Hurco Companies, Inc. Annual Report 2018

FY2018 Annual Report · Hurco Companies, Inc.

Loading PDF…

In celebration of the company’s 50th Anniversary, Hurco leadership and guests rang the Closing Bell at the Nasdaq stock
exchange June 13, 2018. Pictured left to right: Gregory S. Volovic, President; Michael Doar, Chairman and Chief Excecutive
Officer; and Sonja McClelland, Executive Vice President, Secretary, Treasurer, and Chief Financial Officer.

Hurco customers manufacture parts for nearly every industry, such as aerospace, automotive, medical, energy, electronics, and machinery. At Hurco,
we manufacture the CNC machines, equipped with technology that is sophisticated yet intuitive and user-friendly, that our customers use to manufacture
their parts. Our technology helps them manufacture parts more efficiently, which increases their company’s profitability. Hurco has three brands of
CNC machines that are used throughout the world to manufacture parts: Hurco, Milltronics, and Takumi.

Report to Shareholders

Overview
When I reported our 2017 results last year, I told you how
exciting it was to kick off the company’s 50th year with record-
breaking sales of $243 million. The momentum continued as
we celebrated our 50th Anniversary throughout 2018 with a
new sales record of $300 million and net income of $21 million,
the second highest in our company’s history. Other financial
milestones achieved in 2018 include $34 million in operating
profit and earnings per share over $3.

While some of these financial milestones were achieved a
decade ago, they are even more meaningful to me in 2018
because they aren’t due to currency translation, but rather
reflect a company that is much more balanced in multiple ways:
geographically with significant participation from all divisions,
product strategy with entry level and high-end machines for
both simple and complex machining, and control platforms.

The timing of our success was fortunate, but it was also extremely
rewarding because it validates our agile strategic planning
process that balances structured discipline with flexibility. As
a technology company in the manufacturing sector, agility is
critical to success. Change is constant and the pace of change
seems to accelerate exponentially. As a company, we are fortunate
to have a stable foundation built on process and structure that
embraces the entrepreneurial spirit of innovation. Indeed, it
is that history of innovation that we honored as we celebrated
Hurco’s 50th Anniversary with customers, industry partners, and
stakeholders around the world.

This 50th year was a time of celebration and reflection. Hurco
has led the industry throughout its history with products and
technologies that make our customers more productive and
ultimately, more profitable. This mission has served us well and
we continued to lead the industry in 2018 with our automation
quadrant at the International Manufacturing Technology Show
where we demonstrated the technological benefits of Industry
4.0 and the Industrial Internet of Things (IIoT) to provide an
unprecedented level of automation for the high-mix/low-volume
job shop environment, which represents our customer base. Other
product/technology highlights in 2018 included the launch of
several key control software features that help our customers
manufacture parts more efficiently, such as 3D Solid Model
Import, Digital Setup Assistant, and ChipBoss™, in addition to the
introduction of a new generation of control software for the Hurco
turning centers and key product line expansions for all three
brands of CNC machines in our brand portfolio.

Customers
While our CNC machines are found in Fortune 500 companies,
the vast majority of our customers are entrepreneurs who risked
the security of a steady paycheck to start their own business.
The industriousness, ingenuity, and resiliency of our customers
is an inspiration to all of us at Hurco. As such, our employees
possess a deep level of respect for our customers and we are
extremely fortunate to have collaborative relationships with
them. Ultimately, the success of our customers determines our
success and that realization is inherent to our corporate culture.
This symbiotic relationship between Hurco employees and our
customers helps us develop better products and technologies that
ultimately help our customers be more successful.

Core Competencies
Our core competencies include software and product innovation;
efficient design and manufacture of machine tools with a
well-developed supply chain; targeted expansion of products
and markets; and strategic acquisitions. Our ability to provide

customers with reliable machine tools equipped with sophisticated
control technologies that make their businesses more profitable is
a key differentiator. Customers rely on our technology to simplify
complex processes due to the user-friendly attributes of our
products. This is especially advantageous in the growing multi-
axis space, such as 5-axis machining, an area in which we have led
the industry through our commitment to software innovation and
the acquisition of LCM Technologies. 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. The culture at Hurco of respecting the needs of our
customers and realizing the importance of service after the sale is a
core competency that separates Hurco from competitors.

Profitability
Hurco recorded net income of $21.5 million, or $3.15 per diluted
share, in 2018, compared to $15.1 million, or $2.25 per diluted
share, in 2017. As previously mentioned, sales were a record $300.7
million, a 23% increase compared to 2017. For the second year in a
row, all three brands (Hurco, Takumi, and Milltronics) and all global
divisions recorded higher sales levels than last year.

Going Forward
It was a remarkable year for Hurco! With our 50th Anniversary in the
rearview mirror, we are mindful of our responsibility to make sure
we position Hurco to thrive during the next 50 years. This industry is
extremely cyclical. Our customers are the first ones to feel the pain
of an economic downturn and the last to recover. Therefore, financial
discipline combined with an agile strategic planning process is
critical to success. We know we must be prepared for the rainy days,
but be sure to embrace the possibilities of technological innovation.
As with most things in life, it’s important to strike a balance in order
to achieve sustainable results.

When I became the CEO of Hurco in November 2001, we had 14 models
of CNC machines; sales of $70 million with a net loss of $8 million;
and a stock price of approximately $2 per share. Today, we have over
150 models with our three brands of CNC machines; record sales over
$300 million with net income over $21 million; and our stock price
is over $30 per share in addition to paying quarterly dividends to
shareholders.

We will continue to focus on our core competencies and embrace
a pragmatic approach to growth and expansion. With a strong
balance sheet and free cash flow, R&D resources, and an efficient
supply chain, Hurco is well positioned to continue its leadership
in meaningful technology innovation that makes manufacturing
more efficient and customers more profitable.

On behalf of everyone at Hurco, thank you to our existing customers
for their loyalty and support through the years and thank you to
our new customers for choosing Hurco, Milltronics, and/or Takumi.
Thank you to our shareholders for believing in Hurco and for your
enthusiastic appreciation of the progress we have made. I want
to thank our Board of Directors for their insight, guidance and
support in addition to our employees for their dedication to our
customers, commitment to continuous improvement, ingenuity, and
adaptability—all of which are critical to our success.

Finally, thank you to all of our stakeholders around the world who
celebrated 50 Years of Innovation with us during 2018. We certainly
appreciated the well wishes and enthusiasm. Here’s to 50 more!

Sincerely,

Michael Doar
Chairman and Chief Executive Officer

BR ANDS | PRODUCTS | TECHNOLOGIES

“Hurco has been leading the industry in manufacturing technology and user-friendly design from the very beginning. This foundation
of technology innovation and product design that are focused on the end-user—machinists, who depend on our products to achieve
peak efficiency—is a key component of our enduring success in a highly competitive industry. Our strong balance sheet affords us the
opportunity to continuously invest in R&D, expand our product offering, deliver innovative software solutions, and produce high quality
machine tools. We have over 150 products in our brand portfolio, which now includes Hurco, Milltronics, and Takumi machine tools, in
addition to LCM Precision Technology, which manufactures premium components and accessories required for precision machining.
Takumi is our brand that is equipped with third-party controls, Milltronics is the general purpose brand focused on value, and Hurco is the
premium brand focused on innovative, state-of-the-art CNC technology including advanced 5-axis, mulit-axis, and specialty machining
centers. We had the opportunity to share our technology with customers and industry partners as we celebrated our 50th Anniversary
throughout 2018. The pinnacle was the International Machnufacturing Technology Show in September where we demonstrated what’s
possible with Industry 4.0 and the Industrial Internet of Things (IIoT) at our automation quadrant.”
Learn more at www.hurco.com/automation.

Gregory S. Volovic
President

Machining Centers & Turning Centers

Hurco – Mind Over Metal
Hurco CNC machines are powered by proprietary technology that increases
customer productivity and profitability. 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.

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 control systems produced by
third parties, such as Fanuc®, Siemens®, Mitsubishi® or Heidenhain®. The
Takumi brand includes six product lines of CNC mills.

Machining Centers

LCM Precision Technology
LCM designs and manufactures advanced components
for machine tools, such as rotary tables, tilt tables, swivel
heads, and electrospindles.

Components & Accessories

Inventing technology for the metal
cutting industry that makes our

customers more productive and more
profitable—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

2018
$ 300,671
33,796
$
21,490
$
$
3.15
$ 305,845
$ 194,632
$
1,434
$ 222,853
800
40.74
50.50
38.08

$
$
$

2017
$ 243,667
20,903
$
15,115
$
$
2.25
$ 260,609
$ 175,526
$
1,507
$ 203,085
749
44.75
46.75
24.80

$
$
$

350

300

250

200

150

100

$300.7

$227.3

$243.7

2017

2016
Sales and Service Fees
(Millions)

2018

250

200

150

100

$222.9

$203.1

$185.5

2017

2016
Shareholders’ Equity
(Millions)

2018

$33.3

$19.6

$20.9

2016

2017

2018

Operating Income
(Millions)

HURCO COMPANIES, INC. ELEVEN-YEAR
SELECTED FINANCIAL DATA
(In thousands except per share data and number of employees)
2018

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 for the Fiscal Year
High
Low
Closing Stock Price as of October 31

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
Dividends paid per share

(1) Based on shares outstanding at fiscal year end - diluted.
(2) Excluding cash, short-term investments, and debt.

$300,671
208,865
58,010
33,796
(1,300)
32,496
11,006
$21,490

6,700
6,771

$3.19
$3.15

5,863
3,713
36,209
30.5%
11.2%
7.1%
10.1%

$50.50
$38.08
$40.74

2018
$194,632
3.24
$315,407
1,434
222,853
0.6%
$32.91
$0.490
800
$0.43

Annual Report 2018

2017

$243,667
173,103
49,661
20,903
(187)
20,716
5,601
$15,115

6,615
6,680

$2.27
$2.25

4,445
3,616
24,332
29.0%
8.6%
6.2%
7.8%

$46.75
$24.80
$44.75

2017
$175,526
3.48
$277,808
1,507
203,085
0.7%
$30.40
$0.568
749
$0.39

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
$26.20

2016
$160,413
3.77
$251,949
1,476
185,475
0.8%
$27.92
$0.641
758
$0.35

2015

$219,383
150,292
45,287
23,804
(251)
23,553
7,339
$16,214

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
$26.87

2015
$151,026
3.32
$248,577
1,583
174,568
0.9%
$26.44
$0.551
769
$0.31

2014

$222,303
153,691
46,615
21,997
(636)
21,361
6,218
$15,143

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
$38.53

2014
$141,888
3.12
$239,176
3,272
164,645
1.9%
$25.18
$0.513
617
$0.26

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
$24.49

2013
$127,235
3.28
$212,804
3,665
151,491
2.4%
$23.32
$0.583
625
$0.10

2012

$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
$22.98

2012
$122,828
3.49
$197,360
3,206
143,793
2.2%
$22.22
$0.548
560
$ –

2011

$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
$26.12

2011
$104,154
2.82
$186,870
865
126,212
0.7%
$19.50
$0.455
520
$ –

2010

$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
$18.40

2010
$91,501
3.17
$160,959
-
114,740
0.0%
$17.81
$0.628
440
$ –

Annual Report 2018

2009

$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
$15.90

2009
$91,567
5.40
$141,994
-
120,376
0.0%
$18.72
$1.006
390
$ –

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
$22.50

2008
$94,739
2.85
$183,170
-
123,477
0.0%
$19.16
$0.404
430
$ –

50 Years of Innovation
Hurco has been advancing the manufacturing industry for 50 years.
From the first computer controlled back gauge in 1969 to our patented
UltiMotion system, we are dedicated to technology innovation that makes
manufacturing more efficient and manufacturing companies more profitable.

Annual Report 2018

HURCO COMPANIES, INC. LEADERSHIP
Board of Directors

Corporate Officers and Division Executives

Thomas Aaro
Managing Partner, BlueBlack, LLC (2, 3)

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.

Timothy Gardner
Managing Director, Akoya Capital (3)

Jay Longbottom
CEO, Robert Family Holdings (2)

Andrew Niner
President, Niner Wine Estates(1)

Richard Porter
Private Equity Manager (1, 2)

Janaki Sivanesan
Attorney, Sivanesan Law (2)

1 Nominating and Governance Committee
2 Audit Committee
3 Compensation Committee
4 Presiding Independent Director

Sonja K. McClelland
Executive Vice President, Secretary,
Treasurer and Chief Financial Officer

Michael Auer

General Manager,
Hurco GmbH (Germany),
Hurco Sp. z o.o. (Poland)

Paolo Casazza
General Manager, Hurco S.r.l. (Italy)

Cory Miller
General Manager, Hurco North America

Louie Pavlakos
General Manager, Milltronics USA

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)

Sanjib Chakraborty
General Manager,
Hurco India Private, Ltd. (India)

Scott Yao
General Manager, Ningbo Hurco
Trading Co., Ltd. (Shanghai, China)

Phillippe Chevalier
General Manager, Hurco S.a.r.l. (France)

Wai Yip Lee
General Manager,
Hurco (S.E. Asia) Pte Ltd. (Singapore)

Martin Lee, Luke Wang

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 14, 2019,
at 10 a.m. Eastern Daylight Time
at Hurco’s Corporate Offices,
One Technology Way, Indianapolis, IN.
Transfer Agent
Computershare Investor Services
250 Royall St., Canton, MA 02021
Legal Counsel
Corporate Law: Faegre Baker Daniels LLP
Patent Law: Faegre Baker Daniels LLP
Independent Auditors
RSM US LLP
9225 Priority Way W Drive, Suite 300
Indianapolis, IN 46240
Investor Relations
Sonja K. McClelland, Executive 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

2018

2017

High

Low

High

Low

$50.33

$40.41

$34.55

$24.80

$49.29

$38.30

$32.25

$26.25

$50.50

$42.85

$35.83

$27.74

$45.95

$38.08

$46.75

$32.78

January 31

April 30

July 31

October 31

There were approximately 105 holders
of record of Hurco Common Stock as of
December 18, 2018.

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, 2018 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)

35-1150732
(I.R.S. Employer Identification Number)

One Technology Way
Indianapolis, Indiana
(Address of principal executive offices)

46268
(Zip code)

Registrant’s telephone number, including area code (317) 293-5309

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Common Stock, No Par Value

Name of each exchange on which registered

Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

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) of the Act.
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 (or for such shorter period
that the registrant was required to file such reports), 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 every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 (§229.405 of this chapter) 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. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer
[X] Accelerated filer
[ ] Non-accelerated filer
[ ] Smaller reporting company
[ ] Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]

The aggregate market value of the registrant’s voting stock held by non-affiliates as of April 30, 2018 (the
last business day of our most recently completed second quarter) was $296,666,000.

The number of shares of the registrant’s common stock outstanding as of December 18, 2018 was
6,723,160.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its
2019 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 cyclical nature of the machine tool industry, changes in general economic and business

conditions that affect demand for our products, the risks of our international operations, changes in

manufacturing markets, innovations by competitors, the ability to protect our intellectual property, breaches

of our network and system security measures, fluctuations in foreign currency exchange rates, increases in

prices of raw materials, quality and delivery performance by our vendors, our ability to effectively integrate

acquisitions, negative or unforeseen tax consequences, governmental actions and initiatives including

import and export restrictions and tariffs, and 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”).

PART I

Item 1.

BUSINESS

General

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-

accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of

“large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth

company” in Rule 12b-2 of the Exchange Act.

[ ] Large accelerated filer

[X] Accelerated filer

[ ] Non-accelerated filer

[ ] Smaller reporting company

[ ] Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended

transition period for complying with any new or revised financial accounting standards provided pursuant

to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

The aggregate market value of the registrant’s voting stock held by non-affiliates as of April 30, 2018 (the

last business day of our most recently completed second quarter) was $296,666,000.

The number of shares of the registrant’s common stock outstanding as of December 18, 2018 was

6,723,160.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its

2019 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 cyclical nature of the machine tool industry, changes in general economic and business
conditions that affect demand for our products, the risks of our international operations, changes in
manufacturing markets, innovations by competitors, the ability to protect our intellectual property, breaches
of our network and system security measures, fluctuations in foreign currency exchange rates, increases in
prices of raw materials, quality and delivery performance by our vendors, our ability to effectively integrate
acquisitions, negative or unforeseen tax consequences, governmental actions and initiatives including
import and export restrictions and tariffs, and 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”).

PART I

Item 1.

BUSINESS

General

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
interactive, conversational
programming software in our computer control systems enables operators on the production floor to quickly

technology and patented

and easily create a program for machining a particular part from a blueprint or computer aided design file
and immediately begin machining that part.

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

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.

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.

Industry association data for the U.S. machine tool market is available and that market accounts for
approximately 10% 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 behind real-time and, therefore, are
unreliable for forecasting purposes.

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

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

Year Ended October 31,

2018

2017

2016

$ 261,710

87%

$ 209,311

86%

$ 195,618

86%

2,870

27,501

8,590

2,324

24,255

7,777

10%

2,078

21,908

7,685

10%

$ 300,671

100%

$ 243,667

100%

$ 227,289

100%

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

Computerized Machine Tools

Computer Control Systems

and Software †

Service Parts

Service Fees

Total

systems.

Product Portfolio by Brand

We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused

on innovative technology. Milltronics is the general purpose 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. The Takumi brand also is targeted to die and mold customers. 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.

Hurco CNC Machine Tools

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;

________________

†Windows® is a registered trademark of Microsoft Corporation in the United States and other countries.

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.

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.

Machine tool products are considered capital goods, which makes them part of an industry that has

historically been highly cyclical.

Industry association data for the U.S. machine tool market is available and that market accounts for

approximately 10% of worldwide consumption. Reports available for the U.S. machine tool market

• 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 behind real-time and, therefore, are

unreliable for forecasting purposes.

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

Industry

include:

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
Computer Control Systems

Year Ended October 31,

2018
$ 261,710

2017

2016

87%

$ 209,311

86%

$ 195,618

86%

1%
1%
and Software †
9%
10%
Service Parts
3%
3%
Service Fees
100%
Total
100%
† Amounts shown do not include computer control systems and software sold as an integrated component of computerized machine

2,870
27,501
8,590
$ 300,671

2,078
21,908
7,685
$ 227,289

2,324
24,255
7,777
$ 243,667

1%
10%
3%
100%

systems.

Product Portfolio by Brand

We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused
on innovative technology. Milltronics is the general purpose 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. The Takumi brand also is targeted to die and mold customers. 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.

Hurco CNC Machine Tools

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;

________________

†Windows® is a registered trademark of Microsoft Corporation in the United States and other countries.

•

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.

BX Product Line

The BX product line is for customers that require higher accuracy parts as they are built with an extremely

rigid double column design that offers superior vibration dampening and excellent thermal characteristics.

Four models are available, two with 40-inch X-travel (a three-axis version and a five-axis version) as well

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:

HTM/HTL Product Line
The HTM/HTL product line includes a tool room mill and tool room lathe. These models are designed for
easy access to the table or chuck and are popular in tool room, prototype and maintenance applications.
There is a 30-inch X-travel mill and an 8-inch chuck lathe.

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.

Five-Axis 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.

HS Product Line
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.

as 53 and a 63-inch X-travel models.

HM/HMX Product Line

The HM product line offers customers moderately-priced horizontal machining centers designed for small

lot sizes. Two models are available, one with a rotary table and one with a plain table. They both have X-

travel of 67 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.

HBMX Product Line

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.

TM/TMM Product Line

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 TMX-MY models are equipped with an additional axis and motorized live tooling while the TMX-

MYS models also have an additional spindle. These products are designed for customers that want to

reduce part handling and complete complex components in a single set-up.

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.

DCX Product Line

New Product Lines

In fiscal 2018, we introduced the VCX600i and the VCX600HSi, two new cantilever five-axis models

designed for larger parts that require more accuracy and speed. The new models feature high-speed 23.6

inch direct drive C-axis rotary tables, available in the standard model as well as a high-speed spindle

version. A new 63-inch machine was also added to the BX Series. Additionally, Hurco upgraded its VMX

Series machining centers and TM Series of lathes in fiscal 2018, with product improvements aimed at

making these models stronger, faster and more flexible. New optional direct-drive spindles were also

introduced for the VMX models in fiscal 2018. The VM Series also became available with faster spindle

speeds, called Plus models.

•

and

incorporate fast moving changes in technology into their operations to keep their competitive edge;

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:

HTM/HTL Product Line

The HTM/HTL product line includes a tool room mill and tool room lathe. These models are designed for

easy access to the table or chuck and are popular in tool room, prototype and maintenance applications.

There is a 30-inch X-travel mill and an 8-inch chuck lathe.

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.

Five-Axis 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.

HS Product Line

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.

BX Product Line
The BX product line is for customers that require higher accuracy parts as they are built with an extremely
rigid double column design that offers superior vibration dampening and excellent thermal characteristics.
Four models are available, two with 40-inch X-travel (a three-axis version and a five-axis version) as well
as 53 and a 63-inch X-travel models.

HM/HMX Product Line
The HM product line offers customers moderately-priced horizontal machining centers designed for small
lot sizes. Two models are available, one with a rotary table and one with a plain table. They both have X-
travel of 67 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.

HBMX Product Line
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.

TM/TMM Product Line
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 TMX-MY models are equipped with an additional axis and motorized live tooling while the TMX-
MYS models also have an additional spindle. These products are designed for customers that want to
reduce part handling and complete complex components in a single set-up.

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.

New Product Lines
In fiscal 2018, we introduced the VCX600i and the VCX600HSi, two new cantilever five-axis models
designed for larger parts that require more accuracy and speed. The new models feature high-speed 23.6
inch direct drive C-axis rotary tables, available in the standard model as well as a high-speed spindle
version. A new 63-inch machine was also added to the BX Series. Additionally, Hurco upgraded its VMX
Series machining centers and TM Series of lathes in fiscal 2018, with product improvements aimed at
making these models stronger, faster and more flexible. New optional direct-drive spindles were also
introduced for the VMX models in fiscal 2018. The VM Series also became available with faster spindle
speeds, called Plus models.

Milltronics CNC Machine Tools

New Product Lines

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, research and development 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 8200-B control.

MM/MB/RH Product Line
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.

SL Product Line
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, 8 and 10 inches. These compact machines feature the Series 9000 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.

In fiscal 2018, we introduced two new CNC slant bed lathes called the SL6-II and the SL10-II. These

compact machines feature the 9000 Series control and are designed for job shops, short-run production or

other general purpose machining applications. Milltronics also introduced a new version of the popular

VM 50-inch machine with extended spindle nose to table. This machine is designed for special applications

that require rotary tables with large swings.

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 and five-axis machining centers. The Takumi brand

customer base includes manufacturers that 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. Additionally, die and mold shops are another important market segment for

the Takumi brand.

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 travels

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,

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. These machines are targeted especially for die and mold

customers as well as aerospace companies.

U Series

Designed with trunnion tables and swivel heads, these five-axis simultaneous machining centers offer

versatility as well as save setup and process time. Most models are offered with double column structure

for superior stability and performance. The U-Series product line consists of five models, four of which

offer trunnion table sizes of 10, 16, 24 and 31.5 inches. One addition model, the UB, is equipped with B/C

swivel head and HSK100, 12K built-in spindle. The UB’s double column design provides spacious X-axis

travel of 126 inches.

____________

*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.

VT Series

VC Series

of 34 and 42 inches.

V Series

70, 78, 86, and 126 inches.

H Series

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, research and development 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 8200-B control.

MM/MB/RH Product Line

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, 8 and 10 inches. These compact machines feature the Series 9000 control.

SL Product Line

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.

New Product Lines
In fiscal 2018, we introduced two new CNC slant bed lathes called the SL6-II and the SL10-II. These
compact machines feature the 9000 Series control and are designed for job shops, short-run production or
other general purpose machining applications. Milltronics also introduced a new version of the popular
VM 50-inch machine with extended spindle nose to table. This machine is designed for special applications
that require rotary tables with large swings.

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 and five-axis machining centers. The Takumi brand
customer base includes manufacturers that 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. Additionally, die and mold shops are another important market segment for
the Takumi brand.

The Takumi portfolio consists of the following product lines:

VT Series
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.

VC Series
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 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.

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. These machines are targeted especially for die and mold
customers as well as aerospace companies.

U Series
Designed with trunnion tables and swivel heads, these five-axis simultaneous machining centers offer
versatility as well as save setup and process time. Most models are offered with double column structure
for superior stability and performance. The U-Series product line consists of five models, four of which
offer trunnion table sizes of 10, 16, 24 and 31.5 inches. One addition model, the UB, is equipped with B/C
swivel head and HSK100, 12K built-in spindle. The UB’s double column design provides spacious X-axis
travel of 126 inches.
____________
*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.

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.

New Products
In fiscal 2018, we introduced the SL slant-bed lathe series to the Takumi product line. These turning centers
are equipped with box ways and designed for heavy cutting to provide superior part finishes. The SL Series
includes three models: the SL200, SL250, and SL300.

Other Control Systems, Software and Accessories

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, 3D DXF and Solid Model Import,
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.

3D DXF and Solid Model Import automatically uses geometry from a 3D CAD model to easily create

conversational programs for 2D and 3D parts or even 3+2 and 5-sided parts.

