common Net income applicable to common shareholders shareholders Weighted average shares outstanding Weighted average shares outstanding Stock options and contingently issuable Stock options and contingently issuable securities securities Income per share Income per share $ 13,292 $ 13,292 $ 13,292 $ 13,292 $ 16,214 $ 16,214 $ 16,214 $ 16,214 $ 15,143 $ 15,143 $ 15,143 $ 15,143 (76) (76) (76) (76) (93) (93) (93) (93) (121) (121) (121) (121) $ 13,216 $ 13,216 $ 13,216 $ 13,216 $ 16,121 $ 16,121 $ 16,121 $ 16,121 6,569 6,569 6,569 6,569 6,543 6,543 6,543 6,543 $ 15,022 $ 15,022 6,497 6,497 $ 15,022 $ 15,022 6,497 6,497 -- -- 73 73 -- -- 59 59 6,569 6,569 6,642 6,642 6,543 6,543 6,602 6,602 -- -- 6,497 6,497 41 41 6,538 6,538 $ 2.01 $ 2.01 $ 1.99 $ 1.99 $ 2.46 $ 2.44 $ 2.46 $ 2.44 $ 2.31 $ 2.31 $ 2.30 $ 2.30 Income Taxes. We account for income taxes and the related accounts under the asset and liability method. 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 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 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 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. Our judgment regarding the realization of deferred tax assets all of the deferred tax assets will not be realized. Our judgment regarding the realization of deferred tax assets may change due to future profitability and market conditions, changes in U.S. or foreign tax laws and other may change due to future profitability and market conditions, changes in U.S. or foreign tax laws and other factors. These changes, if any, may require material adjustments to these deferred tax assets and an factors. These changes, if any, may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net income in the period when such determinations are made. accompanying reduction or increase in net income in the period when such determinations are made. The determination of our provision for income taxes requires judgment, the use of estimates and the The determination of our provision for income taxes requires judgment, the use of estimates and the interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of interpretation and application of complex tax laws. Our provision for income taxes reflects a combination of income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions. We income earned and taxed at the federal and state level in the U.S., as well as in various foreign jurisdictions. We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries based have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested abroad. Undistributed earnings of our upon our determination that such earnings will be indefinitely reinvested abroad. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. offset, at least in part, by associated foreign tax credits. In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward- In addition to the risks to the effective tax rate described above, the future effective tax rate reflected in forward- looking statements is based on currently effective tax laws. Significant changes in those laws could materially looking statements is based on currently effective tax laws. Significant changes in those laws could materially affect these estimates. affect these estimates. We recognize uncertain tax positions when it is more likely than not that the tax position will be sustained upon 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 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 is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. settlement. Stock Compensation. We account for share-based compensation according to FASB guidance relating to share- 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 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 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 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. expense the value of the portion of the award that is ultimately expected to vest over the requisite service period. Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Estimates. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles requires us to make estimates and assumptions that affect the reported amounts presented and Principles requires us to make estimates and assumptions that affect the reported amounts presented and disclosed in our consolidated financial statements. Significant estimates and assumptions in these consolidated disclosed in our consolidated financial statements. Significant estimates and assumptions in these consolidated financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful financial statements require the exercise of judgment and are used for, but not limited to, allowance for doubtful accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long- accounts, estimates of future cash flows and other assumptions associated with goodwill, intangible and long- lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock lived asset impairment tests, useful lives for depreciation and amortization, warranty programs, stock compensation, income taxes and deferred tax valuation allowances, and contingencies. Due to the inherent compensation, income taxes and deferred tax valuation allowances, and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be different from these uncertainty involved in making estimates, actual results reported in future periods may be different from these estimates. estimates. 2. BUSINESS OPERATIONS 2. BUSINESS OPERATIONS Nature of Business. We design, manufacture and sell computerized CNC machine tools, computer control Nature of Business. We design, manufacture and sell computerized CNC machine tools, computer control systems and software products, machine tool components, software options, control upgrades, accessories and systems and software products, machine tool components, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support, to companies in the metal replacement parts for our products, as well as customer service and training support, to companies in the metal cutting industry through a worldwide sales, service and distribution network. The machine tool industry is cutting industry through a worldwide sales, service and distribution network. The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic markets we serve. As a result of highly cyclical and changes in demand can occur abruptly in the geographic markets we serve. As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand, this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand, have adversely affected our results of operations and financial condition. have adversely affected our results of operations and financial condition. The end market for our products consists primarily of precision tool, die and mold manufacturers, independent The end market for our products consists primarily of precision tool, die and mold manufacturers, independent job shops, and specialized short-run production applications within large manufacturing operations. Industries job shops, and specialized short-run production applications within large manufacturing operations. Industries 48 48 49 49 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. served include: aerospace, defense, medical equipment, energy, automotive/transportation, electronics and computer industries. Our products are sold through more than 195 independent agents and distributors throughout the Americas, Europe and Asia. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and certain areas of the United States. Credit Risk. We sell products to customers located throughout the world. We perform ongoing credit evaluations of customers and generally do not require collateral. Allowances are maintained for potential credit losses. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across many geographic areas. Although a significant amount of trade receivables are with distributors primarily located in the United States, no single distributor or region represents a significant concentration of credit risk. Manufacturing Risk. At present, our wholly-owned subsidiaries, Hurco Manufacturing Limited (“HML”), Ningbo Hurco Manufacturing Limited (“NHML”) and Milltronics USA, Inc. (“Milltronics”) produce the vast majority of our machine tools for all three brands, Hurco, Milltronics and Takumi. In addition, we manufacture electro-mechanical components and accessories for machine tools through our wholly-owned subsidiary, LCM Precision Technology S.r.l. (“LCM”). HML, NHML, Milltronics and LCM manufacture their products in Taiwan, China, the U.S. and Italy, respectively. Any interruption in manufacturing at any of these locations would have an adverse effect on our financial operating results. Interruption in manufacturing at one of these locations could result from a change in the political environment or a natural disaster, such as an earthquake, typhoon, or tsunami. Any interruption with one of our key suppliers may also have an adverse effect on our operating results and our financial condition. 3. INVENTORIES Inventories as of October 31, 2016 and 2015 are summarized below (in thousands): Purchased parts and sub-assemblies ................................................... Work-in-process ................................................................................. Finished goods .................................................................................... 2016 $ 25,661 17,724 73,640 $ 117,025 2015 $ 25,914 20,575 59,819 $ 106,308 Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia was $11.6 million and $6.9 million as of October 31, 2016 and 2015, respectively. 4. ACQUISITIONS OF BUSINESSES On July 14, 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, Inc., a U.S.-based manufacturer of CNC mills, lathes, and vertical and horizontal machining centers. We are operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics. Also, on July 28, 2015, we acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwan-based designer and manufacturer of CNC vertical machining centers, double column machining centers, high speed bridge machines and other machine tools equipped with industrial controls. We are operating this Taiwan business as a product line through our wholly-owned subsidiary, HML. These product lines contribute to our efforts to expand our consolidated product range, customer base and global platform, and accelerate emerging market penetration, particularly in strategic markets such as China and South America. The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different models. The combined machine tool product lines also provide benefits from the development of product enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven engineering designs, allowing us to achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. The acquisitions were accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the total purchase price was initially allocated on a provisional basis to assets acquired and net liabilities assumed in connection with the acquisitions based on their estimated fair values as of the completion of the acquisitions. These allocations reflected various provisional estimates that were available at the time and were subject to change during the purchase price allocation period as valuations were finalized. All valuations are now final. The total fair value of the net assets acquired was approximately $17.6 million, composed of $12.5 million for Milltronics and $5.1 million for Takumi. The results of operations of Milltronics and Takumi have been included in our consolidated financial statements from the respective dates of acquisition. 5. CREDIT AGREEMENTS AND BORROWINGS On December 7, 2012, we entered into an agreement (the “U.S. credit agreement”) with a financial institution that provided us with a $12.5 million unsecured revolving credit and letter of credit facility. The U.S. credit agreement permitted the issuance of up to $3.0 million in letters of credit. On May 9, 2014, the maximum amount for outstanding letters of credit under our U.S. credit agreement was increased from $3.0 million to $5.0 million in order to guarantee a new revolving credit facility in Taiwan. On June 5, 2014, we amended our U.S. credit agreement to increase the cash dividend allowance from $1.0 million per calendar year to $3.0 million per calendar year. On December 5, 2014, we amended our U.S. credit agreement to increase the cash dividend allowance from $3.0 million per calendar year to $4.0 million per calendar year and to extend the scheduled maturity date to December 7, 2016. On December 6, 2016, we amended our U.S. credit agreement, among other things, to increase the unsecured revolving credit facility from $12.5 million to $15.0 million, to increase the cash dividend allowance from $4.0 million per calendar year to $5.0 million per calendar year, and to extend the scheduled maturity date to December 31, 2018. We also amended the U.S. credit agreement to increase the minimum working capital and minimum tangible net worth requirements from $90.0 million to $105.0 million and $120.0 million to $125.0 million, respectively. Borrowings under the U.S. credit agreement bear interest either at a LIBOR-based rate or a floating rate, in each case with an interest rate floor of 0.00%. The floating rate equals the greatest of (a) a one month LIBOR-based rate plus 1.00% per annum, (b) the federal funds effective rate plus 0.50% per annum, (c) the prevailing prime rate, and (d) 0.00%. The rate we must pay for that portion of the U.S. credit agreement which is not utilized is 0.05% per annum. The U.S. credit agreement contains customary financial covenants, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $5.0 million), (2) requiring that we maintain a minimum working capital of $105.0 million, and (3) requiring that we maintain a minimum tangible net worth of $125.0 million. The U.S. credit agreement permits us to pay cash dividends in an amount not to exceed $5.0 million per calendar year, so long as we are not in default before and after giving effect to such dividends. We have a £1.0 million revolving credit facility in the United Kingdom and a €1.5 million revolving credit facility in Germany. On May 12, 2014, we established a Taiwan credit facility in the amount of 100.0 million New Taiwan Dollars with an expiration date of May 12, 2015. We did not renew this Taiwan credit facility. We also have a 40.0 million Chinese Yuan (approximately $5.9 million) credit facility in China that was renewed on February 17, 2016 with an expiration date of February 16, 2017. 50 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued served include: aerospace, defense, medical equipment, energy, automotive/transportation, electronics and served include: aerospace, defense, medical equipment, energy, automotive/transportation, electronics and computer industries. Our products are sold through more than 195 independent agents and distributors computer industries. Our products are sold through more than 195 independent agents and distributors throughout the Americas, Europe and Asia. We also have our own direct sales and service organizations in throughout the Americas, Europe and Asia. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and certain areas of the United States. certain areas of the United States. Credit Risk. We sell products to customers located throughout the world. We perform ongoing credit Credit Risk. We sell products to customers located throughout the world. We perform ongoing credit evaluations of customers and generally do not require collateral. Allowances are maintained for potential credit evaluations of customers and generally do not require collateral. Allowances are maintained for potential credit losses. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number losses. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and their dispersion across many geographic areas. Although a significant amount of trade of customers and their dispersion across many geographic areas. Although a significant amount of trade receivables are with distributors primarily located in the United States, no single distributor or region represents receivables are with distributors primarily located in the United States, no single distributor or region represents a significant concentration of credit risk. a significant concentration of credit risk. Manufacturing Risk. At present, our wholly-owned subsidiaries, Hurco Manufacturing Limited (“HML”), Manufacturing Risk. At present, our wholly-owned subsidiaries, Hurco Manufacturing Limited (“HML”), Ningbo Hurco Manufacturing Limited (“NHML”) and Milltronics USA, Inc. (“Milltronics”) produce the vast Ningbo Hurco Manufacturing Limited (“NHML”) and Milltronics USA, Inc. (“Milltronics”) produce the vast majority of our machine tools for all three brands, Hurco, Milltronics and Takumi. In addition, we manufacture majority of our machine tools for all three brands, Hurco, Milltronics and Takumi. In addition, we manufacture electro-mechanical components and accessories for machine tools through our wholly-owned subsidiary, LCM electro-mechanical components and accessories for machine tools through our wholly-owned subsidiary, LCM Precision Technology S.r.l. (“LCM”). HML, NHML, Milltronics and LCM manufacture their products in Precision Technology S.r.l. (“LCM”). HML, NHML, Milltronics and LCM manufacture their products in Taiwan, China, the U.S. and Italy, respectively. Any interruption in manufacturing at any of these locations Taiwan, China, the U.S. and Italy, respectively. Any interruption in manufacturing at any of these locations would have an adverse effect on our financial operating results. Interruption in manufacturing at one of these would have an adverse effect on our financial operating results. Interruption in manufacturing at one of these locations could result from a change in the political environment or a natural disaster, such as an earthquake, locations could result from a change in the political environment or a natural disaster, such as an earthquake, typhoon, or tsunami. Any interruption with one of our key suppliers may also have an adverse effect on our typhoon, or tsunami. Any interruption with one of our key suppliers may also have an adverse effect on our operating results and our financial condition. operating results and our financial condition. 3. INVENTORIES 3. INVENTORIES Inventories as of October 31, 2016 and 2015 are summarized below (in thousands): Inventories as of October 31, 2016 and 2015 are summarized below (in thousands): Purchased parts and sub-assemblies ................................................... Purchased parts and sub-assemblies ................................................... $ 25,661 $ 25,661 Work-in-process ................................................................................. Work-in-process ................................................................................. 17,724 17,724 Finished goods .................................................................................... Finished goods .................................................................................... 73,640 73,640 2016 2016 $ 117,025 $ 117,025 2015 2015 $ 25,914 $ 25,914 20,575 20,575 59,819 59,819 $ 106,308 $ 106,308 Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia was $11.6 million and $6.9 million as of October 31, 2016 and 2015, respectively. was $11.6 million and $6.9 million as of October 31, 2016 and 2015, respectively. 4. 4. ACQUISITIONS OF BUSINESSES ACQUISITIONS OF BUSINESSES On July 14, 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, On July 14, 2015, we acquired the assets of the machine tool business of Milltronics Manufacturing Company, Inc., a U.S.-based manufacturer of CNC mills, lathes, and vertical and horizontal machining centers. We are Inc., a U.S.-based manufacturer of CNC mills, lathes, and vertical and horizontal machining centers. We are operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics. Also, on July operating this U.S. business as a product line through our wholly-owned subsidiary, Milltronics. Also, on July 28, 2015, we acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a 28, 2015, we acquired the assets of the machine tool business of Takumi Machinery Co., Ltd. (“Takumi”), a Taiwan-based designer and manufacturer of CNC vertical machining centers, double column machining centers, Taiwan-based designer and manufacturer of CNC vertical machining centers, double column machining centers, high speed bridge machines and other machine tools equipped with industrial controls. We are operating this high speed bridge machines and other machine tools equipped with industrial controls. We are operating this Taiwan business as a product line through our wholly-owned subsidiary, HML. These product lines contribute Taiwan business as a product line through our wholly-owned subsidiary, HML. These product lines contribute to our efforts to expand our consolidated product range, customer base and global platform, and accelerate to our efforts to expand our consolidated product range, customer base and global platform, and accelerate emerging market penetration, particularly in strategic markets such as China and South America. The Hurco, emerging market penetration, particularly in strategic markets such as China and South America. The Hurco, Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different Milltronics and Takumi product lines represent a comprehensive product portfolio with more than 150 different models. The combined machine tool product lines also provide benefits from the development of product models. The combined machine tool product lines also provide benefits from the development of product enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven enhancements, technologies and models due to leverage of shared resources and cross-utilization of proven engineering designs, allowing us to achieve manufacturing cost reductions from economies of scale and engineering designs, allowing us to achieve manufacturing cost reductions from economies of scale and manufacturing efficiencies. manufacturing efficiencies. The acquisitions were accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, The acquisitions were accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the total purchase price was initially allocated on a provisional basis to Business Combinations. Accordingly, the total purchase price was initially allocated on a provisional basis to assets acquired and net liabilities assumed in connection with the acquisitions based on their estimated fair assets acquired and net liabilities assumed in connection with the acquisitions based on their estimated fair values as of the completion of the acquisitions. These allocations reflected various provisional estimates that values as of the completion of the acquisitions. These allocations reflected various provisional estimates that were available at the time and were subject to change during the purchase price allocation period as valuations were available at the time and were subject to change during the purchase price allocation period as valuations were finalized. All valuations are now final. The total fair value of the net assets acquired was approximately were finalized. All valuations are now final. The total fair value of the net assets acquired was approximately $17.6 million, composed of $12.5 million for Milltronics and $5.1 million for Takumi. The results of operations $17.6 million, composed of $12.5 million for Milltronics and $5.1 million for Takumi. The results of operations of Milltronics and Takumi have been included in our consolidated financial statements from the respective dates of Milltronics and Takumi have been included in our consolidated financial statements from the respective dates of acquisition. of acquisition. 