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.

3D Print Head

Hurco has designed and offers a 3D print head technology that allows a Hurco CNC machine to be used for

3D printing, which is advantageous for prototyping. It is used as an attachment to an existing machine and

requires no external power supply.

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.

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.

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.

G Series

BC Series

New Products

In fiscal 2018, we introduced the SL slant-bed lathe series to the Takumi product line. These turning centers

are equipped with box ways and designed for heavy cutting to provide superior part finishes. The SL Series

includes three models: the SL200, SL250, and SL300.

Other Control Systems, Software and Accessories

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, 3D DXF and Solid Model Import,

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.

programming time.

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 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.

3D DXF and Solid Model Import automatically uses geometry from a 3D CAD model to easily create
conversational programs for 2D and 3D parts or even 3+2 and 5-sided parts.

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.

3D Print Head
Hurco has designed and offers a 3D print head technology that allows a Hurco CNC machine to be used for
3D printing, which is advantageous for prototyping. It is used as an attachment to an existing machine and
requires no external power supply.

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
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 transmission.

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 (Hurco Manufacturing Limited (“HML”)) and
Waconia, Minnesota (Milltronics USA, Inc. (“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

Taiwan, the United Kingdom and certain parts of the United States, which are among the world's principal

machine tool consuming markets.

Approximately 90% of the worldwide demand for computerized machine tools and computer control

systems is outside of the U.S. In fiscal 2018, approximately 71% 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.

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

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

Demand

•

technology;

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

CNC Rotary Tables

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 transmission.

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).

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.

Parts and Service

Manufacturing

Our computerized metal cutting machine tools are manufactured and assembled to our specifications

primarily by our wholly-owned subsidiaries in Taiwan (Hurco Manufacturing Limited (“HML”)) and

Waconia, Minnesota (Milltronics USA, Inc. (“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 173 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.

Approximately 90% of the worldwide demand for computerized machine tools and computer control
systems is outside of the U.S. In fiscal 2018, approximately 71% 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 or products in the future.

Item 1A.

RISK FACTORS

Employees

We had approximately 800 full-time employees at the end of fiscal 2018, 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.

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.

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, which could re-occur in the future.

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 2018, approximately 71% 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;

•

• negative or unforeseen consequences resulting from the introduction, termination, modification, or

renegotiation of international trade agreements or treaties or the imposition of countervailing

measures or anti-dumping duties or similar tariffs;

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 disrupt 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

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 or products in the future.

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, which could re-occur in the future.

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 2018, approximately 71% 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:

Employees

Backlog

We had approximately 800 full-time employees at the end of fiscal 2018, 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.

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.

•
•
• differing labor regulation;
• governmental expropriation;
• domestic and foreign customs and tariffs;
•

current and changing regulatory environments affecting the importation and exportation of
products and raw materials;

trade barriers;
regional economic uncertainty;

• difficulty in obtaining distribution support;
• difficulty in staffing and managing widespread operations;
• differences in the availability and terms of financing;
• political instability and unrest;
• negative or unforeseen consequences resulting from the introduction, termination, modification, or
renegotiation of international trade agreements or treaties or the imposition of countervailing
measures or anti-dumping duties or similar tariffs;
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 disrupt 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.

Additionally, we must comply with complex foreign and U.S. laws and regulations in a multitude of
jurisdictions, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, 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, tariffs or duties,
restrictions on our business conduct and on our ability to offer our products in one or more countries, and
could also materially adversely 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 will not violate our policies.

We depend on limited sources for our products.
We depend on our wholly-owned subsidiaries, HML, Ningbo Hurco Machine Tool Co., Ltd. (“NHML”),
Milltronics, and LCM, 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 or supply, or
significant increase in price from third party suppliers, would have a material adverse effect on our results
of operations and financial condition. Such an interruption or increase in price could result from various
factors, including a change in the political environment or a natural disaster, such as trade wars or tariffs,
or 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 71% of our revenues in
fiscal 2018, 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 a portion of our foreign currency exposure with the purchase
of forward exchange contracts. These hedge contracts only mitigate the impact of changes in foreign
currency exchange 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. 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 and have substantially greater financial resources and some of which

have been supported by governmental or financial institution subsidies and, therefore, may have

competitive advantages over us. 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, anticipated or perceived shortages and tariffs or other

trade restrictions. 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.

Securities laws and/or SEC rules require a disclosure report to be filed annually with the SEC and require

companies to perform due diligence and to disclose and report whether or not such minerals originate from

the Democratic Republic of Congo or an adjoining country. Such laws or rules 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.

the following:

Acquisitions could disrupt our operations and harm our operating results.

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

• difficulties integrating the operations, technologies, products, and personnel of an acquired

company or being subjected to liability for the target’s pre-acquisition activities or operations as a

successor in interest;

• diversion of management’s attention from normal daily operations of the business;

• potential difficulties completing projects associated with in-process research and development;

• difficulties entering markets in which we have no or limited prior experience, especially when

competitors in such markets have stronger market positions;

of national security or other constraints put upon these ports, may also have an adverse impact on our results

of operations.

Additionally, we must comply with complex foreign and U.S. laws and regulations in a multitude of

jurisdictions, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, 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, tariffs or duties,

restrictions on our business conduct and on our ability to offer our products in one or more countries, and

could also materially adversely 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 will not violate our policies.

We depend on limited sources for our products.

We depend on our wholly-owned subsidiaries, HML, Ningbo Hurco Machine Tool Co., Ltd. (“NHML”),

Milltronics, and LCM, 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 or supply, or

significant increase in price from third party suppliers, would have a material adverse effect on our results

of operations and financial condition. Such an interruption or increase in price could result from various

factors, including a change in the political environment or a natural disaster, such as trade wars or tariffs,

or 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 71% of our revenues in

fiscal 2018, 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 a portion of our foreign currency exposure with the purchase

of forward exchange contracts. These hedge contracts only mitigate the impact of changes in foreign

currency exchange 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. 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 and have substantially greater financial resources and some of which
have been supported by governmental or financial institution subsidies and, therefore, may have
competitive advantages over us. 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, anticipated or perceived shortages and tariffs or other
trade restrictions. 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.
Securities laws and/or SEC rules require a disclosure report to be filed annually with the SEC and require
companies to perform due diligence and to disclose and report whether or not such minerals originate from
the Democratic Republic of Congo or an adjoining country. Such laws or rules 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.
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 or being subjected to liability for the target’s pre-acquisition activities or operations as a
successor in interest;

• diversion of management’s attention from normal daily operations of the business;
• potential difficulties completing projects associated with in-process research and development;
• difficulties entering markets in which we have no or limited prior experience, especially when

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
the 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 or otherwise be subject to 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 or the acquired business.

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 annually
and 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, which could materially adversely affect our
results of operations. 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 our 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.

We are subject to taxes in the U.S. and numerous foreign jurisdictions. Due to economic and political
conditions, tax rates in various jurisdictions, including the U.S., may be subject to significant change. Our
effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing
statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or
their interpretation, including tax laws in the U.S. Similarly, changes in tax laws or regulations, including
those in the U.S., could negatively impact our effective tax rate and results of operations. A change in a
statutory tax rate may result in the revaluation of our deferred tax assets and liabilities related to the relevant

jurisdiction in which the new tax law is enacted, potentially resulting in a material expense or benefit

recorded in our Consolidated Statements of Income for that period.

In December 2017, both houses of the U.S. Congress passed legislation that was approved and signed into

law. This legislation could have a material benefit or material adverse impact on our effective tax rate, tax

expense and cash flow. The Company has evaluated and recorded the aggregate impact of this passed

legislation on our financial condition, cash flows and results of operations. Any benefits associated with

lower U.S. corporate tax rates could be reduced or outweighed by other tax changes adverse to our business

or operations, such as new or additional taxes imposed on earnings and/or reinvested earnings of our foreign

subsidiaries. The aggregate impact of such legislation could have a material adverse impact on our cash

flows and results of operations.

Our continued success depends on our ability to protect our intellectual property.

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 employees’, 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 employees, customers and vendors in

our information technology systems. If a third party gained unauthorized access to our data, including any

data regarding our employees, 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 employee, 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.

•

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

the 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 or otherwise be subject to 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 or the acquired business.

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 annually

and 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, which could materially adversely affect our

results of operations. 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 our 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.

We are subject to taxes in the U.S. and numerous foreign jurisdictions. Due to economic and political

conditions, tax rates in various jurisdictions, including the U.S., may be subject to significant change. Our

effective tax rates could be adversely affected by changes in the mix of earnings in countries with differing

statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or

their interpretation, including tax laws in the U.S. Similarly, changes in tax laws or regulations, including

those in the U.S., could negatively impact our effective tax rate and results of operations. A change in a

statutory tax rate may result in the revaluation of our deferred tax assets and liabilities related to the relevant

jurisdiction in which the new tax law is enacted, potentially resulting in a material expense or benefit
recorded in our Consolidated Statements of Income for that period.

In December 2017, both houses of the U.S. Congress passed legislation that was approved and signed into
law. This legislation could have a material benefit or material adverse impact on our effective tax rate, tax
expense and cash flow. The Company has evaluated and recorded the aggregate impact of this passed
legislation on our financial condition, cash flows and results of operations. Any benefits associated with
lower U.S. corporate tax rates could be reduced or outweighed by other tax changes adverse to our business
or operations, such as new or additional taxes imposed on earnings and/or reinvested earnings of our foreign
subsidiaries. The aggregate impact of such legislation could have a material adverse impact on our cash
flows and results of operations.

Our continued success depends on our ability to protect our intellectual property.
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 employees’, 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 employees, customers and vendors in
our information technology systems. If a third party gained unauthorized access to our data, including any
data regarding our employees, 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 employee, 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.

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, application engineering,
customer service, manufacturing and
assembly

Indianapolis, Indiana, U.S.

165,000

Manufacturing, assembly, sales,
application engineering and customer
service

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, Kunshan, China
Chennai, Delhi, and Pune India
Liegnitz, Poland
Grand Rapids, Michigan, U.S.
Los Angeles, California, U.S.

407,300
72,500
32,300

31,000

42,200
3,500
12,800
20,100
13,800
9,700
3,900
12,200
11,000
2,900
3,700
11,400

We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various
dates ranging from January 2019 to December 2029. 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.

From time to time, we are involved in various claims and lawsuits arising in the normal course of

business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim

when the estimated outcome is a range of possible loss and no one amount within that range is more likely

than another. We maintain insurance policies for such matters, and we record insurance recoveries when

we determine such recovery to be probable. We do not expect any of these claims, individually or in the

aggregate, to have a material adverse effect on our consolidated financial position or results of

operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance

policy coverages.

Item 4. MINE SAFETY DISCLOSURES

None.

Executive Officers of the Registrant

Executive officers are appointed 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, 2018, 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

Chairman of the Board and Chief Executive Officer

President

Financial Officer

Executive Vice President, Secretary, Treasurer and Chief

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. Volovic was employed

by Unisys Corporation.

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 and then Executive Vice President in March

2017. 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.

Item 1B.

UNRESOLVED STAFF COMMENTS

Item 3.

LEGAL PROCEEDINGS

None.

Item 2.

PROPERTIES

Corporate headquarters, design and

engineering, product testing, sales and

marketing, application engineering,

customer service, manufacturing and

assembly

The following table sets forth the principal use, location, and size of each of our facilities:

Principal Uses

Locations

Square Footage

Indianapolis, Indiana, U.S.

165,000

Manufacturing, assembly, sales,

application engineering and customer

service

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, Kunshan, China

Chennai, Delhi, and Pune India

Liegnitz, Poland

Grand Rapids, Michigan, U.S.

Los Angeles, California, U.S.

407,300

72,500

32,300

31,000

42,200

3,500

12,800

20,100

13,800

9,700

3,900

12,200

11,000

2,900

3,700

11,400

We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various

dates ranging from January 2019 to December 2029. 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.

From time to time, we are involved in various claims and lawsuits arising in the normal course of
business. Pursuant to applicable accounting rules, we accrue the minimum liability for each known claim
when the estimated outcome is a range of possible loss and no one amount within that range is more likely
than another. We maintain insurance policies for such matters, and we record insurance recoveries when
we determine such recovery to be probable. We do not expect any of these claims, individually or in the
aggregate, to have a material adverse effect on our consolidated financial position or results of
operations. We believe that the ultimate resolution of claims for any losses will not exceed our insurance
policy coverages.

Item 4. MINE SAFETY DISCLOSURES

None.

Executive Officers of the Registrant

Executive officers are appointed 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, 2018, 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

63
54
47

Chairman of the Board and Chief Executive Officer
President
Executive Vice President, Secretary, Treasurer and Chief

Financial Officer

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. Volovic was employed
by Unisys Corporation.

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 and then Executive Vice President in March
2017. 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.

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”.

Holders

There were 105 holders of record of our common stock as of December 18, 2018.

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 new credit agreement and our prior 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 4 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 at 2018 Fiscal Year End” in our
2019 proxy statement 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.

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

Data:

Sales and service fees

Gross profit

Selling, general and

administrative expenses

Operating income

Other income (expense)

Net income

Earnings per common

share - diluted

Weighted average

common shares

outstanding-diluted

Dividends declared per

common share

Year Ended October 31,

2018

2017

2016

2015

2014

(In thousands, except per share amounts)

$300,671

91,806

$243,667

70,564

$227,289

70,440

$219,383

69,091

$222,303

68,612

58,010

33,796

(1,300)

21,490

49,661

20,903

(187)

15,115

50,824

19,616

(731)

13,292

45,287

23,804

(251)

16,214

46,615

21,997

(636)

15,143

$3.15

$2.25

$1.99

$2.44

$2.30

6,771

$0.43

6,680

6,642

6,602

6,538

$0.39

$0.35

$0.31

$0.26

Balance Sheet Data:

(Dollars in thousands)

2018

2017

2016

2015

2014

As of October 31,

Current assets

Current liabilities

Working capital

Current ratio

Total assets

Non-current liabilities

Total debt

Shareholders’ equity

_______________

$281,435

86,803

194,632

3.2

315,407

5,751

1,434

222,853

$ 246,415

70,889

175,526

3.5

$ 218,381

57,968

160,413

3.8

$ 216,112

65,086

151,026

3.3

$ 208,691

66,803

141,888

3.1

277,808

3,834

1,507

203,085

251,949

8,506

1,476

185,475

248,577

8,923

1,583

174,568

239,176

7,728

3,272

164,645

* Certain prior year amounts have been changed to conform to current year’s presentation.

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY

Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”.

There were 105 holders of record of our common stock as of December 18, 2018.

PART II

SECURITIES

Market Information

Holders

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 new credit agreement and our prior 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 4 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 at 2018 Fiscal Year End” in our

2019 proxy statement 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.

Item 6.

SELECTED FINANCIAL DATA

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
Data:

Sales and service fees
Gross profit
Selling, general and
administrative expenses
Operating income
Other income (expense)
Net income
Earnings per common
share - diluted
Weighted average
common shares
outstanding-diluted
Dividends declared per
common share

Year Ended October 31,

2018

2017

2016

2015

2014

(In thousands, except per share amounts)

$300,671
91,806

$243,667
70,564

$227,289
70,440

$219,383
69,091

$222,303
68,612

58,010
33,796
(1,300)
21,490

49,661
20,903
(187)
15,115

50,824
19,616
(731)
13,292

45,287
23,804
(251)
16,214

46,615
21,997
(636)
15,143

$3.15

$2.25

$1.99

$2.44

$2.30

6,771

$0.43

6,680

6,642

6,602

6,538

$0.39

$0.35

$0.31

$0.26

Balance Sheet Data:

Current assets
Current liabilities
Working capital
Current ratio

Total assets
Non-current liabilities
Total debt
Shareholders’ equity

2018

2017

As of October 31,
2016
(Dollars in thousands)

2015

2014

$281,435
86,803
194,632
3.2

315,407
5,751
1,434
222,853

$ 246,415
70,889
175,526
3.5

$ 218,381
57,968
160,413
3.8

$ 216,112
65,086
151,026
3.3

$ 208,691
66,803
141,888
3.1

277,808
3,834
1,507
203,085

251,949
8,506
1,476
185,475

248,577
8,923
1,583
174,568

239,176
7,728
3,272
164,645

_______________
* Certain prior year amounts have been changed to conform to current year’s presentation.

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 and applications support.

The following overview is intended to provide a brief explanation of the principal factors that have
contributed to our recent financial performance. This overview is intended to be read in conjunction with
the more detailed information included in our financial statements 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 2018, approximately 55% 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 15% of our revenues were attributable to customers in
the Asia Pacific region, where we encounter greater price pressures.

We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused
on innovative technology. Milltronics is the general purpose 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. The Takumi brand is also targeted to die and mold customers. In addition, through our wholly–
owned subsidiary LCM, we produce machine tool components and accessories.

We principally sell our products through more than 173 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, Hurco Manufacturing Ltd.
(“HML”). Machine castings and components to support HML’s production are manufactured at our
wholly-owned subsidiary in Ningbo, China, Ningbo Hurco Machine Tool Co., Ltd. Components to support
our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head and rotary table,
are manufactured by our wholly-owned subsidiary in Italy, LCM.

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

period results, we discuss the effect of currency translation on those results, which reflect translation to

U.S. Dollars at exchange rates prevailing during the period covered by those financial statements.

Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating

currency exchange rates. We seek to mitigate those risks through the use of derivative instruments –

principally foreign currency forward exchange contracts.

Results of Operations

The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements

of 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

2018

2017

2016

Increase/Decrease

’18 vs. ’17

’17 vs. ’16

Sales and service fees

Gross profit

Selling, general and administrative

expenses

Operating income

Net income

100%

31%

19%

11%

100%

29%

20%

100%

31%

22%

23%

30%

17%

62%

42%

-2%

14%

Fiscal 2018 Compared to Fiscal 2017

Sales and Service Fees. Sales and service fees for fiscal 2018 were $300.7 million, an increase of $57.0

million, or 23%, compared to fiscal 2017, and included a favorable currency impact of $10.5 million, or

4%, when translating foreign sales to U.S. Dollars for financial reporting purposes.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the fiscal years ended

October 31, 2018 and 2017 (in thousands):

Americas

Europe

Asia Pacific

Total

Fiscal Year Ended October 31,

2018

$ 90,902

166,202

43,567

$300,671

30%

55%

15%

100%

2017

$ 75,540

133,671

34,456

$ 243,667

31%

55%

14%

100%

Increase/Decrease

Amount

$15,362

32,531

9,111

$57,004

20%

24%

26%

23%

Sales in the Americas for fiscal 2018 increased by 20% compared to fiscal 2017, due primarily to improved

U.S. market conditions and increased demand from U.S. customers for the Hurco and Milltronics product

lines. The increase in sales year-over-year was attributable to an increased sales volume of vertical milling

and lathe machines from all product lines (Hurco, Milltronics and Takumi). European sales for fiscal 2018

increased by 24%, compared to fiscal 2017, and included a favorable currency impact of 7%, when

translating foreign sales to U.S. Dollars for financial reporting purposes. The increase in European sales

for fiscal 2018 resulted mainly from increased customer demand for Hurco and Takumi machines in

Germany, France and the United Kingdom, as well as increased customer demand for electro-mechanical

components and accessories manufactured by our wholly-owned subsidiary, LCM. Asian Pacific sales for

fiscal 2018 increased by 26%, compared to fiscal 2017, and included a favorable currency impact of 3%,

when translating foreign sales to U.S. Dollars for financial reporting purposes. The increase in Asian

Pacific sales for fiscal 2018 was primarily attributable to increased customer demand for Hurco and Takumi

machines in all Asian Pacific countries, particularly in China, the largest market for consumption of

machines tools in the world.

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 and applications support.

The following overview is intended to provide a brief explanation of the principal factors that have

contributed to our recent financial performance. This overview is intended to be read in conjunction with

the more detailed information included in our financial statements 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 2018, approximately 55% 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 15% of our revenues were attributable to customers in

the Asia Pacific region, where we encounter greater price pressures.

We have three brands of CNC machine tools in our product portfolio: Hurco is the premium brand focused

on innovative technology. Milltronics is the general purpose 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. The Takumi brand is also targeted to die and mold customers. In addition, through our wholly–

owned subsidiary LCM, we produce machine tool components and accessories.

We principally sell our products through more than 173 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, Hurco Manufacturing Ltd.

(“HML”). Machine castings and components to support HML’s production are manufactured at our

wholly-owned subsidiary in Ningbo, China, Ningbo Hurco Machine Tool Co., Ltd. Components to support

our SRT line of five-axis machining centers, such as the direct drive spindle, swivel head and rotary table,

are manufactured by our wholly-owned subsidiary in Italy, LCM.

Our sales to foreign customers are denominated, and payments by those customers are made, in the

prevailing currencies in the countries in which those customers are located (primarily the Euro, Pound

Sterling and Chinese Yuan). Our product costs are incurred and paid primarily in the New Taiwan Dollar

and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results

and consolidated financial statements as reported under U.S. Generally Accepted Accounting Principles.

For example, when the U.S. Dollar weakens in value relative to a foreign currency, sales made, and

expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements,

are higher than would be the case when the U.S. Dollar is stronger. In the comparison of our period-to-

period results, we discuss the effect of currency translation on those results, which reflect translation to
U.S. Dollars at exchange rates prevailing during the period covered by those financial statements.
Our high levels of foreign manufacturing and sales also expose us to cash flow risks due to fluctuating
currency exchange rates. We seek to mitigate those risks through the use of derivative instruments –
principally foreign currency forward exchange contracts.

Results of Operations

The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements
of 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
2017

2018

2016

Sales and service fees
Gross profit
Selling, general and administrative
expenses
Operating income
Net income

100%
31%

19%
11%
7%

100%
29%

20%
9%
6%

100%
31%

22%
9%
6%

Fiscal 2018 Compared to Fiscal 2017

Year-to-Year % Change

Increase/Decrease

’18 vs. ’17
23%
30%

’17 vs. ’16
7%
0%

17%
62%
42%

-2%
7%
14%

Sales and Service Fees. Sales and service fees for fiscal 2018 were $300.7 million, an increase of $57.0
million, or 23%, compared to fiscal 2017, and included a favorable currency impact of $10.5 million, or
4%, when translating foreign sales to U.S. Dollars for financial reporting purposes.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the fiscal years ended
October 31, 2018 and 2017 (in thousands):

Americas
Europe
Asia Pacific
Total

2018

Fiscal Year Ended October 31,
2017
$ 75,540
133,671
34,456
$ 243,667

30%
55%
15%
100%

$ 90,902
166,202
43,567
$300,671

Increase/Decrease
%
Amount

$15,362
32,531
9,111
$57,004

20%
24%
26%
23%

31%
55%
14%
100%

Sales in the Americas for fiscal 2018 increased by 20% compared to fiscal 2017, due primarily to improved
U.S. market conditions and increased demand from U.S. customers for the Hurco and Milltronics product
lines. The increase in sales year-over-year was attributable to an increased sales volume of vertical milling
and lathe machines from all product lines (Hurco, Milltronics and Takumi). European sales for fiscal 2018
increased by 24%, compared to fiscal 2017, and included a favorable currency impact of 7%, when
translating foreign sales to U.S. Dollars for financial reporting purposes. The increase in European sales
for fiscal 2018 resulted mainly from increased customer demand for Hurco and Takumi machines in
Germany, France and the United Kingdom, as well as increased customer demand for electro-mechanical
components and accessories manufactured by our wholly-owned subsidiary, LCM. Asian Pacific sales for
fiscal 2018 increased by 26%, compared to fiscal 2017, and included a favorable currency impact of 3%,
when translating foreign sales to U.S. Dollars for financial reporting purposes. The increase in Asian
Pacific sales for fiscal 2018 was primarily attributable to increased customer demand for Hurco and Takumi
machines in all Asian Pacific countries, particularly in China, the largest market for consumption of
machines tools in the world.

86%

87%

2018
$ 261,710

2017
$ 209,311

23%
13%
10%
23%

1%
10%
3%
100%

Amount %
25%
$ 52,399

546
3,246
813
$ 57,004

2,870
27,501
8,590
$ 300,671

2,324
24,255
7,777
$ 243,667

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, 2018 and 2017 (in thousands):

Fiscal Year Ended October 31,

Increase/
Decrease

Computerized Machine Tools
Computer Control Systems
1%
and Software †
9%
Service Parts
3%
Service Fees
100%
Total
† Amounts shown do not include computer control systems and software sold as an integrated component of computerized

Gross Profit. Gross profit for fiscal 2018 was $91.8 million, or 31% of sales, compared to $70.6 million,

or 29% of sales, for fiscal 2017. The year-over-year increase in gross profit as a percentage of sales reflected

increased machine sales across all three regions and product lines and the favorable impact of foreign

currency translation compared to the corresponding prior year period.

Operating Expenses. Selling, general and administrative expenses for fiscal 2018 were $58.0 million, or

19% of sales, compared to $49.7 million, or 20% of sales, in fiscal 2017, and included an unfavorable

currency impact of $1.3 million, when translating foreign expenses to U.S. Dollars for financial reporting

purposes. The year-over-year increase in selling, general and administrative expenses was driven by

increased expenses for tradeshows, global sales and marketing, employee incentive compensation and the

unfavorable impact of foreign currency translation compared to the corresponding prior year period.

Operating Income. Operating income for fiscal 2018 was $33.8 million, or 11% of sales, compared to $20.9

million, or 9% of sales, in fiscal 2017. The year-over-year increase in operating income was primarily

attributable to increased machine sales across all three regions and product lines, and the favorable impact

of foreign currency translation compared to the corresponding prior year period.

Other Income (Expense). Other income (expense) for fiscal 2018 increased by $1.1 million from fiscal

2017, due mainly to increased foreign currency losses experienced in 2018.

Provision for Income Taxes. Our effective tax rate for fiscal 2018 was 34%, compared to 27% for fiscal

2017. The year-over-year increase in the effective tax rate for fiscal 2018 was primarily attributable to one-

time charges of $2.8 million related to the Tax Cuts and Jobs Act that was enacted in December 2017. The

impact of these one-time charges increased the effective tax rate by approximately 39% for the first quarter

of fiscal 2018. Excluding the impact of these charges, earnings per diluted share would have been $0.41

higher than the earnings per diluted share we reported for fiscal 2018.

Net Income. Net income for fiscal 2018 was $21.5 million, or $3.15 per diluted share, an increase of $6.4

million, or 42%, from fiscal 2017 net income of $15.1 million, or $2.25 per diluted share.

Fiscal 2017 Compared to Fiscal 2016

Sales and Service Fees. Sales and service fees for fiscal 2017 were $243.7 million, an increase of $16.4

million, or 7%, compared to fiscal 2016 and included a negative currency impact of $1.3 million, or 1%,

when translating foreign sales to U.S. Dollars for financial reporting purposes.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the fiscal years ended

October 31, 2017 and 2016 (in thousands):

Americas

Europe

Asia Pacific

Total

Fiscal Year Ended October 31,

2017

$ 75,540

133,671

34,456

$ 243,667

31%

55%

14%

100%

2016

$ 74,386

124,070

28,833

$ 227,289

33%

54%

13%

100%

Increase/Decrease

Amount %

$ 1,154

9,601

5,623

$ 16,378

20%

Sales in the Americas for fiscal 2017 increased by 2% compared to fiscal 2016 and reflected improved U.S.

market conditions and demand from customers for all product lines (Hurco, Takumi and Milltronics) and

in all regions of the country where our customers are located. European sales for fiscal 2017 increased by

8%, compared to fiscal 2016, and included a negative currency impact of 1%, when translating foreign sales

to U.S. Dollars for financial reporting purposes. Excluding the negative impact of currency, the year-over-

year increase in European sales for fiscal 2017 was driven primarily by increased sales of Hurco machines

machine systems.

Sales of computerized machine tools and computer control systems and software for fiscal 2018 increased
by 25% and 23%, respectively, and each included a favorable currency impact of 4%, compared to fiscal
2017. The year-over-year increase in sales of computerized machine tools and computer control systems
and software reflected increased machine sales across all three regions and product lines. Sales of service
parts and service fees for fiscal 2018 increased by 13% and 10%, respectively, compared to fiscal 2017,
due primarily to an increase in aftermarket sales and aftermarket service of Hurco products in North
America, France and the United Kingdom.

Orders and Backlog. Orders for fiscal 2018 were a record $305.8 million, an increase of $45.2 million, or
17%, compared to fiscal 2017, and included a favorable currency impact of $13.8 million, or 5%, when
translating foreign orders to U.S. Dollars.

The following table sets forth new orders booked by geographic region for the fiscal years ended October
31, 2018 and 2017 (dollars in thousands):

Americas
Europe
Asia Pacific
Total

Fiscal Year Ended October 31,

2018

$ 94,160
170,366
41,319
$ 305,845

31%
56%
13%
100%

2017
$ 85,070
137,622
37,917
$ 260,609

33%
53%
14%
100%

Increase/Decrease
Amount %
$ 9,090
32,744
3,402
$ 45,236

11%
24%
9%
17%

Orders in the Americas for fiscal 2018 increased by 11%, compared to fiscal 2017. The increase was largely
attributable to improved customer demand for Hurco and Takumi vertical milling and lathe machines.
European orders for fiscal 2018 increased by 24%, compared to fiscal 2017, and included a favorable
currency impact of 9%, when translating foreign orders to U.S. Dollars. The year-over-year increase in
European orders was largely driven by increased customer demand for Hurco and Takumi vertical milling
and lathe machines in Germany and France, as well as increased demand for electro-mechanical
components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2018 increased by 9%,
compared to fiscal 2017, and included a favorable currency impact of 3%, when translating foreign orders
to U.S. Dollars. The year-over-year increase in Asian Pacific orders was largely due to increased customer
demand for Hurco vertical milling machines in India, China and Southeast Asia.

Backlog at October 31, 2018 increased to $55.0 million compared to $52.0 million at October 31, 2017
primarily due to an increase in customer orders during fiscal 2018. We do not believe backlog is a useful
measure of past performance or indicative of future performance. Backlog orders as of October 31, 2018
are expected to be fulfilled in fiscal 2019.

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, 2018 and 2017 (in thousands):

Computerized Machine Tools

$ 261,710

87%

$ 209,311

Computer Control Systems

Fiscal Year Ended October 31,

2018

2017

2,870

27,501

8,590

2,324

24,255

7,777

and Software †

Service Parts

Service Fees

Total

machine systems.

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

$ 300,671

100%

$ 243,667

100%

$ 57,004

Increase/

Decrease

Amount %

$ 52,399

25%

546

3,246

813

23%

13%

10%

23%

86%

10%

Sales of computerized machine tools and computer control systems and software for fiscal 2018 increased

by 25% and 23%, respectively, and each included a favorable currency impact of 4%, compared to fiscal

2017. The year-over-year increase in sales of computerized machine tools and computer control systems

and software reflected increased machine sales across all three regions and product lines. Sales of service

parts and service fees for fiscal 2018 increased by 13% and 10%, respectively, compared to fiscal 2017,

due primarily to an increase in aftermarket sales and aftermarket service of Hurco products in North

America, France and the United Kingdom.

Orders and Backlog. Orders for fiscal 2018 were a record $305.8 million, an increase of $45.2 million, or

17%, compared to fiscal 2017, and included a favorable currency impact of $13.8 million, or 5%, when

translating foreign orders to U.S. Dollars.

The following table sets forth new orders booked by geographic region for the fiscal years ended October

31, 2018 and 2017 (dollars in thousands):

Americas

Europe

Asia Pacific

Total

Fiscal Year Ended October 31,

2018

$ 94,160

170,366

41,319

$ 305,845

31%

56%

13%

100%

2017

$ 85,070

137,622

37,917

$ 260,609

33%

53%

14%

100%

Increase/Decrease

Amount %

$ 9,090

32,744

3,402

$ 45,236

11%

24%

17%

Orders in the Americas for fiscal 2018 increased by 11%, compared to fiscal 2017. The increase was largely

attributable to improved customer demand for Hurco and Takumi vertical milling and lathe machines.

European orders for fiscal 2018 increased by 24%, compared to fiscal 2017, and included a favorable

currency impact of 9%, when translating foreign orders to U.S. Dollars. The year-over-year increase in

European orders was largely driven by increased customer demand for Hurco and Takumi vertical milling

and lathe machines in Germany and France, as well as increased demand for electro-mechanical

components and accessories manufactured by LCM. Asian Pacific orders for fiscal 2018 increased by 9%,

compared to fiscal 2017, and included a favorable currency impact of 3%, when translating foreign orders

to U.S. Dollars. The year-over-year increase in Asian Pacific orders was largely due to increased customer

demand for Hurco vertical milling machines in India, China and Southeast Asia.

Backlog at October 31, 2018 increased to $55.0 million compared to $52.0 million at October 31, 2017

primarily due to an increase in customer orders during fiscal 2018. We do not believe backlog is a useful

measure of past performance or indicative of future performance. Backlog orders as of October 31, 2018

are expected to be fulfilled in fiscal 2019.

Gross Profit. Gross profit for fiscal 2018 was $91.8 million, or 31% of sales, compared to $70.6 million,
or 29% of sales, for fiscal 2017. The year-over-year increase in gross profit as a percentage of sales reflected
increased machine sales across all three regions and product lines and the favorable impact of foreign
currency translation compared to the corresponding prior year period.

Operating Expenses. Selling, general and administrative expenses for fiscal 2018 were $58.0 million, or
19% of sales, compared to $49.7 million, or 20% of sales, in fiscal 2017, and included an unfavorable
currency impact of $1.3 million, when translating foreign expenses to U.S. Dollars for financial reporting
purposes. The year-over-year increase in selling, general and administrative expenses was driven by
increased expenses for tradeshows, global sales and marketing, employee incentive compensation and the
unfavorable impact of foreign currency translation compared to the corresponding prior year period.

Operating Income. Operating income for fiscal 2018 was $33.8 million, or 11% of sales, compared to $20.9
million, or 9% of sales, in fiscal 2017. The year-over-year increase in operating income was primarily
attributable to increased machine sales across all three regions and product lines, and the favorable impact
of foreign currency translation compared to the corresponding prior year period.

Other Income (Expense). Other income (expense) for fiscal 2018 increased by $1.1 million from fiscal
2017, due mainly to increased foreign currency losses experienced in 2018.

Provision for Income Taxes. Our effective tax rate for fiscal 2018 was 34%, compared to 27% for fiscal
2017. The year-over-year increase in the effective tax rate for fiscal 2018 was primarily attributable to one-
time charges of $2.8 million related to the Tax Cuts and Jobs Act that was enacted in December 2017. The
impact of these one-time charges increased the effective tax rate by approximately 39% for the first quarter
of fiscal 2018. Excluding the impact of these charges, earnings per diluted share would have been $0.41
higher than the earnings per diluted share we reported for fiscal 2018.

Net Income. Net income for fiscal 2018 was $21.5 million, or $3.15 per diluted share, an increase of $6.4
million, or 42%, from fiscal 2017 net income of $15.1 million, or $2.25 per diluted share.

Fiscal 2017 Compared to Fiscal 2016

Sales and Service Fees. Sales and service fees for fiscal 2017 were $243.7 million, an increase of $16.4
million, or 7%, compared to fiscal 2016 and included a negative currency impact of $1.3 million, or 1%,
when translating foreign sales to U.S. Dollars for financial reporting purposes.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the fiscal years ended
October 31, 2017 and 2016 (in thousands):

2017

Fiscal Year Ended October 31,
2016
$ 74,386

Americas
Europe
Asia Pacific
Total

$ 75,540
133,671
34,456
$ 243,667

31%
55%
14%
100%

124,070
28,833
$ 227,289

Increase/Decrease
Amount %
$ 1,154
9,601
5,623
$ 16,378

2%
8%
20%
7%

33%
54%
13%
100%

Sales in the Americas for fiscal 2017 increased by 2% compared to fiscal 2016 and reflected improved U.S.
market conditions and demand from customers for all product lines (Hurco, Takumi and Milltronics) and
in all regions of the country where our customers are located. European sales for fiscal 2017 increased by
8%, compared to fiscal 2016, and included a negative currency impact of 1%, when translating foreign sales
to U.S. Dollars for financial reporting purposes. Excluding the negative impact of currency, the year-over-
year increase in European sales for fiscal 2017 was driven primarily by increased sales of Hurco machines

in the United Kingdom and Germany. Asian Pacific sales for fiscal 2017 increased by 20%, compared to
fiscal 2016, primarily due to increased sales of Hurco and Takumi machines in all Asian Pacific countries
where our customers are located, with China contributing the largest increase. Asian Pacific sales for fiscal
2017 included a favorable currency impact 1%, when translating foreign sales to U.S. Dollars for financial
reporting purposes.

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, 2017 and 2016 (in thousands):

Computerized Machine Tools
Computer Control Systems
and Software †
Service Parts
Service Fees
Total

Fiscal Year Ended October 31,

Increase/
Decrease

2017
$ 209,311

86%

2016
$ 195,618

Amount %
7%
$ 13,693

86%

2,324
24,255
7,777
$ 243,667

1%
10%
3%
100%

2,078
21,908
7,685
$ 227,289

1%
10%
3%
100%

246
2,347
92
$ 16,378

12%
11%
1%
7%

† 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 computer control systems and software for fiscal 2017 increased
by 7% and 12%, respectively, compared to fiscal 2016, driven primarily by an increase in sales volume of
Hurco machines in Europe, particularly the United Kingdom and Germany. Sales of service parts and
service fees for fiscal 2017 increased by 11% and 1%, respectively, compared to fiscal 2016, due primarily
to an increase in aftermarket sales of Hurco components in Germany.

Orders and Backlog. Orders for fiscal 2017 were $260.6 million, an increase of $41.4 million, or 19%,
compared to fiscal 2016, and included a negative currency impact of $2.6 million, or 1%, when translating
foreign orders to U.S. Dollars.

The following table sets forth new orders booked by geographic region for fiscal years ended October 31,
2017 and 2016 (dollars in thousands):

Americas
Europe
Asia Pacific
Total

Fiscal Year Ended October 31,

2017

$ 85,070
137,622
37,917
$ 260,609

33%
53%
14%
100%

2016
$ 70,944
121,519
26,759
$ 219,222

32%
56%
12%
100%

Increase/Decrease
%
Amount
$ 14,126
16,103
11,158
$ 41,387

20%
13%
42%
19%

Orders in the Americas for fiscal 2017 increased by 20% compared to fiscal 2016 and reflected improved
U.S. market conditions and demand from customers for all product lines (Hurco, Takumi and Milltronics)
and in all regions of the country where our customers are located. European orders for fiscal 2017 increased
by 13%, compared to fiscal 2016, driven primarily by increased demand for Hurco and Takumi vertical
milling machines in Germany, the United Kingdom, and Italy. European orders for fiscal 2017 included a
negative currency impact of 2%, when translating foreign orders to U.S. Dollars. Asian Pacific orders for
fiscal 2017 increased by 42%, compared to fiscal 2016, driven primarily by increased demand for Hurco
and Takumi machines in all Asian Pacific countries where our customers are located, with China
contributing the largest increase. Asian Pacific orders for fiscal 2017 included a favorable currency impact
of 1%, when translating foreign orders to U.S. Dollars.

Backlog at October 31, 2017 increased to $52.0 million compared to $32.3 million at October 31, 2016

primarily due to an increase in customer orders during fiscal 2017. We do not believe backlog is a useful

measure of past performance or indicative of future performance.

Gross Profit. Gross profit for fiscal 2017 was $70.6 million, or 29% of sales, compared to $70.4 million,

or 31% of sales, for fiscal 2016. The decrease in gross profit as a percentage of sales for fiscal 2017

primarily reflected the negative impact of foreign currency translation, compared to fiscal 2016, and a sales

mix comprised of more entry-level machines, such as those under the Milltronics and Takumi brands, in

price competitive geographic regions, such as the Americas and Asia Pacific.

Operating Expenses. Selling, general and administrative expenses for fiscal 2017 were $49.7 million, or

20% of sales, compared to $50.8 million, or 22% of sales, in fiscal 2016, and included a favorable currency

impact of $0.2 million when translating foreign expenses to U.S. Dollars for financial reporting purposes.

Operating Income. Operating income for fiscal 2017 was $20.9 million, or 9% of sales, compared to $19.6

million, or 9% of sales, in fiscal 2016. The year-over-year increase in operating income was primarily

attributable to a reduction in operating expenses associated with trade show expenses for the International

Manufacturing Technology Show (“IMTS”) held in September 2016.

Other Income (Expense). Other income (expense) for fiscal 2017 decreased by $0.5 million from fiscal

2016 due mainly to lower foreign currency losses experienced in 2017.

Provision for Income Taxes. Our effective tax rate for fiscal 2017 was 27% in comparison to 30% for fiscal

2016. The decrease in the effective tax rate year-over-year was primarily due to changes in the geographic

mix of income and loss among tax jurisdictions.

Net Income. Net income for fiscal 2017 was $15.1 million, or $2.25 per diluted share, an increase of $1.8

million, or 14%, from fiscal 2016 net income of $13.3 million, or $1.99 per diluted share.

Liquidity and Capital Resources

At October 31, 2018, we had cash and cash equivalents of $77.2 million compared to $66.3 million at

October 31, 2017. The increase in cash and cash equivalents was primarily a result of an increase in net

income, partially offset by increases in inventories and accounts payable year-over-year when excluding

the negative impact of foreign currency of $1.0 million when translating foreign assets into U.S. Dollars

for financial reporting purposes. Approximately 69% of our $77.2 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 $194.6 million at October 31, 2018 compared

to $175.5 million at October 31, 2017. The increase in working capital was mostly driven by an increase in

cash and inventories, partially offset by an increase in accounts payable. Inventories were $137.6 million

at October 31, 2018, compared to $119.9 million at October 31, 2017. Inventory turns at October 31, 2018

were 1.6 compared to 1.5 turns at October 31, 2017.

Capital expenditures were $5.9 million in fiscal 2018 compared to $4.4 million in fiscal 2017. Capital

expenditures for fiscal 2018 were primarily for software development costs, purchases of factory equipment

for production facilities, and purchases of general software and equipment for selling facilities. We funded

these expenditures with cash flows from operations.

In December 2012, we entered into a credit agreement (the “2012 Credit Agreement”), which was in effect

through the scheduled maturity date of December 31, 2018, when it terminated. Effective as of December

in the United Kingdom and Germany. Asian Pacific sales for fiscal 2017 increased by 20%, compared to

fiscal 2016, primarily due to increased sales of Hurco and Takumi machines in all Asian Pacific countries

where our customers are located, with China contributing the largest increase. Asian Pacific sales for fiscal

2017 included a favorable currency impact 1%, when translating foreign sales to U.S. Dollars for financial

reporting purposes.

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, 2017 and 2016 (in thousands):

Fiscal Year Ended October 31,

Increase/

Decrease

2017

2016

$ 209,311

86%

$ 195,618

Amount %

86%

$ 13,693

2,324

24,255

7,777

$ 243,667

10%

100%

2,078

21,908

7,685

$ 227,289

10%

246

2,347

12%

11%

100%

$ 16,378

Computerized Machine Tools

Computer Control Systems

and Software †

Service Parts

Service Fees

Total

machine systems.

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

Sales of computerized machine tools and computer control systems and software for fiscal 2017 increased

by 7% and 12%, respectively, compared to fiscal 2016, driven primarily by an increase in sales volume of

Hurco machines in Europe, particularly the United Kingdom and Germany. Sales of service parts and

service fees for fiscal 2017 increased by 11% and 1%, respectively, compared to fiscal 2016, due primarily

to an increase in aftermarket sales of Hurco components in Germany.

Orders and Backlog. Orders for fiscal 2017 were $260.6 million, an increase of $41.4 million, or 19%,

compared to fiscal 2016, and included a negative currency impact of $2.6 million, or 1%, when translating

foreign orders to U.S. Dollars.

The following table sets forth new orders booked by geographic region for fiscal years ended October 31,

2017 and 2016 (dollars in thousands):

Americas

Europe

Asia Pacific

Total

Fiscal Year Ended October 31,

2017

$ 85,070

137,622

37,917

$ 260,609

33%

53%

14%

100%

2016

$ 70,944

121,519

26,759

$ 219,222

32%

56%

12%

100%

Increase/Decrease

Amount

$ 14,126

16,103

11,158

$ 41,387

20%

13%

42%

19%

Orders in the Americas for fiscal 2017 increased by 20% compared to fiscal 2016 and reflected improved

U.S. market conditions and demand from customers for all product lines (Hurco, Takumi and Milltronics)

and in all regions of the country where our customers are located. European orders for fiscal 2017 increased

by 13%, compared to fiscal 2016, driven primarily by increased demand for Hurco and Takumi vertical

milling machines in Germany, the United Kingdom, and Italy. European orders for fiscal 2017 included a

negative currency impact of 2%, when translating foreign orders to U.S. Dollars. Asian Pacific orders for

fiscal 2017 increased by 42%, compared to fiscal 2016, driven primarily by increased demand for Hurco

and Takumi machines in all Asian Pacific countries where our customers are located, with China

contributing the largest increase. Asian Pacific orders for fiscal 2017 included a favorable currency impact

of 1%, when translating foreign orders to U.S. Dollars.

Backlog at October 31, 2017 increased to $52.0 million compared to $32.3 million at October 31, 2016
primarily due to an increase in customer orders during fiscal 2017. We do not believe backlog is a useful
measure of past performance or indicative of future performance.

Gross Profit. Gross profit for fiscal 2017 was $70.6 million, or 29% of sales, compared to $70.4 million,
or 31% of sales, for fiscal 2016. The decrease in gross profit as a percentage of sales for fiscal 2017
primarily reflected the negative impact of foreign currency translation, compared to fiscal 2016, and a sales
mix comprised of more entry-level machines, such as those under the Milltronics and Takumi brands, in
price competitive geographic regions, such as the Americas and Asia Pacific.

Operating Expenses. Selling, general and administrative expenses for fiscal 2017 were $49.7 million, or
20% of sales, compared to $50.8 million, or 22% of sales, in fiscal 2016, and included a favorable currency
impact of $0.2 million when translating foreign expenses to U.S. Dollars for financial reporting purposes.

Operating Income. Operating income for fiscal 2017 was $20.9 million, or 9% of sales, compared to $19.6
million, or 9% of sales, in fiscal 2016. The year-over-year increase in operating income was primarily
attributable to a reduction in operating expenses associated with trade show expenses for the International
Manufacturing Technology Show (“IMTS”) held in September 2016.

Other Income (Expense). Other income (expense) for fiscal 2017 decreased by $0.5 million from fiscal
2016 due mainly to lower foreign currency losses experienced in 2017.

Provision for Income Taxes. Our effective tax rate for fiscal 2017 was 27% in comparison to 30% for fiscal
2016. The decrease in the effective tax rate year-over-year was primarily due to changes in the geographic
mix of income and loss among tax jurisdictions.

Net Income. Net income for fiscal 2017 was $15.1 million, or $2.25 per diluted share, an increase of $1.8
million, or 14%, from fiscal 2016 net income of $13.3 million, or $1.99 per diluted share.

Liquidity and Capital Resources

At October 31, 2018, we had cash and cash equivalents of $77.2 million compared to $66.3 million at
October 31, 2017. The increase in cash and cash equivalents was primarily a result of an increase in net
income, partially offset by increases in inventories and accounts payable year-over-year when excluding
the negative impact of foreign currency of $1.0 million when translating foreign assets into U.S. Dollars
for financial reporting purposes. Approximately 69% of our $77.2 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 $194.6 million at October 31, 2018 compared
to $175.5 million at October 31, 2017. The increase in working capital was mostly driven by an increase in
cash and inventories, partially offset by an increase in accounts payable. Inventories were $137.6 million
at October 31, 2018, compared to $119.9 million at October 31, 2017. Inventory turns at October 31, 2018
were 1.6 compared to 1.5 turns at October 31, 2017.

Capital expenditures were $5.9 million in fiscal 2018 compared to $4.4 million in fiscal 2017. Capital
expenditures for fiscal 2018 were primarily for software development costs, purchases of factory equipment
for production facilities, and purchases of general software and equipment for selling facilities. We funded
these expenditures with cash flows from operations.

In December 2012, we entered into a credit agreement (the “2012 Credit Agreement”), which was in effect
through the scheduled maturity date of December 31, 2018, when it terminated. Effective as of December

31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the “2018 Credit
Agreement”) with Bank of America, N.A., as the lender. The 2018 Credit Agreement is described further
below and in Note 4 of the Notes to Consolidated Financial Statements.

On December 6, 2016, we entered into a fourth amendment to the 2012 Credit Agreement to, among other
things, 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. The 2012 Credit Agreement, as amended, provided for
the issuance of up to $5.0 million in letters of credit. We also amended the 2012 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 2012 Credit Agreement bore 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 equaled 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 paid for the unutilized portion of the 2012 Credit
Agreement was 0.05% per annum.

The 2012 Credit Agreement contained 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
2012 Credit Agreement permitted us to pay cash dividends in an amount not to exceed $5.0 million per
calendar year, so long as we were not in default before and after giving effect to such dividends.

The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a
maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum
amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount
of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and
the maximum amount of all outstanding loans denominated in alternative currencies at any one time may
not exceed $20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries
are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

Borrowings under the 2018 Credit Agreement will bear interest at floating rates based on, at our option,
either (i) a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75%
per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime
rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of
credit will carry an annual rate of 0.75%.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default,
including covenants (1) restricting us from making certain investments, loans, advances and acquisitions
(but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making
certain payments, including cash dividends, except that we may pay cash dividends as long as immediately
before and after giving effect to such payment, the sum of the unused amount of the commitments under
the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not
in default before and after giving effect to such dividend payments; (3) requiring that we maintain a
minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net
worth of $170.0 million.