5. 5. CREDIT AGREEMENTS AND BORROWINGS CREDIT AGREEMENTS AND BORROWINGS On December 7, 2012, we entered into an agreement (the “U.S. credit agreement”) with a financial institution On December 7, 2012, we entered into an agreement (the “U.S. credit agreement”) with a financial institution that provided us with a $12.5 million unsecured revolving credit and letter of credit facility. The U.S. credit that provided us with a $12.5 million unsecured revolving credit and letter of credit facility. The U.S. credit agreement permitted the issuance of up to $3.0 million in letters of credit. On May 9, 2014, the maximum agreement permitted the issuance of up to $3.0 million in letters of credit. On May 9, 2014, the maximum amount for outstanding letters of credit under our U.S. credit agreement was increased from $3.0 million to $5.0 amount for outstanding letters of credit under our U.S. credit agreement was increased from $3.0 million to $5.0 million in order to guarantee a new revolving credit facility in Taiwan. million in order to guarantee a new revolving credit facility in Taiwan. On June 5, 2014, we amended our U.S. credit agreement to increase the cash dividend allowance from $1.0 On June 5, 2014, we amended our U.S. credit agreement to increase the cash dividend allowance from $1.0 million per calendar year to $3.0 million per calendar year. On December 5, 2014, we amended our U.S. credit million per calendar year to $3.0 million per calendar year. On December 5, 2014, we amended our U.S. credit agreement to increase the cash dividend allowance from $3.0 million per calendar year to $4.0 million per agreement to increase the cash dividend allowance from $3.0 million per calendar year to $4.0 million per calendar year and to extend the scheduled maturity date to December 7, 2016. calendar year and to extend the scheduled maturity date to December 7, 2016. On December 6, 2016, we amended our U.S. credit agreement, among other things, to increase the unsecured On December 6, 2016, we amended our U.S. credit agreement, among other things, to increase the unsecured revolving credit facility from $12.5 million to $15.0 million, to increase the cash dividend allowance from $4.0 revolving credit facility from $12.5 million to $15.0 million, to increase the cash dividend allowance from $4.0 million per calendar year to $5.0 million per calendar year, and to extend the scheduled maturity date to million per calendar year to $5.0 million per calendar year, and to extend the scheduled maturity date to December 31, 2018. We also amended the U.S. credit agreement to increase the minimum working capital and December 31, 2018. We also amended the U.S. credit agreement to increase the minimum working capital and minimum tangible net worth requirements from $90.0 million to $105.0 million and $120.0 million to $125.0 minimum tangible net worth requirements from $90.0 million to $105.0 million and $120.0 million to $125.0 million, respectively. million, respectively. Borrowings under the U.S. credit agreement bear interest either at a LIBOR-based rate or a floating rate, in each Borrowings under the U.S. credit agreement bear interest either at a LIBOR-based rate or a floating rate, in each case with an interest rate floor of 0.00%. The floating rate equals the greatest of (a) a one month LIBOR-based case with an interest rate floor of 0.00%. The floating rate equals the greatest of (a) a one month LIBOR-based rate plus 1.00% per annum, (b) the federal funds effective rate plus 0.50% per annum, (c) the prevailing prime rate plus 1.00% per annum, (b) the federal funds effective rate plus 0.50% per annum, (c) the prevailing prime rate, and (d) 0.00%. The rate we must pay for that portion of the U.S. credit agreement which is not utilized is rate, and (d) 0.00%. The rate we must pay for that portion of the U.S. credit agreement which is not utilized is 0.05% per annum. 0.05% per annum. The U.S. credit agreement contains customary financial covenants, including covenants (1) restricting us from The U.S. credit agreement contains customary financial covenants, including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but permitting us to make investments in making certain investments, loans, advances and acquisitions (but permitting us to make investments in subsidiaries of up to $5.0 million), (2) requiring that we maintain a minimum working capital of $105.0 million, subsidiaries of up to $5.0 million), (2) requiring that we maintain a minimum working capital of $105.0 million, and (3) requiring that we maintain a minimum tangible net worth of $125.0 million. The U.S. credit agreement and (3) requiring that we maintain a minimum tangible net worth of $125.0 million. The U.S. credit agreement permits us to pay cash dividends in an amount not to exceed $5.0 million per calendar year, so long as we are permits us to pay cash dividends in an amount not to exceed $5.0 million per calendar year, so long as we are not in default before and after giving effect to such dividends. not in default before and after giving effect to such dividends. We have a £1.0 million revolving credit facility in the United Kingdom and a €1.5 million revolving credit We have a £1.0 million revolving credit facility in the United Kingdom and a €1.5 million revolving credit facility in Germany. On May 12, 2014, we established a Taiwan credit facility in the amount of 100.0 million facility in Germany. On May 12, 2014, we established a Taiwan credit facility in the amount of 100.0 million New Taiwan Dollars with an expiration date of May 12, 2015. We did not renew this Taiwan credit facility. We New Taiwan Dollars with an expiration date of May 12, 2015. We did not renew this Taiwan credit facility. We also have a 40.0 million Chinese Yuan (approximately $5.9 million) credit facility in China that was renewed on also have a 40.0 million Chinese Yuan (approximately $5.9 million) credit facility in China that was renewed on February 17, 2016 with an expiration date of February 16, 2017. February 17, 2016 with an expiration date of February 16, 2017. 50 50 51 51 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. All of our credit facilities are unsecured. Sheets at October 31, 2016 and 2015 was $0.5 million and $1.1 million, respectively. At October 31, 2016, we had $1.5 million of borrowings under our China credit facility which bears interest at 4.6% annually (variable rate). We had no other debt or borrowings under any of our other credit facilities. At October 31, 2015, we had $1.6 million of borrowings outstanding under our credit facility in China. At October 31, 2016, we were in compliance with all covenants contained in the related credit agreements and, as of that date, we had unutilized credit facilities of $19.8 million. 6. FINANCIAL INSTRUMENTS Estimated Fair Value of Financial Instruments FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions. The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of these instruments, and such instruments meet the Level 1 criteria of the three-tier fair value hierarchy discussed below. The carrying amount of short-term debt approximates fair value due to the variable rate of the interest and the short term nature of the instrument. The fair value of Level 2 is based on an internally developed model using current interest rate data for similar issues as there is no active market for this type of instrument. In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of October 31, 2016 and 2015 (in thousands): A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as follows (dollars in thousands): Assets Liabilities October 31, 2016 October 31, 2015 October 31, 2016 October 31, 2015 Level 1 Deferred compensation Level 2 Derivatives $ 1,363 $ 1,310 $ -- $ -- $ 1,725 $ 1,228 $ 538 $ 1,071 Recurring Fair Value Measurements Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices which are readily available. Included as Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying consolidated financial statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 1 of Notes to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these contracts was $125.6 million and $109.6 million at October 31, 2016 and 2015, respectively. The fair value of Derivative assets recorded on our Consolidated Balance Sheets at October 31, 2016 and 2015 was $1.7 million and $1.2 million, respectively. The fair value of Derivative liabilities recorded on our Consolidated Balance 52 53 The fair value of the foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility. The counterparty to the forward exchange contract is a substantial and creditworthy financial institution. We do not consider either the risk of counterparty non-performance or the economic consequences of counterparty non-performance as material risks. 7. INCOME TAXES In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands): Year Ended October 31, 2016 2015 2014 Current: Deferred: U.S. taxes .................................................................. $ 1,362 $ 4,600 $ 3,498 Foreign taxes ............................................................. 4,456 5,818 3,752 8,352 3,594 7,092 U.S. taxes .................................................................. Foreign taxes ............................................................. (176) (49) (225) $ 5,593 (896) (117) (709) (165) (1,013) (874) $ 7,339 $ 6,218 Year Ended October 31, 2016 2015 2014 Income before income taxes: Domestic ................................................................... $ 2,703 $ 10,806 $ 9,190 Foreign ....................................................................... 16,182 12,747 Earnings (Loss) before taxes on income $ 18,885 $ 23,553 12,171 $ 21,361 Tax rates: U.S. statutory rate .............................................................. 34% 35% 35% Effect of tax rate of international jurisdictions different than U.S. statutory rates ................................... Valuation allowance................................................... State taxes ......................................................................... Tax Credits ........................................................................ (7%) 3% 0% (2%) Effect of Tax Rate Changes .............................................. 4% Other ................................................................................. (2%) Effective tax rate ............................................................... 30% (5%) 1% 1% (1%) 0% 0% 31% (4%) 0% 0% (1%) 0% (1%) 29% We have not made any provision for U.S. income taxes on the undistributed earnings of our wholly-owned foreign subsidiaries based upon our determination that such earnings will be indefinitely reinvested. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued All of our credit facilities are unsecured. All of our credit facilities are unsecured. Sheets at October 31, 2016 and 2015 was $0.5 million and $1.1 million, respectively. Sheets at October 31, 2016 and 2015 was $0.5 million and $1.1 million, respectively. The fair value of the foreign currency forward exchange contracts and the related currency positions are subject The fair value of the foreign currency forward exchange contracts and the related currency positions are subject to offsetting market risk resulting from foreign currency exchange rate volatility. The counterparty to the to offsetting market risk resulting from foreign currency exchange rate volatility. The counterparty to the forward exchange contract is a substantial and creditworthy financial institution. We do not consider either the forward exchange contract is a substantial and creditworthy financial institution. We do not consider either the risk of counterparty non-performance or the economic consequences of counterparty non-performance as risk of counterparty non-performance or the economic consequences of counterparty non-performance as material risks. material risks. 7. 7. INCOME TAXES INCOME TAXES In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands): In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands): Year Ended October 31, Year Ended October 31, 2015 2015 2016 2016 2014 2014 Current: Current: U.S. taxes .................................................................. U.S. taxes .................................................................. Foreign taxes ............................................................. Foreign taxes ............................................................. Deferred: Deferred: U.S. taxes .................................................................. U.S. taxes .................................................................. Foreign taxes ............................................................. Foreign taxes ............................................................. $ 1,362 $ 1,362 4,456 4,456 5,818 5,818 (176) (176) (49) (49) (225) (225) $ 5,593 $ 5,593 $ 4,600 $ 4,600 3,752 3,752 8,352 8,352 $ 3,498 $ 3,498 3,594 3,594 7,092 7,092 (896) (896) (117) (117) (709) (709) (165) (165) (1,013) (874) (1,013) (874) $ 6,218 $ 6,218 $ 7,339 $ 7,339 In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets and liabilities measured at fair value as of October 31, 2016 and 2015 (in thousands): and liabilities measured at fair value as of October 31, 2016 and 2015 (in thousands): A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as A comparison of income tax expense at the U.S. statutory rate to the Company’s effective tax rate is as follows (dollars in thousands): follows (dollars in thousands): Income before income taxes: Income before income taxes: Domestic ................................................................... Domestic ................................................................... Foreign ....................................................................... Foreign ....................................................................... Earnings (Loss) before taxes on income Earnings (Loss) before taxes on income Tax rates: Tax rates: U.S. statutory rate .............................................................. U.S. statutory rate .............................................................. Effect of tax rate of international jurisdictions Effect of tax rate of international jurisdictions different than U.S. statutory rates ................................... different than U.S. statutory rates ................................... Valuation allowance................................................... Valuation allowance................................................... State taxes ......................................................................... State taxes ......................................................................... Tax Credits ........................................................................ Tax Credits ........................................................................ Effect of Tax Rate Changes .............................................. Effect of Tax Rate Changes .............................................. Other ................................................................................. Other ................................................................................. Effective tax rate ............................................................... Effective tax rate ............................................................... Year Ended October 31, Year Ended October 31, 2015 2015 2016 2016 2014 2014 $ 2,703 $ 2,703 16,182 16,182 $ 18,885 $ 18,885 $ 10,806 $ 10,806 12,747 12,747 $ 23,553 $ 23,553 $ 9,190 $ 9,190 12,171 12,171 $ 21,361 $ 21,361 34% 34% 35% 35% 35% 35% (7%) (7%) 3% 3% 0% 0% (2%) (2%) 4% 4% (2%) (2%) 30% 30% (5%) (5%) 1% 1% 1% 1% (1%) (1%) 0% 0% 0% 0% 31% 31% (4%) (4%) 0% 0% 0% 0% (1%) (1%) 0% 0% (1%) (1%) 29% 29% At October 31, 2016, we had $1.5 million of borrowings under our China credit facility which bears interest at At October 31, 2016, we had $1.5 million of borrowings under our China credit facility which bears interest at 4.6% annually (variable rate). We had no other debt or borrowings under any of our other credit facilities. 4.6% annually (variable rate). We had no other debt or borrowings under any of our other credit facilities. At October 31, 2015, we had $1.6 million of borrowings outstanding under our credit facility in China. At At October 31, 2015, we had $1.6 million of borrowings outstanding under our credit facility in China. At October 31, 2016, we were in compliance with all covenants contained in the related credit agreements and, as October 31, 2016, we were in compliance with all covenants contained in the related credit agreements and, as of that date, we had unutilized credit facilities of $19.8 million. of that date, we had unutilized credit facilities of $19.8 million. 6. 6. FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENTS Estimated Fair Value of Financial Instruments Estimated Fair Value of Financial Instruments FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in FASB fair value guidance establishes a three-tier fair value hierarchy, which categorizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active measuring fair value. These tiers include: Level 1, defined as observable inputs, such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exist, therefore requiring an entity to develop its own assumptions. therefore requiring an entity to develop its own assumptions. The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of these instruments, and such instruments meet the Level 1 criteria of the three-tier fair value hierarchy discussed these instruments, and such instruments meet the Level 1 criteria of the three-tier fair value hierarchy discussed below. The carrying amount of short-term debt approximates fair value due to the variable rate of the interest below. The carrying amount of short-term debt approximates fair value due to the variable rate of the interest and the short term nature of the instrument. The fair value of Level 2 is based on an internally developed model and the short term nature of the instrument. The fair value of Level 2 is based on an internally developed model using current interest rate data for similar issues as there is no active market for this type of instrument. using current interest rate data for similar issues as there is no active market for this type of instrument. Assets Assets Liabilities Liabilities October 31, October 31, October 31, October 31, October 31, October 31, October 31, October 31, 2016 2016 2015 2015 2016 2016 2015 2015 Deferred compensation Deferred compensation $ 1,363 $ 1,363 $ 1,310 $ 1,310 $ -- $ -- $ -- $ -- $ 1,725 $ 1,725 $ 1,228 $ 1,228 $ 538 $ 538 $ 1,071 $ 1,071 Level 1 Level 1 Level 2 Level 2 Derivatives Derivatives Recurring Fair Value Measurements Recurring Fair Value Measurements Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We Included in Level 1 assets are mutual fund investments under a nonqualified deferred compensation plan. We estimate the fair value of these investments on a recurring basis using market prices which are readily available. estimate the fair value of these investments on a recurring basis using market prices which are readily available. Included as Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on Included as Level 2 fair value measurements are derivative assets and liabilities related to gains and losses on foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these foreign currency forward exchange contracts entered into with a third party. We estimate the fair value of these derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative derivatives on a recurring basis using foreign currency exchange rates obtained from active markets. Derivative instruments are reported in the accompanying consolidated financial statements at fair value. We have instruments are reported in the accompanying consolidated financial statements at fair value. We have derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note derivative financial instruments in the form of foreign currency forward exchange contracts as described in Note 1 of Notes to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these 1 of Notes to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these contracts was $125.6 million and $109.6 million at October 31, 2016 and 2015, respectively. The fair value of contracts was $125.6 million and $109.6 million at October 31, 2016 and 2015, respectively. The fair value of Derivative assets recorded on our Consolidated Balance Sheets at October 31, 2016 and 2015 was $1.7 million Derivative assets recorded on our Consolidated Balance Sheets at October 31, 2016 and 2015 was $1.7 million and $1.2 million, respectively. The fair value of Derivative liabilities recorded on our Consolidated Balance and $1.2 million, respectively. The fair value of Derivative liabilities recorded on our Consolidated Balance subsidiaries based upon our determination subsidiaries based upon our determination We have not made any provision for U.S. income taxes on the undistributed earnings of our wholly-owned We have not made any provision for U.S. income taxes on the undistributed earnings of our wholly-owned foreign indefinitely indefinitely foreign reinvested. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were reinvested. Undistributed earnings of our wholly-owned foreign subsidiaries at October 31, 2016 were approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions approximately $79.7 million. In the event these earnings are later distributed to the U.S., such distributions would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. would likely result in additional U.S. tax that may be offset, at least in part, by associated foreign tax credits. such earnings will be such earnings will be that that 52 52 53 53 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. As of October 31, 2016, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.6 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research and development tax credits of $0.5 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2016 and 2015, the balance of this valuation allowance was $2.1 million and $1.5 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2016 and 2015 were as follows (in thousands): Deferred Tax Assets: Accrued inventory reserves ...................................................................... Accrued warranty expenses ..................................................................... Compensation related expenses ............................................................... Unrealized exchange gain/loss ................................................................. Other accrued expenses ............................................................................ Net operating loss carryforwards ............................................................. Other credit carryforwards…………………………………………... Other ........................................................................................................ Less: Valuation allowance on net operating loss carryforwards……..... Valuation allowance on other credit carryforwards……….......… Deferred tax assets ................................................................................... Deferred Tax Liabilities: Net derivative instruments ....................................................................... Property and equipment and capitalized software development costs ..... Other ........................................................................................................ Net deferred tax assets October 31, 2016 2015 $ 1,824 312 2,664 370 194 1,616 474 331 7,785 (1,593) (474) (2,067) 5,718 $ 1,304 441 1,891 186 237 1,275 287 170 5,791 (1,300) (185) (1,485) 4,306 (701) (2,717) (456) (811) (2,369) (403) $ 1,844 $ 723 As of October 31, 2016, we had net operating losses carryforwards for international and U.S. income tax purposes of $7.9 million, of which $6.5 million will expire within 5 years and $1.4 million will expire between 5 and 20 years. We also had tax credits of $719,000 which will expire between 10 and 20 years. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands): Balance, beginning of year Additions based on tax positions related to the current year Additions (reductions) related to prior year tax positions Reductions due to statute expiration Other Balance, end of year 2016 $ 1,034 52 19 -- (3) 2015 $ 1,196 17 (51) -- (128) 2014 $ 1,284 5 (4) -- (89) $ 1,102 $ 1,034 $ 1,196 The entire balance of the unrecognized tax benefits and related interest at October 31, 2016, if recognized, would favorably affect the effective tax rate in future periods. We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision. As of October 31, 2016, the gross amount of interest accrued, reported in other liabilities, was approximately $53,000, which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between July 2017 and July 2019. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of future audits may result in liabilities that could be different from this estimate. In such case, we would record additional tax expense or tax benefit in the tax provision (benefit) or reclassify amounts on the consolidated balance sheets in the period in which the matter is effectively settled with the taxing authority. We file income tax returns in the U.S. federal jurisdiction and various states, local, and non-U.S. jurisdictions. There are currently no open audits in any jurisdictions. A summary of open tax years by major jurisdiction is presented below: United States federal Fiscal 2013 through the current period Germany¹ Taiwan Fiscal 2013 through the current period Fiscal 2013 through the current period ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. 8. EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our employees, under which our matching contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment. Our contributions and related expense totaled $1.1 million, $933,000, and $884,000, for the fiscal years ended October 31, 2016, 2015 and 2014, respectively. 9. STOCK-BASED COMPENSATION In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights (“SARs”), restricted stock, stock units and other stock-based awards. The 2016 Equity Plan replaced the 2008 Equity Incentive Plan (the “2008 Plan”) and is the only active plan under which equity awards may be made to our employees and non-employee directors. No further awards will be made under our 2008 Plan. The total number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048, which included 386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date of shareholder approval of the 2016 Equity Plan. The Compensation Committee of the Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares under the 2016 Equity Plan which are currently outstanding, and we have granted stock options, restricted shares and performance shares under the 2008 Plan which are currently outstanding. No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee may determine at the date of grant. The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date. 54 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued Deferred income taxes are determined based on the difference between the amounts used for financial reporting Deferred income taxes are determined based on the difference between the amounts used for financial reporting purposes and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the purposes and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when differences are expected to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws when changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than changes are enacted. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. not that a tax benefit will not be realized. As of October 31, 2016, we had deferred tax assets established for accumulated net operating loss carryforwards As of October 31, 2016, we had deferred tax assets established for accumulated net operating loss carryforwards of $1.6 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research of $1.6 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research and development tax credits of $0.5 million. We have established a valuation allowance against some of these and development tax credits of $0.5 million. We have established a valuation allowance against some of these carryforwards due to the uncertainty of their full realization. As of October 31, 2016 and 2015, the balance of carryforwards due to the uncertainty of their full realization. As of October 31, 2016 and 2015, the balance of this valuation allowance was $2.1 million and $1.5 million, respectively. this valuation allowance was $2.1 million and $1.5 million, respectively. Significant components of our deferred tax assets and liabilities at October 31, 2016 and 2015 were as follows Significant components of our deferred tax assets and liabilities at October 31, 2016 and 2015 were as follows (in thousands): (in thousands): Deferred Tax Assets: Deferred Tax Assets: Accrued inventory reserves ...................................................................... Accrued inventory reserves ...................................................................... Accrued warranty expenses ..................................................................... Accrued warranty expenses ..................................................................... Compensation related expenses ............................................................... Compensation related expenses ............................................................... Unrealized exchange gain/loss ................................................................. Unrealized exchange gain/loss ................................................................. Other accrued expenses ............................................................................ Other accrued expenses ............................................................................ Net operating loss carryforwards ............................................................. Net operating loss carryforwards ............................................................. Other credit carryforwards…………………………………………... Other credit carryforwards…………………………………………... Other ........................................................................................................ Other ........................................................................................................ Less: Valuation allowance on net operating loss carryforwards……..... Less: Valuation allowance on net operating loss carryforwards……..... Valuation allowance on other credit carryforwards……….......… Valuation allowance on other credit carryforwards……….......… Deferred tax assets ................................................................................... Deferred tax assets ................................................................................... Deferred Tax Liabilities: Deferred Tax Liabilities: Net derivative instruments ....................................................................... Net derivative instruments ....................................................................... Property and equipment and capitalized software development costs ..... Property and equipment and capitalized software development costs ..... Other ........................................................................................................ Other ........................................................................................................ Net deferred tax assets Net deferred tax assets October 31, October 31, 2016 2016 2015 2015 $ 1,824 $ 1,824 $ 1,304 $ 1,304 312 312 2,664 2,664 370 370 194 194 1,616 1,616 474 474 331 331 7,785 7,785 (1,593) (1,593) (474) (474) (2,067) (2,067) 5,718 5,718 441 441 1,891 1,891 186 186 237 237 1,275 1,275 287 287 170 170 5,791 5,791 (1,300) (1,300) (185) (185) (1,485) (1,485) 4,306 4,306 (701) (701) (2,717) (2,717) (456) (456) (2,369) (2,369) (811) (811) (403) (403) $ 1,844 $ 1,844 $ 723 $ 723 As of October 31, 2016, we had net operating losses carryforwards for international and U.S. income tax As of October 31, 2016, we had net operating losses carryforwards for international and U.S. income tax purposes of $7.9 million, of which $6.5 million will expire within 5 years and $1.4 million will expire between 5 purposes of $7.9 million, of which $6.5 million will expire within 5 years and $1.4 million will expire between 5 and 20 years. We also had tax credits of $719,000 which will expire between 10 and 20 years. and 20 years. We also had tax credits of $719,000 which will expire between 10 and 20 years. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding the related accrual for interest or penalties, is as follows (in thousands): for interest or penalties, is as follows (in thousands): Balance, beginning of year Balance, beginning of year Additions based on tax positions related to the current year Additions based on tax positions related to the current year Additions (reductions) related to prior year tax positions Additions (reductions) related to prior year tax positions Reductions due to statute expiration Reductions due to statute expiration Other Other Balance, end of year Balance, end of year 2016 2016 2015 2015 2014 2014 $ 1,034 $ 1,034 $ 1,196 $ 1,196 $ 1,284 $ 1,284 52 52 19 19 -- -- (3) (3) 17 17 (51) (51) -- -- (128) (128) 5 5 (4) (4) -- -- (89) (89) $ 1,102 $ 1,102 $ 1,034 $ 1,034 $ 1,196 $ 1,196 The entire balance of the unrecognized tax benefits and related interest at October 31, 2016, if recognized, The entire balance of the unrecognized tax benefits and related interest at October 31, 2016, if recognized, would favorably affect the effective tax rate in future periods. would favorably affect the effective tax rate in future periods. We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax provision. As of October 31, 2016, the gross amount of interest accrued, reported in other liabilities, was tax provision. As of October 31, 2016, the gross amount of interest accrued, reported in other liabilities, was approximately $53,000, which did not include the federal tax benefit of interest deductions. The statute of approximately $53,000, which did not include the federal tax benefit of interest deductions. The statute of limitations with respect to unrecognized tax benefits will expire between July 2017 and July 2019. limitations with respect to unrecognized tax benefits will expire between July 2017 and July 2019. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of future audits may result in liabilities that could be different from this estimate. In such case, we would record future audits may result in liabilities that could be different from this estimate. In such case, we would record additional tax expense or tax benefit in the tax provision (benefit) or reclassify amounts on the consolidated additional tax expense or tax benefit in the tax provision (benefit) or reclassify amounts on the consolidated balance sheets in the period in which the matter is effectively settled with the taxing authority. balance sheets in the period in which the matter is effectively settled with the taxing authority. We file income tax returns in the U.S. federal jurisdiction and various states, local, and non-U.S. jurisdictions. We file income tax returns in the U.S. federal jurisdiction and various states, local, and non-U.S. jurisdictions. There are currently no open audits in any jurisdictions. There are currently no open audits in any jurisdictions. A summary of open tax years by major jurisdiction is presented below: A summary of open tax years by major jurisdiction is presented below: United States federal United States federal Germany¹ Germany¹ Taiwan Taiwan Fiscal 2013 through the current period Fiscal 2013 through the current period Fiscal 2013 through the current period Fiscal 2013 through the current period Fiscal 2013 through the current period Fiscal 2013 through the current period ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. ¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable. 8. 8. EMPLOYEE BENEFITS EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our employees, under which our matching We have defined contribution plans that include a majority of our employees, under which our matching contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial contributions are primarily discretionary. The purpose of these plans is generally to provide additional financial security during retirement by providing employees with an incentive to save throughout their employment. Our security during retirement by providing employees with an incentive to save throughout their employment. Our contributions and related expense totaled $1.1 million, $933,000, and $884,000, for the fiscal years ended contributions and related expense totaled $1.1 million, $933,000, and $884,000, for the fiscal years ended October 31, 2016, 2015 and 2014, respectively. October 31, 2016, 2015 and 2014, respectively. 9. 9. STOCK-BASED COMPENSATION STOCK-BASED COMPENSATION In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), In March 2016, we adopted the Hurco Companies, Inc. 2016 Equity Incentive Plan (the “2016 Equity Plan”), which allows us to grant awards of stock options, stock appreciation rights (“SARs”), restricted stock, stock which allows us to grant awards of stock options, stock appreciation rights (“SARs”), restricted stock, stock units and other stock-based awards. The 2016 Equity Plan replaced the 2008 Equity Incentive Plan (the “2008 units and other stock-based awards. The 2016 Equity Plan replaced the 2008 Equity Incentive Plan (the “2008 Plan”) and is the only active plan under which equity awards may be made to our employees and non-employee Plan”) and is the only active plan under which equity awards may be made to our employees and non-employee directors. No further awards will be made under our 2008 Plan. The total number of shares of our common directors. No further awards will be made under our 2008 Plan. The total number of shares of our common stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048, which included 386,048 stock that may be issued pursuant to awards under the 2016 Equity Plan is 856,048, which included 386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date of shareholder shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date of shareholder approval of the 2016 Equity Plan. approval of the 2016 Equity Plan. The Compensation Committee of the Board of Directors has the authority to determine the officers, directors The Compensation Committee of the Board of Directors has the authority to determine the officers, directors and key employees who will be granted awards; designate the number of shares subject to each award; and key employees who will be granted awards; designate the number of shares subject to each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of determine the terms and conditions upon which awards will be granted; and prescribe the form and terms of award agreements. We have granted restricted shares under the 2016 Equity Plan which are currently award agreements. We have granted restricted shares under the 2016 Equity Plan which are currently outstanding, and we have granted stock options, restricted shares and performance shares under the 2008 Plan outstanding, and we have granted stock options, restricted shares and performance shares under the 2008 Plan which are currently outstanding. No stock option may be exercised more than ten years after the date of grant or which are currently outstanding. No stock option may be exercised more than ten years after the date of grant or such shorter period as the Compensation Committee may determine at the date of grant. The market value of a such shorter period as the Compensation Committee may determine at the date of grant. The market value of a share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the share of our common stock, for purposes of the 2016 Equity Plan, is the closing sale price as reported by the Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date. Nasdaq Global Select Market on the date in question or, if not a trading day, on the last preceding trading date. 54 54 55 55 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. During fiscal 2016, we recorded approximately $1.6 million of stock-based compensation expense related to grants under the 2008 Plan and the 2016 Equity Plan. We recorded approximately $1.2 million and $921,000 of stock-based compensation expense related to grants under the 2008 Plan for fiscal 2015 and 2014, respectively. As of October 31, 2016, there was an estimated $2.0 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2019. On March 10, 2016, the Compensation Committee granted a total of 9,170 shares of time-based restricted stock to our non-employee directors under the 2016 Equity Plan. The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date which was $30.52 per share. On January 4, 2016, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance period is fiscal 2016 through fiscal 2018. On that date, the Compensation Committee granted a total of 17,684 shares of time-based restricted shares to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant which was $26.04 per share. On January 4, 2016, the Compensation Committee also granted a total target number of 24,023 performance shares to our executive officers designated as “Performance Shares – TSR”. The shares were weighted as 40% of the overall long-term incentive compensation arrangement and will vest and be paid based upon our total shareholder return of our common stock over a three-year period, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The fair value of the market-based performance shares was $30.67 per share and was calculated using the Monte Carlo approach. On January 4, 2016, the Compensation Committee also granted a total target number of 24,759 performance shares to our executive officers designated as “Performance Shares – ROIC”. These shares were weighted as 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The grant date fair value of the ROIC performance shares was based on the closing sales price of our common stock on the grant date which was $26.04 per share. On March 12, 2015, the Compensation Committee granted a total of 9,086 shares of restricted stock to our non- employee directors. The restricted stock vests in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of restricted stock was based on the closing sales price of our common stock on the grant date which was $30.80 per share. On January 6, 2015, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance period is fiscal 2015 through fiscal 2017. On that date, the Compensation Committee granted a total of 11,174 shares of time-based restricted shares to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant which was $32.22. On January 6, 2015, the Compensation Committee also granted a total target number of 16,740 performance shares to our executive officers designated as “Performance Shares – TSR”. The shares were weighted as 40% of the overall long-term incentive compensation arrangement and will vest and be paid based upon our total shareholder return of our common stock over a three-year period, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The fair value of the market-based performance shares was $34.41 per share and was calculated using the Monte Carlo approach. On January 6, 2015, the Compensation Committee also granted a total target number of 15,643 performance shares to our executive officers designated as “Performance Shares – ROIC”. These shares were weighted as 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The grant date fair value of the ROIC performance shares was based on the closing sales price of our common stock on the grant date which was $32.22 per share. On March 13, 2014, the Compensation Committee granted a total of 11,235 shares of restricted stock to our non-employee directors. The restricted stock vests in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of the restricted stock was based on the closing sales price of our common stock on the grant date which was $24.92 per share. On January 10, 2014, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance period is fiscal 2014 through fiscal 2016. On that date, the Compensation Committee granted a total 12,182 shares of time-based restricted shares to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant which was $24.01 per share. On January 10, 2014, the Compensation Committee also granted a total target number of 16,948 performance shares to our executive officers designated as “Performance Shares –TSR”. The shares were weighted as 40% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over a three-year period, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The fair value of the market-based performance shares was $26.43 per share and was calculated using the Monte Carlo approach. 