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

As of October 31, 2018, we had a £1.0 million revolving credit facility in the United Kingdom and a €1.5

million revolving credit facility in Germany. On February 16, 2017, we amended our credit facility in China

to decrease the credit facility from 40.0 million Chinese Yuan to 20.0 million Chinese Yuan (approximately

$2.9 million). On February 14, 2018, we renewed this facility with an expiration date of February 13,

2019. We had $1.4 million and $1.5 million of borrowings under our China credit facility as of October

31, 2018 and 2017, respectively. We had no other debt or borrowings under any of our other credit facilities

at either of those dates. At October 31, 2018, we were in compliance with the covenants contained in all

of our credit facilities and had $19.4 million of available borrowing capacity under our credit facilities in

effect on that date.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand,

we repaid in full the $1.4 million outstanding under, and terminated, the China credit facility and (2) we

terminated our United Kingdom credit facility. As of December 31, 2018, we retained the €1.5 million

revolving credit facility in Germany and the $40 million revolving credit facility under 2018 Credit

Agreement. As of December 31, 2018, there were no borrowings under any of our credit facilities and

$41.7 million of available borrowing capacity thereunder.

We believe our cash position and borrowing capacity under our credit facilities provide adequate liquidity

to fund our operations over the next twelve months and allow us to remain committed to our strategic plan

of product innovation and targeted penetration of developing markets.

We continue to receive and review information on businesses and assets for potential acquisition, including

intellectual property assets that are available for purchase.

Contractual Obligations and Commitments

The following is a table of contractual obligations and commitments as of October 31, 2018 (in thousands):

Total

Short-term debt ..............

$ 1,434

Operating leases .............

Other… ..........................

9,859

6,002

Payments Due by Period

Less than

1 Year

$ 1,434

3,504

1-3

Years

$ --

3,863

808

3-5

Years

$ --

2,180

345

More than

5 Years

$ --

312

4,849

Total ...............................

$ 17,295

$ 4,938

$ 4,671

$ 2,525

$ 5,161

In addition to the contractual obligations and commitments disclosed above, we also have a variety of other

obligations for the procurement of materials and services, none of which subject us to any material non-

cancelable commitments. While some of these obligations arise under long-term supply agreements, we

are not committed under these agreements to accept or pay for requirements that are not needed to meet our

production needs. We have no material minimum purchase commitments or “take-or-pay” type agreements

or arrangements. Unrecognized tax benefits in the amount of approximately $0.2 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 2019 to be approximately $15.3 million, which includes investments

for software development, real estate development, factory equipment and production facilities, as well as

general software and equipment for selling facilities. We expect to fund a large portion of 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”)

31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the “2018 Credit

Agreement”) with Bank of America, N.A., as the lender. The 2018 Credit Agreement is described further

below and in Note 4 of the Notes to Consolidated Financial Statements.

On December 6, 2016, we entered into a fourth amendment to the 2012 Credit Agreement to, among other

things, 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. The 2012 Credit Agreement, as amended, provided for

the issuance of up to $5.0 million in letters of credit. We also amended the 2012 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 2012 Credit Agreement bore 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 equaled 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 paid for the unutilized portion of the 2012 Credit

Agreement was 0.05% per annum.

The 2012 Credit Agreement contained 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

2012 Credit Agreement permitted us to pay cash dividends in an amount not to exceed $5.0 million per

calendar year, so long as we were not in default before and after giving effect to such dividends.

The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a

maximum aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum

amount of outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount

of outstanding loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and

the maximum amount of all outstanding loans denominated in alternative currencies at any one time may

not exceed $20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries

are guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

Borrowings under the 2018 Credit Agreement will bear interest at floating rates based on, at our option,

either (i) a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75%

per annum, or (ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime

rate or (c) the one month LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of

credit will carry an annual rate of 0.75%.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default,

including covenants (1) restricting us from making certain investments, loans, advances and acquisitions

(but permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making

certain payments, including cash dividends, except that we may pay cash dividends as long as immediately

before and after giving effect to such payment, the sum of the unused amount of the commitments under

the 2018 Credit Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not

in default before and after giving effect to such dividend payments; (3) requiring that we maintain a

minimum working capital of $125.0 million; and (4) requiring that we maintain a minimum tangible net

worth of $170.0 million.

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

As of October 31, 2018, we had a £1.0 million revolving credit facility in the United Kingdom and a €1.5
million revolving credit facility in Germany. On February 16, 2017, we amended our credit facility in China
to decrease the credit facility from 40.0 million Chinese Yuan to 20.0 million Chinese Yuan (approximately
$2.9 million). On February 14, 2018, we renewed this facility with an expiration date of February 13,
2019. We had $1.4 million and $1.5 million of borrowings under our China credit facility as of October
31, 2018 and 2017, respectively. We had no other debt or borrowings under any of our other credit facilities
at either of those dates. At October 31, 2018, we were in compliance with the covenants contained in all
of our credit facilities and had $19.4 million of available borrowing capacity under our credit facilities in
effect on that date.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand,
we repaid in full the $1.4 million outstanding under, and terminated, the China credit facility and (2) we
terminated our United Kingdom credit facility. As of December 31, 2018, we retained the €1.5 million
revolving credit facility in Germany and the $40 million revolving credit facility under 2018 Credit
Agreement. As of December 31, 2018, there were no borrowings under any of our credit facilities and
$41.7 million of available borrowing capacity thereunder.

We believe our cash position and borrowing capacity under our credit facilities provide adequate liquidity
to fund our operations over the next twelve months and allow us to remain committed to our strategic plan
of product innovation and targeted penetration of developing markets.

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

Contractual Obligations and Commitments

The following is a table of contractual obligations and commitments as of October 31, 2018 (in thousands):

Short-term debt ..............
Operating leases .............
Other… ..........................
Total ...............................

Total
$ 1,434
9,859
6,002
$ 17,295

Payments Due by Period
1-3
Years
$ --
3,863
808
$ 4,671

Less than
1 Year
$ 1,434
3,504
--
$ 4,938

3-5
Years
$ --
2,180
345
$ 2,525

More than
5 Years
$ --
312
4,849
$ 5,161

In addition to the contractual obligations and commitments disclosed above, we also have a variety of other
obligations for the procurement of materials and services, none of which subject us to any material non-
cancelable commitments. While some of these obligations arise under long-term supply agreements, we
are not committed under these agreements to accept or pay for requirements that are not needed to meet our
production needs. We have no material minimum purchase commitments or “take-or-pay” type agreements
or arrangements. Unrecognized tax benefits in the amount of approximately $0.2 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 2019 to be approximately $15.3 million, which includes investments
for software development, real estate development, factory equipment and production facilities, as well as
general software and equipment for selling facilities. We expect to fund a large portion of 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, 2018, we had 23 outstanding third party payment guarantees totaling approximately $0.6
million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon
shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title,
however, until the customer has paid for the machine. A retention of title clause allows us to recover the
machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value,
which amounts are insignificant.

Critical Accounting 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 requires
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 or distributor, 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 for our three-axis machines to be
inconsequential and perfunctory. We allocate the transaction prices and recognize revenue associated with
the installation process for our five-axis machines on a prorata basis over the period of the installation
process.

Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over
the term of the contract, and are generally sold on a stand-alone basis. Sales related to software upgrades
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 that 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 lower of cost (first-in, first-out method) or net realizable value. To
determine the appropriate level of valuation reserves, we evaluate current stock levels in relation to
historical and expected patterns of demand for all of our products. We evaluate the need for changes to
valuation reserves based on market conditions, competitive offerings and other factors on a regular basis.

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

In December 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act,

among other things, lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax

system from a worldwide system and imposed a one-time tax on deemed repatriation of earnings of foreign

jurisdictions.

subsidiaries.

As a result of the reduction in the federal corporate income tax rate, we were required to revalue our net

deferred tax asset to account for the future impact of lower corporate tax rates on this deferred amount and

record any change in the value of such asset as a one-time non-cash charge on our income statement. This

resulted in additional expense of $0.6 million, which was recognized in fiscal 2018. Additionally, the Tax

Reform Act required a transition tax on any net accumulated earnings and profits generated by foreign

subsidiaries as of the two required measurement dates, November 2, 2017 and December 31, 2017 while

providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.

This resulted in a one-time transition tax on the deemed repatriation of net accumulated foreign earnings

and profits of $2.2 million in fiscal 2018, for a total impact of $2.8 million. As such, as of December 31,

2017, all of the Company’s accumulated earnings and profits were deemed repatriated. We have not

provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries beginning

January 1, 2018 based upon our determination that such earnings will be indefinitely reinvested abroad.

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 affecting

guidance for accounting for guarantees (codified in Accounting Standards Codification (“ASC”) 460). As

of October 31, 2018, we had 23 outstanding third party payment guarantees totaling approximately $0.6

million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon

shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title,

however, until the customer has paid for the machine. A retention of title clause allows us to recover the

machine if the customer defaults on the financing. We accrue liabilities under these guarantees at fair value,

which amounts are insignificant.

Critical Accounting 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 requires

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 or distributor, 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 for our three-axis machines to be

inconsequential and perfunctory. We allocate the transaction prices and recognize revenue associated with

the installation process for our five-axis machines on a prorata basis over the period of the installation

process.

Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over

the term of the contract, and are generally sold on a stand-alone basis. Sales related to software upgrades

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 that 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 lower of cost (first-in, first-out method) or net realizable value. To

determine the appropriate level of valuation reserves, we evaluate current stock levels in relation to

historical and expected patterns of demand for all of our products. We evaluate the need for changes to

valuation reserves based on market conditions, competitive offerings and other factors on a regular basis.

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.

In December 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act,
among other things, lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax
system from a worldwide system and imposed a one-time tax on deemed repatriation of earnings of foreign
subsidiaries.

As a result of the reduction in the federal corporate income tax rate, we were required to revalue our net
deferred tax asset to account for the future impact of lower corporate tax rates on this deferred amount and
record any change in the value of such asset as a one-time non-cash charge on our income statement. This
resulted in additional expense of $0.6 million, which was recognized in fiscal 2018. Additionally, the Tax
Reform Act required a transition tax on any net accumulated earnings and profits generated by foreign
subsidiaries as of the two required measurement dates, November 2, 2017 and December 31, 2017 while
providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.
This resulted in a one-time transition tax on the deemed repatriation of net accumulated foreign earnings
and profits of $2.2 million in fiscal 2018, for a total impact of $2.8 million. As such, as of December 31,
2017, all of the Company’s accumulated earnings and profits were deemed repatriated. We have not
provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries beginning
January 1, 2018 based upon our determination that such earnings will be indefinitely reinvested abroad.

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 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.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest

rates. At October 31, 2018, we had $1.4 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 2018, we derived approximately 70% of our revenues from customers located outside of the

Americas. All of our computerized machine tools and computer control systems, as well as certain

proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-

invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.

Our products are sourced from foreign suppliers or built to our specifications by either our wholly-owned

subsidiaries in Taiwan, the U.S., Italy and China or an affiliated contract manufacturer in Taiwan. Our

purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers

include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of

currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with

our product purchases relates to the New Taiwan Dollar and the Euro.

We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk

related to forecasted inter-company sales and purchases denominated in, or based on, foreign currencies

(primarily the Euro, Pound Sterling, and New Taiwan Dollar). We also enter into foreign currency forward

exchange contracts to protect against the effects of foreign currency fluctuations on receivables and

payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore,

do not enter into these contracts for trading purposes.

Forward contracts for the sale or purchase of foreign currencies as of October 31, 2018, which are

designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and

hedging activities, were as follows (in thousands, except weighted average forward rates):

Contract Amount at

Notional

Amount

Weighted

Forward Rates in U.S.

Avg.

Dollars

in Foreign Forward

Contract

October 31,

Currency

Rate

Date

2018

Maturity Dates

28,650

1.2151

34,812

32,881 Nov 2018 - Oct 2019

7,450

1.3519

10,071

9,587 Nov 2018 - Oct 2019

Forward

Contracts

Sale Contracts:

Euro

Sterling

Purchase Contracts:

New Taiwan Dollar

1,049,000 29.208*

35,914

34,306 Nov 2018 - Oct 2019

*New Taiwan Dollars per U.S. Dollar

demand. We periodically review the carrying values of these assets and make judgments as to ultimate

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Interest Rate Risk

Interest on borrowings under our bank credit agreements are tied to prevailing domestic and foreign interest
rates. At October 31, 2018, we had $1.4 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 2018, we derived approximately 70% of our revenues from customers located outside of the
Americas. All of our computerized machine tools and computer control systems, as well as certain
proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-
invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.

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

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

Forward contracts for the sale or purchase of foreign currencies as of October 31, 2018, which are
designated as cash flow hedges under FASB guidance related to accounting for derivative instruments and
hedging activities, were as follows (in thousands, except weighted average forward rates):

Weighted
Avg.

Notional
Amount
in Foreign Forward
Currency

Rate

Contract Amount at
Forward Rates in U.S.
Dollars

Contract
Date

October 31,
2018

Maturity Dates

28,650

1.2151

34,812

32,881 Nov 2018 - Oct 2019

7,450

1.3519

10,071

9,587 Nov 2018 - Oct 2019

Forward
Contracts
Sale Contracts:

Euro

Sterling

Purchase Contracts:

New Taiwan Dollar

1,049,000 29.208*

35,914

34,306 Nov 2018 - Oct 2019

*New Taiwan Dollars per U.S. Dollar

Forward contracts for the sale or purchase of foreign currencies as of October 31, 2018, 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 (in thousands,
except weighted average forward rates):

Notional
Amount
in Foreign
Currency

Weighted
Avg.

Contract Amount at
Forward Rates in U.S.
Dollars

Forward Contract October 31,

Rate

Date

2018

Maturity Dates

19,246
6,992

1.1611
0.0667

22,347
466

21,945 Nov 2018 – Jul 2019
464

Apr 2019

1,159,421

30.5528*

37,948

37,567 Nov 2018 – Jan 2019

Forward
Contracts
Sale Contracts:
Euro
South African Rand

Purchase Contracts:
New Taiwan Dollar

* New Taiwan Dollars per U.S. Dollar

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign
countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million
in November 2017. 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, net of tax, in Accumulated other
comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured
in November 2018 and we entered into a new forward contract for the same notional amount that is set to
mature in November 2019. As of October 31, 2018, we had $652,000 of realized gains and $153,000 of
unrealized gains, net of tax, recorded as cumulative translation adjustments in Accumulated other
comprehensive loss, related to these forward contracts.

Forward contracts designated as net investment hedges under this guidance as of October 31, 2018 were as
follows (in thousands, except weighted average forward rates):

Notional
Amount
in Foreign
Currency

Weighted
Avg.
Forward
Rate

Contract Amount at
Forward Rates in U.S. Dollars
October 31,
2018

Contract
Date

Maturity Date

Forward
Contracts

Sale Contracts:

Euro

3,000

1.2095

3,629

3,397

Nov 2018

Management’s Annual Report on Internal Control over Financial Reporting

To the Shareholders and

Board of Directors

of Hurco Companies, Inc.

Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s

internal control over financial reporting as of October 31, 2018, based on criteria established in Internal

Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway

Commission (2013 framework) (COSO). Management is responsible for the Company’s financial

statements, for maintaining effective internal control over financial reporting, and for its assessment of the

effectiveness of internal control over financial reporting.

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent

or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject

to the risk that controls may become inadequate because of changes in conditions, or that the degree of

compliance with the policies or procedures may deteriorate.

In management’s opinion, the Company’s internal control over financial reporting as of October 31, 2018,

was effective based on the criteria specified above.

Our independent registered public accounting firm, RSM US LLP (“RSM”), which also audited our

consolidated financial statements, audited the effectiveness of our internal control over financial reporting

as of October 31, 2018. RSM 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 and Chief Executive Officer

/s/ Sonja K. McClelland

Sonja K. McClelland

Indianapolis, Indiana

January 4, 2019

Executive Vice President, Secretary, Treasurer and Chief Financial Officer

Forward contracts for the sale or purchase of foreign currencies as of October 31, 2018, 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 (in thousands,

except weighted average forward rates):

Contract Amount at

Notional

Amount

Weighted

Forward Rates in U.S.

Avg.

Dollars

in Foreign

Forward Contract October 31,

Currency

Rate

Date

2018

Maturity Dates

South African Rand

6,992

0.0667

466

464

Apr 2019

19,246

1.1611

22,347

21,945 Nov 2018 – Jul 2019

Forward

Contracts

Sale Contracts:

Euro

Purchase Contracts:

New Taiwan Dollar

1,159,421

30.5528*

37,948

37,567 Nov 2018 – Jan 2019

* New Taiwan Dollars per U.S. Dollar

We are also exposed to foreign currency exchange risk related to our investment in net assets in foreign

countries. To manage this risk, we entered into a forward contract with a notional amount of €3.0 million

in November 2017. 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, net of tax, in Accumulated other

comprehensive loss in the same manner as the underlying hedged net assets. This forward contract matured

in November 2018 and we entered into a new forward contract for the same notional amount that is set to

mature in November 2019. As of October 31, 2018, we had $652,000 of realized gains and $153,000 of

unrealized gains, net of tax, recorded as cumulative translation adjustments in Accumulated other

comprehensive loss, related to these forward contracts.

Forward contracts designated as net investment hedges under this guidance as of October 31, 2018 were as

follows (in thousands, except weighted average forward rates):

Notional

Amount

in Foreign

Currency

Weighted

Avg.

Forward

Rate

Contract Amount at

Forward Rates in U.S. Dollars

October 31,

Contract

Date

2018

Maturity Date

Forward

Contracts

Sale Contracts:

Euro

3,000

1.2095

3,629

3,397

Nov 2018

Management’s Annual Report on Internal Control over Financial Reporting

To the Shareholders and
Board of Directors
of Hurco Companies, Inc.

Management of Hurco Companies, Inc. (the “Company”) has assessed the effectiveness of the Company’s
internal control over financial reporting as of October 31, 2018, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (COSO). Management is responsible for the Company’s financial
statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting.

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In management’s opinion, the Company’s internal control over financial reporting as of October 31, 2018,
was effective based on the criteria specified above.

Our independent registered public accounting firm, RSM US LLP (“RSM”), which also audited our
consolidated financial statements, audited the effectiveness of our internal control over financial reporting
as of October 31, 2018. RSM 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 and Chief Executive Officer

/s/ Sonja K. McClelland
Sonja K. McClelland
Executive Vice President, Secretary, Treasurer and Chief Financial Officer

Indianapolis, Indiana
January 4, 2019

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and

Board of Directors

of Hurco Companies, Inc.

To the Shareholders
and Board of Directors
of Hurco Companies, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. and its
subsidiaries (the Company) as of October 31, 2018 and 2017, the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the
related notes and schedule listed in Item 15(a) (collectively, the financial statements). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of
October 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31,
2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated January 4, 2019
expressed an unqualified opinion on the effectiveness of the Company's internal control over financial
reporting.

Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free
of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.

We have served as the Company's auditor since 2017.

/s/ RSM US LLP

Indianapolis, Indiana
January 4, 2019

We have audited the accompanying consolidated statements of income, comprehensive income, changes in

shareholders’ equity and cash flows of Hurco Companies, Inc. for the year ended October 31, 2016. Our

audit also included the financial statement schedule listed at Item 15(a) for the year ended October 31, 2016.

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 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 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 audit provides a

reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the

consolidated results of Hurco Companies, Inc.’s operations and its cash flows for the year ended October

31, 2016 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related

financial statement schedule for the year ended October 31, 2016, when considered in relation to the basic

financial statements taken as a whole, presents fairly in all material respects the information set forth

therein.

/s/ Ernst & Young LLP

Indianapolis, Indiana

January 6, 2017, except for Note 15, as to which the date is January 5, 2018

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and
Board of Directors
of Hurco Companies, Inc.

To the Shareholders

and Board of Directors

of Hurco Companies, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. and its

subsidiaries (the Company) as of October 31, 2018 and 2017, the related consolidated statements of income,

comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the

related notes and schedule listed in Item 15(a) (collectively, the financial statements). In our opinion, the

financial statements present fairly, in all material respects, the financial position of the Company as of

October 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended in

conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight

Board (United States) (PCAOB), the Company's internal control over financial reporting as of October 31,

2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee

of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated January 4, 2019

expressed an unqualified opinion on the effectiveness of the Company's internal control over financial

reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to

express an opinion on the Company’s financial statements based on our audits. We are a public accounting

firm registered with the PCAOB and are required to be independent with respect to the Company in

accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and

Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we

plan and perform the audits to obtain reasonable assurance about whether the financial statements are free

of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing

procedures that respond to those risks. Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the

accounting principles used and significant estimates made by management, as well as evaluating the overall

presentation of the financial statements. We believe that our audits provide a reasonable basis for our

We have served as the Company's auditor since 2017.

opinion.

/s/ RSM US LLP

Indianapolis, Indiana

January 4, 2019

We have audited the accompanying consolidated statements of income, comprehensive income, changes in
shareholders’ equity and cash flows of Hurco Companies, Inc. for the year ended October 31, 2016. Our
audit also included the financial statement schedule listed at Item 15(a) for the year ended October 31, 2016.
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 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 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated results of Hurco Companies, Inc.’s operations and its cash flows for the year ended October
31, 2016 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended October 31, 2016, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.

/s/ Ernst & Young LLP

Indianapolis, Indiana
January 6, 2017, except for Note 15, as to which the date is January 5, 2018

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.

/s/ RSM US LLP

Indianapolis, Indiana

January 4, 2019

Report of Independent Registered Public Accounting Firm

To the Shareholders
and Board of Directors
of Hurco Companies, Inc.

Opinion on the Internal Control Over Financial Reporting
We have audited Hurco Companies, Inc.'s (the Company) internal control over financial reporting as of
October 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2018 and
2017, the related consolidated statements of income, comprehensive income, changes in shareholders’
equity and cash flows, for the years then ended, and the related notes and schedules listed in Item 15(a) of
the Company and our report dated January 4, 2019 expressed an unqualified opinion.

Basis for Opinion
The Company’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 in the
accompanying Management's 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 are
a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/ RSM US LLP

Indianapolis, Indiana
January 4, 2019

Report of Independent Registered Public Accounting Firm

To the Shareholders

and Board of Directors

of Hurco Companies, Inc.

Opinion on the Internal Control Over Financial Reporting

We have audited Hurco Companies, Inc.'s (the Company) internal control over financial reporting as of

October 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the

Company maintained, in all material respects, effective internal control over financial reporting as of

October 31, 2018, based on criteria established in Internal Control — Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2018 and

2017, the related consolidated statements of income, comprehensive income, changes in shareholders’

equity and cash flows, for the years then ended, and the related notes and schedules listed in Item 15(a) of

the Company and our report dated January 4, 2019 expressed an unqualified opinion.

Basis for Opinion

The Company’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 in the

accompanying Management's 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 are

a public accounting firm registered with the PCAOB and are required to be independent with respect to the

Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the

Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. 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, and testing

and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our

audit also included performing such other procedures as we considered necessary in the circumstances. We

believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external

purposes in accordance with generally accepted accounting principles. A company's internal control over

financial reporting includes those policies and procedures that (1) pertain to the maintenance of records

that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the

company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation

of financial statements in accordance with generally accepted accounting principles, and that receipts and

expenditures of the company are being made only in accordance with authorizations of management and

directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of

unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the

financial statements.

HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

HURCO COMPANIES, INC.