56 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued During fiscal 2016, we recorded approximately $1.6 million of stock-based compensation expense related to During fiscal 2016, we recorded approximately $1.6 million of stock-based compensation expense related to grants under the 2008 Plan and the 2016 Equity Plan. We recorded approximately $1.2 million and $921,000 of grants under the 2008 Plan and the 2016 Equity Plan. We recorded approximately $1.2 million and $921,000 of stock-based compensation expense related to grants under the 2008 Plan for fiscal 2015 and 2014, respectively. stock-based compensation expense related to grants under the 2008 Plan for fiscal 2015 and 2014, respectively. As of October 31, 2016, there was an estimated $2.0 million of total unrecognized stock-based compensation As of October 31, 2016, there was an estimated $2.0 million of total unrecognized stock-based compensation cost that we expect to recognize by the end of the first quarter of fiscal 2019. cost that we expect to recognize by the end of the first quarter of fiscal 2019. On March 10, 2016, the Compensation Committee granted a total of 9,170 shares of time-based restricted stock On March 10, 2016, the Compensation Committee granted a total of 9,170 shares of time-based restricted stock to our non-employee directors under the 2016 Equity Plan. The restricted shares vest in full one year from the to our non-employee directors under the 2016 Equity Plan. The restricted shares vest in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was based on the closing sales price of our common stock on the grant date which value of the restricted shares was based on the closing sales price of our common stock on the grant date which was $30.52 per share. was $30.52 per share. On January 4, 2016, the Compensation Committee approved a long-term incentive compensation arrangement On January 4, 2016, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance period is fiscal 2016 through fiscal 2018. period is fiscal 2016 through fiscal 2018. On that date, the Compensation Committee granted a total of 17,684 shares of time-based restricted shares to On that date, the Compensation Committee granted a total of 17,684 shares of time-based restricted shares to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant which was $26.04 per share. the closing sales price of our common stock on the date of grant which was $26.04 per share. On January 4, 2016, the Compensation Committee also granted a total target number of 24,023 performance On January 4, 2016, the Compensation Committee also granted a total target number of 24,023 performance shares to our executive officers designated as “Performance Shares – TSR”. The shares were weighted as 40% shares to our executive officers designated as “Performance Shares – TSR”. The shares were weighted as 40% of the overall long-term incentive compensation arrangement and will vest and be paid based upon our total of the overall long-term incentive compensation arrangement and will vest and be paid based upon our total shareholder return of our common stock over a three-year period, relative to the total shareholder return of the shareholder return of our common stock over a three-year period, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The fair value of the market-based performance shares was $30.67 per share achieving maximum performance. The fair value of the market-based performance shares was $30.67 per share and was calculated using the Monte Carlo approach. and was calculated using the Monte Carlo approach. On January 4, 2016, the Compensation Committee also granted a total target number of 24,759 performance On January 4, 2016, the Compensation Committee also granted a total target number of 24,759 performance shares to our executive officers designated as “Performance Shares – ROIC”. These shares were weighted as shares to our executive officers designated as “Performance Shares – ROIC”. These shares were weighted as 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period. achievement of pre-established goals related to our average return on invested capital over the three-year period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The grant date fair performance and 200% of the target number of shares for achieving maximum performance. The grant date fair value of the ROIC performance shares was based on the closing sales price of our common stock on the grant value of the ROIC performance shares was based on the closing sales price of our common stock on the grant date which was $26.04 per share. date which was $26.04 per share. On March 12, 2015, the Compensation Committee granted a total of 9,086 shares of restricted stock to our non- On March 12, 2015, the Compensation Committee granted a total of 9,086 shares of restricted stock to our non- employee directors. The restricted stock vests in full one year from the date of grant provided the recipient employee directors. The restricted stock vests in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of restricted stock was based on remains on the board of directors through that date. The grant date fair value of restricted stock was based on the closing sales price of our common stock on the grant date which was $30.80 per share. the closing sales price of our common stock on the grant date which was $30.80 per share. On January 6, 2015, the Compensation Committee approved a long-term incentive compensation arrangement On January 6, 2015, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance period is fiscal 2015 through fiscal 2017. period is fiscal 2015 through fiscal 2017. On that date, the Compensation Committee granted a total of 11,174 shares of time-based restricted shares to On that date, the Compensation Committee granted a total of 11,174 shares of time-based restricted shares to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant which was $32.22. the closing sales price of our common stock on the date of grant which was $32.22. On January 6, 2015, the Compensation Committee also granted a total target number of 16,740 performance On January 6, 2015, the Compensation Committee also granted a total target number of 16,740 performance shares to our executive officers designated as “Performance Shares – TSR”. The shares were weighted as 40% shares to our executive officers designated as “Performance Shares – TSR”. The shares were weighted as 40% of the overall long-term incentive compensation arrangement and will vest and be paid based upon our total of the overall long-term incentive compensation arrangement and will vest and be paid based upon our total shareholder return of our common stock over a three-year period, relative to the total shareholder return of the shareholder return of our common stock over a three-year period, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The fair value of the market-based performance shares was $34.41 per share achieving maximum performance. The fair value of the market-based performance shares was $34.41 per share and was calculated using the Monte Carlo approach. and was calculated using the Monte Carlo approach. On January 6, 2015, the Compensation Committee also granted a total target number of 15,643 performance On January 6, 2015, the Compensation Committee also granted a total target number of 15,643 performance shares to our executive officers designated as “Performance Shares – ROIC”. These shares were weighted as shares to our executive officers designated as “Performance Shares – ROIC”. These shares were weighted as 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period. achievement of pre-established goals related to our average return on invested capital over the three-year period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The grant date fair performance and 200% of the target number of shares for achieving maximum performance. The grant date fair value of the ROIC performance shares was based on the closing sales price of our common stock on the grant value of the ROIC performance shares was based on the closing sales price of our common stock on the grant date which was $32.22 per share. date which was $32.22 per share. On March 13, 2014, the Compensation Committee granted a total of 11,235 shares of restricted stock to our On March 13, 2014, the Compensation Committee granted a total of 11,235 shares of restricted stock to our non-employee directors. The restricted stock vests in full one year from the date of grant provided the recipient non-employee directors. The restricted stock vests in full one year from the date of grant provided the recipient remains on the board of directors through that date. The grant date fair value of the restricted stock was based remains on the board of directors through that date. The grant date fair value of the restricted stock was based on the closing sales price of our common stock on the grant date which was $24.92 per share. on the closing sales price of our common stock on the grant date which was $24.92 per share. On January 10, 2014, the Compensation Committee approved a long-term incentive compensation arrangement On January 10, 2014, the Compensation Committee approved a long-term incentive compensation arrangement for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. for our executive officers in the form of restricted shares and performance shares awarded under the 2008 Plan. The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance The awards were 25% time-based vesting and 75% performance-based vesting. The three-year performance period is fiscal 2014 through fiscal 2016. period is fiscal 2014 through fiscal 2016. On that date, the Compensation Committee granted a total 12,182 shares of time-based restricted shares to our On that date, the Compensation Committee granted a total 12,182 shares of time-based restricted shares to our executive officers. The restricted shares vest in thirds over three years from the date of grant provided the executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient remains employed through that date. The grant date fair value of the restricted shares was based upon recipient remains employed through that date. The grant date fair value of the restricted shares was based upon the closing sales price of our common stock on the date of grant which was $24.01 per share. the closing sales price of our common stock on the date of grant which was $24.01 per share. On January 10, 2014, the Compensation Committee also granted a total target number of 16,948 performance On January 10, 2014, the Compensation Committee also granted a total target number of 16,948 performance shares to our executive officers designated as “Performance Shares –TSR”. The shares were weighted as 40% shares to our executive officers designated as “Performance Shares –TSR”. The shares were weighted as 40% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the total of the overall long-term incentive compensation arrangement and will vest and be paid based upon the total shareholder return of our common stock over a three-year period, relative to the total shareholder return of the shareholder return of our common stock over a three-year period, relative to the total shareholder return of the companies in a specified peer group over that period. Participants will have the ability to earn between 50% of companies in a specified peer group over that period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The fair value of the market-based performance shares was $26.43 per share achieving maximum performance. The fair value of the market-based performance shares was $26.43 per share and was calculated using the Monte Carlo approach. and was calculated using the Monte Carlo approach. 56 56 57 57 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. On January 10, 2014, the Compensation Committee also granted a total target number of 17,056 performance shares to our executive officers designated as “Performance Shares –ROIC”. These shares were weighted as 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The grant date fair value of the ROIC performance shares was based on the closing sales price of our common stock on the grant date which was $24.01 per share. A reconciliation of the Company’s restricted stock activity and related information is as follows: Unvested at October 31, 2015 Shares granted Shares vested Shares withheld Unvested at October 31, 2016 Number of Shares 98,799 75,636 (21,385) (5,700) 147,350 Weighted Average Grant Date Fair Value $ 28.89 28.05 27.63 25.29 $ 28.79 A summary of the status of the options as of October 31, 2016, 2015 and 2014 and the related activity for the year is as follows: Balance October 31, 2013 Granted ....................................................... Cancelled .................................................... Expired ....................................................... Exercised .................................................... Balance October 31, 2014 Granted ....................................................... Cancelled .................................................... Expired ....................................................... Exercised .................................................... Balance October 31, 2015 Granted ....................................................... Cancelled .................................................... Expired ....................................................... Exercised .................................................... Balance October 31, 2016 Shares Under Option 168,712 -- (20,217) -- (20,306) 128,189 -- (5,000) -- (15,300) 107,889 -- -- -- -- 107,889 Weighted Average Exercise Price Per Share $ 20.73 -- 25.59 -- 17.67 $ 20.45 -- 35.83 -- 16.81 $ 20.25 -- -- -- -- $ 20.25 The total intrinsic value of stock options exercised during the twelve months ended October 31, 2016, 2015 and 2014 was approximately $0, $154,000 and $424,000, respectively. As of October 31, 2016, the total intrinsic value of outstanding stock options already vested and expected to vest and the intrinsic value of options that are outstanding and exercisable was $690,000. Stock options outstanding and exercisable on October 31, 2016, are as follows: Weighted Weighted Average Shares Under Average Exercise Remaining Contractual Option Price Per Share Life in Years Range of Exercise Prices Per Share Outstanding $ 14.82 14.88 18.13 21.45 23.30 35.83 $ 14.82 14.88 18.13 21.45 23.30 35.83 $ 14.82 – 35.83 Exercisable $ 14.82 – 35.83 24,000 4,200 16,000 37,841 20,848 5,000 107,889 24,000 4,200 16,000 37,841 20,848 5,000 107,889 $ 14.82 14.88 18.13 21.45 23.30 35.83 $ 20.25 $ 14.82 14.88 18.13 21.45 23.30 35.83 $ 20.25 3.1 2.5 3.5 5.1 6.1 1.6 4.4 3.1 2.5 3.5 5.1 6.1 1.6 4.4 10. RELATED PARTY TRANSACTIONS As of October 31, 2016, we owned approximately 35% of the outstanding shares of a Taiwanese-based contract manufacturer, Hurco Automation, Ltd. (“HAL”). HAL’s scope of activities includes the design, manufacture, sales and distribution of industrial automation products, software systems and related components, including control systems and components produced under contract for sale exclusively to us. We are accounting for this investment using the equity method. The investment of $3.6 million and $3.0 million at October 31, 2016 and 2015, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $9.9 million, $8.9 million and $9.3 million in fiscal 2016, 2015 and 2014, respectively. Sales of control component parts to HAL were $623,000, $723,000 and $1.4 million for the fiscal years ended October 31, 2016, 2015 and 2014, respectively. Trade payables to HAL were $2.0 million and $1.8 million at October 31, 2016 and 2015, respectively. Trade receivables from HAL were $94,000 and $55,000 at October 31, 2016 and 2015, respectively. Summary unaudited financial information for HAL’s operations and financial condition is as follows (in thousands): 2016 2015 2014 Net Sales ...................................................... Gross Profit .................................................. Operating Income ........................................ Net Income................................................... $ 13,948 2,240 952 1,323 $ 12,852 $ 12,063 2,041 665 1,546 1,759 468 1,264 Current Assets .............................................. Non-current Assets ...................................... Current Liabilities ........................................ $ 10,238 3,733 2,572 $ 10,262 $ 10,469 3,087 3,472 3,065 3,637 58 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued On January 10, 2014, the Compensation Committee also granted a total target number of 17,056 performance On January 10, 2014, the Compensation Committee also granted a total target number of 17,056 performance shares to our executive officers designated as “Performance Shares –ROIC”. These shares were weighted as shares to our executive officers designated as “Performance Shares –ROIC”. These shares were weighted as 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the 35% of the overall long-term incentive compensation arrangement and will vest and be paid based upon the achievement of pre-established goals related to our average return on invested capital over the three-year period. achievement of pre-established goals related to our average return on invested capital over the three-year period. Participants will have the ability to earn between 50% of the target number of shares for achieving threshold Participants will have the ability to earn between 50% of the target number of shares for achieving threshold performance and 200% of the target number of shares for achieving maximum performance. The grant date fair performance and 200% of the target number of shares for achieving maximum performance. The grant date fair value of the ROIC performance shares was based on the closing sales price of our common stock on the grant value of the ROIC performance shares was based on the closing sales price of our common stock on the grant date which was $24.01 per share. date which was $24.01 per share. A reconciliation of the Company’s restricted stock activity and related information is as follows: A reconciliation of the Company’s restricted stock activity and related information is as follows: Unvested at October 31, 2015 Unvested at October 31, 2015 Shares granted Shares granted Shares vested Shares vested Shares withheld Shares withheld Unvested at October 31, 2016 Unvested at October 31, 2016 A summary of the status of the options as of October 31, 2016, 2015 and 2014 and the related activity for the A summary of the status of the options as of October 31, 2016, 2015 and 2014 and the related activity for the year is as follows: year is as follows: Number of Number of Shares Shares 98,799 98,799 75,636 75,636 (21,385) (21,385) (5,700) (5,700) 147,350 147,350 Weighted Average Weighted Average Grant Date Grant Date Fair Value Fair Value $ 28.89 $ 28.89 28.05 28.05 27.63 27.63 25.29 25.29 $ 28.79 $ 28.79 Shares Under Shares Under Option Option 168,712 168,712 Weighted Weighted Average Average Exercise Price Exercise Price Per Share Per Share $ 20.73 $ 20.73 Balance October 31, 2013 Balance October 31, 2013 Granted ....................................................... Granted ....................................................... Cancelled .................................................... Cancelled .................................................... (20,217) (20,217) Expired ....................................................... Expired ....................................................... Exercised .................................................... Exercised .................................................... Balance October 31, 2014 Balance October 31, 2014 (20,306) (20,306) 128,189 128,189 Granted ....................................................... Granted ....................................................... Cancelled .................................................... Cancelled .................................................... (5,000) (5,000) Expired ....................................................... Expired ....................................................... Exercised .................................................... Exercised .................................................... (15,300) (15,300) Balance October 31, 2015 Balance October 31, 2015 107,889 107,889 Granted ....................................................... Granted ....................................................... Cancelled .................................................... Cancelled .................................................... Expired ....................................................... Expired ....................................................... Exercised .................................................... Exercised .................................................... Balance October 31, 2016 Balance October 31, 2016 107,889 107,889 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 25.59 25.59 17.67 17.67 $ 20.45 $ 20.45 35.83 35.83 16.81 16.81 $ 20.25 $ 20.25 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- $ 20.25 $ 20.25 The total intrinsic value of stock options exercised during the twelve months ended October 31, 2016, 2015 and The total intrinsic value of stock options exercised during the twelve months ended October 31, 2016, 2015 and 2014 was approximately $0, $154,000 and $424,000, respectively. 