Year Ended October 31,
2018
2016
2017
(In thousands, except per share amounts)

Year Ended October 31,

2018

2017

2016

(In thousands)

Sales and service fees

Cost of sales and service

Gross profit

$300,671

$243,667

$227,289

Net Income

$21,490

$15,115

$13,292

208,865

173,103

156,849

Other comprehensive income (loss):

91,806

70,564

70,440

Translation gain (loss) of foreign currency financial statements

(3,183)

4,916

(1,441)

Selling, general and administrative expenses

58,010

49,661

50,824

(Gain) / loss on derivative instruments reclassified into operations,

Operating income

Interest expense

Interest income

Investment income

33,796

20,903

19,616

100

net of tax of $453, $(745), and $(906), respectively

1,355

(1,354)

(1,647)

Gain / (loss) on derivative instruments, net of tax of

$52, $(390), and $787, respectively

155

(709)

1,431

189

Total other comprehensive income (loss)

(1,673)

2,853

(1,657)

339

138

149

Comprehensive income

$19,817

$17,968

$11,635

Income from equity investments

639

505

466

Other expense, net

2,367

780

1,314

Income before income taxes

Provision for income taxes

32,496

20,716

18,885

11,006

5,601

5,593

Net income

$21,490

$15,115

$13,292

Income per common share – basic

$3.19

$2.27

$2.01

Weighted average common shares outstanding – basic

6,700

6,615

6,569

Income per common share – diluted

$3.15

$2.25

$1.99

Weighted average common shares outstanding – diluted

6,771

6,680

6,642

Dividends paid per share

$0.43

$0.39

$0.35

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

HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Sales and service fees

Cost of sales and service

Gross profit

Operating income

Interest expense

Interest income

Investment income

Year Ended October 31,

2018

2017

2016

(In thousands, except per share amounts)

2018

Year Ended October 31,
2017
(In thousands)

2016

$300,671

$243,667

$227,289

Net Income

$21,490

$15,115

$13,292

208,865

173,103

156,849

Other comprehensive income (loss):

91,806

70,564

70,440

Translation gain (loss) of foreign currency financial statements

(3,183)

4,916

(1,441)

33,796

20,903

19,616

100

(Gain) / loss on derivative instruments reclassified into operations,
net of tax of $453, $(745), and $(906), respectively

1,355

(1,354)

(1,647)

Gain / (loss) on derivative instruments, net of tax of
$52, $(390), and $787, respectively

155

(709)

1,431

189

Total other comprehensive income (loss)

(1,673)

2,853

(1,657)

339

138

149

Comprehensive income

$19,817

$17,968

$11,635

Selling, general and administrative expenses

58,010

49,661

50,824

Income from equity investments

639

505

466

Other expense, net

2,367

780

1,314

Income before income taxes

Provision for income taxes

32,496

20,716

18,885

11,006

5,601

5,593

Net income

$21,490

$15,115

$13,292

Income per common share – basic

$3.19

$2.27

$2.01

Weighted average common shares outstanding – basic

6,700

6,615

6,569

Income per common share – diluted

$3.15

$2.25

$1.99

Weighted average common shares outstanding – diluted

6,771

6,680

6,642

Dividends paid per share

$0.43

$0.39

$0.35

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

HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts
of $1,027 in 2018 and $639 in 2017
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

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable
Accounts payable-related parties
Accrued payroll and employee benefits
Accrued income taxes
Accrued expenses and other
Accrued warranty expenses
Derivative liabilities
Short-term debt
Total current liabilities
Non-current liabilities:
Accrued tax liability
Deferred credits and other
Total non-current liabilities
Shareholders’ equity:
Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued
Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized,
6,891,508 and 6,799,006 shares issued; and 6,723,160 and 6,641,197 shares
outstanding, as of October 31, 2018 and October 31, 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity

As of October 31,

2018
(In thousands, except share
and per share data)

2017

$77,170

$66,307

54,414
137,609
3,085
7,332
1,825
281,435

868
7,352
26,840
3,801
38,861
(25,902)
12,959

7,452
2,377
938
2,234
8,012
21,013
$315,407

$54,131
3,387
14,032
5,180
4,122
2,497
2,020
1,434
86,803

2,194
3,557
5,751

672
64,185
167,859
(9,863)
222,853
$315,407

50,094
119,948
596
7,913
1,557
246,415

841
7,352
25,652
3,503
37,348
(25,167)
12,181

6,226
2,440
1,076
2,339
7,131
19,212
$277,808

$45,127
2,511
11,210
2,362
4,668
1,772
1,732
1,507
70,889

117
3,717
3,834

664
61,344
149,267
(8,190)
203,085
$277,808

HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

Increase (decrease) in accrued tax liability

Net change in derivative assets and liabilities

Other

Year Ended October 31,

2018

$21,490

2017

(In thousands)

$15,115

2016

$13,292

388

(530)

(639)

755

456

3,713

(25)

1,108

(505)

(851)

(411)

3,616

2,504

1,698

(5,148)

(20,386)

710

10,788

6,024

2,061

(1,178)

563

1,638

8,529

627

(844)

(930)

(75)

(225)

(466)

1,850

393

3,868

1,607

(8,141)

(13,881)

809

(6,001)

(90)

588

964

(245)

Net cash provided by (used for) operating activities

21,012

30,372

(6,717)

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

180

(3,537)

(2,326)

233

(1,156)

(2,181)

(2,264)

264

(1,972)

(2,205)

417

Net cash provided by (used for) investing activities

(6,606)

(4,028)

(3,913)

Cash flows from financing activities:

Proceeds from exercise of common stock options

Dividends paid

Taxes paid related to net settlement of restricted shares

847

(2,898)

(502)

534

(2,590)

(295)

(2,310)

(146)

Net cash provided by (used for) financing activities

(2,553)

(2,351)

(2,456)

Effect of exchange rate changes on cash and cash

equivalents

(990)

1,097

(934)

Net increase (decrease) in cash and cash equivalents

10,863

25,090

(14,020)

Cash and cash equivalents at beginning of year

66,307

41,217

55,237

Cash and cash equivalents at end of year

$77,170

$66,307

$41,217

Supplemental disclosures:

Cash paid for:

Interest

Income taxes, net

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

$64

$6,172

$66

$4,867

$56

$4,328

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

HURCO COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

Accounts receivable, less allowance for doubtful accounts

of $1,027 in 2018 and $639 in 2017

Current assets:

Cash and cash equivalents

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

Software development costs, less accumulated amortization

Non-current assets:

Goodwill

Intangible assets, net

Deferred income taxes

Investments and other assets, net

Total non-current assets

Total assets

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accounts payable-related parties

Accrued payroll and employee benefits

Accrued income taxes

Accrued expenses and other

Accrued warranty expenses

Derivative liabilities

Short-term debt

Total current liabilities

Non-current liabilities:

Accrued tax liability

Deferred credits and other

Total non-current liabilities

Shareholders’ equity:

Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued

Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized,

6,891,508 and 6,799,006 shares issued; and 6,723,160 and 6,641,197 shares

outstanding, as of October 31, 2018 and October 31, 2017, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Total shareholders’ equity

Total liabilities and shareholders’ equity

As of October 31,

2018

2017

(In thousands, except share

and per share data)

$77,170

$66,307

50,094

119,948

54,414

137,609

3,085

7,332

1,825

281,435

868

7,352

26,840

3,801

38,861

(25,902)

12,959

7,452

2,377

938

2,234

8,012

21,013

$315,407

$54,131

3,387

14,032

5,180

4,122

2,497

2,020

1,434

86,803

2,194

3,557

5,751

672

64,185

167,859

(9,863)

222,853

$315,407

596

7,913

1,557

246,415

841

7,352

25,652

3,503

37,348

(25,167)

12,181

6,226

2,440

1,076

2,339

7,131

19,212

$277,808

$45,127

2,511

11,210

2,362

4,668

1,772

1,732

1,507

70,889

117

3,717

3,834

664

61,344

149,267

(8,190)

203,085

$277,808

HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

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
Increase (decrease) in accrued tax liability
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 cash provided by (used for) investing activities

2018

Year Ended October 31,
2017
(In thousands)

2016

$21,490

$15,115

$13,292

388
(530)
(639)
755
456
3,713
2,504

(5,148)
(20,386)
710
10,788
6,024
2,061
(1,178)
4
21,012

(25)
1,108
(505)
(851)
(411)
3,616
1,698

563
1,638
80
8,529
627
(844)
964
(930)
30,372

(75)
(225)
(466)
1,850
393
3,868
1,607

(8,141)
(13,881)
809
(6,001)
(90)
--
(245)
588
(6,717)

180
(3,537)
(2,326)
233
(1,156)
(6,606)

--
(2,181)
(2,264)
417
--
(4,028)

264
(1,972)
(2,205)
--
--
(3,913)

Cash flows from financing activities:
Proceeds from exercise of common stock options
Dividends paid
Taxes paid related to net settlement of restricted shares
Net cash provided by (used for) financing activities

Effect of exchange rate changes on cash and cash
equivalents

847
(2,898)
(502)
(2,553)

534
(2,590)
(295)
(2,351)

--
(2,310)
(146)
(2,456)

(990)

1,097

(934)

Net increase (decrease) in cash and cash equivalents

10,863

25,090

(14,020)

Cash and cash equivalents at beginning of year

66,307

41,217

55,237

Cash and cash equivalents at end of year

$77,170

$66,307

$41,217

Supplemental disclosures:
Cash paid for:
Interest
Income taxes, net

$64
$6,172

$66
$4,867

$56
$4,328

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

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

HURCO COMPANIES, INC.
HURCO COMPANIES, INC.
HURCO COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HURCO COMPANIES, INC.

(In thousands, except shares
(In thousands, except shares
outstanding)
outstanding)

(In thousands, except shares
outstanding)

Common
Common
Common
Stock
Stock
Stock
Shares
Shares
Shares
Outstanding
Outstanding
Outstanding

Common
Common
Common
Stock
Stock
Stock
Amount
Amount
Amount

Additional
Additional
Additional
Paid-In
Paid-In
Paid-In
Capital
Capital
Capital

Retained
Retained
Retained
Earnings
Earnings
Earnings

Accumulated
Accumulated
Accumulated
Other
Other
Other
Comprehensive
Comprehensive
Loss

Comprehensive

Loss
Loss

Total

Total
Total

Balances, October 31, 2015

Balances, October 31, 2015
Balances, October 31, 2015

6,551,718
6,551,718
6,551,718

$655
$655
$655

$57,539
$57,539
$57,539

$125,760

$125,760
$125,760

($9,386)

($9,386)
($9,386)

$174,568

$174,568
$174,568

Net income
Net income
Net income
Other comprehensive income
Other comprehensive income
Other comprehensive income
(loss)
(loss)
(loss)
Stock-based compensation
Stock-based compensation
Stock-based compensation
expense
expense
expense
Tax benefit (expense) from stock
Tax benefit (expense) from stock
Tax benefit (expense) from stock
option activities
option activities
option activities
Dividends paid
Dividends paid
Dividends paid

Balances, October 31, 2016

Balances, October 31, 2016
Balances, October 31, 2016

Balances, October 31, 2017

Balances, October 31, 2017
Balances, October 31, 2017

Net income
Other comprehensive income
Net income
Net income
(loss)
Other comprehensive income
Other comprehensive income
Exercise of common stock options
(loss)
(loss)
Stock-based compensation
Exercise of common stock options
Exercise of common stock options
expense, net of taxes withheld
Stock-based compensation
Stock-based compensation
for vested restricted shares
expense, net of taxes withheld
expense, net of taxes withheld
Dividends paid
for vested restricted shares
for vested restricted shares
Dividends paid
Dividends paid
Balances, October 31, 2018

--
--
--

21,385
21,385
21,385

--
--
--
--
--
--
6,573,103
6,573,103
6,573,103

--
--
--
--
29,164
--
--
29,164
29,164
38,930
--
38,930
38,930
--
--
6,641,197

6,641,197
6,641,197
--

--
--
--
41,680
--
--
41,680
41,680
40,283
--
40,283
40,283
--
--
6,723,160

--
--
--

2
2
2

--
--
--
--
--
--
$657
$657
$657
--
--
--
--
3
--
--
3
3
4
--
4
4
--
--
$664

$664
$664
--

--
--
--
4
--
--
4
4
4
--
4
4
--
--
$672

--
--
--

13,292
13,292
13,292

--
--

13,292

13,292
13,292

--
--

(1,657)

(1,657)
(1,657)

(1,657)

(1,657)
(1,657)

1,605
1,605
1,605

--
--

1,607

1,607
1,607

(25)
(25)
(25)
--
--
--
$59,119
$59,119
$59,119
--
--
--
--
531
--
--
531
531
1,694
--
1,694
1,694
--
--
$61,344

$61,344
$61,344

843

843
843
1,998

1,998
1,998
$64,185

--
--
--
(2,310)
(2,310)
(2,310)
$136,742

$136,742
$136,742

15,115
15,115
15,115
--
--
--
--
--
--

--
(2,590)

--
--
(2,590)
(2,590)
$149,267

--
--

--
--
--
--
($11,043)

($11,043)
($11,043)

(25)
(2,310)

(25)
(25)
(2,310)
(2,310)

$185,475

$185,475
$185,475

15,115

--
--

15,115
15,115

2,853
--

2,853
2,853
--
--

--
--

--
--
--
--
($8,190)

2,853
534

2,853
2,853
534
534

1,698
(2,590)

1,698
1,698
(2,590)
(2,590)

$203,085

$149,267
$149,267
21,490

21,490
21,490
--
--

--
--
--
--

--
(2,898)

--
--
(2,898)
(2,898)

$167,859

($8,190)
($8,190)
--

--
--

(1,673)
--
(1,673)
(1,673)
--
--

--
--

$203,085
$203,085

21,490

21,490
21,490
(1,673)
847
(1,673)
(1,673)
847
847

2,002
(2,898)

--
--
--
--

($9,863)

2,002
2,002
(2,898)
(2,898)

$222,853

Balances, October 31, 2018
Balances, October 31, 2018

6,723,160
6,723,160

$672
$672

$64,185
$64,185

$167,859
$167,859

($9,863)
($9,863)

$222,853
$222,853

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.

46
46

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana

corporation) and its wholly-owned subsidiaries. We have a 35% ownership interest in a Taiwan affiliate that is

accounted for using the equity method. Our investment in that affiliate was approximately $4.0 million and $3.6

million as of October 31, 2018 and 2017, respectively. That investment is included in Investments and other assets,

net on the accompanying Consolidated Balance Sheets. Intercompany accounts and transactions have been

eliminated.

being hedged.

Reclassifications. Certain prior year amounts have been reclassified to conform to current year presentation. This

reclassification has no impact on previously reported net income or shareholders’ equity.

Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase

of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items

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, 2018 were a net loss of $10.6 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

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except shares

outstanding)

Net income

(loss)

expense

Other comprehensive income

Stock-based compensation

Tax benefit (expense) from stock

option activities

Dividends paid

Net income

(loss)

Other comprehensive income

Stock-based compensation

expense

Dividends paid

Other comprehensive income

Net income

(loss)

Exercise of common stock options

Stock-based compensation

expense, net of taxes withheld

for vested restricted shares

Dividends paid

Common

Stock

Outstanding

Common

Additional

Stock

Amount

Paid-In

Capital

Accumulated

Other

Retained

Earnings

Comprehensive

Loss

Total

Balances, October 31, 2015

6,551,718

$655

$57,539

$125,760

($9,386)

$174,568

13,292

(1,657)

21,385

1,605

1,607

(25)

(2,310)

(25)

(2,310)

Balances, October 31, 2016

6,573,103

$657

$59,119

$136,742

($11,043)

$185,475

Exercise of common stock options

29,164

531

15,115

2,853

534

1,694

(2,590)

1,698

(2,590)

21,490

(2,898)

843

1,998

(1,673)

21,490

(1,673)

847

2,002

(2,898)

38,930

41,680

40,283

Balances, October 31, 2017

6,641,197

$664

$61,344

$149,267

($8,190)

$203,085

Balances, October 31, 2018

6,723,160

$672

$64,185

$167,859

($9,863)

$222,853

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana
corporation) and its wholly-owned subsidiaries. We have a 35% ownership interest in a Taiwan affiliate that is
accounted for using the equity method. Our investment in that affiliate was approximately $4.0 million and $3.6
million as of October 31, 2018 and 2017, respectively. That investment is included in Investments and other assets,
net on the accompanying Consolidated Balance Sheets. Intercompany accounts and transactions have been
eliminated.

Reclassifications. Certain prior year amounts have been reclassified to conform to current year presentation. This
reclassification has no impact on previously reported net income or shareholders’ equity.

Statements of Cash Flows. We consider all highly liquid investments with a stated maturity at the date of purchase
of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items
being hedged.

Translation of Foreign Currencies. All balance sheet accounts of non-U.S. subsidiaries are translated at the
exchange rate as of the end of the year and translation adjustments of foreign currency balance sheets are recorded
as a component of Accumulated other comprehensive loss in shareholders' equity. Income and expenses are
translated at the average exchange rates during the year. Cumulative foreign currency translation adjustments, net
of gains related to our net investment hedges, as of October 31, 2018 were a net loss of $10.6 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

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

HURCO COMPANIES, INC.

assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations
under such contracts.

Derivatives Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company
sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar). The
purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting
from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange
rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the
Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of
the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in
Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period
that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby
providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-
company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes
in the fair value of these hedge contracts is reported in Other expense, net immediately. We perform quarterly
assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and
determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis
whether there have been adverse developments regarding the risk of a counterparty default.

We had forward contracts outstanding as of October 31, 2018, in Euros, Pounds Sterling and New Taiwan Dollars
with set maturity dates ranging from November 2018 through October 2019. The contract amount at forward
rates in U.S. Dollars at October 31, 2018 for Euros and Pounds Sterling was $32.9 million and $9.6 million,
respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $34.3 million at
October 31, 2018. At October 31, 2018, we had approximately $156,000 of gains, net of tax, related to cash flow
hedges deferred in Accumulated other comprehensive loss. Of this amount, $605,000 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 2019, 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 2017.
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, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying
hedged net assets. This forward contract matured in November 2018 and we entered into a new forward contract
for the same notional amount that is set to mature in November 2019. As of October 31, 2018, we had a realized
gain of $652,000 and an unrealized gain of $153,000, 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.

We had forward contracts outstanding as of October 31, 2018, in Euros, South African Rand and New Taiwan

Dollars with set maturity dates ranging from November 2018 through July 2019. The contract amounts at forward

rates in U.S. Dollars at October 31, 2018 for Euros and South African Rand totaled $22.4 million. The contract

amount at forward rates in U.S. Dollars for New Taiwan Dollars was $37.6 million at October 31, 2018.

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, 2018 and October 31, 2017, 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

2018

Balance Sheet

Location

Fair

Value

2017

Balance Sheet

Location

Derivative assets

Derivative liabilities

$ 2,654

$ 1,616

Derivative assets

Derivative liabilities

Fair

Value

$ 305

$ 1,508

Not Designated as Hedging Instruments:

Foreign exchange forward contracts

Derivative assets

Derivative liabilities

$ 431

$ 404

Derivative assets

Derivative liabilities

$ 291

$ 224

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, 2018, 2017,

and 2016 (in thousands):

Location of

Gain (Loss)

Reclassified

From Other

Amount of Gain (Loss)

Recognized in

Other Comprehensive

Comprehensive

Income (Loss)

Amount of Gain (Loss)

Reclassified from

Other Comprehensive

Income (Loss)

2018

2017

2016

2018

2017

2016

$ 155

$ (709)

$1,431

$(1,355)

$1,354

$1,647

Cost of sales

and service

$ 136

$ (96)

$ 28

We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal 2018. We

recognized a gain of $18,000 during the fiscal year ended October 31, 2017 and a gain of $18,000 during the fiscal

year ended October 31, 2016 as a result of contracts closed early that were deemed ineffective for financial

reporting and did not qualify as cash flow hedges.

Derivatives

Designated as

Hedging Instruments:

(Effective Portion)

Foreign exchange

forward contracts

– Intercompany

sales/purchases

– Net Investment

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

We had forward contracts outstanding as of October 31, 2018, in Euros, South African Rand and New Taiwan
Dollars with set maturity dates ranging from November 2018 through July 2019. The contract amounts at forward
rates in U.S. Dollars at October 31, 2018 for Euros and South African Rand totaled $22.4 million. The contract
amount at forward rates in U.S. Dollars for New Taiwan Dollars was $37.6 million at October 31, 2018.

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, 2018 and October 31, 2017, 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

2018
Balance Sheet
Location

Fair
Value

2017
Balance Sheet
Location

Derivative assets
Derivative liabilities

$ 2,654
$ 1,616

Derivative assets
Derivative liabilities

Fair
Value

$ 305
$ 1,508

Not Designated as Hedging Instruments:
Foreign exchange forward contracts
Foreign exchange forward contracts

Derivative assets
Derivative liabilities

$ 431
$ 404

Derivative assets
Derivative liabilities

$ 291
$ 224

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, 2018, 2017,
and 2016 (in thousands):

assets), in order to minimize credit risk and, to date, that counterparty has not failed to meet its financial obligations

under such contracts.

Derivatives Designated as Hedging Instruments

We enter into foreign currency forward exchange contracts periodically to hedge certain forecasted inter-company

sales and purchases denominated in foreign currencies (the Pound Sterling, Euro and New Taiwan Dollar). The

purpose of these instruments is to mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting

from sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange

rates. These forward contracts have been designated as cash flow hedge instruments, and are recorded in the

Consolidated Balance Sheets at fair value in Derivative assets and Derivative liabilities. The effective portion of

the gains and losses resulting from the changes in the fair value of these hedge contracts are deferred in

Accumulated other comprehensive loss and recognized as an adjustment to Cost of sales and service in the period

that the corresponding inventory sold that is the subject of the related hedge contract is recognized, thereby

providing an offsetting economic impact against the corresponding change in the U.S. Dollar value of the inter-

company sale or purchase being hedged. The ineffective portion of gains and losses resulting from the changes

in the fair value of these hedge contracts is reported in Other expense, net immediately. We perform quarterly

assessments of hedge effectiveness by verifying and documenting the critical terms of the hedge instrument and

determining that forecasted transactions have not changed significantly. We also assess on a quarterly basis

whether there have been adverse developments regarding the risk of a counterparty default.

We had forward contracts outstanding as of October 31, 2018, in Euros, Pounds Sterling and New Taiwan Dollars

with set maturity dates ranging from November 2018 through October 2019. The contract amount at forward

rates in U.S. Dollars at October 31, 2018 for Euros and Pounds Sterling was $32.9 million and $9.6 million,

respectively. The contract amount at forward rates in U.S. Dollars for New Taiwan Dollars was $34.3 million at

October 31, 2018. At October 31, 2018, we had approximately $156,000 of gains, net of tax, related to cash flow

hedges deferred in Accumulated other comprehensive loss. Of this amount, $605,000 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 2019, 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 2017.

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, net of tax, in Accumulated other comprehensive loss in the same manner as the underlying

hedged net assets. This forward contract matured in November 2018 and we entered into a new forward contract

for the same notional amount that is set to mature in November 2019. As of October 31, 2018, we had a realized

gain of $652,000 and an unrealized gain of $153,000, 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.

We did not recognize any gains or losses as a result of hedges deemed ineffective during fiscal 2018. We
recognized a gain of $18,000 during the fiscal year ended October 31, 2017 and a gain of $18,000 during the fiscal
year ended October 31, 2016 as a result of contracts closed early that were deemed ineffective for financial
reporting and did not qualify as cash flow hedges.

$ 155

$ (709)

$1,431

$ 136

$ (96)

$ 28

Cost of sales
and service

$(1,355)

$1,354

$1,647

Derivatives
Designated as
Hedging Instruments:
(Effective Portion)
Foreign exchange
forward contracts
– Intercompany
sales/purchases
– Net Investment

Amount of Gain (Loss)
Reclassified from
Other Comprehensive
Income (Loss)
2017

Amount of Gain (Loss)
Recognized in
Other Comprehensive
Income (Loss)
2017

Location of
Gain (Loss)
Reclassified
From Other

Comprehensive
Income (Loss)

2016

2018

2016

2018

Amount of Gain (Loss)
Recognized in Operations
2017

Derivatives

Location of Gain (Loss)
Recognized in Operations

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

HURCO COMPANIES, INC.

We recognized the following gains and losses in our Consolidated Statements of Income during the fiscal years
ended October 31, 2018, 2017, and 2016 on derivative instruments not designated as hedging instruments (in
thousands):

Not Designated as Hedging Instruments:
Foreign exchange forward contracts

Other expense, net

$(963)

$(1,001)

$536

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax,
for the fiscal years ended October 31, 2018 and 2017 (in thousands):

Balance, October 31, 2016…………………………….......
Other comprehensive income (loss) before reclassifications
Reclassifications ……………………………………………
Balance, October 31, 2017 …………………………………

Other comprehensive income (loss) before reclassifications
Reclassifications ……………………………………………
Balance, October 31, 2018 …………………………………

Foreign
Currency
Translation

Cash
Flow
Hedges

$ (12,325)
4,916
--
$ (7,409)

(3,183)
--
$ (10,592)

$ 1,282
(709)
(1,354)
$ (781)

155
1,355
$ 729

Total
$ (11,043)
4,207
(1,354)
$ (8,190)

(3,028)
1,355
$ (9,863)

Inventories. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-
in, first-out method. Provisions are made to reduce excess or obsolete inventories to their estimated realizable
value.

Property and Equipment. Property and equipment are carried at cost. Depreciation and amortization of assets are
provided primarily under the straight-line method over the shorter of the estimated useful lives or the lease terms
as follows:

Land
Building
Machines
Shop and office equipment
Building & leasehold improvements

Number of Years
Indefinite
40
7 – 10
3 – 7
3 – 40

Total depreciation and amortization expense recognized for property and equipment was $2.5 million for each of
the fiscal years ended October 31, 2018, 2017 and 2016.

Revenue Recognition. We recognize revenue from sales of our machine tool systems upon delivery of the product
to the customer or distributor, which is normally at the time of shipment, 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 for our three-axis machines to be inconsequential and perfunctory.

We allocate the transaction prices and recognize revenue associated with the installation process for our five-axis

machines on a prorata basis over the period of the installation process.

Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term

of the contract, and are generally sold on a stand-alone basis.

Sales related to software upgrades 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 we charge off uncollectible balances when

all reasonable collection efforts have been exhausted.

Product Warranty. Expected future product warranty claims are recorded to expense when the product is sold.

Product warranty estimates are established using historical information about the nature, frequency, and average

cost of warranty claims. Warranty claims are influenced by factors such as new product introductions,

technological developments, the competitive environment, and the costs of component parts. Actual payments

for warranty claims could differ from the amounts estimated requiring adjustments to the liabilities in future

periods. See Note 11 of 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 $4.7 million, $4.2 million, and $4.9 million, in fiscal 2018,

2017, and 2016, respectively.

Software Development Costs. We sell software products that are essential to our machine tools. Costs incurred

to develop computer software products and significant enhancements to software features of existing products to

be sold or otherwise marketed are capitalized, after technological feasibility is established. Software development

costs are amortized on a straight-line basis over the estimated product life of the related software, which ranges

from three to five years. We capitalized costs of $2.3 million in fiscal 2018, $2.3 million in fiscal 2017, and $2.2

million in fiscal 2016 related to software development projects. Amortization expense for software development

costs was $1.1 million, $1.0 million, and $1.2 million, for the fiscal years ended October 31, 2018, 2017, and

2016, respectively. Accumulated amortization at October 31, 2018 and 2017 was $18.5 million and $17.4 million,

respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

We recognized the following gains and losses in our Consolidated Statements of Income during the fiscal years

ended October 31, 2018, 2017, and 2016 on derivative instruments not designated as hedging instruments (in

thousands):

Derivatives

Not Designated as Hedging Instruments:

Foreign exchange forward contracts

Other expense, net

Location of Gain (Loss)

Recognized in Operations

Amount of Gain (Loss)

Recognized in Operations

2018

2017

2016

$(963)

$(1,001)

$536

The following table presents the changes in the components of Accumulated other comprehensive loss, net of tax,

for the fiscal years ended October 31, 2018 and 2017 (in thousands):

Foreign

Currency

Translation

Cash

Flow

Hedges

Balance, October 31, 2016…………………………….......

Other comprehensive income (loss) before reclassifications

Reclassifications ……………………………………………

Balance, October 31, 2017 …………………………………

$ (12,325)

4,916

$ (7,409)

Other comprehensive income (loss) before reclassifications

(3,183)

Reclassifications ……………………………………………

Balance, October 31, 2018 …………………………………

$ (10,592)

$ 1,282

(709)

(1,354)

$ (781)

155

1,355

$ 729

Total

$ (11,043)

4,207

(1,354)

$ (8,190)

(3,028)

1,355

$ (9,863)

Inventories. Inventories are stated at the lower of cost or net realizable value, with cost determined using the first-

in, first-out method. Provisions are made to reduce excess or obsolete inventories to their estimated realizable

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

value.

as follows:

Land

Building

Machines

Shop and office equipment

Building & leasehold improvements

Number of Years

Indefinite

7 – 10

3 – 7

3 – 40

Total depreciation and amortization expense recognized for property and equipment was $2.5 million for each of

the fiscal years ended October 31, 2018, 2017 and 2016.

Revenue Recognition. We recognize revenue from sales of our machine tool systems upon delivery of the product

to the customer or distributor, which is normally at the time of shipment, 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 for our three-axis machines to be inconsequential and perfunctory.
We allocate the transaction prices and recognize revenue associated with the installation process for our five-axis
machines on a prorata basis over the period of the installation process.

Service fees from maintenance contracts are deferred and recognized in earnings on a prorata basis over the term
of the contract, and are generally sold on a stand-alone basis.

Sales related to software upgrades 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 we charge off uncollectible balances when
all reasonable collection efforts have been exhausted.

Product Warranty. Expected future product warranty claims are recorded to expense when the product is sold.
Product warranty estimates are established using historical information about the nature, frequency, and average
cost of warranty claims. Warranty claims are influenced by factors such as new product introductions,
technological developments, the competitive environment, and the costs of component parts. Actual payments
for warranty claims could differ from the amounts estimated requiring adjustments to the liabilities in future
periods. See Note 11 of 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 $4.7 million, $4.2 million, and $4.9 million, in fiscal 2018,
2017, and 2016, respectively.

Software Development Costs. We sell software products that are essential to our machine tools. Costs incurred
to develop computer software products and significant enhancements to software features of existing products to
be sold or otherwise marketed are capitalized, after technological feasibility is established. Software development
costs are amortized on a straight-line basis over the estimated product life of the related software, which ranges
from three to five years. We capitalized costs of $2.3 million in fiscal 2018, $2.3 million in fiscal 2017, and $2.2
million in fiscal 2016 related to software development projects. Amortization expense for software development
costs was $1.1 million, $1.0 million, and $1.2 million, for the fiscal years ended October 31, 2018, 2017, and
2016, respectively. Accumulated amortization at October 31, 2018 and 2017 was $18.5 million and $17.4 million,
respectively.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

Estimated amortization expense for the remaining unamortized software development costs for the fiscal years
ending October 31, is as follows (in thousands):

Intangible asset amortization expense was $107,000, $136,000, and $137,000 for fiscal 2018, 2017 and 2016,

respectively. Annual intangible asset amortization expense is estimated to be $117,000 per year for fiscal years

Fiscal Year
2019
2020
2021
2022
2023

Amortization Expense
1,000
1,300
1,500
1,400
1,050

Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination
are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be
reviewed annually for impairment, or more frequently, if circumstances arise indicating potential impairment.
This impairment review was most recently completed as of July 31, 2018. For goodwill, if the carrying amount of
the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is
recognized to the extent the “implied fair value” of the reporting unit goodwill is less than the carrying amount of
the goodwill. For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment
loss is recognized in an amount equal to that excess. Intangible assets that are determined to have a finite life are
amortized over their estimated useful lives and are also subject to review for impairment, if indicators of
impairment are identified.

There were no impairments recognized with respect to the carrying value of goodwill or intangible assets for the
years ended October 31, 2018, 2017 or 2016.

As of October 31, 2018, the balances of intangible assets, other than goodwill, were as follows (in thousands):

Weighted
Average
Amortization
Period
indefinite
13 years
15 years
13 years
sraey 6
sraey 8

Gross
Intangible
Assets
$ 60
238
255
692
379,2
773
595,4 $

Accumulated
Amortization

$ -

(98)
(148)
(284)
)097,2(
)733(
(3,657)
$

Net Intangible
Assets

$ 60
140
107
408
183
40
$ 938

Tradenames and trademarks
Tradenames and trademarks
Customer relationships
Technology
stnetaP
rehtO
latoT

As of October 31, 2017, the balances of intangible assets, other than goodwill, were as follows (in thousands):

Tradenames and trademarks
Tradenames and trademarks
Customer relationships
Technology
Patents
Other

Total

Weighted
Average
Amortization
Period
indefinite
13 years
15 years
13 years
6 years

8 years

Gross
Intangible
Assets
$ 60
245
257
713
2,973

378
$ 4,626

Accumulated
Amortization

$ -

(81)
(132)
(239)
(2,765)

(333)
$ (3,550)

Net Intangible
Assets

$ 60
164
125
474
208

45
$ 1,076

2019 through 2023.

Impairment of Long-Lived Assets. Annually, or when there are indicators of impairment, we evaluate the carrying

value of long-lived assets to be held and used, including property and equipment, software development costs and

intangible assets, including goodwill, when events or circumstances warrant such a review. The carrying value

of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately

identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the

asset (or group of assets) 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:

(in thousands, except per share amounts)

2018

2017

2016

Fiscal Year Ended October 31,

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

Basic

Diluted

Basic

Diluted

Basic

Diluted

$21,490

$15,115

$13,292

(132)

(100)

(76)

$21,358

$15,015

$13,216

6,700

6,615

6,569

6,700

$3.19

6,771

$3.15

6,615

$2.27

6,680

$2.25

6,569

$2.01

6,642

$1.99

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.

In December 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act, among

other things, lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax system from a

worldwide system and imposed a one-time tax on deemed repatriation of earnings of foreign subsidiaries.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Estimated amortization expense for the remaining unamortized software development costs for the fiscal years

ending October 31, is as follows (in thousands):

Fiscal Year

Amortization Expense

2019

2020

2021

2022

2023

1,000

1,300

1,500

1,400

1,050

Goodwill and Intangible Assets. Goodwill and indefinite-lived intangibles arising from a business combination

are not amortized and charged to expense over time. Instead, goodwill and indefinite-lived intangibles must be

reviewed annually for impairment, or more frequently, if circumstances arise indicating potential impairment.

This impairment review was most recently completed as of July 31, 2018. For goodwill, if the carrying amount of

the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is

recognized to the extent the “implied fair value” of the reporting unit goodwill is less than the carrying amount of

the goodwill. For indefinite-lived intangible assets, if the carrying amount exceeds the fair value, an impairment

loss is recognized in an amount equal to that excess. Intangible assets that are determined to have a finite life are

amortized over their estimated useful lives and are also subject to review for impairment, if indicators of

impairment are identified.

There were no impairments recognized with respect to the carrying value of goodwill or intangible assets for the

years ended October 31, 2018, 2017 or 2016.

As of October 31, 2018, the balances of intangible assets, other than goodwill, were as follows (in thousands):

As of October 31, 2017, the balances of intangible assets, other than goodwill, were as follows (in thousands):

Weighted

Average

Amortization

Period

indefinite

13 years

15 years

13 years

sraey 6

sraey 8

Weighted

Average

Amortization

Period

indefinite

13 years

15 years

13 years

6 years

8 years

Tradenames and trademarks

Customer relationships

Technology

stnetaP

rehtO

latoT

Tradenames and trademarks

Customer relationships

Technology

Patents

Other

Total

Gross

Intangible

Assets

$ 60

238

255

692

379,2

773

595,4 $

Accumulated

Amortization

$ -

(98)

(148)

(284)

)097,2(

)733(

(3,657)

Net Intangible

Assets

$ 60

140

107

408

183

$ 938

Accumulated

Amortization

$ -

(81)

(132)

(239)

(2,765)

(333)

$ (3,550)

Net Intangible

Assets

$ 60

164

125

474

208

$ 1,076

Gross

Intangible

Assets

$ 60

245

257

713

2,973

378

$ 4,626

Intangible asset amortization expense was $107,000, $136,000, and $137,000 for fiscal 2018, 2017 and 2016,
respectively. Annual intangible asset amortization expense is estimated to be $117,000 per year for fiscal years
2019 through 2023.

Impairment of Long-Lived Assets. Annually, or when there are indicators of impairment, we evaluate the carrying
value of long-lived assets to be held and used, including property and equipment, software development costs and
intangible assets, including goodwill, when events or circumstances warrant such a review. The carrying value
of a long-lived asset (or group of assets) to be held and used is considered impaired when the anticipated separately
identifiable undiscounted cash flows from such an asset (or group of assets) are less than the carrying value of the
asset (or group of assets) 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:

(in thousands, except per share amounts)

2018

Fiscal Year Ended October 31,
2017

2016

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

Basic
$21,490

Diluted
$21,490

Basic
$15,115

Diluted
$15,115

Basic
$13,292

Diluted
$13,292

(132)

(100)

(76)

$21,358

$15,015

$13,216

6,700

6,615

6,569

-
6,700
$3.19

71
6,771
$3.15

-
6,615
$2.27

65
6,680
$2.25

-
6,569
$2.01

73
6,642
$1.99

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.

In December 2017, the Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted. The Tax Reform Act, among
other things, lowered the U.S. corporate tax rate from 35% to 21%, implemented a territorial tax system from a
worldwide system and imposed a one-time tax on deemed repatriation of earnings of foreign subsidiaries.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

As a result of the reduction in the federal corporate income tax rate, we were required to revalue our net deferred
tax asset to account for the future impact of lower corporate tax rates on this deferred amount and record any
change in the value of such asset as a one-time non-cash charge on its income statement. This resulted in additional
expense of $0.6 million. Additionally, the Tax Reform Act required a transition tax on any net accumulated
earnings and profits generated by foreign subsidiaries as of the two required measurement dates, November 2,
2017 and December 31, 2017 while providing for future tax-free repatriation of such earnings through a 100%
dividends-received deduction. This resulted in a one-time transition tax on the deemed repatriation of net
accumulated foreign earnings and profits of $2.2 million, for a total impact of $2.8 million. As such, as of
December 31, 2017, all of the Company’s accumulated earnings and profits are deemed repatriated. We have not
provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries beginning January 1,
2018 based upon our determination that such earnings will be indefinitely reinvested abroad.

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 and applications 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

served include: aerospace, defense, medical equipment, energy, automotive/transportation, electronics and

computer industries. Our products are sold principally through more than 173 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 Machine Tool Co., Ltd. (“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 trade wars or tariffs, or 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, 2018 and 2017 are summarized below (in thousands):

Purchased parts and sub-assemblies

Work-in-process

Finished goods

2018

$ 38,303

22,786

76,520

$ 137,609

2017

$ 33,045

20,008

66,895

$ 119,948

Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia was

$9.9 million and $12.1 million as of October 31, 2018 and 2017, respectively.

CREDIT AGREEMENTS AND BORROWINGS

On December 7, 2012, we entered into an agreement, which was subsequently amended on May 9, 2014, June 5,

2014, December 5, 2014 and December 6, 2016 (as amended, the “2012 Credit Agreement”) with JP Morgan

Chase Bank, N.A. that provided us with an unsecured revolving credit and letter of credit facility. The 2012 Credit

Agreement contained 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, and (3) requiring that we maintain a

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

As a result of the reduction in the federal corporate income tax rate, we were required to revalue our net deferred

tax asset to account for the future impact of lower corporate tax rates on this deferred amount and record any

change in the value of such asset as a one-time non-cash charge on its income statement. This resulted in additional

expense of $0.6 million. Additionally, the Tax Reform Act required a transition tax on any net accumulated

earnings and profits generated by foreign subsidiaries as of the two required measurement dates, November 2,

2017 and December 31, 2017 while providing for future tax-free repatriation of such earnings through a 100%

dividends-received deduction. This resulted in a one-time transition tax on the deemed repatriation of net

accumulated foreign earnings and profits of $2.2 million, for a total impact of $2.8 million. As such, as of

December 31, 2017, all of the Company’s accumulated earnings and profits are deemed repatriated. We have not

provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries beginning January 1,

2018 based upon our determination that such earnings will be indefinitely reinvested abroad.

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 and applications 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
served include: aerospace, defense, medical equipment, energy, automotive/transportation, electronics and
computer industries. Our products are sold principally through more than 173 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 Machine Tool Co., Ltd. (“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 trade wars or tariffs, or 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, 2018 and 2017 are summarized below (in thousands):

Purchased parts and sub-assemblies
Work-in-process
Finished goods

2018
$ 38,303
22,786
76,520
$ 137,609

2017
$ 33,045
20,008
66,895
$ 119,948

Finished goods inventory consigned to our distributors and agents throughout the Americas, Europe and Asia was
$9.9 million and $12.1 million as of October 31, 2018 and 2017, respectively.

CREDIT AGREEMENTS AND BORROWINGS

On December 7, 2012, we entered into an agreement, which was subsequently amended on May 9, 2014, June 5,
2014, December 5, 2014 and December 6, 2016 (as amended, the “2012 Credit Agreement”) with JP Morgan
Chase Bank, N.A. that provided us with an unsecured revolving credit and letter of credit facility. The 2012 Credit
Agreement contained 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, and (3) requiring that we maintain a

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

minimum tangible net worth. The 2012 Credit Agreement permitted us to pay certain cash dividends, so long as
we were not in default under the 2012 Credit Agreement before and after giving effect to such dividends.

after giving effect to such dividend payments; (3) requiring that we maintain a minimum working capital of $125.0

million; and (4) requiring that we maintain a minimum tangible net worth of $170.0 million.

Borrowings under our 2012 Credit Agreement bore 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 equaled 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 paid for that portion of the 2012 Credit Agreement which was not utilized is
0.05% per annum.

On December 6, 2016, we entered into a fourth amendment to our 2012 Credit Agreement to, among other things,
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. The 2012 Credit Agreement, as amended, provided for the issuance of up
to $5.0 million in letters of credit. We also amended the 2012 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.

As of October 31, 2018, we had a £1.0 million revolving credit facility in the United Kingdom and a €1.5 million
revolving credit facility in Germany. On February 16, 2017, we amended our credit facility in China to decrease
the credit facility from 40.0 million Chinese Yuan to 20.0 million Chinese Yuan (approximately $2.9 million). On
February 14, 2018, we renewed this facility with an expiration date of February 13, 2019. We had $1.4 million
and $1.5 million of borrowings under our China credit facility as of October 31, 2018 and 2017, respectively. We
had no other debt or borrowings under any of our other credit facilities at either of those dates. At October 31,
2018, we had $19.4 million of available borrowing capacity under our credit facilities in effect on that date.

Effective as of December 31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the
“2018 Credit Agreement”) with Bank of America, N.A., as the lender. The 2018 Credit Agreement replaced the
2012 Credit Agreement, which terminated on December 31, 2018. The 2018 Credit Agreement provides for an
unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The
2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may
not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any
one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in
alternative currencies at any one time may not exceed $20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are
guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

Borrowings under the 2018 Credit Agreement will bear interest at floating rates based on, at our option, either (i)
a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75% per annum, or
(ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month
LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of
0.75%.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default,
including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but
permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain
payments, including cash dividends, except that we may pay cash dividends as long as immediately before and
after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit
Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand, we

repaid in full the $1.4 million outstanding under, and terminated, the China credit facility and (2) we terminated

our United Kingdom credit facility. As of December 31, 2018, we retained the €1.5 million revolving credit facility

in Germany and the $40 million revolving credit facility under 2018 Credit Agreement. As of December 31, 2018,

there were no borrowings under any of our credit facilities and $41.7 million of available borrowing capacity

thereunder.

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 for which little or no market data exists, therefore

requiring an entity to develop its own assumptions.

The carrying amounts for cash and cash equivalents approximate their fair values due to the short maturity of

these instruments, and such instruments meet the Level 1 criteria of the three-tier fair value hierarchy discussed

above. The carrying amount of short-term debt approximates fair value due to the variable rate of the interest and

the short term nature of the instrument.

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets

and liabilities measured at fair value as of October 31, 2018 and 2017 (in thousands):

Assets

Liabilities

October 31,

2018

2017

2018

2017

Deferred compensation

$ 1,723

$ 1,638

$ --

$ 3,085

$ 596

$ 2,020

$ 1,732

Level 1

Level 2

Derivatives

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

minimum tangible net worth. The 2012 Credit Agreement permitted us to pay certain cash dividends, so long as

we were not in default under the 2012 Credit Agreement before and after giving effect to such dividends.

after giving effect to such dividend payments; (3) requiring that we maintain a minimum working capital of $125.0
million; and (4) requiring that we maintain a minimum tangible net worth of $170.0 million.

Borrowings under our 2012 Credit Agreement bore 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 equaled 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 paid for that portion of the 2012 Credit Agreement which was not utilized is

0.05% per annum.

On December 6, 2016, we entered into a fourth amendment to our 2012 Credit Agreement to, among other things,

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. The 2012 Credit Agreement, as amended, provided for the issuance of up

to $5.0 million in letters of credit. We also amended the 2012 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.

As of October 31, 2018, we had a £1.0 million revolving credit facility in the United Kingdom and a €1.5 million

revolving credit facility in Germany. On February 16, 2017, we amended our credit facility in China to decrease

the credit facility from 40.0 million Chinese Yuan to 20.0 million Chinese Yuan (approximately $2.9 million). On

February 14, 2018, we renewed this facility with an expiration date of February 13, 2019. We had $1.4 million

and $1.5 million of borrowings under our China credit facility as of October 31, 2018 and 2017, respectively. We

had no other debt or borrowings under any of our other credit facilities at either of those dates. At October 31,

2018, we had $19.4 million of available borrowing capacity under our credit facilities in effect on that date.

Effective as of December 31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the

“2018 Credit Agreement”) with Bank of America, N.A., as the lender. The 2018 Credit Agreement replaced the

2012 Credit Agreement, which terminated on December 31, 2018. The 2018 Credit Agreement provides for an

unsecured revolving credit and letter of credit facility in a maximum aggregate amount of $40.0 million. The

2018 Credit Agreement provides that the maximum amount of outstanding letters of credit at any one time may

not exceed $10.0 million, the maximum amount of outstanding loans made to our subsidiary Hurco B.V. at any

one time may not exceed $20.0 million, and the maximum amount of all outstanding loans denominated in

alternative currencies at any one time may not exceed $20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are

guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

Borrowings under the 2018 Credit Agreement will bear interest at floating rates based on, at our option, either (i)

a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75% per annum, or

(ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month

LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of

0.75%.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default,

including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but

permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain

payments, including cash dividends, except that we may pay cash dividends as long as immediately before and

after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit

Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In December 2018, in connection with our entry into the 2018 Credit Agreement, (1) using cash on hand, we
repaid in full the $1.4 million outstanding under, and terminated, the China credit facility and (2) we terminated
our United Kingdom credit facility. As of December 31, 2018, we retained the €1.5 million revolving credit facility
in Germany and the $40 million revolving credit facility under 2018 Credit Agreement. As of December 31, 2018,
there were no borrowings under any of our credit facilities and $41.7 million of available borrowing capacity
thereunder.

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 for which little or no market data exists, therefore
requiring an entity to develop its own assumptions.

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

In accordance with this guidance, the following table represents the fair value hierarchy for our financial assets
and liabilities measured at fair value as of October 31, 2018 and 2017 (in thousands):

Level 1
Deferred compensation
Level 2
Derivatives

Assets

Liabilities

October 31,
2018

October 31,

2017

2018

2017

$ 1,723

$ 1,638

$ --

$ 3,085

$ 596

$ 2,020

$ 1,732

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

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these contracts was
$145.2 million and $134.3 million at October 31, 2018 and 2017, respectively.

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):

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.

Income before income taxes:

Domestic ..................................................................

Foreign ....................................................................

Year Ended October 31,

2018

2017

2016

$ 14,101

18,395

$ 32,496

$ 5,477

15,239

$ 20,716

$ 2,703

16,182

$ 18,885

INCOME TAXES

In December 2017, the Tax Reform Act was enacted. The Tax Reform Act, among other things, lowered the U.S.
corporate tax rate from 35% to 21%, implemented a territorial tax system from a worldwide system and imposed
a one-time tax on deemed repatriation of accumulated earnings and profits of foreign subsidiaries. In fiscal 2018,
our U.S. taxable income was taxed at a 23% federal tax rate; thereafter, the 21% rate will apply. During fiscal
2018, we revalued our deferred tax assets to the lower statutory rate of 21%, which resulted in expense of
$596,000. The transition tax, required by the Tax Reform Act was also recorded in fiscal 2018 based on current
guidance and available information, adding $2.2 million to income tax expense. The transition tax is eligible to
be paid in unequal installments over 8 years. We plan to make that election.

On December 22, 2017, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act.
In accordance with ASC Topic 740, Income Taxes, SAB 118 and available guidance from the SEC, FASB and
the U.S. Treasury Department as of October 31, 2018, we have completed our accounting for the income tax
effects of the Tax Reform Act with the exception of the provisions related to Global Intangible Low Taxed Income
(“GILTI”) and Foreign Derived Intangible Income (“FDII”).

In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands):

Current:

U.S. taxes .................................................................
Foreign taxes ...........................................................

Deferred:

U.S. taxes .................................................................
Foreign taxes ...........................................................

Year Ended October 31,
2017

2018

2016

$ 6,333
5,203
11,536

(326)
(204)
(530)
$ 11,006

$ 308
4,185
4,493

$ 1,362
4,456
5,818

1,236
(128)
1,108
$ 5,601

(176)
(49)
(225)
$ 5,593

Tax rates:

U.S. statutory rate ...........................................................

23%

34%

Effect of tax rate of international jurisdictions

different than U.S. statutory rates ................................

Valuation allowance...................................................

State taxes .......................................................................

Tax Credits .....................................................................

Effect of Tax Rate Changes ...........................................

Transition Tax…………………………………………

Other…………………………………………………..

(1%)

(5%)

(3%)

(7%)

(2%)

Effective tax rate ............................................................

34%

27%

30%

We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries

beginning January 1, 2018 based upon our determination that such earnings will be indefinitely reinvested abroad.

Additionally, the Tax Reform Act required a transition tax on any net accumulated earnings and profits generated

by foreign subsidiaries as of the two required measurement dates, November 2, 2017 and December 31, 2017

while providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.

As such, as of December 31, 2017, all of the Company’s accumulated earnings and profits were deemed

repatriated.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting

purposes and tax bases 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, 2018, we had deferred tax assets established for accumulated net operating loss carryforwards

of $1.3 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research

and development tax credits of $0.7 million. We have established a valuation allowance against some of these

carryforwards due to the uncertainty of their full realization. As of October 31, 2018 and 2017, the balance of this

valuation allowance was $2.1 million and $2.3 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

2016

2018

Year Ended October 31,
2017

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):

to Consolidated Financial Statements in which the U.S. Dollar equivalent notional amount of these contracts was

$145.2 million and $134.3 million at October 31, 2018 and 2017, respectively.

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.

INCOME TAXES

In December 2017, the Tax Reform Act was enacted. The Tax Reform Act, among other things, lowered the U.S.

corporate tax rate from 35% to 21%, implemented a territorial tax system from a worldwide system and imposed

a one-time tax on deemed repatriation of accumulated earnings and profits of foreign subsidiaries. In fiscal 2018,

our U.S. taxable income was taxed at a 23% federal tax rate; thereafter, the 21% rate will apply. During fiscal

2018, we revalued our deferred tax assets to the lower statutory rate of 21%, which resulted in expense of

$596,000. The transition tax, required by the Tax Reform Act was also recorded in fiscal 2018 based on current

guidance and available information, adding $2.2 million to income tax expense. The transition tax is eligible to

be paid in unequal installments over 8 years. We plan to make that election.