2014 was approximately $0, $154,000 and $424,000, respectively. As of October 31, 2016, the total intrinsic value of outstanding stock options already vested and expected to vest As of October 31, 2016, the total intrinsic value of outstanding stock options already vested and expected to vest and the intrinsic value of options that are outstanding and exercisable was $690,000. Stock options outstanding and the intrinsic value of options that are outstanding and exercisable was $690,000. Stock options outstanding and exercisable on October 31, 2016, are as follows: and exercisable on October 31, 2016, are as follows: Range of Exercise Range of Exercise Prices Per Share Prices Per Share Shares Under Shares Under Option Option Weighted Weighted Average Exercise Average Exercise Price Per Share Price Per Share Weighted Average Weighted Average Remaining Contractual Remaining Contractual Life in Years Life in Years Outstanding Outstanding $ 14.82 $ 14.82 14.88 14.88 18.13 18.13 21.45 21.45 23.30 23.30 35.83 35.83 $ 14.82 – 35.83 $ 14.82 – 35.83 Exercisable Exercisable $ 14.82 $ 14.82 14.88 14.88 18.13 18.13 21.45 21.45 23.30 23.30 35.83 35.83 $ 14.82 – 35.83 $ 14.82 – 35.83 24,000 24,000 4,200 4,200 16,000 16,000 37,841 37,841 20,848 20,848 5,000 5,000 107,889 107,889 24,000 24,000 4,200 4,200 16,000 16,000 37,841 37,841 20,848 20,848 5,000 5,000 107,889 107,889 $ 14.82 $ 14.82 14.88 14.88 18.13 18.13 21.45 21.45 23.30 23.30 35.83 35.83 $ 20.25 $ 20.25 $ 14.82 $ 14.82 14.88 14.88 18.13 18.13 21.45 21.45 23.30 23.30 35.83 35.83 $ 20.25 $ 20.25 3.1 3.1 2.5 2.5 3.5 3.5 5.1 5.1 6.1 6.1 1.6 1.6 4.4 4.4 3.1 3.1 2.5 2.5 3.5 3.5 5.1 5.1 6.1 6.1 1.6 1.6 4.4 4.4 10. 10. RELATED PARTY TRANSACTIONS RELATED PARTY TRANSACTIONS As of October 31, 2016, we owned approximately 35% of the outstanding shares of a Taiwanese-based contract As of October 31, 2016, we owned approximately 35% of the outstanding shares of a Taiwanese-based contract manufacturer, Hurco Automation, Ltd. (“HAL”). HAL’s scope of activities includes the design, manufacture, manufacturer, Hurco Automation, Ltd. (“HAL”). HAL’s scope of activities includes the design, manufacture, sales and distribution of industrial automation products, software systems and related components, including sales and distribution of industrial automation products, software systems and related components, including control systems and components produced under contract for sale exclusively to us. We are accounting for this control systems and components produced under contract for sale exclusively to us. We are accounting for this investment using the equity method. The investment of $3.6 million and $3.0 million at October 31, 2016 and investment using the equity method. The investment of $3.6 million and $3.0 million at October 31, 2016 and 2015, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. 2015, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases of controls from HAL amounted to $9.9 million, $8.9 million and $9.3 million in fiscal 2016, 2015 Purchases of controls from HAL amounted to $9.9 million, $8.9 million and $9.3 million in fiscal 2016, 2015 and 2014, respectively. Sales of control component parts to HAL were $623,000, $723,000 and $1.4 million for and 2014, respectively. Sales of control component parts to HAL were $623,000, $723,000 and $1.4 million for the fiscal years ended October 31, 2016, 2015 and 2014, respectively. Trade payables to HAL were $2.0 million the fiscal years ended October 31, 2016, 2015 and 2014, respectively. Trade payables to HAL were $2.0 million and $1.8 million at October 31, 2016 and 2015, respectively. Trade receivables from HAL were $94,000 and and $1.8 million at October 31, 2016 and 2015, respectively. Trade receivables from HAL were $94,000 and $55,000 at October 31, 2016 and 2015, respectively. $55,000 at October 31, 2016 and 2015, respectively. Summary unaudited financial information for HAL’s operations and financial condition is as follows (in Summary unaudited financial information for HAL’s operations and financial condition is as follows (in thousands): thousands): 2016 2016 2015 2015 2014 2014 Net Sales ...................................................... Net Sales ...................................................... Gross Profit .................................................. Gross Profit .................................................. Operating Income ........................................ Operating Income ........................................ Net Income................................................... Net Income................................................... $ 13,948 $ 13,948 2,240 2,240 952 952 1,323 1,323 $ 12,852 $ 12,852 2,041 2,041 665 665 1,546 1,546 $ 12,063 $ 12,063 1,759 1,759 468 468 1,264 1,264 Current Assets .............................................. Current Assets .............................................. Non-current Assets ...................................... Non-current Assets ...................................... Current Liabilities ........................................ Current Liabilities ........................................ $ 10,238 $ 10,238 3,733 3,733 2,572 2,572 $ 10,262 $ 10,262 3,087 3,087 3,472 3,472 $ 10,469 $ 10,469 3,065 3,065 3,637 3,637 58 58 59 59 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. 11. CONTINGENCIES AND LITIGATION 13. OPERATING LEASES We are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. 12. GUARANTEES AND PRODUCT WARRANTIES From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of October 31, 2016, we had 26 outstanding third party payment guarantees totaling approximately $1.2 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve is as follows (in thousands): Balance, beginning of year Provision for warranties during the year Charges to the accrual Impact of foreign currency translation Balance, end of year 2016 $ 2,186 2,715 (3,349) (29) $ 1,523 2015 $ 2,048 3,736 (3,495) (103) $ 2,186 2014 $ 1,778 3,846 (3,529) (47) $ 2,048 The decrease in our warranty reserve in fiscal 2016 compared to 2015 was primarily due to a reduction in unit sales volume, as well as a reduction in average warranty cost per machine as our product mix of machines under warranty shifted from more complex, higher-performance machines. The fiscal 2016 reduction in warranty reserve was also attributable to reductions in warranty obligations assumed as part of the acquisition of Milltronics and Takumi, as actual claims were less than anticipated, resulting in adjustments to the provision for warranties during the year. The increase in warranty reserve from fiscal 2014 to 2015 included $241,000 of warranty obligations assumed as part of the acquisitions of Milltronics and Takumi. 60 We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through 2024. Future payments required under operating leases as of October 31, 2016, are summarized as follows (in thousands): 2017 ................................................................................................... $ 2,929 2018 ................................................................................................... 2019 ................................................................................................... 2020 ................................................................................................... 2021 and thereafter............................................................................ 1,573 911 377 556 Total .................................................................................................. $ 6,346 Lease expense for the fiscal years ended October 31, 2016, 2015, and 2014 was $4.5 million, $3.8 million, and $4.0 million, respectively. 14. QUARTERLY FINANCIAL INFORMATION (Unaudited) 2016 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Operating income Provision for income taxes Net income Income per common share – basic Income per common share – diluted 2015 (In thousands, except per share data) Sales and service fees Gross profit Gross profit margin Selling, general and administrative expenses Operating income Provision for income taxes Net income Income per common share – basic Income per common share – diluted First Quarter Second Quarter Third Quarter Fourth Quarter $56,503 $52,029 $52,403 $66,354 First Quarter Second Quarter Third Quarter Fourth Quarter $50,972 $50,183 $52,535 $65,693 16,610 32% 11,943 4,667 1,225 3,674 $0.56 $0.56 16,559 33% 10,850 5,709 1,878 3,961 $0.60 $0.60 16,135 31% 12,042 4,093 1,120 2,720 $0.41 $0.40 16,630 32% 11,351 5,279 1,573 3,683 $0.56 $0.55 19,997 30% 14,878 5,119 1,539 3,003 $0.45 $0.45 19,355 29% 12,632 6,723 1,851 4,804 $0.73 $0.72 17,698 31% 11,961 5,737 1,709 3,895 $0.59 $0.58 16,547 32% 10,454 6,093 2,037 3,766 $0.57 $0.57 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 11. 11. CONTINGENCIES AND LITIGATION CONTINGENCIES AND LITIGATION 13. 13. OPERATING LEASES OPERATING LEASES We are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable We are involved in various claims and lawsuits arising in the normal course of business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range accounting rules, we accrue the minimum liability for each known claim when the estimated outcome is a range of possible loss and no one amount within that range is more likely than another. We maintain insurance of possible loss and no one amount within that range is more likely than another. We maintain insurance policies for such matters, and we record insurance recoveries when we determine such recovery to be policies for such matters, and we record insurance recoveries when we determine such recovery to be probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse probable. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of effect on our consolidated financial position or results of operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance policy coverages. claims for any losses will not exceed our insurance policy coverages. 12. 12. GUARANTEES AND PRODUCT WARRANTIES GUARANTEES AND PRODUCT WARRANTIES From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in machines to customers that use financing. We follow FASB guidance for accounting for guarantees (codified in ASC 460). As of October 31, 2016, we had 26 outstanding third party payment guarantees totaling ASC 460). As of October 31, 2016, we had 26 outstanding third party payment guarantees totaling approximately $1.2 million. The terms of these guarantees are consistent with the underlying customer approximately $1.2 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not financing terms. Upon shipment of a machine, the customer has the risk of ownership. The customer does not obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the obtain title, however, until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are insignificant. which amounts are insignificant. We provide warranties on our products with respect to defects in material and workmanship. The terms of these We provide warranties on our products with respect to defects in material and workmanship. The terms of these warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the with respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve. The amount of the warranty reserve is determined based on historical trend experience and any known reserve. The amount of the warranty reserve is determined based on historical trend experience and any known warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of warranty issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes in our warranty reserve is as follows (in thousands): the changes in our warranty reserve is as follows (in thousands): Balance, beginning of year Balance, beginning of year Provision for warranties during the year Provision for warranties during the year Charges to the accrual Charges to the accrual 2016 2016 2015 2015 $ 2,186 $ 2,186 $ 2,048 $ 2,048 2,715 2,715 (3,349) (3,349) 3,736 3,736 (3,495) (3,495) 2014 2014 $ 1,778 $ 1,778 3,846 3,846 (3,529) (3,529) Impact of foreign currency translation Impact of foreign currency translation (29) (29) (103) (103) (47) (47) Balance, end of year Balance, end of year $ 1,523 $ 1,523 $ 2,186 $ 2,186 $ 2,048 $ 2,048 The decrease in our warranty reserve in fiscal 2016 compared to 2015 was primarily due to a reduction in unit The decrease in our warranty reserve in fiscal 2016 compared to 2015 was primarily due to a reduction in unit sales volume, as well as a reduction in average warranty cost per machine as our product mix of machines under sales volume, as well as a reduction in average warranty cost per machine as our product mix of machines under warranty shifted from more complex, higher-performance machines. The fiscal 2016 reduction in warranty warranty shifted from more complex, higher-performance machines. The fiscal 2016 reduction in warranty reserve was also attributable to reductions in warranty obligations assumed as part of the acquisition of reserve was also attributable to reductions in warranty obligations assumed as part of the acquisition of Milltronics and Takumi, as actual claims were less than anticipated, resulting in adjustments to the provision for Milltronics and Takumi, as actual claims were less than anticipated, resulting in adjustments to the provision for warranties during the year. The increase in warranty reserve from fiscal 2014 to 2015 included $241,000 of warranties during the year. The increase in warranty reserve from fiscal 2014 to 2015 included $241,000 of warranty obligations assumed as part of the acquisitions of Milltronics and Takumi. warranty obligations assumed as part of the acquisitions of Milltronics and Takumi. 60 60 We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through 2024. Future payments required under operating leases as of October 31, 2016, are summarized as follows (in 2024. Future payments required under operating leases as of October 31, 2016, are summarized as follows (in thousands): thousands): 2017 ................................................................................................... 2017 ................................................................................................... 2018 ................................................................................................... 2018 ................................................................................................... 2019 ................................................................................................... 2019 ................................................................................................... 2020 ................................................................................................... 2020 ................................................................................................... 2021 and thereafter............................................................................ 2021 and thereafter............................................................................ Total .................................................................................................. Total .................................................................................................. $ 2,929 $ 2,929 1,573 1,573 911 911 377 377 556 556 $ 6,346 $ 6,346 Lease expense for the fiscal years ended October 31, 2016, 2015, and 2014 was $4.5 million, $3.8 million, and Lease expense for the fiscal years ended October 31, 2016, 2015, and 2014 was $4.5 million, $3.8 million, and $4.0 million, respectively. $4.0 million, respectively. 14. 14. QUARTERLY FINANCIAL INFORMATION (Unaudited) QUARTERLY FINANCIAL INFORMATION (Unaudited) 2016 (In thousands, except per share data) 2016 (In thousands, except per share data) Sales and service fees Sales and service fees Gross profit Gross profit Gross profit margin Gross profit margin Selling, general and administrative expenses Selling, general and administrative expenses Operating income Operating income Provision for income taxes Provision for income taxes Net income Net income Income per common share – basic Income per common share – basic Income per common share – diluted Income per common share – diluted 2015 (In thousands, except per share data) 2015 (In thousands, except per share data) Sales and service fees Sales and service fees Gross profit Gross profit Gross profit margin Gross profit margin Selling, general and administrative expenses Selling, general and administrative expenses Operating income Operating income Provision for income taxes Provision for income taxes Net income Net income Income per common share – basic Income per common share – basic Income per common share – diluted Income per common share – diluted First First Quarter Quarter Second Second Quarter Quarter Third Third Quarter Quarter Fourth Fourth Quarter Quarter $56,503 $56,503 $52,029 $52,029 $52,403 $52,403 $66,354 $66,354 17,698 17,698 31% 31% 11,961 11,961 5,737 5,737 1,709 1,709 3,895 3,895 $0.59 $0.59 $0.58 $0.58 16,610 16,610 32% 32% 11,943 11,943 4,667 4,667 1,225 1,225 3,674 3,674 $0.56 $0.56 $0.56 $0.56 16,135 16,135 31% 31% 12,042 12,042 4,093 4,093 1,120 1,120 2,720 2,720 $0.41 $0.41 $0.40 $0.40 19,997 19,997 30% 30% 14,878 14,878 5,119 5,119 1,539 1,539 3,003 3,003 $0.45 $0.45 $0.45 $0.45 First First Quarter Quarter Second Second Quarter Quarter Third Third Quarter Quarter Fourth Fourth Quarter Quarter $50,972 $50,972 16,547 16,547 $50,183 $50,183 16,559 16,559 $52,535 $52,535 16,630 16,630 $65,693 $65,693 19,355 19,355 33% 33% 10,850 10,850 5,709 5,709 1,878 1,878 3,961 3,961 $0.60 $0.60 $0.60 $0.60 32% 32% 11,351 11,351 5,279 5,279 1,573 1,573 3,683 3,683 $0.56 $0.56 $0.55 $0.55 29% 29% 12,632 12,632 6,723 6,723 1,851 1,851 4,804 4,804 $0.73 $0.73 $0.72 $0.72 32% 32% 10,454 10,454 6,093 6,093 2,037 2,037 3,766 3,766 $0.57 $0.57 $0.57 $0.57 61 61 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. 15. SEGMENT INFORMATION The following table sets forth revenues by geographic area, based on customer location, for each of the past We operate in a single segment: industrial automation equipment. We design, manufacture and sell computerized (i.e., Computer Numeric Control) 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, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support. We sell our products through more than 195 independent agents and distributors throughout the Americas, Europe and Asia. Our line is the primary line for the majority of our distributors globally even though some may carry competitive products. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and certain areas of the United States, which are among the world's principal machine tool consuming countries. During fiscal 2016, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2016, approximately 69% of our revenues were from customers located outside of the U.S. and no single end-user of our products accounted for more than 5% of our total sales and service fees. The following table sets forth the contribution of each of our product groups to our total sales and service fees during each of the past three fiscal years (in thousands): Net Sales and Service Fees by Product Category Year ended October 31, 2015 2016 2014 Computerized Machine Tools * ................................ Computer Control Systems and Software † .............. Service Parts ............................................................. Service Fees .............................................................. Total .................................................................... $ 195,618 2,078 21,908 7,685 $ 227,289 $ 189,712 3,085 19,375 7,211 $ 219,383 $ 193,937 3,407 17,391 7,568 $ 222,303 * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective dates of acquisitions. † Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine systems. three fiscal years (in thousands): Revenues by Geographic Area United States of America ..................................................... Canada .................................................................................. South America ...................................................................... Total Americas .................................................................. Germany ............................................................................... United Kingdom ................................................................... Italy ...................................................................................... France ................................................................................... Other Europe ........................................................................ Total Europe ..................................................................... Asia Pacific .......................................................................... Other Foreign ....................................................................... Total Europe, Asia Pacific and Other Foreign ..................... Year Ended October 31, 2016 2015 2014 $ 70,630 3,881 1,950 76,461 44,411 25,313 12,947 13,787 27,150 123,608 25,633 1,587 150,828 $ 227,289 $ 66,781 3,114 1,930 71,825 43,727 30,235 11,768 13,162 26,598 125,490 20,265 1,803 147,558 $ 219,383 $ 59,414 2,434 450 62,298 51,581 34,288 13,456 9,972 24,728 134,025 23,766 2,214 160,005 $ 222,303 Long-lived tangible assets, net by geographic area, were (in thousands): United States of America….…………………………...….. Foreign countries…………………………………............... Net assets by geographic area were (in thousands): As of October 31, 2016 $ 7,846 5,911 $ 13,757 2015 $ 8,658 5,893 $ 14,551 As of October 31, 2016 2015 $ 83,236 59,468 31,864 $ 174,568 $ 185,475 Americas ............................................................................................. $ 84,040 Europe ................................................................................................. 60,861 Asia Pacific ......................................................................................... 40,574 16. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncement: In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to present deferred income tax assets and deferred income tax liabilities as noncurrent in a classified balance sheet instead of the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted either prospectively or retrospectively. We adopted this accounting update in the first 62 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 15. 