On December 22, 2017, the United States Securities and Exchange Commission (“SEC”) issued Staff Accounting

Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Reform Act.

In accordance with ASC Topic 740, Income Taxes, SAB 118 and available guidance from the SEC, FASB and

the U.S. Treasury Department as of October 31, 2018, we have completed our accounting for the income tax

effects of the Tax Reform Act with the exception of the provisions related to Global Intangible Low Taxed Income

(“GILTI”) and Foreign Derived Intangible Income (“FDII”).

In the fiscal years set forth below, the provision for income taxes consisted of the following (in thousands):

Year Ended October 31,

2018

2017

2016

Current:

Deferred:

U.S. taxes .................................................................

$ 6,333

$ 308

$ 1,362

Foreign taxes ...........................................................

5,203

11,536

4,185

4,493

4,456

5,818

U.S. taxes .................................................................

Foreign taxes ...........................................................

(326)

(204)

(530)

$ 11,006

1,236

(128)

1,108

$ 5,601

(176)

(49)

(225)

$ 5,593

Income before income taxes:

Domestic ..................................................................
Foreign ....................................................................

Tax rates:
U.S. statutory rate ...........................................................
Effect of tax rate of international jurisdictions
different than U.S. statutory rates ................................
Valuation allowance...................................................
State taxes .......................................................................
Tax Credits .....................................................................
Effect of Tax Rate Changes ...........................................
Transition Tax…………………………………………
Other…………………………………………………..
Effective tax rate ............................................................

$ 14,101
18,395
$ 32,496

$ 5,477
15,239
$ 20,716

$ 2,703
16,182
$ 18,885

23%

34%

2%
0%
0%
(1%)
4%
7%
(1%)
34%

(5%)
1%
0%
(3%)
0%
0%
0%
27%

(7%)
3%
0%
(2%)
4%
0%
(2%)
30%

We have not provided for any U.S. income taxes on the undistributed earnings of our foreign subsidiaries
beginning January 1, 2018 based upon our determination that such earnings will be indefinitely reinvested abroad.
Additionally, the Tax Reform Act required a transition tax on any net accumulated earnings and profits generated
by foreign subsidiaries as of the two required measurement dates, November 2, 2017 and December 31, 2017
while providing for future tax-free repatriation of such earnings through a 100% dividends-received deduction.
As such, as of December 31, 2017, all of the Company’s accumulated earnings and profits were deemed
repatriated.

Deferred income taxes are determined based on the difference between the amounts used for financial reporting
purposes and tax bases 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, 2018, we had deferred tax assets established for accumulated net operating loss carryforwards
of $1.3 million, primarily related to state and foreign jurisdictions. We also have deferred tax assets for research
and development tax credits of $0.7 million. We have established a valuation allowance against some of these
carryforwards due to the uncertainty of their full realization. As of October 31, 2018 and 2017, the balance of this
valuation allowance was $2.1 million and $2.3 million, respectively.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

Significant components of our deferred tax assets and liabilities at October 31, 2018 and 2017 were as follows (in
thousands):

We file income tax returns in the U.S. federal jurisdiction and various states, local, and non-U.S. jurisdictions.

Currently, our Germany subsidiary is under tax audit for the fiscal year 2013 to 2016.

Deferred Tax Assets:
Accrued inventory reserves ......................................................................
Accrued warranty expenses .....................................................................
Compensation related expenses ...............................................................
Net derivative instruments……………………………………………..
Unrealized exchange gain/loss .................................................................
Other accrued expenses ............................................................................
Net operating loss carryforwards .............................................................
Other credit carryforwards………………………………………….....
Other ........................................................................................................

Less: Valuation allowance - net operating loss and other credit

carryforwards…….....

Deferred tax assets ...................................................................................

October 31,

2018

2017

$ 1,325
499
2,644
--
159
170
1,316
686
350
7,149

(2,106)
5,043

$ 1,965
438
2,952
417
--
187
1,722
517
404
8,602

(2,282)
6,320

Deferred Tax Liabilities:
Net derivative instruments .......................................................................
Property and equipment and capitalized software development costs .....
Unrealized exchange gain/loss………………………………………....
Other ........................................................................................................
Net deferred tax assets

(208)
(2,370)
--
(231)
$ 2,234

--
(3,241)
(116)
(624)
$ 2,339

As of October 31, 2018, we had net operating losses carryforwards for international and U.S. income tax purposes
of $6.1 million, of which $4.9 million will expire within 5 years beginning in fiscal 2019 and $1.2 million will
expire between 5 and 20 years. We also had tax credits of $870,000 which will expire between years 2022 and
2029.

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

2018
$ 1,101
37
(945)
(18)
5
$ 180

2017
$ 1,102
37
(20)
(74)
56
$ 1,101

2016
$ 1,034
52
19
--
(3)
$ 1,102

The entire balance of the unrecognized tax benefits and related interest at October 31, 2018, if recognized, could
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, 2018, the amount of interest accrued, reported in other liabilities, was approximately
$25,000, 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 2019 and July 2022.

A summary of open tax years by major jurisdiction is presented below:

United States federal

Fiscal 2015 through the current period

Germany¹

Taiwan

Fiscal 2013 through the current period

Fiscal 2015 through the current period

¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable.

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 $1.2 million, $1.1 million, and $1.1 million, for the fiscal years ended

October 31, 2018, 2017 and 2016, respectively.

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, restricted stock, stock units and other

stock-based awards. The 2016 Equity Plan replaced the Hurco Companies, Inc. 2008 Equity Incentive Plan (the

“2008 Plan”) and is the only active plan under which equity awards may be made by us to our employees and

non-employee directors. No further awards will be made under our 2008 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 includes

386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date our

shareholders approved the 2016 Equity Plan.

The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and

key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to

each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and

terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan

that are currently outstanding, and we have granted stock options, restricted shares and performance shares under

the 2008 Plan that 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Significant components of our deferred tax assets and liabilities at October 31, 2018 and 2017 were as follows (in

Accrued inventory reserves ......................................................................

$ 1,325

$ 1,965

thousands):

Deferred Tax Assets:

Accrued warranty expenses .....................................................................

Compensation related expenses ...............................................................

Net derivative instruments……………………………………………..

Unrealized exchange gain/loss .................................................................

Other accrued expenses ............................................................................

Net operating loss carryforwards .............................................................

Other credit carryforwards………………………………………….....

Other ........................................................................................................

October 31,

2018

2017

499

2,644

159

170

1,316

686

350

7,149

438

2,952

417

187

1,722

517

404

8,602

Less: Valuation allowance - net operating loss and other credit

carryforwards…….....

Deferred tax assets ...................................................................................

(2,106)

5,043

(2,282)

6,320

Deferred Tax Liabilities:

Net derivative instruments .......................................................................

Property and equipment and capitalized software development costs .....

Unrealized exchange gain/loss………………………………………....

Other ........................................................................................................

Net deferred tax assets

(208)

(2,370)

(231)

$ 2,234

(3,241)

(116)

(624)

$ 2,339

As of October 31, 2018, we had net operating losses carryforwards for international and U.S. income tax purposes

of $6.1 million, of which $4.9 million will expire within 5 years beginning in fiscal 2019 and $1.2 million will

expire between 5 and 20 years. We also had tax credits of $870,000 which will expire between years 2022 and

2029.

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

2018

$ 1,101

(945)

(18)

2017

$ 1,102

2016

$ 1,034

(20)

(74)

(3)

$ 180

$ 1,101

$ 1,102

The entire balance of the unrecognized tax benefits and related interest at October 31, 2018, if recognized, could

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, 2018, the amount of interest accrued, reported in other liabilities, was approximately

$25,000, 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 2019 and July 2022.

We file income tax returns in the U.S. federal jurisdiction and various states, local, and non-U.S. jurisdictions.
Currently, our Germany subsidiary is under tax audit for the fiscal year 2013 to 2016.

A summary of open tax years by major jurisdiction is presented below:

United States federal
Germany¹
Taiwan

Fiscal 2015 through the current period
Fiscal 2013 through the current period
Fiscal 2015 through the current period

¹ Includes federal as well as state, provincial or similar local jurisdictions, as applicable.

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 $1.2 million, $1.1 million, and $1.1 million, for the fiscal years ended
October 31, 2018, 2017 and 2016, respectively.

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, restricted stock, stock units and other
stock-based awards. The 2016 Equity Plan replaced the Hurco Companies, Inc. 2008 Equity Incentive Plan (the
“2008 Plan”) and is the only active plan under which equity awards may be made by us to our employees and
non-employee directors. No further awards will be made under our 2008 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 includes
386,048 shares remaining available for future grants under the 2008 Plan as of March 10, 2016, the date our
shareholders approved the 2016 Equity Plan.

The Compensation Committee of our Board of Directors has the authority to determine the officers, directors and
key employees who will be granted awards under the 2016 Equity Plan; designate the number of shares subject to
each award; determine the terms and conditions upon which awards will be granted; and prescribe the form and
terms of award agreements. We have granted restricted shares and performance units under the 2016 Equity Plan
that are currently outstanding, and we have granted stock options, restricted shares and performance shares under
the 2008 Plan that 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.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

A summary of the status of the options as of October 31, 2018, 2017 and 2016 and the related activity for the year
is as follows:

Weighted Average Grant
Date Fair Value

Balance October 31, 2015
Granted
Cancelled
Expired
Exercised
Balance October 31, 2016
Granted
Cancelled
Expired
Exercised
Balance October 31, 2017
Granted
Cancelled
Expired
Exercised
Balance October 31, 2018

Shares Under
Option

107,889
--
--
--
--
107,889
--
--
--
(29,164)
78,725
--
--
--
(41,680)
37,045

$20.25
--
--
--
--
$20.25
--
--
--
$18.31
$20.97
--
--
--
$20.33
$21.69

The total intrinsic value of stock options exercised during the twelve months ended October 31, 2018, 2017 and
2016 was approximately $847,000, $771,000 and $0, respectively.

As of October 31, 2018, the total intrinsic value of outstanding stock options already vested and the intrinsic value
of options that are outstanding and exercisable was $706,000. Stock options outstanding and exercisable on
October 31, 2018, were as follows:

Range of Exercise
Prices Per Share

Outstanding and
Exercisable

18.13
21.45
23.30
$ 18.13 – 23.30

Shares Under
Option

Weighted Average
Exercise Price Per
Share

Weighted Average
Remaining Contractual
Life in Years

3,738
21,748
11,559
37,045

18.13
21.45
23.30
$21.69

1.5
3.1
4.1
3.3

On March 15, 2018, the Compensation Committee granted a total of 9,114 shares of time-based restricted stock
to our non-employee directors. The restricted shares vest in full one year from the date of grant provided the
recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was
based on the closing sales price of our common stock on the grant date, which was $46.05 per share.

On January 3, 2018, the Compensation Committee determined the degree to which the long-term incentive
compensation arrangement approved for the fiscal 2015-2017 performance period was attained, and the resulting
payout level relative to the target amount for each of the metrics that were established by the Compensation
Committee in 2015. As a result, the Compensation Committee determined that a total of 23,299 performance
shares were earned by our executive officers, which performance shares vested on January 3, 2018. The vesting
date fair value of the performance shares was based on the closing sales price of our common stock on the vesting

date, which was $42.20 per share. All related stock-based compensation cost for these vested performance shares

was expensed accordingly during the three-year performance period ended October 31, 2017.

On January 3, 2018, the Compensation Committee also approved a long-term incentive compensation arrangement

for our executive officers in the form of restricted shares and performance stock units (“PSUs”) under the 2016

Equity Plan, which will be payable in shares of our common stock if earned and vested. The awards were 25%

time-based vesting and 75% performance-based vesting. The three-year performance period for the PSUs is fiscal

2018 through fiscal 2020.

On that date, the Compensation Committee granted a total of 14,810 shares of time-based restricted stock to our

executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient

remains employed through that date. The grant date fair value of the restricted shares was based upon the closing

sales price of our common stock on the date of grant, which was $42.20 per share.

On January 3, 2018, the Compensation Committee also granted a total target number of 21,891 PSUs to our

executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall

2018 executive long-term incentive compensation arrangement and will vest and be paid based upon the total

shareholder return of our common stock over the three-year period of fiscal 2018-2020, 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 the PSUs – TSR for achieving threshold performance and 200% of

the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs

– TSR was $45.68 per PSU and was calculated using the Monte Carlo approach.

On January 3, 2018, the Compensation Committee also granted a total target number of 20,734 PSUs to our

executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall

2018 executive 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

of fiscal 2018-2020. Participants will have the ability to earn between 50% of the target number of the PSUs –

ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving

maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our

common stock on the grant date, which was $42.20 per share.

On November 15, 2017, the Compensation Committee granted a total of 2,364 shares of time-based restricted

stock to our non-executive employees. The restricted shares vest in thirds over three years from the date of grant

provided the recipient remains employed through that date. The grant date fair value of the restricted shares was

based upon the closing sales price of our common stock on the date of grant, which was $42.30 per share.

On March 9, 2017, the Compensation Committee granted a total of 14,920 shares of time-based restricted stock

to our non-employee directors. The restricted shares vest in full one year from the date of grant provided the

recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was

based on the closing sales price of our common stock on the grant date, which was $26.80 per share.

On January 5, 2017, the Compensation Committee determined the degree to which the long-term incentive

compensation arrangement approved for the fiscal 2014-2016 performance period was attained, and the resulting

payout level relative to the target amount for each of the metrics that were established by the Compensation

Committee in 2014. As a result, the Compensation Committee determined that a total of 30,683 performance

shares were earned by our executive officers, which performance shares vested on January 5, 2017. The vesting

date fair value of the performance shares was based on the closing sales price of our common stock on the vesting

date, which was $33.90 per share. All related stock-based compensation cost for these vested performance shares

was expensed accordingly during the three-year performance period ended October 31, 2016.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

A summary of the status of the options as of October 31, 2018, 2017 and 2016 and the related activity for the year

is as follows:

date, which was $42.20 per share. All related stock-based compensation cost for these vested performance shares
was expensed accordingly during the three-year performance period ended October 31, 2017.

On January 3, 2018, the Compensation Committee also approved a long-term incentive compensation arrangement
for our executive officers in the form of restricted shares and performance stock units (“PSUs”) under the 2016
Equity Plan, which will be payable in shares of our common stock if earned and vested. The awards were 25%
time-based vesting and 75% performance-based vesting. The three-year performance period for the PSUs is fiscal
2018 through fiscal 2020.

On that date, the Compensation Committee granted a total of 14,810 shares of time-based restricted stock to our
executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient
remains employed through that date. The grant date fair value of the restricted shares was based upon the closing
sales price of our common stock on the date of grant, which was $42.20 per share.

On January 3, 2018, the Compensation Committee also granted a total target number of 21,891 PSUs to our
executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall
2018 executive long-term incentive compensation arrangement and will vest and be paid based upon the total
shareholder return of our common stock over the three-year period of fiscal 2018-2020, 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 the PSUs – TSR for achieving threshold performance and 200% of
the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs
– TSR was $45.68 per PSU and was calculated using the Monte Carlo approach.

On January 3, 2018, the Compensation Committee also granted a total target number of 20,734 PSUs to our
executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall
2018 executive 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
of fiscal 2018-2020. Participants will have the ability to earn between 50% of the target number of the PSUs –
ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving
maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our
common stock on the grant date, which was $42.20 per share.

On November 15, 2017, the Compensation Committee granted a total of 2,364 shares of time-based restricted
stock to our non-executive employees. The restricted shares vest in thirds over three years from the date of grant
provided the recipient remains employed through that date. The grant date fair value of the restricted shares was
based upon the closing sales price of our common stock on the date of grant, which was $42.30 per share.

On March 9, 2017, the Compensation Committee granted a total of 14,920 shares of time-based restricted stock
to our non-employee directors. The restricted shares vest in full one year from the date of grant provided the
recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was
based on the closing sales price of our common stock on the grant date, which was $26.80 per share.

On January 5, 2017, the Compensation Committee determined the degree to which the long-term incentive
compensation arrangement approved for the fiscal 2014-2016 performance period was attained, and the resulting
payout level relative to the target amount for each of the metrics that were established by the Compensation
Committee in 2014. As a result, the Compensation Committee determined that a total of 30,683 performance
shares were earned by our executive officers, which performance shares vested on January 5, 2017. The vesting
date fair value of the performance shares was based on the closing sales price of our common stock on the vesting
date, which was $33.90 per share. All related stock-based compensation cost for these vested performance shares
was expensed accordingly during the three-year performance period ended October 31, 2016.

Shares Under

Option

107,889

Weighted Average Grant

Date Fair Value

Balance October 31, 2016

107,889

$20.25

Balance October 31, 2015

Granted

Cancelled

Expired

Exercised

Granted

Cancelled

Expired

Exercised

Granted

Cancelled

Expired

Exercised

Balance October 31, 2017

Balance October 31, 2018

(29,164)

78,725

(41,680)

37,045

$20.25

$18.31

$20.97

$20.33

$21.69

The total intrinsic value of stock options exercised during the twelve months ended October 31, 2018, 2017 and

2016 was approximately $847,000, $771,000 and $0, respectively.

As of October 31, 2018, the total intrinsic value of outstanding stock options already vested and the intrinsic value

of options that are outstanding and exercisable was $706,000. Stock options outstanding and exercisable on

October 31, 2018, were as follows:

Shares Under

Option

Weighted Average

Exercise Price Per

Weighted Average

Remaining Contractual

Life in Years

Range of Exercise

Prices Per Share

Outstanding and

Exercisable

18.13

21.45

23.30

$ 18.13 – 23.30

3,738

21,748

11,559

37,045

18.13

21.45

23.30

$21.69

1.5

3.1

4.1

3.3

On March 15, 2018, the Compensation Committee granted a total of 9,114 shares of time-based restricted stock

to our non-employee directors. The restricted shares vest in full one year from the date of grant provided the

recipient remains on the board of directors through that date. The grant date fair value of the restricted shares was

based on the closing sales price of our common stock on the grant date, which was $46.05 per share.

On January 3, 2018, the Compensation Committee determined the degree to which the long-term incentive

compensation arrangement approved for the fiscal 2015-2017 performance period was attained, and the resulting

payout level relative to the target amount for each of the metrics that were established by the Compensation

Committee in 2015. As a result, the Compensation Committee determined that a total of 23,299 performance

shares were earned by our executive officers, which performance shares vested on January 3, 2018. The vesting

date fair value of the performance shares was based on the closing sales price of our common stock on the vesting

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

On January 5, 2017, the Compensation Committee also approved a long-term incentive compensation arrangement
for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be
payable in shares of our common stock if earned and vested. The awards were 25% time-based vesting and 75%
performance-based vesting. The three-year performance period for the PSUs is fiscal 2017 through fiscal 2019.

On that date, the Compensation Committee granted a total of 14,747 shares of time-based restricted stock to our
executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient
remains employed through that date. The grant date fair value of the restricted shares was based upon the closing
sales price of our common stock on the date of grant, which was $33.90 per share.

On January 5, 2017, the Compensation Committee also granted a total target number of 18,496 PSUs to our
executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall
2017 executive long-term incentive compensation arrangement and will vest and be paid based upon the total
shareholder return of our common stock over the three-year period of fiscal 2017-2019, 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 the PSUs – TSR for achieving threshold performance and 200% of
the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs
– TSR was $43.25 per PSU and was calculated using the Monte Carlo approach.

On January 5, 2017, the Compensation Committee also granted a total target number of 20,647 PSUs to our
executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall
2017 executive 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
of fiscal 2017-2019. Participants will have the ability to earn between 50% of the target number of the PSUs -
ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving
maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our
common stock on the grant date, which was $33.90 per share.

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 stock to our
executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient
remains employed through that date. The grant date fair value of the restricted shares was based upon the closing
sales price of our common stock on the date of grant which was $26.04 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 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 grant date fair value of the Performance Shares - TSR 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

Performance Shares - ROIC was based on the closing sales price of our common stock on the grant date which

A reconciliation of the Company’s restricted stock, performance share and PSU activity and related information

was $26.04 per share.

is as follows:

Unvested at October 31, 2017

Shares or units granted

Shares or units vested

Shares or units cancelled

Shares withheld

Unvested at October 31, 2018

Number

of Shares

157,809

68,913

(40,283)

(6,385)

(11,706)

168,348

Weighted Average Grant

Date Fair Value

$32.05

43.82

30.20

33.67

32.19

$37.24

During fiscal 2018, 2017, and 2016, we recorded approximately $2.5 million, $1.7 million and $1.6 million,

respectively, of stock-based compensation expense related to grants under the 2008 Plan and the 2016 Equity

Plan. As of October 31, 2018, there was an estimated $2.9 million of total unrecognized stock-based compensation

cost that we expect to recognize by the end of the first quarter of fiscal 2021.

RELATED PARTY TRANSACTIONS

As of October 31, 2018, 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 $4.0 million and $3.6 million at October 31, 2018 and

2017, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases

of controls from HAL amounted to $11.3 million, $10.0 million and $9.9 million in fiscal 2018, 2017 and 2016,

respectively. Sales of control component parts to HAL were $197,000, $139,000 and $623,000 for the fiscal years

ended October 31, 2018, 2017 and 2016, respectively. Trade payables to HAL were $3.4 million and $2.5 million

at October 31, 2018 and 2017, respectively. Trade receivables from HAL were $68,000 and $30,000 at October

31, 2018 and 2017, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

On January 5, 2017, the Compensation Committee also approved a long-term incentive compensation arrangement

for our executive officers in the form of restricted shares and PSUs under the 2016 Equity Plan, which will be

payable in shares of our common stock if earned and vested. The awards were 25% time-based vesting and 75%

performance-based vesting. The three-year performance period for the PSUs is fiscal 2017 through fiscal 2019.

On that date, the Compensation Committee granted a total of 14,747 shares of time-based restricted stock to our

executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient

remains employed through that date. The grant date fair value of the restricted shares was based upon the closing

sales price of our common stock on the date of grant, which was $33.90 per share.

On January 5, 2017, the Compensation Committee also granted a total target number of 18,496 PSUs to our

executive officers designated as “PSU – TSR”. These PSUs were weighted as approximately 40% of the overall

2017 executive long-term incentive compensation arrangement and will vest and be paid based upon the total

shareholder return of our common stock over the three-year period of fiscal 2017-2019, 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 the PSUs – TSR for achieving threshold performance and 200% of

the target number of the PSUs – TSR for achieving maximum performance. The grant date fair value of the PSUs

– TSR was $43.25 per PSU and was calculated using the Monte Carlo approach.

On January 5, 2017, the Compensation Committee also granted a total target number of 20,647 PSUs to our

executive officers designated as “PSU – ROIC”. These PSUs were weighted as approximately 35% of the overall

2017 executive 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

of fiscal 2017-2019. Participants will have the ability to earn between 50% of the target number of the PSUs -

ROIC for achieving threshold performance and 200% of the target number of the PSUs - ROIC for achieving

maximum performance. The grant date fair value of the PSUs – ROIC was based on the closing sales price of our

common stock on the grant date, which was $33.90 per share.

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 stock to our

executive officers. The restricted shares vest in thirds over three years from the date of grant provided the recipient

remains employed through that date. The grant date fair value of the restricted shares was based upon the closing

sales price of our common stock on the date of grant which was $26.04 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 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 grant date fair value of the Performance Shares - TSR 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
Performance Shares - ROIC was based on the closing sales price of our common stock on the grant date which
was $26.04 per share.

A reconciliation of the Company’s restricted stock, performance share and PSU activity and related information
is as follows:

Unvested at October 31, 2017
Shares or units granted
Shares or units vested
Shares or units cancelled
Shares withheld
Unvested at October 31, 2018

Number
of Shares

157,809
68,913
(40,283)
(6,385)
(11,706)
168,348

Weighted Average Grant

Date Fair Value

$32.05
43.82
30.20
33.67
32.19
$37.24

During fiscal 2018, 2017, and 2016, we recorded approximately $2.5 million, $1.7 million and $1.6 million,
respectively, of stock-based compensation expense related to grants under the 2008 Plan and the 2016 Equity
Plan. As of October 31, 2018, there was an estimated $2.9 million of total unrecognized stock-based compensation
cost that we expect to recognize by the end of the first quarter of fiscal 2021.

RELATED PARTY TRANSACTIONS

As of October 31, 2018, 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 $4.0 million and $3.6 million at October 31, 2018 and
2017, respectively, is included in Investments and other assets, net on the Consolidated Balance Sheets. Purchases
of controls from HAL amounted to $11.3 million, $10.0 million and $9.9 million in fiscal 2018, 2017 and 2016,
respectively. Sales of control component parts to HAL were $197,000, $139,000 and $623,000 for the fiscal years
ended October 31, 2018, 2017 and 2016, respectively. Trade payables to HAL were $3.4 million and $2.5 million
at October 31, 2018 and 2017, respectively. Trade receivables from HAL were $68,000 and $30,000 at October
31, 2018 and 2017, respectively.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

Summary unaudited financial information for HAL’s operations and financial condition is as follows (in
thousands):

Net Sales
Gross Profit
Operating Income
Net Income

Current Assets
Non-current Assets
Current Liabilities

2018

2017

2016

$17,841
2,944
1,534
1,845

$12,870
4,579
4,666

$15,800
2,457
1,037
1,320

$11,310
4,440
3,916

$13,948
2,240
952
1,323

$10,238
3,733
2,572

10.