15. SEGMENT INFORMATION SEGMENT INFORMATION We operate in a single segment: industrial automation equipment. We design, manufacture and sell We operate in a single segment: industrial automation equipment. We design, manufacture and sell computerized (i.e., Computer Numeric Control) machine tools, consisting primarily of vertical machining computerized (i.e., Computer Numeric Control) machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal cutting industry through a worldwide 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 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 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 computer control systems and software products are primarily sold as integral components of our computerized machine tool products. We also provide machine tool components, software options, control upgrades, machine tool products. We also provide machine tool components, software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support. accessories and replacement parts for our products, as well as customer service and training support. We sell our products through more than 195 independent agents and distributors throughout the Americas, We sell our products through more than 195 independent agents and distributors throughout the Americas, Europe and Asia. Our line is the primary line for the majority of our distributors globally even though some Europe and Asia. Our line is the primary line for the majority of our distributors globally even though some may carry competitive products. We also have our own direct sales and service organizations in China, France, may carry competitive products. We also have our own direct sales and service organizations in China, France, Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and certain areas of the Germany, India, Italy, Poland, Singapore, South Africa, Taiwan, the United Kingdom, and certain areas of the United States, which are among the world's principal machine tool consuming countries. During fiscal 2016, no United States, which are among the world's principal machine tool consuming countries. During fiscal 2016, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2016, approximately 69% of our distributor accounted for more than 5% of our sales and service fees. In fiscal 2016, approximately 69% of our revenues were from customers located outside of the U.S. and no single end-user of our products accounted for revenues were from customers located outside of the U.S. and no single end-user of our products accounted for more than 5% of our total sales and service fees. more than 5% of our total sales and service fees. The following table sets forth the contribution of each of our product groups to our total sales and service fees The following table sets forth the contribution of each of our product groups to our total sales and service fees during each of the past three fiscal years (in thousands): during each of the past three fiscal years (in thousands): Net Sales and Service Fees by Product Category Net Sales and Service Fees by Product Category Year ended October 31, Year ended October 31, 2016 2016 2015 2015 2014 2014 Computerized Machine Tools * ................................ Computerized Machine Tools * ................................ $ 195,618 $ 195,618 $ 189,712 $ 189,712 $ 193,937 $ 193,937 Computer Control Systems and Software † .............. Computer Control Systems and Software † .............. Service Parts ............................................................. Service Parts ............................................................. Service Fees .............................................................. Service Fees .............................................................. Total .................................................................... Total .................................................................... 2,078 2,078 21,908 21,908 7,685 7,685 $ 227,289 $ 227,289 3,085 3,085 19,375 19,375 7,211 7,211 3,407 3,407 17,391 17,391 7,568 7,568 $ 219,383 $ 219,383 $ 222,303 $ 222,303 * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective * Amounts shown include sales of Milltronics and Takumi computerized machine tools to third parties since the respective † Amounts shown do not include computer control systems and software sold as an integrated component of computerized † Amounts shown do not include computer control systems and software sold as an integrated component of computerized dates of acquisitions. dates of acquisitions. machine systems. machine systems. The following table sets forth revenues by geographic area, based on customer location, for each of the past The following table sets forth revenues by geographic area, based on customer location, for each of the past three fiscal years (in thousands): three fiscal years (in thousands): Revenues by Geographic Area Revenues by Geographic Area United States of America ..................................................... United States of America ..................................................... Canada .................................................................................. Canada .................................................................................. South America ...................................................................... South America ...................................................................... Total Americas .................................................................. Total Americas .................................................................. Germany ............................................................................... Germany ............................................................................... United Kingdom ................................................................... United Kingdom ................................................................... Italy ...................................................................................... Italy ...................................................................................... France ................................................................................... France ................................................................................... Other Europe ........................................................................ Other Europe ........................................................................ Total Europe ..................................................................... Total Europe ..................................................................... Asia Pacific .......................................................................... Asia Pacific .......................................................................... Other Foreign ....................................................................... Other Foreign ....................................................................... Total Europe, Asia Pacific and Other Foreign ..................... Total Europe, Asia Pacific and Other Foreign ..................... 2016 2016 Year Ended October 31, Year Ended October 31, 2015 2015 2014 2014 $ 70,630 $ 70,630 3,881 3,881 1,950 1,950 76,461 76,461 44,411 44,411 25,313 25,313 12,947 12,947 13,787 13,787 27,150 27,150 123,608 123,608 25,633 25,633 1,587 1,587 150,828 150,828 $ 227,289 $ 227,289 $ 66,781 $ 66,781 3,114 3,114 1,930 1,930 71,825 71,825 43,727 43,727 30,235 30,235 11,768 11,768 13,162 13,162 26,598 26,598 125,490 125,490 20,265 20,265 1,803 1,803 147,558 147,558 $ 219,383 $ 219,383 $ 59,414 $ 59,414 2,434 2,434 450 450 62,298 62,298 51,581 51,581 34,288 34,288 13,456 13,456 9,972 9,972 24,728 24,728 134,025 134,025 23,766 23,766 2,214 2,214 160,005 160,005 $ 222,303 $ 222,303 Long-lived tangible assets, net by geographic area, were (in thousands): Long-lived tangible assets, net by geographic area, were (in thousands): United States of America….…………………………...….. United States of America….…………………………...….. Foreign countries…………………………………............... Foreign countries…………………………………............... Net assets by geographic area were (in thousands): Net assets by geographic area were (in thousands): As of October 31, As of October 31, 2016 2016 $ 7,846 $ 7,846 5,911 5,911 $ 13,757 $ 13,757 2015 2015 $ 8,658 $ 8,658 5,893 5,893 $ 14,551 $ 14,551 Americas ............................................................................................. $ 84,040 Americas ............................................................................................. $ 84,040 60,861 Europe ................................................................................................. 60,861 Europe ................................................................................................. 40,574 Asia Pacific ......................................................................................... 40,574 Asia Pacific ......................................................................................... $ 185,475 $ 185,475 2016 2016 2015 2015 $ 83,236 $ 83,236 59,468 59,468 31,864 31,864 $ 174,568 $ 174,568 As of October 31, As of October 31, 16. NEW ACCOUNTING PRONOUNCEMENTS 16. NEW ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncement: Recently Adopted Accounting Pronouncement: In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to present deferred income tax assets and deferred Classification of Deferred Taxes, which requires companies to present deferred income tax assets and deferred income tax liabilities as noncurrent in a classified balance sheet instead of the current requirement to separate income tax liabilities as noncurrent in a classified balance sheet instead of the current requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. ASU 2015-17 is effective for deferred income tax liabilities and assets into current and noncurrent amounts. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted either prospectively or retrospectively. We adopted this accounting update in the first application is permitted either prospectively or retrospectively. We adopted this accounting update in the first 62 62 63 63 HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. year 2018, including interim periods within the fiscal year. Early adoption is permitted. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) - a Consensus of the FASB’s Emerging Issues Task Force, which provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for our fiscal year 2018. We do not expect that the adoption of this accounting standard update will have a material effect on our consolidated financial statements. In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, which removes the prohibition in ASC 740 (Income Taxes) against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for our fiscal year 2019, including interim periods within those fiscal years. Early adoption is permitted however the guidance can only be adopted in the first interim period of a fiscal year. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. There have been no other significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended October 31, 2016. quarter of fiscal 2016 and applied it retrospectively to prior periods. The impact on our October 31, 2015 Consolidated Balance Sheet was a reduction in Total current assets of $2.0 million, an increase in Total non- current assets of $4.7 million, and an increase in Total non-current liabilities of $2.7 million. New Accounting Pronouncements: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This update provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. We have the option of using either a full retrospective or modified approach to adopt this guidance. Between August 2015 and May 2016, the FASB issued four additional updates to Topic 606: 1) ASU No. 2015- 14, Deferral of the Effective Date, 2) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), 3) ASU No. 2016-10, Identifying Performance Obligations and Licensing, and 4) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients to provide further guidance and clarification in accounting for revenue arising from contracts with customers. All these updates will be effective for our fiscal year 2019, including interim periods within the fiscal year. We are assessing the method of adoption and the impact this new accounting guidance will have on our consolidated financial statements. In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. ASU 2014-15 is effective for our fiscal year 2018, including interim periods within the fiscal year. Early adoption is permitted for financial statements that have not been previously issued. We do not expect that the adoption of this accounting standard update will have a material effect on our consolidated financial statements. In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance on the classification and measurement of financial instruments under the fair value option, as well as the presentation and disclosure requirements for financial instruments. Among other things, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, ASU 2016-01 requires public companies to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, to separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and to eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU 2016-01 is effective for our fiscal year 2019, including interim periods within the fiscal year. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. ASU 2016-02 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application. Early adoption is permitted. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several areas of accounting for share-based compensation arrangements, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for our fiscal 64 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued year 2018, including interim periods within the fiscal year. Early adoption is permitted. We are assessing the year 2018, including interim periods within the fiscal year. Early adoption is permitted. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. impact this new accounting guidance will have on our consolidated financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) - a Consensus of the In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) - a Consensus of the FASB’s Emerging Issues Task Force, which provides guidance intended to reduce diversity in practice in how FASB’s Emerging Issues Task Force, which provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for our fiscal year certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for our fiscal year 2018. We do not expect that the adoption of this accounting standard update will have a material effect on our 2018. We do not expect that the adoption of this accounting standard update will have a material effect on our consolidated financial statements. consolidated financial statements. In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset In October 2016, the FASB issued ASU No. 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory, which removes the prohibition in ASC 740 (Income Taxes) against the Transfers of Assets Other than Inventory, which removes the prohibition in ASC 740 (Income Taxes) against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for our fiscal year 2019, including interim periods within those fiscal years. inventory. ASU 2016-16 is effective for our fiscal year 2019, including interim periods within those fiscal years. Early adoption is permitted however the guidance can only be adopted in the first interim period of a fiscal year. Early adoption is permitted however the guidance can only be adopted in the first interim period of a fiscal year. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. There have been no other significant changes in the Company’s critical accounting policies and estimates during There have been no other significant changes in the Company’s critical accounting policies and estimates during the fiscal year ended October 31, 2016. the fiscal year ended October 31, 2016. quarter of fiscal 2016 and applied it retrospectively to prior periods. The impact on our October 31, 2015 quarter of fiscal 2016 and applied it retrospectively to prior periods. The impact on our October 31, 2015 Consolidated Balance Sheet was a reduction in Total current assets of $2.0 million, an increase in Total non- Consolidated Balance Sheet was a reduction in Total current assets of $2.0 million, an increase in Total non- current assets of $4.7 million, and an increase in Total non-current liabilities of $2.7 million. current assets of $4.7 million, and an increase in Total non-current liabilities of $2.7 million. New Accounting Pronouncements: New Accounting Pronouncements: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts establishing a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. This update provides a five-step analysis in determining when and how revenue is recognized. with customers. This update provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services and will supersede most of the existing revenue recognition guidance, including industry-specific or services and will supersede most of the existing revenue recognition guidance, including industry-specific guidance. We have the option of using either a full retrospective or modified approach to adopt this guidance. guidance. We have the option of using either a full retrospective or modified approach to adopt this guidance. Between August 2015 and May 2016, the FASB issued four additional updates to Topic 606: 1) ASU No. 2015- Between August 2015 and May 2016, the FASB issued four additional updates to Topic 606: 1) ASU No. 2015- 14, Deferral of the Effective Date, 2) ASU No. 2016-08, Principal versus Agent Considerations (Reporting 14, Deferral of the Effective Date, 2) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), 3) ASU No. 2016-10, Identifying Performance Obligations and Licensing, and 4) Revenue Gross versus Net), 3) ASU No. 2016-10, Identifying Performance Obligations and Licensing, and 4) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients to provide further guidance and ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients to provide further guidance and clarification in accounting for revenue arising from contracts with customers. All these updates will be effective clarification in accounting for revenue arising from contracts with customers. All these updates will be effective for our fiscal year 2019, including interim periods within the fiscal year. We are assessing the method of for our fiscal year 2019, including interim periods within the fiscal year. We are assessing the method of adoption and the impact this new accounting guidance will have on our consolidated financial statements. adoption and the impact this new accounting guidance will have on our consolidated financial statements. In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there is substantial doubt about Continue as a Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and provide related footnote disclosures. ASU 2014-15 is an entity’s ability to continue as a going concern and provide related footnote disclosures. ASU 2014-15 is effective for our fiscal year 2018, including interim periods within the fiscal year. Early adoption is permitted effective for our fiscal year 2018, including interim periods within the fiscal year. Early adoption is permitted for financial statements that have not been previously issued. We do not expect that the adoption of this for financial statements that have not been previously issued. We do not expect that the adoption of this accounting standard update will have a material effect on our consolidated financial statements. accounting standard update will have a material effect on our consolidated financial statements. In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance on the Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance on the classification and measurement of financial instruments under the fair value option, as well as the presentation classification and measurement of financial instruments under the fair value option, as well as the presentation and disclosure requirements for financial instruments. Among other things, ASU 2016-01 requires equity and disclosure requirements for financial instruments. Among other things, ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting, or those that result in investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. In addition, ASU 2016-01 requires public companies to use the exit price notion when measuring the fair value In addition, ASU 2016-01 requires public companies to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, to separate presentation of financial assets and financial of financial instruments for disclosure purposes, to separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and to eliminate the requirement to disclose the liabilities by measurement category and form of financial asset, and to eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU 2016-01 is effective for our fiscal year 2019, including interim periods within the fiscal amortized cost. ASU 2016-01 is effective for our fiscal year 2019, including interim periods within the fiscal year. We are assessing the impact this new accounting guidance will have on our consolidated financial year. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and requires lessees to recognize leases on the balance sheet classification similar to current lease classifications, and requires lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve as a lease liability with a corresponding right-of-use asset for leases with a lease-term of more than twelve months. ASU 2016-02 is effective for our fiscal year 2020, including interim periods within the fiscal year, and months. ASU 2016-02 is effective for our fiscal year 2020, including interim periods within the fiscal year, and requires modified retrospective application. Early adoption is permitted. We are assessing the impact this new requires modified retrospective application. Early adoption is permitted. We are assessing the impact this new accounting guidance will have on our consolidated financial statements. accounting guidance will have on our consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several areas of accounting for Improvements to Employee Share-Based Payment Accounting, which simplifies several areas of accounting for share-based compensation arrangements, including income tax consequences, classification of awards as either share-based compensation arrangements, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for our fiscal equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for our fiscal 64 64 65 65 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Item 9B. OTHER INFORMATION None. Item 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2016, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the evaluation date. There have been no changes in our internal control over financial reporting that occurred during the fourth quarter of the fiscal year ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The attestation report of our independent registered public accounting firm on our internal control over financial reporting is included in this report under Item 8. Financial Statements and Supplementary Data. Our management’s annual report on internal control over financial reporting is included in this report immediately preceding Item 8. During the fourth quarter of fiscal 2016, the Audit Committee of the Board of Directors did not engage our independent registered public accounting firm to perform any new non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes- Oxley Act of 2002. The graph below compares the 5-Year cumulative total return on our common stock relative to that of the Russell 2000 Index and two customized peer groups of twenty companies and nineteen companies respectively, whose individual companies are listed below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each Index and in each of the peer groups on 10/31/2011 and its relative performance is tracked through 10/31/2016. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, 2015 Peer Group and 2016 Peer Group $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 10/11 10/12 10/13 10/14 10/15 10/16 Hurco Companies, Inc. 2015 Peer Group Russell 2000 2016 Peer Group *$100 invested on 10/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Hurco Companies, Inc. Russell 2000 2015 Peer Group 2016 Peer Group 10/11 100.00 100.00 100.00 100.00 10/12 87.98 112.08 96.96 97.07 10/13 94.11 152.75 151.68 150.82 10/14 149.40 165.07 145.28 141.32 10/15 105.20 165.62 121.96 120.93 10/16 103.84 172.43 132.35 129.77 The stock price performance included in this graph is not necessarily indicative of future stock price performance. 2015 Peer Group: The twenty companies included in the company's 2015 peer group are: Ampco-Pittsburgh Corporation, Douglas Dynamics, Inc., Dynamic Materials Corporation, The Eastern Company, Electro Scientific Industries, Inc., FARO Technologies Inc., Graham Corporation, Hardinge Inc., Kadant Inc., Key Technology, Inc., Key Tronic Corporation, The L.S. Starrett Company, Nanometrics Incorporated, NN Inc., Novanta Inc. (f/k/a GSI Group, Inc.), PDF Solutions, Inc., Proto Labs, Inc., QAD Inc., Sun Hydraulics Corp. and Transcat Inc. 2016 Peer Group: The nineteen companies included in the company's 2016 peer group are: Ampco-Pittsburgh Corporation, Douglas Dynamics, Inc., Dynamic Materials Corporation, The Eastern Company, Electro Scientific Industries, Inc., FARO Technologies Inc., Graham Corporation, Hardinge Inc., Kadant Inc., Key Technology, Inc., Key Tronic Corporation, The L.S. Starrett Company, Nanometrics Incorporated, Novanta Inc., PDF Solutions, Inc., Proto Labs, Inc., QAD Inc., Sun Hydraulics Corp. and Transcat Inc. 66 67 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND Item 9B. OTHER INFORMATION Item 9B. OTHER INFORMATION FINANCIAL DISCLOSURE FINANCIAL DISCLOSURE None. None. Item 9A. CONTROLS AND PROCEDURES Item 9A. CONTROLS AND PROCEDURES Under the supervision and with the participation of management, including our Chief Executive Officer and Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2016, pursuant to Rule 13a-15(b) under the Securities disclosure controls and procedures as of October 31, 2016, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our management, including the Chief Exchange Act of 1934, as amended. Based upon that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of the evaluation date. effective as of the evaluation date. There have been no changes in our internal control over financial reporting that occurred during the fourth There have been no changes in our internal control over financial reporting that occurred during the fourth quarter of the fiscal year ended October 31, 2016 that have materially affected, or are reasonably likely to quarter of the fiscal year ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. materially affect, our internal control over financial reporting. The attestation report of our independent registered public accounting firm on our internal control over financial The attestation report of our independent registered public accounting firm on our internal control over financial reporting is included in this report under Item 8. Financial Statements and Supplementary Data. Our reporting is included in this report under Item 8. Financial Statements and Supplementary Data. Our management’s annual report on internal control over financial reporting is included in this report immediately management’s annual report on internal control over financial reporting is included in this report immediately preceding Item 8. preceding Item 8. During the fourth quarter of fiscal 2016, the Audit Committee of the Board of Directors did not engage our During the fourth quarter of fiscal 2016, the Audit Committee of the Board of Directors did not engage our independent registered public accounting firm to perform any new non-audit services. This disclosure is made independent registered public accounting firm to perform any new non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes- pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes- Oxley Act of 2002. Oxley Act of 2002. The graph below compares the 5-Year cumulative total return on our common stock relative to that of the The graph below compares the 5-Year cumulative total return on our common stock relative to that of the Russell 2000 Index and two customized peer groups of twenty companies and nineteen companies respectively, Russell 2000 Index and two customized peer groups of twenty companies and nineteen companies respectively, whose individual companies are listed below. An investment of $100 (with reinvestment of all dividends) is whose individual companies are listed below. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each Index and in each of the peer groups on 10/31/2011 assumed to have been made in our common stock, in each Index and in each of the peer groups on 10/31/2011 and its relative performance is tracked through 10/31/2016. and its relative performance is tracked through 10/31/2016. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Hurco Companies, Inc., the Russell 2000 Index, Among Hurco Companies, Inc., the Russell 2000 Index, 2015 Peer Group and 2016 Peer Group 2015 Peer Group and 2016 Peer Group $200 $200 $180 $180 $160 $160 $140 $140 $120 $120 $100 $100 $80 $80 $60 $60 $40 $40 $20 $20 $0 $0 10/11 10/11 10/12 10/12 10/13 10/13 10/14 10/14 10/15 10/15 10/16 10/16 Hurco Companies, Inc. Hurco Companies, Inc. 2015 Peer Group 2015 Peer Group Russell 2000 Russell 2000 2016 Peer Group 2016 Peer Group *$100 invested on 10/31/11 in stock or index, including reinvestment of dividends. *$100 invested on 10/31/11 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Fiscal year ending October 31. Hurco Companies, Inc. Hurco Companies, Inc. Russell 2000 Russell 2000 2015 Peer Group 2015 Peer Group 2016 Peer Group 2016 Peer Group 10/11 10/11 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 10/12 10/12 87.98 87.98 112.08 112.08 96.96 96.96 97.07 97.07 10/13 10/13 94.11 94.11 152.75 152.75 151.68 151.68 150.82 150.82 10/14 10/14 149.40 149.40 165.07 165.07 145.28 145.28 141.32 141.32 10/15 10/15 105.20 105.20 165.62 165.62 121.96 121.96 120.93 120.93 10/16 10/16 103.84 103.84 172.43 172.43 132.35 132.35 129.77 129.77 The stock price performance included in this graph is not necessarily indicative of future stock price performance. The stock price performance included in this graph is not necessarily indicative of future stock price performance. 2015 Peer Group: The twenty companies included in the company's 2015 peer group are: Ampco-Pittsburgh 2015 Peer Group: The twenty companies included in the company's 2015 peer group are: Ampco-Pittsburgh Corporation, Douglas Dynamics, Inc., Dynamic Materials Corporation, The Eastern Company, Electro Corporation, Douglas Dynamics, Inc., Dynamic Materials Corporation, The Eastern Company, Electro Scientific Industries, Inc., FARO Technologies Inc., Graham Corporation, Hardinge Inc., Kadant Inc., Key Scientific Industries, Inc., FARO Technologies Inc., Graham Corporation, Hardinge Inc., Kadant Inc., Key Technology, Inc., Key Tronic Corporation, The L.S. Starrett Company, Nanometrics Incorporated, NN Inc., Technology, Inc., Key Tronic Corporation, The L.S. Starrett Company, Nanometrics Incorporated, NN Inc., Novanta Inc. (f/k/a GSI Group, Inc.), PDF Solutions, Inc., Proto Labs, Inc., QAD Inc., Sun Hydraulics Corp. Novanta Inc. (f/k/a GSI Group, Inc.), PDF Solutions, Inc., Proto Labs, Inc., QAD Inc., Sun Hydraulics Corp. and Transcat Inc. and Transcat Inc. 2016 Peer Group: The nineteen companies included in the company's 2016 peer group are: Ampco-Pittsburgh 2016 Peer Group: The nineteen companies included in the company's 2016 peer group are: Ampco-Pittsburgh Corporation, Douglas Dynamics, Inc., Dynamic Materials Corporation, The Eastern Company, Electro Corporation, Douglas Dynamics, Inc., Dynamic Materials Corporation, The Eastern Company, Electro Scientific Industries, Inc., FARO Technologies Inc., Graham Corporation, Hardinge Inc., Kadant Inc., Key Scientific Industries, Inc., FARO Technologies Inc., Graham Corporation, Hardinge Inc., Kadant Inc., Key Technology, Inc., Key Tronic Corporation, The L.S. Starrett Company, Nanometrics Incorporated, Novanta Inc., Technology, Inc., Key Tronic Corporation, The L.S. Starrett Company, Nanometrics Incorporated, Novanta Inc., PDF Solutions, Inc., Proto Labs, Inc., QAD Inc., Sun Hydraulics Corp. and Transcat Inc. PDF Solutions, Inc., Proto Labs, Inc., QAD Inc., Sun Hydraulics Corp. and Transcat Inc. 66 66 67 67 PART III PART IV Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders except that the information required by Item 10 regarding our executive officers is included herein under a separate caption at the end of Part I. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders. (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: Reports of Independent Registered Public Accounting Firm ........................ Consolidated Statements of Income – years ended October 31, 2016, 2015 and 2014 ............................................................... Consolidated Statements of Comprehensive Income – years ended October 31, 2016, 2015 and 2014 ............................................................... Consolidated Balance Sheets – as of October 31, 2016 and 2015 ................. Consolidated Statements of Cash Flows – years ended October 31, 2016, 2015 and 2014 .................................................... Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2016, 2015 and 2014 ........................................... Notes to Consolidated Financial Statements.................................................. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR 2. Financial Statement Schedule. The following financial statement schedule INDEPENDENCE is included in this Item. The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Schedule II - Valuation and Qualifying Accounts and Reserves ............................. All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders. (b) Exhibits Exhibits being filed with this Form 10-K or incorporated herein by reference are listed on page 71. Page 35 37 38 39 40 41 42 Page 70 68 69 The information required by this item is incorporated herein by reference to the definitive proxy statement for The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders except that the information required by Item 10 regarding our our 2017 annual meeting of shareholders except that the information required by Item 10 regarding our executive officers is included herein under a separate caption at the end of Part I. executive officers is included herein under a separate caption at the end of Part I. Item 11. EXECUTIVE COMPENSATION Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to the definitive proxy statement for The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders. our 2017 annual meeting of shareholders. Item 12. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the definitive proxy statement for The information required by this item is incorporated herein by reference to the definitive proxy statement for our 2017 annual meeting of shareholders. our 2017 annual meeting of shareholders. PART III PART III PART IV PART IV Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statements. The following consolidated financial statements of the Company are (a) 1. Financial Statements. The following consolidated financial statements of the Company are included herein under Item 8 of Part II: included herein under Item 8 of Part II: Reports of Independent Registered Public Accounting Firm ........................ Reports of Independent Registered Public Accounting Firm ........................ Consolidated Statements of Income – years ended Consolidated Statements of Income – years ended October 31, 2016, 2015 and 2014 ............................................................... October 31, 2016, 2015 and 2014 ............................................................... Consolidated Statements of Comprehensive Income – years ended Consolidated Statements of Comprehensive Income – years ended October 31, 2016, 2015 and 2014 ............................................................... October 31, 2016, 2015 and 2014 ............................................................... Consolidated Balance Sheets – as of October 31, 2016 and 2015 ................. Consolidated Balance Sheets – as of October 31, 2016 and 2015 ................. Consolidated Statements of Cash Flows – years Consolidated Statements of Cash Flows – years ended October 31, 2016, 2015 and 2014 .................................................... ended October 31, 2016, 2015 and 2014 .................................................... Consolidated Statements of Changes in Shareholders’ Equity – Consolidated Statements of Changes in Shareholders’ Equity – years ended October 31, 2016, 2015 and 2014 ........................................... years ended October 31, 2016, 2015 and 2014 ........................................... Notes to Consolidated Financial Statements.................................................. Notes to Consolidated Financial Statements.................................................. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR 2. Financial Statement Schedule. The following financial statement schedule 2. Financial Statement Schedule. The following financial statement schedule INDEPENDENCE INDEPENDENCE is included in this Item. is included in this Item. The information required by this item is incorporated herein by reference to the definitive proxy statement for The information required by this item is incorporated herein by reference to the definitive proxy statement for Schedule II - Valuation and Qualifying Accounts and Reserves ............................. Schedule II - Valuation and Qualifying Accounts and Reserves ............................. Page Page 35 35 37 37 38 38 39 39 40 40 41 41 42 42 Page Page 70 70 our 2017 annual meeting of shareholders. our 2017 annual meeting of shareholders. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES our 2017 annual meeting of shareholders. our 2017 annual meeting of shareholders. The information required by this item is incorporated herein by reference to the definitive proxy statement for The information required by this item is incorporated herein by reference to the definitive proxy statement for (b) Exhibits (b) Exhibits Exhibits being filed with this Form 10-K or incorporated herein by reference are listed on page 71. Exhibits being filed with this Form 10-K or incorporated herein by reference are listed on page 71. All other financial statement schedules are omitted because they are not applicable or the required All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. information is included in the consolidated financial statements or notes thereto. 68 68 69 69 Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended October 31, 2016, 2015, and 2014 (Dollars in thousands) Balance at Beginning of Period Charged to/ (Recovered from) Costs and Expenses Charged to Other Accounts Deductions Balance at End of Period Description Allowance for doubtful accounts for the year ended: October 31, 2016 .................. $ 739 $ (15) $ -- $ 60 October 31, 2015 .................. $ 878 $ (13) $ -- $ 126 October 31, 2014 .................. $ 540 $ 446 $ -- $ 108 (1) (1) (1) $ 664 $ 739 $ 878 Income tax valuation allowance for the year ended: October 31, 2016 .................. $ 1,485 $ 587 $ -- $ 5 $ 2,067 October 31, 2015 .................. $ 1,225 $ 402 $ -- $ 142 $ 1,485 Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: October 31, 2014 .................. $ 1,199 $ 81 $ -- $ 55 $ 1,225 (1) Receivable write-offs. EXHIBITS INDEX Exhibits Filed. The following exhibits are filed with this report: 21 23 31.1 31.2 32.1 32.2 101.INS 101.SCH 101.CAL 101.LAB 101.PRE 101.DEF * Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP Certification by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. Exchange Act of 1934, as amended. Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002. XBRL Instance Document* XBRL Taxonomy Extension Schema Document* XBRL Taxonomy Extension Calculation Linkbase* XBRL Taxonomy Taxonomy Extension Label Linkbase Document* XBRL Taxonomy Extension Presentation Linkbase Document* XBRL Taxonomy Extension Definition Linkbase Document* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. 2.1 Asset Purchase Agreement, dated as of July 14, 2015, by and among Milltronics Manufacturing Company, Inc. d/b/a Milltronics CNC Machines, Liberty Diversified International, Inc. and Hurco USA, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 15, 2015.+ 2.2 Asset Purchase Agreement, dated as of July 14, 2015, by and among Takumi Machinery Co., Ltd., Liberty Diversified International, Inc. and Hurco Manufacturing Limited, incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on July 15, 2015.+ 2.3 Amendment No. 1 to Asset Purchase Agreement, dated as of July 27, 2015, by and among Takumi Machinery Co., Ltd., Liberty Diversified International, Inc. and Hurco Manufacturing Limited, incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on July 28, 2015. July 31, 2009. 3.1 3.2 Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. Amended and Restated By-Laws of the Registrant as amended through July 8, 2009, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended 10.1 Fourth Amendment to Credit Agreement, dated as of December 6, 2016, between Hurco Companies, Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 8, 2016. 10.2 Replacement Revolving Note, dated as of December 6, 2016, by Hurco Companies, Inc. for the benefit of JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 8, 2016. 10.3* Hurco Companies, Inc. 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 10, 2016. 10.4* Form of Restricted Stock Agreement (Director) under the 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 10, 2016. 10.5* Hurco Companies, Inc. Cash Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 10, 2016. 70 71 Schedule II - Valuation and Qualifying Accounts and Reserves Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended October 31, 2016, 2015, and 2014 for the Years Ended October 31, 2016, 2015, and 2014 (Dollars in thousands) (Dollars in thousands) Balance at Balance at Beginning Beginning of Period of Period Charged to/ Charged to/ (Recovered (Recovered from) from) Costs and Costs and Expenses Expenses Charged Charged to Other to Other Accounts Accounts Deductions Deductions Balance Balance at End at End of Period of Period Description Description Allowance for doubtful Allowance for doubtful accounts for the year ended: accounts for the year ended: Income tax valuation Income tax valuation allowance for the year allowance for the year ended: ended: (1) Receivable write-offs. (1) Receivable write-offs. October 31, 2016 .................. October 31, 2016 .................. $ 739 $ 739 $ (15) $ (15) $ -- $ -- $ 60 $ 60 $ 664 $ 664 October 31, 2015 .................. October 31, 2015 .................. $ 878 $ 878 $ (13) $ (13) $ -- $ -- $ 126 $ 126 $ 739 $ 739 October 31, 2014 .................. October 31, 2014 .................. $ 540 $ 540 $ 446 $ 446 $ -- $ -- $ 108 $ 108 $ 878 $ 878 (1) (1) (1) (1) (1) (1) October 31, 2016 .................. October 31, 2016 .................. $ 1,485 $ 1,485 $ 587 $ 587 $ -- $ -- $ 5 $ 5 $ 2,067 $ 2,067 October 31, 2014 .................. October 31, 2014 .................. $ 1,199 $ 1,199 $ 81 $ 81 $ -- $ -- $ 55 $ 55 $ 1,225 $ 1,225 EXHIBITS INDEX EXHIBITS INDEX Exhibits Filed. The following exhibits are filed with this report: Exhibits Filed. The following exhibits are filed with this report: 21 21 23 23 31.1 31.1 31.2 31.2 32.1 32.1 32.2 32.2 101.INS 101.INS 101.SCH 101.SCH 101.CAL 101.CAL 101.LAB 101.LAB 101.PRE 101.PRE 101.DEF 101.DEF * * Subsidiaries of the Registrant. Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP Certification by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Certification by the Chief Executive Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. Exchange Act of 1934, as amended. Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Certification by the Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as amended. Exchange Act of 1934, as amended. Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002. Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002. XBRL Instance Document* XBRL Instance Document* XBRL Taxonomy Extension Schema Document* XBRL Taxonomy Extension Schema Document* XBRL Taxonomy Extension Calculation Linkbase* XBRL Taxonomy Extension Calculation Linkbase* XBRL Taxonomy Taxonomy Extension Label Linkbase Document* XBRL Taxonomy Taxonomy Extension Label Linkbase Document* XBRL Taxonomy Extension Presentation Linkbase Document* XBRL Taxonomy Extension Presentation Linkbase Document* XBRL Taxonomy Extension Definition Linkbase Document* XBRL Taxonomy Extension Definition Linkbase Document* Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. subject to liability under these sections. October 31, 2015 .................. October 31, 2015 .................. $ 1,225 $ 1,225 $ 402 $ 402 $ -- $ -- $ 142 $ 142 $ 1,485 $ 1,485 Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: Exhibits Incorporated by Reference. The following exhibits are incorporated into this report: 2.1 2.1 2.2 2.2 2.3 2.3 3.1 3.1 3.2 3.2 10.1 10.1 10.2 10.2 10.3* 10.3* 10.4* 10.4* 10.5* 10.5* Asset Purchase Agreement, dated as of July 14, 2015, by and among Milltronics Manufacturing Asset Purchase Agreement, dated as of July 14, 2015, by and among Milltronics Manufacturing Company, Inc. d/b/a Milltronics CNC Machines, Liberty Diversified International, Inc. and Hurco Company, Inc. d/b/a Milltronics CNC Machines, Liberty Diversified International, Inc. and Hurco USA, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K USA, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 15, 2015.+ filed on July 15, 2015.+ Asset Purchase Agreement, dated as of July 14, 2015, by and among Takumi Machinery Co., Ltd., Asset Purchase Agreement, dated as of July 14, 2015, by and among Takumi Machinery Co., Ltd., Liberty Diversified International, Inc. and Hurco Manufacturing Limited, incorporated by reference Liberty Diversified International, Inc. and Hurco Manufacturing Limited, incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on July 15, 2015.