CONTINGENCIES AND LITIGATION

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.

11.

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, 2018, we had 23 outstanding third party payment guarantees totaling approximately
$0.6 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon
shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however,
until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer
defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are
insignificant.

We provide warranties on our products with respect to defects in material and workmanship. The terms of these
warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with
respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve.
The amount of the warranty reserve is determined based on historical trend experience and any known warranty
issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes
in our warranty reserve is as follows (in thousands):

Balance, beginning of year
Provision for warranties during the year
Charges to the accrual
Impact of foreign currency translation
Balance, end of year

2018
$ 1,772
4,121
(3,326)
(68)
$ 2,499

2017
$ 1,523
3,379
(3,203)
73
$ 1,772

2016
$ 2,186
2,715
(3,349)
(29)
$ 1,523

The increase in our warranty reserve from fiscal 2017 to fiscal 2018 was primarily due to an increase in the number

of machines under warranty resulting from increased sales volume. The increase in our warranty reserve from

fiscal 2016 to fiscal 2017 was primarily due to an increase in unit sales volume, as well as an increase in average

warranty cost per machine as our product mix of machines under warranty shifted to more complex, higher-

performance machines.

12.

OPERATING LEASES

We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through

2025. Future payments required under operating leases as of October 31, 2018, are summarized as follows (in

thousands):

2019 ...................................................................................................

$ 3,504

2020 ...................................................................................................

2021 ...................................................................................................

2022… ...............................................................................................

2023 and thereafter ............................................................................

2,320

1,543

1,312

1,180

Total ..................................................................................................

$ 9,859

Lease expense for the fiscal years ended October 31, 2018, 2017, and 2016 was $4.5 million, $4.4 million, and

$4.5 million, respectively.

13.

QUARTERLY FINANCIAL INFORMATION (Unaudited)

2018 (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

2017 (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

Second

Third

Fourth

Quarter

$68,444

20,121

29%

12,966

7,155

4,500

2,937

$0.44

$0.43

$70,424

19,313

27%

13,320

5,993

1,656

3,751

$0.55

$78,752

24,521

31%

15,160

9,361

2,511

6,500

$0.96

$0.95

$83,051

27,851

34%

16,564

11,287

2,339

8,302

$1.24

$1.22

First

Quarter

Second

Quarter

Third

Quarter

Fourth

Quarter

$48,744

12,586

26%

11,167

1,419

543

879

$0.13

$58,222

17,068

29%

11,714

5,354

1,467

3,646

$0.55

$0.54

$60,770

17,540

29%

12,395

5,145

1,353

3,888

$0.58

$75,931

23,370

31%

14,385

8,985

2,238

6,702

$1.01

$1.00

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Summary unaudited financial information for HAL’s operations and financial condition is as follows (in

thousands):

Net Sales

Gross Profit

Operating Income

Net Income

Current Assets

Non-current Assets

Current Liabilities

2018

2017

2016

$17,841

2,944

1,534

1,845

$12,870

4,579

4,666

$15,800

2,457

1,037

1,320

$11,310

4,440

3,916

$13,948

2,240

952

1,323

$10,238

3,733

2,572

10.

CONTINGENCIES AND LITIGATION

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.

11.

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, 2018, we had 23 outstanding third party payment guarantees totaling approximately

$0.6 million. The terms of these guarantees are consistent with the underlying customer financing terms. Upon

shipment of a machine, the customer assumes the risk of ownership. The customer does not obtain title, however,

until it has paid for the machine. A retention of title clause allows us to recover the machine if the customer

defaults on the financing. We accrue liabilities under these guarantees at fair value, which amounts are

insignificant.

We provide warranties on our products with respect to defects in material and workmanship. The terms of these

warranties are generally one year for machines and shorter periods for service parts. We recognize a reserve with

respect to this obligation at the time of product sale, with subsequent warranty claims recorded against the reserve.

The amount of the warranty reserve is determined based on historical trend experience and any known warranty

issues that could cause future warranty costs to differ from historical experience. A reconciliation of the changes

in our warranty reserve is as follows (in thousands):

Balance, beginning of year

Provision for warranties during the year

Charges to the accrual

Impact of foreign currency translation

Balance, end of year

2018

$ 1,772

4,121

(3,326)

(68)

$ 2,499

2017

$ 1,523

3,379

(3,203)

$ 1,772

2016

$ 2,186

2,715

(3,349)

(29)

$ 1,523

The increase in our warranty reserve from fiscal 2017 to fiscal 2018 was primarily due to an increase in the number
of machines under warranty resulting from increased sales volume. The increase in our warranty reserve from
fiscal 2016 to fiscal 2017 was primarily due to an increase in unit sales volume, as well as an increase in average
warranty cost per machine as our product mix of machines under warranty shifted to more complex, higher-
performance machines.

12.

OPERATING LEASES

We lease facilities, certain equipment and vehicles under operating leases that expire at various dates through
2025. Future payments required under operating leases as of October 31, 2018, are summarized as follows (in
thousands):

2019 ...................................................................................................
2020 ...................................................................................................
2021 ...................................................................................................
2022… ...............................................................................................
2023 and thereafter ............................................................................
Total ..................................................................................................

$ 3,504
2,320
1,543
1,312
1,180
$ 9,859

Lease expense for the fiscal years ended October 31, 2018, 2017, and 2016 was $4.5 million, $4.4 million, and
$4.5 million, respectively.

13.

QUARTERLY FINANCIAL INFORMATION (Unaudited)

2018 (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

2017 (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

$68,444
20,121
29%

12,966
7,155
4,500
2,937
$0.44
$0.43

$70,424
19,313
27%

13,320
5,993
1,656
3,751
$0.55
$0.55

$78,752
24,521
31%

15,160
9,361
2,511
6,500
$0.96
$0.95

$83,051
27,851
34%

16,564
11,287
2,339
8,302
$1.24
$1.22

First

Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter

$48,744
12,586
26%
11,167
1,419
543
879
$0.13
$0.13

$58,222
17,068
29%
11,714
5,354
1,467
3,646
$0.55
$0.54

$60,770
17,540
29%
12,395
5,145
1,353
3,888
$0.58
$0.58

$75,931
23,370
31%
14,385
8,985
2,238
6,702
$1.01
$1.00

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

14.

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 and applications support.

We principally sell our products through more than 173 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
2018, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2018, approximately 71%
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

Computerized Machine Tools
Computer Control Systems and Software †
Service Parts
Service Fees
Total

2018
$ 261,710
2,870
27,501
8,590
$ 300,671

Year ended October 31,
2017
$209,311
2,324
24,255
7,777
$243,667

2016
$195,618
2,078
21,908
7,685
$227,289

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

Net assets by geographic area were (in thousands):

machine systems.

three fiscal years (in thousands):

Revenues by Geographic Area

United States of America

Canada

Central & South Americas

Total Americas

Germany

United Kingdom

Italy

France

Other Europe

Total Europe

China

Other Asia Pacific

Total Asia Pacific

Other Foreign

Grand Total

United States of America

Foreign countries

Americas

Europe

Asia Pacific

Year Ended October 31,

2018

2017

2016

$ 87,231

$ 70,912

$ 70,630

2,915

2,194

92,340

62,346

34,216

16,691

15,815

32,034

161,102

27,748

17,937

45,685

1,544

3,801

1,844

76,557

48,786

28,019

13,416

13,917

27,583

131,721

22,456

10,238

32,694

2,695

3,881

1,950

76,461

44,411

25,313

12,947

13,787

27,150

123,608

16,644

8,989

25,633

1,587

$ 227,289

$ 300,671

$ 243,667

As of October 31,

2018

$ 8,375

6,617

$ 14,992

2017

$ 7,599

6,185

$ 13,784

2016

$ 7,846

5,911

$ 13,757

2018

$ 96,348

74,558

51,947

$ 222,853

As of October 31,

2017

$ 86,432

70,536

46,117

$ 203,085

2016

$ 84,040

60,861

40,574

$ 185,475

Long-lived tangible assets, net by geographic area, were (in thousands):

14.

SEGMENT INFORMATION

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 and applications support.

We principally sell our products through more than 173 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

2018, no distributor accounted for more than 5% of our sales and service fees. In fiscal 2018, approximately 71%

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

Computerized Machine Tools

Computer Control Systems and Software †

Year ended October 31,

2018

2017

$ 261,710

2,870

27,501

8,590

$ 300,671

$209,311

2,324

24,255

7,777

$243,667

2016

$195,618

2,078

21,908

7,685

$227,289

Service Parts

Service Fees

Total

machine systems.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

The following table sets forth revenues by geographic area, based on customer location, for each of the past
three fiscal years (in thousands):

Revenues by Geographic Area

United States of America
Canada
Central & South Americas
Total Americas

Germany
United Kingdom
Italy
France
Other Europe
Total Europe

China
Other Asia Pacific
Total Asia Pacific

Other Foreign
Grand Total

2018
$ 87,231
2,915
2,194
92,340

Year Ended October 31,
2017
$ 70,912
3,801
1,844
76,557

2016
$ 70,630
3,881
1,950
76,461

62,346
34,216
16,691
15,815
32,034
161,102

27,748
17,937
45,685

48,786
28,019
13,416
13,917
27,583
131,721

22,456
10,238
32,694

44,411
25,313
12,947
13,787
27,150
123,608

16,644
8,989
25,633

1,544
$ 300,671

2,695
$ 243,667

1,587
$ 227,289

Long-lived tangible assets, net by geographic area, were (in thousands):

United States of America
Foreign countries

2018

$ 8,375
6,617
$ 14,992

As of October 31,
2017

$ 7,599
6,185
$ 13,784

2016
$ 7,846
5,911
$ 13,757

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

Net assets by geographic area were (in thousands):

Americas
Europe
Asia Pacific

2018

$ 96,348
74,558
51,947
$ 222,853

As of October 31,
2017

$ 86,432
70,536
46,117
$ 203,085

2016

$ 84,040
60,861
40,574
$ 185,475

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

15. NEW ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncements:

Recently Adopted Accounting Pronouncements:

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock
Compensation (Topic 718), 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 year 2018, including interim
periods within the fiscal year. Early adoption is permitted. We elected to early adopt the new guidance in the
fourth quarter of fiscal 2017 which required us to reflect any adjustments as of November 1, 2016, the beginning
of the annual period that includes the interim period of adoption. Upon adoption, excess tax benefits or deficiencies
from share-based award activity are reflected in the consolidated statements of income as a component of the
provision for income taxes, whereas they previously were recognized in equity. We also elected to account for
forfeitures as they occur, rather than estimate expected forfeitures. The adoption of ASU 2016-09 resulted in a net
cumulative-effect adjustment of a $0.2 million increase to retained earnings as of November 1, 2017, mostly
related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective
method. The previously unrecognized excess tax effects were recorded as a reduction to tax liability or an increase
to deferred tax asset.

We adopted the aspects of the standard affecting the cash flow presentation retrospectively, and accordingly, to
conform to the current year presentation, we reclassified $146,000 of employee taxes paid for withheld shares
under operating activities to financing activities for the years ended October 31, 2016 on our consolidated
statements of cash flows.

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 No. 2014-15 was effective for our fiscal year 2018, including interim periods within
the fiscal year. As such, we adopted this standard in the first quarter of fiscal 2018. This standard did not have a
significant effect on our accounting policies or on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of
Inventory, which requires companies to measure inventory at the lower of cost and net realizable value, versus the
lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 was effective for our fiscal
year 2018, with early adoption permitted and to be applied prospectively. As such, we adopted this standard in
the first quarter of fiscal 2018 on a prospective basis. This standard did not have a significant effect on our
accounting policies or on our consolidated financial statements and related disclosures. For additional information,
see Note 3: Inventories.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of
Certain Cash Receipts and Cash Payments. This standard is intended to address eight classification issues related
to the statement of cash flows to reduce diversity in practice in how certain transactions are classified. ASU 2016-
15 is effective for our fiscal year 2019, with early adoption permitted. This standard requires adoption based upon
a retrospective transition method. We elected to early adopt this standard in the first quarter of fiscal 2018. This
standard did not have a significant effect on our accounting policies or on our consolidated financial statements
and related disclosures.

Between May 2014 and December 2016, the FASB issued ASU No. 2014-09, Revenue from Contracts with

Customers (Topic 606), and various related updates, establishing a single comprehensive model for entities to use

in accounting for revenue arising from contracts with customers. This standard 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 applying this new standard retrospectively

to each prior period presented (“full retrospective approach”) or retrospectively with the cumulative effect

recognized in retained earnings as of the date of adoption (“modified retrospective approach”). Topic 606 was

effective for us beginning November 1, 2018 and we adopted it on that date using the modified retrospective

approach. Our evaluation of our contracts subject to this standard is complete and the application of Topic 606 to

these contracts did not have a material impact on our consolidated financial statements at initial implementation.

We are also evaluating the new disclosures required by Topic 606 to determine what additional information will

need to be disclosed.

Between February 2016 and July 2018, the FASB issued ASU No. 2016-02, Leases (Topic 842), and various

related updates, which establish 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 and disclosures.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted

Improvements to Accounting for Hedging Activities, which simplifies the application of hedge accounting and

enables companies to better portray the economics of their risk management activities in their financial

statements. ASU 2017-12 is effective for our fiscal year 2020, including interim periods within the fiscal year,

and requires modified retrospective application. Early adoption is permitted. We do not anticipate that the

adoption of this ASU will have a material impact on our consolidated financial statements and disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income

(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which will

allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects

resulting from the Tax Reform Act that are stranded in accumulated other comprehensive income. This standard

also requires certain disclosures about stranded tax effects. This ASU, however, does not change the underlying

guidance that requires that the effect of a change in tax laws or rates be included in income from continuing

operations. ASU 2018-02 will be effective for our fiscal year 2020, with the option to early adopt at any time prior

to the effective date. It must be applied either in the period of adoption or retrospectively to each period in which

the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We are

assessing the impact this new accounting guidance will have on our consolidated financial statements and

disclosures.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

15. NEW ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncements:

Recently Adopted Accounting Pronouncements:

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock

Compensation (Topic 718), 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 year 2018, including interim

periods within the fiscal year. Early adoption is permitted. We elected to early adopt the new guidance in the

fourth quarter of fiscal 2017 which required us to reflect any adjustments as of November 1, 2016, the beginning

of the annual period that includes the interim period of adoption. Upon adoption, excess tax benefits or deficiencies

from share-based award activity are reflected in the consolidated statements of income as a component of the

provision for income taxes, whereas they previously were recognized in equity. We also elected to account for

forfeitures as they occur, rather than estimate expected forfeitures. The adoption of ASU 2016-09 resulted in a net

cumulative-effect adjustment of a $0.2 million increase to retained earnings as of November 1, 2017, mostly

related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective

method. The previously unrecognized excess tax effects were recorded as a reduction to tax liability or an increase

to deferred tax asset.

We adopted the aspects of the standard affecting the cash flow presentation retrospectively, and accordingly, to

conform to the current year presentation, we reclassified $146,000 of employee taxes paid for withheld shares

under operating activities to financing activities for the years ended October 31, 2016 on our consolidated

statements of cash flows.

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 No. 2014-15 was effective for our fiscal year 2018, including interim periods within

the fiscal year. As such, we adopted this standard in the first quarter of fiscal 2018. This standard did not have a

significant effect on our accounting policies or on our consolidated financial statements and related disclosures.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of

Inventory, which requires companies to measure inventory at the lower of cost and net realizable value, versus the

lower of cost or market. Net realizable value is the estimated selling price in the ordinary course of business, less

reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 was effective for our fiscal

year 2018, with early adoption permitted and to be applied prospectively. As such, we adopted this standard in

the first quarter of fiscal 2018 on a prospective basis. This standard did not have a significant effect on our

accounting policies or on our consolidated financial statements and related disclosures. For additional information,

see Note 3: Inventories.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of

Certain Cash Receipts and Cash Payments. This standard is intended to address eight classification issues related

to the statement of cash flows to reduce diversity in practice in how certain transactions are classified. ASU 2016-

15 is effective for our fiscal year 2019, with early adoption permitted. This standard requires adoption based upon

a retrospective transition method. We elected to early adopt this standard in the first quarter of fiscal 2018. This

standard did not have a significant effect on our accounting policies or on our consolidated financial statements

and related disclosures.

Between May 2014 and December 2016, the FASB issued ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606), and various related updates, establishing a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers. This standard 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 applying this new standard retrospectively
to each prior period presented (“full retrospective approach”) or retrospectively with the cumulative effect
recognized in retained earnings as of the date of adoption (“modified retrospective approach”). Topic 606 was
effective for us beginning November 1, 2018 and we adopted it on that date using the modified retrospective
approach. Our evaluation of our contracts subject to this standard is complete and the application of Topic 606 to
these contracts did not have a material impact on our consolidated financial statements at initial implementation.
We are also evaluating the new disclosures required by Topic 606 to determine what additional information will
need to be disclosed.

Between February 2016 and July 2018, the FASB issued ASU No. 2016-02, Leases (Topic 842), and various
related updates, which establish 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 and disclosures.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) Targeted
Improvements to Accounting for Hedging Activities, which simplifies the application of hedge accounting and
enables companies to better portray the economics of their risk management activities in their financial
statements. ASU 2017-12 is effective for our fiscal year 2020, including interim periods within the fiscal year,
and requires modified retrospective application. Early adoption is permitted. We do not anticipate that the
adoption of this ASU will have a material impact on our consolidated financial statements and disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income
(Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which will
allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects
resulting from the Tax Reform Act that are stranded in accumulated other comprehensive income. This standard
also requires certain disclosures about stranded tax effects. This ASU, however, does not change the underlying
guidance that requires that the effect of a change in tax laws or rates be included in income from continuing
operations. ASU 2018-02 will be effective for our fiscal year 2020, with the option to early adopt at any time prior
to the effective date. It must be applied either in the period of adoption or retrospectively to each period in which
the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We are
assessing the impact this new accounting guidance will have on our consolidated financial statements and
disclosures.

HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial
Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial
Liabilities, which clarifies the guidance in ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10)
on certain issues related to financial instruments including, among other things, forward contracts and presentation
requirements. ASU 2018-03 will be 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
and disclosures.

Between May 2017 and June 2018, the FASB issued ASU No. 2017-09 and ASU No. 2018-07, Compensation –
Stock Compensation (Topic 718), to include share-based payments issued to nonemployees for goods or services,
as well to provide clarity and to reduce diversity in practice and cost and complexity when applying the guidance
in Topic 718. These updates include guidance on determining which changes to the terms and conditions of share-
based payment awards require a company to apply modification accounting under Topic 718 and to align the
accounting for share-based payments to nonemployees and employees. These updates are effective for our fiscal
year 2019. Early adoption is permitted, including adoption in any interim period. We do not expect that the
adoption of these updates will have a material effect on our consolidated financial statements and disclosures.

There have been no other significant changes in the Company’s critical accounting policies and estimates during
the fiscal year ended October 31, 2018.

preceding Item 8.

FINANCIAL DISCLOSURE

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, 2018, 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, 2018 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued

HURCO COMPANIES, INC.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial

Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial

Liabilities, which clarifies the guidance in ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10)

on certain issues related to financial instruments including, among other things, forward contracts and presentation

requirements. ASU 2018-03 will be 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

and disclosures.

Between May 2017 and June 2018, the FASB issued ASU No. 2017-09 and ASU No. 2018-07, Compensation –

Stock Compensation (Topic 718), to include share-based payments issued to nonemployees for goods or services,

as well to provide clarity and to reduce diversity in practice and cost and complexity when applying the guidance

in Topic 718. These updates include guidance on determining which changes to the terms and conditions of share-

based payment awards require a company to apply modification accounting under Topic 718 and to align the

accounting for share-based payments to nonemployees and employees. These updates are effective for our fiscal

year 2019. Early adoption is permitted, including adoption in any interim period. We do not expect that the

adoption of these updates will have a material effect on our consolidated financial statements and disclosures.

There have been no other significant changes in the Company’s critical accounting policies and estimates during

the fiscal year ended October 31, 2018.

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, 2018, 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, 2018 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.

The graph below matches the cumulative 5-Year total return of holders of Hurco Companies, Inc.'s common stock

with the cumulative total returns of the Russell 2000 index, the NASDAQ Global Select index and a customized

peer group of seventeen companies that includes: Ampco-Pittsburgh Corporation, DMC Global Inc., Douglas

Dynamics Inc., The Eastern Company, Electro Scientific Industries Inc., FARO Technologies Inc., Graham

Corporation, Kadant Inc., Key Tronic Corporation, L. S. Starrett Company, Nanometrics Incorporated, Novanta

Inc., PDF Solutions Inc., Proto Labs Inc., QAD Inc., Sun Hydraulics Corporation (doing business as Helios

Technologies) and Transcat Inc. The graph assumes that the value of the investment in our common stock, in each

index, and in the peer group (including reinvestment of dividends) was $100 on 10/31/2013 and tracks it through

10/31/2018.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Hurco Companies, Inc., the Russell 2000 Index,

the NASDAQ Global Select Index, and a Peer Group

Item 9B. OTHER INFORMATION

Effective as of December 31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the
“2018 Credit Agreement”) with Bank of America, N.A., as the lender.

The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum
aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of
outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding
loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount
of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million.

Under the 2018 Credit Agreement, we and Hurco B.V. are borrowers, and certain of our other subsidiaries are
guarantors. The scheduled maturity date of the 2018 Credit Agreement is December 31, 2020.

Borrowings under the 2018 Credit Agreement will bear interest at floating rates based on, at our option, either (i)
a LIBOR-based rate, or other alternative currency-based rate approved by the lender, plus 0.75% per annum, or
(ii) a base rate (which is the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate or (c) the one month
LIBOR-based rate plus 1.00%), plus 0.00% per annum. Outstanding letters of credit will carry an annual rate of
0.75%.

The 2018 Credit Agreement contains customary affirmative and negative covenants and events of default,
including covenants (1) restricting us from making certain investments, loans, advances and acquisitions (but
permitting us to make investments in subsidiaries of up to $10.0 million); (2) restricting us from making certain
payments, including cash dividends, except that we may pay cash dividends as long as immediately before and
after giving effect to such payment, the sum of the unused amount of the commitments under the 2018 Credit
Agreement plus our cash on hand is not less than $10.0 million, and as long as we are not in default before and
after giving effect to such dividend payments; (3) requiring that we maintain a minimum working capital of $125.0
million; and (4) requiring that we maintain a minimum tangible net worth of $170.0 million.

We may use the proceeds from advances under the 2018 Credit Agreement for general corporate purposes.

In the ordinary course of business, the lender under the 2018 Credit Agreement and its affiliates have provided,
and may in the future provide, investment banking, commercial banking, cash management, foreign exchange or
other financial services to us for which they have received, and may in the future receive, compensation.

$250

$200

$150

$100

$50

The foregoing description of the 2018 Credit Agreement does not purport to be complete and is qualified in its
entirety by reference to the full text of the 2018 Credit Agreement, which is filed as Exhibit 10.1 to this report and
is incorporated herein by reference.

10/13

10/14

10/15

10/16

10/17

10/18

Hurco Companies, Inc.

Russell 2000

In addition, effective December 31, 2018, the date we entered into the 2018 Credit Agreement, the Credit
Agreement, dated as of December 7, 2012, as amended, among us, the lenders party thereto and JP Morgan Chase
Bank, N.A., including all related documents, was terminated and is of no further force or effect except with respect
to any obligations and provisions that survive the termination thereof.

During the fourth quarter of fiscal 2018, 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 amended, as added by Section 202 of
the Sarbanes-Oxley Act of 2002.

NASDAQ Global Select

Peer Group

*$100 invested on 10/31/13 in stock or index, including reinvestment of dividends.

Fiscal year ending October 31.

Hurco Companies, Inc.

Russell 2000

NASDAQ Global Select

Peer Group

10/13

100.00

10/14

158.75

108.06

119.83

94.13

10/15

111.79

108.43

133.19

80.55

10/16

110.34

112.89

138.44

86.64

10/17

190.67

144.32

180.51

150.97

10/18

175.27

147.00

197.13

167.83

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Item 9B. OTHER INFORMATION

Effective as of December 31, 2018, we and our subsidiary Hurco B.V. entered into a new credit agreement (the

“2018 Credit Agreement”) with Bank of America, N.A., as the lender.

The 2018 Credit Agreement provides for an unsecured revolving credit and letter of credit facility in a maximum

aggregate amount of $40.0 million. The 2018 Credit Agreement provides that the maximum amount of

outstanding letters of credit at any one time may not exceed $10.0 million, the maximum amount of outstanding

loans made to our subsidiary Hurco B.V. at any one time may not exceed $20.0 million, and the maximum amount

of all outstanding loans denominated in alternative currencies at any one time may not exceed $20.0 million.