+ to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed on July 15, 2015.+ Amendment No. 1 to Asset Purchase Agreement, dated as of July 27, 2015, by and among Takumi Amendment No. 1 to Asset Purchase Agreement, dated as of July 27, 2015, by and among Takumi Machinery Co., Ltd., Liberty Diversified International, Inc. and Hurco Manufacturing Limited, Machinery Co., Ltd., Liberty Diversified International, Inc. and Hurco Manufacturing Limited, incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on incorporated by reference to Exhibit 2.3 to the Company’s Current Report on Form 8-K filed on July 28, 2015. July 28, 2015. Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997. Amended and Restated By-Laws of the Registrant as amended through July 8, 2009, incorporated Amended and Restated By-Laws of the Registrant as amended through July 8, 2009, incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2009. July 31, 2009. Fourth Amendment to Credit Agreement, dated as of December 6, 2016, between Hurco Fourth Amendment to Credit Agreement, dated as of December 6, 2016, between Hurco Companies, Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Companies, Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 8, 2016. Registrant’s Current Report on Form 8-K filed on December 8, 2016. Replacement Revolving Note, dated as of December 6, 2016, by Hurco Companies, Inc. for the Replacement Revolving Note, dated as of December 6, 2016, by Hurco Companies, Inc. for the benefit of JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.2 to the benefit of JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 8, 2016. Registrant’s Current Report on Form 8-K filed on December 8, 2016. Hurco Companies, Inc. 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 Hurco Companies, Inc. 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 10, 2016. to the Company’s Current Report on Form 8-K filed on March 10, 2016. Form of Restricted Stock Agreement (Director) under the 2016 Equity Incentive Plan, incorporated Form of Restricted Stock Agreement (Director) under the 2016 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 10, 2016. 10, 2016. Hurco Companies, Inc. Cash Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Hurco Companies, Inc. Cash Incentive Plan, incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on March 10, 2016. Company’s Current Report on Form 8-K filed on March 10, 2016. 70 70 71 71 SIGNATURES January, 2017. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 6th day of HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland Sonja K. McClelland Vice President, Secretary, Treasurer and Chief Financial Officer 10.6 10.7 10.8 10.9 10.10 10.11* 10.12* 10.13* 10.14* 10.15* 10.16* 10.17* 10.18* 10.19* 10.20* 10.21* 10.22* + * Takumi Sale Agreement, dated as of July 14, 2015, by and between Hurco Companies, Inc., Hurco Manufacturing Limited and Liberty Diversified International, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 15, 2015. Credit Agreement dated as of December 7, 2012 among Hurco Companies, Inc., the lenders party thereto and JP Morgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 10, 2012. First Amendment to Credit Agreement dated as of May 9, 2014 between Hurco Companies, Inc., JPMorgan Chase Bank, N.A. and the lenders signatory thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2014. Second Amendment to Credit Agreement dated as of May 9, 2014 between Hurco Companies, Inc., JPMorgan Chase Bank, N.A. and the lenders signatory thereto, incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2014. Third Amendment to Credit Agreement and Amendment to Subsidiary Guaranty dated as of December 5, 2014, between Hurco Companies, Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 8, 2014. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Michael Doar, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and John P. Donlon, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Gregory S. Volovic, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Sonja K. McClelland, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Hurco Companies, Inc. 2008 Equity Incentive Plan, incorporated by reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed January 28, 2008. Form of restated split-dollar insurance agreement, incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2008. Form of Restricted Stock Award Agreement – Employee, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2011. Form of Restricted Stock Award Agreement – Director, incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2011. Form of Restricted Share Award Agreement (Employee), incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on January 14, 2014. Form of Performance Share Award Agreement (Employee), incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on January 14, 2014. Fiscal 2015 Short-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2015. Fiscal 2016 Short-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2016. Schedules to the indicated exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request. The indicated exhibit is a management contract, compensatory plan or arrangement required to be listed by Item 601 of Regulation S-K. 72 73 SIGNATURES SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 6th day of duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, this 6th day of January, 2017. January, 2017. HURCO COMPANIES, INC. HURCO COMPANIES, INC. By: /s/ Sonja K. McClelland By: /s/ Sonja K. McClelland Sonja K. McClelland Sonja K. McClelland Vice President, Secretary, Treasurer and Vice President, Secretary, Treasurer and Chief Financial Officer Chief Financial Officer 10.6 10.6 Takumi Sale Agreement, dated as of July 14, 2015, by and between Hurco Companies, Inc., Hurco Takumi Sale Agreement, dated as of July 14, 2015, by and between Hurco Companies, Inc., Hurco Manufacturing Limited and Liberty Diversified International, Inc., incorporated by reference to Manufacturing Limited and Liberty Diversified International, Inc., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 15, 2015. Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 15, 2015. 10.7 10.7 Credit Agreement dated as of December 7, 2012 among Hurco Companies, Inc., the lenders party Credit Agreement dated as of December 7, 2012 among Hurco Companies, Inc., the lenders party thereto and JP Morgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the thereto and JP Morgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 10, 2012. Registrant’s Current Report on Form 8-K filed December 10, 2012. 10.8 10.8 First Amendment to Credit Agreement dated as of May 9, 2014 between Hurco Companies, Inc., First Amendment to Credit Agreement dated as of May 9, 2014 between Hurco Companies, Inc., JPMorgan Chase Bank, N.A. and the lenders signatory thereto, incorporated by reference to Exhibit JPMorgan Chase Bank, N.A. and the lenders signatory thereto, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2014. 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2014. 10.9 10.9 Second Amendment to Credit Agreement dated as of May 9, 2014 between Hurco Companies, Inc., Second Amendment to Credit Agreement dated as of May 9, 2014 between Hurco Companies, Inc., JPMorgan Chase Bank, N.A. and the lenders signatory thereto, incorporated by reference to Exhibit JPMorgan Chase Bank, N.A. and the lenders signatory thereto, incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2014. 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2014. 10.10 10.10 Third Amendment to Credit Agreement and Amendment to Subsidiary Guaranty dated as of Third Amendment to Credit Agreement and Amendment to Subsidiary Guaranty dated as of December 5, 2014, between Hurco Companies, Inc. and JPMorgan Chase Bank, N.A., incorporated December 5, 2014, between Hurco Companies, Inc. and JPMorgan Chase Bank, N.A., incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 8, by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December 8, 10.11* 10.11* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Michael Doar, Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Michael Doar, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed 10.12* 10.12* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and John P. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and John P. Donlon, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K Donlon, incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K 10.13* 10.13* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Gregory S. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Gregory S. Volovic, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K Volovic, incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K 2014. 2014. March 16, 2012. March 16, 2012. filed March 16, 2012. filed March 16, 2012. filed March 16, 2012. filed March 16, 2012. 10.14* 10.14* Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Sonja K. Employment Agreement dated March 15, 2012, between Hurco Companies, Inc. and Sonja K. McClelland, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on McClelland, incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed March 16, 2012. Form 8-K filed March 16, 2012. 10.15* 10.15* Hurco Companies, Inc. 2008 Equity Incentive Plan, incorporated by reference to Appendix A of the Hurco Companies, Inc. 2008 Equity Incentive Plan, incorporated by reference to Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A filed January 28, 2008. Registrant’s definitive Proxy Statement on Schedule 14A filed January 28, 2008. 10.16* 10.16* Form of restated split-dollar insurance agreement, incorporated by reference to Exhibit 10.2 to the Form of restated split-dollar insurance agreement, incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 2008. Registrant’s Annual Report on Form 10-K for the year ended October 31, 2008. 10.17* 10.17* Form of Restricted Stock Award Agreement – Employee, incorporated by reference to Exhibit 10.1 Form of Restricted Stock Award Agreement – Employee, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2011. to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2011. 10.18* 10.18* Form of Restricted Stock Award Agreement – Director, incorporated by reference to Exhibit 10.2 to Form of Restricted Stock Award Agreement – Director, incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2011. the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2011. 10.19* 10.19* Form of Restricted Share Award Agreement (Employee), incorporated by reference to Exhibit 10.2 Form of Restricted Share Award Agreement (Employee), incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on January 14, 2014. to the Registrant’s Current Report on Form 8-K filed on January 14, 2014. 10.20* 10.20* Form of Performance Share Award Agreement (Employee), incorporated by reference to Exhibit Form of Performance Share Award Agreement (Employee), incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on January 14, 2014. 10.3 to the Registrant’s Current Report on Form 8-K filed on January 14, 2014. 10.21* 10.21* Fiscal 2015 Short-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to Fiscal 2015 Short-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2015. the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2015. 10.22* 10.22* Fiscal 2016 Short-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to Fiscal 2016 Short-Term Incentive Compensation Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2016. the Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2016. + + * * Schedules to the indicated exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Schedules to the indicated exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request. Commission upon request. The indicated exhibit is a management contract, compensatory plan or arrangement required to be The indicated exhibit is a management contract, compensatory plan or arrangement required to be listed by Item 601 of Regulation S-K. listed by Item 601 of Regulation S-K. 72 72 73 73 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature and Title(s) Date /s/ Michael Doar Michael Doar, Chairman of the Board, Chief Executive Officer of Hurco Companies, Inc. (Principal Executive Officer) /s/ Sonja K. McClelland Sonja K. McClelland Vice President, Secretary, Treasurer and Chief Financial Officer of Hurco Companies, Inc. (Principal Financial Officer and Principal Accounting Officer) /s/ Thomas A. Aaro Thomas A. Aaro, Director /s/ Robert W. Cruickshank Robert W. Cruickshank, Director /s/ Jay C. Longbottom Jay C. Longbottom, Director /s/ Andrew Niner Andrew Niner, Director /s/ Richard Porter Richard Porter, Director /s/ Janaki Sivanesan Janaki Sivanesan, Director /s/ Ronald Strackbein Ronald Strackbein, Director January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF HURCO COMPANIES, INC. Name Hurco B.V Hurco Europe Limited Hurco GmbH Hurco India Private, Ltd. Hurco Manufacturing Limited Hurco S.a.r.l. Hurco S.r.l. Hurco (S.E. Asia) Pte Ltd. LCM Precision Technology S.r.l. Milltronics USA, Inc. Jurisdiction of Incorporation The Netherlands United Kingdom Federal Republic of Germany India Taiwan R.O.C. France Italy Singapore Italy United States Ningbo Hurco Machine Tool Company Limited China Hurco Companies, Inc. is the Company’s headquarters in Indianapolis, Indiana, U.S.A. The foregoing list does not include other subsidiaries which, individually or in the aggregate, did not constitute a significant subsidiary as of October 31, 2016. 74 75 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature and Title(s) Signature and Title(s) Date Date /s/ Michael Doar /s/ Michael Doar Michael Doar, Chairman of the Board, Michael Doar, Chairman of the Board, Chief Executive Officer Chief Executive Officer of Hurco Companies, Inc. of Hurco Companies, Inc. (Principal Executive Officer) (Principal Executive Officer) /s/ Sonja K. McClelland /s/ Sonja K. McClelland Sonja K. McClelland Sonja K. McClelland Vice President, Vice President, Secretary, Treasurer and Secretary, Treasurer and Chief Financial Officer Chief Financial Officer of Hurco Companies, Inc. of Hurco Companies, Inc. (Principal Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Principal Accounting Officer) /s/ Thomas A. Aaro /s/ Thomas A. Aaro Thomas A. Aaro, Director Thomas A. Aaro, Director /s/ Robert W. Cruickshank /s/ Robert W. Cruickshank Robert W. Cruickshank, Director Robert W. Cruickshank, Director /s/ Jay C. Longbottom /s/ Jay C. Longbottom Jay C. Longbottom, Director Jay C. Longbottom, Director /s/ Andrew Niner /s/ Andrew Niner Andrew Niner, Director Andrew Niner, Director /s/ Richard Porter /s/ Richard Porter Richard Porter, Director Richard Porter, Director /s/ Janaki Sivanesan /s/ Janaki Sivanesan Janaki Sivanesan, Director Janaki Sivanesan, Director /s/ Ronald Strackbein /s/ Ronald Strackbein Ronald Strackbein, Director Ronald Strackbein, Director January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 January 6, 2017 Exhibit 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF HURCO COMPANIES, INC. SUBSIDIARIES OF HURCO COMPANIES, INC. Name Name Hurco B.V Hurco B.V Hurco Europe Limited Hurco Europe Limited Hurco GmbH Hurco GmbH Hurco India Private, Ltd. Hurco India Private, Ltd. Hurco Manufacturing Limited Hurco Manufacturing Limited Hurco S.a.r.l. Hurco S.a.r.l. Hurco S.r.l. Hurco S.r.l. Hurco (S.E. Asia) Pte Ltd. Hurco (S.E. Asia) Pte Ltd. LCM Precision Technology S.r.l. LCM Precision Technology S.r.l. Milltronics USA, Inc. Milltronics USA, Inc. Ningbo Hurco Machine Tool Company Limited Ningbo Hurco Machine Tool Company Limited Jurisdiction of Incorporation Jurisdiction of Incorporation The Netherlands The Netherlands United Kingdom United Kingdom Federal Republic of Germany Federal Republic of Germany India India Taiwan R.O.C. Taiwan R.O.C. France France Italy Italy Singapore Singapore Italy Italy United States United States China China Hurco Companies, Inc. is the Company’s headquarters in Indianapolis, Indiana, U.S.A. The foregoing list does Hurco Companies, Inc. is the Company’s headquarters in Indianapolis, Indiana, U.S.A. The foregoing list does not include other subsidiaries which, individually or in the aggregate, did not constitute a significant subsidiary not include other subsidiaries which, individually or in the aggregate, did not constitute a significant subsidiary as of October 31, 2016. as of October 31, 2016. 74 74 75 75 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE Exhibit 23 Exhibit 31.1 We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-48204, 333- 126036, 333-149809 and 333-210072), pertaining to the Hurco Companies, Inc. 1997 Stock Option and Incentive Plan, the Hurco Companies, Inc. 2008 Equity Incentive Plan, and the Hurco Companies, Inc. 2016 Equity Incentive Plan, of our reports dated January 6, 2017, with respect to the consolidated financial statements and schedule of Hurco Companies, Inc. and the effectiveness of internal control over financial reporting of Hurco Companies, Inc. included in this Annual Report (Form 10-K) for the year ended October 31, 2016. /s/ Ernst & Young LLP Indianapolis, Indiana January 6, 2017 I, Michael Doar, certify that: ACT OF 1934, AS AMENDED 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Michael Doar Michael Doar, January 6, 2017 Chairman of the Board and Chief Executive Officer 76 77 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-48204, 333- We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-48204, 333- 126036, 333-149809 and 333-210072), pertaining to the Hurco Companies, Inc. 1997 Stock Option and 126036, 333-149809 and 333-210072), pertaining to the Hurco Companies, Inc. 1997 Stock Option and Incentive Plan, the Hurco Companies, Inc. 2008 Equity Incentive Plan, and the Hurco Companies, Inc. 2016 Incentive Plan, the Hurco Companies, Inc. 2008 Equity Incentive Plan, and the Hurco Companies, Inc. 2016 Equity Incentive Plan, of our reports dated January 6, 2017, with respect to the consolidated financial statements Equity Incentive Plan, of our reports dated January 6, 2017, with respect to the consolidated financial statements and schedule of Hurco Companies, Inc. and the effectiveness of internal control over financial reporting of and schedule of Hurco Companies, Inc. and the effectiveness of internal control over financial reporting of Hurco Companies, Inc. included in this Annual Report (Form 10-K) for the year ended October 31, 2016. Hurco Companies, Inc. included in this Annual Report (Form 10-K) for the year ended October 31, 2016. /s/ Ernst & Young LLP /s/ Ernst & Young LLP Indianapolis, Indiana Indianapolis, Indiana January 6, 2017 January 6, 2017 Exhibit 23 Exhibit 23 Exhibit 31.1 Exhibit 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED ACT OF 1934, AS AMENDED I, Michael Doar, certify that: I, Michael Doar, certify that: 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)] for the registrant and have: for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. significant role in the registrant's internal control over financial reporting. /s/ Michael Doar /s/ Michael Doar Michael Doar, Michael Doar, Chairman of the Board and Chief Executive Officer Chairman of the Board and Chief Executive Officer January 6, 2017 January 6, 2017 76 76 77 77 Exhibit 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Sonja K McClelland, certify that: 1. I have reviewed this annual report on Form 10-K of Hurco Companies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures [as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. Generally Accepted Accounting Principles; and (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Sonja K McClelland Sonja K McClelland Vice President, Secretary, Treasurer and Chief Financial Officer January 6, 2017 78 Exhibit 32.1 Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the period ending October 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the period ending October 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities that: (1) Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. condition and results of operations of the Company. /s/ Michael Doar Michael Doar Chairman of the Board and Chief Executive Officer January 6, 2017 /s/ Sonja K McClelland Sonja K McClelland January 6, 2017 Vice President, Secretary, Treasurer and Chief Financial Officer 79 80 Exhibit 32.1 Exhibit 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the period ending October 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: Exchange Act of 1934; and (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. In connection with the Annual Report of Hurco Companies, Inc. (the “Company”) on Form 10-K for the period ending October 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) Exchange Act of 1934; and (2) condition and results of operations of the Company. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities The information contained in the Report fairly presents, in all material respects, the financial /s/ Michael Doar Michael Doar January 6, 2017 Chairman of the Board and Chief Executive Officer /s/ Sonja K McClelland Sonja K McClelland Vice President, Secretary, Treasurer and Chief Financial Officer January 6, 2017 79 80 [This page intentionally left blank.] GLOBAL LOCATIONS Hurco Europe Ltd. (United Kingdom) Serving the United Kingdom, Ireland, Africa, the Middle East, and Scandinavia [This page intentionally left blank.] Milltronics USA (Waconia, Minnesota, USA) Hurco B.V. (The Netherlands) Hurco Sp. z o.o. (Poland) Hurco GmbH (Germany) Serving Germany, Austria, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Latvia, Lithuania, Mazedonia, Montenegro, the Netherlands, Portugal, Romania, Russia, Serbia, Slovakia, Slovenia, Switzerland, Turkey, and Ukraine Ningbo Hurco Trading Co., Ltd. (Beijing, China) Ningbo Hurco Trading Co., Ltd. (Shanghai, China) Ningbo Hurco Machine Tool Co., Ltd. (Ningbo, China) Takumi (Taiwan) Hurco Companies, Inc. Hurco North America (Indianapolis, Indiana, USA) Serving the USA, Canada, Mexico, and South America Hurco India Private Ltd. Serving India, Pakistan, Bangladesh, and Sri Lanka Hurco S.a.r.l. (France) Serving France and Belgium (Wallonia) Hurco (S.E. Asia) Pte. Ltd. (Singapore) Serving Singapore, Malaysia, Thailand, Australia, New Zealand, Philippines, Indonesia, and Myanmar Hurco S.r.l. (Italy) LCM Precision Technology S.r.l. (Italy) Hurco Manufacturing Ltd. (Taiwan) Hurco Automation Ltd. (Taiwan) Hurco Manufacturing Limited is responsible for the manufacturing and assembly of Hurco machine tools. Hurco Automation Limited is responsible for the manufacturing and assembly of Hurco controls. Hurco South Africa (PTY) Ltd. (South Africa) One Technology Way | PO Box 68180 | Indianapolis, IN 46268 800.634.2416 | HURCO.com 

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